Enterprise Resource Planning, Essay Example
The reduction of cost through increased efficiency is the cardinal imperative that has guided the design and implementation of Enterprise Resource Planning (ERP) systems. This study will examine the salient features of ERP systems, in order to analyze successful and unsuccessful ERP implementations. Part I describes the origins of ERP systems, and the foundational imperative of efficiency leading to a ROI that has guided them since their inception. Part II discusses ERP-adopting organizations’ efforts to realize a ROI, and why these efforts might succeed or fail. Part III advances the position that integration is the main determinant of the effectiveness of an ERP system: only if the organization integrates its processes and articulates a sound strategic vision can it successfully implement an ERP system. Part IV examines the new ‘modular’ paradigm of ERP systems, contrasting it with the ‘monolithic’ paradigm of older ERP systems. This paradigm is shown to be seminal to success, and findings pertinent to successful ERP-adopting organizations are presented. Finally, Part V examines current and expected trends in ERP systems, including the rise of service-oriented architectures (SOA) and cloud-based ERP systems. Arguments for and against the relevance of ERP systems are considered. The Conclusion offers final remarks on the business value of ERP systems.
I. What Does ERP Need to Deliver?
In consideration of the fundamental capacities that an ERP system must possess, it is first essential to define what an ERP system is, and what it is for. A concise definition comes from Markus, Axline, Petrie, & Tanis (2000), who define ERP systems as “commercial software packages that enable the integration of transaction-oriented data and business processes throughout an organization”. This definition has the advantage of touching upon both what an ERP system is, and what it does.
ERP systems are as old as the first computers, created in the 1950s (Sonnichsen 2009). A rising trend in early computing was the use of computers as corporate accounting systems. However, the origins of the ERP system concept lie with the material requirements planning (MRP) systems implemented by manufacturing organizations in the course of the 1970s and 1980s ERP (Systems 2012). The proliferation of these systems led organizations to the realization that it would be beneficial to integrate “material planning and manufacturing operations with financial and sales functions”. ERP systems grew from this integrated development. In this history lies the cardinal imperative that has driven ERP systems since their inception: the pursuit of a ROI through increased efficiency (Second Wave 2000). But the quest for ROI remains no easy task: ERP systems are expensive, difficult to install, and require much ongoing effort to better integrate them into the organization’s processes and functionalities (Second Wave 2000).
II. ROI: An Imperative for ERP
In pursuit of a ROI, the adopting organization must recognize that ERP implementation consists of two distinct ‘waves’: first, the process of installation itself, with all of its accompanying changes, and second, the ongoing efforts of the organization to effectively make use of the system Second Wave (2000). Failure to realize benefits of ERP adoption is a well-attested problem among many of the top 100 companies in the chemical industry. The error is their own: the organizations in question operated under a false concept concerning the completion of ERP system implementation Second Wave (2000). Installation is not equivalent to implementation: contrary to many organizations’ expectations, it is not the case that once the system is installed, it will yield a ROI. By contrast, organizations that have successfully used ERP systems follow such best practices as focusing on capabilities, alignment to objectives, and “balanced people, process and technology changes across all areas”.
As Singhal and Sharma (2010) explained, ERP systems can have tremendous benefits. In particular, ERP systems can reduce operating costs: they are computerized, and their management of information pertaining to resources can improve an organization’s business process efficiencies. ERP systems’ management of information can also facilitate decision-making, precisely because they can be used to disseminate information across an entire organization. Singhal and Sharma found that ERP systems reduced inventory costs for a number of ERP-adopting organizations “by an average of 25-30%”, and reduced raw material costs “by about 15%”. And ERP systems have become the foundation of other applications, such as “Enterprise Performance Management (EPM) and Business Process Management (BPM)” Butler & Muldoon (2010).
III. ERP Integration: The Determinant of ERP Value
Misconceptions concerning ERP systems are not the only reason that adopting organizations fail to realize a ROI. Singhal and Sharma (2010) highlighted the importance of knowledge transfer: existing organizational knowledge must be integrated with new knowledge from the ERP system. Markus et al. (2000) found that problems in the course of ERP installation and implementation were quite common amongst ERP adopters. Nonetheless, planning ahead made a considerable difference. In essence, organizations need to plan ahead by starting with the perspective that ERP adoption takes place in three phases: firstly, the project phase, in which the ERP software is installed “and rolled out to the organization”; secondly, the shakedown phase, wherein the organization adjusts to the new norm, and thirdly, the “onward and upward phase”, wherein the company realizes the benefits of the system. Companies that start with this perspective, and plan accordingly, tend to experience more success and encounter fewer and less serious hang-ups.
