Enterprise Resource Planning ERP

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Enterprise Resource Planning (ERP)
Dr Jirarat Sitthiworachart Faculty of Information
Technology King Mongkuts University of
Technology North Bangkok
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ERP Overview

• Enterprise Resource Planning (ERP) programs are
  software used by companies to manage information
  in every area of the business.
• ERP programs help manage company-wide business
  processes using a common database and shared
  management reporting tools.
• ERP software supports the efficient operation of
  business processes by integrating activities
  throughout a business.

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Functional Areas of Operation

• Most companies have four main functional areas
• Marketing and Sales (M/S)
• Supply Chain Management (SCM)
• Accounting and Finance (A/F)
• Human Resources (HR)
• Historically, business have had organizational
  structures that separated the functional areas,
  and
• business schools have been similarly organized,
  so each functional area has been taught as a
  separate course.

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Functional Areas of Operation
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Business Processes

• A business process is a collection of activities
  that takes one or more inputs and creates an
  output that is of value to the customer, for
  example
• Input Technical support by M/S
• Process 24-hour help line available
• Output Customers technical query is resolved
• The customer may be the traditional external
  customer who buys the product or service, or an
  internal customer (a colleague in another
  department)
• The customer does not care that different
  functions are involved in processing their order,
  and will not tolerate mistakes and delays caused
  by poor coordination of business functions

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Sample of Business Processes

• Suppose that a customer wants to purchase a new
  computer.
• She wants information about the companys
  products.
• She wants to place her order quickly and easily.
• She expects quick delivery of a correctly
  configured, working computer.
• She wants 24-hour customer support for any
  problems.
• The customer is not concerned about how the
  computer was marketed, or how its components were
  purchased, or how it was built, or the route the
  delivery truck took to get to her house.

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Sample of Business Processes

• Suppose the customers computer is damaged during
  shipment.
• Several functional area (i.e. CRM, M/S) are
  involved in repair and return of the computer,
  the handling of the repair is a business process.
• A successful customer interaction is one in which
  the customer is not required to interact with
  each business function involved in the process.
• Successful business managers view their business
  operations from the perspective of a satisfied
  customer.

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Sample of Business Processes

• For the computer company to provide customer
  satisfaction, it must take sure that its
  functional areas of operation are integrated. For
  example
• Computer technology changes rapidly, and the
  hardware the company sells changes frequently.
  Therefore, people performing the sales function
  must have up-to-date information about computer
  configurations so they can provide the customer
  with accurate information.
• People performing the manufacturing function need
  to get the details of the customers computer
  configuration quickly and accurately from those
  performing the sales function, so the right
  computer can be manufactured and shipped on time
  to the customer.

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Integration of Business Functions

• Sharing data efficiently and effectively within
  and between functional areas leads to more
  efficient business processes
• Information systems that share data between
  functional areas are called Integrated
  Information Systems
• Lack of integration can lead to costly
  inefficiencies
• Errors from keying in the same data more than
  once
• Lack of timely data due to periodic updating
  between systems
• Problems with data being defined differently in
  different systems

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Integration of Business Functions

• ERP systems can integrate a companys operations
  by providing a company-wide computing environment
  that
• Includes a single database shared by all
  functions
• Can deliver consistent data to all business
  functions in real-time
• ERP systems can dramatically reduce costs and
  increase operational efficiency
• With ERP, IBM Storage Systems division
• Reprices inventory in 5 minutes instead of 5 days
• Ships a replacement part in 3 days instead of 22
• Checks customer credit in 3 seconds instead of 20
  minutes

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Lemonade Stand Functional Areas

• Marketing and Sales
• Design new products
• Determine pricing
• Promote products
• Take customer orders
• Make sales forecast
• Track repeat customers to send flyers or
  thank-you notes
• Manage credit

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Lemonade Stand Functional Areas

• Supply Chain Management
• Buying raw materials (purchasing)
• Making lemonade (production)
• Manage recipe
• Maintain manufacturing (cost) records

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Lemonade Stand Functional Areas

• Accounting and Finance
• Recording raw transaction data
• Sales, raw material purchases, payroll, cash
  receipts
• Provide data for sales forecasting, credit
  management, cash management

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Lemonade Stand Functional Areas

• Human Resources
• Recruit, train, evaluate and compensate employees
• Develop personnel plans (staffing) based on sales
• Determine compensation/wagesdepends on labor
  market

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Functional Area Information Systems
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Supply Chain Management

• Manufacturing firms develop production plans of
  varying length and detail. For example
• expanding manufacturing capacity,
• hiring new workers,
• paying extra overtime for existing workers and
• taking sales forecasts to plan manufacturing
  runs.
• Production plans are based on information about
  product sales that comes from M/S.
• The purchasing function bases its orders of raw
  materials on production plans, expected
  shipments, delivery lead time, and existing
  inventory levels.

