Skip to main content
Select Source:

Enterprise Resource Planning (ERP)

Enterprise Resource Planning (ERP)

Enterprise resource planning (ERP) is a method of using computer technology to link various functionssuch as accounting, inventory control, and human resourcesacross an entire company. ERP is intended to facilitate information sharing, business planning, and decision making on an enterprise-wide basis. ERP came into sharp visibility in the mid-1990s and was still energetically developing in the mid-2000s a decade later. ERP enjoyed a great deal of popularity among large manufacturers in the mid- to late-1990s. Most early ERP systems consisted of mainframe computers and software programs that integrated the various smaller systems used in different parts of a company. Since the early ERP systems could cost up to $2 million and take as long as four years to implement, the main market for the systems was Fortune 1,000 companies.

"Throughout the 1990s, most large industrial companies installed enterprise resource planning systemsthat is, massive computer applications allowing a business to manage all of its operations (finance, requirements planning, human resources, and order fulfillment) on the basis of a single, integrated set of corporate data," Dorien James and Malcolm L. Wolf wrote in The McKinsey Quarterly. "ERP promised huge improvements in efficiencyfor example, shorter intervals between orders and payments, lower back-office staff requirements, reduced inventory, and improved customer service. Encouraged by these possibilities, businesses around the world invested some $300 billion in ERP during the decade."

By the late 1990s sales of ERP systems began to slow. Some manufacturers had encountered implementation problems. Other factors also began to influence ERP systems both in design and deployment. Many companies developed close relationships with customers and suppliers and began conducting business over the Internet on a massive scale. Small PC-based networks became much faster, more flexible, and cheaper than mainframes. After the slow recovery from the economic downturn that came in 2000s, ERP has become much more closely associated with web-based systemswhich have also lifted it into prominence again. In 2006, for instance, American Banker magazine polled experts in banking who saw ERP as a new tool in business-to-business electronic commerce, with ERPs communicating with one another over the Web.

BENEFITS AND DRAWBACKS OF ERP

When the idea was first introduced, ERP was an attractive solution for many large companies because it offered so many potential uses. For example, the same system could be used to forecast demand for a product, order the necessary raw materials, establish production schedules, track inventory, allocate costs, and project key financial measures. ERP "acts as a planning backbone for a company's core business processes," Gary Forger wrote in Modern Materials Handling. "In addition to directing many of them, the system also ties together these varied processes using data from across the company. For instance, a typical ERP system manages functions and activities as different as the bills of materials, order entry, purchasing, accounts payable, human resources, and inventory control, to name just a few of the 60 modules available. As needed, ERP is also able to share the data from these processes with other corporate software systems." Another important benefit of ERP systems was that they allowed companies to replace a tangle of complex computer applications with a single, integrated system.

Despite these potential benefits, however, ERP systems continue to extract a cost. Implementation requires substantial time commitments from the company's information technology (IT) department or outside professionals. An article in Computing, for instance, citing a survey of 100 organizations, showed that only 5 percent of IT managers "were able to install ERP packages straight out of the box." On the other hand, only 9 percent reported very significant customization work. In addition, because ERP systems affected most major departments in a company, they tend to create changes in many business processes. Putting ERP in place thus requires new procedures, employee training, and both managerial and technical support. As a result, many companies find the changeover to ERP a slow and painful process. Once the implementation phase is complete, some businesses have trouble quantifying the benefits they gained from ERP.

ERP SOLUTIONS FOR SMALL BUSINESSES

As sales of ERP systems to large manufacturing companies began to slow, some vendors changed their focus to smaller companies. According to a survey by AMR research reported in Modern Materials Handling, the overall market for ERP systems grew 21 percent in 1998, despite the fact that sales to companies with greater than $1 billion in revenues declined 14 percent during the same period. "ERP applications are no longer just the stuff of huge corporations," Constance Loizos noted in Industry Week. "While billion-dollar manufacturing companies are now completing their ERP implementations, mid-size customerswitness to the improved business processes of manufacturing market leadersare beginning to refine their own operations. Invariably the most substantial reason for companies to implement ERP is that without it, staying competitive is a practical impossibility. The business world is moving ever closer toward a completely collaborative model, and that means companies must increasingly share with their suppliers, distributors, and customers the in-house information that they once so vigorously protected."

