The following excerpt from IT Manager's Handbook is printed with permission from from Morgan Kaufmann, a division of Elsevier. Copyright 2006. Click here to access the complete Chapter 15, "Enterprise Applications."
Enterprise resource planning
Enterprise Resource Planning (ERP) has a broad definition; it's used in a variety of ways to mean the set of activities that a company engages in to manage its resources across the entire enterprise. This can mean activities as diverse as product planning, sales programs, materials purchasing, maintaining inventories, and performing classically defined HR functions. Major software companies in the ERP space include SAP, Lawson, SSA Global, and Oracle. ERP is a hot topic in corporate circles. To avoid looking like the naïve ITer in a popular TV commercial, keep in mind that ERP is pronounced "E-R-P," not "erp."
Prior to ERP, companies would use different packages for various business functions: inventory, sales and distribution, financials, HR, and so on. Different packages were used simply because no vendor had a product offering that could cross all these various disciplines. The various packages might be purchased or homegrown. To pass data among the various functions, a company would write numerous interface programs to extract data from one application's database for use in another application.
The value of ERP software
With the introduction of ERP, a company can essentially have a single application (or a single set of applications provided by a single vendor) and database for all its vital business functions. The value of this can be enormous. Since all the applications are integrated, a change in activity in one area of the company ripples through the system to all affected departments so that they could react accordingly. A sudden spike in sales notifies the Purchasing department to increase orders of raw materials, the receiving department to look out for these deliveries, the manufacturing department to gear up for increased production, HR that more labor will be needed to fulfill the demands of the increased sales, etc.
ERP solutions for the supply chain (manufacturing, purchasing, logistics, warehousing, inventory, distribution, etc.) are a large portion of the market. Solutions for the supply chain often extend to include links and interfaces with suppliers and partners. ERP vendors also have different offerings for different industries.
General ERP implementation issues
There are several elements of ERP to keep in mind when considering implementing an ERP system:
- ERP isn't a trivial-sized activity. True ERP systems run across the entire enterprise and as such, they literally affect every aspect of a company's business.
- Because the scope of an ERP implementation can be so far reaching, it acts as a magnifying glass. Problems are quickly seen throughout the organization. And, problems no one knew about suddenly become very exposed.
- Implementation of an ERP system is a gut-wrenching experience for a corporation. Some companies thrive on the new system, embrace it as the salvation of their business, and explode forward. Others find the difficult medicine of ERP a very hard pill to swallow, and eventually bail in midstream, leaving unhappy employees, customers, and vendors screaming in their wake (to say nothing of opening the gate of lawsuits). Trade journals are equally filled with success and failure stories of companies that have gone through ERP implementations.
Costs of implementing ERP
In addition to the upheaval an ERP implementation can cause, the cost of implementing ERP will easily be in the hundreds of thousands of dollars, and could go to the tens of millions for larger and more complex environments. Usually, the biggest costs of an ERP implementation are the consultants that you will need to assist in the implementation. Because of the complexity of installing an ERP package, it's common for consulting costs to total two to three times the cost of the actual software package. Many very large consulting firms (e.g., PricewaterhouseCoopers, Accenture, Ernst & Young) have entire divisions dedicated to ERP implementations.
In addition to consultants, a good portion of the budget will also go to training, support, and a large investment in additional hardware.
Major changes required
In many cases, the organization may find that it actually has to change the way it does business in order to implement an ERP package. While the traditional approach of implementing a package is to tailor it to your organization's needs, it's not uncommon to have to use the reverse approach when implementing an ERP package.
There are many core activities associated with ERP that are software related, although the thrust of the implementation is often not only software. It can include changing the way departments function, organization, procedures, employees' roles, and a sea of change in the way the company operates. As the person responsible for a large part of the software and hardware health and well-being of the corporation, your job, your responsibilities, and your entire skill set are going to be radically affected by any ERP motions your company undertakes.
It isn't only IT's decision
It's likely that you won't be the only one consulted before your company decides to implement an ERP system. Most likely, you will be part of a group or committee making that decision. Because implementing an ERP system is almost always a multi-year adventure, you will likely join a company in mid-implementation. Your decisions won't be "Should my company do this?" as much as "How can I help my company do this in the most efficient manner possible?"
ERP may be the single largest IT project your company has ever undertaken. Its success or failure may lead to the success or failure of many executives and departments. Stories abound of ERP implementations that led to enormous cost overruns, 20-hour days, 7-day weeks, loss of key team members, implementation delays, and more.
If you're involved in an ERP implementation, chances are you will be making more use of some of the topics in this book (project management, budgeting, etc.) than with any other project you'll ever be involved in. You, as well as everyone else involved, should look at an ERP implementation as the single greatest opportunity to re-engineer the way your organization works, and to have a huge beneficial impact that will probably live on for many years.
Disadvantages to ERP
ERP isn't without its risk and detractors. There can be disadvantages and pitfalls to it.
- The very rigid structure of an ERP solution oftentimes makes it difficult to adapt to the specific needs of individual organizations.
- Because ERP software is enormously sophisticated, there is often a tendency to implement more features and functions for a particular installation than is actually needed. This drives up costs and may reduce usage if the system proves to be too complex to use.
- The cost to implement and maintain ERP systems is very high, and can challenge ROI calculations.
- Some departments and users may be hesitant to agree to the implementation if they feel they're giving up control of their data by switching from a department application to an enterprise-wide solution.