Saturday 8 March 2014

The historical review and ideology of ERP (Part 2)

Authored by Junaid Khan

An Enterprise is a group of people with a common goal, having resources to achieve that goal; resources include money, manpower, material, machines, technologies, etc. Whereas planning is a necessary tool which hooks up all resources together. Enterprise Resource Planning (ERP) provide platform to integrate all the business processes of different departments and functions across a company onto a single computer system that can serve particular needs of the different departments. ERP combines all the business requirements of the company together into a single, integrated software program that runs off a single database so that various departments can share information and communicate with each other to accomplish the departmental / organizational objectives. The concept of ERP evolved during the last 40 years and today it is considered as an important requirement to align the operations of business with best practices of the industry as the modern techniques from Supply Chain, Accounting and Finance, Manufacturing and Operations segments have been incorporated in the available ERPs.

There is no doubt that ERP systems are in great demand nowadays and industry analysts are forecasting growth rates of more than 30% during the next five years. According to recent reports on ERPs carried out by International Data Corporation, corporate growth has been indicated as the most compelling driver for adoption of ERP systems amongst senior management, in result the organizations have improved their Customer Services, Supply Chain Systems and reduced operational expenses. Almost two third of the 50 CEOs/Senior Management have agreed that ERP is an important tool to achieve competitive advantages.

Prior to 1960s, business had to rely on the traditional ways of inventory management to ensure smooth functioning for the organization. These theories are called classical inventory management or scientific inventory control methods. The most popular amongst them was EOQ (Economic Order Quantity). In this method, each item in the stock was analyzed for its ordering cost and inventory carrying cost. A trade off was established on a phased out expected demand of one year and this way the most economic ordering quantity was decided. This technique was a deterministic way of managing inventory.

In 1960s a new technique of MRP (Material Requirement Planning) was evolved, this technique fundamentally reveals the end product demand obtained from the MPS (Master Production Schedule) for a specified product structure into a detailed schedule purchase order. The 1970s showcased the expansion of hardware, plus early PCs, some inclusion of accounting functions, and an initial focus on business processes. In 1980s, the need was felt to integrate the financial resources with the manufacturing activities. Thus Software companies such as SAP and JD Edwards appeared and MRP II was evolved. IBM was the major hardware vendor in this era.

The 1990s witnessed a rapid growth in both hardware and ERP software systems with an emphasis on business process integration across and within all functional areas. Process integration increasingly included ‘order-to-cash’ and ‘purchase-to-pay’. In 1990s with the expansion of Internet, Application Service Providers (ASP) appeared which provided small businesses with the service of hosting and managing specialized business application. Early 2000s saw a reversal of the 1990s with major software vendor consolidation, Oracle and SAP were the major ERP software firms in this era that survived Supply chain, accounting and HR business process software suites which were rapidly expanded to accommodate the extended enterprise planning and execution environment. Starting from 2003, the SaaS (Software as a Service) became popular because it replaces rigid, complex, expensive and difficult-to-modify applications with solutions that increase productivity, TCO and ROI and also provide a substitute for limited out-of-the-box functionality with close alignment to key business processes and priorities and easy adaptability as priorities change. SaaS increased speed of internet connections, ultimately in up coming era of electronic world all software will be web-based and pay-as-go.


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