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ERP is an acronym that stands for Enterprise Resource Planning. ERP is package software solution that addresses the enterprise needs of an organization by tightly integrating the various functions of an organization using a process view of the organization.
It is a package software and not a custom made software for a specific firm. It understands the needs of any organization within a specific industry segment. Many of the processes implemented in an ERP software are core processes such as order processing, order fulfillment, shipping, invoicing, BOM processing, purchase order processing, preparation of Balance Sheet, Profit and Loss statement etc., that are common to all industry segments.
That is the reason why the package software solution works so well. The firm specific needs are met through a process of customization. ERP addresses not merely the needs of a single function such as finance, marketing, production or HR. Rather it addresses the entire needs of an enterprise that cuts across these functions to meaningfully execute any of the core processes. ERP integrates the functional modules tightly. It is not merely the import and export of data across the functional modules.
The integration ensures that the logic of a process that cuts across the function is captured genuinely. This in turn implies that data once entered in any of the functional modules (whichever of the module owns the data) is made available to every other module that needs this data. This leads to significant improvements by way of improved consistency and integrity of data. ERP users the process view of the organization in the place of function view which dominated the enterprise software before the advent of ERP.
The process view provides a much better insight into the organizational systems and procedures and also breaks the "kingdoms" that work at cross-purposes in many organizations. To implement such a demanding software one needs high performance computing, high availability systems, large, high speed high availability on line storage and high speed, high reliable net works, all at affordable cost. Though many ERP software vendors have been around for more than two decades, ERP software started to make major inroads into the corporate world only in the last couple of years. Interestingly Indian corporate houses are taking the ERP route exceptionally fast, even by world standards in the past two years.
The investments on a complete ERP implementation for a Rs. 100+ core corporation would easily run into Rs 10+ crores. ERP is the only software whose deployment decisions are made in the corporate boardrooms and not by EDP / MIS departments. ERP software today represents possibly the single most expensive piece of general-purpose software.
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.
Many IS professionals perceive ERP as a paradox. "How can a software company located in Germany, Netherlands or U.S.A understand the needs of my organization operating in Bangalore?" is the question they generally ask.
Many of them feel that custom software should work far better than packaged software. For many of them holding this view, the success of ERP is a paradox. What they miss out is the point that the core processes of most organizations are by and large, the same. Thanks to globalization, there has been a significant amount of uniformity, standardization and simplification of the core processes across the industry.
Some of the technologies such as EDI have even standardized the contents of critical documents, such as shipping and purchase orders. Standard processes and procedures, for example, Letter of Credit, have seen a great level of standardization to suit International Trade. These developments permit companies in Germany and Netherlands to develop the world-class software that can be profitably used by a corporation in Bangalore also. By pumping in billions of dollars in understanding the business processed used by thousands of corporations worldwide, the ERP software vendors also bring in world-class practices to any company that implements the ERP software.
In a similar vein, large ERP software vendors such as SAP & BaaN are also able to employ and retain thousands of software professionals who can continuously improve their ERP software product. No individual end user company can afford such large pool of software professionals. This is the secret of success of ERP. A possible analogy may drive home the point better. An average Indian has already realized the fact that a ready-made garment made using sophisticated technology can indeed fit him/her better than a street corner tailor. The highly sophisticated technology of Computer Aided Design to model human anatomy and Computer Aided Manufacturing tools to cut complex contours effortlessly at high speed, explain the better fit. Similar is the case of packaged software.
BPR as an acronym stands for Business Process Reengineering. It used to be a buzzword until a few years ago. Overzealous BPR pundits caused so much havoc through job cuts, it is a controversial subject today in many countries. An organization can go for standalone BPR or they can choose ERP. Since ERP anyway comes bundled with several of the best practices, a well implemented ERP exercise leads to some amount of BPR, though the reengineering effort may not be full-blown. However, reengineering through ERP, generally termed package enabled process reengineering (PEPR) leads to less drastic change in an organization. Such package enabled reengineering through ERP has been received much better by the end users rather than stand alone BPR in many companies around the world.
There is no easy algorithm that can give a simple answer. A BPR exercise preceding the ERP implementation can help the organization significantly. It may also increase a combined time of implementing BPR and ERP significantly. There is also a risk that a particular ERP software selected later may not be able to implement the reengineered processes.
A simultaneous BPR and ERP exercise saves time and also minimizes the risk of sequential implementation of BPR followed by ERP. One rarely comes across the instance where BPR is followed by ERP. As such the ordering of ERP & BPR must be based on the needs of a specific organization.
