- Introduction to ERP
- What is ERP?
- When ERP is developed?
- What ERP benefit to me?
- What ERP may harm?
- Successful ERP Case Studies
- When do you need ERP?
- Which ERP is the best?
- How much does ERP cost?
- What to know before making a buying decision?
- What is the ROI for the ERP?
- Who should be involved in ERP?
- What are the typical selection procedures?
- How long does it take to implement ERP?
- How to implement ERP?
- How to ensure ERP is working for me?
- Can I have a tailor-made ERP with customized functions?
1. Introduction to ERP
ERP, also known as enterprise resource planning, is the English abbreviation for Enterprise Resource Planning. Proposed in 1990 by the famous American management consulting firm Garter, it was originally defined as a software package, but was quickly recognized globally as a comprehensive enterprise resource management solution. ERP is considered crucial for companies wanting to enter into the e-commerce field. Put in simple terms, ERP is the use of computer software to regulate the function of every aspect of the company, from chain management to customer relationship management. In general, ERP’s end users range from procurement, sales, warehouse, accounting, material control, engineering, logistics and management and so on.
ERP now has become a compulsory course in the studying of modern enterprise management theory, proving its importance in business administration.
2. What is ERP?
Definition of ERP:
ERP emerged in the early 1980s as a solution for corporations to streamline all internal and external resources through a single platform. Through ERP, companies can manage human resources, material and financial resources, automate operations and enhance efficiency to reduce wastage of resources. ERP is a new generation of integrated management information system evolved from MRP (Material Resource Program). Elaborating on the concept underlying MRP, ERP tries to manage the supply chain from beginning to end in order to lower the possibility of mismatching. ERP is developed as a next generation MRP II (Manufacturing Resource Planning) designed and developed by Gartner Group.
ERP involves building a Client/Server architecture using a graphical user interface and open system. In addition to the existing standard features, ERP also includes specific features covering quality management, wastage management and regulatory reporting. Since ERP software and hardware could be totally independent and separate, regular system upgrade is made much easier, a major reason that helps to explain why ERP is one of the most widely used software in the world. With data generated that is automatically analyzed, decisions can be made quickly to improve business processes, thereby enhancing business efficiency and corporations’ competitiveness. ERP plays an important role in modern-day business world.
ERP's core features include:
The most commonly used modules in ERP include sales, finance, material control, procurement. Data is shared in the highly integrated ERP system, and since a single data input entry can generate multiple retrieving points, it can eliminate the tedious work of repeating data input to enhance efficiency.
ERP provides a standardized and automated backbone for a company's internal business processes and management processes. With the use of the latest technology and architecture, including the Internet and Windows interface, ERP systems allows users to access the system anywhere, anytime via the Internet or intranet.
By integrating a company’s procurement, production, cost, inventory, distribution, transportation, finance, and human resources planning together on a single platform, ERP creates a complete supply chain. Enterprises should try their best to fully comprehend ERP and carefully analyze its benefits before considering it.
3. When ERP is developed?
The history of ERP
ERP is not a new concept but, rather, a concept gradually evolved from MRP (Material Requirements Planning) in the 1970’s and MRP II (Manufacturing Resource Planning in the subsequent decade. ERP was developed to expand the features of MRP II which controlled the internal supply chain from business planning to supply chain execution. APICS (American Production and Inventory Management Association, famous for its MRP and MRP II), said, “The biggest difference between ERP and MRP II lies in its technical requirements, such as a graphical user interface (GUI) , relational database using a fourth-generation language, using computer aided tools in the development of software, client/server architecture, and open systems in the facilitation. “ Other than that, Gartner Group also think that ERP uses artificial intelligence, enabling it to simulate and apply to project management, internally allowing high quality management, externally integrating customers and vendors, as well as generating a wide variety of reports.
