Introduction to ERP

Why ERP?

This chapter presents the impact of ERP on the management and operations of an organisation. It starts
with an overview of the deining characteristics of ERP. Ater this, it gives an overview of companies
and organisations that apply ERP systems, and the expectations they have before implementation of the
systems. he chapter concludes with the extent to which these expectations are met, and the impact of
ERP in practice.

The main characteristics of ERP

Enterprise Resource Planning (or: ERP) systems are computer applications that are being used by
organisations in many industries. ERP is a mature concept: it has been there for more than forty years,
tens of thousands of companies have implemented ERP, and millions of people world wide use ERP in
their daily work.

ERP systems have two important characteristics: data integration and support for best practice processes.
Data integration means that data only have to be entered once, ater which they are available for use
throughout the organisation. Traditionally, many organisations have had parallel administrations before
they implemented ERP. In this situation, it would be possible that within one company the marketing
department has a customer register, the warehouse has an order register, and the credit management
department has a register of sales invoices. hese registers could be electronic, in other cases they
might still be kept on physical iles in iling cabinets. he data in these registers will partly overlap: in
each of them customer name and address will be registered. However, there will also be diferences and
inconsistencies in the data.

With an ERP system, one integrated register can be created, which satisies the requirements of the the
marketing, warehouse as well as the credit management department. Employees who need the data can
be given access, and for one customer data like name and address can be combined with shipped orders
or open invoices. he departments can agree upon the responsibility for the accuracy and completeness
of the data, and in many cases the ERP system can automatically update the data. When for example
the warehouse ships an order, the ERP system can automatically print an invoice and create an open
invoice in the accounts receivable register.

As a result of data integration, ERP can make double work redundant and stimulate eiciency. But maybe
more importantly, it can stop the search for and explanation of diferences between the various registers
and deinitions, and make the organisation rely on one shared source of data.

The second important characteristic of ERP systems is support for best practices. A best practice is a
generally accepted way of working that has been adopted by many organisations and has proven its
practical value. An example of a best practice is the use of credit limits to mitigate the risk of bad debt.
Credit limits work in the following way: when a customer places a new order, a check is performed
whether the total amounts on outstanding invoices plus the amounts of previously placed orders plus
the amount of the newly placed order does not exceed a predetermined credit limit. If the credit limit
is exceeded because of the new order, the goods will not be shipped before the customer has paid part
of the outstanding amounts.

Modern ERP systems ofer support for a variety of best practices. A brief example to clarify how ERP
systems do this. In an ERP system that supports credit limits, it is possible to enter a credit limit for every
customer. With every new order entry, the ERP system calculates the total amount of open invoices,
the amount of already placed orders and the amount of this new order. If the total amount exceeds the
credit limit, the ERP system automatically puts the new order on status “credit hold”. In the warehouse,
the warehouse employees pick the orders, but they will only ship those orders that are not on credit hold.

Organisations can embed the best practices of the ERP system in their business processes. hey can
introduce best practices directly when they start using the ERP system, or they can let the ERP system
support their current ways of working. hey can also gradually improve their business processes by
increasing their use of the best practices supported by the ERP system.

Above Image illustrates how the company Wolters Kluwer wants to standardise its business processes and
realise data integration [MD Business News, 2003].