Enterprice_Resource_Planing

Enterprise Resource Planning Introduction Enterprise Resource Planning has become a powerful tool in the hands of management for effective use of resources and to improve efficiency of an enterprise. During 1970s Material Requirement Planning (MRP) was a fundamental concept of production management in manufacturing industries. In today’s rapidly changing business environment every organization has to face new market, new standard for quality assurance, new competition, increasing customer expectations. As a result the business enterprises are in a constant need of reviewing and re-engineering their processes in order to survive and grow under competitive environment. With the advent of innovations in information technology, a concept of integrated approach embracing all functional areas have been evolved. This has led to development of ERP packages which were originally targeted at manufacturing industries and consisted mainly of functions like Sales Management, Production Management, Accounting and Financial Affairs. In the recent years this has been extended to all industries covering whole management functions like: • Manufacturing • Material Management • Quality Management • Sales and Distribution • Logistic Management • Maintenance Management • Human Resources • Finance • Strategic and Operational Planning etc. ERP Overview Information in large organizations is often spread across numerous homegrown computer systems, housed in different functions or organizational units. While each of these “information islands” can ably support a specific business activity, enterprise-wide performance is hampered by the lack of integrated information. Further, the maintenance of these systems can result in substantial costs. For example, many of the older programs cannot properly handle dates beyond the year 2000, and they must be fixed at a steep cost or replaced. While the Y2K bug has been fixed over time (at an estimated cost of $600 billion worldwide), the lack of integration is a pervasive problem. Consider, for example, Boeing, which relies on hundreds of internal and external suppliers for the millions of components needed to build an airplane. The goal of putting the right parts in the right airplane in the right sequence at the right time was managed at Boeing by four hundred systems that were designed in the sixties and were all but integrated. Information inconsistencies were prevalent and the systems were not synchronized. As a result, parts often arrived late, idling partially-built airplanes on Boeing’s assembly lines. In 1997, as Boeing faced unprecedented demand for its aircraft, these problems became unbearable, and the company’s manufacturing ground to a halt. Boeing was forced to shut down two of its major assembly lines and take a $1.6 billion charge against earnings. Boeing has since replaced these systems by an integrated Enterprise Resource Planning (ERP) system based on commercial, off-the-shelf software. With the advent of E-Business and the need to leverage multiple sources of information within the enterprise, ERP software has emerged as a major area of interest for many businesses. Back-office enterprise software has its roots in the 1960s and 1970s, as computing power became affordable enough for companies to automate materials planning through MRP and financial processing through payroll and general ledger software. MRP, short for Material Requirements Planning, was developed in early 1960s at IBM and had become the principal production control paradigm in the U.S. MRP consists of a set of procedures that convert forecasted demand for a manufactured product into a requirements schedule for the components, subassemblies and raw materials comprising that product. MRP is limited to controlling the flow of components and materials, and does not lend itself to more complete production control and coordination. The next generation of manufacturing software, known as MRP II, was developed to address this shortcoming and to further integrate business activities into a common framework. MRP II divides the production control problem into a hierarchy based on time scale and product aggregation. It coordinates the manufacturing process, allowing a variety of tasks such as capacity planning, demand management, production scheduling and distribution to be linked together. However, even MRP II is primarily a specialized tool designed to serve the needs of the manufacturing function within a company. Its data and processes are not integrated with those in the rest of the enterprise, such as marketing, finance and human resources. ERP entered the scene to facilitate information sharing and integration across these different functions and to operate the enterprise more efficiently and effectively, using a unified data store and consistent processes. What is ERP' ERP is a software architecture that facilitates the flow of information among the different functions within an enterprise. Similarly, ERP facilitates information sharing across organizational units and geographical locations. It enables decision-makers to have an enterprise-wide view of the information they need in a timely, reliable and consistent fashion. ERP provides the backbone for an enterprise-wide information system. At the core of this enterprise software is a central database which draws data from and feeds data into modular applications that operate on a common computing platform, thus standardizing business processes and data definitions into a unified environment. With an ERP system, data needs to be entered only once. The system provides consistency and Visibility and transparency across the entire enterprise. A primary benefit of ERP is easier access to reliable, integrated information. A related benefit is the elimination of redundant data and the rationalization of processes, which result in substantial cost savings. The integration among business functions facilitates communication and information sharing, leading to dramatic gains in productivity and speed. Cisco Systems, for example, harnessed ERP to help it become the market leader in the global networking industry. Cisco’s ERP system was the backbone