ERP Beginner's Guide In So Many Words
Written By: Predrag Jakovljevic
Published On: February 2001
ERP Beginner's Guide In So Many Words
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:
- 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.
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.
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.
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.
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.
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.
more detailed information, see The
Essential ERP - Its Genesis and Future, and Essential
ERP - Its Underpinning Technology)
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
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.
more detailed information, see Essential
ERP - Its Functional Scope)
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.
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).
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).
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.
following high-level criteria, each containing up to several hundreds
of lower-level criteria, must be concurrently evaluated during a selection
Functionality - evaluates the current features and functions supported
by the 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.
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.
Service and Support - defines the capability of the vendor to provide
a high level of global implementation services and ongoing support.
Viability - examines the financial and management strength of the
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.
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.
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.
more detailed information, see ERP
Systems Selection Audio Conference Transcript)