Enterprise Resource Planning Systems
Enterprise Resource Planning (ERP) Systems are software systems that tie business processes together. Businesses started using ERP by the mid-1990s. The software product is separated in modules that represent business divisions such as Supply Chain Management (SPM), Marketing and Sales (M/S), Accounting and Financials (A/F), and Human Resources (H/R). There are many different software packages of ERP systems available that are sold by software companies that specialize in different types of business. According to the Computer Economics Report (2008), “Major vendors of ERP systems today include SAP and Oracle, as well as a number of second- and third-tier vendors such as Infor, Lawson Software, IFS, QAD, Epicor, Consona, Sage, and Best”(p. 3). When integrating an ERP system, modules that fit the company are selected which provides flexibility in price. Because of the complexity of ERP systems, the selection of the right modules is done by consultants who are experts in their fields. However, these systems are not only flexible, but they also help businesses to be more efficient.
The Usage of Enterprise Resource Planning in Business
Companies that use ERP systems gain competitive advantages. Business processes between divisions such as Supply Chain Management (SCM) and Marketing, which in the past took a long time, are now realized in real-time. This real-time communication benefit is, however, not limited to just Marketing and Sales. All major divisions can communicate with SCM to gain real-time information about production. This change is made possible through a shared database environment also called an integrated information system (IS), which originated from manufacturing software in the 1970s. A non-integrated information system consists of databases and file sharing environments that operate disconnected from each other. The possibility of exchanging data in real time is in fact one of the most important services that an ERP system provides. Nevertheless, the fact that data redundancy is reduced to a minimum and that the company is able to do business on a global basis via online stores are also important facts that should not be forgotten.
ERP Pricing and Implementation
The integration and installation of an ERP system is an expensive process and can take up to six years. The main factors that influence price and time are the size and complexity, hardware and software systems that might have to be upgraded to support the ERP system, consultant fees, implementation of the system, and training that can take up to twenty percent of the whole budget. According to Monk and Wagner (2009): A large company, one with well over 1,000 employees, will likely spend $50 million to $500 million for an ERP system which operations involving multiple countries, currencies, languages, and tax laws. Such an installation might cost as much as $30 million software license fees, $200 million in consulting fees, additional millions to purchase new hardware, and even more millions to train managers and employees. (p. 34) From an investing standpoint the need for a return of investment (ROI) seems obvious. A tangible return which would be savings in cost will, however, not be visible in the immediate time after the installation of the system. The main focus of ERP systems is to optimize work flows and business processes that, if successfully optimized, will yield a more intangible return of investment such as customer satisfaction and employee happiness. Unfortunately, these two factors have been not taken serious by management in the past. According to Zviran, Pliskin & Levin (2005), “if users are dissatisfied with an IS, it is difficult to consider it a success” (p. 43).
ERP Systems are Not for Every Business
The benefits that ERP systems can provide for a company are great. Nevertheless, ERP systems are not for everybody, and the benefits can be explained with three simple arguments. First, if a company does not fit the requirements of this specific system, it will not work. Second, the budget required to implement an ERP systems is great and might not be affordable for every business. Third, an ERP system that was implemented with poor planning can lead to a company’s bankruptcy. A good example of a company that struggled implementing its system is the Hershey Company. Owing the fact of poor planning and implementation that was too fast, Hershey lost a large share of its Halloween candy market in the year of implementation in 1992. The poor planning and fast implementation created a lack of communication within the system which caused major errors between Supply Chain Management and Marketing/Sales. By looking at the example of the Hershey Company, there is one question that needs to be answered: Why are some companies successful with their ERP systems when others are not? This leads back to the three main arguments that were mentioned at the beginning: the system requirements, the budget that is available, and the planning and implementation phase.If a company does not include enough time for the planning and implementation phase nor the employee training, the implementation of an ERP system might be headed for failure from the beginning. According to the International Journal of Production Research (2005), “ERP systems, similar to other new technologies in an organization, require training for employees to be able to use them correctly and effectively. ERP training has been considered as the most important element in the success of ERP implementation” (p. 3747). ERP systems seem to be a good choice for medium to large sized companies but should not be seen as the ultimate solution that will take care of every problem a company might have. Depending on the field of services or products a company offers, it may not be the right choice. The decision to switch to this kind of system can be difficult since it can include the hardware and software systems to change. The people who use the system as an everyday tool have to change also, and, without the trust that the new system will work, such a transition will be difficult. The adaption of new ways of doing business creates a great challenge for people who are set in their way of doing things, and this is why planning and employee training are of such importance. If a business chooses to implement such a system, the implementation of an ERP system is not something that can happen overnight. Years of planning and consulting work are necessary to choose the right ERP modules and connect them. The cost of an ERP system can be high and might not be affordable for every business. However, the return of investment in the short and long run are impressive, and this is why ERP systems offer a win, win, and win situation for each stakeholder. Management will have access to reporting and electronic data interchange immediately after the implementation and will benefit from financial savings in the future. Employees, if they are trained properly and are open minded, will be able to experience a new way of doing business that will make their everyday work more enjoyable. Finally, almost all the wishes of customers can be granted through real-time information about production of an ordered good, online ordering that is possible on a global basis, and electronic data interchange which creates automated order processes.
