Essential ERP - Its Functional Scope

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P.J. Jakovljevic - December 27, 2000

Introduction

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 scheduling.

ERP 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.

Savvy 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.

ERP Functional Scope

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.

The Three Major Functional areas of ERP are as follows:

• Manufacturing & Logistics
  
  
• Finance & Accounting
  
  
• Human Resources & Payroll.

Manufacturing & Logistics

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:

Operations (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.

Engineering - 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.

Shop 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 tracking, etc.

Procurement 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.

Order 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.

Sales, marketing, and after sales - Provides a basic functionality for lead tracking, customer information, quote processing, commissions & rebates, etc.

Warehouse (Inventory) management - Maintains records of warehoused goods and processes movement of products through warehouses.

Distribution (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 documentation, etc.

Project 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.

Plant 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.

Customer service management - Administers installed-base service agreements and checks contracts and warranties when customers call for help.

The 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.

A 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:

• Schedule group technology (GT)-based shop floor cells or flexible manufacturing systems (FMS)
  
  
• Perform finite capacity planning
  
  
• Perform both forward and backward scheduling
  
  
• Provide an integrated preventive maintenance (PM) capability
  
  
• Perform true probability-based simulation
  
  
• Perform true optimization capability with linear programming
  
  
• Provide more graphically used and intuitive reporting capabilities
  
  
• Utilize expert system knowledge (AI)
  
  
• Provide extended supply chain management

In addition 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.

Finance & Accounting

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:

General 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 transactions.

Accounts 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.

Accounts 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.

Fixed assets - Manages depreciation and other costs associated with tangible assets such as buildings, property, and equipment.

Cash 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, etc.

Budgeting - Involves budgetary controls, budget accounting, budget development, and budget allocation.

Treasury management - Monitors and analyzes cash holdings, financial deals, and investment risks.

Cost 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 (ABC).

Financial consolidation - Enables individual business units to view their financial information, while parent companies can roll up all business subsidiaries and view the consolidated information.

The 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.

Major 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.

Leading 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.

Vendors 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.

Finally, 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 accounting operations.

Human 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:

Human resources administration - Automates personnel management processes including recruitment, business travel, and vacation allotments.

Payroll - Handles accounting and preparation of checks related to employee salaries, wages, and bonuses.

Benefits - 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.

Self-service HR - Lets workers change their personal information and benefit allocations online without having to send forms to human resources.

Analyzing 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.

Leading 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.

On 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.

Rationale for using ERP

Consequently, the three major reasons why companies undertake deployment of ERP applications are:

To 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.

To 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 headcount.

To 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.

How 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 business.

Almost 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.

The more comprehensive list of reasons for deploying an ERP system is given in Table 1.

Table 1. Why companies purchase ERP?
Strategic Reasons	Enabling (Tactical) Goals	Technical Reasons
Enable New Business Strategies	Reduce Cost/Improve Productivity	Standardize System/Platform
Enable Globalization	Increase Flexibility	Improve Quality & Visibility of Information
Enable Growth Strategies	Integrate Business Processes	Enhance Technology Infrastructure
Extend Supply/Demand Chain	Integrate Acquisitions	Provide Y2K Compliance
Increase Customer Responsiveness	Standardize Business Processes
	Improve Specific Business Processes/Performances

Summary

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.

In 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.

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