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What is Enterprise Resources Planning or ERP ?
What is Enterprise Resources Planning (ERP)?
what is ERP - Definition of ERP
Today the phrase Enterprise Resource Planning (ERP) is what RDBMS or OOPs were a couple of years ago. Every software vendor mouths the phrase, EDP managers will respond to any mailer containing the term, and you can make a fortune floating seminars on ERP. However, it’s tough to pin down people on what exactly they mean by the term ERP.
By definition, ERP should help you put the resources of an organization to the best possible use. This definition is too broad. The best way to define ERP is to take a historical approach. The roots of ERP lie in Material Requirements Planning (MRP) which evolved into Manufacturing Resources Planning (MRPII). Demand for increased functionality led to the current avatar ERP.
Understanding MRP is an essential prerequisite to understanding ERP. So, I’ll devote the remainder of this column to discussing plain vanilla MRP. MRP is a computerized approach to the planning of materials acquisition for production.
It has traditionally been associated with discrete manufacturing operations and in its pure form is not well suited to continuous process industries. The MRP technique revolves around the Bill of Materials (BOM) and the Master Production Schedule (MPS).
A BOM describes the parent/child relationship between an assembly and its component parts or raw materials. For example, a stool might be made up of four legs and a seat. The seat itself might consist of a frame and a cushion, made up of cushion material.
Thus the BOM of the stool will contain two entries—legs and seat—and would list out the quantity of each. The leg might be purchased by the stool manufacturer from outside and hence there would be no BOM for the leg. The seat might be manufactured in house and the BOM of the seat would again consist of two entries—the frame and the cushion. Every product is exploded into progressively lower levels until one comes across a raw material or purchased component.
The MPS is a spreadsheet that projects the demand for each product of the company over time. In its simplest from the MPS is a matrix with time periods as columns and products as rows. The essence of MRP lies in using a Bill of Materials Processor (BOMP) to project the requirement of each component/material/assembly.
The algorithm starts out by exploding the bill of material of each top level product using the MPS to get the requirements of each subassembly. Different products might use common assemblies and the algorithm would combine these requirements. It would then calculate the net requirement of the assembly by subtracting the projected inventory and receipts from the gross requirement.
The BOMP would then use its knowledge of lead times for each sub-assembly to generate the requirements schedule for the sub-assembly using a backwards scheduling process. The process is repeated at the next lower level till one reached the lowest level possible in the BOMs.
You have to adjust the projection at each stage to take into account things like minimum lot sizes and economic order quantities. The result would be a set of projected purchase and production orders.
Events such as unforeseen orders, vendor failures, machine breakdowns, etc also serve to invalidate the original material requirements plan. For this MRP offers two approaches - top down planning and bottom up replanning. Top down planning starts with the modified MSP and drills down and has two approaches.
The regeneration approach uses brute force to start from the top and re-explode the BOMs at every level. The net change approach uses sophisticated algorithms to figure out just the net impact of an event. Top down planning is not able to handle all situations—for example, it might generate a solution where orders had to be placed before the current date.
In such cases one has to use bottom up replanning that allows the user to interact with the
system at much lower levels of detail. This naturally requires that the system has the
capability of disaggregating the net material requirement and tracing back the demand of a lower level component to higher level assemblies and products.
The bottom line—MRP is the first stage of ERP. Getting it right is essential for successful ERP implementation.
ERP for the small and medium segments
A few years back, ERP was a distant concept, perceived as applicable for the most elite of companies, with deep pockets, who are ready to experiment with new ideas. Today, the scene has significantly changed and ERP is considered as a desirable tool for most organizations, in the medium and small sectors.
Entrepreneurs now seriously consider ERP as panacea for all their present day ills and as an imperative to retain their competitive edge. Some of the factors that have catalyzed this process are globalization, competition, need for faster response to the market place and the pressure to contain costs and improve efficiencies.
While ERP implementation can be undertaken by a well-run organization as a proactive
measure to be ahead in the race, the normal symptoms that would suggest the need for ERP would be high levels of inventory, mismatched stock, lack of coordinated activity, excessive need for reconciliation, flouting of controls, poor customer response levels and operations falling short of industry benchmarks in terms of cost controls, and general efficiency.
ERP is often considered synonymous with enterprise computerization, which significantly dilutes the concept. It is really a business tool, which seamlessly integrates the strategic initiatives and policies of the organization with the operations, thus providing an effective means of translating strategic business goals to real time planning and control.