that enabled its new business model Global Networked Business based on the use of electronic communications to build interactive, knowledge-based relationships with its customers, business partners, suppliers and employees. In the process, Cisco doubled in size each year and reaped hundreds of millions of dollars in both cost savings and revenue enhancements. Some popularly known ERP packages: • SAP AG: The leading ERP package vendor, with a 32% market share in 1999, is SAP AG (SAP stands for “Systeme, Anwendungen, und Prudukte in Datenverarbeltung” or Systems, Applications and Products in Data Processing). SAP AG was founded in Germany in 1972 by five engineers who wanted to produce integrated business application software for the manufacturing enterprise. Seven years later, the company launched its first enterprise software, R/2, which was designed around a centralized, mainframe-based database. SAP’s client/software product, R/3, was introduced in 1992 and quickly came to dominate the ERP software market. Leveraging its leading position in the ERP market, SAP developed vertical, industry-specific business solutions for 19 industries. These industry “solution maps” provide functionality from SAP and its partners for complete, end-to-end industry- specific processes. SAP followed the lead of focused niche players, and in 1999 it extended its ERP offering to include customer relationship management, data warehousing and supply chain management modules. SAP recast its entire set of offerings around the Internet, borrowing the “business portal” concept (called mySAP.com Workplace in SAP parlance) to organize all information around the user’s role in the enterprise, and adding functionality for business-to-business and business-toconsumer electronic commerce. SAP started the mySAP.com Marketplace, an electronic inter-company trading community for buying, selling and collaborating within and across industries. • Oracle Corporation The heavyweight of the database software market, Silicon-Valley-based Oracle is the world’s second largest software company. Second to SAP in the enterprise software market, Oracle applications serve over 5,000 customers in 140 countries. Oracle has been a leader in refocusing its ERP solutions around the Internet, and it launched a barrage of electronic-commerce and Internet-based business-to-business software applications while the other JBOPS companies were slow to react to the changing marketplace. Further, Oracle was the first JBOPS company to integrate front-office applications with its ERP offering. • Peoplesoft Started as a software firm for human resource management in 1987, Pleasanton-based PeopleSoft gradually expanded its software to cater to other corporate functions. PeopleSoft’s ERP system provides enterprise solutions for finance, materials management, distribution, supply chain planning, manufacturing and human resources. In 1996, PeopleSoft acquired Red Pepper, a producer of supply chain management software, and in 1999 it acquired Vantive for its customer relationship management offering. • BaaN The Baan Company was founded in The Netherlands in 1978 making financial software. Baan’s products have been simpler to use than SAP’s, leading to the company’s growth in the early nineties. Today, the company operates in 80 countries, serving more than 2,800 customers. The Baan Series is its primary enterprise system, which incorporates a variety of functionalities from sale order management and manufacturing to supply chain management. Since October of 1998, Baan suffered a series of setbacks including management turmoil, accounting irregularities, multiple-quarter losses and CEO turnover. • J D Adwards Founded in 1977 by three partners from an accounting firm, Denverbased J.D. Edwards addresses business processes in finance, manufacturing, distribution/logistics and human resources, and encompasses the entire supply chain from planning and scheduling through execution. The software maker has served over 5,000 customers in over 100 countries. Its OneWorld system is considered to be more flexible than its competitors’, and the company made headway in smaller enterprises. And, rather than build its own customer relationship management system, J.D. Edwards developed tight integration with Siebel’s leading offering. • INTENTA (Sweden) • QUAD • Marshall (Developed by Ramco System, Chennai, India) • SSA (System Software Associates, Inc., USA) etc. ERP Package: It is a software with the help of Database Management System integrating information related to all functional areas. Globally acceptance of ERP System is in great demand. Industry analysts are forecasting growth rate of more than 30% in next five years. The reason for accepting ERP System replacing their old business system are as follows: • Improved business performance through optimum resource utilization. • Reduction in manufacturing cycle time by integrated planning process. • Better support Customers in fast changing in market conditions. • Better Cost Control mechanism by way of accurate costing system. • Enhanced efficiency in control through feedback information and online access to accurate information. • Establishment of Decision Support System etc. Three fundamental characteristics of an information system are accuracy, relevancy and timeliness. Today, time is a crucial parameter for good quality service to the market. In fact, there are interlinks among all the systems. A data in isolation does not give right direction in decision making. When the impact of the same can be seen in all activities in totality, the information becomes far more relevant. A well designed ERP package can provide these advantages. Selection process of an ERP Package There are many ERP packages available in the market. Analyzing all the packages for choosing the right one is a time consuming process. Thus, it is better to limit the number of packages at the beginning for the purpose of evaluation. Looking at the product literature of the vendors, one can eliminate the packages that are not at all suitable. Normally this evaluation process is done by a Committee. What is required to be done is gap-analysis between the requirement of the company and capability of the package. Presentation or demo from the selective vendors will provide some direction towards choosing the best. Of course, cost of the package is also a key factor. Cost benefit analysis is also to be done. The Common Criteria for selection for a package: 1. How best the package fits the requirement of the company 2. Provision for accommodating the changes in the system 3. Implementation and Post Implementation support from vendor 4. Reliability of Vendor 5. Change in Hardware and Skill requirement 6. Cost of the Package and Budget Cost of ERP Implementation A budget is required for implementation of an ERP package. It is not only the cost of ERP package but also there are many hidden costs that are to be considered. The following costs are to be considered: 1. ERP package cost. 2. Consultant cost. 3. Cost of Data conversion. 