Enterprise Resource Planning (ERP)

1. Enterprise Resource Planning (ERP) Dr Jirarat Sitthiworachart Faculty of Information Technology King Mongkut’s University of Technology North Bangkok

2. ERP Overview • Enterprise Resource Planning (ERP) programs are software used by companies to manage information in every area of the business. • ERP programs help manage company-wide business processes using a common database and shared management reporting tools. • ERP software supports the efficient operation of business processes by integrating activities throughout a business.

3. Functional Areas of Operation • Most companies have four main functional areas: • Marketing and Sales (M/S) • Supply Chain Management (SCM) • Accounting and Finance (A/F) • Human Resources (HR) • Historically, business have had organizational structures that separated the functional areas, and • business schools have been similarly organized, so each functional area has been taught as a separate course.

4. Functional Areas of Operation

5. Business Processes • A business process is a collection of activities that takes one or more inputs and creates an output that is of value to the customer, for example • Input – Technical support by M/S • Process – 24-hour help line available • Output – Customer’s technical query is resolved • The customer may be the traditional external customer who buys the product or service, or an internal customer (a colleague in another department) • The customer does not care that different functions are involved in processing their order, and will not tolerate mistakes and delays caused by poor coordination of business functions

6. Sample of Business Processes • Suppose that a customer wants to purchase a new computer. • She wants information about the company’s products. • She wants to place her order quickly and easily. • She expects quick delivery of a correctly configured, working computer. • She wants 24-hour customer support for any problems. • The customer is not concerned about how the computer was marketed, or how its components were purchased, or how it was built, or the route the delivery truck took to get to her house.

7. Sample of Business Processes • Suppose the customer’s computer is damaged during shipment. • Several functional area (i.e. CRM, M/S) are involved in repair and return of the computer, the handling of the repair is a business process. • A successful customer interaction is one in which the customer is not required to interact with each business function involved in the process. • Successful business managers view their business operations from the perspective of a satisfied customer.

8. Sample of Business Processes • For the computer company to provide customer satisfaction, it must take sure that its functional areas of operation are integrated. For example • Computer technology changes rapidly, and the hardware the company sells changes frequently. Therefore, people performing the sales function must have up-to-date information about computer configurations so they can provide the customer with accurate information. • People performing the manufacturing function need to get the details of the customer’s computer configuration quickly and accurately from those performing the sales function, so the right computer can be manufactured and shipped on time to the customer.

9. Integration of Business Functions • Sharing data efficiently and effectively within and between functional areas leads to more efficient business processes • Information systems that share data between functional areas are called Integrated Information Systems • Lack of integration can lead to costly inefficiencies • Errors from keying in the same data more than once • Lack of timely data due to periodic updating between systems • Problems with data being defined differently in different systems

10. Integration of Business Functions • ERP systems can integrate a company’s operations by providing a company-wide computing environment that: • Includes a single database shared by all functions • Can deliver consistent data to all business functions in real-time • ERP systems can dramatically reduce costs and increase operational efficiency • With ERP, IBM Storage Systems division • Reprices inventory in 5 minutes instead of 5 days • Ships a replacement part in 3 days instead of 22 • Checks customer credit in 3 seconds instead of 20 minutes

11. Lemonade Stand Functional Areas • Marketing and Sales • Design new products • Determine pricing • Promote products • Take customer orders • Make sales forecast • Track repeat customers to send flyers or thank-you notes • Manage credit

12. Lemonade Stand Functional Areas • Supply Chain Management • Buying raw materials (purchasing) • Making lemonade (production) • Manage recipe • Maintain manufacturing (cost) records

13. Lemonade Stand Functional Areas • Accounting and Finance • Recording raw transaction data • Sales, raw material purchases, payroll, cash receipts • Provide data for sales forecasting, credit management, cash management

14. Lemonade Stand Functional Areas • Human Resources • Recruit, train, evaluate and compensate employees • Develop personnel plans (staffing) based on sales • Determine compensation/wages—depends on labor market

15. Functional Area Information Systems

16. Supply Chain Management • Manufacturing firms develop production plans of varying length and detail. For example • expanding manufacturing capacity, • hiring new workers, • paying extra overtime for existing workers and • taking sales forecasts to plan manufacturing runs. • Production plans are based on information about product sales that comes from M/S. • The purchasing function bases its orders of raw materials on production plans, expected shipments, delivery lead time, and existing inventory levels.