Of course, small and medium-sized companiesas well as those involved in service rather than manufacturing industrieshave different resources, infrastructure, and needs than the large industrial corporations who provided the original market for ERP systems. Vendors had to create a new generation of ERP software that was easier to install, more manageable, required less implementation time, and entailed lower startup costs. Many of these new systems were more modular, which allowed installation to proceed in smaller increments with less support from information technology professionals. Other small businesses elected to outsource their ERP needs to vendors. For a fixed amount of money, the vendor would supply the technology and the support staff needed to implement and maintain it. This option often proved easier and cheaper than buying and implementing a whole system, particularly when the software and technology seemed likely to become outdated within a few years.

ERP AND THE INTERNET

Another trend in ERP development and use involves vendors making the software available to client companies on the Internet. Known as hosted ERP or Web-deployed ERP, this trend has also contributed to making ERP systems available to smaller businesses. When a company chooses to run its ERP systems through a Web-based host, the software is not purchased by or installed at the client company. Instead, it resides on the vendor's host computer, where clients access it through an Internet connection. "Rather than dispersing ERP to multiple corporate sites and incurring the costs of many servers needed to run the software, Web-deployed ERP centralizes the system," Forger noted. "Using the Web to access a single ERP system at a central location, companies can reduce their IT investment on two frontshardware and personnel."

Running ERP systems on a host computer relieves small businesses from the need to purchase a mainframe computer or hire information technology specialists to support the system. In addition, this arrangement allows client companies to save money by paying only for the ERP applications they use rather than having to buy a certain number of modules. In effect, ERP vendors act as application service providers (ASPs) for several client firms. "Systems supplied by ASPs are particularly attractive to start-up companies that can't reliably predict their future business volumes, can't afford to pay for first-tier ERP systems, and don't want to be continually replacing cheaper, less capable systems as their businesses grow," James and Wolf explained.

ERP EXPANDS ALONG THE SUPPLY CHAIN

Traditional ERP systems were concerned with automating processes and connecting disparate information systems within a business enterprise. But during the late 1990s, an increasing number of businesses turned their focus outward, toward collaboration and forging technological links to other companies in the supply chain. "Increasingly, manufacturers in developed countries are becoming part of the design and production line of their customers," Richard Adhikari wrote in Industry Week. "Tight scheduling requires automating the supply chain and enterprise resource planning functions and implementing electronic communications links." ERP vendors have responded to this trend by integrating ERP systems with other types of applications, such as e-commerce, and even with the computer networks of suppliers and customers. These interconnected ERP systems are known as extended enterprise solutions.

ERP systems have expanded to include several new functions. For example, application integration functions link ERP to other software systems that affect the supply chain. Visibility functions give companies an overview of inventory and its status as it moves through the supply chain. Supply chain planning software helps create optimal plans for producing and delivering goods. Similarly, customer relationship management software customizes the way that a supplier deals with each customer individually. ERP has also been adapted to support e-commerce by facilitating order fulfillment and distribution, simplifying the process of electronic procurement, and tracking information about customers and their orders.

CHOOSING AN ERP VENDOR

Leading vendors in the field are SAP of Germany; Oracle; J.D. Edwards; PeopleSoft; and Baan of the Netherlands. Marketing efforts of the leaders continue to be on large business clients and concentrated on automating manufacturing, distribution, human resources, and financial systems. But numerous smaller vendors are active in the market serving smaller business clients and focused on niche applications.

Loizos outlined a series of factors for small businesses to consider in choosing an ERP vendor. For example, she emphasized that implementing an ERP system is a major information technology decision that requires time and resources, so companies should avoid choosing a vendor too quickly. Instead, she recommended that small businesses evaluate their needs carefully and come up with a list of business issues they expect the ERP system to help them address. Loizos also suggested that companies research potential ERP vendors thoroughly, looking at their reputations in the industry but also checking references and interviewing previous clients. She recommended avoiding multiple vendors if possible, and ensuring that the vendor chosen is appropriate for the small business's future growth and expansion plans. Finally, she noted that companies should ensure that project funding is in place before a contract is signed.