The concept of ERP first came from the famous American information technology research and advisory firm Gartner Group in the early 90s. Based on the development of information technology and supply chain management concept, ERP, simply put, is "defined as the ability to deliver an integrated suite of business applications. ERP tools share a common process and data model, covering broad and deep operational end-to-end processes, such as those found in finance, HR, distribution, manufacturing, service and the supply chain.“It’s the backbone of e-business, and the core for any foreground application systems including e-Commerce, customer relationship management (CRM), SCM and so on. SAP, Oracle, and Microsoft are the more well-known multinational ERP service providers among all.
4. How does ERP benefit me?
Benefits of ERP are mainly reflected in the following aspects:
• Strong integration. Compared with other traditional single system, the strongest feature of ERP is its ability to integrate the entire enterprise information systems;
• Greatly reduce turnaround time, improve resilience and flexibility to adapt rapidly to the ever-changing business environment;
• Integrated platform to streamline logistics, cash flow, or information data exchange;
• Ability to allow staff to access the data anywhere anytime;
• Ability to simulate different market conditions and provide foresight to production planning, capacity requirements planning, material procurement, and logistics;
• Strict internal control such ISO;
• ERP improves communication and enables management to access real-time information and monitoring;
• ERP allows prompt decision makings with its accurate and timely financial reporting, management reporting and analysis of data;
• ERP facilitates communication between enterprise and vendors and increases enterprises' ability to respond to market changes quickly;
• ERP's flexibility can be easily extended to different platforms such as online stores, retail stores, and other logistics team.
5. What are the cons of ERP?
There lies certain risks for ERP implementation and this include:
• Failure to meet expectations;
• The cost of ERP implementation too high, including the architectural costs, software and hardware fees, as well as the consultation fees. Often, only medium to large enterprises have the ability to pay for these;
• Not fully understanding the actual needs of enterprises, thereby choosing the wrong ERP solution and ultimately resulting in the implementation failure;
• A failed ERP system will complicate business process and eventually slow down daily operations and efficiency;
• The lack of full understanding the ERP software will also induce an increase in the cost of providing extra training for staff;
• Staff unwillingness to change, as this change involves everyone in a company, from management to users, from business processes to organizational structure, to implement ERP;
• Hardware and software providers and consultants failing to cooperate effectively.
6. Successful ERP Case Studies
The most obvious answer of all is of course to enhance business efficiency. When implemented successfully, ERP can not only help enterprises build a good system, but can also help employees to make full use of it to reap real benefits for the enterprise.
What kind of enterprises can benefit the most from ERP? This is no clear standard, but generally speaking, one must delve into one’s operational processes and ERP’s established set of processes to see whether the concepts are able to complement each other.
ERP solution is perhaps the most important reason in helping to select the appropriate system for your company, which is why this has often become the benchmark for the selection process. ERP solutions comprise of various aspects, from process optimization solutions to system solutions and from network solutions to hardware and system configuration solutions and so on.
There have been a lot of successfully cases in which companies adopted ERP. Taking one of the world’s largest American express delivery company which has adopted Oracle’s ERP solutions as an example, to better fit the diversity of their business nature, their ERP systems covers a lot of different modules such as asset management, accounting, finance, human resource, e-procurement, expense reporting, inventory management, and project costing etc. Since 1997, the ledger and asset management modules have been added as well, and after undergoing a major system upgrade in 2004, their ERP systems now comprise of as many as 12 modules, with current users exceeding 20,000.
An example of a SME who has successfully implemented ERP is the Chinese Carpenter Tan Handicraft Co., Ltd. When the company was first established, it mainly produces traditional folk wooden comb, and to cope with its gradual growth in market share and to help it to expand nationally, they needed an efficient IT solution that can support the company’s strategic growth with an agile resource planning system. The system has to be able to modify and upgrade, to integrate corporate resources and allow information exchange. It also has to be able to help the company gain more control over store inventory, sales, financial figures, and reduce corporate risks. Following the implementation, business efficiency was improved and the company's ability to resist risks was greatly lowered.
