ENTERPRISE RESOURCE PLANNING (ERP)

 Definition
 A system that integrates all aspects of an organization’s activities—such as accounting, finance, marketing,
human resources, manufacturing, inventory management— into one system.
o An ERP system is modularized; companies can purchase the individual modules that meet their
specific needs. Typical ERP Modules include:
 Financial Reporting and General Ledger
 Human Resource and Payroll
 Order to Cash (Revenue Cycle)
 Purchase to Pay (Expenditure Cycle)
 Manufacturing
 Project Management
 Customer Relationship Management
 System Tools
o An ERP facilitates information flow among the company’s various business functions and manages
communications with outside stakeholders.
 ERP systems help organizations deal with the supply chain, receiving, inventory management, customer
order management, production planning, shipping, accounting, human resource management, and other
business functions (Somers and Nelson, 2003).
 According to Deloitte Consulting, an ERP system is a packaged business software system that allows a
company to “automate and integrate the majority of its business processes; share common data and practices
across the enterprise; and produce and access information in a real-time environment.”
 The objective of ERP is to integrate key processes of the organization; by doing so, single computer system
can serve the unique needs of each functional areas.
o Unlike the traditional system, each functional areas or department has its own computer system
optimized to the way it does its daily business.
 Advantages of ERP
 An ERP provides an integrated, enterprise-wide, single view of the organization’s data and financial
situation. Storing all corporate information in a single database breaks down barriers between departments
and streamlines the flow of information.
 Data input is captured or keyed once, rather than multiple times, as it is entered into different systems.
Downloading data from one system to another is no longer needed.
 Management gains greater visibility into every area of the enterprise and greater monitoring capabilities.
Employees are more productive and efficient because they can quickly gather data from both inside and
outside their own department.
 The organization gains better access control. An ERP can consolidate multiple permissions and security
models into a single data access structure.
 Procedures and reports are standardized across business units. This standardization can be especially
valuable with mergers and acquisitions because an ERP system can replace the different systems with a
single, unified system.
 Customer service improves because employees can quickly access orders, available inventory, shipping
information, and past customer transaction details.
 Manufacturing plants receive new orders in real time, and the automation of manufacturing processes leads
to increased productivity.
 Disadvantages of ERP
 Cost. ERP hardware, software, and consulting costs range from $50 to $500 million and upgrades can cost
$50 million to $100 million. Midsized companies spend between $10 and $20 million.
 Amount of time required. It can take years to select and fully implement an ERP system, depending on
business size, number of modules to be implemented, degree of customization, the scope of the change, and
how well the customer takes ownership of the project. As a result, ERP implementations have a very high
risk of project failure.
 Changes to business processes. Unless a company wants to spend time and money customizing modules,
they must adapt to standardized business processes as opposed to adapting the ERP package to existing

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 company processes. The failure to map current business processes to existing ERP software is a main cause
of ERP project failures.
 Complexity. This comes from integrating many different business activities and systems, each having
different processes, business rules, data semantics, authorization hierarchies, and decision centers.
 Resistance. Organizations that have multiple departments with separate resources, missions, profit and loss,
and chains of command may believe that a single system has few benefits.
o It also takes considerable training and experience to use an ERP system effectively, and employee
resistance is a major reason why many ERP implementations do not succeed.
o It is not easy to convince employees to change how they do their jobs, train them in new procedures,
master the new system, and persuade them to share sensitive information.
o Resistance, and the blurring of company boundaries, can cause problems with employee morale,
accountability, and lines of responsibility.
 ERP Systems Development Process
1. Planning
o Planning starts with a needs assessment, which provides a business justification for the purchase of
the software.
o This needs assessment phase is important because of the major investment in an ERP system and its
business impact.
o The business justifications for ERP include tangible and intangible benefits, including:
 Inventory reduction
 Operating cost reductions
 Overdue accounts collection
 Process improvement
 Reduction in cycle times
2. Requirement Analysis
o Since the company is buying into the vendor’s view of best practices, it is important to select a
system which fits with the organization’s goals and competitive strategy.
o Requirements analysis activities involve:
 Analyzing business processes
 Specifying the processes to be supported by the ERP package
o Technology factors to consider in selecting an ERP System
 Cost of technology
o What are the start-up and recurring costs?
 Installation
o What consulting assistance is offered (time, cost)?
 User interfaces
o What interfaces are supported?
 Upgradability
o What is the frequency of upgrades?
 Computing environment
o What is the computing environment?
 Personnel requirements
o What expertise is needed for design and implementation?
3. Design
o The fundamental decision in ERP systems design is re-engineering versus customizing
 Re-engineering
o Systematic starting over and reinventing the way a firm, or a business process, gets
its work done
o The process of changing and improving the design of a product or system
o In the re-engineering approach, the team selects a commercial off-the-shelf ERP and
re-engineers business processes to fit the package.
o Re-engineering the business to fit the software can disrupt the organization because
this represents changes in procedures, work flows, and data.
 Customizing
o Modify to suit a particular individual or task.