FACTORS IN A SUCCESSFUL ERP IMPLEMENTATION

Once a small business has decided to install an ERP system and selected a vendor, there are a number of steps the company can take to ensure a successful implementation. In his article, Forger noted that the ERP implementation is more likely to succeed if the company positions it as a strategic business issue and integrates it with a process redesign effort. Of course, the ERP system should fit the company's overall strategy and help it serve its customers. It may also be helpful to find a passionate leader for the project and select a dedicated, cross-functional project team. The small business owner should make certain that these individuals have the power to make decisions about the ERP implementation process.

Forger recommends that companies attack the implementation project in short, focused stages, working backward from targeted deadlines to create a sense of urgency. It may be helpful to begin with the most basic systems and then expand to other functional areas. Forger also suggests using change management techniques to manage the human dimension of the project, since ERP requires a great deal of support from affected areas of the company. Finally, he emphasizes that once the ERP system is in place, companies need to interpret the data collected carefully and accurately if the system is to contribute to business planning.

Although ERP systems may seem complex and costly, even small businesses are increasingly finding it necessary to invest in such technology in order to remain competitive. "ERP systems are being implemented today to provide a stable foundation for a growing number of businesses across all segments, from dot-coms to major automotive manufacturers," Dave Morrison wrote in CMA Management. "The number of implementations down the supply chain and into small and medium-sized companies is steadily growing as the initial costs are reduced along with the overall cost of ownership. Pre-configured and pre-tested versions are now effectively slashing the implementation costs while reducing the project complexity and risks. These new systems are providing a clean head start in development and delivering a stable and fully tested product to production. The methodology is continually evolving and the results are very positive."

see also Material Requirements Planning; Inventory Control Systems

BIBLIOGRAPHY

Adhikari, Richard. "ERP Meets the Middle Market." Industry Week. 1 March 1999.

Brown, Alan S. "Lies Your ERP System Tells You: Enterprise resource planning has always had a hard time bridging the gap between corporate offices and the factory floor. Here's why." Mechanical Engineering-CIME. March 2006.

"EnterpriseERP Requires Adjustment." Computing. 23 February 2006.

Forger, Gary. "ERP Goes Mid-Market." Modern Materials Handling. 31 January 2000.

James, Dorien, and Malcolm L. Wolf. "A Second Wind for ERP." McKinsey Quarterly. Spring 2000.

Loizos, Constance. "ERP: Is It the Ultimate Software Solution?" Industry Week. 7 September 1998.

Morrison, Dave. "Full Speed Ahead." CMA Management. November 2000.

"What Industry Leaders Foresee." American Banker. 21 February 2006.

"Wireless ERP." Modern Plastics Worldwide. March 2006.

                            Hillstrom, Northern Lights

                             updated by Magee, ECDI

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Enterprise Resource Planning (ERP)." Encyclopedia of Small Business. . Encyclopedia.com. 16 Aug. 2017 <http://www.encyclopedia.com>.

"Enterprise Resource Planning (ERP)." Encyclopedia of Small Business. . Encyclopedia.com. (August 16, 2017). http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/enterprise-resource-planning-erp

"Enterprise Resource Planning (ERP)." Encyclopedia of Small Business. . Retrieved August 16, 2017 from Encyclopedia.com: http://www.encyclopedia.com/entrepreneurs/encyclopedias-almanacs-transcripts-and-maps/enterprise-resource-planning-erp

Enterprise Resource Planning (ERP)

ENTERPRISE RESOURCE PLANNING (ERP)

Relied upon by more than 90 percent of Fortune 100 companies, enterprise resource planning (ERP) systems integrate accounting, human resources distribution, manufacturing, and other back-end process-esthose that do not directly involve customersfor businesses of all sizes. In recent years, they have also evolved to include front-end processesthose that involve customerssuch as customer relationship management (CRM), supply chain management, and e-commerce. In the early 1990s, most major corporations began upgrading their mainframe systems with the new client/server-based ERP systems developed by industry leaders like SAP AG, People-Soft Inc., and J.D. Edwards & Co. As the World Wide Web began to replace client/server platforms later in the decade, ERP firms began working to enable their technology to operate via the Web. Although some analysts predicted that the rise of the Internet as a business platform would render the $20 billion ERP industry obsolete, others believed that ERP and e-commerce technology vendors would likely work together in the early years of the twenty-first century to create new e-business applications.

