Enterprise resource planning

Diagram showing some typical ERP modules

Enterprise resource planning (ERP) is the integrated management

of main business processes, often in real time and mediated by
software and technology.

ERP is usually referred to as a category of business management

software—typically a suite of integrated applications—that an
organization can use to collect, store, manage, and interpret data
from many business activities.

ERP provides an integrated and continuously updated view of core

business processes using common databases maintained by a
database management system. ERP systems track business
resources—cash, raw materials, production capacity—and the
status of business commitments: orders, purchase orders, and

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 payroll. The applications that make up the system share data across
various departments (manufacturing, purchasing, sales, accounting,
etc.) that provide the data.[1] ERP facilitates information flow
between all business functions and manages connections to outside
stakeholders.[2]

Enterprise system software is a multibillion-dollar industry that

produces components supporting a variety of business functions. IT
investments have, as of 2011, become one of the largest categories
of capital expenditure in United States-based businesses. Though
early ERP systems focused on large enterprises, smaller enterprises
increasingly use ERP systems.[3]

The ERP system integrates varied organizational systems and

facilitates error-free transactions and production, thereby
enhancing the organization's efficiency. However, developing an
ERP system differs from traditional system development.[4] ERP
systems run on a variety of computer hardware and network
configurations, typically using a database as an information
repository.[5]

Origin
The Gartner Group first used the acronym ERP in the 1990s[6][7] to
include the capabilities of material requirements planning (MRP),
and the later manufacturing resource planning (MRP II),[8][9] as well
as computer-integrated manufacturing. Without replacing these
terms, ERP came to represent a larger whole that reflected the
evolution of application integration beyond manufacturing.[10]

Not all ERP packages are developed from a manufacturing core;

ERP vendors variously began assembling their packages with

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 finance-and-accounting, maintenance, and human-resource
components. By the mid-1990s ERP systems addressed all core
enterprise functions. Governments and non–profit organizations
also began to use ERP systems.[11]

Expansion
ERP systems experienced rapid growth in the 1990s. Because of the
year 2000 problem many companies took the opportunity to replace
their old systems with ERP.[12]

ERP systems initially focused on automating back office functions

that did not directly affect customers and the public. Front office
functions, such as customer relationship management (CRM), dealt
directly with customers, or e-business systems such as e-
commerce, e-government, e-telecom, and e-finance—or supplier
relationship management (SRM) became integrated later, when the
internet simplified communicating with external parties.[13]

"ERP II" was coined in 2000 in an article by Gartner Publications

entitled ERP Is Dead—Long Live ERP II.[14][15] It describes web–
based software that provides real–time access to ERP systems to
employees and partners (such as suppliers and customers). The
ERP II role expands traditional ERP resource optimization and
transaction processing. Rather than just manage buying, selling,
etc.—ERP II leverages information in the resources under its
management to help the enterprise collaborate with other
enterprises.[16] ERP II is more flexible than the first generation ERP.
Rather than confine ERP system capabilities within the organization,
it goes beyond the corporate walls to interact with other systems.
Enterprise application suite is an alternate name for such systems.
ERP II systems are typically used to enable collaborative initiatives

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 such as supply chain management (SCM), customer relationship
management (CRM), and business intelligence (BI) among business
partner organizations through the use of various e-business
technologies.[17][18]

Developers now make more effort to integrate mobile devices with

the ERP system. ERP vendors are extending ERP to these devices,
along with other business applications. Technical stakes of modern
ERP concern integration—hardware, applications, networking,
supply chains. ERP now covers more functions and roles—including
decision making, stakeholders' relationships, standardization,
transparency, globalization, etc.[19]

Characteristics
ERP systems typically include the following characteristics:

An integrated system
Operates in (or near) real time
A common database that supports all the applications
A consistent look and feel across module
Installation of the system with elaborate application/data
integration by the Information Technology (IT) department,
provided the implementation is not done in small steps[20]
Deployment options include: on-premises, cloud hosted, or
SaaS