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 o To build, fit, or alter according to individual specifications
o In the customizing approach, the team selects a commercial ERP and customizes the
ERP to meet unique requirements
o However, customizing an ERP can make upgrading to newer versions difficult since
vendor-supplied versions will be based upon vanilla versions of the software.
4. Detailed Design
o In the project’s detailed design phase, the team selects the models, processes, and information
supported by the system.
o Detailed design involves interactive prototyping and extensive user involvement in determining
systems design elements.
o The best practices methodology provides models supporting the business processes for each
functional area within the business.
5. Implementation
o ERP implementation includes:
 Addressing configuration issues
o Data Ownership
 Who is responsible for data integrity?
o Distribution of procedures
 Which business processes should be centralized?
 Which processes should remain under local control?
o Transactions
 Does the ERP provide an audit trail of transactions at the traceable level?
 Does the ERP provide an audit trail of transactions at the aggregate level?
o Data management
 Will the ERP support centralized data management—a master repository?
 Will the ERP support local data management?
 Migrating data from the old system to the new system
 Building interfaces
 Implementing reports
 Pilot testing
o ERP implementation includes establishing security and permissions, so users have the access they
need.
o Migrating data from the old system to the new system means ensuring that data to be migrated are
accurate and that data bridges work
o Risks Associated with ERP Implementation
 Implementing an ERP system has more to do with changing the way an organization does
business than it does with technology.
o As a result, most ERP implementation failures are the result of cultural problems
within the firm that stand in opposition to the objective of the new ERP system.
o Strategies for implementing ERP systems to achieve this objective follow two
general approaches:
1. Big Bang Method
 Organization taking this approach attempt to switch operations from
their old systems to the new system in a single event that
implements ERP across the entire company
 Although this method has certain advantages, it has been associated
with numerous system failures because the new ERP means new
ways of conducting business; getting the entire organization on
board and in sync can be a daunting task.
 Once the initial adjustment period has passed and the new culture
emerges, the ERP becomes an effective operational and strategic
tool that provides competitive advantage to the firm.
2. Phased-in Approach
 Because of the disruptions associated with the big bang, this
approach has emerged as a popular alternative.