4. Cost of training. 5. Cost of testing. 6. Cost of Post-Implementation support. Business Process Re-engineering and Implementation of ERP According to Peter F. Drucker, “Re-engineering is new and it has to be done.” Business Process Re- Engineering (BPR) aims at performance improvement through dramatic change in organizational structure,skill development, change in technology and change in mindset of people. BPR is a process which explores the possibility of doing things in different ways to improve efficiency in the operation and it involves rethinking, renovation, redesigning, etooling. In other words, it is an exercise towards transformation of an organization to dynamic change which involves lot of innovations in every activity. Implementation of ERP involves replacement of all existing Information Systems. Thus at the beginning there is a need to change the traditional method of data gathering and analysis because data from different departments needs to be integrated. The question of performing in isolation vanishes. Developing linkage of data from different sources, correlating them and understanding the impact of an integrated system are the important processes involved in implementation of an ERP System. To device a system with holistic view of enterprise requires integration of isolated piecemeal Information Systems and facilitates seamless flow of information across departmental barriers. In other words, implementation of ERP Systems involves great change in information flow and reporting system. The success depends on support and co-operation of all users and managing the changes. BPR exercise is essential for getting true benefit out of an implementation of ERP package. The main reason is to bring the changes in the physical system, data flow and mindset of the people to effectively utilize its capability of integrating information for the benefit of management decision making. BPR exercise may be divided into different phases as given below: Phase I: Begin Organizational Change • Understanding the current state of Organization • Assess the need for changes • To explain how to bring the changes • To project the new dimension in the business • To make a document on new organizational structure Phase II: Bringing Re-engineering process • Establish BPR Organizational structure • Selection of people to be involved in BPR • To fix the responsibilities of these people Phase III: Identify BPR Operations • To pinpoint the processes to be re-engineered • To assess the potential changes • To fix priorities of activities • To draw performance matrix • To establish business strategies • To identify the potential barriers Phase IV: Understanding the existing process • To Develop the model of current process • To understanding the technology currently in use • To assess the present flow of information • To identify the gaps in the flow of information Phase V: Newly designed model • To draw new work flow • To define new process steps • To describe the new information requirement • To assess new technology requirement • To assess skill requirement Phase VI: Transformation • To develop migration strategy • To devise action plan • To reallocate workforce • To develop training curriculum • To ensure smooth change over to new process Business Modules in an ERP Package All ERP packages contain a set of modules. These modules are related to different functional areas like Finance, Manufacturing and Production Planning, Materials Management, Selling and Distribution and so on. These modules in business systems have close relationship. An ERP system takes care the flow of information from different modules and understanding the interactions among them. To avoid data redundancy, data generated from the activity centres are entered and the same data is considered by different modules of the system where the same is relevant for the purpose of understanding the impact of one the other. This is the basis of integration of information. This is the most important feature of an ERP system. Module of ERP Package 1. Finance Module: Finance module in an ERP system will have the following subsystems : • Financial Accounting: General Ledger, Accounts Receivable, Accounts Payable, Fixed Assets Accounting etc. • Investment Management: Investment Planning, Budgeting, Depreciation, Forecast, Simulation etc. • Controlling: Overheads Cost Controlling, Activity Based Costing, Product Costing, Profitability Analysis etc. • Treasury: Cash Management, Treasury Management, Market Risk Management, Funds Management etc. 2. Manufacturing Module: Manufacturing Module generally has the following subsystem: • Material and Capacity Planning • JIT/ Repetitive Manufacturing • Engineering Data Management • Cost Management • Quality Management • Configuration Management • Tooling etc. 3. Human Resources Module: Human Resource Module generally has the following sub-systems : • Personnel Management – HR Master data, personnel administration, Recruitment, Deployment, Transfer etc. • Organizational Management – Job Specification, Staffing Scheduling, Personnel cost planning etc. • Payroll Accounting – Salary Calculation, Income Tax Calculation, Accounting for Fringe Benefits • Time Management – Staff Planning, Work Scheduling, Time Recording, Absence recording etc. 4. Material Management Module: Material Management Module generally consists of the following sub-systems: • Material Procurement planning • Purchasing • Vendor Evaluation • Inventory Management • Material Inspection etc. 5. Sales and Distribution Module: • Master Data Management • Order Management • Warehouse Management • Shipping • Billing • Pricing • Sales Support • Transportation • Foreign Trade etc. ERP Implementation Life cycle ERP implementation project involves different phases which have definite activities as explained below: 1. Pre-evaluation screening – to search for perfect package which will be most suitable in terms of functional fit of the business process, skill set available and easiness to adopt. 