Enterprise resource planning

Enterprise resource planning (ERP) is the

integrated management of main business processes,
often in real time and mediated by software and
technology. ERP is usually referred to as a category of
business management software—typically a suite of
integrated applications—that an organization can use
to collect, store, manage and interpret data from many
business activities. ERP systems can be local based or
cloud-based. Cloud-based applications have grown in
recent years due to information being readily available
from any location with Internet access. Traditional on-
premises ERP systems are now considered legacy
technology.[1][2][3][4] Diagram showing some typical ERP modules

ERP provides an integrated and continuously updated

view of core business processes using common databases maintained by a database management system.
ERP systems track business resources—cash, raw materials, production capacity—and the status of
business commitments: orders, purchase orders, and payroll. The applications that make up the system
share data across various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the
data.[5] ERP facilitates information flow between all business functions and manages connections to outside
stakeholders.[6]

According to Gartner, the global ERP market size is estimated at $35 billion in 2021.[7][8] Though early
ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems.[9]

The ERP system integrates varied organizational systems and facilitates error-free transactions and
production, thereby enhancing the organization's efficiency. However, developing an ERP system differs
from traditional system development.[10] ERP systems run on a variety of computer hardware and network
configurations, typically using a database as an information repository.[11]

Origin
The Gartner Group first used the acronym ERP in the 1990s[12][13] to include the capabilities of material
requirements planning (MRP), and the later manufacturing resource planning (MRP II),[14][15] as well as
computer-integrated manufacturing. Without replacing these terms, ERP came to represent a larger whole
that reflected the evolution of application integration beyond manufacturing.[16]

Not all ERP packages are developed from a manufacturing core; ERP vendors variously began assembling
their packages with finance-and-accounting, maintenance, and human-resource components. By the mid-
1990s ERP systems addressed all core enterprise functions. Governments and non–profit organizations also
began to use ERP systems.[17] An "ERP system selection methodology" is a formal process for selecting an
enterprise resource planning (ERP) system. Existing methodologies include: Kuiper’s funnel method,
Dobrin’s three-dimensional (3D) web-based decision support tool, and the Clarkston Potomac
methodology.[18]

Expansion
ERP systems experienced rapid growth in the 1990s. Because of the year 2000 problem many companies
took the opportunity to replace their old systems with ERP.[19]

ERP systems initially focused on automating back office functions that did not directly affect customers and
the public. Front office functions, such as customer relationship management (CRM), dealt directly with
customers, or e-business systems such as e-commerce and e-government—or supplier relationship
management (SRM) became integrated later, when the internet simplified communicating with external
parties.[20]

"ERP II" was coined in 2000 in an article by Gartner Publications entitled ERP Is Dead—Long Live ERP
II.[21][22] It describes web–based software that provides real–time access to ERP systems to employees and
partners (such as suppliers and customers). The ERP II role expands traditional ERP resource optimization
and transaction processing. Rather than just manage buying, selling, etc.—ERP II leverages information in
the resources under its management to help the enterprise collaborate with other enterprises.[23] ERP II is
more flexible than the first generation ERP. Rather than confine ERP system capabilities within the
organization, it goes beyond the corporate walls to interact with other systems. Enterprise application suite
is an alternate name for such systems. ERP II systems are typically used to enable collaborative initiatives
such as supply chain management (SCM), customer relationship management (CRM) and business
intelligence (BI) among business partner organizations through the use of various electronic business
technologies.[24][25] The large proportion of companies are pursuing a strong managerial targets in ERP
system instead of acquire a ERP company.[26]

Developers now make more effort to integrate mobile devices with the ERP system. ERP vendors are
extending ERP to these devices, along with other business applications, so that businesses don’t have to
rely on third-party applications.[27] As an example, the e-commerce platform Shopify was able to make
ERP tools from Microsoft and Oracle available on its app in October 2021.[27]

Technical stakes of modern ERP concern integration—hardware, applications, networking, supply chains.
ERP now covers more functions and roles—including decision making, stakeholders' relationships,
standardization, transparency, globalization, etc.[28]

Characteristics
ERP systems typically include the following characteristics:

An integrated system
Operates in (or near) real time
A common database that supports all the applications
A consistent look and feel across modules
Installation of the system with elaborate application/data integration by the Information
Technology (IT) department, provided the implementation is not done in small steps[29]
 Deployment options include: on-premises, cloud hosted, or SaaS

Functional areas
An ERP system covers the following common functional areas. In many ERP systems, these are called and
grouped together as ERP modules:

Financial accounting: general ledger, fixed assets, payables including vouchering, matching
and payment, receivables and collections, cash management, financial consolidation
Management accounting: budgeting, costing, cost management, activity based costing
Human resources: recruiting, training, rostering, payroll, benefits, retirement and pension
plans, diversity management, retirement, separation
Manufacturing: engineering, bill of materials, work orders, scheduling, capacity, workflow
management, quality control, manufacturing process, manufacturing projects, manufacturing
flow, product life cycle management
Order processing: order to cash, order entry, credit checking, pricing, available to promise,
inventory, shipping, sales analysis and reporting, sales commissioning
Supply chain management: supply chain planning, supplier scheduling, product
configurator, order to cash, purchasing, inventory, claim processing, warehousing (receiving,
putaway, picking and packing)
Project management: project planning, resource planning, project costing, work breakdown
structure, billing, time and expense, performance units, activity management
Customer relationship management (CRM): sales and marketing, commissions, service,
customer contact, call center support – CRM systems are not always considered part of ERP
systems but rather business support systems (BSS)
Supplier relationship management (SRM): suppliers, orders, payments.
Data services: various "self–service" interfaces for customers, suppliers and/or employees
Management of school and educational institutes.

GRP - ERP use in government

Government resource planning (GRP) is the equivalent of an ERP for the public sector and an integrated
office automation system for government bodies.[30] The software structure, modularization, core
algorithms and main interfaces do not differ from other ERPs, and ERP software suppliers manage to adapt
their systems to government agencies.[31][32][33]

Both system implementations, in private and public organizations, are adopted to improve productivity and
overall business performance in organizations, but comparisons (private vs. public) of implementations
shows that the main factors influencing ERP implementation success in the public sector are
cultural.[34][35][36]

Best practices
Most ERP systems incorporate best practices. This means the software reflects the vendor's interpretation of
the most effective way to perform each business process. Systems vary in how conveniently the customer
can modify these practices.[37]
Use of best practices eases compliance with requirements such as IFRS, Sarbanes-Oxley, or Basel II. They
can also help comply with de facto industry standards, such as electronic funds transfer. This is because the
procedure can be readily codified within the ERP software and replicated with confidence across multiple
businesses that share that business requirement.[38][39]

Connectivity to plant floor information

ERP systems connect to real–time data and transaction data in a variety of ways. These systems are
typically configured by systems integrators, who bring unique knowledge on process, equipment, and
vendor solutions.

Direct integration—ERP systems have connectivity (communications to plant floor equipment) as part of
their product offering. This requires that the vendors offer specific support for the plant floor equipment
their customers operate.

Database integration—ERP systems connect to plant floor data sources through staging tables in a
database. Plant floor systems deposit the necessary information into the database. The ERP system reads the
information in the table. The benefit of staging is that ERP vendors do not need to master the complexities
of equipment integration. Connectivity becomes the responsibility of the systems integrator.

Enterprise appliance transaction modules (EATM)—These devices communicate directly with plant
floor equipment and with the ERP system via methods supported by the ERP system. EATM can employ a
staging table, web services, or system–specific program interfaces (APIs). An EATM offers the benefit of
being an off–the–shelf solution.

Custom–integration solutions—Many system integrators offer custom solutions. These systems tend to
have the highest level of initial integration cost, and can have a higher long term maintenance and reliability
costs. Long term costs can be minimized through careful system testing and thorough documentation.
Custom–integrated solutions typically run on workstation or server-class computers.

