ENTERPRISE RESOURCE PLANNING AND MANAGEMENT

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THE DEVELOPMENT OF ERP SYSTEM

The Development of ERP Systems

Increasing the efficiency of information systems

results in more efficient management of business
processes, which could be their competitive edge.

An Enterprise Resource Planning (ERP) system can

help a company integrate its operations by serving
as a company-wide computing environment that
includes a shared database—delivering consistent
data across all business functions in real time.

Information systems configured before ERP

development are known as a stovepipe (silo).
● Costly inefficient Early Attempts to Share Resources
● Disrupted operations
● Time-consuming ● As PCs gained popularity in business in the
● Unwieldy paper trail 1980s, it became clear that users needed a
● Limited exchange of information way to share peripheral equipment (such
● Prone to errors as printers and hard disks, which were fairly
● Not updated due to time-lags expensive in the early 1980s) and, more
Current ERP systems evolved in 1990s as a result of: importantly, data.

● advancement of the hardware and software ● By the mid-1980s, telecommunications

technology (computing power, memory, developments allowed users to share data
and communications) needed to support and peripherals on local networks known as
the system the client-server architecture.

● development of a vision of integrated ● By the end of the 1980s, much of the

information systems hardware and software needed to support
the development of ERP systems was in
● reengineering of companies to shift from a place: fast computers, networked access,
functional focus to a business-process focus and advanced database technology that
allows for the easy retrieval of data, is the
Computer Hardware and Software Development database management system.

The computer hardware and software developments The Manufacturing Roots of ERP
of 1960s, 1970s, and 1980s paved the way for the
development of ERP systems, which were accurately ● Manufacturing software advanced during
described by Moore’s Law. 1960s and 1970s, evolving from simple
inventory-tracking systems to material
In 1965, Intel employee Gordon Moore observed requirements planning software.
that the number of transistors that could be built
into a computer chip doubled every 24 months, ● MRP is a production-scheduling
evident in 1960s and 1970s. methodology that determines the timing
and quantity of production runs and
purchase-order releases to meet a master
production schedule, which allows a plant
manager to plan production and raw
materials requirements by working
backward from the sales forecast, the
prediction of future sales.
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● The basic functions of MRP could be

handled by mainframe computers;
however, advent of electronic data
interchange — direct computer-to-
computer exchange of standard documents
— allowed companies to handle purchasing
process electronically, avoiding cost and
delays resulting from paper purchase order
and invoice systems.

Management’s Impetus to Adopt ERP

● The hard economic times of the late 1980s

and early 1990s caused many companies to
downsize and reorganize. These company ERP SOFTWARE EMERGES: SAP AND R/3
overhauls were one stimulus for ERP
● SAP was the premier to develop software
development.
for ERP systems.
● In the quickly changing markets, flexibility
● 1972: former IBM systems analysts in
and rapid decision-making became a
Mannheim, Germany—Dietmar Hopp, Claus
necessity.
Wellenreuther, Hasso Plattner, Klaus
Tschira, and Hans-Werner Hector—formed
Systemanalyse und Programmentwicklung
(Systems Analysis and Program
Development), or currently known as
Systeme, Anwendungen und Produkte in
der Datenverarbeitung (Systems,
Applications and Products in Data
Processing.)

● IBM controlled computer market with its

360 mainframe computer, which had only
512K of main memory.
In a process-oriented company, the horizontal flow
of information and management activity across ● SAP’s goal was to develop a standard
functions, in line with the flow of materials and software product that could be configured
products. to meet the needs of each company. These
goals were lofty and forward-looking for
Michael Hammer’s 1993 landmark book, 1972, and it took almost 20 years to achieve
Reengineering the Corporation: A Manifesto for them.
Business Revolution, stimulated managers to see
the importance of managing business processes. SAP Begins Developing Software Modules

