Enterprise Resource Planning for Business - Term Paper Example

INTRODUCTION ERP, an abbreviation for Enterprise Resource Planning, consists mainly of an ERP software system that aims to improve a company’s performance in terms of resource planning, operational control, and management control (Zhang, 2005). The purpose of an ERP system is to integrate all the functional departments in the organization that might be running in isolation currently. Processes like production planning, purchasing, inventory management, order tracking, sales, marketing, and so on, are all brought together under one umbrella to work in collaboration and coordination with each other. In addition to that, an ERP system also comprises of modules that are specifically designed to cater to a company’s accounting, finance, human resource management, and planning purposes as well. This paper discusses how an ERP system can provide improved business performance for a company and how it can reduce costs, aid in strategic level planning, and facilitate day to day management activities of the company. The paper, then, goes on to discuss the importance of lean processes for companies in today’s competitive environment, and how ERP systems can enable companies to pursue that goal. HOW COMPANIES BENEFIT FROM ERP SYSTEMS Integration Integration can be considered as the core purpose of an ERP implementation in a company (Zhang, 2005). In a traditional organization environment, all the functional departments worked in isolation and were concerned only with their own performance and profits. Information flow between departments was not efficient because the need to share information was not realized. Also, departments felt that sharing information would make them lose their integrity and others could excel using their information. With an ERP implementation, the company cashes on the data available to the company and information is shared throughout the organization. The central database, facilitated by the ERP software, is used as the hub of information of the organization. Data is no longer constrained to individual departments. Instead, all relevant information for every department is made available to them. The central database does not only make the data available, but it also reduces redundancy in data. By providing a common platform for all the departments in the organization, ERP integrates and streamlines the processes, and thus, improves overall company’s performance. Reduction in Operating Costs As the ERP software integrates all the processes in the different departments of the company, and brings them on to a common platform, there is accurate and up to date information available for everyone. This availability of data results in efficient business processes and effective decisions made on a daily basis. The ERP system can help reduce the operating costs of the business through maintaining optimal levels of inventory and, hence, reducing inventory carrying and inventory holding costs. It can also reduce production costs, marketing costs and product support costs. (Wagner & Monk, 2008) It is important to note that these cost reductions begin to materialize after a relatively longer period in time. Also, there will be heavy costs incurred in the purchase of the ERP software, the training of human resource to use the system, and the time spent in adapting to the changed environment that is required by the system. However, in the long run, all these cost incurs would seem justified as the higher returns and improved business performance is experienced by the company. Assists Day-to-Day Management ERP can help ease the day to day management in companies. ERP systems consist of a central repository of data that acts as the backbone of the system. It is a pool of information that is made up of entries from throughout the company. This repository can be easily accessed by management and up to date, accurate information can be used in the decision making. This can smooth out the processes by a great deal. For instance, simple data such as the state of the inventory can cause a lot of delay if not promptly available. If the customer wants to place a big order and the sales person does not know if there are enough items available in the inventory to satisfy the customer, then this can even result in loss of customer. ERP system would facilitate access to this, and many other routine queries, and help make the day to day management in the company efficient. (Wagner & Monk, 2008) Facilitate Strategic Planning Strategic Planning is a process by which the needs and resources of the organization are established, the target audience is defined, the long term goals and the short term objectives are laid out, and evaluation and appraisal is done to assess whether the company achieved its targets or not. ERP system facilitates these planning activities through different features and modules that are part of the system. (Wagner & Monk, 2008) Moreover, because of free flow of information in the company, demand forecasting, which is an essential part of the production process, can be accurately estimated through the historic sales trends and records. This, otherwise, would have to be done based on instinct or very limited information that the management would have access to. ERP MAKES THE COMPANY LEAN Most of the companies, today, aim to become lean. By lean, it means down on unnecessary costs and making the company efficient in terms of delivering shorter lead times, enhances quality, lesser costs, higher profits, greater productivity, and better, more satisfying customer service. Lean, however, is not just a process. It is a continuous quest for perfection. Companies who aim to get lean must analyze their business process on a continuous basis, and find out the factors in those processes that add value to the customer. Anything that does not provide the customer with added value must be eliminated from the processes. (Turbide, n.d.) Value does not only come from what goes into the production process. In fact, all processes, such as logistics, warehousing, inventory management, administration, etc. can be made lean to add value to the customer. ERP helps companies get lean. The uninterrupted support of information and management, facilitated by an ERP system can help the company become lean and get a major competitive edge over others. (Turbide, n.d.) Waste Reduction ERP systems can contribute towards the goal of getting lean to a great deal. ERP systems act the hub for all the activities that go on in the company. It stores all the data and keeps a log of all the activities and processes. Also, it provides features and functionalities to help management analyze these activities to find out where the bottlenecks lie, and where improvements in the current processes can be made to increase efficiency. These systems also provide tools where management can plug in metric values and get a performance appraisal based on those values. The management can, then, test different data sets on these tools and find out