Introduction
Enterprise resource planning (ERP) is a state-of-the-art approach to running organizations with the help of comprehensive information systems, providing support for key business processes and more general, for electronic business (e-business). ERP has evolved from earlier approaches, in particular, materials requirement planning (MRP) and manufacturing resource planning (called MRP II) in the 1980s. The focus of MRP and MRP II was on manufacturing firms. The essential problem that MRP attacked was to determine suitable quantities of all parts and materials needed to produce a given master production schedule (also called a “production program”), plus the dates and times when those quantities had to be available. Application packages for MRP have been available from the 1960s on. In the beginning, they were mostly provided by hardware vendors like IBM, Honeywell Bull, Digital Equipment, Siemens, etc. MRP was later expanded to closed-loop MRPto includecapacity planning,shopfloor control, and purchasing, because as Oliver Wight (1884) puts it: “Knowing what material was needed was fine, but if the capacity wasn’t available, the proper material couldn’t be produced” (p. 48).
The next step in the evolution was MRP II (manufacturing resource planning). According to the father of MRP II, Oliver Wight, top management involvement in the planning is indispensable. Therefore, MRP II expands closed-loop MRP “to include the financial numbers that management needs to run the business and a simulation capability” (Wight, 1984, p. 54).
Enterprise resource planning (ERP) has its roots in the earlier MRP II concepts, but it extends those concepts substantially into two directions. ERP takes into account that other types of enterprises than those producing physical goods need comprehensive information system (IS)support as well, and even in the manufacturing industry, there are more areas than those directly related to the production of goods that are critical for the success of a business.
background of ERP
The key issue of ERP is integration (Langenwalter, 1999). While stand-alone solutions—sometimes quite sophisticated information systems—for various areas of a business have been available before, ERP takes a holistic approach. Instead of isolated views—on procurement, on manufacturing, on sales and distribution, on accounting, etc.—the focus is now on integrating those functional areas (Scheer & Habermann, 2000). The need for integrated systems has been recognized by many, but Germany-based SAP AG was the first to put them into reality. SAP’s early success as worldwide market leader comes largely from the fact that this company actually designed and implemented business-wide integrated information systems. The lack of integration of information systems has created a variety of problems. The most serious ones are the following:
• Redundancy (i.e., the sameinformation is stored and maintained several times)
• Inconsistency (i.e., information about the same entity stored in different places is not the same)
• Lack ofintegrity (i.e., databases where such information is stored are not correct)
Mistakes, wrong decisions, and additional work are some of the consequences resulting from these problems. Consider, for example, data about customers. Such data are often entered and maintained in a sales and distribution information system (customer orders), then again in the dispatching system (delivery orders), and perhaps once more in a financial accounting system (invoices). Not only is this redundant and means additional work, but also the same attributes may even stand for different things. For example, an “address” field in the sales and distribution system may represent the address of the customer’s procurement department, whereas “address” in the dispatching system is the place where the goods have to be delivered.
Integration of information systems can be considered from several perspectives: from the data, the functions, the operations, the processes, the methods, and the software perspectives. The most important aspects are data integration, operations integration, process integration, and software integration:
• Integration of data means that data models and databases are unified so that all departments of an enterprise use the same data entities, with the same values.
• Integration of operations requires connecting individual operations, or steps of a business process, with preceding or succeeding operations, respectively.
• Integration of processes means that interfaces between different business processes are explicitly considered (e.g., connections between order processing and flow of material control).
• Integration of software means that different programs (e.g., information systems for different business functions, can run together and use each other’s data and operations.
Those aspects of integration have always been considered important requirements for effective business information processing, but how does one actually obtain enterprise-wide integrated information systems?
Because most organizationshavebeenusing information systems in various business areas for quite some time, one way is to integrate those stand-alone systems subsequently. This approach has been discussed and practiced under the concept of “software reengineering,” often related to the term “legacy systems” for the information systems to be integrated (Miller, 1997; Seacord et al., 2003).
The other approach to obtain integrated information systems is obviously to start developing them from scratch. In such a situation, information structures can be modelled and designed on the drawing board in an enterprise-wide manner, at least in theory. Practicalexperiences have shown that developing comprehensive information systems for all areas of a business is a giant task. That is why such systems have rarely been developed as individual solutions. Not only is the investment needed very high, but also manpower and know-how to develop such systems are often beyond the means of a single company. Therefore, comprehensive integrated information systems have mostly been developed by dedicated software and consulting companies. In the 1970s and 1980s, those systems were named with rather general terms, like standard packagesor integrated business information systems, until the terms “enterprise resource planning” and “ERP system” emerged in the 1990s. In fact, the term “enterprise resource planning” has been coined by the software industry and not by academia.