As Kahn (2011) explained, there are seven important steps that business owners and other management personnel need to take if they are to realize success with their ERP systems:
- Firstly, stepping up and taking personal responsibility. This is essential, because the only way for an ERP system to increase organizational efficiency is for it to be a part of the organization’s overall objective: it must be fully integrated into the business strategy that the organization is using.
- The second principle also pertains to objectives: management must know what they want the ERP system to do, specifically what problems they intend for it to manage. It is recommended to look to other organizations, especially organizations in the same industry, for examples.
- The third principle is finding a partner: organizations that can find a supplier who will partner with them in the implementation of business goals will enjoy a significant advantage Kahn (2011).
- The fourth principle involves acquiring the requisite staff to complete the necessary processes—not only pertaining to installation, but also maintenance. Skill sets are important here: the organization needs people with the right kind of skills, or people who can be trained to acquire the right skills.
- The fifth principle is finance and budgeting: ERP systems are both very expensive to purchase, and expensive to maintain. Organizations that plan accordingly will be better prepared to meet these expenses and realize a savings. Such organizations treat their ERP systems like any piece of technology or other capacity designed to improve functionality.
- In exactly this vein, the sixth principle is taking ownership: the ERP system is an asset to the company, and it is one that management should take ownership of, be proud of, and be prepared to invest in as needed Kahn (2011). In Kahn’s words: “Properly selected, implemented and employed, your ERP will make you a lot more money over time… because it will optimize your entire business”.
- The seventh principle has already been encountered. It entails an understanding of cycles of implementation. Implementation does not end when the ERP system is installed, online, and running: implementation is only beginning. Continuous improvement is the mentality that any organization with an ERP system should adopt. Continuous improvement in the information that is sent into the ERP system, continuous improvement in how the information is used, continuous improvement through upgrades, and continuous improvement of the staff through training.
As Butler and Muldoon (2010) explained, ERP systems are evolving in profound ways that will overcome many of the problems that organizations have faced with implementation. The new generation of ERP systems is better designed, more sophisticated, and cheaper to maintain. One of the major ways in which ERP systems have changed is with regard to the information technology (IT) function: where ‘traditional’ ERP systems taxed IT capacities considerably, newer systems have completely revolutionized the organization’s use of IT. The new emphasis is on customization and end-user efficiency: where older systems required the IT department to perform customization, newer systems allow the users to do it. Now users can produce their own reports, making for a reduced IT workload and greater efficiency and productivity for the organization overall.
IV. Modular vs. Monolithic: Realization of Expanded Benefits
As Stephens and Ramos (2002) explained, older ERP systems, such as those that predominated in the early 1990s, were very internally-focused: internal integration was their main concern, and they were essentially “single unified total enterprise solutions”, with separate applications covering a variety of processes and functionalities. The central problem with these systems’ architecture was that it was monolithic and closed: all of the information that the first-generation ERP systems processed was internal to the organization. What these older systems did not do was handle relationships with business partners and customers: all of their information came from within the organization, and all of it was used within the organization alone.
Contemporary ERP systems demonstrate signal departures from the older paradigm. The new generation of ERP systems is web-based, modular rather than monolithic, and fully capable of “interoperating with other systems” Stephens & Ramos (2002). The modularization of ERP systems is an important improvement, one that is well worth a deeper look. The significance of the modularization of ERP systems is that it further increases user choice: users are now able to “choose only the functionality they need”. In this vein, the shortcoming of the monolithic character of older ERP systems was that functionality was determined entirely by the vendor—and, of course, operable only within the organization. Contemporary ERP systems incorporate functions that include “customer relationship management (CRM), supply chain management (SCM), advanced planning and scheduling (APS), and total value management (TVM)”.
