The Development of Enterprise

Resource Planning Systems

Objectives
After completing this chapter, you will be able to:
 Identify the factors that led to the development of
Enterprise Resource Planning (ERP) systems
 Describe the distinguishing modular
characteristics of ERP software
 Discuss the pros and cons of implementing an ERP
systema
 Summarize ongoing developments in ERP

2
Introduction
 Think about all the core processes needed to run a
company: finance, HR, manufacturing, supply chain,
services, procurement, and others. At its most basic
level, ERP integrates these processes into a single
system.
 But new ERP systems are anything but basic. They use
the latest technologies – such as machine learning and
AI – to provide intelligence, visibility, and efficiency
across every aspect of a business.

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Introduction
 Efficient, integrated information systems are very
important for companies to be competitive
 An Enterprise Resource Planning (ERP) system can
help integrate a company’s operations
 Acts as a company-wide computing environment
 Includes a database that is shared by all functional areas
 Can deliver consistent data across all business functions
in real time

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The Evolution of Information
Systems
 Silos
 Information systems configuration used until recently
 Companies had unintegrated information systems that
supported only the activities of individual business
functional areas
 Current ERP systems evolved as a result of:
 Advancement of hardware and software technology
 Development of a vision of integrated information
systems
 Reengineering of companies to shift from a functional
focus to a business process focus
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Computer Hardware and Software
Development
 Computer hardware and software developed rapidly in
the 1960s and 1970s
 First practical business computers were the mainframe
computers of the 1960s
 Over time, computers got faster, smaller, and cheaper
 Moore’s Law
 Number of transistors that could be built into a
computer chip doubled every 18 months

6
Computer Hardware and Software
Development

Figure 2-1 The actual increase in transistors on a chip approximates Moore’s Law
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Computer Hardware and Software
Development (cont’d.)
 Advancements in computer software
 1970s: relational database software developed
 Provide businesses the ability to store, retrieve, and analyze
large volumes of data
 1980s: spreadsheet software became popular
 Managers can easily perform complex business analyses

8
The Manufacturing Roots of ERP
 Manufacturing software developed during the 1960s
and 1970s
 Evolved from simple inventory-tracking systems to
material requirements planning (MRP) software
 Electronic data interchange (EDI)
 Direct computer-to-computer exchange of standard
business documents
 Allowed companies to handle the purchasing process
electronically

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Management’s Impetus to Adopt
ERP
 Hard economic times of the late 1980s and early 1990s
caused many companies to downsize and reorganize
 Stimulus to ERP development
 Inefficiencies caused by the functional model of
business organization
 Silos of information
 Limits the exchange of information between the lower
operating levels

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Management’s Impetus to Adopt
ERP (cont’d.)

Figure 2-2 Information and material flows in a functional business model

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Management’s Impetus to Adopt
ERP (cont’d.)
 Functional model led to top-heavy and overstaffed
organizations incapable of reacting quickly to change
 Process business model
 Information flows between the operating levels without
top management’s involvement
 Further impetus for adopting ERP systems has come
from compliance with the Sarbanes-Oxley Act of 2002
 Requires companies to substantiate internal controls on
all information
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Management’s Impetus to Adopt
ERP (cont’d.)

Figure 2-3 Information and material flows in a process business model

13
SAP Begins Developing Software
Modules
 During their work for German chemical company ICI,
Plattner and Hopp had developed the idea of modular
software development
 Software modules: individual programs that can be
purchased, installed, and run separately, but that all
extract data from the common database
 1982: SAP released its R/2 mainframe ERP software
package

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SAP Begins Developing Software
Modules (cont’d.)

 1980s: sales grew rapidly; SAP extended its software’s

capabilities and expanded into international markets
 By 1988, SAP had established subsidiaries in numerous
foreign countries

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New Directions in ERP
 Late 1990s: Year 2000 (or Y2K) problem motivated
many companies to move to ERP systems
 By 2000, SAP AG had 22,000 employees in 50
countries and 10 million users at 30,000 installations
around the world
 By 2000, SAP’s competition in the ERP market:
 Oracle
 PeopleSoft
 Late 2004: Oracle succeeded in its bid to take over
PeopleSoft
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New Directions in ERP (cont’d.)
 PeopleSoft
 Founded by David Duffield, a former IBM employee
 Today, PeopleSoft, under Oracle, is a popular software
choice for managing human resources and financial
activities at universities
 Oracle
 SAP’s biggest competitor
 Began in 1977 as Software Development Laboratories
(SDL)
 Founders: Larry Ellison, Bob Miner, and Ed Oates

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New Directions in ERP (cont’d.)
 SAP ERP
 Latest versions of ERP systems by SAP and other
companies allow:
 All business areas to access the same database
 Elimination of redundant data and communications lags
 Data to be entered once and then used throughout the
organization

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New Directions in ERP (cont’d.)