Implementation
ERP's scope usually implies significant changes to staff work processes and practices.[40] Generally, three
types of services are available to help implement such changes: consulting, customization, and support.[40]
Implementation time depends on business size, number of modules, customization, the scope of process
changes, and the readiness of the customer to take ownership for the project. Modular ERP systems can be
implemented in stages. The typical project for a large enterprise takes about 14 months and requires around
150 consultants.[41] Small projects can require months; multinational and other large implementations can
take years.[42][43] Customization can substantially increase implementation times.[41]

Besides that, information processing influences various business functions e.g. some large corporations like
Walmart use a just in time inventory system. This reduces inventory storage and increases delivery
efficiency, and requires up-to-date data. Before 2014, Walmart used a system called Inforem developed by
IBM to manage replenishment.[44]

Process preparation

Implementing ERP typically requires changes in existing business processes.[45] Poor understanding of
needed process changes prior to starting implementation is a main reason for project failure.[46] The
difficulties could be related to the system, business process, infrastructure, training, or lack of motivation.
It is therefore crucial that organizations thoroughly analyze processes before they deploy an ERP software.
Analysis can identify opportunities for process modernization. It also enables an assessment of the
alignment of current processes with those provided by the ERP system. Research indicates that risk of
business process mismatch is decreased by:

Linking current processes to the organization's strategy

Analyzing the effectiveness of each process
Understanding existing automated solutions[47][48]

ERP implementation is considerably more difficult (and politically charged) in decentralized organizations,
because they often have different processes, business rules, data semantics, authorization hierarchies, and
decision centers.[49] This may require migrating some business units before others, delaying
implementation to work through the necessary changes for each unit, possibly reducing integration (e.g.,
linking via master data management) or customizing the system to meet specific needs.[50]

A potential disadvantage is that adopting "standard" processes can lead to a loss of competitive advantage.
While this has happened, losses in one area are often offset by gains in other areas, increasing overall
competitive advantage.[51][52]

Configuration

Configuring an ERP system is largely a matter of balancing the way the organization wants the system to
work with the way it was designed to work. ERP systems typically include many settings that modify
system operations. For example, an organization can select the type of inventory accounting—FIFO or
LIFO—to use; whether to recognize revenue by geographical unit, product line, or distribution channel;
and whether to pay for shipping costs on customer returns.[50]

Two-tier enterprise resource planning

Two-tier ERP software and hardware lets companies run the equivalent of two ERP systems at once: one at
the corporate level and one at the division or subsidiary level. For example, a manufacturing company
could use an ERP system to manage across the organization using independent global or regional
distribution, production or sales centers, and service providers to support the main company's customers.
Each independent center (or) subsidiary may have its own business operations cycles, workflows, and
business processes.

Given the realities of globalization, enterprises continuously evaluate how to optimize their regional,
divisional, and product or manufacturing strategies to support strategic goals and reduce time-to-market
while increasing profitability and delivering value.[53] With two-tier ERP, the regional distribution,
production, or sales centers and service providers continue operating under their own business model—
separate from the main company, using their own ERP systems. Since these smaller companies' processes
and workflows are not tied to main company's processes and workflows, they can respond to local business
requirements in multiple locations.[54]

Factors that affect enterprises' adoption of two-tier ERP systems include:

Manufacturing globalization, the economics of sourcing in emerging economies

Potential for quicker, less costly ERP implementations at subsidiaries, based on selecting
software more suited to smaller companies
 Extra effort, (often involving the use of enterprise application integration) is required where
data must pass between two ERP systems[55] Two-tier ERP strategies give enterprises
agility in responding to market demands and in aligning IT systems at a corporate level
while inevitably resulting in more systems as compared to one ERP system used throughout
the organization.[56]

Customization

ERP systems are theoretically based on industry best practices, and their makers intend that organizations
deploy them "as is".[57][58] ERP vendors do offer customers configuration options that let organizations
incorporate their own business rules, but gaps in features often remain even after configuration is complete.