EARLY DEVELOPERS OF ERP SYSTEMS

SAP AG

The world's largest provider of ERP software, Germany's SAP AG, was founded in 1972 by five German engineers working for a branch of IBM. SAP's first project was to develop integrated enterprise software applications that could run on a mainframe; the five engineers had been working on a similar project for IBM, and when IBM moved the enterprise software project to a different unit, the partners decided to form their own company and continue working on the software. Originally, SAP was an acronym for systems analysis and program development; however, the wording was later changed to systems, applications, and products in data processing.

Within six years, SAP had secured 40 corporate clients. The firm began working on a real-time, mainframe-based business software suite to integrate accounting, sales and distribution, and production processes for corporations. The new product, known as R/2, allowed users to unify financial and operational data into a single database; it also eliminated paperwork and streamlined data entry processes. R/2 was formally introduced in 1979, and SAP found itself attracting clients such as Dow Chemical and Bayer. In the early 1980s, many competitors to SAP's clients began purchasing the software in an effort to keep pace with their rivals. SAP expanded outside of Germany for the first time in 1985. Two years later, the firm formed an alliance with IBM Corp., agreeing to help IBM standardize all of its systems and platforms to increase the compatibility of SAP and IBM products. International expansion continued with a unit in Switzerland. In 1988, SAP moved into the U.S. for the first time, creating an office in Philadelphia, Pennsylvania. To fund future research and development efforts, the firm conducted its initial public offering (IPO) that year.

By the early 1990s, R/2 had become the European standard for integrated business software. SAP unveiled R/3, which had been a work in progress since the late 1980s, in 1992. An ERP for the burgeoning client/server market in which data was processed via a networked server linked to multiple clients, such as personal computers (PCs), R/3 operated on IBM's OS/2 platform; it utilized IBM's DB2 database program, as well as several application components manufactured by SAP. Many of the businesses looking to streamline operations in the recessionary economic conditions of the early 1990s turned to SAP for the R/3 system. In 1993, R/3 accounted for 80 percent of SAP's total revenues. Sales grew by 66 percent the following year, and Microsoft Corp. convinced SAP to manufacture a version of its software compatible with Windows NT, SQL Server, and other Microsoft products.

By 1995, SAP had installed R/3 for more than 1,100 billion-dollar companies; installations for small and mid-sized clients reached 1,300. Complex R/3 installations cost up to $30 million, although the cost for an average client, not including consultants' fees, was $1 million. North American sales garnered nearly one-third of total revenues by then. That year, Microsoft selected R/3 to integrate its global finance and accounting system. Sales grew 48 percent to $1.35 billion. SAP was considered the most valuable company in Germany in 1996. Its stock had grown roughly 1,000 percent in the eight years since its IPO. R/3 was offered in 14 different languages as international operations grew to include South Africa, Malaysia, Japan, the Czech Republic, Russia, mainland China, and Mexico.

PEOPLESOFT, INC.