Today there is a common understanding of what the term stands for. The definition used in this article is as follows: An enterprise resource planning system (ERP system) is a comprehensive information system that collects, processes, and provides information about all parts of an enterprise, automating business processes and business rules within and across business functions partly or completely.
Alternatively, an ERP system may be defined as a set of integrated information systems rather than as one system. This depends on the perspective of the viewer. For the user, an ideal ERP system will behave like one enterprise-wide information system, with one database, and one common user interface. Nevertheless, such a system may be composed of many subsystems and many databases, as long as they are well integrated.
components of an erp system
Horizontal and Vertical Views of Enterprise Resource Planning
An ERP system integrates information, processes, functions, and people into one coherent system (Brady et al., 2001). Such a system supports all horizontal business functions and all vertical levels of a business (operational, tactical, and strategic). Figure 1 illustrates this view in a simplified information systems pyramid. Each component may be seen as a functional subsystem. In a horizontal perspective, systems are integrated along the value chain. The vertical direction asks for integration of operative systems with their corresponding value-oriented accounting systems; reporting and controlling systems; analysis and management information systems; and long-term planning and decision support systems (Scheer, 1994, p. 5).
A typical ERP system provides components like the ones shown inFigure 1, arranged and extended in one way or another. As an example of integrated information systems, the mySAP ERP system is described subsequently.
An Example: SAP ERP
SAP ERP has evolved from SAP R/3 which is still the most frequently installed ERP system. SAP ERP is based on SAP NetWeaver as technology platform (SAP, 2006b). Encompassing all levels of the pyramid, SAP ERP is logically structured into the following modules (short descriptions are taken from SAP, 2006a, 2006b):
Analytics
• Strategic enterprise management—Supports the top level of the pyramid in Figure 1: integrated strategic planning, performance monitoring, business consolidation, and stakeholder communication; provides tools for planning and executing the strategies: balanced scorecard, value-based management, financial statement planning, risk management, investment planning, and more
• Business analytics (financial, operations, workforce analytics)—Supports managers with methods and tools for financial and management reporting, financial planning, budgeting and forecasting, profitability management, product and service cost management, overhead cost management, working capital and cash-flow management, etc.; provides analytical functions for procurement, inventory and warehouse management, manufacturing, transport, sales, customer service, quality management, enterprise asset management, program and project management, and more. [In Figure 1, those functions, tools, and methods belong mostly to levels 2 (analysis and information systems) and 3 (reporting and controlling information systems).
Figure 1. Integrated business information systems
Figure 2. Application domains and modules of SAP ERP
Financials
The Financials module supports several application areas that are located on level 4 of the pyramid:
• Financial accounting: Processing of incoming and outgoing payments, cash flows; provides general ledger, accounts receivable, accounts payable, fixed assets accounting, inventory accounting, tax accounting, financial statements, and more; helps to monitor financial transactions; supports business analysis through combined planning, reporting, and analysis of competitive measures
• Managerial accounting: Provides profit center accounting, cost center and internal order accounting, project accounting, product cost accounting, profit-abilityaccounting;supportsinvestmentmanagement, revenue and cost planning, transfer pricing, etc.
• Financial supply chain management: Supports financial collaboration within the enterprise and its business networks; provides credit management, cash and liquidity management, treasury and risk management, and more
• Corporate governance: Helps to ensure that the objectives, rules and regulations under which the corporation is directed and controlled are being followed and met.
Human Resources
The human resources module is comprehensive, including functionalities of the operative, administrative level (level 5) and the value-oriented level (level 4).
• Talent management: Supports recruiting and talent management, performance management, compensation management for various modes (e.g., performance- and competency-based pay)
• Workforce process management: Provides the central repository for employee data; integrates the information with other SAP business applications, especially Financials and Operations; supports time and attendance processing (planning, managing, and evaluating the working times and activities of internal and external employees); handles working-time provisions determined by companies themselves, by standard agreements, or required by law; handles all payroll processes, supports current legal regulations and collective agreement specifications, and ensures compliance with regulatory changes
• Workforce deployment: Provides project resource planning, resource and program management (i.e., resource management, project portfolio management, project execution, and skills management) and specific solutions for retail personnel and call centers.