Typical Modules of ERP include sales (sales forecasting, customer prospecting, customer follow-up, support for telemarketing, database marketing), order processing (inquiry handling, order taking) shipping, transportation, invoicing, finance (G/L, AR, AP), asset management, cost accounting, financial accounting, manufacturing and materials management. Optionally quality project, warehouse, continuos production and other modules are also present in different ERP software. Industry specific modules to cater to hospitals, retail, banking, insurance, oil, shipping and transportation are also available from some vendors.
ERP will ultimately affect everyone in the organization. An ERP implementation represents a major organizational intervention. The process view of ERP would remove many of the "kingdoms" in the organization. This would lead to a shift in power centers; naturally ERP represents a major change. Managing change of such high order cannot be done without top management commitment.
ERP exercise is also a major exercise and can cost anyway from several lakhs to several crores of rupees. Such large resource requirements also necessitate commitment from top management. Last, but not the least, ERP implementation is a long process, generally running into several months. Keeping an activity alive for such long duration would be nearly impossible without top management commitment.
The top management commitment in ERP is not limited to writing a big cheque, which is very much necessary. But it has to go much beyond that. ERP exercise in India represents a paradigm shift in the way many CEO's run their corporations. ERP software implementation vendors often make it mandatory for the chief executive and his / her team to spend a full one week listening to ERP consultants. Such an exercise is unheard of at least in the Indian corporate history. The core committee of ERP needs champions who are well respected, very knowledgeable and often impossible to spare for any organization.
The success of ERP implementation needs the full-time attention of these champions who must be drawn from the key functions and detained for ERP project implementation for a long period of six to nine months. ERP project cannot be managed by people who "can be spared"; it must be managed by the "indispensable" personnel.
Top Management commitment must ensure the release of such key people for the ERP core committee. The ERP software often brings the best practices from the industry. To benefit from such best practices, existing business practices may have to be altered. Top management commitment should include the political will to implement such changes.
ERP being a major initiative costing significant amount of money, lasting several months and ultimately affecting everyone in the organization, change management is the key for the success of any ERP project. ERP software brings along with them some of the best practices. Implementing such practices would need change. To profit from ERP such change must be managed. That is the reason ERP needs top management commitment.
It is a loaded question. The cost of ERP software should not be viewed as an expense. It is an investment towards an ability that provides better profitability, market share or customer service. Of course, the up-front cost of ERP software is very high.
Most software pieces used by the corporations for commercial applications never had price tags of crores of rupees which ERP software carry. ERP decisions are a "high-risk high reward" decision. The view that ERP is expensive only looks at the risk but not the rewards.
It is difficult to calculate return on investment for ERP decisions, though several successful installations of ERP had dramatic returns on investment. For example, Microsoft estimates that the investments in ERP will be paid back by way of better performance in flat two years. It must be realized that the ERP is an enabler.
ERP gives agility to organization, which can be exploited to improve profitability, market share or customer service. Without ERP, the organization may not be in a position to handle larger business or provide faster response to customers. The results from enlarged business or faster customer response should pay back for ERP investment. It is predicated on the fact that the organization would leverage the agility towards such corporate goals. ERP helps in pursuing such goals often successfully.
But mere ERP implementation does not necessarily translate to benefits. Better health enables a human being to do things, which would have been difficult, if not impossible, without such sound health. But if the individual does not make use of his improved status towards the pursuit of any goal, he or she is not capitalizing on the improved health. ERP must also be viewed as a way of providing a better health to an organization.
The set of activities through which ERP is implemented in an organization constitutes the ERP life cycle. This can be compared to the well developed System Development Life Cycle (SDLC) in the traditional Structured System Analysis and Design (SSAD). Typical ERP project consists of the following steps:
Step 1: ERP readiness assessment
Step 2: Preparing the organization for ERP
Step 3: ERP Feasibility Study
Step 4: Process modelling and documenting the "AS IS" processes & "TO BE" processes (along with BPR)
Step 5: Detailed plan for ERP implementation (includes ERP software selection, selection of implementation partners, implementation methodology - "Big Bang" or Modular Implementation - and the final and precise extent of implementation)
Step 6: Detailed implementation including development, quality assurance and production system
Step 7: Preparing to "go live" including data migration
Step 8: Going live
Step 9: Performance assessment, documentation, training (continues in early stages also) and future plans.
