Importance of ERP

There are five major reasons why companies undertake ERP.

1. Integrate financial information—;As the CEO tries to understand the company’s overall performance, he may find many different versions of the truth. Finance has its own set of revenue numbers, sales has another version, and the different business units may each have their own version of how much they contributed to revenue. ERP creates a single version of the truth that cannot be questioned because everyone is using the same system.
2. Integrate customer order information—;ERP systems can become the place where the customer order lives from the time a customer service representative receives it until the loading dock ships the merchandise and finance sends an invoice. By having this information in one software system, rather than scattered among many different systems that can’t communicate with one another, companies can keep track of orders more easily, and coordinate manufacturing, inventory and shipping among many different locations simultaneously.
3. Standardize and speed up manufacturing processes—;Manufacturing companies—especially those with an appetite for mergers and acquisitions—often find that multiple business units across the company make the same widget using different methods and computer systems. ERP systems come with standard methods for automating some of the steps of a manufacturing process. Standardizing those processes and using a single, integrated computer system can save time, increase productivity and reduce headcount.
4. Reduce inventory—;ERP helps the manufacturing process flow more smoothly, and it improves visibility of the order fulfillment process inside the company. That can lead to reduced inventories of the materials used to make products (work-in-progress inventory), and it can help users better plan deliveries to customers, reducing the finished good inventory at the warehouses and shipping docks. To really improve the flow of your supply chain, you need supply chain software, but ERP helps too.
5. Standardize HR information—;Especially in companies with multiple business units, HR may not have a unified, simple method for tracking employees’ time and communicating with them about benefits and services. ERP can fix that.

Advantages

In the absence of an ERP system, a large manufacturer may find itself with many software applications that do not talk to each other and do not effectively interface. Tasks that need to interface with one another may involve:

• design engineering (how to best make the product)
• order tracking from acceptance through fulfillment
• the revenue cycle from invoice through cash receipt
• managing interdependencies of complex Bill of Materials
• tracking the 3-way match between Purchase orders (what was ordered), Inventory receipts (what arrived), and Costing (what the vendor invoiced)
• the Accounting for all of these tasks, tracking the Revenue, Cost and Profit on a granular level.

Change how a product is made, in the engineering details, and that is how it will now be made. Effective dates can be used to control when the switch over will occur from an old version to the next one, both the date that some ingredients go into effect, and date that some are discontinued. Part of the change can include labeling to identify version numbers.
Computer security is included within an ERP to protect against both outsider crime, such as industrial espionage, and insider crime, such as embezzlement. A data tampering scenario might involve a terrorist altering a Bill of Materials so as to put poison in food products, or other sabotage. ERP security helps to prevent abuse as well.

Disadvantages

Many problems organizations have with ERP systems are due to inadequate investment in ongoing training for involved personnel, including those implementing and testing changes, as well as a lack of corporate policy protecting the integrity of the data in the ERP systems and how it is used.
Limitations of ERP include:
Success depends on the skill and experience of the workforce, including training about how to make the system work correctly. Many companies cut costs by cutting training budgets. Privately owned small enterprises are often undercapitalized, meaning their ERP system is often operated by personnel with inadequate education in ERP in general, such as APICS foundations, and in the particular ERP vendor package being used.

• Personnel turnover; companies can employ new managers lacking education in the company's ERP system, proposing changes in business practices that are out of synchronization with the best utilization of the company's selected ERP.
• Customization of the ERP software is limited. Some customization may involve changing of the ERP software structure which is usually not allowed.
• Re-engineering of business processes to fit the "industry standard" prescribed by the ERP system may lead to a loss of competitive advantage.
• ERP systems can be very expensive to install often ranging from 30,000 to 500,000,000 for multinational companies.
• ERP vendors can charge sums of money for annual license renewal that is unrelated to the size of the company using the ERP or its profitability.
• Technical support personnel often give replies to callers that are inappropriate for the caller's corporate structure. Computer security concerns arise, for example when telling a non-programmer how to change a database on the fly, at a company that requires an audit trail of changes so as to meet some regulatory standards.
• ERPs are often seen as too rigid and too difficult to adapt to the specific workflow and business process of some companies—this is cited as one of the main causes of their failure.
• Systems can be difficult to use.
• Systems are too restrictive and does not allow much flexibility in implementation and usage.
• The system can suffer from the "weakest link" problem—an inefficiency in one department or at one of the partners may affect other participants.
• Many of the integrated links need high accuracy in other applications to work effectively. A company can achieve minimum standards, then over time "dirty data" will reduce the reliability of some applications.
• Once a system is established, switching costs are very high for any one of the partners (reducing flexibility and strategic control at the corporate level).
• The blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale.
• Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the software.
• There are frequent compatibility problems with the various legacy systems of the partners.
• The system may be over-engineered relative to the actual needs of the customer.

Why ERP?

Corporations go for ERP either to solve the existing problems or to explore new opportunities. I call these two approaches as negative & positive approach respectively. One aspect of the negative approach forces some corporations to go for ERP to solve their Y2K problem. This is particularly true of those corporations that are heavily dependent on legacy systems running on old main frames. The second aspect of the negative approach is to get over the problems of islands of heterogeneous and incompatible information systems that were developed over the past several years in many organizations.

Functional IS modules representing areas such as Finance, Marketing, HR, and Production in these organizations would be running on diverse hardware and software platforms leading to nearly insurmountable problems of reconciling data locked up among the diverse systems. From a positive perspective many organization look at the great opportunity provided by ERP software that lead to almost instant access of transactional information across the corporation. Such an information rich scenario permits organization to reduce inventory across multiple units/ departments/ plants; reduce cycle times from weeks to hours; and improve customer satisfaction by orders of magnitude. All these translate to increased profitability or increase in market share and in turn much larger market capitalization. However ERP is only means and not an end by itself. ERP provides an opportunity for a corporation to operate as an agile entity to improve production / operation, customer service and customer satisfaction. The creative ingenuity of an organization to drive towards these corporate goals determines the extent of success an ERP implementation can deliver.

NSPL