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Enterprise Resource Planning (ERP) systems are used to run small and large organizations. With its roots in material requirements planning (MRP) for manufacturing organizations, ERP has expanded in reach, and is now used by all types of organizations, including non-profits, universities, and government agencies. Up until the mid-1990’s, companies had separate systems for most functions inside the organization. While each function may have been tailored for each activity, the lack of portability across departments meant slower, less accurate, and more labor-intensive transfer of critical information. By enabling all parts of a company to immediately access the information that they require, ERP has streamlined business operations significantly. Initially, a company would employ ERP to acquire an advantage over the competition, but as a result of its widespread use, it is practically required in order to keep pace with the competition.
What exactly does an ERP system do?
Companies are made up of many different functions, and to work well, these functions must be integrated. In a very small company, a software program such as Intuit QuickBooks might be the only tool needed to track customers, orders, accounting, and inventory. It doesn’t take long, however, for an ambitious company to outgrow the software. For example, the company may begin to track customer metrics, leads, and relationships, necessitating the use of a Customer Relationship Management (CRM) tool. The company may also wish to gain better control of inventory and production scheduling and management, meaning it will need to purchase a manufacturing resource planning tool. If human resources is important to the company (and it should be, if it wishes to take care of its employees and stay on the correct side of the law), it will need to purchase a software package to manage that part of the business. An ERP system ties all of these functions, and more, into one system. No longer will the sales group need to email a spreadsheet or report detailing forecasts for future sales to production; production can pull the reports up and act immediately, without having to wait for a salesperson who would rather be selling, to crunch the numbers and pass the information on.
In addition to departmental functions, ERP software will usually provide a central clearinghouse for internal documentation, handle meeting scheduling, facilitate custom reporting of almost anything that can be thought of, and it will control access by providing varying levels of information to different users. Over the last decade, one of the largest developments of ERP software is the ability to tie into the ERP systems up and down the supply chain, allowing seamless transfer of information between companies that rely on each other’s products or services. A natural extension of this development is the ability for a customer to access a company’s ERP system, usually through an e-Commerce website. Through the website, a customer can research, determine availability and lead time of a product, purchase the product, and obtain support for the product – all functions that are tied into the company’s ERP system.
Enterprise Resource Planning systems are not small software packages that are installed by a user on a workstation, rather, implementation is usually performed by a team from the ERP provider which interfaces with the purchasing company, and can take from days to years to come to fruition. There are varying levels of customization and modularity in ERP systems. In an effort to achieve cost savings, some smaller companies may use an ERP system in its off-the-shelf form, with little or no customization. Also, small business users may only use several modules of the system, as their business might not require the use of other modules, or they may be too expensive for the time being. As companies grow, larger and more customized ERP systems are generally required in order to meet their needs. In a research paper by Prasad Bingi, et al, we learn that a successful ERP implementation is achieved through commitment from top management, the willingness to reengineer existing processes, the integration of the ERP system with other business information systems, proper selection and management of employees and consultants, and proper training of employees once the new system is implemented.
The business world is littered with the remains of discarded ERP systems and companies that have failed or gone bankrupt because of poor implementation. For example, Dow Chemical spent over $500 million and seven years implementing an ERP system that runs from a central mainframe system, only to discard it and start over with a new client/server system. In another failed attempt, Unisource Worldwide wrote off $168 million dollars when it abandoned a new ERP system that it rolled out nationwide a short time before. If the system is not designed and implemented well, it is likely to be more cumbersome to use, it won’t meet the requirements of some user groups; as a result, there will be no buy-in within the company, and the product will likely fail.
Which ERP vendor is right for your business?
There are a plethora of vendors in the ERP business, but some of the largest are SAP, Oracle, Sage, and Microsoft. Some companies compete in varying focused markets, while others target broader markets. For example, Sage is the third largest ERP vendor by sales, but it is the largest in the small business segment of the market, while SAP and Oracle court large companies and institutions. Oracle acquired PeopleSoft several years ago, and as a result is considered to have excellent HR capabilities. Each ERP vendor is going to have a different fit, and a careful vetting of vendors through structured criteria should narrow the choices down. An excellent resource for ERP vendor selection can be found here.
There is an ERP system for almost any business of any size. If proper planning, selection, and implementation methodology is utilized, a company greatly increases the chances of success. If the ERP system chosen fits the business and is adopted company-wide, the tools will be available to improve efficiency and quality, while bringing up the bottom line.
(image courtesy of: http://careerbright.com/career-self-help/boosting-hr-efficiency-with-an-enterprise-resource-planning-system)
Links to ERP software companies: