Enterprise Resource Planning (ERP) is an integrated computer-based

system used to manage internal and external resources, including

tangible assets, financial resources, materials, and human resources. Its
purpose is to facilitate the flow of information between all business
functions inside the boundaries of the organization and manage the
connections to outside stakeholders. Built on a centralized database and
normally utilizing a common computing platform, !" systems
consolidate all business operations into a uniform and enterprise-wide
system en#ironment. !" system can either reside on a centralized
ser#er or be distributed across modular hardware and software units that
pro#ide $ser#ices$ and communicate on a local area network. %he
distributed design allows a business to assemble modules from different
#endors without the need for the placement of multiple copies of
complex and expensi#e computer systems in areas which will not use
their full capacity.
Origin of the term
%he initialism !" was first employed by research and analysis firm
&artner &roup in '(() as an extension of *!" (*aterial !e+uirements
"lanning, later manufacturing resource planning and -I* (-omputer
Integrated *anufacturing), and while not supplanting these terms, it has
come to represent a larger whole. It came into use as makers of *!"
software started to de#elop software applications beyond the
manufacturing arena.
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!" systems now attempt to co#er all core
functions of an enterprise, regardless of the organization1s business or
charter. %hese systems can now be found in non-manufacturing
businesses, non-profit organizations and go#ernments.
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%o be considered an !" system, a software package should ha#e the
following traits3
4hould be integrated and operate in real time with no periodic batch
updates.
5ll applications should access one database to pre#ent redundant
data and multiple data definitions.
5ll modules should ha#e the same look and feel.
6sers should be able to access any information in the system without
needing integration work on the part of the I4 department.
Commercial applications
Manufacturing
ngineering, bills of material, work orders, scheduling, capacity,
workflow management, +uality control, cost management,
manufacturing process, manufacturing pro7ects, manufacturing
flow
Supply chain management
8rder to cash, in#entory, order entry, purchasing, product
configurator, supply chain planning, supplier scheduling,
inspection of goods, claim processing, commission calculation
Financials
&eneral ledger, cash management, accounts payable, accounts
recei#able, fixed assets
Project management
-osting, billing, time and expense, performance units, acti#ity
management
Human resources
9uman resources, payroll, training, time and attendance, rostering,
benefits
Customer relationship management
4ales and marketing, commissions, ser#ice, customer contact, call-
center support
Data services
:arious $self-ser#ice$ interfaces for customers, suppliers and;or
employees
Access control
*anagement of user pri#ileges for #arious processes
History
%he term $nterprise resource planning$ originally deri#ed from
manufacturing resource planning (*!" II) that followed material
re+uirements planning (*!").
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*!" e#ol#ed into !" when
$routings$ became a ma7or part of the software architecture and a
company1s capacity planning acti#ity also became a part of the standard
software acti#ity.
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!" systems typically handle the
manufacturing, logistics, distribution, in#entory, shipping, in#oicing,
and accounting for a company. !" software can aid in the control of
many business acti#ities, including sales, marketing, deli#ery, billing,
production, in#entory management, +uality management, and human
resource management.
!" systems saw a large boost in sales in the '(()s as companies faced
the =>? problem in their legacy systems. *any companies took this
opportunity to replace such information systems with !" systems. %his
rapid growth in sales was followed by a slump in '(((, at which time
most companies had already implemented their =>? solution.
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!" systems are often incorrectly called back office systems, indicating
that customers and the general public are not directly in#ol#ed. %his is
contrasted with front office systems like customer relationship
management (-!*) systems that deal directly with the customers, or the
eBusiness systems such as e-ommerce, e&o#ernment, e%elecom, and
e@inance, or supplier relationship management (4!*) systems.
ERP systems are crossfunctional an! enterprise"i!e# All functional
!epartments that are involve! in operations or pro!uction are
integrate! in one system# $n a!!ition to areas such as
manufacturing% "arehousing% logistics% an! information technology%
this typically inclu!es accounting% human resources% mar&eting an!
strategic management#
ERP $$% a term coine! in the early '(((s% is often use! to !escri)e
"hat "oul! )e the ne*t generation of ERP soft"are# +his ne"
generation of soft"are is "e))ase! an! allo"s )oth employees an!
e*ternal resources ,such as suppliers an! customers- realtime
access to the system.s !ata#
54 A nterprise 5pplication 4uite is a new name for formerly
de#eloped !" systems which include (almost) all segments of business
using ordinary Internet browsers as thin clients.
%hough traditionally !" packages ha#e been on-premise installations,
!" systems are now also a#ailable as 4oftware as a 4er#ice.
/est practices are incorporate! into most ERP ven!or.s soft"are
pac&ages# 0hen implementing an ERP system% organi1ations can
choose )et"een customi1ing the soft"are or mo!ifying their
)usiness processes to the 2)est practice2 function !elivere! in the
2outofthe)o*2 version of the soft"are#
"rior to !", software was de#eloped to fit indi#idual processes of an
indi#idual business. Bue to the complexities of most !" systems and
the negati#e conse+uences of a failed !" implementation, most
#endors ha#e included $Best "ractices$ into their software. %hese $Best
"ractices$ are what the :endor deems as the most efficient way to carry
out a particular business process in an Integrated nterprise-Cide
system. 5 study conducted by Dudwigshafen 6ni#ersity of 5pplied
4cience sur#eyed '(> companies and concluded that companies which
implemented industry best practices decreased mission-critical pro7ect
tasks such as configuration, documentation, testing and training. In
addition, the use of best practices reduced o#er risk by E'F when
compared to other software implementations.
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%he use of best practices can make complying with re+uirements such as
I@!4, 4arbanes-8xley, or Basel II easier. %hey can also help where the
process is a commodity such as electronic funds transfer. %his is because
the procedure of capturing and reporting legislati#e or commodity
content can be readily codified within the !" software, and then
replicated with confidence across multiple businesses who ha#e the
same business re+uirement.
$mplementation
Businesses ha#e a wide scope of applications and processes throughout
their functional units, producing !" software systems that are typically
complex and usually impose significant changes on staff work practices.
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Implementing !" software is typically too complex for $in-house$
skill, so it is desirable and highly ad#ised to hire outside consultants who
are professionally trained to implement these systems.
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%his is typically
the most cost effecti#e way.
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%here are three types of ser#ices that may
be employed for - -onsulting, -ustomization, 4upport.
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%he length of
time to implement an !" system depends on the size of the business,
the number of modules, the extent of customization, the scope of the
change and the willingness of the customer to take ownership for the
pro7ect. !" systems are modular, so they don1t all need be implemented
at once. It can be di#ided into #arious stages, or phase-ins. %he typical
pro7ect is about 'G months and re+uires around '/) consultants.
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small pro7ect (e.g., a company of less than ')) staff) can be planned and
deli#ered within HI( months, howe#er, a large, multi-site or multi-
country implementation can take years.
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%he length of the
implementations is closely tied to the amount of customization desired.
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%o implement !" systems, companies often seek the help of an !"
#endor or of third-party consulting companies. %hese firms typically
pro#ide three areas of professional ser#ices3 consulting, customization,
and support. %he client organization can also employ independent
program management, business analysis, change management, and 65%
specialists to ensure their business re+uirements remain a priority during
implementation.
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Consulting services
*any organizations do not ha#e sufficient internal skills to implement
an !" pro7ect. %his results in many organizations offering consulting
ser#ices for !" implementation. %ypically, a consulting team is
responsible for the entire !" implementation including3
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'. selecting
>. planning
H. training
G. testing
/. implementation
2. deli#ery
of any customized modules. xamples of customization includes
creating processes and reports for compliance, additional product
training, creation of process triggers and workflow, specialist ad#ice to
impro#e how the !" is used in the business, system optimization, and
assistance writing reports, complex data extracts or implementing
Business Intelligence.
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@or most mid-sized companies, the cost of the implementation will range
from around the list price of the !" user licenses to up to twice this
amount (depending on the le#el of customization re+uired). Darge
companies, and especially those with multiple sites or countries, will
often spend considerably more on the implementation than the cost of
the user licensesAthree to fi#e times more is not uncommon for a multi-
site implementation.
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6nlike most single-purpose applications, !" packages ha#e historically
included full source code and shipped with #endor-supported team IBs
for customizing and extending the deli#ered code. Buring the early years
of !" the guarantee of mature tools and support for extensi#e
customization was an important sales argument when a potential
customer was considering de#eloping their own uni+ue solution in-
house, or assembling a cross-functional solution by integrating multiple
$best of breed$ applications.
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3e!it4 2Core system2 customi1ation vs configuration
Increasingly, !" #endors ha#e tried to reduce the need for
customization by pro#iding built-in $configuration$ tools to address
most customers1 needs for changing how the out-of-the-box core system
works. ?ey differences between customization and configuration
include3
-ustomization is always optional, whereas some degree of
configuration (e.g., setting up cost;profit centre structures,
organisational trees, purchase appro#al rules, etc.) may be needed
before the software will work at all.
-onfiguration is a#ailable to all customers, whereas customization
allows indi#idual customer to implement proprietary $market-
beating$ processes.
-onfiguration changes tend to be recorded as entries in #endor-
supplied data tables, whereas customization usually re+uires some
element of programming and;or changes to table structures or
#iews.
