Enterprise resource planning (ERP) is a method of using computer technology to link various functions—such as accounting, inventory control, and human resources—across an entire company. ERP is intended to facilitate information sharing, business planning, and decision making on an enterprise-wide basis. ERP enjoyed a great deal of popularity among large manufacturers in the mid-to late-1990s. Most early ERP systems consisted of mainframe computers and software programs that integrated the various smaller systems used in different parts of a company. Since the early ERP systems could cost up to $2 million and take as long as four years to implement, the main market for the systems was Fortune 1000 companies.
"Throughout the 1990s, most large industrial companies installed enterprise resource planning systems—that is, massive computer applications allowing a business to manage all of its operations (finance, requirements planning, human resources, and order fulfillment) on the basis of a single, integrated set of corporate data," Dorien James and Malcolm L. Wolf wrote in The McKinsey Quarterly. "ERP promised huge improvements in efficiency—for example, shorter intervals between orders and payments, lower back-office staff requirements, reduced inventory, and improved customer service. Encouraged by these possibilities, businesses around the world invested some $300 billion in ERP during the decade."
By the late 1990s, however, sales of ERP systems began to slow. Some large manufacturers encountered problems implementing the systems, and others felt that ERP did not live up to its billing as a planning tool. Larger economic factors also influenced sales of ERP systems. For example, many companies developed close relationships with customers and suppliers and began conducting business over the World Wide Web. In addition, a growing number of companies came to value the speed and flexibility of smaller, interconnected computer systems and no longer wanted to rely on a mainframe to run ERP software. In response to these issues, the vendors of ERP systems have evolved to focus on smaller companies, develop Web-enabled systems, and expand their offerings up and down the supply chain.
When the idea was first introduced, ERP was an attractive solution for many large companies because it offered so many potential uses. For example, the same system could be used to forecast demand for a product, order the necessary raw materials, establish production schedules, track inventory, allocate costs, and project key financial measures. ERP "acts as a planning backbone for a company's core business processes," Gary Forger wrote in Modern Materials Handling. "In addition to directing many of them, the system also ties together these varied processes using data from across the company. For instance, a typical ERP system manages functions and activities as different as the bills of materials, order entry, purchasing, accounts payable, human resources, and inventory control, to name just a few of the 60 modules available. As needed, ERP is also able to share the data from these processes with other corporate software systems." Another important benefit of ERP systems was that they allowed companies to replace a tangle of complex computer applications with a single, integrated system.
Despite these potential benefits, however, traditional ERP systems also had a number of drawbacks. For instance, the early systems tended to be large, complicated, and expensive. Implementation required an enormous time commitment from a company's information technology department or outside professionals. In addition, because ERP systems affected most major departments in a company, they tended to create changes in many business processes. Putting ERP in place thus required new procedures, employee training, and both managerial and technical support. As a result, many companies found the changeover to ERP a slow and painful process. Once the implementation phase was complete, some businesses had trouble quantifying the benefits they gained from ERP.
Finally, as technology began shifting toward speedy Internet connections, Web-based business-to-business (B2B) relationships, and electronic commerce, some companies worried that their mainframe-based ERP systems were too slow and outdated. As it turned out, though, many companies found that their ERP systems provided a solid technological foundation for future growth by standardizing business procedures, facilitating information sharing across the company, and creating an organization accustomed to change. "ERP systems may feel like an albatross to companies that have expensively and painfully installed them," James and Wolf stated. "Nonetheless, they constitute a valuable foundation for a wide range of new value-enhancing applications. …In hindsightit appears that much of the value of these large systems lay in the infrastructure foundation they created for future growth based on information technology."
As sales of ERP systems to large manufacturing companies began to slow, some vendors changed their focus to smaller companies. According to a survey by AMR research reported in Modern Materials Handling, the overall market for ERP systems grew 21 percent in 1998, despite the fact that sales to companies with greater than $1 billion in revenues declined 14 percent during the same period. "ERP applications are no longer just the stuff of huge corporations," Constance Loizos noted in Industry Week. "While billion-dollar manufacturing companies are now completing their ERP implementations, mid-size customers—witness to the improved business processes of manufacturing market leaders—are beginning to refine their own operations…. Invariably the mostsubstantial reason for companies to implement ERP is that without it, staying competitive is a practical impossibility. The business world is moving ever closer toward a completely collaborative model, and that means companies must increasingly share with their suppliers, distributors, and customers the in-house information that they once so vigorously protected."
Of course, small and medium-sized companies—as well as those involved in service rather than manufacturing industries—have different resources, infrastructure, and needs than the large industrial corporations who provided the original market for ERP systems. Vendors had to create a new generation of ERP software that was easier to install, more manageable, required less implementation time, and entailed lower startup costs. Many of these new systems were more modular, which allowed installation to proceed in smaller increments with less support from information technology professionals. Other small businesses elected to outsource their ERP needs to vendors. For a fixed amount of money, the vendor would supply the technology and the support staff needed to implement and maintain it. This option often proved easier and cheaper than buying and implementing a whole system, particularly when the software and technology seemed likely to become outdated within a few years.