In recent years, further impetus for adopting ERP ● Before leaving IBM, Plattner and Hopp had
systems has come from companies’ efforts to be in worked on an order-processing system for
compliance with the Sarbanes-Oxley Act of 2002. the German chemical company ICI. The
order-processing system was so successful
that ICI managers also wanted a materials
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and logistics management system—a capabilities and expanded into

system for handling the purchase, receiving, international markets.
and storage of materials—that could be
integrated into the new order-processing ● This was no small task, because the
system. In the course of their work for ICI, software had to be able to accommodate
Plattner and Hopp had already developed different languages, currencies, accounting
the idea of modular software practices, and tax laws.
development.
● In the late 1990s, the year 2000, or Y2K,
● Software modules are individual programs problem motivated many companies to
that can be purchased, installed, and run move to ERP systems:
separately, but all of the modules extract
○ Necessity to consolidate data &
data from a common database.
Minimal memory and storage
In the course of their work together, Plattner space
and Hopp began to consider the idea of leaving
● Many companies that had not yet decided
IBM to form their own company so they would
to move to a Y2K-compliant ERP system
be free to pursue their own approach to
waited until after the new millennium to
software development. They also asked Claus
upgrade their information systems.
Wellenreuther, an expert in financial accounting
who had just left IBM, to join them, and on April ● 2000: SAP AG had 22,000 employees in 50
1, 1972, SAP was founded countries and 10 million users at 30,000
installations around the world. SAP also had
● At the time Plattner, Hopp, and
competition in the ERP market, namely
Wellenreuther established the company,
from Oracle and PeopleSoft.
they could not even afford to purchase their
own computer. Their first contract, with ICI, PeopleSoft and Oracle
to develop the follow-on materials and
logistics management system, included ● Founded by David Duffield, a former IBM
access to ICI’s mainframe computer at employee who, like SAP’s founders, faced
night—a practice they repeated with other opposition to his ideas from IBM
clients until they acquired their first management.
computer in 1980.
Offers software for human resources and
● At ICI, the SAP founders developed their payroll accounting, and it achieved considerable
first software package, variously called success, even with companies that already were
System R, System RF (for real-time using SAP for accounting and production
financial accounting), and R/1.
● 2003: PeopleSoft strengthened its offerings
● 1978: SAP began developing a more in the supply chain area with its acquisition
integrated version of its software products, of ERP software vendor JD Edwards.
called the R/2 system.
● 2004: Oracle succeeded in its bid to take
● In 1982, SAP released its R/2 mainframe over PeopleSoft.
ERP software package. Sales grew rapidly in
the 1980s, and SAP extended its software’s
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● Oracle, is a popular software choice for computer hardware and software that
managing human resources and financial developed the Java software development
activities at universities. platform.

● Currently Oracle offers PeopleSoft’s ERP ● “Oracle will be the only company that can
solution under the PeopleSoft Enterprise engineer an integrated system—
Applications name; it offers JD Edwards ERP applications to disk—where all pieces fit
solutions as JD Edwards EnterpriseOne and and work together so customers do not
JD Edwards World. have to do it themselves. Our customers
benefit as their systems integration costs go
● Oracle is now SAP’s biggest competitor. down while system performance, reliability,
Oracle began in 1977 as Software and security go up.”
Development Laboratories. Its founders,
Larry Ellison, Bob Miner, and Ed Oates, ● 2010: An effort to consolidate its customer
won a contract from the Central base on a single software platform, Oracle
Intelligence Agency to develop a system to released Fusion Applications, which is a
manage large volumes of data and extract software suite designed to give its
information quickly. PeopleSoft, JD Edwards, and Siebel
customers a modular and flexible upgrade
● Although the Oracle project was canceled path to a single Oracle ERP solution:
before a successful product was developed,
the three founders of SDL saw the Major functional modules in the current SAP ERP
commercial potential of a relational system, also known as Enterprise Central
database system. Component 6.0:

● 1979: SDL became Relational Software, ● Sales and Distribution (SD) module records
Inc., and released its first commercial sales orders and scheduled deliveries.
database product. Information about the customer (pricing,
address and shipping instructions, billing
● 1986: Released the client-server Oracle details, and so on) is maintained and
relational database. The company accessed from this module.
continued to improve its database product,
and in 1988 released. ● Materials Management (MM) module
manages the acquisition of raw materials
● The financial applications suite of modules from suppliers (purchasing) and the
included Oracle Financials, Oracle Supply subsequent handling of raw materials
Chain Management, Oracle Manufacturing, inventory, from storage to work-in-progress
Oracle Project Systems, Oracle Human goods to shipping of finished goods to the
Resources, and Oracle Market customer.
Management, which is the foundation for
what would become Oracle’s ERP product. ● Production Planning (PP) module maintains
production information. Here production is
● 2005: Oracle acquired Siebel, a major CRM planned and scheduled, and actual
software company. production activities are recorded.

● 2010: Oracle completed its acquisition of ● Quality Management (QM) module plans
Sun Microsystems, a major manufacturer of and records quality control activities, such
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as product inspections and material This module generates financial statements

certifications. for external reporting purposes.

● Plant Maintenance (PM) module manages ● Controlling (CO) module serves internal
maintenance resources and planning for management purposes, assigning
preventive maintenance of plant machinery manufacturing costs to products and to cost
in order to minimize equipment centers so the profitability of the company’s
breakdowns. activities can be analyzed. The CO module
supports managerial decision making.
● Asset Management (AM) module helps the
company manage fixed-asset purchases ● Workflow (WF) module is not a module
(plant and machinery) and related that automates a specific business function.
depreciation. Rather, it is a set of tools that can be used
to automate any of the activities in SAP ERP.
● Human Resources (HR) module facilitates It can perform task-flow analysis and
employee recruiting, hiring, and training. prompt employees (by email) if they need
This module also includes payroll and to take action. The Workflow module works
benefits. well for business processes that are not
daily activities but that occur frequently
● Project System (PS) module facilitates the
enough to be worth the effort to implement
planning for and control over new research
the workflow module—such as preparing
and development (R&D), construction, and
customer invoices.
marketing projects. This module allows for
costs to be collected against a project, and ● In summary, ERP integrates business
it is frequently used to manage the functional areas with one another.
implementation of the SAP ERP system. PS
manages build-to-order items, which are SAP ERP Software Implementation
low-volume, highly complex products such
as ships and aircrafts. ● When top management is queried on
reasons for implementing ERP systems, the
Two financial modules, Financial Accounting (FI) and overriding answer is control.
Controlling (CO) encompassing the modules
described above. ● Many different departments are involved,
as are the many users of the system,
programmers, systems analysts, and other
personnel. Without top management
commitment, large projects are doomed to
fail.