Functional areas
An ERP system covers the following common functional areas. In
many ERP systems, these are called and grouped together as ERP
modules:

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 Financial accounting: general ledger, fixed assets, payables
including vouchering, matching and payment, receivables and
collections, cash management, financial consolidation
Management accounting: budgeting, costing, cost
management, activity based costing
Human resources: recruiting, training, rostering, payroll,
benefits, retirement and pension plans, diversity management,
retirement, separation
Manufacturing: engineering, bill of materials, work orders,
scheduling, capacity, workflow management, quality control,
manufacturing process, manufacturing projects, manufacturing
flow, product life cycle management
Order processing: order to cash, order entry, credit checking,
pricing, available to promise, inventory, shipping, sales analysis
and reporting, sales commissioning
Supply chain management: supply chain planning, supplier
scheduling, product configurator, order to cash, purchasing,
inventory, claim processing, warehousing (receiving, putaway,
picking and packing)
Project management: project planning, resource planning,
project costing, work breakdown structure, billing, time and
expense, performance units, activity management
Customer relationship management (CRM): sales and
marketing, commissions, service, customer contact, call center
support – CRM systems are not always considered part of ERP
systems but rather business support systems (BSS)
Data services: various "self–service" interfaces for customers,
suppliers and/or employees

GRP

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 Government resource planning (GRP) is the equivalent of an ERP for
the public sector and an integrated office automation system for
government bodies.[21] The software structure, modularization, core
algorithms and main interfaces do not differ from other ERPs, and
ERP software suppliers manage to adapt their systems to
government agencies.[22][23][24]

Both system implementations, in private and public organizations,

are adopted to improve productivity and overall business
performance in organizations, but comparisons (private vs. public)
of implementations shows that the main factors influencing ERP
implementation success in the public sector are cultural.[25][26][27]

Best practices
Most ERP systems incorporate best practices. This means the
software reflects the vendor's interpretation of the most effective
way to perform each business process. Systems vary in how
conveniently the customer can modify these practices.[28] In
addition, best practices reduced risk by 71% compared to other
software implementations.[29]

Use of best practices eases compliance with requirements such as

IFRS, Sarbanes-Oxley, or Basel II. They can also help comply with
de facto industry standards, such as electronic funds transfer. This
is because the procedure can be readily codified within the ERP
software and replicated with confidence across multiple businesses
that share that business requirement.[30][31]

Connectivity to plant floor information

ERP systems connect to real–time data and transaction data in a
variety of ways. These systems are typically configured by systems

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 integrators, who bring unique knowledge on process, equipment,
and vendor solutions.

Direct integration—ERP systems have connectivity

(communications to plant floor equipment) as part of their product
offering. This requires that the vendors offer specific support for the
plant floor equipment their customers operate.

Database integration—ERP systems connect to plant floor data

sources through staging tables in a database. Plant floor systems
deposit the necessary information into the database. The ERP
system reads the information in the table. The benefit of staging is
that ERP vendors do not need to master the complexities of
equipment integration. Connectivity becomes the responsibility of
the systems integrator.

Enterprise appliance transaction modules (EATM)—These

devices communicate directly with plant floor equipment and with
the ERP system via methods supported by the ERP system. EATM
can employ a staging table, web services, or system–specific
program interfaces (APIs). An EATM offers the benefit of being an
off–the–shelf solution.

Custom–integration solutions—Many system integrators offer

custom solutions. These systems tend to have the highest level of
initial integration cost, and can have a higher long term maintenance
and reliability costs. Long term costs can be minimized through
careful system testing and thorough documentation. Custom–
integrated solutions typically run on workstation or server-class
computers.

