What are Enterprise Resource Planning Systems?
Enterprise Resource Planning (ERP) systems are software applications that help organizations manage their business processes and operations by integrating various departments and functions, such as finance, human resources, supply chain management, production, and customer relationship management, into a single, unified system. ERP systems provide real-time visibility into an organization’s operations, enabling managers to make better, more informed decisions.
Table of Content
ERP systems constitute the most important enterprise systems currently being used. The term ERP evolved from Material Resources Planning (MRP) which were systems developed to integrate functions of manufacturing, such as managing inventories, parts purchases, and production planning.
An MRP system allowed managers to provide inputs about product demand, including the different items demanded and the time at which they are required, and the system then determined the type, number, and time duration in which various intermediate parts had to be assembled. It also tracked inventory levels for parts and using scientific models determined when these parts had to be replenished to ensure a smooth manufacturing process.
Inspired by how MRP managed different systems used for manufacturing on the shop floor, software engineers tried to integrate the data and operations for all the other functions of the organization. This led to the evolution of ERP.
One of the pioneers in the world of ERP systems is the German company SAP. Starting in the late 1970s, SAP had a vision of creating a common platform for all the major functions of any commercial organization. The company was started by engineers who had worked at IBM and who knew the challenges of integrating data across functions. SAP remained a relatively unknown player in enterprise systems until the 1990s by when some very large firms around the world deployed SAP very successfully across their enterprise.
SAP currently is synonymous with ERP software. It is one of the largest software product firms in the world and has deployments in 100,000 companies across 120 countries. The firm itself employs about 50,000 people, and it partners with over 2000 companies that act as SAP specialists and implementers. SAP is available in 40 languages and 50 different currencies.
Owing to the popularity of the ERP software concept, several competitors to SAP have emerged over the years, many of which have been bought out or have not survived. Currently, the strongest competitors to SAP are Oracle, Microsoft (with a product called Microsoft Dynamics), Ramco, Epicor, and Infor.
Almost 70% of the market share is with SAP, Oracle, and Microsoft, with the balance distributed between over a dozen smaller vendors. The smaller players include open-source ERP products such as Adempiere, OpenBravo, and Compiere.
An ERP package consists of four fundamental modules – manufacturing, finance and accounting, sales and marketing, and human resources – that are supported by a central database. Each module fully implements the functions that it is designed for, and additionally brings the best practices in terms of processes. The modules may be implemented independently but the core database remains the same.
The SAP ERP package further distinguishes between modules and business processes. The modules represent functions such as marketing or accounting, whereas the business processes are integrated, and they implement several transactions or steps that may cut across modules.
SAP business modules include within them a large number of operations or functions that are routinely used by organizations. A brief description of these operations is described below.
Modules of ERP Package Supported by the Central Database
- Finance and Accounting Module
- Human Resource Management Module
- Enterprise Compensation Management
- Manufacturing and Operations Module
- Sales and Marketing Module
Finance and Accounting Module
Finance and Accounting Module includes:
- General Ledger Accounting: It is a place to record all the business transactions occurring across the organization.
- Accounts Payable and Receivables: It is a place where the data about vendor payments is recorded, along with cash and monies received from customers.
- Asset Accounting: It is a place where data about transactions involving fixed assets is maintained.
- Funds Monitoring: It is a set of operations where revenues and expenditures are monitored, along with a facility to plan and monitor budgets.
- Governance and Risk: It is a facility to monitor and govern the organization’s regulatory requirements. These functions help the organization monitor its compliance with various laws and regulations.
- Overhead Cost Controlling: It is a function that enables the organization to allocate, monitor, and assess the overhead costs being incurred, and also helps in controlling these costs.
- Activity-based Costing: It is a function that allows the firm to charge overheads to activities such as sales, operations, and customer management, and obtain an analysis of overheads based on the principles of activity-based costing.
- Profitability Analysis: It is an analysis function that helps the organization views the profits from different product lines and department.
- Business Planning and Budgeting: It is a function that enables management to see the dependencies between profits and loss, the balance sheet and cash flows, and create plans for budgets.
- Cash Management: It allows firms to have a clear view of their liquidity, both in terms of current status and future flows.
- Credit Management: It enables firms to have a clear view of credits allocated, pending, managed, and controlled.
Human Resource Management Module
Human Resource Management Module includes:
- Workforce Process Management: It is a place where data on employee performance, benefits, and work records is maintained according to legal requirements. These functions enable management to view the record of and make decisions about employees.
- Manager Self-service: It is a module that allows managers to view the profile of employees to seek out top performers and those with specific skills, calculate costs associated with employees, and estimate salary enhancements and budgets.
Enterprise Compensation Management
It is a place where data and analyses regarding salaries, benefits, bonus awards, salary trends, salary adjustments, budgets and planning, and compensation management are conducted. This module helps keep track of salary trends within the industry to help management attract and retain the best skilled and most talented employees.
This module helps organizations track candidates for employment through online databases, notifications, and hiring facilities.
- Organizational Management: This module helps with analyzing the structure of the organization in terms of its reporting and functional hierarchy and helps analyze how different structures could be evolved and how they could be staffed.
- Organisational Learning: This module allows managers to assess the qualifications and skills within their workforce and plan for training and education for skills development. The module enables planning for company-wide training programs, budgeting for them, and managing their execution.
Manufacturing and Operations Module
The manufacturing and Operations Module includes:
- Production Planning and Control: This module maintains data on all production-related activities such as raw materials, sales forecasts and plans, production schedules, bill-of-material for different products, orders for repetitive manufacturing, costs of production data, just-in-time production plans, and so on. It is a high-level module for managing the production function.
- Material Management: This module is responsible for managing inventories of consumable and non-consumable items in the firm. The module manages the inventory that includes purchasing, billing, storage in warehouses and bins, confirming invoices, as also material planning.
- Plant Maintenance: This module helps manage different manufacturing plants by keeping data on plant equipment, maintenance schedules, service routines, equipment details, equipment warranties and contracts, and orders.
Sales and Marketing Module
Sales and Marketing Module includes:
- Sales Management: This module helps in managing a sales force by keeping data on sales force distribution, sales calls, sales contacts, customer contacts and call information, regional sales data, contracts, and so on.
- Marketing Management: This part helps in planning for campaigns, costs of campaigns, and analyzing competitor data.
- Distribution Management: This module complements the production module in keeping track of product distribution centers, the needs of various zones and warehouses, and the unmet demand.
Many of the tasks of the sales and marketing function of the ERP have now shifted to CRM systems, which are discussed later.