%he effect of configuration changes on the performance of the
system is relati#ely predictable and is largely the responsibility of
the !" #endor. %he effect of customization is unpredictable and
may re+uire time-consuming stress testing by the implementation
team.
-onfiguration changes are almost always guaranteed to sur#i#e
upgrades to new software #ersions. 4ome customizations (e.g.
code that uses pre-defined $hooks$ that are called before;after
displaying data screens) will sur#i#e upgrades, though they will
still need to be re-tested. *ore extensi#e customizations (e.g. those
in#ol#ing changes to fundamental data structures) will be
o#erwritten during upgrades and must be re-implemented
manually.
By this analysis, customizing an !" package can be unexpectedly
expensi#e and complicated, and tends to delay deli#ery of the ob#ious
benefits of an integrated system. Je#ertheless, customizing an !" suite
gi#es the scope to implement secret recipes for excellence in specific
areas while ensuring that industry best practices are achie#ed in less
sensiti#e areas.
E*tensions
In this context, $xtensions$ refers to ways that an !" en#ironment can
be $extended$ (supplemented) with third-party programs. It is
technically easy to expose most !" transactions to outside programs
that do other things, e.g.3
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archi#ing, reporting and republishing (these are easiest to achie#e,
because they mainly address static data),
performing transactional data captures, e.g. using scanners, tills or
!@IBs (also relati#ely easy because they touch existing data),
9owe#er, because !" applications typically contain sophisticated rules
that control how data can be created or changed, some such functions
can be #ery difficult to implement.
A!vantages
In the absence of an !" system, a large manufacturer may find itself
with many software applications that cannot communicate or interface
effecti#ely with one another. %asks that need to interface with one
another may in#ol#e3
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!" systems connect the necessary software in order for accurate
forecasting to be done. %his allows in#entory le#els to be kept at
maximum efficiency and the company to be more profitable.
Integration among different functional areas to ensure proper
communication, producti#ity and efficiency
Besign engineering (how to best make the product)
8rder tracking, from acceptance through fulfillment
%he re#enue cycle, from in#oice through cash receipt
*anaging inter-dependencies of complex processes bill of
materials
%racking the three-way match between purchase orders (what was
ordered), in#entory receipts (what arri#ed), and costing (what the
#endor in#oiced)
%he accounting for all of these tasks3 tracking the re#enue, cost and
profit at a granular le#el.
!" 4ystems centralize the data in one place. Benefits of this include3
liminates the problem of synchronizing changes between multiple
systems - consolidation of finance, marketing and sales, human
resource, and manufacturing applications
"ermits control of business processes that cross functional
boundaries
"ro#ides top-down #iew of the enterprise (no $islands of
information$), real time information is a#ailable to management
anywhere, anytime to make proper decisions.
!educes the risk of loss of sensiti#e data by consolidating multiple
permissions and security models into a single structure.
4horten production leadtime and deli#ery time
@acilitating business learning, empowering, and building common
#isions
4ome security features are included within an !" system to protect
against both outsider crime, such as industrial espionage, and insider
crime, such as embezzlement. 5 data-tampering scenario, for example,
might in#ol#e a disgruntled employee intentionally modifying prices to
below-the-breake#en point in order to attempt to interfere with the
company1s profit or other sabotage. !" systems typically pro#ide
functionality for implementing internal controls to pre#ent actions of this
kind. !" #endors are also mo#ing toward better integration with other
kinds of information security tools.
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Disa!vantages
"roblems with !" systems are mainly due to inade+uate in#estment in
ongoing training for the in#ol#ed I% personnel - including those
implementing and testing changes - as well as a lack of corporate policy
protecting the integrity of the data in the !" systems and the ways in
which it is used.
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Bisad#antages
-ustomization of the !" software is limited...
!e-engineering of business processes to fit the $industry standard$
prescribed by the !" system may lead to a loss of competiti#e
ad#antage.
!" systems can be #ery expensi#e (%his has led to a new
category of $!" light$ solutions)
!"s are often seen as too rigid and too difficult to adapt to the
specific workflow and business process of some companiesAthis
is cited as one of the main causes of their failure.
*any of the integrated links need high accuracy in other
applications to work effecti#ely. 5 company can achie#e minimum
standards, then o#er time $dirty data$ will reduce the reliability of
some applications.
8nce a system is established, switching costs are #ery high for any
one of the partners (reducing flexibility and strategic control at the
corporate le#el).
%he blurring of company boundaries can cause problems in
accountability, lines of responsibility, and employee morale.
!esistance in sharing sensiti#e internal information between
departments can reduce the effecti#eness of the software.
4ome large organizations may ha#e multiple departments with
separate, independent resources, missions, chains-of-command,
etc, and consolidation into a single enterprise may yield limited
benefits.