Enterprise Resource Planning

The Business Backbone

ERP is the technological backbone of e-business,
an enterprise wide transaction framework
with links into sales order processing,
inventory management and control,
production and distribution planning, and
finance .
ERP gives a company an integrated real-time view of its core
business processes, such as production, order processing,
and inventory management, tied together by the ERP
application software and a common database maintained
by a database management system. ERP systems track
business resources (such as cash, raw materials, and
production capacity), and the status of commitments made
by the business (such as customer orders, purchase orders,
and employee payroll), no matter which department
(manufacturing, purchasing, sales, accounting, and so on)
has entered the data into the system.
 Benefits and Challenges of ERP
• Quality and efficiency
ERP creates a framework for integrating and improving a company’s internal business
processes that results in significant improvements in the quality and efficiency of customer
service, production, and distribution.
• Decreased costs
Many companies report significant reductions in transaction processing costs and hardware,
software, and IT support staff compared to the non-integrated legacy systems that were
replaced by their new ERP systems.
• Decision support
ERP provides vital cross-functional information on business performance to managers
quickly to significantly improve their ability to make better decisions in a timely manner across
the entire business enterprise.
• Enterprise agility
Implementing ERP systems breaks down many former departmental and functional walls or
“silos” of business processes, information systems, and information resources. This results in
more flexible organizational structures, managerial responsibilities, and work roles, and
therefore a more agile and adaptive organization and workforce that can more easily
capitalize on new business opportunities.
 Costs of ERP
Though the benefits of ERP are many, the costs and risks are also
considerable, as we will continue to see in some of the real-
world cases and examples in the text. Figure 8.11 illustrates
the relative size and types of costs of implementing an ERP
system in a company. Notice that hardware and software costs
are a small part of total costs, and that the costs of developing
new business processes (reengineering) and preparing
employees for the new system (training and change
management) make up the bulk of implementing a new ERP
system. Converting data from previous legacy systems to the
new cross-functional ERP system is another major category of
ERP implementation costs.
 Trends in ERP
Figure 8.12 illustrates four major developments and trends that are evolving in ERP applications. First, the ERP
software packages that were the mainstay of ERP implementations in the 1990s, and were often criticized
for their inflexibility, have gradually been modified into more flexible products. Companies that installed
ERP systems pressured software vendors to adopt more open, flexible, standards-based software
architectures. This makes the software easier to integrate with other application programs of business
users, as well as making it easer to make minor modifications to suit a company’s business processes. An
example is SAP R/3 Enterprise, released in 2002 by SAP AG as a successor to earlier versions of SAP R/3.
Other leading ERP vendors, including Oracle, PeopleSoft, and J.D. Edwards, have also developed more
flexible ERP products. Web-enabling ERP software is a second development in the evolution of ERP. The
growth of the Internet and corporate intranets and extranets prompted software companies to use
Internet technologies to build Web interfaces and networking capabilities into ERP systems. These features
make ERP systems easier to use and connect to other internal applications, as well as to the systems of a
company’s business partners. This Internet connectivity has led to the development of interenterprise ERP
systems that provide Web-enabled links between key business systems (such as inventory and production)
of a company and its customers, suppliers, distributors, and others. These external links signaled a move
toward the integration of internal-facing ERP applications with the external-focused applications of supply
chain management (SCM) and a company’s supply chain partners. All of these developments have
provided the business and technological momentum for the integration of ERP functions into e-business
suites . The major ERP software companies have developed modular, Web-enabled software suites that
integrate ERP, customer relationship management, supply chain management, procurement, decision
support, enterprise portals, health care functionality, and other business applications and functions.
Examples include Oracle’s e-Business Suite and SAP’s mySAP. Some e-business suites disassemble ERP
components and integrate them into other modules, while other products keep ERP as a distinct module in
the software suite. Of course, the goal of these software suites is to enable companies to run most of their
business processes using one Web-enabled system of integrated software and databases, instead of a
variety of separate e-business applications.
 Supply Chain Management
Supply Chain Management is a cross-functional inter-
enterprise system that uses information technology
to help support and manage the links between some
of a company’s key business processes and those of
its suppliers, customers, and business partners.
The goal of SCM is to create a fast, efficient, and low-
cost network of business relationships, or supply
chain , to get a company’s products from concept to
market.
Let’s suppose a company wants to build and sell a product to other
businesses. Then it must buy raw materials and a variety of
contracted services from other companies. The interrelationships with
suppliers, customers, distributors, and other businesses that are needed
to design, build, and sell a product make up the network of business
entities, relationships, and processes that is called a supply chain.
Because each supply chain process should add value to the products
or services a company produces, a supply chain is frequently called a
value chain , a different but related concept. In any event, many
companies today are using Internet technologies to create
interenterprise e-business systems for supply chain management that
help a company streamline its traditional supply chain processes.
Figure 8.15 illustrates the basic business processes in the supply chain life cycle
and the functional SCM processes that support them. It also emphasizes how many
companies today are reengineering their supply chain processes, aided by Internet
technologies and supply chain management software. For example, the demands of
today’s competitive business environment are pushing manufacturers to use their intranets,
extranets, and e-commerce Web portals to help them reengineer their
relationships with their suppliers, distributors, and retailers. The objective is to significantly
reduce costs, increase efficiency, and improve their supply chain cycle times. SCM
software can also help to improve interenterprise coordination among supply chain
process players. The result is much more effective distribution and
channel networks among business partners. The Web initiatives of PC Connection
illustrate these developments.
The Role of SCM in Business
The top three levels show the strategic, tactical, and
operational objectives and outcomes of SCM planning,
which are then accomplished by the business partners in a
supply chain at the execution level of SCM.
The role of information technology in SCM is to support
these objectives with inter-enterprise information systems
that produce many of the outcomes a business needs to
manage its supply chain effectively.
That’s why many companies today are installing SCM
software and developing Web-based SCM information
systems.
 Benefits of SCM
• Companies know that SCM systems can provide them
with key business benefits such as faster,
• More accurate order processing; reductions in
inventory levels;
• Quicker times to market;
• Lower transaction and materials costs;
• And strategic relationships with their suppliers.
• All of these benefits of SCM are aimed at helping a
company achieve agility and responsiveness in
meeting the demands of its customers and the needs
of its business partners.
Objectives of Supply Chain Management
 Challenges of SCM
1. A lack of proper demand planning knowledge, tools, and guidelines
is a major source of SCM failure.
2. Inaccurate or overoptimistic demand forecasts will cause major
production, inventory, and other business problems, no matter
how efficient the rest of the supply chain management process is
constructed.
3. Inaccurate production, inventory, and other business data provided
by a company’s other information systems are a frequent cause of
SCM problems.
4. In addition, lack of adequate collaboration among marketing,
production, and inventory management departments within a
company, and with suppliers, distributors, and others, will
sabotage any SCM system.
 Trends in Supply Chain Management
Three possible stages in a company’s implementation of SCM
systems.
In the first stage, a company concentrates on making improvements
to its internal supply chain processes and its external processes
and relationships with suppliers and customers.
In stage two, a company accomplishes substantial supply chain
management applications by using selected SCM software
programs internally, as well as externally via intranet and extranet
links among suppliers, distributors, customers, and other trading
partners.
In the third stage, a company begins to develop and implement
cutting-edge collaborative supply chain management applications
using advanced SCM software, full-service extranet links, and
private and public e-commerce exchanges.