One of SAP's first true rivals in the ERP market emerged in 1987, when software developers Dave Duffield and Ken Morris left their posts at Integral Corp. to establish PeopleSoft, a maker of human resources software that could run on the increasingly popular client/server computer systems. The following year, the company introduced People-Soft HRMS, the market's first viable human resources software application for a client/server platform. Eastman Kodak became the first large client to purchase HRMS. Sales in 1989 reached $1.9 million as PeopleSoft products gained recognition for their ability to assist companies undergoing reorganization, as well as companies looking to cut costs by streamlining operations. Sales jumped to $6.1 million in 1990. Expansion into Canada helped boost revenues to $17 million in 1991, and earnings exceeded $1 million for the first time. With a 40 percent share of the human resources applications market, People-Soft began working on financial management programs in 1992. To generate funds for additional research and development efforts, the firm conducted its IPO that year, raising $36 million. International expansion efforts intensified in 1993 as PeopleSoft opened branches in Sydney and Melbourne, Australia. The firm also began selling its products in France, England, and South America. Earnings grew nearly twofold, to $8.4 million, on $320 million in revenues. In 1994, the firm launched PeopleSoft Distribution and PeopleSoft Financials products. Expansion into Mexico took place in 1995 with the establishment of a subsidiary there.

In 1996, PeopleSoft began to compete directly with SAP when it acquired Red Pepper Software Co., a maker of ERP software, which it folded into its new PeopleSoft Manufacturing unit. New product releases that year included PeopleSoft Human Resources for Federal Government.

J.D. EDWARDS & CO.

An ERP systems provider targeting smaller clients than SAP and PeopleSoft, Denver, Colorado-based J.D. Edwards was founded in 1977 by Jack Thompson, Dan Gregory, and Edward McVaney. Originally a designer of software for small and mid-sized computers, J.D. Edwards evolved into a developer of ERP systems after it began focusing its efforts on software for IBM's System/38 machine in the early 1980s. The firm's flagship ERP product, WorldSoftware, eventually ran on IBM's AS/400 computer. The application was designed to integrate the back-end functions, including accounting and manufacturing, of businesses with $50 million to $1 billion in sales.

In 1996, after recognizing that its software's dependency on a single platform was limiting its reach, J.D. Edwards released OneWorld, a client-server-based suite of applications that could run on a variety of platforms, such as Unix and Windows NT. The firm completed its initial public offering (IPO) the following year. By then, customers exceeded 4,000.

IMPACT OF THE INTERNET ON ERP SYSTEMS

As early as 1994, SAP began working to upgrade its flagship R/3 product with Internet capabilities; the move reflected SAP's desire to compete with increasingly popular "intranets," the in-house data networks similar in structure and appearance to the Web that were adopted by many corporations. However, despite these early efforts toward integration with Internet technology, SAP found itself lagging behind rivals in the late 1990s. For example, PeopleSoft unveiled a series of self-service, Internet-based applications in 1997. Also, database giant Oracle Corp., which diversified into ERP software in the late 1980s, became the first ERP vendor to move its client/server applications to the Web that year. According to a July 2001 article in BusinessWeek Online, upon receiving the news in early 1999 of SAP's less than desirable position, CEO Hasso Plattner, "reacted like a man shot out of a cannon. In a matter of days, a series of frenetic brainstorming sessions yielded a brand new strategy, which he personally christened mySAP.com. SAP's array of software programs would be made Net-ready before the end of the year, and millions of office workers from Berlin to Bangkok would tap into the Net and their own companies' networks on computer screens with SAP's logo on them." Plattner believed mySAP.com could become a major online gateway for businesses, reaching the business masses in the same way online services provider America Online (AOL) had reached consumer masses.

What SAP eventually realized, however, was that making its products compatible with the Web was not enough to reposition itself as a business systems leader in the rapidly evolving ERP market. The firm also needed to reconsider its tradition of developing all of its own software in-house and seek out partnerships as a means of gaining quick access to new technology. For example, the firm began using Commerce One Inc.'s business-to-business (B2B) software when it created a U.S. subsidiary, known as SAPMarkets, to build and operate e-marketplaces. SAP also forged an alliance with Siemens AG to offer mySAP.com via Siemens's mobile devices.

While SAP was undergoing its metamorphosis, competitor PeopleSoft also continued working to stay abreast of cutting edge technology. In 1999, People-Soft paid $600 million for Vantive Corp. to gain access to CRM technology for the first time. The firm also began licensing procurement software leader CommerceOne Inc.'s BuySite application. PeopleSoft released PeopleSoft 8, a suite of e-business applications that was designed to put all the back-end and front-end operations of a business on the Web, in 2000; by the end of the following year, roughly 1,500 clients had signed up for the new package.

