11.5: Enterprise Resource Planning

The increased use of automated systems like TPSs creates the challenge of controlling and centralizing the information generated. For instance, someone in sales creates a spreadsheet to calculate sales revenue, while someone in finance creates a different revenue document that meets the needs of their department, but calculates revenue differently. The two spreadsheets report different revenue totals, but which one is correct? Who is responsible for managing all of this information?

Figure \(\PageIndex{1}\): Enterprise Resource Planning System

In the 1990s the need to bring an organization’s information back under centralized control became more apparent. The Enterprise Resource Planning (ERP) system was developed to bring together an entire organization within one program. Some of the best-known ERP vendors are SAP, Microsoft, and Oracle. Here are some key points of an ERP:

• Computer program. The system is a computer program, which means that it has been developed with specific logic and rules behind it. It is customized and installed to work specifically for an individual organization.
• Centralized database. All data in an ERP system is stored in a single, central database. Centralization is key to the success of an ERP. Data entered in one part of the company can be immediately available to other parts of the company.
• Organization wide. An ERP can be used to manage an entire organization’s operations. Companies can purchase modules for an ERP that represent different functions within the organization such as finance, manufacturing, and sales. Some companies choose to purchase many modules, others choose a subset of the modules. A firm can also mix and match components, linking software the firm has written with modules purchased from different enterprise software vendors. However, this route is more challenging from an integration perspective.

Enterprise Resource Planning Example

An ERP system with multiple modules installed can touch many functions of the business for example:

• Sales. A sales rep from Vancouver-based SnowboardCo takes an order for five thousand boards from a French sporting goods chain. The system can verify credit history, apply discounts, calculate price (in euros), and print the order in French.
• Inventory. While the sales rep is on the phone with his French customer, the system immediately checks product availability, signaling that one thousand boards are ready to be shipped from the company’s warehouse, the other four thousand need to be manufactured and can be delivered in two weeks from the firm’s manufacturing facility in Guangzhou, China.
• Manufacturing. When the customer confirms the order, the system notifies the Guangzhou factory to ramp up production for the model ordered.
• Human Resources. High demand across this week’s orders triggers a notice to the Guangzhou hiring manager, notifying her that the firm’s products are a hit and that the flood of orders coming in globally means her factory will have to hire five more workers to keep up.
• Purchasing. The system keeps track of raw material inventories, too. New orders trigger an automatic order with SnowboardCo’s suppliers, so that raw materials are on hand to meet demand.
• Order Tracking. The French customer can log in to track her SnowboardCo order. The system shows her other products that are available, using this as an opportunity to cross-sell additional products.
• Decision Support. Management sees the firm’s European business is booming and plans a marketing blitz for the continent, targeting board models and styles that seem to sell better for the Alps crowd than in Canadian market.

ERP & Business Process

An ERP system not only centralizes an organization’s data, but it enforces the business processes for the organization. When an ERP vendor designs a module, it has to implement the rules for the associated business processes. Best practices can be built into the ERP – a major selling point for ERP. In other words, when an organization implements an ERP, it also gets improved best practices as part of the deal.

For many organizations the implementation of an ERP system is an excellent opportunity to improve their business practices and upgrade their software at the same time. If done properly, an ERP system can bring an organization a good return on their investment. By consolidating information systems across the enterprise and using the software to enforce best practices, most organizations see an overall improvement after implementing an ERP. But for some an ERP brings a challenge. Is the process embedded in the ERP really better than the process they are currently utilizing? And if they implement this ERP and it happens to be the same one that all of their competitors have, will they simply become more like them, making it much more difficult to differentiate themselves? A large organization may have one version of the ERP, then acquire a subsidiary which has a more recent version. Imagine the challenge of requiring the subsidiary to change back to the earlier version.

One of the criticisms of ERP systems has been that they commoditize business processes, driving all businesses to use the same processes and thereby lose their uniqueness. The good news is that ERP systems also have the capability to be configured with custom processes. For organizations that want to continue using their own processes or even design new ones, ERP systems offer customization so the ERP is unique to the organization.

There is a drawback to customizing an ERP system. Namely, organizations have to maintain the changes themselves. Whenever an update to the ERP system comes out, any organization that has created a custom process will be required to add that change to their new ERP version. This requires someone to maintain a listing of these changes as well as re-testing the system every time an upgrade is made. Organizations will have to wrestle with this decision. When should they go ahead and accept the best-practice processes built into the ERP system and when should they spend the resources to develop their own processes?

Other categories of enterprise software that managers are likely to encounter include: Customer Relationship Management systems, Supply Chain Management systems, and Business intelligence systems. Business intelligence and decision support systems are explored in chapter 12.