ERP, hence, means much more than computerizing the existing operations and is really an integrated change process, which encompasses all levels and elevates the total organization to a higher level of information, expertise and intelligence.
The SME segment is large and offers substantial potential to the ERP vendor. However, this segment is also extremely price-sensitive and is generally intolerant of high gestations on realizations from investment.
Hence, this segment would be keen on an effective but low priced solution, which can be speedily implemented and vendors have realized the potential of this segment and are working out ways to meet this requirement.
Investment required for ERP
Most customers are alive to the fact that an ERP solution, however comprehensive, cannot really be a shrink wrapped plug-and-play package and customization and implementation chores are necessary evils to reach their destination.
Notwithstanding this realization, the customer is rarely prepared to accept that these add-on services could cost twice as much as the cost of the package, or even higher. The total cost of implementation, including hardware, networking, database and all add-on services could range anywhere from Rs. 20 lakh to Rs. 50 lakh, depending on the size of the organization and the customization desired.
Benefits of ERP
The benefits of ERP implementation, though tangible, can only be defined in generic terms and guarantees are difficult to come by. International studies have estimated that ERP implementation has reduced inventories anywhere from 15 to 35 percent.
The incidence of stockouts are also found to have significantly reduced and even such incidences are largely due to extraneous delays, rather than planning inaccuracies. Diversion of manpower from routine activities to more profitable ones can be tangibly projected, though assessment of the gains derived therefrom would still be subjective.
There are other intangible gains, such as executive times becoming available for better and more productive causes, elimination of unproductive reconciliation efforts on various counts, improved decision making due to availability of timely and appropriate information, improved process times and the feasibility of administering pre facto control on the operations.
In conclusion, ERP implementation allows myriad benefits, both tangible and intangible and the payback period could be as low as a year, if the exercise is undertaken with commitment and purpose.
ERP - A re-engineering tool
ERP implementation is a re-engineering of sorts, though not the classical re-engineering invented by Mike Hammer, which calls for throwing out the old and ringing in the new while promising dramatic improvements in process cycle times.
The re-engineering is more in terms of business process-wise integration of activities and formalization of a number of operating parameters such as bill of materials, process routes, planning methodology, etc, all of which will now require detailing out and committing to paper.
There is often a debate on the desirability of conducting a Business Process Re - engineering (BPR) exercise prior to ERP implementation--one school of thought is ERP implementation without BPR would be tantamount to computerizing all existing inefficiencies.
The ERP system could then serve as the bedrock system, based on which the BPR exercise could thereafter be conducted more effectively.
ERP--The change process
With ERP implementation, the system and the centralized database becomes the basis for decision making and time honored power pockets, evolved organically by self appointed custodians of information and expertise lose relevance.
Most of the routine functions, such as statutory compliance, book keeping etc are taken over by the system and retraining and redeployment is a necessary part of the change process.
Managing the change calls for effective communication of the advantages of ERP implementation and emphasis on the organizational and individual gains by undertaking the exercise.
As in any change process, the consultant's role in ERP implementation is limited to providing the technical inputs and guidance and the responsibility for implementation has to be indigenously vested.
The normal procedure is to form a core group, which is dedicated to the implementation process. The core group member profile essentially calls for intimate knowledge of the business processes in the organization, adequate level of seniority to wield the necessary clout and a deep conviction in the change process.
A steering committee is additionally constituted to oversee the implementation and provide management support to overcome hurdles encountered. The committee should comprise senior members of the management team who meet on a periodic basis to formally review the progress.
The core group besides being operationally responsible for implementation has to serve as effective arbiters, in the event of conflicts arising between the consultant and the user groups or even between user groups.
The issues involved generally pertain to role clarity, the levels of customization and changes in specifications after freezing. The core group has to play a pivotal role in the implementation and it is imperative that the management communicate this responsibility in no uncertain terms to the members of this group.
Vendor selection criteria
Selection of the vendor and the package is crucial to the success of the implementation. Essentially the vendor should have a track record of previous implementations and should be in a position to provide guidance in the implementation and the change process, as also be able to translate user requirements into efficient systems.
Very often, aspiring ERP entrants offer unrealistically low prices, with the avowed objective of using the implementation to build a package of their own.
This could be disastrous for the user and would result in a serious setback to the whole process as the attitude of the user groups to ERP concept would be rendered cynical and reversing the situation would be difficult.
On the other hand, if tying up with an international ERP major is considered a feasible proposition, serious consideration should be given to retention of the implementation personnel, as there is a continuous paucity of personnel exposed to such implementation and they are immediate candidates for overseas employment.