J.D. Edwards also spent the late 1990s and early 2000s retooling itself. The firm made its first acquisition in 1999, paying $12 million for The Premisys Corp., a sales automation software provider. The firm also purchased supply chain software provider Numetrix, eventually adding supply chain functionality to its OneWorld suite. J.D. Edwards also pursued deals with Siebel Systems Inc. for access to its CRM applications and with Ariba Inc. for B2B e-commerce technology. Although the alliance with Siebel Systems eventually proved fairly fruitless, the firm did eventually acquire CRM technology via its September 2001 purchase of Youcentric Inc. Late in 2000, the firm unveiled OneWorld Xe, which used the Web's extended markup language (XML) technology to allow clients to electronically connect to business partners using other platforms and software applications.

According to an October 2000 article in Internet-Week, what companies like SAP, J.D. Edwards, and PeopleSoft were doing entailed "the Webification of enterprise resource planning software, a migration long promised but only recently realized. The core ERP applications, which until recently meant back-office functions such as accounting, human resources, payroll, and fulfillment among others, are expanding to embrace strategic functions such as e-business relationships (EBR), supply chain management (SCM) and e-commerce services." According to many industry experts, however, adding front-end applications and Web functionality to their products only scratches the surface of what ERP vendors must do to stay afloat in constantly shifting e-business landscape. Although many firms have moved toward developing a comprehensive end-to-end enterprise management system that fully integrates all business functions, several analysts argue that such a system has yet to be developed.

FURTHER READING:

Borck, James R. "Enterprise Strategies: ERP Faces Rocky Road." InfoWorld, May 14, 2001.

Chiem, Phat X. "ERP Vendors Make Move From Back Office to Front." B to B, February 19, 2001.

J.D. Edwards & Co. "J.D. Edwards Corporate Backgrounder." Denver, CO: J.D. Edwards & Co., 2001.

Hamm, Steve. "Meet the New Hasso Plattner." BusinessWeek Online, July 9, 2001. Available from www.businessweek.com

Mullin, Rick. "ECM: Where ERP Meets the Web." Chemical Week, April 25, 2001.

Pender, Lee. "J.D. Edwards Shifts Its Focus to Front Office." PC Week, March 1, 1999.

Schaff, William. "J.D. Edwards Breaks Out." Information-Week, June 8, 1999.

Stein, Tom. "Beyond ERPNew IT AgendaA Second Wave of ERP Activity Promises to Increase Efficiency and Transform Ways of Doing Business." InformationWeek, November 30,1998.

Stevens, Tim. "ERP Explodes." Industry Week, July 1, 1996.

Sutton, Neil. "JDE Buys Into CRM Space." Computer Dealer News, September 28, 2001.

Sweeney, Terry. "ERP Takes On E-Business." InternetWeek, October 30, 2000.

SEE ALSO: Customer Relation Management (CRM); J.D. Edwards; PeopleSoft Corp.; Supply Chain Management

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Enterprise Resource Planning (ERP)." Gale Encyclopedia of E-Commerce. . Encyclopedia.com. 16 Aug. 2017 <http://www.encyclopedia.com>.

"Enterprise Resource Planning (ERP)." Gale Encyclopedia of E-Commerce. . Encyclopedia.com. (August 16, 2017). http://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/enterprise-resource-planning-erp

"Enterprise Resource Planning (ERP)." Gale Encyclopedia of E-Commerce. . Retrieved August 16, 2017 from Encyclopedia.com: http://www.encyclopedia.com/economics/encyclopedias-almanacs-transcripts-and-maps/enterprise-resource-planning-erp

Enterprise Resource Planning

Enterprise Resource Planning

Enterprise resource planning (ERP) refers to a computer information system that integrates all the business activities and processes throughout an entire organization. ERP systems incorporate many of the features available in other types of manufacturing programs, such as project management, supplier management, product data management, and scheduling. The objective of ERP is to provide seamless, real-time information to all employees throughout the enterprise. Companies commonly use ERP systems to communicate the progress of orders and projects throughout the supply chain, and to track the costs and availability of value-added services.

