ERP: Origins, Developments, and Trends
Written By: TEC staff writer
Published On: May 17 2005
History teaches everything, including the future.
The names for new technology systems continue to change, but the promises they make remain the same: improve the bottom line. This is the first installment of Back to the Basics, an intermittent series that will unearth the core definitions of buzzwords and key application systems, and chart their evolution. Understanding their evolution is essential to knowing their current use, future developments, and upcoming trends—and more importantly, for making informed decisions.
Enterprise resource planning: noun. An accounting-oriented information system for identifying and planning the enterprise-wide resources needed to take, make, ship, and account for customer orders .
—from the APICS Dictionary, 10th edition
Enterprise resource planning (ERP) systems started as a means for inventory control and grew to replace islands of information by integrating traditional management functions, such as financials, payroll, and human resources, with other functions including manufacturing and distribution. Currently, the complexity of business is creating new user needs; the growth of computers is developing new potential; the quest for new markets by vendors has given users a new voice; and ERP is evolving once again. Names and acronyms like extended-ERP, ERP II, enterprise business applications (EBA), enterprise commerce management (ECM), and comprehensive enterprise applications (CEA) are being tossed about, but what's really going on?
Adapted from Enterprise Applications—The Genesis and Future
series by PJ Jakovljevic
In the 1960s, the key goal of an ERP system was inventory control. Manufacturers assumed consumers would continue their buying patterns and aimed to keep enough inventory on hand to meet demand. The sophistication of resource planning grew with the affordability and feasibility of the computer. In the sixties, computers were large, hot, noisy machines that occupied entire rooms, but by the seventies, average manufacturing companies could finally afford them. The innovation computers allowed caused management to review traditional product cycles and resource allocation. Materials requirement planning (MRP) computer systems were developed to promote having the right amount of materials when needed. First developed by IBM and J I Case, a US tractor maker, MRP promised to automatically plan, build, and purchase requirements based on the finished products, the current and allocated inventory, and expected arrivals. Master production schedule (MPS) was built to monitor the finished goods. Naturally data from MPS fed into the MRP, which contained phased, net requirements for planning the procurement of sub-assembly components, raw materials, and ingredients.
MRP gave planners more control, allowing them to be proactive and use time phased orders, rather than reacting only when delays occurred. However, because of the limitations of computers at the time, the software could handle only limited variables. There was no way to see how a late part, for example, would impact overall production. The general assumption was that delays in the system would mean the customer would receive the product late. Also, backward scheduling, where the start date was calculated backwards from the desired completion date, had to be employed to minimize inventory and still meet the customer's delivery date.
Determining the quantity of parts needed to complete the order, however, was not enough. Companies needed to create capacity plans based on materials, equipment, and priorities to improve efficiency. Thus capacity requirements planning (CPR) emerged. Unfortunately, again due to the limited capabilities of computers, variables such as idle time, maintenance, and labor could not be fitted into the CPR equation. Thus each work center was assumed to have an infinite capacity—a problem that still plagues manufacturers today. Scheduling and planning still remained imprecise. As a result, the need to factor in other resources became apparent.
This need moved beyond the shop floor. Keeping financial tabs on the coming and going of inventory, the labor and overhead involved, and the revenue generated from the delivery was also necessary. Manufacturing resource planning (MRPII) attempted to integrate business planning, sales, support, and other functions together so they could work in concert.
By the nineties, each functional area also saw the benefits of computerized tracking and planning. With computers being more common and affordable and programming more sophisticated, each department could use its own software program. Unfortunately, that was the problem. Disparate systems and different databases were not linked and the need for integration became obvious. Moreover, the time to market for consumer goods decreased sharply because of consumer demand. This combined with new, Japanese manufacturing philosophies, meant that western enterprises had to re-evaluate their manufacturing processes. Just in time (JIT), which aimed to eliminate waste and material lag time, meant that suppliers and manufacturers had to develop closer relationships. Also, labor exploitation caused cost of goods sold (COGS) to shift to purchase materials. Planners needed to know the cost of material allocations immediately after orders were placed, but buyers purchasing raw materials need to know the sales plan months in advance. A common database had to be developed: enterprise resource planning was born.
Currently, the goal of integrated ERP is to replace islands of information with cross-communication to ensure enterprise-wide coherency. Though ERP promises quick access to information, it is still plagued with problems it inherited from MRPII: assumptions of infinite capacity, and inflexible scheduling dates. However, ERP can be purchased as a product. Vendors now offer broad functional coverage nearing best-of-breed capabilities; vertical industry extensions; and strong technical architectures. This, combined with product enhancements, global support, and technology partners, is narrowing the gap between desired and actual features.