17. Supply Chain Management (cont.) • With accurate data about required production levels, raw material and packaging can be ordered as needed, and inventory levels can be kept low, saving money. • SCM data can support the M/S function by providing information about what has been produced and shipped. • Accurate and timely production information can support the sales production and increase customer satisfaction.

18. Enterprise Resource Planning Systems

19. SAP • Systemanalyse und Programmentwicklung (SAP) was formed in Mannheim, Germany, in 1972 by five former IBM systems analysts • SAP’s goal was to develop a standard business software product that could be configured to meet the needs of a company • SAP’s founders wanted • Data to be available in real time • Users to work on a computer screen, not with paper

20. SAP R/3 Enterprise • The system allows data to be entered once and then used throughout the organization. • SAP’s R/3 Enterprise uses a central database to share data between the primary functional areas of: • Marketing and Sales • Production and Materials Management • Human Resources • Accounting and Finance

21. Y2K • Most business software programs written in the 1960s and ‘70s saved storage space by using only 2 digits to store the year • For example, 10/29/75 rather than 10/29/1975 • Companies faced a choice as the new millennium approached: • Rewrite old software to store year data correctly • Use problem as an opportunity to upgrade to ERP

22. Y2K • The Y2K problem created explosive sales growth for Y2K-compliant ERP systems • This lead to a significant shortage of experienced ERP consultants, leading many companies to have problems with their sometimes-rushed implementations • The high demand for experienced ERP consultants prior to Y2K was followed by an abrupt drop off by the middle of 1999 • By middle 1999, companies had decided how they were going to handle the Y2K problem, so new ERP sales dropped significantly

23. Best Practices • Before ERP, IS people designed software to reflect a company’s business practices • With ERP software, the software developers have used their experience with a number of companies to develop “best practices” • Which means that R/3 designers choose the best, most efficient ways in which business processes should be handled

24. Best Practices (cont.) • The company began to develop models of how certain industries’ business process should be managed in a way that was compatible with the R/3 system. • Best Practices represent the way an ERP company feels a particular business transaction should be carried out to maximize efficiency

25. ERP Software Benefits • Reduced IT maintenance: single system is easier to maintain • Provides information so that a company can be managed, not just monitored • For example, without ERP, getting an answer to “How are we doing?” requires getting data from each business unit and then putting the data together for a comprehensive, integrated picture. • The ERP system already has all the data, allowing the manager to focus on improving processes. • This focus enhances management of the company as a whole, and makes the organization more adaptable when change is required.

26. ERP System Costs • The cost of an ERP system: • Depends on the size and complexity of the software package, which is a function of the size of the firm • Includes new hardware required to run the system • Includes consultant and business analyst fees • Includes the time required for implementation (disruption of business) • Includes training costs (cost to develop and deploy training plus employees’ time away from their job) • A large company, with over 1,000 employees, can spend from $50 million to $500 million on a complex implementation

27. Summary • All manufacturing companies have basic functional areas of: • Marketing and Sales: Sets product prices, promotes products, takes customer orders, and creates sales forecasts. • Supply Chain Management: Develops production plans, orders raw materials from suppliers, receives the raw material into the facility, manufactures products, and ships products to customers.

28. Summary • All manufacturing companies have basic functional areas of: • Accounting and Finance: Records sales transactions, records customers’ payments, records suppliers’ invoices and payments to suppliers, and summarizes operational data in managerial reports. • Human Resources: Recruits, trains, compensates, and oversees the evaluation of employees.

29. Summary • Functional areas are served by information systems, which capture, process, and store data to provide information needed for decision making. • Employees working in one functional area need data from other functional areas. Functional area information systems should be integrated, so shared data are accurate and readily available.

30. Summary • Business managers are increasingly thinking in terms of business processes that integrate functional areas. • The business process view promotes efficiency and competitiveness. • Business processes require information sharing between functional areas. • ERP software provides this capability by using a single common database.