The Importance of Enterprise Resource Planning

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Introduction

The introduction of computers and Information Technology has revolutionized the way the business community operates. Various applications have been developed to aide businesses in solving the challenges they face in operations. Over the years, most of these IT solution packages have been targeted to exclusively deal with specific problems. Accounting packages such as Sage, QuickBooks and Pastel specifically target the accounting division while others may be employed to deal with production processes, sales and marketing as well as general business administration. The challenge has thus been on establishing a common base upon which the various software in use in a certain business entity can operate from in order to smoothen the operation processes.

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Enterprise Resource Planning is a method of enjoining or incorporating the data as well as the entire operating processes into a single system. An ERP system combines selected hardware and software components mainly used to integrate the various applications in use. Emphasis for most ERP systems is on establishing a centralized database for storing data originating and utilised by various departments in the organisation (‘What is ERP?’ 2009 ¶1).

Anthony (2005) states that three general levels of organisation processes exist. They are operational control, management control and strategic planning. Much of ERP application is in rationalising operations across departments though they are still applied in control of management and strategic planning.

In general the benefits of utilising ERP systems in business include the reduction of costs of operation. The systems bring together processes from all work units resulting in major improvements in operational efficiency. Lower inventory costs, lower marketing overheads, lower production cost as well as lower costs of offering customer care can all be associated with implementation of ERP systems in the organisation (Anthony 2009 ¶1).

Secondly, ERP systems enable easier management of organisations on a daily basis. Establishing centralised databases fastens access to data and information by the managers. This enables prompt and accurate decision making, a perfect recipe for success in business. Still, ERP systems assist in tracking of costs associated with specific activities hence enabling easier assessment of the viability of the activities(Anthony 2009 ¶2)..

In addition, the system aides in strategic planning. ERP systems are partly used to plan for the strategic utilisation of resources in the firm. This function leads to the realisation of higher returns on investment by the organisation. (Anthony 2009 ¶3).

The foregoing indicates that ERP systems are very effective in improving the overall health of the firm. However, of great concern has been on the fact that the systems have large been accessed for use by big companies. This has largely been due to the high cost of procuring the systems. Over the years the Small and Medium Enterprises (SMEs) have thus been left out.

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Mutt (2009 ¶4) argues that the reliability and consistency of data across the organisation, the smoothened transactions in and out of the organisation and the prompt reporting all add up to give a more efficient business.

Small and Medium size Enterprises (SMEs)

SMEs are generally the businesses whose turnover (sales) or number of employees falls below some set limits. The limits may vary even in the EU member states. Medium enterprises in the EU are those with between 250 and 500 employees depending on the state while small companies are those with less than 250 employees. These enterprises are backbone of economies the world over. In the EU they represent about 99% of all enterprises while providing over 65 million jobs. They contribute between 40%-50% of the global GDP. A lot of innovation is also accrued to these enterprises. However due to their relatively small nature, they face many challenges that require special attention of the national governments to solve (Enterprise and Industry 2001 ¶1).

Evolution of ERP Vending

As has been alluded to above, ERPs were out of reach for SMEs. They have been a preserve for the big corporations leaving out the SMEs. The vendors were only interested in selling to the big companies where they could fetch high returns. The popularity of ERPs created by IT researchers and vendors brought a big rush to acquire the systems by the big companies as it became apparent that even if they were doing well, the system would offer competitive advantages. Due to the large number of vendors, competition was stiff hence only the best would make deals. (‘Discussing ERP’s intervention in small and Medium Enterprises’ n. d. ¶3)

With time, almost all the big corporations had an ERP system running hence even the best vendors soon realised that the market was shrinking and their future was at stake.

As the saying goes ‘necessity is the mother of invention’ the vendors had to look elsewhere to market their products and further their businesses. This prompted them to look at the SMEs. The numbers of SMEs was inviting and time had com to rollout services to them. However the challenge lied with the high cost of ERPs. They had to explore ways of offering affordable products. With a small margin but big volumes of sales, the vendors realised they would still be profitable. This was the turning point for SMEs. (‘Discussing ERP’s intervention in small and Medium Enterprises’ n. d ¶4).

Challenges in Implementing ERPs in SMEs

Implementing ERPs has come about with many challenges both for the vendors as well as for the SMEs. First companies need to be careful in choosing the ERP vendor and the software he brings along. This has brought confusion for the SMEs as they are not sure whether to purchase the higher priced branded software or the software offered by smaller players in the market. The argument on one hand is that only branded software can satisfy all specifications of even the smallest businesses while others insist that the small vendors are the most flexible in developing customised systems. Based on these unfounded preconceptions, small companies have often made wrong decisions that have cost them a lot (Aparna 2006 ¶4-5)..