Moreover, with the rise of Service Oriented Architectures (SOA) and other interoperability standards, integration of ERP systems with the rest of the organization, all processes, fields, and departments, has never been easier Butler & Muldoon (2010). In the area of software and hardware, too, many considerable improvements have been made: where older systems were designed for hardware and software systems that have long since become obsolete, today’s ERP systems are designed for contemporary software and hardware systems. Memory and storage, in particular, are cheap rather than expensive, and the new generation of ERP systems is fully equipped to make use of this. In the same vein, scaling has become much easier: it is now possible to add hardware capacities with little in the way of practical limitations. Upgrades, too, are vastly easier: they have been automated, resulting in less lost time. Taken together, these and other improvements have put the lie to the idea that ERP systems are incompatible with ease of use: merely within the last several years, a whole raft of improvements have made ERP systems considerably easy to use.
With this more ecumenical focus on efficiency, ERP systems have been subjected to increasing scrutiny in order to quantify the benefits that can be realized by their adopters. As previously discussed, ERP systems can be extremely costly to implement and maintain. In a survey of 63 ERP-utilizing companies, Meta Group found an average ROI of -$1.5 million (Stein, 1999, p. 60). It is clear, nonetheless, that companies with an appropriately ecumenical focus and modular view of their business processes can realize substantial benefits, particularly from the new generation of ERP systems. As Romero, Menon, Banker, and Anderson (2010) found in a comparative study of ERP-adopting and non-adopting oil and gas firms over a fifteen-year period (1990-2005), adopters realized an improved profitability ratio of 9.6% (pp. 118-120). A seminal cause of this was the adopters’ improved abilities to manage their data-streams faster and more effectively, starting at the oil fields and extending across the entirety of their businesses (p. 120). Capacity utilization also realized an improvement, 7.8%, due to adopters’ improved abilities to identify shifts in demand, and adjust production schedules accordingly.
In order to maximize the utility of such an ERP system, it is essential for business to focus on their own processes, and on the goals associated with them. An example given by Allen (2008) is that of a kitchen equipment repair company, with the stated goal of responding with alacrity to their customers, commercial restaurants (p. 34). Such an alacritous response was the more imperative in light of the fact that the restaurants were often afflicted with equipment failures during busy operating hours. Accordingly, the company sought to improve its “first-time fix capability”: the capacity to rapidly identify the problem and the parts necessary for repair (p. 34). The ERP system that this business implemented was designed to increase the efficiency of fulfilling orders: it included an automated dispatch process, allowing the company to reduce the numbers of dispatch personnel in its call center (p. 34). With the aid of the new system, the remaining dispatch personnel were capable of handling more technicians (p. 34). The result of these improved processes was an increase in the company’s revenues and profitability (p. 34).
The case of Firan Technology Group (FTG) provides further attestation of the benefits realized by organizations that successfully implement a new-generation ERP system. FTG is a producer of custom-designed printed circuits, such as printed circuit boards (PCBs) and “precision illuminated display systems”, which it sells to clients in the “telecommunications, medical, avionics, military and advanced test markets” (p. 19). Accordingly, the company’s engineering and quality control teams collaborate with individual consumers to ensure compliance with all specifications (O’Nell, 2008, p. 19). But despite the salutary performance of FTG’s older, DOS-based ERP system, in light of a plethora of technological changes the company opted to switch to a more modular, up-to-date system (p. 19).
As described by O’Nell (2008), the transition from the old system to the new was effectively seamless: the company slated it for Easter weekend, when a halt in production was already scheduled (p. 19). Thus, FTG was able to implement the new system with a minimum of adjustment issues, and begin to realize the benefits all the sooner. A key advantage offered by the newer system pertained to the organization of reports: the company had many data-reading programs for files of various purposes, and many reports corresponding to the programs’ specific needs (p. 19). However, the older system had certain limitations: the reports were limited in number, and the data was quite difficult to mine. The newer system facilitated data access and report-building, and also allowed for an unlimited number of reports (p. 19). This proved a solid strategy for realizing a ROI, as did FTG’s new plan-by-schedule capacity, which “considers all demand—not just customer orders—and schedules the plant accordingly” (p. 19). Still another improvement realized by FTG is their consignment management module, which enables the company to keep track of customer-purchased inventory that is still in the company’s control; the module also recognizes “the cost side of consigned inventory” (p. 20).