Procurement and Logistics Execution
This module supports the bottom level of the pyramid through quantity-oriented operative subsystems for daily operations, including support for planning and execution.
• Purchase order management: Provides conversion from demands to purchase orders, issuance, and confirmation of purchase orders; supports purchasing of materials and services (for example, subcontracting for components)
• Supplier cooperation: Helps to streamline information supply and communication with and among suppliers
• Inventory and warehouse management: Comprises warehousing and storing (warehouse-internal movements and storage of materials) and managing physical inventory for the company’s own stocks (periodic, continous, etc.)
• Inbound and outbound logistics: Supports inbound processing (all the steps of an external procurement process that occur when the goods are received) and outbound processing (all steps to prepare and ship goods to their destination)
• Transportation management: Provides transportation planning (routing, carrier selection, etc.) and execution (shipment orders), freight costing, and legal services
Product Development and Manufacturing With the help of this module, engineering and design, creating relevant product data, and planning and executing manufacturing operations are supported.
• Product planning: Provides typical MRP (materials requirement planning) functionality: computing quantities and due dates for production orders and purchase requisitions through lead-time scheduling, depending on buffers, operation times, lot-sizing rules and so on
• Manufacturing execution: Supports the process of capturing actual production information from the shop floor to support production control and costing processes; supports a variety of concepts: make-to-order, repetitive manufacturing, flow manufacturing, shop-floor manufacturing, lean manufacturing, process manufacturing, and batch manufacturing
• Product development and life-cycle management: Cover the life-cycle of product related master data such as product structures, routings and documents from invention to phase-out. Provide document management, product structure management (including bills of materials), recipe management, integration of CAD (computer-aided design), PDM (product data management), and GIS (geographical information system) data, and more.
Sales and Services
The Sales and service module addresses the customer focusing processes like selling products and services and providing aftermarket services.
• Sales order management: Supports quotation and order management (creating and processing orders, including pricing and scheduling orders for fulfillment) including inquiries and follow-up orders; provides mobile-sales, billing, and contract-management functionalities
• Aftermarket sales end service: Helps to manage a customer’s product configuration (installation and configuration management, including definition of the product hierarchy, management of serial numbers, measurements, document management, and engineering change management), service contracts, planned services, warranties, and so on
• Professional-service delivery: Provides capabilities for selling, planning, delivering and billing project-based services
• Incentive and commission management: Helps to design incentive compensation plans, calculate variable compensation (e.g., direct sales commissions), carry out evaluations of performance and cost results, and more.
Corporate Services
The Corporate Services module provides comprehensive support for resource-intensive corporate functions including the following:
• Real estate management: Provides tools to support real-estate property acquisition and disposal, property portfolios, functions to helpusers lease and manage the real estate portfolio, etc.
• Project and portfolio: Provides functions for project (project structures, costs, budgets, workforce and resource planning, scheduling activities, etc.), project execution (monitoring project progress analysis/earned value analysis, progress tracking, etc.)
• Travel management: Provides functions for travel request and pre-trip approval, travel planning and online booking, travel expense management, services for mobile staff, and more
• Environment, health, and safety: Supports a variety of functions for product safety, handling of hazardous substances, transportation of dangerous goods, waste management, etc.; allows companies to take preventive careoftheir employees’ health;schedules medical examinations and testing for workers; manages emissions for air, water, and soil; monitors and controls plant emission sources.
• Quality management: Supports quality engineering according to the ISO 9000 standard, quality assurance and control (quality inspections, statistical process control, traceability, etc.), quality improvement (audit management according to ISO 19011, problem/com-plaintmanagement,corrective and preventive action, etc.)
This overview of components of the SAP ERP system illustrates the wide range of functions that support ERP nowadays. The reader interested in details of ERP functionality is encouraged to study the products’ Web sites. Descriptions of the above functions can be found in SAP’s electronic and printed documentation (e.g., SAP, 2006a, 2006b). Other vendors’ ERP systems are outlined below.
