Defining ERP: Enterprise Resource Planning Principles, Strategies, Practices and Technology
Most large companies have integrated software applications that are generically referred to as ERP or Enterprise Resource Planning systems. ERP strategy addresses tying together a company’s different business systems and workflow processes to gain business intelligence, improve workflow, gain greater control and reduce costs. In fact, all businesses have and use "ERP" solutions, whether they realize it or not. The fundamental principles for designing and implementing ERP systems, and their specific strategies, objectives, practices and technologies, including workflow automation, are applicable to all types of businesses, whether services, sales, manufacturing, professional businesses or non-profit organizations.
As an example, every part that is ordered for a manufacturing process must at some point be reflected in raw materials inventory in both units and currency; the part becomes a component of an end product so the quantity and cost must be reflected in finished goods inventory; the invoice for the part must be entered into the accounts payable system and eventually the invoice gets paid. So the apparently simple act of ordering a part from a vendor potentially hits the following systems:
- Purchase requisition (“Hey Joe, order me 15 widgets from Acme.” is an informal Purchase Requisition System.)
- Order entry
- Receiving (or back order)
- Build lists or work orders
- Manufacturing cost systems
- Raw materials Inventory
- Work-in-process Inventory
- Finished Goods Inventory
- Accounts Payable
- Cash Disbursements
- Cost of Sales
- And perhaps more, depending on your particular business.
Let’s take the definition of ERP a little further.
Every business owner, executive and manager is obligated to have strategies for the use of business resources (Enterprise Resource Planning) or it isn’t a business for very long. Even the smallest of businesses needs to schedule staff, order materials, provide facilities and, oh yes, plan cash flow by collecting accounts receivable so you can pay employees, lenders, vendors - and let’s not forget paying the business owner.
Not every business has a sophisticated computer system, but every business has an ERP system even if it’s pencil and paper. All the data that can be collected by an ERP computerized database system can be collected by pencil and paper – with an army of people to do it. Electronic spreadsheets are a little better than pencil and paper, but most of the time the numbers are manually entered by someone.
In an effective ERP design with workflow automation, as the part we ordered in our example above works its way through the manufacturing and business systems, it picks up more and more relationships to other information and it’s done as employees just do their jobs, not as additional steps. It starts with the requisition date, and who requested and approved the requisition, the date ordered, vendor, order price and who placed the order. Later it picks up the date received and who performed the receiving process, when it is installed in the manufacturing process, who installed it and how long did it take them… it can be traced all the way through to who bought the finished goods, where it was shipped, on which invoice and when the transaction was completed with customer payment including the check number.
Those valuable relationships and the data that attaches to each step of the transaction are lost – and errors, processing time and administrative costs increase as well - if manual or duplicate data entry is used get information from one system to another. Examples include the manual entry of an accounts payable invoice or the transfer of sold inventory to cost of sales.
Who wants to know all these relationships and data that are produced? If you’re a business owner, executive or manager – YOU DO! Small or medium sized businesses (sometimes referred to as "SMB's") often don’t think they can afford computerized systems and applications to manage and track all this. They also know they can’t afford the army of pencil-pushing clerks.
The reality is that many SMB’s are already paying for the costs of more sophisticated ERP systems without the benefits of workflow automation and business intelligence. If a company's financial statements included lines for the costs of “Bottlenecks”, “Wasted Time”, “Lack of Training”, “Duplicate Data Entry” or “Bad Decisions” those costs would get serious attention.
Recently and almost daily more sophisticated software applications become more affordable to small or medium sized businesses. There are software applications and designs for virtually every industry – Property Management, Manufacturing, Construction, Sub-contracting, Warehousing, Equipment rental and Service businesses, just to name a few.
About now, some of you are saying, “I already have a computer system, but it only does______ [you get to fill in the blank].” or, “Our computer system has a lot more stuff than we’ll ever use.” Both responses are pretty typical.
SMB’s are often triggered to look for software solutions to address “a couple problems” that are immediately facing them. What they buy has many more features than they want. A statistic that often shows up is that most companies only get about 20% of the benefits from their software systems. I don’t know if that number is the result of some expensive study, or blind reference to the “80/20 rule”, but I will share my observations with you.
The changes that are necessary when a new software solution is installed are uncomfortable. It takes a lot of planning (or at least it should and we’ll talk about ERP deployment strategies in a later conversation), unlearning old methods and learning new practices. The combination of giving up what is comfortable and the discomfort caused by new learning means that new software may only be used to solve the original couple of problems. If the rest of the systems “aren't broken” there is huge resistance to change them - even if it means more work so the “old ways” fit into the new system or application.
If you have a computerized ERP system, chances are you have already done the greatest amount work, incurred the greatest amount of cost and probably realized the least amount of return for it, though its potential beneficial impact to your business is enormous. If you have a tool that is designed for your business from sound principles and fundamentals of enterprise resource planning, then small or incremental changes you make can reap the greatest return on investment through workflow automation and operational reporting.
Here’s an example to illustrate automation: One multi-store company got some 2,000 invoices per month from different dealers of the same manufacturer. They spent about $10,000 to modify their existing ERP system to automatically “read and enter” electronic versions of those invoices into the accounts payable system, if they agreed with the purchase order details. Accounts payable data entry clerks were reduced to one. The modification costs were minor compared to the salary savings.
You don’t get 2,000 invoices from one vendor? No problem. Systems to automate accounts payable processing are referred to as EIPP – Electronic Invoice Presentment and Payment. Accounts payable data entry is one of the most labor-intensive administrative costs in most businesses and one of the first places to look for possible workflow automation to integrate with ERP applications and systems.
We talked above about the business intelligence that ERP systems can provide with the many relationships each piece of data picks up along its path through each system. The level of detail collected in each step of a process is how you turn enormous amounts of raw data into powerful business intelligence. That data can help you produce information to:
- Evaluate every step of your manufacturing and business processes so you can design new processes (some will get automated) to eliminate costs,
- Target employee training,
- Track warranty failures to the root cause;
- Design incentive compensation plans that align the interests of every person in the company from the Chairman of the Board to the mail room;
- Evaluate your customers;
- Learn about your customers’ buying trends to develop new offers and quit selling unprofitable ones.
When you have that kind of data, the burden becomes how to mine the data and turn it into information to improve your business. Believe me, once the addiction to develop strategies and make decisions based on real information takes hold - business intelligence rather than gut instinct - you’ll figure out how to use it. And, you’ll sleep better at night because you won’t have to wonder how things are going, you’ll have the facts in real time.
One word of caution: Don’t be surprised when the facts don’t support your beliefs.
In future posts we will talk about the principles underlying enterprise resource planning design, how to evaluate and deploy ERP systems and applications for your business, and examples of specific implementations I have delivered as well as other examples I've seen or reviewed.
Future articles about ERP in the ETSZONE blog:
- Flow-charting three key business processes for enterprise resource planning
- Design your process improvement objectives and keep it flexible and measureable
- Evaluate options to use your current technology versus something new
- ERP strategies that work and some that didn’t
- Reporting – Good ERP design turns raw data into Business Intelligence you can act on