ERP customers have several options to reconcile feature gaps, each with their own pros/cons. Technical
solutions include rewriting part of the delivered software, writing a homegrown module to work within the
ERP system, or interfacing to an external system. These three options constitute varying degrees of system
customization—with the first being the most invasive and costly to maintain.[59] Alternatively, there are
non-technical options such as changing business practices or organizational policies to better match the
delivered ERP feature set. Key differences between customization and configuration include:

Customization is always optional, whereas the software must always be configured before
use (e.g., setting up cost/profit center structures, organizational trees, purchase approval
rules, etc.).
The software is designed to handle various configurations and behaves predictably in any
allowed configuration.
The effect of configuration changes on system behavior and performance is predictable and
is the responsibility of the ERP vendor. The effect of customization is less predictable. It is
the customer's responsibility, and increases testing requirements.
Configuration changes survive upgrades to new software versions. Some customizations
(e.g., code that uses pre–defined "hooks" that are called before/after displaying data
screens) survive upgrades, though they require retesting. Other customizations (e.g., those
involving changes to fundamental data structures) are overwritten during upgrades and must
be re-implemented.[60]

Advantages of customization include:

Improving user acceptance[61]

Potential to obtain competitive advantage vis-à-vis companies using only standard features.

Customization's disadvantages include that it may:

Increase time and resources required to implement and maintain[59][62]

Hinder seamless interfacing/integration between suppliers and customers due to the
differences between systems[62]
Limit the company's ability to upgrade the ERP software in the future[62]
Create overreliance on customization, undermining the principles of ERP as a standardizing
software platform

Extensions
ERP systems can be extended with third–party software, often via vendor-supplied interfaces.[63][64]
Extensions offer features such as:[64]

product data management

product life cycle management
customer relations management
data mining
e-procurement

Data migration

Data migration is the process of moving, copying, and restructuring data from an existing system to the
ERP system. Migration is critical to implementation success and requires significant planning.
Unfortunately, since migration is one of the final activities before the production phase, it often receives
insufficient attention. The following steps can structure migration planning:[65]

Identify the data to be migrated.

Determine the migration timing.
Generate data migration templates for key data components
Freeze the toolset.
Decide on the migration-related setup of key business accounts.
Define data archiving policies and procedures.

Often, data migration is incomplete because some of the data in the existing system is either incompatible or
not needed in the new system. As such, the existing system may need to be kept as an archived database to
refer back to once the new ERP system is in place.[65]

Advantages

The most fundamental advantage of ERP is that the integration of a myriad of business processes saves time
and expense. Management can make decisions faster and with fewer errors. Data becomes visible across
the organization. Tasks that benefit from this integration include:[66]

Sales forecasting, which allows inventory optimization.

Chronological history of every transaction through relevant data compilation in every area of
operation.
Order tracking, from acceptance through fulfillment
Revenue tracking, from invoice through cash receipt
Matching purchase orders (what was ordered), inventory receipts (what arrived), and costing
(what the vendor invoiced)

ERP systems centralize business data, which:

Eliminates the need to synchronize changes between multiple systems—consolidation of

finance, marketing, sales, human resource, and manufacturing applications
Brings legitimacy and transparency to each bit of statistical data
Facilitates standard product naming/coding
 Provides a comprehensive enterprise view (no "islands of information"), making real–time
information available to management anywhere, anytime to make proper decisions
Protects sensitive data by consolidating multiple security systems into a single structure[67]

Benefits
ERP creates a more agile company that adapts better to change. It also makes a company
more flexible and less rigidly structured so organization components operate more
cohesively, enhancing the business—internally and externally.[68]
ERP can improve data security in a closed environment. A common control system, such as
the kind offered by ERP systems, allows organizations the ability to more easily ensure key
company data is not compromised. This changes, however, with a more open environment,
requiring further scrutiny of ERP security features and internal company policies regarding
security.[69]
ERP provides increased opportunities for collaboration. Data takes many forms in the
modern enterprise, including documents, files, forms, audio and video, and emails. Often,
each data medium has its own mechanism for allowing collaboration. ERP provides a
collaborative platform that lets employees spend more time collaborating on content rather
than mastering the learning curve of communicating in various formats across distributed
systems.[64]
ERP offers many benefits such as standardization of common processes, one integrated
system, standardized reporting, improved key performance indicators (KPI), and access to
common data. One of the key benefits of ERP; the concept of integrated system, is often
misinterpreted by the business. ERP is a centralized system that provides tight integration
with all major enterprise functions be it HR, planning, procurement, sales, customer
relations, finance or analytics, as well to other connected application functions. In that sense
ERP could be described as a centralized integrated enterprise system (CIES)[70]