Yes. Most implementations of ERP include financial module. Every organization has a financial (fiscal) year both for internal use as well as far legal / governmental consolidation. Since the account books must be closed and financial reports prepared (including the balance sheet and the profit and loss statement) for the financial year, most ERP implementations try to synchronize their "go live" date with that of the financial year. (April 1 in India).
If for some reason it cannot be on (April 1), many organizations "go live" on October 1 at the end of the half-year. Technically ERP software doesn't impose any restrictions. Any day is good enough to "go live" as long as it is not " tomorrow"!
ERP consultants operate in the "high risk high reward" area. Contemporary ERP software are complex pieces which need years to master. ERP consultants invest significant amount of time and effort, which need to be rewarded. ERP Consultancy is also given to the highest levels of management often at the level of CEO. CEO level consulting cannot come cheap. A well-implemented ERP can translate to crores of rupees of saving for an organization justifying once again the high cost of ERP consultants.
ERP consultants also combine a rare combination of communication skill, domain knowledge and software expertise, once again justifying the high cost. Last, but not the least, ERP sales are growing fast and the demand for ERP consultants is all time high. The gap in supply-demand also explains the unusually high cost of ERP consultants.
Process Modelling provides a means to map the organization processes and visualize it in a graphical manner. This helps in communication, clarification and documentation of the "AS IS" and "TO BE" processes. Process modelling can be used to reinforce the central theme of ERP, namely, a shift from function orientation to process orientation.
There is no precise algorithm that can measure the fit for an organization to particular ERP software. One generally goes by experiences of similar organizations that have implemented ERP. In general, every ERP software has exceptional strengths in some area. It is better to stay with that ERP software which has special strengths for your area. For example, BaaN & Oracle have outstanding manufacturing modules; People Soft and Marshall have outstanding HR modules. If your core business centers around one of these modules your choice becomes easier.
An academic way to evaluate the fit is to carefully study all the business processes that characterize your business and to look for matching business processes that are supported by particular ERP software. Often such an exercise would call for several man-years of effort. The skill set needed for such an exercise may not be easily available within the organization. Getting an outside consulting group to do this exercise may be very expensive.
Often most organizations decide the ERP software vendor based on the broad needs of the industry in which they operate and the support offered by particular ERP software for that industry.
ERP software integrates all departments and functions across a company onto a single computer system that can serve all those different departments' particular needs. ERP combines finance, HR, manufacturing and distribution all together into a single, integrated software program that runs off a single database so that the various departments can more easily share information and communicate with each other. This integrated approach can have a tremendous payback provided the software is installed and used correctly.
The cost of ERP project would vary significantly from one instance to other. The actual cost depends on the nature of the industry, the size of the firm, the geographical distribution of the organizational units such as offices, plants, warehouses and distribution points, the number of user licenses and the extent of ERP implementation (the number of functional modules implemented).
A typical mid-size Indian company with about Rs 100- 300 crores of annual business will have to invest about five to twenty crores of rupees in the ERP project. This includes ERP software licenses, server cost, communication network cost and the cost of consultants who would do the implementation. Large corporations with Rs 1000+ crores of annual business might invest Rs 100+ crores in ERP project.
A number of small companies have managed to implement ERP in about Rs 1 crore. It may be noted here that in a typical installation the cost of ERP software accounts for only about 20% of the overall cost. A major component in ERP project is the cost of the implementation consultant (both internal and external).
After many months of implementation plan every organization would decide a particular date when they would shift from their legacy system to the ERP system. Up to that time the ERP software would be under development followed by testing and quality assurance.
Once by ERP implementation team feels convinced that the development is complete and testing is satisfactory, they would decide to "go live". In a sense "go live" date marks the end of ERP project completion. Generally most ERP project "go live" on the starting of the fiscal/ financial year, namely April 1 in India.
Project champions (for the crore processes that are taken up for implementation) would be those individuals who would take the ownership of implementation. They are expected to provide the leadership so as to sustain the trials and tribulations of ERP implementation.
ERP project team would be charged with the responsibility of implementing the ERP for the specific organization. A champion, who is skilled in communication and understands the organization well should head the ERP team.
The leader must be well accepted by the most employees of the organization. The leader also must be a person who can keep the motivation level of the implementation team at fairly high levels throughout the several months of implementation.
The implementation team would consist of dozens of people. There will be a number of teams for each of the functional area with every team consisting of key users and IT personnel to provide technology support.
There is no easy magic through which one can prepare an organization for ERP implementation. Exposing the top management to the benefits of ERP through the real world case studies, sharing of experience by other corporations that have successfully implemented ERP and creation of awareness is the first step. Convincing the top management to use a high risk, high reward scheme such as ERP is a major challenge.