ERP systems offer companies the potential to streamline operations, eliminate overlap and bottlenecks, and save money and resources. However, ERP systems are very expensive and time-consuming to implement, and surveys have shown that not all companies achieve the desired benefits. According to the online business resource Darwin Executive Guides, it is a tall order, building a single software program that serves the needs of people in finance as well as it does the people in human resources and the warehouseTo do ERP right, the ways you do business will need to change and the ways people do their jobs will need to change too. And that kind of change doesn't come without pain.

EVOLUTION OF ERP

ERP is a part of an evolutionary process that began with material requirements planning (MRP). MRP is a computer-based, time-phased system for planning and controlling the production and inventory function of a firmfrom the purchase of materials to the shipment of

finished goods. It begins with the aggregation of demand for finished goods from a number of sources (orders, forecasts, and safety stock). This results in a master production schedule (MPS) for finished goods. Using this MPS and a bill-of-material (a listing for all component parts that make up the finished goods), the MRP logic determines the gross requirements for all component parts and subassemblies. From an inventory status file, the MRP logic deducts the on-hand inventory balance and all open orders to yield the net requirements for all parts. Then all requirements are offset by their lead times to provide a date by which an order must be released in order to avoid delaying the production of finished goods.

From this MRP logic evolved manufacturing resource planning (MRP II). Before MRP II, many firms maintained a separate computer system within each functional department, which led to the overlap in storage of much of the firm's information in several different databases. In some cases, the firm did not even know how many different databases held certain information, making it difficult, if not impossible, to update it. This could also cause confusion throughout the firm if different units (such as engineering, production, sales, and accounting) held different values for the same variables. MRP II expands the role of MRP by linking together such functions as business planning, sales and operations planning, capacity requirements planning, and all related support functions. The output from these MRP II functions can be integrated into financial reports, such as the business plan, purchase-commitment report, shipping budget, and inventory projections. MRP II is capable of addressing operational planning in units or financial planning in dollars, and has a simulation capacity that allows its users to analyze the potential consequences of alternative decisions.

The next step in the evolutionary process was enterprise resource planning (ERP), a term coined by the Gartner Group of Stamford, Connecticut. ERP extends the concept of the shared database to all functions within the firm. Like MRP II systems, ERP systems rely on a common database throughout the company with the additional use of a modular software design that allows new programs to be added to improve the efficiency of specific aspects of the business. By entering information only once at the source and making it available to all employees, ERP enables each function to interact with one centralized database and server. This eliminates not only the need for different departments within the firm to reenter the same information over and over again into separate computer systems, but also the incompatibility that was created by past practice.

FEATURES OF ERP

ERP is a hybrid of many different types of software, incorporating many of the features available in other programs. ERP provides a way to keep track of materials, inventory, human resources, billing, and purchase orders. It is also useful for managing various types of orders, from mass-customized orders where daily or weekly shifts occur within the plant or multiple plants, to products that are made-to-stock, made-to-order, or assembled-to-order.

Higher-level ERPs employ design engineering and engineering change control modules. These modules facilitate the development of new product-engineering information and provide for modification of existing bills of material, allowing engineers to support working models of items and bills of material prior to their production releases.

It is important to understand that ERPs are not cheap to implement and operate, nor can they be implemented overnight. Owens-Corning spent more than $100 million over the course of two years installing one of the most popular ERP systems, SAP AG's R/3 system. Microsoft spent $25 million over 10 months installing R/3. Chevron also spent $100 million on installation. Apparently, however, the benefits of ERP implementation and use can be enormous. Microsoft used its ERP system to replace thirty-three different financial tracking systems used in twenty-six of its subsidiaries, with an expected savings of $18 million annually. In the same respect, Chevron expected to recoup its $100 million investment within two years.

Owens-Corning's aim was to offer buyers one-stop shopping for insulation, pipes, and roofing material. Use of the R/3 facilitated this goal by allowing sales representatives to quickly see what products were available at any plant or warehouse. Analog Devices use the R/3 to consolidate the products stored at its warehouse, thereby creating an international order-processing system that can calculate exchange rates automatically.