ERPs for small businesses may not be very costly but still involve a lot of work. Small businesses however constantly demand for too low prices as not to guarantee a decent return. True, the companies can demand low prices due to competition but since the vendors also need to be profitable, they may not avail the best ERP systems for the small businesses (Aparna 2006 ¶8).

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The one biggest challenge is the uniqueness of the SMEs in terms of structure, operational processes and management system. This demands that the ERPs to be implemented in each of the businesses. Indeed developing customised ERPs for SMEs tends to be even more tiresome than in larger firms (‘What are the common problems for ERP in SME’S?’ n.d).

Even when their specifications are met, the SMEs demand more.They may even end up frustrated as they shift from the branded software to the unbranded ones in search of the desired specifications. (‘What are the common problems for ERP in SME’S?’ n.d)

S Vijay Venkatesh (2003 ¶7) has learnt through experience that effective implementation of ERPs must emphasis on involving staff from all departments as well as the top management. This requirement is at times far fetched. Depending on the specific company’s culture it may be impossible to have all these people available and committed to the success of the ERP.

In addition, a myriad of questions have to be answered for the small businesses management before enrolling the system. Questions on how the system is evaluated, how it fits in to the business, the payback period, how long the ERP takes to install as well as the availability of support and upgrades have to be cleared convincingly before the managers can commit funds for the process (S Vijay Venkatesh 2003).

The challenges can be categorised into 4 main categories namely the ccomplexity in project management, change management, user resistance and training, high Infrastructure development costs, IT Skills and up gradation Issues

As can be seen, the challenges are numerous but unified by one common factor: the need to have one ERP system running for each and every business. This had to be well thought.

Overcoming the barriers

ERP systems can be very complicated with the implementation being very costly and time consuming. Due to this, vendors have come up with ways of enabling SMEs take full advantage of ERP systems without having to invest too much effort and time and other resources.

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Application Service Providers (ASPs) have come up. An ASP is a company that offers access to application software and other IT related services through the internet as opposed to the users having them for themselves only. Specialised modules dealing with e-commerce, supply and distribution, accounting and others are downloaded through the internet for a fee. The benefits accruing from this form of vending for the SMEs are many. First, they are cost effective because the SMEs need not invest in the specialised hardware and also not concerned about future upgrading. Secondly, there is better flexibility as well as security. The number of IT staff is also drastically reduced when ASPs are utilised (Telus 2005 p3).

Outsourcing ERPs has also become very popular for SMEs. The main reasoning behind this is the fact that the firm only concentrates on furthering its business rather than solving issues related to the system. A firm is hired to run the system within the company at a fee. This implies that the company has no need to hire IT people and there exists no concerns with maintaining the system. Still the flexibility in terms of the fact that the firm can hire the services for trials and change the provider if need the need arise (Telus 2005 p5).

A great invention is the introduction of pre-configured ERP systems. These are systems which have been tailor-made for certain industries. Hospitals, utility companies, banks and other financial institutions, educational institutions and many others can be offered ERP systems that are specific to the nature of business. Thorough studies on the operation processes have been conducted and the common widely acceptable practices incorporated in developing systems for small businesses operating in specific industries (ERP New Insights, 2004).

Saas

The most recent and revolutionising service provision has been the use of SaaS. When the ERP systems are bought and installed in the computers for use, they are seen as Software as a Product. When accessed and used through the internet, then they are Software as a Service. Saas is a form of application of cloud computing where business applications are accessed online from a web browser while the data and software are centrally stored on the servers. The users do not need to have any knowledge or expertise in the supporting infrastructure (SearchCloudComputing.comDefinations n. d).

Saas is thus a mode used to deploy software in the form of ‘service on demand’ from providers. ‘Service on demand’ implies that the user accesses and pays for the service when only when he needs it. It is disabled after the on demand contract expires. Interestingly, this on demand function can be handled internally by the firm so that the licence is shared with a third party (Bennett, Keith; et al. 2000).

Application of Saas differs from the earlier discussed systems delivered over the internet in that Saas software were developed to specifically utilise technologies inherent in the internet such as web browser thus they reside permanently in the net and not hardware. Also the applications of Saas are built in a way that they can be accessed by several tenants simultaneously hence enabling many customers to share a single model. This is unlike the Application Service Providers which cannot be shared and have to be downloaded from the internet for use (Bennett, Keith; et al. 2000).

