Essential ERP - Its Functional Scope
Written By: Predrag Jakovljevic
Published On: December 2000
Essential ERP - Its Functional Scope
The comprehensive definition of enterprise resource planning (ERP) software
is a set of applications that automate finance and human resources departments
and help manufacturers handle jobs such as order processing and production
began as a term used to describe a sophisticated and integrated software
system used for manufacturing. In its simplest sense, ERP systems create
interactive environments designed to help companies manage and analyze
the business processes associated with manufacturing goods, such as inventory
control, order taking, accounting, and much more. Although this basic
definition still holds true for ERP systems, today its definition is expanding.
ERP users, increasing customer expectations, changes in manufacturing
requirements, and technology's relentless pursuit of innovation are just
some of the forces reshaping the definition of ERP. In today's dynamic
and turbulent business environment, there is a strong need for organizations
to become globally competitive. The survival guide to competitiveness
is to be closer to the customer and deliver value-added product and services
in the shortest possible time. This, in turn, demands integration of the
business processes of an enterprise, which is the stronghold of ERP.
Today's leading ERP systems group all traditional company management functions
(finance, sales, manufacturing, human resources) and include, with varying
degrees of acceptance and skill, many solutions that were formerly considered
peripheral (product data management (PDM), warehouse management, manufacturing
execution system (MES), reporting, etc.). While during the last two years
the functional perimeter of ERP systems began an expansion into its adjacent
markets, such as supply chain management (SCM), customer relationship
management (CRM), business intelligence/data warehousing, and e-Business,
the scope of this document is limited to the traditional ERP realms of
finance, materials planning, and human resources.
Three Major Functional areas of ERP are as follows:
Resources & Payroll.
This encompasses a group of applications for planning production, taking
orders, and delivering products to the customer. Some of its most common
modules and their high-level functions are:
(Production) planning - Performs capacity planning and creates a daily
production schedule for a company's manufacturing plants. It involves
forecasting, production scheduling and material planning, etc.
- Provides the ability to integrate at the engineering level to ensure
accurate updated product information. It involves bills of materials &
routings creation, engineering change management, etc.
floor control - Provides control and tracking of the status of production
orders in the plant. It involves production orders dispatching, capacity
planning, resource allocation, production tracking & reporting, waste/reject
management - Controls purchasing of raw materials needed to build
products. Manages inventory stocks. It involves creating purchase orders/contracts,
supplier tracking, goods receipt & payment, etc.
entry and processing - Automates the data entry process of customer
orders and keeps track of the status of orders. It involves order entry,
order tracing and status reporting, pricing, invoicing, etc.
marketing, and after sales - Provides a basic functionality for lead
tracking, customer information, quote processing, commissions & rebates,
(Inventory) management - Maintains records of warehoused goods and
processes movement of products through warehouses.
(Transportation) management - Arranges, schedules, and monitors delivery
of products to customers via trucks, trains, and other transport means.
It involves transportation planning and execution, loading and shipping
management - Monitors costs and work schedules on a project-by-project
basis. It usually includes the following sub-modules: project control,
project analyzer, project budgeting, project timekeeping, project billings,
contract management, and workflow communicator.
maintenance - Sets plans and oversees upkeep of internal facilities.
It enables the control of every aspect of both routine and unscheduled
equipment maintenance so as to provide uninterrupted work order process.
service management - Administers installed-base service
agreements and checks contracts and warranties when customers call for
MRP systems of the late 1960s consisted of only two primary software modules:
material requirements planning (MRP) and (infinite) capacity requirements
planning (CRP). Over the next three decades and three generations of software,
more functionality (including more on-line capability) were incorporated,
so that an average ERP package today exhibits at least the following functionality
for manufacturing: order entry, forecasting, distribution requirements
planning (DRP), inventory management, master production scheduling (MPS),
materials requirements planning (MRP), capacity requirements planning
(CRP), shop floor control, purchasing, and cost accounting.
