Enterprise Resource Planning

(ERP)
 Module 1
Introduction to ERP
 Learning Objectives

 Name the main functional areas of operation used in

business
 Differentiate a business process from a business
function
 Identify the kinds of data that each main functional area
produces and needs
 Define integrated information systems and explain why
they are important
 What is ERP Systems?

 The software tools used to manage

enterprise data
 A packaged business software
system to
 automate and integrate the majority of
business processes
 share common data and practices
 produce and access information in a real-
time environment

An ERP system introduces “best practices” which

are defined as “simply the best way to perform a
process”
 ERP as Integrated System

• The goal is to provide quick and effective access to information

• From stand alone systems to integrated system to support business processes
• Common information model
• Standardized interfaces
 ERP is Used in ...

 Aerospace & Defense  Media

 Automotive  Mill Products
 Banking  Mining
 Chemicals  Oil & Gas
 Consumer Products  Pharmaceuticals
 Defense & Security  Postal Services
 Engineering, Const.  Professional Services
 Healthcare  Public Sector
 High Tech  Railways
 Higher Education  Retail
 Industrial Machinery  Telecommunications
 Insurance  Utilities
 Life Sciences  Wholesale Distribution
 Logistics Service Prod
Functional Areas and Business Processes

 To understand ERP, you must

understand how a business works
 Functional areas of operation
 Business processes
Business Functions
 Functional Areas of Operation

 Business functions: Activities specific to a

functional area of operation
 Marketing and Sales (M/S)
 Supply Chain Management (SCM)
 Accounting and Finance (A/F)
 Human Resources (HR)
 Functional Areas of Operation [2]

Examples of
functional areas
of operation
and their
business
functions
 Functional Areas of Operation [3]

 Functional areas are interdependent

 Each requires data from the others
 Better integration of functional areas leads
to improvements in communication,
workflow, and success of company
 Information system (IS): Computers,
people, procedures, and software that store,
organize, and deliver information
Business Processes
 Definition of Business Processes

 Collection of activities that takes one

or more kinds of input and creates an
output that is of value to customer
 Customer can be traditional external customer
or internal customer
 Thinking in terms of business
processes helps managers to look at
their organization from the customer’s
perspective
 Business Processes
[2]
 Sample business processes related to the sale of a personal computer
 Business Processes [3]

 Businesses must always consider customer’s viewpoint

in any transaction
 Successful customer interaction
 Customer (either internal or external) is not required to interact with
each business function involved in the process
 Successful business managers view business
operations from the perspective of a satisfied customer
 Sharing data effectively and efficiently between and
within functional areas leads to more efficient business
processes
 Integrated information systems: Systems in which
functional areas share data
 Business Processes [4]

 A process view of
business
 Business Processes [5]

 Businesses take inputs (resources) and

transform these inputs into goods and
services for customers
 Inputs: Material, people, equipment
 Managing inputs and business processes
effectively requires accurate and up-to-date
information
 Marketing and Sales

 Functions of Marketing and Sales

 Developing products
 Determining pricing
 Promoting products to customers
 Taking customers’ orders
 Helping create a sales forecast
 Marketing and Sales [2]

 Marketing and Sales tasks for the

lemonade stand
 Formal recordkeeping not required
 Need to keep track of customers
 Product development can be done
informally
 Good repeat customers allowed to charge
purchases—up to a point
• Records must show how much each
customer owes and his or her available credit
 Supply Chain Management (SCM)

 Functions within Supply Chain

Management
 Making the lemonade
(manufacturing/production)
 Buying raw materials
(purchasing)
 Production planning requires sales
forecasts from M/S functional
area
 Sales forecasts: Analyses that attempt to
predict the future sales of a product
 Supply Chain Management [2]

 Production plans used to develop

requirements for raw materials and
packaging
 Raw materials: Bottled spring water, fresh
lemons, artificial sweetener, raw sugar
 Packaging: Cups, straws, napkins
 SCM and M/S must choose a recipe
for each lemonade product sold
 Accounting and Finance