Some key distinguishing features of the SaaS are that first it is commercially available software whose access and management is purely over the internet. Secondly, management of activities is centralised rather than distributed to all the existing customers’ sites. Also, the delivery of the system is a one to many rather than on a one to one basis. Finally, updating is also centralised hence users need not download any upgrades (Finch& Curt 2006)

Benefits of Saas Model

The use of cloud computing in provision of ERP systems has brought lots of benefits to the end users. The administration of the system being centralised has been made easier and more efficient. This has resulted in huge benefits in terms of lower costs for the SMEs in accessing the services. Still the automatic updates means that the systems are constantly in the best possible form at all times for the SMEs to use without caring about maintenance issues. The systems are also accessible globally.

Finch& Curt (2006) continues to spell out the benefits of Saas models. He Emphasises on the low level of investment required to access the service. Instead of purchasing the ERP systems for exclusive use, the SMEs only require to purchase licences for access within a specific period. Still the roll out can be easily done on a pilot basis where the introduction is done on one department and if successful, it is rolled out to others but if it fails, it is discarded with minimal loss.

In an interesting twist, the responsibility of ensuring that the ERP system is on top form is not on the small business. This implies that if one vendors software is not working, he will have to work service it promptly lest he/she losses revenues. Also, since the vendor runs everything securely for the buyer, the buyer need not rely on their IT departments for installations. The sellers also have to provide top security for data for them to remain in business, proper back-ups and controlled access is adhered to in the best ways possible.

Example of Saas Package

Sap is the largest multinational in software development offering business solutions to businesses of all sizes. Headquartered in Germany, the company is best known product is its SAP ERP Software. There exist various components of the ERP systems offered by SAP.

Sap ERP Operations

This service seeks to reorganise the processes of the clients in order to better satisfy their customers. It seeks to introduce dexterity to the suppliers regardless of the dynamics in the market. The service supports complete operations in areas such as sales service, procurement logistics manufacturing and (Features & Functions of SAP ERP Operations n.d). .

In logistics and procurement, the ERP there exists four categories: Inventory, warehouse management and Procurement, transportation management inbound and outbound logistics.

In procurement, the system performs the purchase process up to the point of payment. It also manages the catalogue content, integrate all partners in business from designers to suppliers as well manufacturers and customers.

In inventory and warehouse management, the system tracks and records data regarding to the value and quantity of all input materials, performs physical inventory while assisting in the optimised use of storage facilities.

For Inbound and outbound logistics, the system aides in the movement of goods both inside the firm as well as outside to customers. It supports the progress of goods by monitoring them from time of reception to the time they become finished goods. Operations external to the firm such as delivery, posting of goods, and distribution and the accompanying documentation are also supported.

Transport processes including shipments and timely delivery of products within the budget is greatly optimised. The system also applies some vigorous options to combine orders and deliveries into shipments through the internet. This helps in utilising economies of scale for the firm.

For the product development and manufacturing, the system delivers functions that assisting in the manufacturing execution, production planning, product development and lifecycle data management (Features & Functions of SAP ERP Operations n.d).

In production planning, the ERP systems support the optimal plans used in production and organises production in the factories to meet orders promised. In manufacturing execution, the system supports the capturing of accurate information from the production centres offering increased transparency in the production processes. It also records and monitors stocks through the production life (Features & Functions of SAP ERP Operations n.d).

Under the sales and services section system the system supports professional- service delivery, after sales services and sales management.

In service delivery, the system takes full control of the sales order management. It assists in handling issues arising, preparing quotations, generating accurate orders and the billing systems. Still, using the e-commerce platform the system aides the utilisation of the internet as an interaction model. It also aides the development of the most effective incentive programs for sales personnel (Features & Functions of SAP ERP Operations n.d).

The after sales service benefits from the system in that, the system addresses basic requirements for support and also manages the processing of after sales service all the way from the first inquiry to the invoicing and confirmation. Finally Professional delivery is supported through analysing time spent on services as well as tracking deliveries (Features & Functions of SAP ERP Operations n.d)

As observed in the above example of an ERP system, integration is central in the functioning of the system. The system touches on almost all aspects of an organisation hence ensuring harmony in all the departments. Clearly the benefits are numerous.