These configuration options allow the company to

customize the modules it has chosen to fit its needs

● SAP developed SAP Business All-in-One, a

single package containing specific,
preconfigured bundles of SAP ERP tailored
for particular industries, such as
● Financial Accounting (FI) module records
transactions in the general ledger accounts.
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automotive, banking, chemicals, and oil and Owens Corning, and a lawsuit by the now-
gas. defunct FoxMeyer drug company. Cadbury
experienced a well-publicized surplus of
● 2002: To address the needs of smaller chocolate bars at the end of 2005.
companies, such as those with less than 500
employees, SAP purchased the ERP system In response to these and other implementation
of Israeli-based TopManage Financial challenges, SAP developed the Accelerated SAP
Systems and renamed this package SAP (ASAP) implementation methodology, a framework
Business One. The capabilities of SAP for implementing systems, to ease the
Business One have increased over the years implementation process
through both internal development at SAP
and the acquisition of other software ● SAP has continued developing
companies such as iLytix Systems AS. implementation methodology; the latest
version, Solution Manager.
● July 2011: SAP announced that SAP
Business One would be available in a new ● SAP continues to extend the capabilities of
subscription-based, hosted offering SAP ERP with additional, separate products
through SAP partners. In addition, SAP has that run on separate hardware and that
developed its BusinessByDesign product, extract data from the SAP ERP system.
which is an ERP product hosted by SAP and SAP’s Business Warehouse product is an
accessed through a Web browser. example of one such solution; which could
be run on a separate server and lets the
● It is an example of the Software-as-a- user define unique reporting and analysis
service (SaaS) approach that eliminates the methods and integrate information from
need for a company to buy and maintain other systems.
the software and hardware to run an ERP
application. ● The tools used to analyze data in the BW
system are known as business intelligence;
● SAP and Oracle have significant competition SAP has recently announced its in-memory
for small-business customers from a data analysis tool, SAP HANA (High-
number of smaller ERP software companies performance ANalytical Appliance), a
such as Sage Business Solutions, Exact, technology which will likely revolutionize
Infor, and Epicor. Business Intelligence. Rather than storing
data on hard disk drives, SAP’s HANA
● 2000: Software giant Microsoft acquired system stores data in memory for
Great Plains, a provider of ERP software, as dramatically quicker access.
an entry into the small-business ERP
market. Microsoft currently has five ERP ● The SAP ERP system provides some tools to
products offered. manage customer interactions and analyze
the success of promotional campaigns, but
Responses of the Software to the Changing Market SAP also sells a separate application called
Customer Relationship Management,
● In the mid-1990s, many companies
which has extended customer service
complained about the difficulty of
capabilities.
implementing the SAP R/3 system. SAP
faced a canceled implementation by Dell
Computers, a lengthy implementation at
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● SAP’s CRM product is designed to compete ● Software license fees

with CRM systems from competitors, such ● Hardware
as Oracle’s Siebel CRM application. ● Implementation costs
Should Every Business Buy an ERP Package?
● SAP addressed the issue of Internet-based ● ERP packages imply, by their design, a
certain way of doing business, and they
data exchange with its NetWeaver
require users to follow that way of doing
integration platform, which provides a
business. Therefore, it is imperative for a
unified means to connect SAP systems to business to analyze its own business
other systems and to the Internet. strategy, organization, culture, and
operation before choosing an ERP
● SAP ERP does offer numerous configuration approach.
options that help businesses customize the The Continuing Evolution of ERP
software to fit their unique needs. In ● Understanding the social and business
addition, programmers can write specific implications of new technologies is not
routines for special applications in SAP’s easy. Howard H. Aiken, the pioneering
computer engineer behind the first large-
internal programming language, called
scale digital computer, the Harvard Mark I,
Advanced Business Application predicted in 1947 that only six electronic
Programming (ABAP). digital computers would be needed to
satisfy the computing needs of the entire
THE SIGNIFICANCE AND BENEFITS OF ERP United States.
SOFTWARE AND SYSTEMS ● Hewlett-Packard passed up the opportunity
to market the computer created by Steve
● Central, shared and common database Wozniak that became the Apple I. Microsoft
● No to redundancy founder Bill Gates did not appreciate the
● Real-time data, increased computing speeds importance of the Internet until 1995, by
● Efficient, Effective, Efficacious business which time Netscape controlled the bulk of
operations the Internet browser market. Gates,
● Streamline business processes however, did dramatically reshape
● Goal congruent-oriented Microsoft around an Internet strategy by
● Timely management reporting and decision the late 1990s.
making ● As this young technology continues to
● Competitive edge across diversified market mature, ERP vendors are working to solve
conditions the adaptability problems that plague
● Suitability for large companies customers.
● Automation of data updates
● Applicability of best practices
● Global integration: Barriers of currency
exchange rates, language, tax laws and
culture can be bridged
● People and data integration
● Growth and needed a scalable business
(returns on investment)
How Much Does an ERP System Cost?
● The scale of the ERP software
● The need for new hardware capable of
running complex ERP software
● Consultants’ and analysts’ fees
● Length of time required for implementation
(which causes disruption of business)
● Training (which costs both time and money)