Implementation

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 ERP's scope usually implies significant changes to staff work
processes and practices.[32] Generally, three types of services are
available to help implement such changes—consulting,
customization, and support.[32] Implementation time depends on
business size, number of modules, customization, the scope of
process changes, and the readiness of the customer to take
ownership for the project. Modular ERP systems can be
implemented in stages. The typical project for a large enterprise
takes about 14 months and requires around 150 consultants.[33]
Small projects can require months; multinational and other large
implementations can take years.[34][35] Customization can
substantially increase implementation times.[33]

Besides that, information processing influences various business

functions e.g. some large corporations like Wal-Mart use a just in
time inventory system. This reduces inventory storage and
increases delivery efficiency, and requires up-to-date data. Before
2014, Walmart used a system called Inforem developed by IBM to
manage replenishment.[36]

Process preparation

Implementing ERP typically requires changes in existing business

processes.[37] Poor understanding of needed process changes prior
to starting implementation is a main reason for project failure.[38]
The difficulties could be related to the system, business process,
infrastructure, training, or lack of motivation.

It is therefore crucial that organizations thoroughly analyze business

processes before they implement ERP software. Analysis can
identify opportunities for process modernization. It also enables an
assessment of the alignment of current processes with those

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 provided by the ERP system. Research indicates that risk of
business process mismatch is decreased by:

Linking current processes to the organization's strategy

Analyzing the effectiveness of each process
Understanding existing automated solutions[39][40]

ERP implementation is considerably more difficult (and politically

charged) in decentralized organizations, because they often have
different processes, business rules, data semantics, authorization
hierarchies, and decision centers.[41] This may require migrating
some business units before others, delaying implementation to work
through the necessary changes for each unit, possibly reducing
integration (e.g., linking via Master data management) or
customizing the system to meet specific needs.[42]

A potential disadvantage is that adopting "standard" processes can

lead to a loss of competitive advantage. While this has happened,
losses in one area are often offset by gains in other areas,
increasing overall competitive advantage.[43][44]

Configuration

Configuring an ERP system is largely a matter of balancing the way

the organization wants the system to work with the way it was
designed to work. ERP systems typically include many settings that
modify system operations. For example, an organization can select
the type of inventory accounting—FIFO or LIFO—to use; whether to
recognize revenue by geographical unit, product line, or distribution
channel; and whether to pay for shipping costs on customer returns.
[42]

Two-tier enterprise resource planning

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 Two-tier ERP software and hardware lets companies run the
equivalent of two ERP systems at once: one at the corporate level
and one at the division or subsidiary level. For example, a
manufacturing company could use an ERP system to manage
across the organization using independent global or regional
distribution, production or sales centers, and service providers to
support the main company's customers. Each independent center
(or) subsidiary may have its own business models, workflows, and
business processes.

Given the realities of globalization, enterprises continuously

evaluate how to optimize their regional, divisional, and product or
manufacturing strategies to support strategic goals and reduce
time-to-market while increasing profitability and delivering value.[45]
With two-tier ERP, the regional distribution, production, or sales
centers and service providers continue operating under their own
business model—separate from the main company, using their own
ERP systems. Since these smaller companies' processes and
workflows are not tied to main company's processes and workflows,
they can respond to local business requirements in multiple
locations.[46]

Factors that affect enterprises' adoption of two-tier ERP systems

include:

Manufacturing globalization, the economics of sourcing in

emerging economies
Potential for quicker, less costly ERP implementations at
subsidiaries, based on selecting software more suited to
smaller companies
Extra effort, (often involving the use of Enterprise application
integration) is required where data must pass between two ERP

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 systems[47] Two-tier ERP strategies give enterprises agility in
responding to market demands and in aligning IT systems at a
corporate level while inevitably resulting in more systems as
compared to one ERP system used throughout the
organization.[48]

Customization

ERP systems are theoretically based on industry best practices, and

their makers intend that organizations deploy them "as is".[49][50]
ERP vendors do offer customers configuration options that let
organizations incorporate their own business rules, but gaps in
features often remain even after configuration is complete.

