Enterprise Resource Planning (ERP)
Module 01
1. Module 01: Introduction to ERP
Contents
1. Module 01: Introduction to ERP ........................................................................................................ 1
1.1 ERP and Why we learn it ........................................................................................................ 2
1.2 Features of ERP ...................................................................................................................... 2
1.2.1 Characteristics of ERP ................................................................................................................................ 3
1.3 Uses of ERP in Organizations ................................................................................................. 4
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1.1 ERP and why we learn it
This part of the Guide to ERP is a general introduction. The aim of this part is to familiarise the reader with the most
important characteristics of ERP. It consists of four chapters.
The first chapter starts with an overview of the defining characteristics of ERP. After this, it gives an overview of
companies and organizations that apply ERP systems , and the expectations they have before implementing the
systems. The chapter concludes with the extent to which these expectations are met, and the impact of ERP in practice
.
In the second chapter, the operations of ERP is explained. This is done on the basis of two management models: the
value chain and the supply chain . The origin of ERP is described , and an explanation of the initial applications of
ERP in manufacturing companies also be given. After this, several extensions to ERP are presented : industry
solutions, improvements and extensions, and the application of ERP in the supply chain.
In the third chapter , the various parties that play a role in the ERP market are introduced . An organization that plans to
implement ERP will meet three groups of suppliers: software suppliers, implementation partners and application service
providers. The roles of each of the three parties will be explained, in addition to their portfolios of products and services
and their main developments in the market.
The fourth chapter introduces a number of technical aspects of ERP. Like any other computer system, ERP is based on a
so-called computer or IT architecture . The chapter starts with the three components of the logical architecture of ERP.
After this, the three physical architectures that have frequently been used for ERP in the past decades will be described.
This fourth chapter describes technology, avoiding specialist terminology . The chapter is meant for a broad audience and
not just for readers with a technical background.
1.2 Features of ERP
This chapter presents the impact of ERP on the management and operations of an organization. It starts with an overview
of the defining characteristics of ERP. After this, it gives an overview of companies and organizations that apply ERP
systems, and the expectations they have before implementing the systems. The chapter concludes with the extent to
which these expectations are met, and the impact of ERP in practice.
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1.2.1 Characteristics of ERP
Enterprise Resource Planning (or: ERP) systems are computer applications that are being used by organizations in many
industries. ERP is a mature concept: it has been there for more than forty years, with tens of thousands of companies
implementing and using it in their daily operational activities.
ERP systems have two important characteristics: data integration and support for best practice processes. Data integration
means that the data has to be entered only once, after which they are available for use throughout the organization .
Traditionally , many organizations have had parallel administrations before they implemented ERP. In this situation, the
marketing department of a company will possibly have a customer register, the warehouse will have an order register ,
and the credit management department will have a register of sales invoices . These registers could be electronic ; in
other cases, they might still be kept on physical files in filing cabinets. The data in these registers will partly overlap : in
each of them, customer name and address will be registered . However , there will also be differences and inconsistencies
in the data.
With an ERP system, one integrated register can be created to satisfy the requirements of the marketing , warehouse as
well as the credit management department. Employees who need the data can be given access, and customer data such as
the name and address can be combined with shipped orders or open invoices . The 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 efficiency. But maybe more
importantly, it can stop the search for an explanation of differences between the various registers and definitions,
and make the organization rely on one shared source of data.
Figure 1 Data integration through ERP at Wolters Kluwer. Source: MD Business News [2003]
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The second important characteristic of ERP systems is the support for best practices . A best practice is a
generally accepted way of working that has been adopted by many organisations and that 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 offer support for a variety of best practices. A brief example to clarify how ERP systems do this
in given as follow:
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 ERP system in their business processes . They 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 . They can also gradually improve their business processes by increasing their use of the best practices
supported by the ERP system.
Figure 1 illustrates how the company Wolters Kluwer wants to standardise its business processes and realise data
integration [MD Business News, 2003].
1.3 Uses of ERP in Organizations
Because of their two most important characteristics, data integration and best practices, ERP systems can substantially
improve business processes. In the forty years of their existence, the use of ERP systems has spread extensively.
From the start, ERP has been used by large multinational companies. Caldwell & Stein [1998] estimate that around
forty percent of all US companies with an annual revenue of 1 billion US$ or more use an ERP system. The use
of ERP is also wide-spread in Europe . In Table 1.1, an overview of companies with a listing on the AEX , the
main Dutch stock exchange , that worked on an ERP implementation between 1995 and 2005 has been
presented . During these eleven years , a total of 42 companies had a listing in at least one year on this exchange.