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  It is particularly suited to diversified organizations whose units do
not share common processes and data.
 The goal is to get ERP up and running concurrently with old
system, and as more of the organization’s functions are converted to
ERP, old systems are systematically retired.
 Opposition to Changes in the Business Culture
o To be successful, all functional areas of the organization need be involved in
determining the culture of the firm and in defining the new system’s requirements.
o The firm’s willingness and ability to undertake a change of the magnitude of an
ERP implementation is an important consideration
 If the corporate culture is such that change is not tolerated or desired, then
an ERP implementation will not be successful.
o The technological culture must also be assessed
 Organizations that lack technical support staff for the new system or have a
user base that is unfamiliar with computer technology face a steeper
learning curve and potentially greater barrier to acceptance of the system by
its employees
 ERP Systems
1. Sales and Marketing
o Sales and Marketing Operational Processes
 Operational processes include daily activities, such as prospecting, contact management,
telemarketing, and direct mail.
 Sales representatives need to create and maintain lists of prospects by location, by product
category, and by sales potential and need to create and maintain a contact management
system, which tracks customer preferences, sales history data, and the history of sales calls
 Traditionally, sales and marketing operational functions are supported by:
o Sales order processing systems, which capture order data
o Point-of-sale (POS) systems, which capture data at the point of sale.
o Sales and Marketing Management Processes
 Management control activities in sales and marketing are designed to allocate sales and
marketing resources in order to achieve maximum revenues.
o Sales Management Process
 Sales managers are responsible for creating territories and for allocating
sales people’s time to generate maximum revenue and service
 The information that sales managers use to make decisions is largely based
upon an analysis of past sales; summary reports, comparative analysis
reports, and exception reports are all useful tools in analyzing sales trends
and determining how to best allocate resources.
 Sales Management software is used by sales managers to assess the
productivity of the sales force and the success of products, by salesperson,
by territory, and by customer type.
 Sales analysis will drive decisions about how to allocate sales personnel,
how to organize territories, how to serve customer needs, and how to train
sales personnel to use their time more effectively to generate maximum
revenues from the highest potential accounts.
o Sales Forecasting Process
 Sales forecasting is important to determine the potential needs of customers
in various market segments
 Sales forecasting activities include segmenting the market into target groups
of potential customers and planning products/services to meet the
customers’ needs.
 Sales forecasts can be developed for overall sales, for sales by territory, for
sales by each product or service, for sales for new products/services, and for
sales by sales representative.
 Sales forecasts use information on past sales history as well as information
about competition, customer demand, and demographic trends.

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 o Advertising and Promotion
 Another important marketing process, which requires decisions about how
to allocate resources, is advertising and promotion which answers the
following questions:
 Which advertising media and promotional channels should I use?
 Which advertising channels and media are most effective in
addressing specific market targets?
o Product Pricing Systems
 To make pricing decisions, the marketing manager should know the
expected product demand, the desired profit margin, the product production
costs, and the competing products.
 Pricing depends upon pricing strategy; pricing models are built from data
from various forces that influence pricing, including consumer price
indices, expected consumer disposable income, volume of products
produced, labor costs, and raw materials costs.
o ERP and Customer Relationship Management (CRM)
 An ERP system supports back-office functions, such as sales, accounting, human resources,
and manufacturing, and the ERP system provides a foundation for advanced applications,
such as CRM.
 CRM represents the systems that interface with the customer
 CRM is a comprehensive sales and marketing approach to building long-term customer
relationships.
 CRM provides a single interface to the customer, so a salesperson who has a customer will
know about all the worldwide interactions for that customer.
 Key features of CRM:
o One-on-one marketing
 Tailors products, pricing, and promotions to the customer
o Telemarketing
 Facilitates customer contact and call list management
o Sales force automation
 Maintains information on customer contacts in a database; forecasts
customer’s needs
o Sales campaign management
 Organizes marketing campaigns, including the creation of call lists
o Call center automation
 Enables queries to a product marketing database
o e-Selling
 Delivers on-line systems that enable customers to configure products on-
line, including a shopping basket
o Customer service
 Handles customer service, from the customer request for service to the
service technician reporting time and materials used
2. Accounting and Finance
o Accounting and Finance Operational Processes
 At the operational level, an accounting system produces transactions, such as paychecks,
checks to vendors, customer invoices, and purchase orders
 The accounting processes begin when a sales order is entered; this generates an inventory
update to the inventory system, which maintains information about each item in stock and
triggers the purchase of additional stock when stock levels reach certain points.
 The purchase order system creates purchase orders and tracks which purchase orders have
been filled, which items are on back order, and when orders are expected to be received.
 Operational Accounting Processes:
o General Ledger
o Fixed Asset
o Sales Order

