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Enterprise Resource Planning

Enterprise resource planning systems (ERPs) are management information systems that integrate and automate many of the business practices associated with the operations or production aspects of a company.

Overview

Enterprise resource planning is a term derived from material resource planning. ERP systems typically handle the manufacturing, logistics, distribution, inventory, shipping, invoicing and accounting for a company. Enterprise Resource Planning or ERP software can aid in the control of many business activities like sales, delivery, billing, production, inventory management, and human resources management.

ERPs are often called back office systems indicating that customers and the general public are not directly involved. This is contrasted with front office systems like customer relationship management systems that deal directly with the customers or supplier relationship management (SRM) systems that deal with the suppliers.

ERPs are cross-functional and enterprise wide. All functional departments that are involved in operations or production are integrated in one system. In addition to manufacturing, warehousing and shipping, this would include accounting, human resources, marketing and strategic management.

In the early days of business computing, companies used to write their own software to control their business processes. This is an expensive approach. Since many of these processes occur in common across various types of businesses, common reusable software may provide cost-effective alternatives to custom software. Thus some ERP software caters to a wide range of industries from service sectors like software vendors and hospitals to manufacturing industries and even to government departments.

Implementation

Because of their wide scope of application within the firm, ERP software systems rely on some of the largest bodies of software ever written. Implementing such a complex and huge software system in a company usually involves an army of analysts , programmers , and users, and often comprises a very expensive project in itself for bigger companies, especially transnationals.

Enterprise resource planning systems are often closely tied to supply chain management and logistics automation systems. Supply chain management software can extend the ERP system to include links with suppliers.

To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. Consulting in ERP involves two levels, namely business consulting and technical consulting. A business consultant studies an organization's current business processes and matches them to the corresponding processes in the ERP system, thus 'configuring' the ERP system to the organisation's needs. Technical consulting often involves programming. Most ERP vendors allow changing their software to suit the business needs of their customer.

Some risks to watch out for in implementing an ERP system include :

• Incompatibility of the ERP system with the operational level legacy systems (existing/old information systems).
  
• User Resistance/Revolt - Users who fear being downsized may sabotage the system.
  
• Mismatch between ERP system and Organizational Culture - If a system attempts to implement best practices inappropriate to the organization, the system may suffer from "culture clash" consequences.
  
• Inability to control technology
  
• Illogical processing
  
• Inability to stop processing quickly
  
• Cascading errors
  
• Repetition of Errors
  
• Concentration of data
  
• Inability to substantive processing
  
• Concentration of responsibility

Advantages

The benefits from enterprise resource planning are claimed to include:

• Facilitates macro level decision making by having access to consolidated data/information
  
• Transparency across entire organization
  
• Integration of all standard business process (human resources, financials, operation)
  
• lower inventory carrying costs
  
• lower ordering costs
  
• lower production costs
  
• lower accounting and record keeping costs
  
• lower investment in equipment
  
• lower investment in plant
  
• reduced assembly line down-times
  
• more flexible production processes
  
• more efficient lot sizes and scheduling
  
• reduced errors due to better coordination
• the cost and efficiency improvements (mentioned above) could increase profitability or increase market share (at a lower price)
  
• reduced number of stock-outs
  
• reduced fulfillment times
  
• increase process transparency for the customer
  
• allow greater product customization, and thereby better match the exact needs of the customer
  
• the customer satisfaction improvements (mentioned above) could increase sales volume, increase sales revenue (due to a higher effective price, ie. - no discounts), increase market share and increase profitability

Disadvantages

The limitations and pitfalls of the enterprise resource planning are claimed to be :

• the systems can be very expensive to install and maintain
  
• ERP are often seen as too rigid, and difficult to adapt to the specific Workflow and Business process of some companies, this is cited as one of the main cause of their failure.
  
• some systems can be difficult to use
  
• the system is no better than the weakest link in the chain - a problem in one department or at one of the partners will affect all the other participants.

If the ERP system is integrated with a supply chain management system, other potential problems include :

• the system is vulnerable to a strike or labour problem at any one link in the chain
  
• there can be transportation inefficiencies if small lots of product are transported several times before reaching the consumer/user
  
• once a system is established, switching cost are very high for any one of the partners (reduced flexibility and strategic control at the corporate level)
  
• the blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale
  
• there is a resistance to sharing sensitive internal information, information that may be essential to the process
  
• there are compatibility problems with the various legacy systems of all the partners
  
• customers may order more than they require (as in the dot.com/telecommunications boom and bust of 2001)

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