2. Package evaluation – to understanding the performance of the business and do the cost benefit analysis. 3. Project Planning Phase – to make a tentative plan for implementation in terms of time, identification of person responsible for co-ordination of the implementation programmes, skill development and monitoring the progress. 4. Gap Analysis – to identify the gap between the existing system and future expectations from the ERP system so as to optimize the outcome from the implementation programme. 5. Re-engineering – to bring the necessary changes in the system in terms of physical system, hardware, mindset of the people, data flow and reporting. 6. Configuration – to install the necessary hardware, data base management system and configuration of the ERP system accordingly. 7. Testing – to test the system with test data set like entering data, validating them and generating reports for all modules and checking their correctness. 8. End user Training – to impart training to people from different functional areas who will be associated with operations and handling reports. 9. Going live – to finally switching over to new system with data migration, and running the system with live data of all functional areas. 10. Post – Implementation – to arrange for maintenance of the system in terms provision of technical expertise in cases of problems. Implementation Methodology The methodology of implementation of ERP system involves different activities like understanding the need for the system, benefits to be derived, people to be associated, need for their skill updates, database configuration etc. Generally, an ERP implementation can be divided into four phases: 1. Understanding the problem 2. Defining solutions 3. Undertaking technical work 4. Going live 5. Post implementation maintenance 1. Understanding the problem: This is the phase where in-depth analysis of business system is undertaken to understanding the need for an integrated system in handling data and how to improve the data flow towards better management reporting and effective decision making. The company goes for evaluation of different packages and selects the one which is the perfect fit to the requirement. In the evaluation process of the package the following parameters are taken into consideration: • Functional fit with company’s business process • Degree of implementation among various modules • Flexibility • Technology requirement • Cost of the system (Systems, Training and Maintenance) • Time of implementation • Skill requirement • Technical support 2. Defining the solution: This phase considers all the intricacies of the systems so as to take care of all those during the development process. The gaps in the present system, scope of improvement in the data flow and need for integration for better control are the most important three areas which are critically evaluated to arrive at a solution set. Finally, the outcome of the same is taken into consideration for software. This phase gives solution for data migration process, volume of data and database size,plan for implementation in terms of technical requirements and timeframe. In fact, in this phase,project team is built, project schedule is defined for all broad activities. 3. Undertaking Technical Work: In this phase, the activities are broken into details. The work involved in this phase are: • Procurement of hardware • Configuration of the system • Data migration • Developing and testing the interfaces • Developing the new procedure associated with the system • Testing the new system • Training the end-users 4. Going Live: In this phase, the system is to be finally implemented in new environment with real life data set and to the satisfaction of the end-users. In ERP systems, the integration of all the modules is the critical part. The end-users must understanding the sequence of operations, how one module interact with the others and what are the restrictions in operation in terms of priority so as to establish proper checks at all levels in the process. The co-ordination among project members for different modules is very essential for smooth and successful implementation. 5. Post-implementation maintenance: Once the implementation is over, the services of vendor and the hired consultants will not be available. Trained in-house employees may have limited exposure to take care of all the problems just after implementation. Post implementation needs a different set of roles and skills to solve the problems in an integrated system. The training will never end. New functionality may be added which will invite different technical problems like enhancement of system, fresh configuration for added integration features. Thus, this is a very critical phase. To reap the full benefit of ERP system, there should be arrangement for continuous training of employees and periodical review on how to enhance the advantage from the system. The Leading ERP Package: SAP R/3 SAP R/3 is a general-purpose platform with options that enable it to be configured for the specific needs of each customer without changing the R/3 code. This does not mean hat SAP R/3 is a plug-and-play solution. In order to implement SAP R/3, the system must be configured to specifically meet the organization’s process requirements. This is a complex and lengthy process, which can take years to implement. The organization, the business process and all transaction details must be explicitly modeled and entered as settings in about 8,000 configuration