Another trend in ERP development and use involves vendors making the software available to client companies on the Internet. Known as hosted ERP or Web-deployed ERP, this trend has also contributed to making ERP systems available to smaller businesses. When a company chooses to run its ERP systems through a Web-based host, the software is not purchased by or installed at the client company. Instead, it resides on the vendor's host computer, where clients access it through an Internet connection. "Rather than dispersing ERP to multiple corporate sites and incurring the costs of many servers needed to run the software, Web-deployed ERP centralizes the system," Forger noted. "Using the Web to access a single ERP system at a central location, companies can reduce their IT investment on two fronts—hardware and personnel."
Running ERP systems on a host computer relieves small businesses from the need to purchase a mainframe computer or hire information technology specialists to support the system. In addition, this arrangement allows client companies to save money by paying only for the ERP applications they use rather than having to buy a certain number of modules. In effect, ERP vendors act as application service providers (ASPs) for several client firms. "Systems supplied by ASPs are particularly attractive to start-up companies that can't reliably predict their future business volumes, can't afford to pay for first-tier ERP systems, and don't want to be continually replacing cheaper, less capable systems as their businesses grow," James and Wolf explained.
Traditional ERP systems were concerned with automating processes and connecting disparate information systems within a business enterprise. But during the late 1990s, an increasing number of businesses turned their focus outward, toward collaboration and forging technological links to other companies in the supply chain. "Increasingly, manufacturers in developed countries are becoming part of the design and production line of their customers," Richard Adhikari wrote in Industry Week. "Tight scheduling requires automating the supply chain and enterprise resource planning functions and implementing electronic communications links." ERP vendors have responded to this trend by integrating ERP systems with other types of applications, such as e-commerce, and even with the computer networks of suppliers and customers. These interconnected ERP systems are known as extended enterprise solutions.
Sales of extensions to traditional ERP systems increased by 92 percent in 1999, and were expected to continue growing by over 50 percent annually through 2004, according to a survey by AMR Research reported in Manufacturing Systems. In the meantime, sales of core ERP systems were expected to stagnate. These core systems, which accounted for 90 percent of ERP vendors' revenues in 1999, were expected to make up only 57 percent of the market by 2004. "In today's business climate, manufacturers realize that true value comes from collaboration rather than trying to further streamline business processes," analyst Simon Bragg told Jim Fulcher in Manufacturing Systems. "For example, to get MRP [material requirements planning] to really work, a manufacturer needs decent forecast information. The best way to improve forecast accuracy is to work closely with customers and suppliers."
ERP systems have expanded to include several new functions. For example, application integration functions link ERP to other software systems that affect the supply chain. Visibility functions give companies an overview of inventory and its status as it moves through the supply chain. Supply chain planning software helps create optimal plans for producing and delivering goods. Similarly, customer relationship management software customizes the way that a supplier deals with each customer individually. ERP has also been adapted to support e-commerce by facilitating order fulfillment and distribution, simplifying the process of electronic procurement, and tracking information about customers and their orders.
As of 1998, according to Loizos, there were five leading ERP vendors that accounted for 62 percent of the market: SAP of Germany; Oracle; J.D. Edwards; People Soft; and Baan of the Netherlands. For the most part, these vendors focused on large business clients and concentrated on automating manufacturing, distribution, human resources, and financial systems. The remaining 38 percent of the ERP applications market was comprised of numerous smaller vendors which served smaller business clients and focused on niche applications.
Loizos outlined a series of factors for small businesses to consider in choosing an ERP vendor. For example, she emphasized that implementing an ERP system is a major information technology decision which requires time and resources, so companies should avoid choosing a vendor too quickly. Instead, she recommended that small businesses evaluate their needs carefully and come up with a list of business issues they expect the ERP system to help them address. Loizos also suggested that companies research potential ERP vendors thoroughly, looking at their reputations in the industry but also checking references and interviewing previous clients. She recommended avoiding multiple vendors if possible, and ensuring that the vendor chosen is appropriate for the small business's future growth and expansion plans. Finally, she noted that companies should ensure that project funding is in place before a contract is signed.
Once a small business has decided to install an ERP system and selected a vendor, there are a number of steps the company can take to ensure a successful implementation. In his article, Forger noted that the ERP implementation is more likely to succeed if the company positions it as a strategic business issue and integrates it with a process redesign effort. Of course, the ERP system should fit the company's overall strategy and help it serve its customers. It may also be helpful to find a passionate leader for the project and select a dedicated, cross-functional project team. The small business owner should make certain that these individuals have the power to make decisions about the ERP implementation process.
Forger recommends that companies attack the implementation project in short, focused stages, working backward from targeted deadlines to create a sense of urgency. It may be helpful to begin with the most basic systems and then expand to other functional areas. Forger also suggests using change management techniques to manage the human dimension of the project, since ERP requires a great deal of support from affected areas of the company. Finally, he emphasizes that once the ERP system is in place, companies need to interpret the data collected carefully and accurately if the system is to contribute to business planning.
Although ERP systems may seem complex and costly, even small businesses are increasingly finding it necessary to invest in such technology in order to remain competitive. "ERP systems are being implemented today to provide a stable foundation for a growing number of businesses across all segments, from dot-coms to major automotive manufacturers," Dave Morrison wrote in CMA Management. "The number of implementations down the supply chain and into small and medium-sized companies is steadily growing as the initial costs are reduced along with the overall cost of ownership. Pre-configured and pretested versions are now effectively slashing the implementation costs while reducing the project complexity and risks. These new systems are providing a clean head start in development and delivering a stable and fully tested product to production. The methodology is continually evolving and the results are very positive."
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