Traditionally the biggest purchasers of ERP solutions have been large Fortune 100 companies, however, the surge of IT investments in the nineties dropped in 1998. It continued to fall until 2000, and has not yet reached the same numbers. As a result, vendors are now looking to increase their market share by meeting the needs of small and medium businesses. However, entering a new market is not enough to build a strong repertoire. What will truly differentiate the leaders in this industry is the breadth, depth, and diversity offered at the plant level, and the ability to meet the requirements of distribution centers. Furthermore, planning functionality will have to extend from the shop floor to distribution centers. This includes flow-based manufacturing, work instruction, dynamic dispatching, and other elements. Web-based, service oriented architecture will also have to be factored in. New systems will also have to be more customer-focused, incorporating e-commerce interaction and collaboration with business partners.
ERP "extension" software is also in demand. Users want comprehensive functionality from advanced planning and scheduling (APS), manufacturing execution systems (MES), to sales force automation (SFA). As a result, broader customer relationship, business intelligence (BI), business-to-business (B2B) and business-to-commerce (B2C) functionalities are being included. These features need to be integrated, and ideally, "one-stop-shop" offerings should synchronize and integrate releases.
To meet the integration needs of users, all major, traditional ERP players have begun moving into the areas of supply chain management (SCM) and customer relationship management (CRM). For example, in 2004 it was reported that SAP's SCM revenue outpaced industry leaders i2 Technologies, Ariba, and Manugistics. Incorporating SCM functionality may be a way to circumvent MRP II's capacity planning limitations. Furthermore, APS, a subset of supply chain planning (SCP), allows users to create a feasible schedule using identified, finite constraints. Finite capacity creates simulations and allows the user to analyze the results prior to committing to the action. SCM also addresses the need for enhanced information flow among customers, suppliers, and business partners outside of the enterprise. The concept of global logistics was created by combining APS with specialized warehouse and transportation management solutions. Thus the global supply management chain linked suppliers and user companies and encompassed all processes, including initial raw materials, to the consumption of finished goods. Yet, while SCM and its offshoots promise to improve some of the deficits in ERP, it will not be a replacement. No matter how responsive a supply chain execution (SCE) system is, it still functions on the premise of waiting for a problem to occur, then acting on it. This is just as flawed as relying on unyielding plans and never obtaining feedback. They are both needed for an enterprise to be productive.
Product lifecycle management (PLM) too may seem to be a rival system to ERP, perhaps more so than SCM. PLM solutions are oriented around creative product innovation processes, whereas ERP is transaction oriented. Furthermore, PLM stand-alone packages accommodate collaboration better than ERP. However, the market is up for grabs and PLM vendors need to focus on easy integration with ERP in order to stay competitive. Likewise, if ERP vendors continue to develop extended functionality, collaborative capabilities, accessibility, and integration by incorporating universal interfaces and Web services standards, then PLM's current market superiority will be noticeably diminish.
In addition to SCM functionality, vendors are also encompassing front-end CRM functionality in their ERP solutions. CRM itself has gone from a vast field of point solutions to suites of customer care applications covering SFA, field service, telesales, call centers, marketing automation, etc. Additionally, e-business is also being factored into the ERP equation, as is real time performance integration. Currently, ERP systems rely relational databases, which are good at retrieving small numbers of records, but do not effectively retrieve large numbers of records nor do they summarize them on request. To compensate, vendors are now increasingly embracing on-line analytical processing (OLAP) which provides CFOs, CEOs, and other decision makers with tools providing high-level, aggregated views of data.
Consequently, to meet these needs, ERP vendors have partnered with other vendors or are finding other means to create solutions. As a result, two things are happening. First, the lines between SCM, CRM, and e-commerce, and ERP are being blurred. However, they still remain crucial areas, with their own specific functions and needs. Second, many users feel oversold on ERP solutions. Thus, when evaluating ERP systems, decision makers need to be all the more careful to determine and rank their priorities to ensure they don't become saddled with functionality that they will never use. Ultimately, to make the best of an ERP solution, all the functional models should have access to and should use the same data in near real time, unless all the processes are fully integrated. Users also need the ability to move seamlessly among modules. Otherwise, information will pool in certain areas, and will either be disconnected or, at best, loosely connected to other areas.
Written by TEC staff writer with files
About the Back to the Basics series
The names for new technology systems continue to change, but the promises they make remain the same: improve the bottom-line. Back to the Basics is an intermittent series that will unearth the core definitions of buzz words and key application systems and chart their evolution. Understanding their evolution is essential to knowing their current use, future developments, and upcoming trends—and more importantly, for making informed decisions.