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New Directions in ERP (cont’d.)
 Current SAP ERP system: SAP ECC 6.0 (Enterprise
Central Component 6.0)
 Sales and Distribution (SD) module
 Materials Management (MM) module
 Production Planning (PP) module
 Quality Management (QM) module
 Plant Maintenance (PM) module
 Asset Management (AM) module

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New Directions in ERP (cont’d.)
 Current SAP ERP system: SAP ECC 6.0 (Enterprise
Central Component 6.0)
 Human Resources (HR) module
 Project System (PS) module
 Financial Accounting (FI) module
 Controlling (CO) module
 Workflow (WF) module

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New Directions in ERP (cont’d.)

Figure 2-5 Modules within the SAP ERP integrated information systems
environment (Courtesy of SAP AG)
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23
SAP ERP Software Implementation

 Not all companies that use SAP use all of the SAP ERP
modules
 Company’s level of data integration is highest when it
uses one vendor to supply all of its modules
 Configuration options allow the company to
customize the modules it has chosen to fit the
company’s needs

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SAP ERP Software Implementation
(cont’d.)

 Tolerance groups
 Specific ranges that define transaction limits
 SAP has defined the tolerance group methodology as its
method for placing limits on an employee
 Configuration allows the company to further tailor
tolerance group methodology

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SAP ERP Software Implementation
(cont’d.)

Figure 2-6 A customization example: tolerance groups to set transaction

limits` 26
SAP ERP Software Implementation
(cont’d.)
 Features of SAP ERP
 First software that could deliver real-time ERP
integration
 Usability by large companies
 High cost
 Automation of data updates
 Applicability of best practices
 Best practices: SAP’s software designers choose the best,
most efficient ways in which business processes should be
handled

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ERP for Midsized Companies
 By 1998
 Most of the Fortune 500 companies had already
installed ERP systems
 ERP vendors refocused their marketing efforts on
midsized companies
 SAP All-in-One
 Single package containing specific, preconfigured
bundles of SAP ERP tailored for particular industries
 Can be installed more quickly than the standard ERP
product

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ERP for Midsized Companies
(cont’d.)
 Application hosting
 Third-party company provides the hardware and
software support
 Makes ERP systems like SAP more appealing to
midsized companies
 SAP and Oracle are facing competition from smaller
providers of ERP software

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Responses of the Software to the
Changing Market
 In mid-1990s, many companies complained about the
difficulty of implementing SAP R/3 system
 SAP responded by developing Accelerated SAP (ASAP)
implementation methodology
 Eases the implementation process
 SAP continues to extend capabilities of SAP ERP with
additional, separate products that run on separate
hardware and extract data from the SAP ERP system

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Choosing Consultants and Vendors

 One person cannot fully understand a single ERP

system
 Before choosing a software vendor, most companies:
 Study their needs
 Hire an external team of software consultants to help
choose the right software vendor(s) and the best
approach to implementing ERP

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33
 The Significance and Benefits of
ERP Software and Systems
 More efficient business processes that cost less than
those in unintegrated systems
 Easier global integration
 Integrates people and data while eliminating the need
to update and repair many separate computer systems
 Allows management to manage operations, not just
monitor them
 Can dramatically reduce costs and improve operational
efficiency
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Benefits of ERP
 Higher productivity
 Better insights
 Accelerated reporting
 Lower risk
 Simpler IT
 Improved agility

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The Continuing Evolution of ERP

 Understanding the social and business implications of

new technologies is not easy
 ERP systems have been in common use only since the
mid-1990s
 ERP vendors are working to solve adaptability
problems that plague customers

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Summary
 Speed and power of computing hardware increased
exponentially, while cost and size decreased
 Early client-server architecture provided the
conceptual framework for multiple users sharing
common data
 Increasingly sophisticated software facilitated
integration, especially in two areas: A/F and
manufacturing resource planning

37
Summary (cont’d.)
 Growth of business size, complexity, and competition
made business managers demand more efficient and
competitive information systems
 SAP AG produced a complex, modular ERP program
called R/3
 Could integrate a company’s entire business by using a
common database that linked all operations
 SAP R/3, now called SAP ERP, is modular software
offering modules for Sales and Distribution, Materials
Management, Production Planning, Quality
Management, and other areas
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Summary (cont’d.)
 ERP software is expensive to purchase and time-
consuming to implement, and it requires significant
employee training—but the payoffs can be spectacular
 For some companies, ROI may not be immediate or even
calculable
 Experts anticipate that ERP’s future focus will be on
managing customer relationships, improving planning
and decision making, and linking operations to the
Internet and other applications through service-
oriented architecture
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