The case of Pitney Bowes, Inc., a Stamford, Connecticut-based manufacturer of fax machines, copiers, and mailing systems, is also illustrative (Stein, 1999, p. 62). Pitney Bowes implemented an automation system from Trilogy Corp., with the express purpose of improving profits. Specific objectives set by the company included “reduced processing costs, faster order entry, fewer reorders, increased sales productivity, and dramatically reduced logistics costs” due to erroneous shipments (p. 62). The software enables the sales personnel to construct complex orders in a very timely fashion, particularly because it allowed the company to eliminate the telephone book-sized manual which the sales personnel had relied on (p. 63). As a result, sales representatives can complete an order on a computer within 15 minutes, rather than in hours. This has produced an increase in sales of 3.8%, and a 41% increase in order accuracy (p. 63). The cost of overall operations has dropped by 28%, yielding an annual savings of $3.4 million (p. 63). Such is the potential of the modular, process-based approach with ERP systems.
V. The Future of ERP
In light of the improvements and changes discussed above, the very future of ERP warrants an especial look. Firstly, due consideration should be paid to the argument that ERP systems, despite numerous upgrades and revolutionary changes, are headed for oblivion. Tzuo (2012), former Salesforce CMO and CSO and current CEO of Zuora, argued that ERP systems are headed for extinction: they will become casualties of the cloud-based “Subscription Economy”. Tzuo (2012), made a compelling case: after all, the subscription-based economy has already produced Pandora and Spotify (music), Netflix (movies), Zipcar (automobiles), and cloud-based apps and computing power. Innovative companies such as “Salesforce.com, Box, Tata, VNU Media and Zendesk” have revolutionized entire industries with the subscription economy business model, and even computer titan Dell has reoriented its entire business model from hardware to services. Tzuo’s argument is that ERP systems were built for 20th-century companies that delivered tangible products, not 21st-century companies that deliver services.
However, there is a counter-argument: ERP systems, properly speaking, have evolved into something new, something that should probably be labeled “Enterprise Applications” End (2011). Granting Tzuo his point, the very name ‘ERP’ refers to “a time when integrated financials and payroll were first being linked to production planning and inventory controls”. However, over time ERP systems have changed in fundamental ways, some of which have already been discussed: they have incorporated such front-office functions as “customer service, sales and procurement” and, later, “workflow and reporting”. Today, ERP systems are capable of correlating end-to-end business processes with solutions that range from “native package, custom, third party or even external (e.g., business partner or cloud-based)”. ERP systems can provide users with information delivered not only to their desktops, but also to mobile devices, and yes, cloud-computing platforms. And despite this precipitous increase in complexity and scope, ERP systems are fully capable of providing applications to optimize business processes and functionalities.
ERP systems are, beyond doubt, a mature technology: their commoditization follows a well-established pattern with information technologies and systems Hoffman (2008). The biggest asset that ERP systems have going for them is their ability to “reliably execute well-defined process flows in the form of very secure transactions”. ERP systems are currently being used in the retail banking sector for precisely these ends. User-centric, front-end apps have been hailed as a challenger to ERP systems, or else a bellwether of the precipitous change that is making ERP systems obsolete. And yet, these apps are incapable of delivering the kind of steady, consistent information that ERP systems have been designed to deliver and systematize: indeed, one of the most important capacities of ERP systems is their ability to deliver a “globally consistent view of a company’s financials and inventory at any time”. And although Hoffman predicted that multicore parallel computing will exert the kind of paradigm change on the current IT landscape that the PC once did on an IT landscape of water-cooled host machines, he also made the important point that software and hardware development have tended to keep pace with each other.
Service-Oriented Architecture (SOA) may provide the key to another paradigm shift with ERP systems: partition Hoffman (2008). The reasoning is simple: updates require tests, which are extremely expensive on large, complex systems. However, SOA allows applications to be partitioned and decoupled: it bridges technologies that are otherwise incompatible, which is the key to its interoperability. What this means for ERP systems is that they could be partitioned into “smaller building blocks”, components which could then be updated separately at need. This would save a great deal of “ownership, innovation, and maintenance costs”.
And where Tzuo argued that cloud computing and the subscription economy portend the inevitable downfall of ERP systems, Hoffman (2008) argued that in fact, online services provide the ideal platform for adapting ERP systems to the processes of the organizations that use them. Ironically enough, an article from Computer Economics Report noted that Salesforce.com (Tzuo’s former employer) is a leading innovator in providing online, subscription-based, cloud computing-style ERP systems, such as FinancialForce, Rootstock, and Kenandy, ERP Systems (2012). Indeed, Stephens and Ramos (2002) captured this trend in its much earlier stages, noting that “Web-enabled systems are now becoming a necessity”. The future belongs to service-based ERP solutions, delivered by way of the Internet; this was already very much the case in 2002.
