Enterprise Resource Planning (ERP)

Related Terms: Material Requirements Planning; Inventory Control Systems

Enterprise resource planning (ERP) is a method of using computer technology to link various functions—such as accounting, inventory control, and human resources—across an entire company. ERP is intended to facilitate information sharing, business planning, and decision making on an enterprise-wide basis. ERP came into sharp visibility in the mid-1990s and was still energetically developing in the mid-2000s a decade later. ERP enjoyed a great deal of popularity among large manufacturers in the mid- to late-1990s. Most early ERP systems consisted of mainframe computers and software programs that integrated the various smaller systems used in different parts of a company. Since the early ERP systems could cost up to $2 million and take as long as four years to implement, the main market for the systems was Fortune 1,000 companies.

"Throughout the 1990s, most large industrial companies installed enterprise resource planning systems—that is, massive computer applications allowing a business to manage all of its operations (finance, requirements planning, human resources, and order fulfillment) on the basis of a single, integrated set of corporate data," Dorien James and Malcolm L. Wolf wrote in The McKinsey Quarterly. "ERP promised huge improvements in efficiency—for example, shorter intervals between orders and payments, lower back-office staff requirements, reduced inventory, and improved customer service. Encouraged by these possibilities, businesses around the world invested some $300 billion in ERP during the decade."

By the late 1990s sales of ERP systems began to slow. Some manufacturers had encountered implementation problems. Other factors also began to influence ERP systems both in design and deployment. Many companies developed close relationships with customers and suppliers and began conducting business over the Internet on a massive scale. Small PC-based networks became much faster, more flexible, and cheaper than mainframes. After the slow recovery from the economic downturn that came in 2000s, ERP has become much more closely associated with web-based systems—which have also lifted it into prominence again. In 2006, for instance, American Banker magazine polled experts in banking who saw ERP as a new tool in business-to-business electronic commerce, with ERPs communicating with one another over the Web.

BENEFITS AND DRAWBACKS OF ERP

When the idea was first introduced, ERP was an attractive solution for many large companies because it offered so many potential uses. For example, the same system could be used to forecast demand for a product, order the necessary raw materials, establish production schedules, track inventory, allocate costs, and project key financial measures. ERP "acts as a planning backbone for a company's core business processes," Gary Forger wrote in Modern Materials Handling. "In addition to directing many of them, the system also ties together these varied processes using data from across the company. For instance, a typical ERP system manages functions and activities as different as the bills of materials, order entry, purchasing, accounts payable, human resources, and inventory control, to name just a few of the 60 modules available. As needed, ERP is also able to share the data from these processes with other corporate software systems." Another important benefit of ERP systems was that they allowed companies to replace a tangle of complex computer applications with a single, integrated system.

Despite these potential benefits, however, ERP systems continue to extract a cost. Implementation requires substantial time commitments from the company's information technology (IT) department or outside professionals. An article in Computing, for instance, citing a survey of 100 organizations, showed that only 5 percent of IT managers "were able to install ERP packages straight out of the box." On the other hand, only 9 percent reported very significant customization work. In addition, because ERP systems affected most major departments in a company, they tend to create changes in many business processes. Putting ERP in place thus requires new procedures, employee training, and both managerial and technical support. As a result, many companies find the changeover to ERP a slow and painful process. Once the implementation phase is complete, some businesses have trouble quantifying the benefits they gained from ERP.

ERP SOLUTIONS FOR SMALL BUSINESSES

As sales of ERP systems to large manufacturing companies began to slow, some vendors changed their focus to smaller companies. According to a survey by AMR research reported in Modern Materials Handling, the overall market for ERP systems grew 21 percent in 1998, despite the fact that sales to companies with greater than $1 billion in revenues declined 14 percent during the same period. "ERP applications are no longer just the stuff of huge corporations," Constance Loizos noted in Industry Week. "While billion-dollar manufacturing companies are now completing their ERP implementations, mid-size customers—witness to the improved business processes of manufacturing market leaders—are beginning to refine their own operations'¦. Invariably the most substantial reason for companies to implement ERP is that without it, staying competitive is a practical impossibility. The business world is moving ever closer toward a completely collaborative model, and that means companies must increasingly share with their suppliers, distributors, and customers the in-house information that they once so vigorously protected."

Of course, small and medium-sized companies—as well as those involved in service rather than manufacturing industries—have different resources, infrastructure, and needs than the large industrial corporations who provided the original market for ERP systems. Vendors had to create a new generation of ERP software that was easier to install, more manageable, required less implementation time, and entailed lower startup costs. Many of these new systems were more modular, which allowed installation to proceed in smaller increments with less support from information technology professionals. Other small businesses elected to outsource their ERP needs to vendors. For a fixed amount of money, the vendor would supply the technology and the support staff needed to implement and maintain it. This option often proved easier and cheaper than buying and implementing a whole system, particularly when the software and technology seemed likely to become outdated within a few years.

ERP AND THE INTERNET

Another trend in ERP development and use involves vendors making the software available to client companies on the Internet. Known as hosted ERP or Web-deployed ERP, this trend has also contributed to making ERP systems available to smaller businesses. When a company chooses to run its ERP systems through a Web-based host, the software is not purchased by or installed at the client company. Instead, it resides on the vendor's host computer, where clients access it through an Internet connection. "Rather than dispersing ERP to multiple corporate sites and incurring the costs of many servers needed to run the software, Web-deployed ERP centralizes the system," Forger noted. "Using the Web to access a single ERP system at a central location, companies can reduce their IT investment on two fronts—hardware and personnel."

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