Of these 42 companies, 26 have been working on ERP implementations during this period [Sneller, 2010]. This
means that ERP has penetrated over sixty percent of the AEX listed companies.
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At least one remarkable conclusion can be drawn from Table 1.1: many of the companies use more than one ERP system,
which implies that they can only benefit to a limited extent from the ERP data integration characteristic.
InTable 1.2,an overview of companies with a listing on the Belgian BEL 20 stock exchange that were
mentioned in press releases about ERP implementations between 1995 and 2009 has been presented. In these
fifteen years , 53 companies have had a BEL 20 listing , 24 of which worked on ERP during this period . In
Belgium, ERP has spread less widely than in The Netherlands. In Belgium, like in The Netherlands, companies
tend to have more than one ERP system. It is remarkable that JD Edwards and Microsoft Business Solutions are
not used by Belgian listed companies.
ERP is also used by governmental organisations and agencies. In The Netherlands, both the Ministry of Education,
Culture and Science and the Ministry of Finance have used ERP for several years. Decentralised governments , such as
the provinces of North Holland and North Brabant , as well as the Dutch Vehicle and Driving Licence body have
implemented ERP systems. The Municipality of Hengelo implements ERP in order to allow the municipality to better
anticipate information requests of other parties . The mayor of Hengelo explains his reasons for the decision to
implement ERP in the following way: “because of this system, the transparency and the accountability for the city
council’s policies and resource usage towards the citizens can in the future be further improved.“ [Nieuwsbank, 2005
]
Business
JD Solutions Movex SSA MFG
Edwards (Microsoft) (lntentia) Global Pro (QAD)
ABN Amro
AEX company X Pe
SA X Sag X
Or X Ba
Ge X
Ot
Aegon P opl
X e acl
X ac an her
eso e
Ahold X
ft
Akzo X X X X X
ASML X
Corus X
DSM X X X
Fortis X
Getronics X
Gucci X
Hagemeyer X
Heineken X
ING X X
KLM X X
KPN X X X
Numico X
Philips X X X X X
Polygram X
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Shell X X X X
TNT X X
Unilever X X X X X
Vendex X
Versatel X
VNU X X X X
Wolters Kluwer X X X
Table 1 AEX-listed companies that worked on ERP between 1995 and 2005
Some of the ERP implementations in government organisations have an enormous size. As an example: with
the various ERP implementations at the Dutch Ministry of Defenc an amount of around €400 million is
involved ; in five to ten years, 12.000 users have to be trained [Hulsebos , 2008]. The ERP implementation
that supports the full centralisation of the payroll and staff administration for the Dutch central
administration , has an estimated time to completion of seven years and involves 130.000 users [PR Newswire,
2004].
ERP is not exclusively meant for large organisations. Despite this, in the years before the Millennium, ERP penetration
in medium-sized European companies was not very deep: not even thirty percent of them used ERP [Everdingen et al.,
2000]. Recent developments , however , bring ERP systems within the reach of small and medium -sized businesses .
Firstly , ERP has become less demanding for the computer hardware ; in its early days , ERP could only be
implemented on mainframes, whereas, today a small server or even a personal computer is sufficient. Secondly, ERP has
spread so far in large organisations that this market has become saturated and suppliers that want to grow have to adapt
their systems to fit the requirements of smaller organisations . Lastly, knowledge of information technology is increasing
also in smaller organisations , which means that the benefits of ERP are being recognised in this market. The growth of the
ERP penetration in the next decades can , therefore , be expected to mainly take place in small and medium sized
organisations.
BEL20-company SAP Peoplesoft Oracle Baan MFG Pro Other
AGFA X X X
Anheuser Busch X X X
Barco X X
Belgacom X X
Cofinimmo X
Delhaize X
Dexia X X
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D’Ieteren X X
Electrabel X X
Fortis X X X
Gaz de France – Suez X X
Gevaert X X
IBA X
Interbrew X X X
KBC X X X
Mobistar X
Petrofina X
Recticel X
Soc Generale X X
Solvay X X X
Telenet X
Telindus X
UCB X X
Umicore X X
Table 2 AEX-listed companies that worked on ERP between 1995 and 2005
