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 manufacturing resource planning (MRP II) that followed material requirements planning (MRP). 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, quality 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 (CRM) systems that deal directly with the customers, or the eBusiness systems such as eCommerce, eGoverment, eTelecom, and eFinance, 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, logistics, and Information Technology, 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 large and complex software system in a company used to involve an army of analysts, programmers, and users. This was, at least, until the development of the Internet allowed outside consultants to gain access to company computers in order to install standard updates. ERP implementation, without professional help, can be a very expensive project for bigger companies, especially transnationals. Companies specializing in ERP implementation, however, can expedite this process and can complete the task in under six months with solid pilot testing.

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 modification of their software to suit the business needs of their customer.

Customizing an ERP package can be very expensive and complicated, because many ERP packages are not designed to support customization, so most businesses implement the best practices embedded in the acquired ERP system. Some ERP packages are very generic in their reports and inquiries, such that customization is expected in every implementation. It is important to recognize that for these packages, it makes more sense to buy third party reporting packages that interface well to particular ERP, than to reinvent what tens of thousands of other clients of that same ERP have needed to develop.

Today there are also web-based ERP systems. Companies would deploy web-based ERP because it requires no client side installation, and is cross-platform and maintained centrally. As long as you have an Internet connection, you can access web-based ERPs through typical web browsers.

Advantages

In the absence of an ERP system, a manufacturer in need of what it has to offer, may find itself with many software applications that do not talk to each other, do not effectively interface: design engineering how best to make the product; keeping track of the status of customer orders from acceptance thru fulfillment; managing interdependencies of complex Bill of Materials product structures in the real world of evolving Engineering and Revision changes and improvements, and the need to make material substitutions, during temporary inventory shortages; 3-way match between Purchase orders (what was ordered), Inventory receipts (what arrived), and Costing (what the vendor invoiced); Accounting for all of this, including tracking Costs and Profits on a granular level. But the advantage of having an ERP is that all this, and more, is integrated.

Change how a product is made, in the engineering details, and that is how it will now be made. Effectivity dates can be used to control when the switch over will occur from an old version to the next one, both the date that some ingredients go into effect, and date that some are discontinued. Part of the change can include labeling to identify version #s.

Computer security is included within an ERP, to protect against both outsider crime, such as industrial espionage and insider crime, such as embezzlement. Can some terrorist mess with the Bill of Materials so as to put poison in food products, or other sabotage? Preventing abuse is part of what ERP security takes care of.

There are concepts of Front office (how the company interacts with customers), which includes CRM or Customer relationship management; Back end (internal workings of the company to fulfill customer needs), which includes quality control, to make sure there are no problems not fixed, in the end products; Supply chain (interacting with suppliers and transportation infrastructure). All of these can be integrated through an ERP, although some systems have gaps in comprehensiveness and effectiveness. Without an ERP that integrates all these, it can be a nightmare for a manufacturer to manage.

Disadvantages

There can be limitations and pitfalls to ERP, for instance:

• Success depends on the skill and experience of the work force, including education in how to make the system work correctly. Many companies cut costs by cutting user training. Privately owned small enterprises are often undercapitalized, meaning their ERP system is often operated by personnel with inadequate education in ERP in general, such as APICS foundations, and in the particular ERP vendor package being used.
• Personnel turnover; companies can employ new managers lacking education in the company's ERP system, proposing changes in business practices that are out of synchronization with the best utilization of the company's selected ERP.
• ERP systems can be very expensive to install.
• ERP vendors can charge sums of money for annual license renewal that is unrelated to the size of the company using the ERP or its profitability.
• Technical support personnel often give replies to callers that are inappropriate for the caller's corporate structure. Computer security concerns arise, for example when telling a non-programmer how to change a database on the fly, at a company that requires an audit trail of changes so as to meet some regulatory standards.
• ERPs 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 causes of their failure.
• Systems can be difficult to use.
• The system can suffer from the "weakest link" problem - an inefficiency in one department or at one of the partners may affect other participants.
• Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, then over time "dirty data" will reduce the reliability of some applications.
• Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level).
• The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale.
• Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software.
• There are frequent compatibility problems with the various legacy systems of the partners.
• The system may be over-engineered relative to the actual needs of the customer.