Almost all the members of the organization should get the excitement about ERP project implementation. Communicating and sharing of the ERP vision is the most important organizational preparation for a successful ERP implementation.
Every ERP vendor provides performance guidelines that can be used by system administrators to fine tune performance. Some of them are very comprehensive and address fine-tuning at the application, database, operating system, processor and even the network level. Other ERP vendors provide tools that can leverage the leading edge database tuning, operating system tuning and network performance tuning tools.
A key contribution of ERP software is the bundled business process knowledge that come along with ERP software. These processes have evolved over the past two decades of ERP implementation in some of the most well-managed corporations around the world.
By adapting to those processes that have proved successful in some of the finest corporations around the world, an organization implementing ERP would get the advantage of these "best of the breed" practices. That is the reason behind the consultant recommendations.
Financial modules provide the basic pulse of an organization. It also impacts all other modules. Successful implementations of financials show up immediately reinforcing the faith of an organization in ERP. Other modules cannot be implemented without the financial module in place. All these factors explain the fact that financial modules are taken up first.
Yes. The full benefit of ERP would accrue if all the ERP modules are implemented. However many organizations implement ERP only in those functions, which are, considered to be of strategic importance. Some of the modules, though they appear to be limited to specific functions, in fact integrate with many other functions indirectly.
For example finance module primarily targets the accounting and finance functions. However the accounts payable module address all the material purchases and in turn impacts the entire materials management functions. Many more examples can be quoted to reinforce our viewpoint. The process orientation of ERP software definitely contributes to a better management of the organization. Even partial implementation of the ERP therefore leads to significant benefits.
The three dominant approaches to ERP implementation are "big bang", location-wise and module-wise implementation.
In the big bang approach the organization decides to implement all relevant modules, for example - Financials, Logistics & HR- all at the same time. This has the advantage of getting the full benefit of the integrated software across all functions of the organization. However there is a risk of the implementation getting out of control.
In "Location-wise" implementation, the organization chooses a specific location, say, the head office, one of the new plants etc. The choice could be based on better infrastructure, better IT culture, more co-operative set of users, higher level of automation etc.
In "module-wise" implementation individual modules are taken up for implementation in a phased manner depending on the criticality of applications. Once again a module taken up for implementation can be implemented across all locations or just one location. Later they can be rolled out to other locations.
Customization is the process of fitting the chosen ERP software to the needs of a specific organization. Whenever the processes represented in the ERP software differ significantly from the processes used by the firm one has two options. First is to build the organizational process into the ERP software through customization. The second one is to change the practice followed by the firm to suit the process native to the ERP software. Traditional common sense would force people to customize the software to suit the individual demands of the organization.
This leads to two problems. The first one arises out of the fact that any customization done locally is outside the core ERP software. Accordingly, the next release of the ERP software would not support local customization. They have to be re-done by the end user for the new release. Second the very purpose of ERP is to take advantage of the best practices in industry that come embedded with the ERP software. By over customizing the implementers would deprive the benefit of world - class practice to the organization that is implementing ERP.
Implementation partners generally come from specialized ERP consulting houses that are generally outside the organization. Being experts in a particular area (materials, production, finance or distribution), these experts from outside, not only bring software expertise with respect to particular ERP software, but also bring the extra benefit from their vast prior experiences in other firms where they would have implemented that particular ERP.
Over the years, the implementation partners have developed enough know-how in the form of templates for implementation. These templates significantly reduce the cost and time of implementation and errors of implementation. Though implementation consultants charge a high fee, they bring significant amount of value, thanks to their prior experiences.
The ERP vendors and their implementation partners deliver most of the ERP training. There are several levels of training. Overview training in ERP concepts and ERP benefits would be necessary for the top management and steering committee members. An in depth software specific training would be necessary for the implementation team. An infrastructure management (hardware, software, networking) and ERP software maintenance training would be necessary for the IT team. Once implemented, detailed user-training would be necessary for a large number of users and potential users throughout the organization. User training would be limited to modules specific to individual users.
ERP software must address all the enterprise needs of an organization within the social context in which the enterprise operates. This would imply that the local accounting practices, locally applicable taxation laws (excise, customs, sales tax and income tax) are fully adhered to in implementing the various business processes.
The software vendor must incorporate India specific features before selling the software. The specific ERP software that has been adopted to suit to Indian statutory laws is called India specific ERP.
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