ERP customers have several options to reconcile feature gaps, each

with their own pros/cons. Technical solutions include rewriting part
of the delivered software, writing a homegrown module to work
within the ERP system, or interfacing to an external system. These
three options constitute varying degrees of system customization—
with the first being the most invasive and costly to maintain.[51]
Alternatively, there are non-technical options such as changing
business practices or organizational policies to better match the
delivered ERP feature set. Key differences between customization
and configuration include:

Customization is always optional, whereas the software must

always be configured before use (e.g., setting up cost/profit
center structures, organizational trees, purchase approval
rules, etc.).
The software is designed to handle various configurations and
behaves predictably in any allowed configuration.
The effect of configuration changes on system behavior and

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 performance is predictable and is the responsibility of the ERP
vendor. The effect of customization is less predictable. It is the
customer's responsibility, and increases testing activities.
Configuration changes survive upgrades to new software
versions. Some customizations (e.g., code that uses pre–
defined "hooks" that are called before/after displaying data
screens) survive upgrades, though they require retesting.
Other customizations (e.g., those involving changes to
fundamental data structures) are overwritten during upgrades
and must be re-implemented.[52]

Customization advantages include that it:

Improves user acceptance[53]

Offers the potential to obtain competitive advantage vis-à-vis
companies using only standard features

Customization disadvantages include that it may:

Increase time and resources required to implement and

maintain[51][54]
Hinder seamless interfacing/integration between suppliers and
customers due to the differences between systems[54]
Limit the company's ability to upgrade the ERP software in the
future[54]
Create overreliance on customization, undermining the
principles of ERP as a standardizing software platform

Extensions

ERP systems can be extended with third–party software, often via

vendor-supplied interfaces.[55][56] Extensions offer features such
as:[56]

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 product data management
product life cycle management
customer relations management
data mining
e-procurement

Data migration

Data migration is the process of moving, copying, and restructuring

data from an existing system to the ERP system. Migration is critical
to implementation success and requires significant planning.
Unfortunately, since migration is one of the final activities before the
production phase, it often receives insufficient attention. The
following steps can structure migration planning:[57]

Identify the data to be migrated.

Determine the migration timing.
Generate data migration templates for key data components
Freeze the toolset.
Decide on the migration-related setup of key business
accounts.
Define data archiving policies and procedures.

Often, data migration is incomplete because some of the data in the

existing system is either incompatible or not needed in the new
system. As such, the existing system may need to be kept as an
archived database to refer back to once the new ERP system is in
place.[57]

Advantages

The most fundamental advantage of ERP is that the integration of a

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 myriad of business processes saves time and expense.
Management can make decisions faster and with fewer errors. Data
becomes visible across the organization. Tasks that benefit from
this integration include:[58]

Sales forecasting, which allows inventory optimization.

Chronological history of every transaction through relevant
data compilation in every area of operation.
Order tracking, from acceptance through fulfillment
Revenue tracking, from invoice through cash receipt
Matching purchase orders (what was ordered), inventory
receipts (what arrived), and costing (what the vendor invoiced)

ERP systems centralize business data, which:

Eliminates the need to synchronize changes between multiple

systems—consolidation of finance, marketing, sales, human
resource, and manufacturing applications[citation needed]
Brings legitimacy and transparency to each bit of statistical
data
Facilitates standard product naming/coding
Provides a comprehensive enterprise view (no "islands of
information"), making real–time information available to
management anywhere, anytime to make proper decisions
Protects sensitive data by consolidating multiple security
systems into a single structure[59]

Benefits

ERP creates a more agile company that adapts better to

change. It also makes a company more flexible and less rigidly
structured so organization components operate more

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 cohesively, enhancing the business—internally and externally.
[60]

ERP can improve data security in a closed environment. A

common control system, such as the kind offered by ERP
systems, allows organizations the ability to more easily ensure
key company data is not compromised. This changes, however,
with a more open environment, requiring further scrutiny of ERP
security features and internal company policies regarding
security.[61]
ERP provides increased opportunities for collaboration. Data
takes many forms in the modern enterprise, including
documents, files, forms, audio and video, and emails. Often,
each data medium has its own mechanism for allowing
collaboration. ERP provides a collaborative platform that lets
employees spend more time collaborating on content rather
than mastering the learning curve of communicating in various
formats across distributed systems.[56]
ERP offers many benefits such as standardization of common
processes, one integrated system, standardized reporting,
improved key performance indicators (KPI), and access to
common data. One of the key benefits of ERP; the concept of
integrated system, is often misinterpreted by the business. ERP
is a centralized system that provides tight integration with all
major enterprise functions be it HR, planning, procurement,
sales, customer relations, finance or analytics, as well to other
connected application functions. In that sense ERP could be
described as "Centralized Integrated Enterprise System (CIES)"
[62]