Another advantage of the cloud computing model for ERP systems pertains to updates: with a cloud-based ERP system, the software can be kept perpetually up-to-date, saving the organization both the costs of buying new upgrades and the time and effort necessary to transfer implementation to the update (Symonds, 2012, p. 40). A related key pillar of the cloud-based model, also known as SaaS (Software as a Service), is multi-tenant architecture: all companies using a particular solution use a “’single instance’” of the system (p. 40). Configuration allows for customization without departure from the “single instance” foundation. A key benefit of this approach for the companies that adopt it is that with cloud-delivered ERP, there is no need for in-house IT specialists to operate the system. Unsurprisingly, the cloud-delivered ERP sector is expected to grow precipitously, with a forecasted 14.7% compound annual growth rate from 2010 to 2015 (p. 40).
And the rise of dynamic scripting languages, such as Ruby, points to another compelling opportunity for ERP systems. Dynamic scripting languages will link the shifting, user-centric, dynamic Web 2.0 world with the ERP world Hoffman (2008). Dynamic scripting languages have a seminal role, inasmuch as they are capable of modifying services “in a declarative way, defining additional functionality and gluing the services together into larger building blocks”. The connection to ERP systems is profound: ERP stacks could provide the platform for programming business apps with dynamic scripting languages.
Sonnichsen (2009) investigated the future of ERP systems, and noted that there is a great deal of controversy over the answer to another, closely-related question: how to approach the problem of the “gap” between the functionality delivered by ERP systems, and the processes of the organizations that adopt them. Although contemporary ERP systems are highly customizable, they are still built on ‘best practice’ standards; accordingly, the organization must either customize the ERP system, or customize their processes. Opinions are divided, with one school of thought holding that ERP systems need to change, and another holding that the onus to change should properly be on the organizations.
This gap is of considerable interest to the Copenhagen-based 3gERP Project, which is attempting to design the next generation of ERP systems Sonnichsen (2009). Two researchers who are with the project have argued that future ERP systems should be designed according to a model that incorporates feedback from business requirements (as cited in Sonnichsen, 2009). This is a statement for the organization-led model of closing the gap, with the onus to change on ERP systems, but what is especially interesting is how these authors suggest it should be done: “qualitative interviews with end-users[,] together with strategic business requirements from end-customer executives and experience from existing ERP systems”. In other words, start with the scenarios, and then work backwards from there.
Another possibility for future ERP systems is to go beyond business processes to look at roles, specifically the roles that employees play in the organization Sonnichsen (2009). Processes are well and good, but a description of processes alone cannot capture all of the dimensions of employee roles: after all, a role is the assortment of tasks performed by an individual within the organization, either singly or as part of a team. If ERP systems were designed around roles, they could well become much more intuitive, reducing the need to train employees extensively in their use.
Of course, role-based ERP systems would need to be very carefully designed to capture the full dimensions of the roles Sonnichsen (2009). But, properly defined, this focus on roles could close the gap between the functionality that an organization needs from its ERP system, and the functionality that the ERP system was designed to implement. This approach, then, might be described in terms of a focus on people over processes: focus on people and the things they actually do, rather than on routine, standardized schema for the tasks that are completed. Focusing on roles would liberate ERP systems and organizations alike from a focus that is dominated by processes, allowing them to embrace a focus that is more descriptive of the actual day-to-day workings of the organization. Surely this alone makes role-based ERP systems a trend of note.
From their inception, ERP systems were designed to effectively manage information: store it, systematize it, and then disseminate it at need. ERP systems were, in this sense, the logical outgrowth of the material requirements planning (MRP) systems that were utilized by manufacturing companies in the 1970s and 1980s. The imperative to realize savings and thus a ROI through the more effective management of information has consistently shaped ERP architectures. The paradigm shift of the new generation of ERP systems accords with this: a shift from monolithic, internally-focused architectures to modular, dynamic, integrative architectures with an emphasis on all processes. Despite predictions of ERP’s impending demise, a consideration of the evidence points towards the successful adaptation of ERP systems into the cloud-based model, which offers further advantages. ERP systems remain relevant because they are able to deliver systematized, organized information, and this is what has made them the IT backbone of so many organizations. Organizations that recognize this will continue to be well-positioned as competitive players in their industries.
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