THE MARKET FOR ERP
ERP systems have been around for about two decades now. All large and medium-size companies use such systems today, and more small companies are catching up. Well-known ERP systems in use include R/3 Enterprise, and SAP ERP (by SAP AG, Germany), Oracle’s E-Business Suite (by Oracle, USA), Microsoft Dynamics, and infor: COM (by Infor Global Solutions, formerly Germany, now USA). Well-known ERP systems such as iBaan Enterprise, J.D. Edwards, PeopleSoft, Navision and many more have disappeared, either bought by competitors or gone up into other systems of the vendor.
Names and vendors are changing, as there is plenty of dynamic in the ERP market. Mergers and acquisitions and an ongoing market concentration can be observed year by year.
Although there is still a fairly large number of ERP vendors, a handful of them dominate the ERP market worldwide. The global market leader by far is SAP AG from Walldorf (Germany). Followers are Oracle, Microsoft, Infor, and Sage.
future trends
While ERP continues to be the core of any integrated business software, the focus has shifted toward advanced user support, like Business Intelligence (Biere, 2003) and Knowledge Management (Davenport et al., 1998; Earl, 2001), and inter-organizational support of electronic business, in particular, supply chain management and customer relationship management. As those areas are closely related to ERP, all major vendors have extended their systems to support them as well. Customer Relationship Management (CRM) is an approach to develop a coherent, integrated view of all relationships a firm maintains with its existing and potential customers (Laudon, 2007, p. 59). Nowadays, many channels are available for enterprises and customers to be in contact with each other: retail stores, telephone, email, electronic shopping on the Web, mobile devices, etc. CRM systems try to consolidate customer information from all those channels and integrate the firm’s diverse customer-related processes.
The major focus of ERP is to support the internal business processes of an organization. However, business activities do not end at the limits of one’s own company. A natural extension of ERP is,therefore,supply chainmanage-ment (SCM; Ayers, 2001). SCM looks at the organization’s business partners, in particular at the suppliers and their suppliers. In addition, many methodological and technical shortcomings of ERP have been removed or at least improved in SCM. Those improvements have been discussed in the literature under “Advanced Planning and Scheduling” (e.g., Meyr et al., 2002) and were implemented in SCM solutions by SCM vendors.
One example of such improvements is the use of optimization methods, like linear programming, mixed- integer programming, constraint propagation, and heuristics like genetic algorithms to solve production and distribution planning problems. Another example is pegging, i.e., creating, maintaining, and evaluating relationships between purchasing orders, production orders, transportation orders, and customer orders across entire supply networks worldwide.
conclusion
ERP is a comprehensive approach to running organizations with the help of computer-based information systems. Such systems, so-called ERP systems, support all major areas of a business. ERP systems are integrated systems, with respect to information, processes, functions, and people. Usually, those systems are very large, developed by specialized software firms. The worldwide market leader is, by far, Germany-based SAP AG, with its current systems R/3 Enterprise and SAP ERP. Except for small enterprises, almost all of today’s companies use ERP systems for their ongoing business.
Extensions of ERP systems can be observed at the former limits of ERP: in CRM, the focus is on dedicated customer support; the focus of SCM is to help organizations plan worldwide supplier-buyer networks and to act successfully within such networks; business intelligence enables enterprises to behave in an ” intelligent” way (e.g., addressing the most promising customers well-aimed); knowledge management helps to formalize and preserve important knowledge in an organization; and information system support for key areas, like the before-mentioned areas, is provided both by ERP vendors and by specialized software and consulting firms
KEY TERMs
Data Integration: Unifying data models and databases so that all departments of an enterprise use the same data entities, with the same values.
Enterprise Resource Planning (ERP): The current state-of-the-art approach to running organizations with the help of information systems that provide support for key business processes and, more general, for electronic business (e-business).
ERP System (Enterprise Resource Planning System): A comprehensive information system that collects, processes, and provides information about all parts of an enterprise, automating business processes and business rules within and across business functions, partly or completely.
Operations Integration: Creating logical connections of individual operations, or steps of a business process, with preceding or succeeding operations, respectively.
Process Integration: Defining and automating interfaces between different business processes explicitly.
SAP: Software company based in Walldorf (Germany); market leader in ERP software worldwide. SAP is an abbreviation of the company’s German name ” Systeme, An-wendungen, Produkte in der Datenverarbeitung” (systems, applications, products in data processing).
Software Integration: Connecting different programs so that they can run together and use each other’s data and operations.