7. When will you need ERP?
When a business expands and reaches a certain level of maturity, they may found its scale too large to cope with and too complex to manage. Often, they may turn to think on how to enhance the company's management through various ways such as adopting ISO management methods or administrative measures. Although it is correct to a certain extent, it is hard to control and measure its success as the process is executed by people, a subject of great variables. Its stability can never be stronger than a computer system. For example, when a supplier mistakenly delivered 11,000 units of electronic parts to a factory which has only purchased 10,000 units, without a computer’s monitoring, the worker may not realized until the stock arrived. The factory will have to bear the financial losses as well as warehouse capacity of storing the extra 1,000 units of good. Whereas, with ERP, the system can automatically detect and notify the warehouse prior to the confirmation of goods receipt and before they were shipped out, thereby minimizing the chances of losses and risks.
In fact, there have been countless traumatic incidents in which Hong Kong companies that have factories located in PRD had to bear millions of dollars loss due to sluggish warehousing errors. Only by then did these enterprises tried to seek help from ERP vendors, but could these be avoided beforehand?
ERP is NOT the answer to every problem. Years are required to lay out a solid foundation before building a skyscraper; similarly, years have to be taken to implementing ERP as the solid basis of a successful company. It is certainly even harder to convince the decision-maker to invest money into upgrading your IT system when your company is experiencing loss making. However, rather than spending on things that cannot be easily quantified, why not invest it in an ERP system that can provide more standardized operation procedures and eliminate all human blunders? Looking back, many well-known brands’ success stories whose business leaders have openly expressed how expensive it was in the initial stages of implementing ERP had, in hindsight, been glad they have done it early – the return is yielded in just a few years!
8. Which ERP is the best?
Upon confirmation on procuring an ERP system, the first problem one might face is which ERP software to choose among the dozens on the market. In the selection process, many business executives tend to ask "Which brand is the best?" There is no definitive answer to that question. In fact, there is never “the best” ERP software but only “the most suitable”. Regardless of the business scale, every ERP development is based on the management philosophy of design and development. Generally speaking, the more similar the mind sets between corporations and ERP solutions provider, the higher the success rate.
As a professional consultant, an ERP solutions provider should not only possess professional knowledge on its system but also understand its clients’ industry and its philosophy and culture to assist them in their ERP selection process. A company must choose a credible ERP solutions provider that can fully comprehend its company’s corporate culture and management ideas.
A company must understand its needs, current difficulties it is facing, and expected returns which ERP could bring prior its selection process. Shortly after ERP was launched, the world faces the Internet/Intranet boom, highly raising the bar on software requirements. ERP responsiveness in adapting swiftly to the changes of an era brought information system to a new stage.
The main features of the current ERP solutions are:
(1) Newly added workflow, EDI, DSS, and other functions all share a common feature, which is the management of ERP software objects, from internal and external resources, to physically and productivity requirements to expand the information resources.
(2) Currently, ERP enables extended OLTP down to office automation, paperless processing; extends up to decision support online and analytical processing OLAP, and horizontally to the design and engineering fields.
(3) The current ERP software allows the transition from traditional computer environment of a client/server environment to Internet/Intranet environment for support.
(4) The current ERP software structure no longer blindly pursue large and comprehensive in size but leans more towards flexibility and practicability.
(5) The current ERP software has broadened its range of applications to cover many industries and fields.
These developments are benchmarks to how ERP has developed and grow with the market over the years.
9. How much does ERP cost?
ERP is generally categorized into three levels:
First level: Less than 20 users, price <HK$ 100,000
Second level: 20 - 200 users, price approximately HK$ 100,000 ~ 2,000,000
Third level: Over 200 users, price > HK$ 2,000,000
Since different ERP service providers offer different technologies, architects, modules and services, enterprises should have a clear planning and roadmap as to how many stages is needed to implement ERP according to its business needs and future business development.
10.What to know before making a buying decision?
An enterprise must understand its needs, current difficulties, what it hopes to achieve via ERP and its expected return/target. Needs may include: the need for speed, geographical need (i.e. multiply users online at the same time in different countries), language needs, needs for interface friendliness, number of users, service needs (such as 7/24 support), and security needs. Sometimes, as detail as to which departments would be the first to import the ERP and how to convert existing data into the new system is necessary.