 Functions within Accounting and

Finance
 Recording raw data about transactions
(including sales), raw material purchases,
payroll, and receipt of cash from
customers
 Raw data: Numbers collected from
those operations, without any
manipulation, calculation, or
arrangement for presentation
 Accounting and Finance [2]

 Data from Accounting and Finance

used by Marketing and Sales and
Supply Chain Management
 Sales records are important component of
sales forecast
 Sales forecast is used in making staffing
decisions and in production planning
 Records from accounts receivable used to
monitor the overall credit-granting policy of the
lemonade stand
 Human Resources

 Functions of Human Resources

 Recruit, train, evaluate, and compensate
employees
 HR uses sales forecasts developed by
the individual departments to plan
personnel needs
Systems integrated using ERP software
provide the data sharing necessary
between functional areas
 Functional Area
Information Systems
 Marketing and Sales

 Needs information from all other functional

areas
 Customers communicate orders to M/S in
person or by telephone, e-mail, fax, the Web,
etc.
 M/S has a role in determining product prices
 Pricing might be determined based on a product’s
unit cost, plus some percentage markup
 Requires information from Accounting and Finance,
and Supply Chain Management data
 Marketing and Sales [2]

The Marketing and Sales functional area exchanges data with customers
and with the Human Resources, Accounting and Finance, and Supply Chain
Management functional areas
 Supply Chain Management

 Needs information from various functional areas

 Production plans based on information about product sales
(actual and projected) that comes from Marketing and Sales
 With accurate data about required production levels:
 Raw material and packaging can be ordered as needed
 Inventory levels can be kept low, saving money
 Supply Chain Management data and records can:
 Provide data needed by Accounting and Finance to determine how
much of each resource was used
 Support the M/S function by providing information about what has
been produced and shipped
 Supply Chain Management interacts in some ways with Human
Resources
 Supply Chain Management [2]
The Supply Chain Management functional area exchanges data with
suppliers and with the Human Resources, Marketing and Sales, and
Accounting and Finance functional areas
 Accounting and Finance

 Needs information from all other functional areas

 A/F personnel:
 Record company’s transactions in the books of account
 Record accounts payable when raw materials are purchased
and cash outflows when they pay for materials
 Summarize transaction data to prepare reports about company’s
financial position and profitability
 People in other functional areas provide data to A/F
 M/S provides sales data
 SCM provides production and inventory data
 HR provides payroll and benefit expense data
 M/S personnel require data from A/F to evaluate customer
credit
 Accounting and Finance [2]

The Accounting and Finance functional area exchanges data with

customers and with the Human Resources, Marketing and Sales, and Supply
Chain Management functional areas
 Human Resources

 HR needs information from the other

departments
 Tasks related to employee hiring, benefits,
training, and government compliance are all
responsibilities of HR
 HR needs accurate forecasts of personnel
needs from all functional units
 HR needs to know what skills are needed to
perform a particular job and how much the
company can afford to pay employees
 Observing governmental regulations in
recruiting, training, compensating, promoting,
and terminating employees
 Human Resources [2]

The Human Resources functional area exchanges data with the Accounting
and Finance, Marketing and Sales, and Supply Chain Management functional
areas
 ERP Modules Supported by Vendors

Function SAP Oracle PeopleSoft

Sales order Sales and Marketing Sales Supply Chain
processing Distributions (SD) Supply Chain Management
Purchasing Materials Procurement Supplier
Management (MM) Relationship
Management
Production Production Manufacturing
Planning Planning (PP)
Financial Financial Financials Financial
Accounting Accounting (FA) Management
Systems
Management Controlling (CO)
Accounting
Human Resources Human Resources Human Resources Human Capital
(HR) Management
Source: Vendor Websites
 ERP Design Alternatives

Option Cost and Time Advantages Disadvantages

Vanilla ERP $150 million over Complete standardization of Competitors have access
implementation 5 years business processes based to the same system
upon vendor’s “best Disruption of operations
practices” over 3-5 years
Partial ERP $108 million over Partial changes in business Disruption of operations
implementation 2-3 years processes over 2-3 years
(e.g. selected
modules)
In-house $240 million over Custom-designed ERP Long-term analysis and
development 7-10 years system – unique design process; high
from competitors expenses
Status quo No cost but no No business process May provide a competitive
gain change; little disruption of disadvantage because
operations competitors have an ERP
system
 ERP Implementation Approach

Implementation Approach Swedish U.S.