ERP AND SUPPLY CHAIN MANAGEMENT

When ERP systems first appeared, they acted as the connection between front-office operations (e.g., sales and forecasting) and the day-to-day functions of manufacturing. As ERP technology has advanced, the systems have increasingly incorporated logistics and warehousing capabilities, further connecting them with the supply chain. Some ERP systems offer Internet functionality, which can provide real-time connectivity from suppliers to the end customer.

The result of ERP use is more than an automation of existing processesit is a significantly new way of doing business that enables a firm to respond to market changes more rapidly and efficiently. This can apply to service firms as well as manufacturers. Many ERP packages also let the user track and cost service products in the same way they compute the cost of making, storing, and shipping physical products.

RECENT DEVELOPMENTS

The same technological advances that made MRP, MRP II, and ERP more useable and powerful have led to the improvement of other systems with similar purposes, such as lean manufacturing and just-in-time (JIT) production. ERP has been challenged in recent years by improvements in these other areas, with some firms coming to see ERP systems as obsolete. However, research has found that in certain environments with advance demand information, ERP systems yield better performance than their competitors. In 2007, author Phil Robinson noted that when properly implemented, an ERP package can be the most cost-effective project a company has ever seen.

Others note that MRP and EPR systems are so entrenched in businesses that they no longer provide a source of competitive advantage, necessitating further advances in these systems' use. In 2005, the authors of Manufacturing Planning and Control for Supply Chain Management pointed out that sustaining competitive advantagewouldrequirethat manufacturing planning and control (MPC) systems cross organizational boundaries to coordinate company units that have traditionally worked independently. Calling this the next frontier for manufacturing planning and control systems, they recommended that organizations should begin working in pairs or dyads to develop jointly new MPC systems that would allow integrated operations. This approach would allow organizations to learn as much as possible from each dyad and then leverage what they have learned into other dyads.

SEE ALSO Lean Manufacturing and Just-in-Time Production; Management Information Systems; Manufacturing Resources Planning

BIBLIOGRAPHY

Hanson, J.J. Successful ERP Implementations Go Far Beyond Software. San Diego Business Journal 5 July 2004.

Larson, Melissa. Meet Customer Demands with New ERP Systems. Quality February 1998, 8081.

Millman, Gregory J. What Did You Get from ERP and What Can You Get? Financial Executive May 2004.

Monk, Ellen F., Bret Wagner, and Joseph Brady. Concepts in Enterprise Resource Planning. 3rd ed. Boston: Thompson Course Technology, 2008.

O'Leary, Daniel F. ERP: Systems, Life Cycle, E-Commerce, and Risk. Cambridge University Press, 2000.

Olinger, Charles. The Issues Behind ERP Acceptance and Implementation. APICS: The Performance Advantage June 1998, 4448.

Robinson, Phil. ERP (Enterprise Resource Planning) Survival Guide. The Business Improvement Consultancy 2007. Available from: http://www.bpic.co.uk/erp.htm.

Vollmann, Thomas E., et al. Manufacturing Planning and Control for Supply Chain Management. Boston: McGraw-Hill, 2005.

Wallace, Thomas F., and Michael H. Kremzar. ERP: Making It Happen-The Implementer's Guide to Success with ERP. New York: John Wiley, 2001.

Cite this article
Pick a style below, and copy the text for your bibliography.

  • MLA
  • Chicago
  • APA

"Enterprise Resource Planning." Encyclopedia of Management. . Encyclopedia.com. 16 Aug. 2017 <http://www.encyclopedia.com>.

"Enterprise Resource Planning." Encyclopedia of Management. . Encyclopedia.com. (August 16, 2017). http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/enterprise-resource-planning

"Enterprise Resource Planning." Encyclopedia of Management. . Retrieved August 16, 2017 from Encyclopedia.com: http://www.encyclopedia.com/management/encyclopedias-almanacs-transcripts-and-maps/enterprise-resource-planning