what path to choose; the path that gives maximum efficiency and performance. Through the tools and functionalities available in ERP, companies can minimize inventory and save the unnecessary inventory holding and carrying costs. They can know the optimal levels of inventory that they need on hand to facilitate the demand and cut back on the waste. Also, they can more efficiently schedule their work activities to make most out of the available time and resources (Turbide, n.d.). Moreover, all secondary activities, such as setting up and handling of the primary processes can be effectively timed and scheduled in parallel to the ongoing activities. All this is only possible when the company has a holistic view of all the processes going on in different departments of the company. Another major contribution ERP makes is the streamlining of the supply chain activities. The Supply Chain Management (SCM) module of the system connects the company to its partners outside the boundaries of the company. It connects the entire supply chain of the company, including the raw material suppliers, the distributers, the wholesalers, the retailers, as well as the customers and facilitates the flow of information between the channel members (Mentzer, 2000). This aids in accurate demand forecasts which, if relied on a manual process, would have been extremely difficult. Having an accurate demand forecast is extremely essential for the company. The entire production plan depends on this demand forecast, and having an inaccurate estimate would result in excessive costs cascade throughout the company’s chain. An accurate demand forecast can minimize the wasteful inventory, as well as save inventory stock outs for the company, both of which can prove to be disastrous for the company’s costs. Moreover, by linking the supply chain, the company is saved from miscommunication, unnecessary delays and confusion. ERP’s transportation management systems can help choose the leanest routes for logistics as well (Turbide, n.d.). These can be tailored to fit the objectives and goals of individual companies as well. Continuous Improvement The pursuit of becoming lean does not have an end. After a set of objectives are met, new process refinement objectives must be set. Enterprise systems include the definition and documentation of the company’s processes (Turbide, n.d.). Once the initial set of objectives are completed, these revise the process definitions that exist in the system and the system, using comparative measurements and business intelligence point out the areas in which further refinement and improvements could be made. ERP offers features for Business Intelligence (BI), also known as Business Performance Management. This feature of the ERP system gathers data from throughout the organization and stores it for analytical purposes. The data is obtained from all areas of the business; production, warehouse, logistics, sales, customer support, supply chain, and so on. BI then analyses and monitors this data based on key performance indicators and alerts the management of any changes that it observes. Management can use these alerts to address to problems early and save the company from its effects. (Turbide, n.d.) Moreover, BI comprises of powerful tools that can do data mining and point out improvement opportunities to management. It uses pictorial and graphical representation of the data into many different forms that can help the management get an insight into how different areas of the company interact with each other and influence each others’ performance. This is very beneficial to the company. The management can understand how different business processes are linked to each other and how changes, good or bad, in one process can affect other processes. Sometimes, an improvement in one of the processes can even cause a bigger over loss for the company because of the extra waste it creates in another process. The holistic view of the company can help management understand these links and make decisions that benefit, not just a single process, but the company as a whole. Improved Customer Service All business strategies in today’s environment must be customer focused. Similarly, lean processes, assisted by ERP solutions, keep the customer in focus as well. When the company eliminates waste from its customer services processes, it reduces delays, errors, and inconvenience faced by the customers. The customers, then, naturally prefer to buy the company’s offerings because of the customer service value they get. The Customer Relationship Management (CRM) capabilities imbedded into the ERP systems make data from all over the business readily available to the customers, as well as the customer service representatives. This helps provide instant price quotes, configuration options, availability checking, product tracking capabilities, and so on. This makes the customer experience very pleasant and attracts him or her to do business with the company. CONCLUSION The implementation of ERP system in an organization can help boost the company’s performance and give it a competitive edge over others. In today’s environment of globalization and fierce competition, it is essential for the companies to be on their toes and make use of any opportunities available to them. ERP systems can help the companies identify those opportunities and use them to their advantage. It is important to note that ERP implementations are not cheap. Companies have to spend money in purchasing the software and training the employees. Moreover, it requires a complete change in the mindset of the management (Koch, n.d.). ERP implementation requires collaboration and coordination amongst all departments of the company. Successful ERP implementations require cooperation from throughout the company. However, once the system is implemented successfully and the human resource is on board, the implementation can improve the company’s performance drastically. Also, in the long run, the extra costs incurred by the company during the implementation would be justified and higher profits, greater customer satisfaction, and higher customer retention would be observed. REFERENCES Wagner, B. & Monk, E.(2008). Enterprise Resource Planning. Cengage Learning. Mentzer, J.(2000). Supply Chain Management. Edition 2. Sage Publications. Koch, C.(n.d.). How can ERP improve a company’s business performance? Available from http://www.miraclewisdom.com/how_can_erp_improve_a_companys_business_performance_1.htm [Accessed June 13, 2010] Zhang, B.(2005). ERP definition – A Systems Perspective. Available from http://www.sysoptima.com/erp/erp_definition.php [Accessed June 13, 2010] Zhang, B.(2005). ERP benefits – Operational Control, Management Control and Strategic Planning. Available from http://www.sysoptima.com/erp/erp_benefits.php [Accessed June 13, 2010] Turbide, D.(n.d). Five Ways ERP Can Help You Implement Lean. Epicor. Available from http://www.epicor.com/Host/na/Internal/5WaysImpLeanMfg_WP_Ltr_090512_Ens.pdf [Accessed June 13, 2010] Read More