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Supply Chain Management (cont.)

• With accurate data about required production
  levels, raw material and packaging can be ordered
  as needed, and inventory levels can be kept low,
  saving money.
• SCM data can support the M/S function by
  providing information about what has been
  produced and shipped.
• Accurate and timely production information can
  support the sales production and increase
  customer satisfaction.

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Enterprise Resource Planning Systems
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SAP

• Systemanalyse und Programmentwicklung (SAP) was
  formed in Mannheim, Germany, in 1972 by five
  former IBM systems analysts
• SAPs goal was to develop a standard business
  software product that could be configured to meet
  the needs of a company
• SAPs founders wanted
• Data to be available in real time
• Users to work on a computer screen, not with paper

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SAP R/3 Enterprise

• The system allows data to be entered once and
  then used throughout the organization.
• SAPs R/3 Enterprise uses a central database to
  share data between the primary functional areas
  of
• Marketing and Sales
• Production and Materials Management
• Human Resources
• Accounting and Finance

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Y2K

• Most business software programs written in the
  1960s and 70s saved storage space by using only
  2 digits to store the year
• For example, 10/29/75 rather than 10/29/1975
• Companies faced a choice as the new millennium
  approached
• Rewrite old software to store year data correctly
• Use problem as an opportunity to upgrade to ERP

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Y2K

• The Y2K problem created explosive sales growth
  for Y2K-compliant ERP systems
• This lead to a significant shortage of
  experienced ERP consultants, leading many
  companies to have problems with their
  sometimes-rushed implementations
• The high demand for experienced ERP consultants
  prior to Y2K was followed by an abrupt drop off
  by the middle of 1999
• By middle 1999, companies had decided how they
  were going to handle the Y2K problem, so new ERP
  sales dropped significantly

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Best Practices

• Before ERP, IS people designed software to
  reflect a companys business practices
• With ERP software, the software developers have
  used their experience with a number of companies
  to develop best practices
• Which means that R/3 designers choose the best,
  most efficient ways in which business processes
  should be handled

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Best Practices (cont.)

• The company began to develop models of how
  certain industries business process should be
  managed in a way that was compatible with the R/3
  system.
• Best Practices represent the way an ERP company
  feels a particular business transaction should be
  carried out to maximize efficiency

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ERP Software Benefits

• Reduced IT maintenance single system is easier
  to maintain
• Provides information so that a company can be
  managed, not just monitored
• For example, without ERP, getting an answer to
  How are we doing? requires getting data from
  each business unit and then putting the data
  together for a comprehensive, integrated picture.
• The ERP system already has all the data, allowing
  the manager to focus on improving processes.
• This focus enhances management of the company as
  a whole, and makes the organization more
  adaptable when change is required.

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ERP System Costs

• The cost of an ERP system
• Depends on the size and complexity of the
  software package, which is a function of the size
  of the firm
• Includes new hardware required to run the system
• Includes consultant and business analyst fees
• Includes the time required for implementation
  (disruption of business)
• Includes training costs (cost to develop and
  deploy training plus employees time away from
  their job)
• A large company, with over 1,000 employees, can
  spend from 50 million to 500 million on a
  complex implementation

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Summary

• All manufacturing companies have basic functional
  areas of
• Marketing and Sales Sets product prices,
  promotes products, takes customer orders, and
  creates sales forecasts.
• Supply Chain Management Develops production
  plans, orders raw materials from suppliers,
  receives the raw material into the facility,
  manufactures products, and ships products to
  customers.

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Summary

• All manufacturing companies have basic functional
  areas of
• Accounting and Finance Records
  sales transactions, records customers payments,
  records suppliers invoices and payments to
  suppliers, and summarizes operational data in
  managerial reports.
• Human Resources Recruits, trains, compensates,
  and oversees the evaluation of employees.

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Summary

• Functional areas are served by information
  systems, which capture, process, and store data
  to provide information needed for decision
  making.
• Employees working in one functional area need
  data from other functional areas. Functional area
  information systems should be integrated, so
  shared data are accurate and readily available.

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Summary

• Business managers are increasingly thinking in
  terms of business processes that integrate
  functional areas.
• The business process view promotes efficiency and
  competitiveness.
• Business processes require information sharing
  between functional areas.
• ERP software provides this capability by using a
  single common database.