Meanwhile, existing issues must also be addressed, such as how inadequate the old system is, incomplete database, slow operation speed, down machines etc.
Expected return from the system has to be measurable, such as reduction in sluggish stock, increase in sales amount or a rise in cash flow liquidity.
The initial plan for enterprises on implementing ERP basically includes people-in-charge, budgeting, implementation time, implementation scope, risks, and how to react to change in needs etc.
In addition to the above, to successfully implement a new ERP system, enterprises must also pay attention to political factors (such as how implementing the new ERP system will affect the interests of stakeholders), staff’s reluctance to learn new things, whether the companies have people possessing the expertise to lead the ERP team etc.
An enterprise must gain market information on ERP such as product features, supporting services, price comparison and different ERP service providers and their background (any existing customer's recommendation, its history, support and services, etc.).
For more advice, you can always go to the government / authorized institutions (such as the HKPC) to see if there is any financial assistance schemes available to reduce your investment costs.
11. What is the ROI for the ERP?
When procuring or replacing an existing ERP system, management often considers its ROI (Return On Investment). Total investment amount can be broken down into software and hardware investment, advisory fees and annual maintenance costs. Whilst return is rather vague, a more direct way to measure ROI is the amount of reduced sluggish goods, increased cash flow and sales order. Often, we see companies measuring ROI based on how effectively it is able to compensate its profit loss. For example, a wrong decision in purchasing a $500,000 worth of material now becomes sluggish goods, so they might expect an ERP system be able to make up for that $500,000 monetary loss. While it is not possible for the ERP system to do so, there are actually many other intangible benefits to it, such as its capability to provide real-time data, to generate a more accurate price list and financial statements, all of which are very important to SMEs.
12. Who should be involved in ERP?
When procuring a new ERP system, an entrusted ERP special project team composed of one or more members should be established. This could include department heads, IT department heads, administrative department and accounting department, as well as the senior management team and, if possible, the boss. Everyone should express their specific needs on behalf of their department, and the representative should balance the needs of every party before making the final decision. If possible, hire consultants specializing in ERP to give expert advice to the group.
13. What are the typical selection procedures?
Prior to researching for ERP service vendors, the ERP special project team should lay down a set of basic procurement guidelines. The team should also have a basic understanding of the vendor’s company background and its product before the first meeting, be able to explain its requirements, and try to get on good terms to facilitate a healthy cooperative relationship in the future.
You should be able to filter out a handful of ERP providers after the first meeting. If there are still too many suppliers, the ERP special project team should decide, based on their own judgment, which vendors can advance into Phase 2. This should include more in-depth understanding of the ERP systems – whether or not it meets the actual request of the enterprise, its user interface design, and its operating and system processes. At this stage, the ERP special project team group should spend more time to study and understand the practicality and its subsequent implementation plan and be able to differentiate the difference among vendors.
After the second stage, the ERP special project group should be able to match the needs of its company with that of an ERP solution provider. To better understand other details (such as database, hardware, communications networks, project management, system changes, the actual data presentations, etc.), they can request help from the ERP vendor.
The third stage will be the final stage of negotiations with ERP solutions provider. The ERP special project group should select the best matched ERP supplier based on the set of guidelines made at the beginning and discuss contract details and implementation schedule. Senior management or boss should be involved in the last stage decision.
14. How long does it take to implement ERP?
Implementation of ERP can be divided into 2 categories. The first being those who is not using any existing ERP and process all documents via WORD/EXCEL. This category is relatively simple, because data is processed from scratch, saving tremendous organizing and filtering time. For general trading company, around 3-6 months is required for several modules, and for those that needed MRP/CRP as well, another extra 3-6 months.
The second category is those that are already using another ERP system. Because the old ERP system possess large amount of data that has to be transferred to the new system, it is extremely time consuming. Depending on the disparities between the two systems, the greater the difference, the more data needed to process, resulting in a longer time needed.