number of additional capabilities have already been incorporated by some
vendors and will continue to be added in response to growing user sophistication
and needs for the following functionality, to name but a few:
group technology (GT)-based shop floor cells or flexible manufacturing
finite capacity planning
both forward and backward scheduling
an integrated preventive maintenance (PM) capability
true probability-based simulation
true optimization capability with linear programming
more graphically used and intuitive reporting capabilities
expert system knowledge (AI)
extended supply chain management
to the core functions, integrated industry-specific applications can add
significant functionality and value. As an example, in the apparel industry,
the ability to configure products and produce an accurate bill of material
based on a multidimensional, user-defined matrix greatly simplifies the
complexity of order entry and production. Also critical for this industry
is the ability to handle flexible pricing structures and customization
of packaging products, and shipping options.
This encompasses modules for bookkeeping and making sure the accounts
are paid and/or received on time. Some of its most common modules and
their high-level functions are:
ledger - Keeps centralized charts of accounts and corporate financial
balances. It supports all aspects of the business accounting process.
In this module, financial accounting transactions are posted, processed,
summarized, and reported. It also maintains a complete audit trail of
receivable - Tracks payments due to a company from its customers.
It contains tools to control and expedite the receipt of money from the
entry of a sales order to posting payments received.
payable - Schedules bill payments to suppliers and distributors,
and keeps accurate information about owed money, due dates, and available
discounts. It provides functionality and integration to other areas such
as customer service, purchasing, inventory, and manufacturing control.
assets - Manages depreciation and other costs associated with tangible
assets such as buildings, property, and equipment.
management - Involves the capability of the system to record cash
charges or deposits, recording of cash payments and receipts, cash projection
reporting, calculation of expected cash uses/sources, current cash availability,
- Involves budgetary controls, budget accounting, budget development,
and budget allocation.
management - Monitors and analyzes cash holdings, financial deals,
and investment risks.
control - Analyzes corporate costs related to overhead, products,
and manufacturing orders. It provides a variety of costing approaches
such as standard, FIFO, LIFO, average, target, and activity-based costing
consolidation - Enables individual business units to view their
financial information, while parent companies can roll up all business
subsidiaries and view the consolidated information.
scope of ERP financial functionality has been increasingly going beyond
traditional transactional business functions by enabling organizations
to deliver real-time performance analysis directly on the desktops of
CFOs, CEOs, and business managers.
ERP vendors are shifting focus from routine users' transaction requirements
to the overall organization's business imperatives, thereby helping lines-of-business
become more knowledgeable and proactive. Instead of requiring a collection
of processes, the system should appear to each user as a vast source of
information. Accounting is seen as a cornerstone of continuous business
improvement strategies. Its ability to effectively deliver management
information across business functions determines the company's business
efficiency and competitiveness. In addition, accounting systems increasingly
begin to consider external business partners (customers and suppliers),
which requires offering access to key information and enabling interaction
directly via the Internet.
ERP systems offer a broader accounting functionality scope, including
financial reporting, analysis, and budgeting capabilities, as well as
other functions traditionally covered by niche players (e.g., project
management, management consolidation, treasury management). Furthermore,
leading systems increasingly leverage OLAP technology, which embeds business
information warehouse tools. These enable users to aggregate and analyze
information from multiple sources (other than accounting modules) and
have access to a rich set of predefined performance indicators and strategic
applications such as strategic planning/forecasting and balanced scorecard.
are enriching budgeting and reporting functions with more flexibility,
integrated decision support tools, and interfaces with decision support
system (DSS) packages, like Cognos and Business Objects. Multinational
capabilities (Euro compliance, increased support of multinational requirements,
etc.) remain top functional criteria.
new functionality brought by workflow, document management, and Web capabilities
enables organizations to improve communications with non-accounting staff
and casual users, thereby increasing the overall profitability of corporate
Resources & Payroll
This encompasses applications for handling personnel-related tasks for
corporate managers and individual employees. Some of its most common modules
and their high-level functions are:
resources administration - Automates personnel management
processes including recruitment, business travel, and vacation allotments.
