Next Generation Enterprise Applications - Term Paper Example

Enterprise Resource Planning Systems Contents of the Report Introduction ERP: Current Situation ERP Advantages ERP Failures ERP Best Practices Introduction In the modern business world, the concept of blue ocean markets has become a clich. Companies are leaving no stone unturned in the process of acquiring the maximum market share. In such a red ocean market scenario, Enterprise Resource Planning (ERP) is not just a supplement, but a competitive weapon that a company can use to stay afloat. According to AMR's research; in 1999, the five biggest ERP vendors (SAP, PeopleSoft, Oracle, Baan, and J.D. Edwards) accounted for 59 % of the IT market. In 2004, the five biggest ERP vendors (SAP, Oracle, Sage Group, Microsoft's Business Solutions group, and SSA Global accounted for 72 % of the revenues (AMR, 2005). Although ERP has been the cornerstone of the success stories of most companies from several years, there has not been a unified definition for the term ERP. The absence of a single definition is due to the intrinsic complexity of the motive behind ERP implementation. According to the PC Magazine, "ERP is a concept that aims at utilizing an integrated IT system, which serves all departments within an enterprise" (PC Magazine, 2007). The definition implies that an ERP system is not a custom software, but a packaged software that a company can configure to interface with its own IT systems and business processes (finance, logistics, HR, manufacturing etc). Some of today's leading ERP vendors are SAP, Oracle and Microsoft. ERP: Current Situation ERP: The Present Although its implementation has taken various forms, the essential concept of ERP has remained the same. Today ERP has become a worldwide industry standard term for the broad set of activities supported by multi-module application software that helps a manufacturer or other business manage the important parts of its business, including product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service, and tracking orders. ERP can also include application modules for the finance and human resources aspects of a business (EC Council, 2002). ERP Customization: The First Step to Success ERP is a standard software package, and like any other standard software package aimed at automating an anonymous industry; it must be tailored to the specific requirements of the business domain in which it is being used. According to Gartner Group (1997), the scale of Business Process Re-Engineering and customization account for the maximum reasons for ERP implementation failures. Therefore customization of the ERP software is a primary and a critical step in ERP implementation. Two types of tailoring methods can be applied to customize the ERP software to the specific business. Customize the ERP package to suit the business process. Business Process Re-Engineering: Customizing the Business Process to suit the ERP package. In the first scenario, the company buys the off-shelf ERP package, and customizes the software based on the business rules and policies defined by the company. The second scenario is the one that is most commonly applied. In this customization strategy, the company re-engineers its business processes to match the vendor's ERP logic. It is not essential that all the business processes of the company be re-engineered. The company performs BPR on only those business processes that are currently not in tandem with the philosophy of the ERP package. ERP implementation and BPR activities should be closely connected. ERP implementation should involve the analysis of current business processes and the chance of reengineering, rather than designing an application system that makes only the best of bad processes (Scheer & Habermann, 2000). Current ERP Technology Most current ERP software packages are based on 3-Tier Client Server Architecture. The 3 tiers of this architecture are: User Interface: Contains the GUI that receives user input. Business Logic: These are servers that perform the business tasks. Database: A centralized database that holds company wide master and transaction data. The most essential advantage of this architecture is scalability. Since the three layers can be considered to be virtually distinct, changes can be made to one layer without adversely affecting the other two layers. It also leads to load balancing, by not overloading a single monolithic application. A recent trend in ERP has been Service Oriented Architectures (SOA) where the business logic is split among several specialized services; however this technology has not been realized to its complete capacity. The Niche Players ERP market is extremely competitive and only the niche players survive. Some of the top companies in the ERP markets are listed below: SAP AG: Apart from being the largest ERP vendor, SAP AG is also the third largest software vendor. Sap's ERP product, mySAP ERP Suite is a very comprehensive suite. Oracle: Oracle is the second largest ERP vendor in the world. Oracle has a strong foothold in the financials vertical. The Oracle's acquisition of People Soft further strengthened its market base with a strong HR module. Microsoft: Although Microsoft is a software giant, it does not occupy a very comfortable position in the ERP market. Microsoft products are generally well suited to small scale companies who are not capable of investing in products of SAP and Oracle. ERP: Advantages Implementation of ERP provides several benefits; tangible and intangible. Advantages of ERP Integration: The single most important objective in implementing an ERP package is to reduce redundancy in data storage and data entry. ERP aims at improving the performance of the enterprise-wide business process through integration. Global Application: Because of its world-wide acceptance ERP has been constantly worked upon in order to encompass all the jargons, conversions, standards, laws and languages. This helps an organization to carry out its business globally. Improves Efficiency: Implementation of ERP reduces paper work, enables quicker processing of information and provides accurate outputs in the way needed for the specific business process. Optimizing Specific Business needs: An ERP package is built upon the best practices in each business domain. ERP helps an organization to optimize specific processes in all business domains. Competitive Advantage: ERP verticals such as Supply Chain Management, Strategic Enterprise Management and Customer Resource Management enable the company to get a competitive advantage. TISCO: An ERP Success Story The following case study is just one of the thousands of ERP success stories. This story has been taken from the success story archives of ERPwire (2006). Tata Iron and Steel Company is one of the leading Iron and Steel companies of the world with its base in India. The company decided to implement SAP R/3 ERP after careful consideration of what matched best with their requirements. The implementation process took a long time which also resulted in initial failures particularly at bigger units. But the stakeholders of the company understood the nature of ERP and did not get bogged down by initial failures and long time spans. Within a few months after implementation and training, the company was able to reap benefits in all aspect and make