Ask the Experts: So, This ERP Thing… How Does It Work?

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TEC reader Martin K. recently wrote in with these questions:
What kind of data is handled by ERP systems and how it is done? How does the interface work? Which departments normally use it? And who is the recommended team that should choose the ERP system?

TEC analyst Alex Hankewicz says:

To answer these questions, we need to take a step back and examine the evolution of ERP.

ERP systems were developed as an extension of materials requirements planning (MRP) systems. MRP, in turn, was originally developed (late 70s and early 80s) to integrate planning and scheduling elements to the manufacturing process. Subsequently “MRP II” was introduced to incorporate the planning elements of distribution and forecast requirements to the central manufacturing location.

ERP was introduced in the late 80s as a means to integrate other enterprise functionality. One example would be when a software system can provide at least two other functions (as is the case if an organization has the means to integrate the requirements of both a human resources module and a financial system).

In modern ERP systems, usage is not confined to manufacturing organizations. It is typically designed to integrate applications that traditionally would have been separate “stand alone” activities, such as product configuration control, bill of materials and sales, or order entry.

In current ERP systems one would expect to have the ability to manage the following applications (among others) through a single database:

  • manufacturing

  • supply chain

  • financials

  • customer relationship management

  • HR

  • warehouse management

  • business intelligence

Determining which ERP solution best meets your needs depends to a great extent on your industry vertical space, as well as the application requirements of your organization.

If your organization lacks the resources to integrate a complete ERP system package, then only portions of the system need be implemented, with the other applications introduced gradually over a period of time. In other instances an organization may already have a very robust accounting system, with other applications in place, and may simply be looking to extend the capabilities of current systems by adding additional applications.

One example might be a retail company that has a point of sale (POS) system and a financial application from different software vendors. However, additional specialized applications such as warehouse management systems (WMS) and transportation management systems (TMS) and demand planning are not in place and are required to optimize the supply chain capabilities.

Integration to other functionality is large part a measure of the capabilities of the company’s existing legacy systems. In systems using modern relational database management systems (RDBMS), integrating other applications as a “best of breed” solution is fairly commonplace.

The alternative is to explore alternatives in light of the total cost of ownership (TCO) of supporting and maintaining the existing legacy system. In many instances it may make sense to purchase a new solution where all required applications are available as a standard part of the software solution.

As an aside, there has never been a better time for prospective ERP system buyers, as there are so many choices that can support the best practices of what ever industry vertical or business model your organization has in place.

If your organization has limited IT resources and budget constraints, one option to consider is software as a service (SaaS), whereby your organization can access a externally hosted solution with a set of pre-configured modules that can provide the functionality of a completely integrated ERP system (for a monthly fee). This can address the need to have a solution in place, without incurring the costs for support and maintenance of an ERP system.

Another alternative is to explore the growing number of open source ERP vendors, which can address many application requirements for little or no up-front costs. Other costs are applied at the back end for support and for features which may not be available within the standard open source offering.


David Clark says:

Alex has covered Martin’s first three questions, so I’ll just respond quickly and talk about who should be involved in choosing a new ERP system.

The short answer: everybody. I’m not trying to be flippant—I just want to emphasize the importance of achieving buy-in for your system, organization-wide. Otherwise, you risk catastrophically low rates of user adoption, which in turn can torpedo your return on investment (ROI).

I can’t think of a better illustration of this danger than my favorite joke from the Pink Panther Strikes Again:

Inspector Clouseau: Does your dog bite?
Hotel Clerk: No.
Clouseau: [bowing down to pet the dog] Nice doggie.
[Dog barks and bites Clouseau in the hand]
Clouseau: I thought you said your dog did not bite!
Hotel Clerk: That is not my dog.

The moral of the story: Your ERP system will bite you unless you ensure your entire organization takes ownership.

Of course, you’ll need to choose a project team leader to steer the selection process through the various pitfalls and minefields, as well as a project champion—usually a C-level executive who has the authority to make the difficult decisions such a project inevitably requires. Also, you should involve internal subject matter experts (i.e., employees who are extremely well versed in internal business processes for the various areas your ERP system will be impacting), and managers from the affected departments.

Remember that the stakeholders of your ERP selection project are not limited to your business users. Depending on the size of your organization, your stakeholders will also include C-level executives, IT infrastructure support staff, managers, suppliers, customers, and even investors.

More links and resources:
TurtleSpice Project Team Proposal
How to Kill Your Software Selection Project in 10 Very Easy Steps
ERP Evaluation Center
ERP Vendor Directory
ERP RFP Template
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