[MCS-052] What is ERP? Explain different components of an ERP system. Compare ERP with other similar software solution.

ERP is the acronym of Enterprise Resource Planning. ERP utilizes ERP software applications to improve the performance of organizations’ resource planning, management control and operational control. ERP software is multi-module application software that integrates activities across functional departments, from product planning, parts purchasing, inventory control, and product distribution, to order tracking. ERP software may include application modules for the finance, accounting and human resources aspects of a business.

Enterprise resource planning – integrates all departments and functions throughout an
organization into a single IT system (or integrated set of IT systems) so that employees can make enterprise wide decisions by viewing enterprise wide information on all business operations
Components:
There are 2 main types of Components.

1. Core ERP component – traditional components included in most ERP systems and they primarily focus on internal operations
2. Extended ERP components - extra components that meet the organizational needs not covered by the core components and primarily focus on external operations.

Core ERP component

1. Accounting and finance component – manages accounting data and financial processes within the enterprise with functions such as general ledger, accounts payable, accounts receivable, budgeting, and asset management
2. Production and materials management component – handles the various aspects of production planning and execution such as demand forecasting, production scheduling, job cost accounting, and quality control
3. Human resource component – tracks employee information including payroll, benefits, compensation, performance assessment, and assumes compliance with the legal requirements of multiple jurisdictions and tax authorities

Extended ERP component

1. Business intelligence – describes information that people use to support their decision-making efforts
2. Customer relationship management – involves managing all aspects of a customer’s relationships with an organization to increase customer loyalty and retention and an organization’s profitability.
3. Supply chain management – involves the management of information flows between and among stages in a supply chain to maximize total supply chain effectiveness and profitability.
4. E-business – means conducting business on the Internet, not only buying and selling, but also serving customers and collaborating with business partners.

Stages of Development of ERP

ERP Maturity Model

ERP implementation is not the ‘be all’ and ‘end all’ for any growing organisation. Though technology dependent, it is a living system and passes through different stages of development and maturity.

As the business grows, ERP should be adaptable to meet the changing processes, organization structure and demand patterns. There are many challenges that a company which has set up ERP encounters in its endeavour to achieve peak performance.

The most significant results require a lot of effort after the ‘go-live.’ And this is where most companies falter. As such, any ERP system is unique, but the stages of maturity after go-live normally fall into one of the following three stages:

Stage 1: Chaos

The implemented system needs to be streamlined to ensure that all the components of the system are stabilized and work in harmony.
After go-live, the company usually turns its attention to gaining administrative and information stability. At this stage, the focus areas for attention are redefinition of user roles and responsibilities, establishment of new policies to support the ERP infrastructure, and integration and utilization of the information generated from the new ERP system. The maximum energy is however spent on handling the change in the culture brought about by an ERP implementation.
Unfortunately, once through the deadlines of implementation, organizations go back into old habits and routines. The alignment of business processes and ERP definition is lost. Manual systems and reports are created to work around perceived system constraints.
Exceptions, that are not mapped properly during implementation will hinder regular processes time and again. Workarounds that have been designed increase operations and steps in the processes, thereby rendering them inefficient.
All this, coupled with transactional complexity, business case exceptions and frustrated users often drives organizations into their first post-ERP projects. Such organizations will face a lot of problems after golive till they streamline their processes on the ERP system.

Stage 2: Stagnancy

Even after a successful implementation and streamlining of new processes, organizations still do not get the expected benefits from ERP. Such organizations are reasonably satisfied with the implementation but they had hoped for a higher ROI.
Organizations in this stage need to refine and improve the performance of the business. The improvement can be achieved in two phases:

A) Incorporate unused functionalities of the ERP system into the business process. This would help the business in one of the following ways:

• Manual activities would be eliminated and replaced with automated ERP system driven transactions.
• Activities mapped using system workarounds can be done away with, thereby reducing transaction complexity and operation cycle time.

B) Increase the intelligence of the system with advanced planning engines, schedulers, etc. ERP could thus be used as the base foundation on which several other best-of-breed solutions can be built to provide extra business intelligence to the ERP system.

Stage 3: Growth

At this highest stage of development after go-live, organizations seek strategic support from the ERP system. This requires the system to align with the corporate vision and business strategies. The focus moves over to profit, working capital management and people growth.

ERP plays a crucial role in improving the value chain, providing for efficient capital management and optimizing customer/product mixes. The company is thus completely transformed into an entity that is responsive to client needs, has a pulse on market movements and hence can forecast and plan with a higher degree of accuracy.

This calls for a comprehensive approach to the technological, strategic and operational aspects of the ERP system wherein IT forms the backbone of the infrastructure and supports, facilitates and monitors the different resources across the organization at various levels.

Effective post-implementation

To help organizations get the maximum possible benefit from ERP in the post-implementation stage, Ernst & Young recommends a combination of optimization approaches. Leveraging our rich global experience in ERP implementation and reviews, these approaches help bring the right perspective at any stage of the post go-live environment.

ERP optimization

ERP optimization intends to provide an approach to extract maximum benefits from ERP postimplementation.

It comprises three distinct approaches:

• Streamlining of operations to help organizations that have not achieved a stable operating environment post-ERP implementation. There is a high possibility of companies slipping back at this stage if issues are not addressed in time.
• A short situational analysis would be done to establish causes and help the company with solutions in stabilizing and streamlining processes.
• Operational improvement by reviewing the existing ERP with the key business drivers in mind.This helps to identify unused functionalities of the ERP application, complex mapping of transactions and neglect of ERP generated reports. The system can then be optimized to improve efficiency.
• Strategic transformation takes the CEO’s perspective of the company’s business strategy. This considers ERP as the backbone to transform organizational strategic objectives into tactical, reliable and measurable goals and monitor them on a continuous basis. Business benefits There are a lot of opportunities for companies desiring to extract maximum value and competitive advantage from the existing ERP system. The benefits to the companies would be:
• Increased efficiencies through integrated processes.
• A strong coherence between strategic objectives and tactical plans and goals.
• Strong alignment of people, processes and technology with organizational goals.