Disadvantages

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 Customization can be problematic. Compared to the best-of-
breed approach, ERP can be seen as meeting an organization's
lowest common denominator needs, forcing the organization to
find workarounds to meet unique demands.[63]
Re-engineering business processes to fit the ERP system may
damage competitiveness or divert focus from other critical
activities.
ERP can cost more than less integrated or less comprehensive
solutions.
High ERP switching costs can increase the ERP vendor's
negotiating power, which can increase support, maintenance,
and upgrade expenses.
Overcoming resistance to sharing sensitive information
between departments can divert management attention.
Integration of truly independent businesses can create
unnecessary dependencies.
Extensive training requirements take resources from daily
operations.
Harmonization of ERP systems can be a mammoth task
(especially for big companies) and requires a lot of time,
planning, and money.[64]
Critical challenges include disbanding the project team very
quickly after implementation, interface issues, lack of proper
testing, time zone limitations, stress, offshoring, people's
resistance to change, a short hyper-care period, and data
cleansing.[65]

Postmodern ERP
The term "postmodern ERP" was coined by Gartner in 2013, when it
first appeared in the paper series "Predicts 2014".[66] According to
Gartner's definition of the postmodern ERP strategy, legacy,

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 monolithic and highly customized ERP suites, in which all parts are
heavily reliant on each other, should sooner or later be replaced by a
mixture of both cloud-based and on-premises applications, which
are more loosely coupled and can be easily exchanged if needed.

The basic idea is that there should still be a core ERP solution that
would cover most important business functions, while other
functions will be covered by specialist software solutions that
merely extend the core ERP. This concept is similar to the so-called
best-of-breed approach[67] to software execution, but it shouldn't
be confused with it. While in both cases, applications that make up
the whole are relatively loosely connected and quite easily
interchangeable, in the case of the latter there is no ERP solution
whatsoever. Instead, every business function is covered by a
separate software solution.[68]

There is, however, no golden rule as to what business functions

should be part of the core ERP, and what should be covered by
supplementary solutions. According to Gartner, every company
must define their own postmodern ERP strategy, based on
company's internal and external needs, operations and processes.
For example, a company may define that the core ERP solution
should cover those business processes that must stay behind the
firewall, and therefore, choose to leave their core ERP on-premises.
At the same time, another company may decide to host the core
ERP solution in the cloud and move only a few ERP modules as
supplementary solutions to on-premises.[68]

The main benefits that companies will gain from implementing

postmodern ERP strategy are speed and flexibility when reacting to
unexpected changes in business processes or on the organizational
level.[69] With the majority of applications having a relatively loose

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 connection, it is fairly easy to replace or upgrade them whenever
necessary. In addition to that, following the examples above,
companies can select and combine cloud-based and on-premises
solutions that are most suited for their ERP needs. The downside of
postmodern ERP is that it will most likely lead to an increased
number of software vendors that companies will have to manage, as
well as pose additional integration challenges for the central IT.[68]
[70]

See also
List of ERP software packages
Accounting software
Bill of resources
Business process management
Business intelligence
Cost accounting
Cybernetics
Document automation
Data migration
Economic planning
Enterprise feedback management (EFM)
Enterprise planning systems
Enterprise system
ERP modeling
ERP system selection methodology
Information technology management
List of project management software
Management information system
Manufacturing operations management
Material balance planning
Operations research

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 Service management
Software as a service
Visitor management systems

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External links

Media related to Enterprise resource planning at Wikimedia

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