The above is made on the assumption that these enterprises requested only standard ERP systems. For those requiring additional program modifications or customization, development time may be longer.
15. How to implement ERP?
“How to implement ERP” should not be a problem if companies have been following the guidelines and procurement procedures on purchasing an ERP system. Their next question, then, should be “How to go live with my ERP?” and “What factors will affect its speed?”
Entering the third stage, the ERP project team should re-examine the "ERP system implementation plan", in particular the Implementation Period (TIME), Implementation Category (SCOPE), Implementation Risk (RISK), Change of needs Mechanism (CHANGE MANAGEMENT) and other non-physical constraints (such as politics).
Although budget amount is confirmed in the contract, enterprises should adopt stringent measures on their implementation plans to ensure that it will not go over-budget. In general, the longer time needed for implementation, the more changes in demand will be induced, resulting in a higher risk and thus, more expensive project price. As requirements changed but not the change of needs mechanism, there will be a waste of resources that results in a lose-lose situation. Therefore, the key to success is to have a stringent implementation plan that must be detailed, rational, standardized and recognized by the management.
As mentioned previously, it is very important to establish friendly relations with your ERP supplier. As ERP is a large system that involves tens of hundreds of people in the process, and since it is near to impossible to find an ERP system that can fit almost perfectly with any company, conflicts happens and this will, in the end, slow down the work progress. It is for this reason that cultivating friendly relations with your ERP vendor can ensure a successful implementation, because most ERP systems can be mildly adapted according to users’ requests to make it more user-friendly, which can greatly shorten the implementation and adjustment time, thereby vastly improve its success rate.
In addition, management’s involvement is also very important in helping to promote the use and implementation of the system within the company. When management is involved, they will be aware of progress made or a rise in potential risks, allowing them to react quickly to discuss measures and tweak their plans with their respective ERP service providers.
If management still lacks the confidence, they can always sit down to discuss the entire plan with its ERP service provider to reassess the situation to reduce the risk of the company.
16. How to ensure ERP is working for me?
To ensure that the ERP system could actually run, we have to go through a series of tests, among which the first is the stage known as “trial run”. This typically takes place during the final stage of implementation and generally last for one to three months. System users should have completed training and possess in-depth knowledge of the system and understand the day-to-day business operation of the system. To test the system, the ERP development team will propose a few scenarios, mainly issues that one might encounter in a normal daily routine, to test the ERP system and what its users might experience to ensure its capability to tackle any unexpected problems.
A further step to ensure the smoothness of the ERP system upon completion of the trial run is by inputting a day’s invoices to run in the system. If everything is smooth, you are ready to work out a timeline on when to cut-off the existing system and start using the new ERP system.
Following the test run, enterprises should have a “parallel run” where the old and new systems run together for a certain period of time to make sure there is a smooth transition.
17. Can I have a tailor-made ERP with customized functions?
Although it is close to impossible to find an ERP system that can fulfill an enterprise’s requirements 100%, most of them are very standardized and mature enough to meet your needs. If you can find a standard version of an ERP system that is able to meet your requirements of up to 50-80%, it can already be considered a very good match.
Most ERP service providers have the ability to develop new features according to customers’ specific needs. It is necessary for you to know during the selection process that some ERP service providers act solely as the distributor and lack formal systems development experience, whereas some other have the capability to provide an ERP system that is completely tailor-made, with each and every design features and user interface made according to customer’s specific needs. However, you should understand that developing customized features requires a lot of time and money, and these uncertainties can greatly affect the estimated cost with a certain risk posed.
To ease the process, most companies will choose a standardized ERP to start with and add customization along the way to ensure a smooth implementation of the ERP system. However, to some industry such as dockyards, banking, and government departments, it may be difficult to find a solution that can fit them 100%, which is why most of them requires an ERP service provider that can tailor-made the system according to their specific needs.
Solutions for Trading & Manufacturing Industry:
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