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 o Accounts Receivable
o Accounts Payable
o Inventory Control
o Purchase Order
o Payroll
o Accounting and Finance Management Control Process
 Cash Management Process
o Cash management ensures the organization has sufficient cash to meet its needs and
to place excess funds into use through investments
o A cash flow analysis shows the estimated amount of revenues and expenditures each
month; budget analysts can perform what-if cash flow analysis to determine the
impact of different business conditions, such as decreased revenue, deferred
expenditures, deferred hiring, and leasing fixed assets instead of purchasing them.
 Capital Budgeting Processes
o Capital budgeting processes analyze the impact of possible acquisitions
o Capital budgeting uses evaluation tools, such as
 Net Present Value (NPV)
 Internal Rate of Return (IRR)
 Payback Period
o Accounting and Finance Modules in ERP Systems
 Traditionally, computerized accounting systems provide operating-level software to produce
invoices, checks, monthly statements, financial statements, and other financial outputs.
 The difference between traditional computerized accounting systems and ERP modules
supporting the Accounting and Finance departments is that financial information is shared in
an integrated database
o Accounts receivable balances are automatically updated, so sales has up-to-date
information on customer credit limits (Credit Management)
o Data is entered and stored in an integrated database, leading to uniform results
(Product Profitability)
o ERP automatically updates the increase in the monetary value of finished goods
when finished goods are transferred to the warehouse; financial statements are
updated (Finished Goods Inventory)
o Provides up-to-date information on cost variances, which enables the company to
establish prices that will enable it to sell products profitably (Inventory Costing)
o Provides an integrated database with the capability of converting multiple currencies
(Consolidation from Subsidiaries)
o ERP database is integrated, so all information is consistent, complete, and accurate;
a data warehouse provides a comprehensive database for management reporting
(Management Reporting)
o ERP provides interconnected document flow, which establishes an audit trail and
makes it possible to research and link source documents (Audit Trail)
 Financial Accounting Modules
o Financial Accounting deals with financial statements required for external reporting
purposes; external reporting requirements are set by general accounting standards,
as well as legal requirements
o Financial Accounting modules post all accounting transactions, and these
transactions are reflected in the general ledger
 Management Accounting Modules
o Management accounting modules provide an internal accounting perspective for
managers who are responsible for directing and controlling operations
o Management accounting modules provide information about variances between
planned versus actual data.
o Key management accounting activities include the following:
 Cost Center Accounting: Cost centers are organization sub-areas treated as
independent account assignment objects in cost accounting.

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  Internal Orders: Internal orders are used as a basis for collecting and
controlling costs according to the job incurring the costs.
 Activity-Based Costing (ABC): ABC monitors costs by business process
rather than by cost center, so the cost of a business process can be
determined.
 Product Cost Controlling: Product cost controlling calculates the costs of
manufacturing a product or providing a service; this provides information to
Profitability Analysis to calculate contribution margins.
 Profitability Analysis: Profitability analysis analyzes profit or loss by
individual market segments, which include products, customers, and orders.
 Profit Center Accounting: Profit center accounting evaluates the profit or
loss of an organization’s individual, independent areas.
 Consolidation: Consolidation provides the ability to consolidate financial
data for external and internal accounting perspectives.
o New Role for Management Accounting
 ERP systems provide on-line real-time data for decision making
 “Accountants are no longer at the back of the corporate ship issuing delayed
reports about the history of the voyage . . . Instead, they will be on the
bridge with the CEO, offering real-time cost information to help steer the
ship into the future” (Kaplan and Cooper, 1998)
3. Productions and Materials Management
o Background
 The history of manufacturing systems shows the evolution of systems that were designed to
re-order inventory using a re-order point systems, which adapt production schedules to meet
customer needs
o Increased flexibility, increased responsiveness to customer demand, and increased
integration are themes associated with manufacturing system evolution.
 The manufacturing systems of the 1960s, 1970s, and 1980s were designed to manage high-
volume production of a few products
 By the late 1980s, the rules of thumb governing manufacturing changed; customers expected
their suppliers to create new products and services to meet their needs
o This meant that production schedules needed to be more changeable and flexible to
accommodate changing customer demands
 In the 1990s, ERP systems were instrumental in integrating manufacturing processes with
other business processes; ERP systems manage processes across the supply chain so that
customers’ needs for information about products and services are met.
 Many of the problems with traditional systems occur because of lack of integration between
production planning, sales, purchasing, and accounting
o If production plans are not linked to expected sales levels, then there may not be
sufficient inventory to meet demand.
o There may be too many slow-moving items because customers no longer demand
these items
o Inaccurate production forecasts trigger incorrect purchasing decisions by Materials
Management, leaving excess raw materials and finished goods inventory
o Production Planning and Manufacturing Process
 Production Planning and Manufacturing Processes include all the activities necessary to
ensure production
 Production systems achieve these objectives
o Producing the production plan
o Acquiring raw materials
o Scheduling equipment, facilities, and workforce to process these materials
o Designing products and services
o Producing the right quantity and the required level of quality at the time required by
production goals
 Operational Level Processes:

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 o Purchasing
 To obtain the right quantity of raw materials and production supplies
o Receiving
 Items are inspected and received, and information about their status is
passed along to accounts payable, inventory, and production
o Quality Control (QC)
 Continues to monitor the quality of production goods as they move from
raw materials, to goods-in-process, to finished goods inventory
 In Total Quality Management (TQM) environment, emphasis is placed on
anticipating and preventing defects. Continuous feedback about quality is
critical.
o Cost accounting
 Collect and report information about the resources used in production
processes to determine accurate production costs, including the cost of
personnel, materials, equipment, and facilities
o Materials Management
 Provide information on inventory levels of production materials, usage of
these materials in production, and location of materials
o Inventory Management/Control
 Maintain inventories at their proper levels.
 Traditionally, a re-order point system makes certain that sufficient
production materials are ordered with sufficient lead time to arrive at the
plant when they are needed in the production process
 Another inventory management tool is economic order quantity, which
identifies the economic order quantity for each item.
o Management Control Processes in Production and Manufacturing
 Material Requirement Planning (MRP)
o An automated system used to support inventory management
o MRP supports these processes:
 Identifying stock that planned production calls for
 Determining the lead time to get the stock from suppliers
 Calculating safety stock levels
 Calculating the most cost-effective order quantities
 Producing purchase orders for needed stock items in the right amounts
o Just in Time (JIT) Model
 This manufacturing approach is in direct opposition to the traditional
manufacturing, which is typified by high inventory levels, large production
lot sizes, process inefficiencies and wastes.
 The just-in-time (JIT) inventory system is a management strategy that aligns
raw-material orders from suppliers directly with production schedules
 The ideal production and manufacturing environment is a just-in-time (JIT)
system, in which enough inventory is on hand to serve needs
 To make a just-in-time system work, suppliers need to deliver enough
material to meet the production schedule
 Capacity Planning Process
o The purpose of capacity planning is to determine if there is enough production
capacity, in terms of personnel, space, machines, and other production facilities, to
meet production goals
o Capacity planning requires detailed information about human resources, BOM (bill
of materials), goods-in-process inventories, finished goods inventories, lot sizes,
status of raw materials, orders in the plant, and lead time for orders
o Product Scheduling
 Allocate specific production facilities for the production of finished goods
to meet the master production schedule
 This allows managers to control projects and project completion times/dates
and to determine the impact of problems on projected completion dates.

