ERP Beginner's Guide In So Many Words

ERP Beginner's Guide In So Many Words
P.J. Jakovljevic - February 5, 2001


While a slew of pundits have been predicting a demise of ERP, TEC's findings, based on a surge of received enquiries and/or a number of conducted selections engagements, have led to the following opposite conclusions:

  1. ERP remains the information backbone for contemporary manufacturing enterprises. However, today's ERP systems are indisputably required to address more than traditional processes taking place within the walls of an enterprise.

  2. There is a vast population of companies still running on legacy-based traditional MRP, HR and/or accounting islands of information, particularly in a largely non-tapped small-to-medium enterprises (SME) market.

Moreover, a general knowledge regarding ERP features and the ramifications of implementing it (or not) has been staggeringly low despite a bulk of available published research. Our intention hereby is to provide a concise (in less than 1,200 words) ERP reference guide for anyone needing that kind of information.

Quick Overview 

Enterprise Resources Planning (ERP) is the latest phase in over 40 years of evolution of business management techniques and information technology. Up through the 1960's, business had to rely on traditional inventory management concepts, Reorder Point (ROP) and Economic Order Quantity (EOQ) being the most commonly known. The next evolutionary phase, Material Requirements Planning (MRP), developed in the 1970's. It uses bills of material, inventory data, and the master production scheduled (MPS) to proactively calculate time-phased materials requirements and make recommendations to release or reschedule replenishment orders for materials.

In the 1980s, the concept of Manufacturing Resources Planning (MRP-II) evolved as an enhancement to MRP by integrating other manufacturing company's resources, particularly shop floor, accounting and distribution management. In the early 1990s, MRP-II was further extended to cover areas like engineering, finance, human resources, project management, etc. namely, the comprehensive breadth of activities within any (not only manufacturing) business enterprise. Therefore, the new acronym ERP was coined to reflect the fact that these computerized systems had evolved well beyond their origins as inventory transaction and cost accounting systems.

ERP is the current generation of resource planning systems, which replaces "islands of information" (MRP-II being one) with a single, packaged software solution that integrates all traditional enterprise management functions. In simplest terms, ERP systems use database technology and a single interface to control the all-encompassing information related to a company's business. Along with functionality for enterprise and supply chain management, ERP is typically associated with the use of client/server (recently with Internet Computing Architecture (ICA) as well), relational database technology, and UNIX, Windows NT, AS/400 or mainframe operating systems.

(For more detailed information, see The Essential ERP - Its Genesis and Future, and Essential ERP - Its Underpinning Technology)

What to expect when switching to ERP 

Today's leading ERP systems group all traditional company management functions (finance, sales, manufacturing, human resources) and include, with varying degrees of success, many solutions that were formerly considered bolt-ons (product data management (PDM), warehouse management systems (WMS), manufacturing execution system (MES), etc.). ERP functionality has increasingly been tailored to support the specific needs of vertical industries, e.g. healthcare or automotive.

Recently, the functional perimeter of ERP systems began an expansion into its adjacent markets, such as supply chain management (SCM), customer relationship management (CRM), decision support systems (DSS), and e-business, making systems less inward looking. Other value-added aspects of the newest systems include product configuration, field service modules, and Internet self-service capabilities that extend system access to more users and/or business partners. Finally, ERP can be the means for business-process reengineering (BPR), increasing flexibility and responsiveness by breaking down barriers between functional departments and reducing duplication of effort.

(For more detailed information, see Essential ERP - Its Functional Scope)

ERP has earned the general perception of being exorbitantly expensive to license and implement. Users typically pay an up-front per-user (either concurrent, named or casual) license fee and an annual maintenance charge to use ERP systems (typically 12%-20% of the license fee). The per-seat price for ERP varies greatly depending on the number of users, the number of modules to be deployed and what "bells and whistles" are added, and the company's size and revenue. The per-user price range has been from $1,000 to $8,000 (typically higher values for larger companies), with a continual price decline trend owing to fierce competition and the reduced demand for software. Many vendors offer per-month per-user rental or outsourcing deals as an alternative to traditional up-front licenses. Fixed price, preinstalled, pre-configured ERP is also available and is particularly attractive for the lower-end of the market.

Implementation cycles vary from a few months to years depending on company size, organizational structure (single or multi-site, international or not), and the functional scope of the project. Full-scale ERP implementations generally take between 6 - 12 months on average. As a rule, every $1 of ERP software sales drives on average another $3-$6 of additional hardware, third party integration and consulting, and resellers revenue, although in some cases additional costs can reach $10-15 for each dollar spent on software. The most commonly overlooked or underestimated costs of ERP implementations come from: training, integration & testing, data conversion & analysis, staff turnover, post-implementation turmoil, etc. Total cost of ownership (TCO) as a percentage of company revenue generally ranges from 1.5% to 6%, depending on the industry and the company size (typically higher for smaller companies).

Many customers begin with implementing accounting modules, although manufacturing and human resources are also popular for initial implementations. ERP benefits come mainly from reduced inventories and order lead-times, increased production capacity, lower distribution and procurement costs, etc. However, the first tangible returns on investment (ROI) come only several months after the implementation (eight in the best scenario).

How to select an ERP system 

Users must understand their business requirements and critical business processes. Not knowing their present business state of affairs and strategic direction will disqualify any future ERP system implementation from being a success. Understanding these issues should help users create a long list of vendors to include in an ERP package selection. Precedence should be given to vendors with a proven vertical focus on the user's industry.

The following high-level criteria, each containing up to several hundreds of lower-level criteria, must be concurrently evaluated during a selection process:

Product Functionality - evaluates the current features and functions supported by the product.

Product Technology - defines the technical architecture of the product, and the technological environment in which the product can run successfully. Sub-criteria include product architecture, software usability and administration, platform and database support, application standards support, communications and protocol support and integration capabilities.

Product Cost - examines the initial product acquisition cost as well as long-term costs, including maintenance fees, upgrade costs, training and implementation costs, and service & support fees.

Corporate Service and Support - defines the capability of the vendor to provide a high level of global implementation services and ongoing support.

Corporate Viability - examines the financial and management strength of the vendor.

Corporate Strategy - evaluates the corporate roadmap and strategy of the software vendor with specific timelines regarding how the product will be developed, sold, and supported within the specific market.

Most ERP selection teams appreciate the importance of product functionality, technology and cost criteria in making the decision. Too often, however, these are the only criteria that play a role in the decision-making process, which subsequently results in an unsuccessful implementation.

Users should put software through its paces during "scripted scenario" demonstrations (detailed sequences of real-life business processes), in order to further distinguish between the vendors who made the short list. Only after a short list has been defined should the cost criteria be reinserted into the decision; using relative cost differences between products provides negotiating leverage during the final selection phases.

(For more detailed information, see ERP Systems Selection Audio Conference Transcript)

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