Case study- Bak-Ambalaj

Bak-Ambalaj is a company based in Istanbul. It was started in 1973 and specialised on production of printed and non printed paper bags. It later diversified into snacks beverages and deserts. Currently the company maintains its leading position by utilising leading technologies and continually upgrading its assets. Since 1996 the company has been receiving ISO 9002 certification from Bureau Veristas. Also, since 1997 the company has received HACCP and Pest Control certification from AIB (American Institute of Baking), as well as certification for Turkish Food Regulation (Ilgar 2006 ¶1).

Prior to the implementation of the ERP, the business process analysis was very frustrating though necessary. The study done in one of the company’s facility showed that expandables and job orders were being incorrectly specified. Attempts to establish balance sheets produced huge errors as 800 tons being recorded as 8kgs. The report was judged as too difficult to develop. Also the management had no idea what inventory the maintenance warehouse contained and where it was situated (Ilgar 2006 ¶2).

Also the management was somewhat in the dark as far as costs were concerned. There was a lot of data to be processed but no appropriate technology to synthesise and condense it. One employee would work on all job orders for 15 days and come up with the cost data. A ‘unit cost’ form called was filled by the sales department where costs were categorised for expenses and proof films to be used mainly based on what they believed were the costs. Monthly purchases were not tracked as well as periodic increases. This meant that end of period cost analysis was senseless. It was never clear how costs were to be tracked. Still, inventories were verified using stock count tables maintained manually (Ilgar 2006 ¶3).

On Implementing the CANIS ERP through the help of a German Firm, the results were amazing.

The reports about inventories that were previously hard to develop only took a few hours to develop. Workers realised they constantly skipped entries of job orders that were part of business processes. The warehouse management drastically improved. The system was well able to locate materials down to its location on a specific shelf where it can be easily found (Ilgar 2006 ¶4).

True, it wasn’t possible to track costs on a monthly or periodic bases. The CANAIS ERP could track all costs and avail properly analysed data to the management at the touch of a button (Ilgar 2006 ¶6).

A complete picture can be got from an analysis done in the company in the year 2006. An inventory count of all materials found no discrepancies. The figures in the inventory management module were exactly the same as that in physical stock counts. This was previously unimaginable. In the warehouse there were about 3600 types of in-use items and 6500 types of non-used items (Ilgar 2006 ¶6).

Conclusion

The use ERPs in the operation processes is an absolute necessary in the long-term success of any modern business entity. The success achieved by the ERP vendors in providing ERPs using the Saas model is in fact one of the greatest milestone in the use of IT to drive business. The benefits achieved in improving productivity and eliminating costs is amazing. Also, the aspect of access and paying only as per own requirement, introduces a very exiting cost effective element of the ERP system. Even more fascinating is the possibility of sharing the software.

The responsibility of maintenance of the system is also shifted from the businesses to the vendors freeing up valuable time for SMEs to focus on other challenges. This being the case, the prosperity of small businesses will continue being greatly boosted.

Reference List

Anthony, G 2009, “Understanding ERP”, TechRepublic. Web.

Aparna, L 2006, “SMEs present the largest potential for ERP. Web.

Articlesbase 2009. “Importance and Benefits of ERP System in SME Segment.” Web.

Bennett, K, Layzell, P, Budgen, D, Brereton, P, Macaulay, L, & Munro, M 2000.

Service-based software: the future for flexible software. Seventh Asia-Pacific Software Engineering Conference, 2000. APSEC 2000.. Proceedings: Seventh Asia-Pacific Software Engineering Conference, pp. 214-221.

E-Business Insight 2005, “ERP Benefits – Operational Control, Management Control and Strategic Planning.” Web.

Enterprise and Industry, 2001. “SME Definition”. Web.

ERPWire. n.d. Discussing ERP’s intervention in small and Medium Enterprises. Web.

ERPWire. n. d., “What are the common problems for ERP in SME’S?”. Web.

Finch, C 2006, “The Benefits of the Software-as-a-Service Model.” Web.

Ilgar 2006, “CANIAS ERP Success Story of Bak Ambalaj, A Leading Name in Packaging Industry.” Industrial Application Software. Web.

Mutt, N 2009, “Benefits of ERPs: an essential Guide for Entrepreneurs”. Web.

Ryeson University n.d., “Why has the adoption of ERPs by SMEs lagged that of larger firms?” Web.

Searchcloudcomputing.com n. d. “Search Cloud Computing. Definations.” Web.

Tech-faq n. d., “What is ERP?”. Web.

Venkatesh, S 2003, “ERP for SME..A propellent for profitability” . Web.

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