tables.The user defines precisely her organizational units, processes, transactions, the different SAP R/3 screens, reports etc. SAP R/3 consists of modules that may be used separately or bundled together. This enterprise system has an open architecture that allows third-party solutions providing other functionality’s to be “bolted on” to the SAP backbone. All the modules work in an integrated fashion, so different parts of the enterprise use the same data at the same time. The software can also link business processes between companies worldwide, for example between a supplier and a customer in different countries. The SAP R/3 database integrates all data items, so entire processes use the same data, seamlessly passed from step to step. Consider, for example, how the order fulfillment process is managed by SAP R/3. As seen in Figure 6, when a customer inquires about a potential purchase (1), SAP R/3 creates a quote (2) including price and delivery date. The quote takes into account what the system already knows about the customer (3), about the item and about inventory and materials availability (4), which are in the SAP R/3 database. As a result, the prices, delivery times and delivery terms are based on uptodate information and may be specific to a customer or an order. If the customer accepts the quote, SAP records a sales order (5), including pricing and delivery terms. The order then goes into production, triggering the entire order fulfillment process. SAP automatically sends the relevant data where it needs to go,so delivery can be automatically scheduled (6). The customer’s credit limit can be automatically checked by the system, and the collection process can be managed through the system as well (7). SAP R/3 Modules The modules are: SAP R/3 is composed of a number of modules that are fully coordinated and integrated. SD - Sales and Distribution module supports sales and distribution processes, with functions for pricing, order processing and on-time delivery. It has a direct interface to the Materials Management (MM) and Production Planning (PP) modules. This enables an integrated process that involves checking customer credit, ensuring materials and production capacity are available to satisfy an order at the time it is placed, executing the order, and automating the billing process. This module also facilitates an analysis of sales and delivery performance using standard metrics that are defined within SAP R/3. MM - Materials Management module is designed to support the procurement process and to optimize the logistics pipeline within the enterprise. It enables automated supplier evaluation and can lower procurement and warehousing costs with accurate inventory and warehouse management, and integrates invoice verification. The module is designed to support foreign trade processing, such as customs declarations, as well. Tools for inventory control and purchasing information help to identify trends and developments. PP - Production Planning module supports production planning, manufacturing processe execution, analysis and production control. This application covers the production process from the creation of master data to production planning, MRP, and capacity planning, right down to production control and costing. It supports a variety of manufacturing processes including repetitive, make-to-order and assemble-to-order production. Quality management, laboratory information systems and data analysis functions are also available. FI - Financial Accounting module collects all the data relevant to financial accounting, from transactions to accounts, into an integrated General Ledger. It provides comprehensive, consolidated financial reports and ties together the different pieces of financial data, Accounts Payable, Accounts Receivable and Asset Management. It also provides an up-to-the-minute basis for enterprise-wide control and planning, giving a “snapshot” of the enterprise. The FI module supports international accounting standards such as GAAP and IAS. CO - Controlling module includes a variety of planning and control tools for enterprise control systems, following a uniform system of reporting. It provides comprehensive reports to support most common cost-accounting problems, as well as the capability to put together additional reports. TR - Treasury module is a comprehensive solution for financial/treasury management. EC - Enterprise Controlling module continuously monitors metrics and performance indicators on the basis of specially prepared management information. IM - Investment Management provides integrated management of investment projects. Projects are tracked from planning through execution to settlement, including preinvestment analysis and depreciation simulation. PM - Plant Maintenance and Service Management module handles planning, control, and processing of scheduled maintenance, inspection, special maintenance, and service management. QM - Quality Management module monitors, manages and tracks all processes relevant to quality assurance along the entire supply chain, coordinates inspection processing and initiates corrective measures. PS - Project System module coordinates and controls all phases of a project, in direct cooperation with Purchasing and Controlling, from quotation to design and approval, to resource management and cost settlement. Linking SAP R/3 to Other Applications: BAPIs SAP does not solve everything. For example, the firm’s forecasting or customer relationship management processes may not be modeled within SAP. Where SAP does not provide a solution, it is possible to “bolt-on” another application to attain the required functionality. SAP has an open, component-based architecture that enables integration with other applications. This architecture consists of two key elements: 1. SAP Business Objects are essentially “black boxes” that contain SAP R/3 data and business processes, while suppressing the details of their data structure or specific implementation details, and 2. BAPIs (Business Application Programming Interfaces) define how the application links to SAP R/3. The result is a standard method of communication between SAP R/3 and other applications.