Would your brain be as powerful in controlling your body’s different parts, if it had no information on their strengths, weaknesses, and abilities? The brain is powerful as it receives and interprets numerous signals that are sent to it from different parts of the body. An Enterprise Resource Planning (ERP) system is similar to the brain as it integrates different departments or functions across a company in a centralized manner.
An ERP software solution like SAP can maintain information and business processes for a variety of business functions such as Manufacturing, Supply Chain Management (SCM), Financials, Human Resources and Customer Relationship Management (CRM). Prior to the concept of ERP systems, every department within an organization had its own customized computer applications. For example, the human resources department, the payroll department, and the financial department all had their own computer applications. Typically, this resulted in silos of information and delayed decision-making, as information or data had to be integrated from different computer applications. As an ERP is based on a common database, it allows every department or function to store and access information in real time. A typical ERP can provide solutions related to accounting, production, materials management, quality, sales and distribution, HR and project management.
How ERP helps in improving an organization’s performance
The ability of an ERP system to provide the same updated and accurate information across different functions is what makes the application so valuable to enterprises. Let’s take the example of a customer order to understand this better: Before the advent of ERP applications, once a customer order was placed, it had to follow a paper trail from department to department – with details of the order being entered and re-entered into the applications of the different departments. This manual process was prone to errors and delays; till the order was entered into the application of a particular department, the goods could not be manufactured or shipped.
With an ERP system, a customer order is entered only once, and this information is available to all the applications across different functions. Once the order is entered, the application checks if goods are available in the inventory. If the goods are not available, it raises a purchase order which is subsequently used by the production team to manufacture goods, and by the finance team to issue an invoice. The produced goods go back into inventory, where they then become available for shipment. This single view of demand and supply enables organizations to better understand the needs and demands of the customer - and actually anticipate their requirements. This information can then be used to forecast future demands. This shortens lead time, reduces the overall cost of manufacturing, and ensures enhanced customer satisfaction.
The advantage of ERP is the fact that people in different departments can all see the same information, and update relevant information. As soon as one department finishes its part of the order, the ERP system forwards it to the next concerned department, which is defined in the workflow. To understand the status of an order, anyone in the organization can simply login to the ERP system. Web-based access can also be provided to customers who want to track down the order status.
Benefits of ERP
Apart from the low cost of ownership and savings achieved by standardizing one application to manage multiple business functions, usage of ERP promises much more. With a successful implementation of an ERP system, top management can have a consolidated view of sales, inventory and receivables at the same time.
Other significant benefits include:
Improved visibility: Due to the centralized nature of ERP systems, organizations can track inventory levels on a daily basis, including inventory in transit and future consignments to be received. This visibility can enable organizations to control their working capital requirements to a great degree. This visibility also enables organizations to run their enterprise in accordance with their strategy, while empowering them to make quick decisions to pursue opportunities.
Reduced operating costs: One of the most immediate benefits from implementing an ERP is reduced operating costs: such as lower inventory control costs, lower production costs and lower marketing costs. By avoiding duplication of information but not reinventing the wheel for common business processes, an ERP provides opportunities for cost reduction and value-added tasks, leading to increased margins.
Standardized business processes: Most ERP vendors design their products around standard best-business processes, which are based on industry best practices. Organizations can use these business processes to standardize their own processes. This process consistency allows a consolidated view of the business across the distributed enterprise, enabling organizations to drive continuous improvements, as operations are streamlined and there is healthy synergy between departments and functions. The improvement also comes from transparency and reduction in human errors due to automation of inter-company transactions.
Improved compliance: With ERP, organizations can enforce compliance related to different regulations such as Sarbanes-Oxley or industry specific initiatives such as 21 CFR part II.
What ERP entails
ERP requires a huge amount of planning, co-ordination and support to reap the promised benefits. For instance, at the heart of any ERP system is information – if the information is entered incorrectly, the ERP system cannot deliver benefits. ERP is also about process – if employees in an organization resist the best practices in the process as underlined by the ERP, they will resist using the software, eventually resulting in poor ROI.
As implementation of ERP changes the way people work, top management has to be proactive in explaining the reasons for, and how the organization as a whole will benefit from the implementation. A proper change management initiative can lower the potential risk of an ERP implementation, through a comprehensive communication and training process. To reap the full benefits of ERP, organizations need to partner with competent, proven service providers, with the technical and functional experience and expertise to ensure successful implementation.
An ERP implementation done right, can build the foundation for future growth, and translate into improved productivity, cost savings, and a much better bottom line.