Disadvantages
Customization can be problematic. Compared to the best-of-breed approach, ERP can be
seen as meeting an organization's lowest common denominator needs, forcing the
organization to find workarounds to meet unique demands.[71]
Re-engineering business processes to fit the ERP system may damage competitiveness or
divert focus from other critical activities.
ERP can cost more than less integrated or less comprehensive solutions.
High ERP switching costs can increase the ERP vendor's negotiating power, which can
increase support, maintenance, and upgrade expenses.
Overcoming resistance to sharing sensitive information between departments can divert
management attention.
Integration of truly independent businesses can create unnecessary dependencies.
Extensive training requirements take resources from daily operations.
Harmonization of ERP systems can be a mammoth task (especially for big companies) and
requires a lot of time, planning, and money.[72]
 Critical challenges include disbanding the project team very quickly after implementation,
interface issues, lack of proper testing, time zone limitations, stress, offshoring, people's
resistance to change, a short hyper-care period, and data cleansing.[73]

Critical success factors

Critical success factors are limited number of areas in which results, if satisfactory, will ensure the
organization’s successful competitive performance. The CSF method has helped organizations specify their
own critical information needs. Achieving satisfactory results in the key areas of critical success factors can
ensure competitive advantage leading to improved organizational performance and overcome the
challenges faced by organizations. Critical success factors theoretical foundation was improved upon,
verified, and validated by several researchers, which underscored the importance of CSFs and its
application to ERP project implementations.[74]

The application of critical success factors can prevent organizations from making costly mistakes, and the
effective usage of CSFs can ensure project success and reduce failures during project implementations.
Some of the important critical success factors related to ERP projects are: Know your data, longer and more
integrated testing, utilization of the right people, longer stabilization period (hyper-care), clear
communication, early buy-in from business, have a Lean Agile program, less customization, ERP projects
must be business-driven and not IT-driven.[74]

Adoption rates

Research published in 2011 based on a survey of 225 manufacturers, retailers and distributors found "high"
rates of interest and adoption of ERP systems and that very few businesses were "completely untouched"
by the concept of an ERP system. 27% of the companies survey had a fully operational system, 12% were
at that time rolling out a system and 26% had an existing ERP system which they were extending or
upgrading.[75]

Postmodern ERP
The term "postmodern ERP" was coined by Gartner in 2013, when it first appeared in the paper series
"Predicts 2014".[76] According to Gartner's definition of the postmodern ERP strategy, legacy, monolithic
and highly customized ERP suites, in which all parts are heavily reliant on each other, should sooner or
later be replaced by a mixture of both cloud-based and on-premises applications, which are more loosely
coupled and can be easily exchanged if needed.[76]

The basic idea is that there should still be a core ERP solution that would cover most important business
functions, while other functions will be covered by specialist software solutions that merely extend the core
ERP. This concept is similar to the so-called best-of-breed approach[77] to software execution, but it
shouldn't be confused with it. While in both cases, applications that make up the whole are relatively
loosely connected and quite easily interchangeable, in the case of the latter there is no ERP solution
whatsoever. Instead, every business function is covered by a separate software solution.[78]

There is, however, no golden rule as to what business functions should be part of the core ERP, and what
should be covered by supplementary solutions. According to Gartner, every company must define their
own postmodern ERP strategy, based on company's internal and external needs, operations and
processes.[76] For example, a company may define that the core ERP solution should cover those business
processes that must stay behind the firewall, and therefore, choose to leave their core ERP on-premises. At
the same time, another company may decide to host the core ERP solution in the cloud and move only a
few ERP modules as supplementary solutions to on-premises.

The main benefits that companies will gain from implementing postmodern ERP strategy are speed and
flexibility when reacting to unexpected changes in business processes or on the organizational level.[79]
With the majority of applications having a relatively loose connection, it is fairly easy to replace or upgrade
them whenever necessary. In addition to that, following the examples above, companies can select and
combine cloud-based and on-premises solutions that are most suited for their ERP needs. The downside of
postmodern ERP is that it will most likely lead to an increased number of software vendors that companies
will have to manage, as well as pose additional integration challenges for the central IT.[80]

See also
List of ERP software packages
Business process management
Comparison of project management software

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External links
Media related to Enterprise resource planning at Wikimedia Commons
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