What is an ERP?
What the brain does for the body, the ERP (or ERP software — we can use any of these terms) does for an organization. Every part of the body is in constant communication with the brain and vice versa — the brain is thus a central unit that allows different parts of the body to work in coordination with each other.
By analogy, an organization or a business enterprise needs to keep its constituent departments and teams such as Sales, Human Resources, Research & Development, Supply Chain, Procurement, and so on, on the same page. Each of these departments has its own needs and plays a unique role; an ERP is thus a central unit that all these departments feed information to, and, in turn, accept information from. There, thus, exists a feedback loop between the ERP and each of these departments. By keeping different departments of an enterprise on the same page, an ERP functions as an integrated system.
It is not just important, but, in fact, essential for different departments across an enterprise to stay on the same page. The information flow within an organization — what management pundits call business intelligence — enhances the organization’s business performance. By connecting and harmonizing the performance of different departments through a shared data bank, ERP softwares play a vital role in the enhancement of business intelligence within an enterprise.
If each department of the enterprise uses a software that is well-tailored for its needs, the ERP software will act as a meta-software that will absorb data from all different softwares and help putting all departments to work in harmony and enhances business performance.
What Are The Benefits of ERP Implementation?
A major benefit of ERP softwares is that they add information in real time. To understand what real time means, one can compare the process through which one department informs another of its need via an employee or a messenger. Consider this: if the sales and manufacturing departments were located in different parts of a town, the messenger would take a certain amount of time to carry this information. Since ERP functions as a data bank shared by different teams in the company, the information would be communicated to different departments instantaneously. And because the ERP software keeps a record of all the data flowing within the company, the information that is relevant and important to investors, business partners and shareholders, can be readily accessed and shared with them as well.
Consider the following as an example of how an ERP would function in a small business. For an enterprise that includes Human Resources, Sales, Customer Support and Supply Chain, the ERP could work as follows: the Sales department manages to sign a deal with 500 new customers in one financial quarter. As this data flows into the ERP software, both Customer Support and HR notice that there will be a demand for more Customer Support employees — it will act accordingly and make new hires to fill this need. Meanwhile, supply chain and purchasing managers will use this information to streamline their efforts in order to bring the product to the new customers.
Implementing the ERP
There is little doubt as to what the benefits of implementing an enterprise resource planning system are. It is, however, essential to determine exactly why an enterprise wants to implement an ERP, and to what end. It is also prudent to realistically examine what it would cost to implement an ERP software — because most ERPs are famously expensive, not to mention the fact that it takes forever to implement an ERP system.
Consider Nestle’s decision to implement a new ERP; in 1997, Nestle decided to implement SAP, one of the most eminent ERP solutions in the market. Nestle committed $200 million to the project which entailed the installation of five ERP modules: Purchasing, Finance, Sales and Distribution, Accounts Payable and Accounts Receivable. Nestle appointed 50 top executives and 10 IT experts to oversee the project. As the implementation began in full force in 1999, several problems surfaced. Nestle realized that employees were not familiar with the new system and executives were not trained to adopt the SAP ERP system either. Additionally, since the deadline for the project was set for the end of 1999 (the decision was taken to steer clear of Y2K problems, which were giving business across the world a huge fright), the software development and implementation were rushed. Due to this rush, cross modules activities were not properly coordinated. For example, if a customer was given a discount and paid the price minus the discount, the accounts receivable did not take the discount into account and considered the payment as partial.
Despite these problems, Nestle America attributed $325 Million in savings to the their new ERP in 2002. The savings mainly resulted from changes in Nestle’s Supply Chain Management and Demand Forecasting. Prior to ERP implementation, a salesperson was in charge of providing a demand forecast — something which was never quite welcomed by Nestle’s factory workers and management. The factory would allegedly change the forecast numbers, and this would have an impact on the business overall. With SAP in place, there was a more trustworthy connection between the salespeople and the factory executives. This is a premium example of how ERP implementation boosts business intelligence. After Nestle SA and Nestle UK adopted SAP, Nestle’s global properties came under SAP. This helped Nestle bring its global entities on the same page.
The Evolution of ERP
Nowadays, it is customary to identify ERP as a natural stage in the evolution of Material Requirement Planning (MRP). MRP was a well-suited system for manufacturing businesses. Its task above all was to ensure that raw materials required for manufacturing were available, and customers received the products they purchased. To put it simply, MRP was a simple input-output management system. With rapid growth in the size of non-manufacturing businesses, a gap for a new core management software became visible and ERP became a go-to solution. Unlike the MRP, which served only a limited number of departments and had a narrower scope, the ERP, with its umbrella structure, covers all corners of an enterprise.
While the ERP expanded resource management beyond manufacturing businesses, it was not without its own limitations. “ERP Is Dead, Long Live ERP II” by Gartner predicted that due to the demand for an inter-enterprise resource management, the ERP must reinvent itself. ERP II led to the introduction of resource management in collaborative-commerce, aka c-commerce, where the resource management goes beyond the bounds of a business enterprise to embrace the interactions amongst internal personnel, as well as business partners and customers.
ERPs Today — It’s All In The Cloud
While using ERP and ERP II softwares in a company required certain amount of investment in IT infrastructure, cloud technology has made it possible to minimize the cost of resource planning. Cloud enables enterprises to use erp softwares on the internet on a shared platform. While traditionally every enterprise had to invest in an IT platform held and maintained on the premises, nowadays a monthly fee can be paid for access to cloud based ERP softwares. Not only cloud has eliminated the need to buy IT equipments upfront, it will save enterprises the space where servers, IT experts and other equipments occupied.
Another benefit that comes with cloud based systems is that while the cost of having ERP made it difficult for small and many of the medium sized businesses to utilize it, arrival of cloud ERP systems has made it cost-efficient for executives of small size businesses as well as medium sized ones.
The Future of ERP
It is predicted by Gartner that the task expected of the next generation of ERPs to tackle is a function diversification. While a central cloud-based ERP will handle the core tasks, some more specific tasks should be handled by accompanying softwares that will serve as extensions of the core ERP software.
The main advantage of this new generation of ERP systems — referred to as postmodern ERPs — will have is the following: given the specific needs of different businesses, it would be up to the executives to decide what should be included within the core ERP solutions and what should be left to extensions.
This prediction is a result of the failures of those ERP implementations that lacked customization. It is critical that prior to implementation of ERP systems, top executives make decisions about which ERP modules are of a higher priority (and hence indispensable), and which modules might not benefit the company — since it might be the case that the cost of implementing some modules might surpass the savings they bring about.
Customization can happen in two ways. While some companies prefer to keep the modules with higher priority within their core ERP system and move the less significant tasks to the accompanying extensions, there are arguments for opting the reverse. The surge of SaaS solutions, which meet the needs of specific functions, has made it more efficient for businesses to allocate core modules to specific SaaS solutions and keep the less important tasks within the core ERP.