further progress in each and every operation of an enterprise. Every success story suggests that, due to the nature of the ERP, a company may not be able to see tangible benefits as soon as it buys the product. However the company must understand the product well and not get frustrated by initial losses, since a proper implementation will fetch positive results in the long run. ERP: Failures Regardless of the several benefits offered by ERP systems, there is still a quantifiable chance of failure in every ERP implementation. It has been observed that several companies tend to lose a lot of money and also lose sales and profits during the first few months after a new ERP system goes live. There have been worse cases wherein a company has never recovered after making initial losses and ended up becoming almost bankrupt. Hershey's is the best case study to consider to analyze the reasons why ERP implementation and deployment involves a risk of failure. Hershey's: An ERP Failure Hershey is a leading manufacturer of chocolates, confectionaries and beverages in United States of America. The technical team at Hershey had been working hard to implement ERP solutions for more than three years. They had chosen to implement SAP ERP a favorite choice of corporates ever since SAP ventured on to the service in the year 1992. This process went on during the peak periods when business was expected to do its best. The company had chosen to implement ERP by using a popular method whereby the whole process was brought into action at a stretch. The implementation and the business process which followed it proved to be a major setback for the company. There was a heavy loss in profits and sales (ERPWire, 2006). Reasons for ERP Risks and Failures The reasons for the risks involved in ERP implementation and initial losses can be best understood by first analyzing the two main dis advantages of ERP: Expensive: Currently, most of the comprehensive ERP packages by leading vendors are affordable only by niche companies. The cost of implementing an enterprise-wide ERP package is prohibitively expensive for most small scale companies. Implementation Issues: This is not as much a disadvantage of the ERP itself as it is of the lack of understanding of ERP by the companies/users. Successful implementation requires a thorough understanding of the ERP package (which by nature is complex) and re-engineering of several existing business processes. The two most crucial factors involved in ERP implementation are costs and business process re engineering. Cost is a factor that must be justified at the top management level. If a company is decided upon an ERP implementation, it is pretty obvious that the company is aware of the huge expenses involved. The companies implementing SAP are generally massive profit making companies. The main cause for concern is the phase after the ERP system is put to production. ERP systems are based on success stories and are therefore fit only for those business processes that suit its business philosophy. Therefore if a company uses a different procurement strategy, whereas the ERP system implemented uses a different strategy, the company will not be able to exploit the benefits of the system. Instead, it leads to huge losses. Therefore analyzing the current business process and customizing it to match the ERP suite's business practice is a major challenge. Going back to the example, inefficient BPR was the major reason for the failure of ERP system at Hershey's. The timing chosen by Hershey's for ERP implementation was absolutely inappropriate. It was a time when the business prospects were slated to be promising. The companies cannot be expected to change their way of business or restructure at this point of time. It is the period wherein competitors will vie in with each other to become the market leader and as well as defeat their rivals. When this is the case Hershey made a blunder of not only restructuring the business process and changing it but it went to the extent of spending the whole time and efforts on implementing Enterprise resource planning. This disrupted the normal functioning of the business and as well as created lots of confusions in the company. Even if the chaos can be controlled, there is always a possibility of some losses in the initial phases of ERP implementations because of the following reasons: Understanding the new System: Any new technological system needs to be understood by the end users thoroughly. An ERP system is a comprehensive system with several functionalities. Therefore a lot of time and money needs to be invested into training the end users about the ERP system which will lead to potential loss of time, man power, work and money. Business Process Re Engineering: On the business side, an ERP system brings with it, certain changes in the way the business processes impacted by the ERP system are carried out. This requires the managers and employees in the line departments to learn and adjust to new ways. There is always some loss of money, time and work while abandoning old embedded principles and changing to new ways. Expense: An ERP implementation means a huge startup expense for the company. Expenses include huge amounts to be paid to, vendor, consultant, trainers, new employees, new technology, supporting technology etc. Therefore by the time an ERP system is ready to be used in production, the company would have lost a huge amount of money. It will take some time until the company realizes the benefits offered by the new ERP system. ERP: Best Practices Maximum amount of risk of failure and initial losses can be minimized by just following certain best practices while implementing an ERP solution. Most importantly, the need for an ERP system must be well justified from all aspects. The cost of purchase, cost of technology, implementation and deployment and the cost of re engineering and training must be charted out as a management level decision and be kept in mind throughout the implementation phases. The next best practice is to analyze all the ERP vendors and choose the right vendor solution that is closest to the current business requirements. Business Process Re Engineering is the most critical phase. The selective business processes that do not fit with the ERP suite's philosophy must be customized. It must be ensured that as minimum customization as possible is being implemented. Finally, comprehensive training must be provided to all the end users working on the new system. If these steps are followed, any initial loss because of the ERP system can be covered in a relatively short period of time and achieve the return on investment of the ERP system. References AMR Research (2005), "Research Article on ERP Market Share", Found Online at: http://www.amrresearch.com/Content/View.asppmillid=18358 PC Magazine (2007), "Definition of ERP", Found Online at: http://www.pcmag.com/encyclopedia_term/0,2542,t=ERP&i=42727,00.asp EC Council(2002), "Enterprise Resource Planning", EC Council Press Gartner Group, Ed (1997), "Next Generation Enterprise Applications", Systems Software Architecture Scenarios. Scheer, A. & Habermann, Frank. (2000), "Making ERP a Success", ACM Communications, Vol 43, No. 4. ERPwire (2006), "An Article on the History of ERP", Found Online at: http://www.erpwire.com/erp-articles/erp-evolution.htm Read More