- Handles accounting and preparation of checks related to employee salaries,
wages, and bonuses.
- Administers a diverse range of benefit plans including health and medical,
life and supplemental life insurance, accidental death and dismemberment
(AD&D), disability plans, flexible benefits, 401(k) plans, profit sharing
plans, stock plans, retirement plans, and leave plans such as vacation
and sick leave accruals.
HR - Lets workers change their personal information and benefit allocations
online without having to send forms to human resources.
the workforce and strategically managing the company's human capital has
become the latest focus of human resource management systems (HRMS). Integrated
business information warehouses enable multidimensional analysis on information
aggregated from internal and external resources (e.g., salary survey),
performance indicators (e.g., turnover) and views on strategic HR information
with powerful drill-down features.
ERP packages deliver key HR information to managers' desktops such as
turnover, competencies gap analysis, compensation analysis, headcount
and cost analysis (actual vs. budgeted). Manager Web self-service applications
enable business line managers to access selected reports, performance
indicators, graphs, etc., as well as view information on their employees,
complete and transmit a job requisition form, report on interviews with
applicants, follow up on upcoming performance appraisals, etc.
the other hand, providing employees with Web self-service access to their
HR information (e.g., address, dependents, benefits, payroll information,
education, etc.) and to corporate HR information (e.g., job openings,
training enrollment) enables companies to significantly increase the efficiency
and responsiveness of their HR department and improve the overall quality
of human resources management within the organization.
for using ERP
Consequently, the three major reasons why companies undertake deployment
of ERP applications are:
integrate financial data - As the CEO tries to understand the company's
overall performance, he/she may find many different versions of the truth.
Finance may have its own set of revenue numbers, while sales has another
version, and the different business units may each have their own versions
of how much they contributed to revenues. ERP creates a single version
of the truth that cannot be questioned because everyone is accessing the
same repository of data.
standardize manufacturing processes - Manufacturing companies-especially
those with an appetite for mergers and acquisitions-often find that multiple
business units across the company make the same part using different methods
and computer systems. Standardizing those processes and using a single,
integrated computer system can save time, increase productivity, and optimize
standardize HR information - Especially in companies with multiple
business units, HR may not have a unified, simple method for tracking
employee time and communicating with them about benefits and services.
ERP can resolve that problem.
does an ERP system make it happen? The essence of it is in the fundamental
premise that the whole is always greater than the sum of its parts. The
traditional legacy application systems, which organizations generally
employed in the past, treat each transaction separately. They are built
around strong boundaries of distinct enterprise functions that a specific
application is meant to cater for. ERP, on the other hand stops treating
these transactions separately as stand-alone activities and considers
them to be the part of the inter-linked processes that make up the entire
all typical application systems are nothing but data manipulation tools.
They store date, process it, and present it in the appropriate form whenever
requested by the user. In this process, the only problem is that there
is no link between the application systems being used by different departments.
An ERP system bridges those gaps by using an integrated database system.
There are hundreds of data tables, which store data generated as a result
of a diverse transaction, but they are not confined to any departmental
or functional boundaries. Rather, they are integrated to be used by multiple
users, for multiple purposes, and at multiple places.
more comprehensive list of reasons for deploying an ERP system is given
in Table 1.
1. Why companies purchase ERP?
New Business Strategies
Quality & Visibility of Information
Specific Business Processes/Performances
Without a doubt, ERP remains the information backbone for contemporary
manufacturing enterprises. However, today's ERP systems are required to
address more than the processes taking place within the walls of an enterprise.
These systems must be able to address the players and processes involved
in extended enterprise - the people and partners that the manufacturers
collaborate and coordinate within their supply chains.
short, the E in ERP will no longer be representative of just the internal
enterprise. Rather, it will transcend the walls of the traditional manufacturing
environment to encompass the extended enterprise. Therefore, we expect
significant expansion of the functional scope of future leading ERP systems
as to accommodate increasing user requirements.