(%) (%)
Single ERP package 55.6 39.8
Single ERP package with other systems 30.1 50
Multiple ERP packages with other systems 6.5 4.0
Best-of-breed from several ERP packages 3.9 3.9
Totally in-house developed 2.0 0.5
In-house plus specialized packages 2.0 1.0
 ERP Cost Components

ERP Cost Component Swedish (%) U.S. (%)

Software 24.2 30.2
Hardware 18.5 17.8
Consulting 30.1 24.1
Training 13.8 10.9
Implementation team 12.0 13.6
Main Elements in Implementing ERP

Technology Processes
-Hardware -Business events
-Software -SOP
-Workflow

People
-Knowledge
-Skills
-Behaviors
The Stages in Implementing ERP System

 Markus et al. Proposes three stages:

 The project phase
• Introducing ERP software
 The shakedown phase
• Implementing ERP software into the firm’s
operations
 The onward and upward phase
• ERP modules are sucessfully integrated with
operations that the organization can achieve the
actual business results such as inventory
reduction
 ERP Issues

 Use ERP system or develop from scratch?

 The biggest mistake made in
implementing ERP, especially in a
manufacturing environment, is to redesign
the new system to work in the old
environment (Honig, 1999)
The Development of
ERP Systems
 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
 ERP Software Emerges:
SAP and R/3
 1972: five former IBM systems analysts in Mannheim,
Germany formed Systemanalyse und Programmentwicklung
(Systems, Applications and Products in Data Processing, or
SAP)
 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
 SAP’s goals:
 Develop a standard software product that could be configured to
meet the needs of each company
 Data available in real time
 Users working on computer screens, rather than with
voluminous
 SAP ERP
 SAP ECC 6.0 (Enterprise
Central Component
6.0)
 Sales and Distribution (SD)
 Materials Management (MM)
 Production Planning (PP)
 Quality Management (QM)
 Plant Maintenance (PM)
 Asset Management (AM)
 Human Resources (HR)
 Project System (PS)
 Financial Accounting (FI)
 Controlling (CO)
 Workflow (WF)
(Courtessy of SAP AG)
 Summary

 Employees working in one functional area need data

from employees in other functional areas
 Functional area information systems should be integrated, so
shared data are accurate and timely
 Managers think in terms of business processes that
integrate the functional areas
 Need to share information between functions and functional
areas
 ERP software provides this capability by means of a single
common database
 Accounting and Finance: Financial accounting to
provide summaries of operational data in managerial
reports, controlling accounts, planning and
budgeting, and cash-flow management
 Summary [2]

 Human Resources: Recruits, hires, trains, and

compensates employees, ensures compliance with
government regulations, and oversees the evaluation
of employees
 Information systems capture, process, and store data
to provide information needed for decision making
 Employees working in one functional area need data
from employees in other functional areas
 Functional area information systems should be integrated, so
shared data are accurate and timely
 Managers think in terms of business processes that
integrate the functional areas
 Need to share information between functions and functional
areas
 ERP software provides this capability by means of a single
common database
 References

 E.F.Monk and B.J. Wagner. Concepts in

Enterprise Resource Planning, 4th edition. Course
Technology, 2013
 Magal and Word. Integrated Business Processes
with ERP Systems. Wiley, 2012
 Sumner, Mary. Enterprise Resource Planning.
Prentice Hall, 2005.
 Teaching Materials from SAP University
Alliances