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 o
Product Design and Development
 Integrate information about component costs into product
design/engineering in order to reduce costs.
o Production Planning and Manufacturing Modules in ERP System
 Sales Forecasting
o Production has access to sales forecasts, so it can adjust production levels to actual
sales if sales differ from expectations
 Sales and Operations Planning
o Determines if production facilities can produce enough to meet consumer demand
 Demand Management
o Breaks down the production plan into weekly production; produces the MPS, which
is the production plan for finished goods
 MRP
o Determines the amount and timing of raw materials orders or subassemblies to
support the MPS
 Purchasing
o Generates Purchase Orders for raw materials
 Detailed Scheduling
o Schedules production based on demand
 Production
o Uses the detailed schedule to manage operations
 Accounting
o ERP captures data on the shop floor for accounting purposes
4. Human Resources
o Human Resource Business Processes
 Operational Level
o Creating and maintaining employee information
o Position information
o Handling the job application screening and placement process
o Government reporting
o Payroll administration
 Management Control
o Job analysis and design
o Recruiting information
o Compensation
o Employee training and development
o Human Resource Information System
 HR information systems have evolved in much the same way as information systems
supporting finance, sales and marketing, and production and manufacturing
 Historically, there has been a reliance on stand-alone, specialized applications supporting
applicant tracking, compensation and benefits planning, skills training, and time and
attendance reporting
o This proliferation of applications leads to redundant data, which are difficult to
maintain
o Another shortcoming of traditional human resource management systems is their
failure to link HR data with financial data; HR software that maintains and updates
information on benefits, payroll, and labor without a tie-in to financial systems has
limited value.
 An HR module within an ERP system offers the linkage between HR applications and
financial systems and a standard set of processes based on best practices
o Human Resource Modules in ERP Systems
 The components of HR modules within an ERP system include
o HR Management records personnel activity from the job application to retirement.
Advanced systems can read résumés and enter pertinent data into the database.

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 o Benefits Administration links employee data to benefits data, including employee
benefit election data. Advanced systems enable employees to elect and update
benefits’ preferences via the web.
o Payroll produces paychecks, tax reports, and sends accounting data to the general
ledger.
o Time and Labor Management collects data for time/work reporting.
o Employee Self Service provides web-based self-service reporting for travel
reimbursement, personnel data changes, benefits enrollment, and training classes
enrollment.
 Attributes of Human Resource Modules in ERP Systems
o The attributes of a HR module within an ERP system include integration, a common
database underlying all individual modules, and a common relational database,
which promotes ad hoc query and reporting capabilities
o Additional ERP attributes include security, user friendliness, web features, and
document management and imaging capability.
 Implications for Internal Control and Auditing
 Transaction Authorization
o Controls need to be built into the system to validate transactions before other modules accept and act
upon them
o The challenge for auditors in verifying transactions transaction authorization is to gain a detailed
knowledge of ERP system configuration as well as a thorough understanding of the business
processes and the flow of information between system components
 Segregation of Duties
o Organizations using ERP systems must establish new security, audit and control tools to ensure
duties are properly segregated.
 Supervision
o Supervisors need to acquire an extensive technical and operational understanding of the ERP system.
 Accounting Records
o ERP systems have the ability to streamline the entire financial reporting process; in fact, many
organizations can do close their business daily.
o In spite of ERP technology, some risk to accounting records may still exist
 Inaccurate data may be passed from external sources and corrupt the ERP accounting
database.
 Some organizations still need to import data from old systems into their ERP.
 Independent Verification
o The focus of independent verification needs to be redirected from the individual transaction level to
one that views overall performance.
 Access Controls
o Access security is one of the most critical control issues in an ERP environment
o The goal of ERP access controls is to maintain data confidentiality, integrity, and availability.
o Uncontrolled access exposes organizations to cyber criminals who steal and subsequently sells
critical data to competitors.
o Traditional Access Control Models
 Traditionally, the owner of system resources (data, functions and processes) grants access
privileges individually to users based on the individual’s trust level and job description.
 Access control is typically achieved via an access control list, which specifies the user-ID,
the resources available for the user, and the level of permission granted such as read only,
edit or create.
 Any access-granting model must efficiently keep up with new hires, changes to existing
privilege brought about by promotions and individuals transferring from one department to
another, and personnel terminations.
o Role Based Access Control (RBAC)
 A role is a formal technique for grouping together users according to the system resources
they need to perform the assigned tasks.

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  More than one individual can be assigned to a role and a predefined set of access
permissions; also, an individual may be assigned more than one role, but can log into the
system only under one role a time.
 RBAC conveniently handles many-to-many relationships between users and permissions
and facilitates dealing efficiently with vast number of employees.
 Annex

END

Prepared by:
EUREZE LHOED G. TABAR
CPA, MBA, CrFA

Source:
 Accounting Information System Ninth Edition by James A. Hall
 Accounting Information Systems, Marshall Romney, Paul John Steinbart
 Enterprise Resource Planning, Mary Summer First Edition
 Various Websites

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