Evolution of ERP

ERP systems are now ubiquitous in large businesses and the current move by vendors is to repackage them for small to medium enterprises (SMEs). This migration has many consequences that have to be addressed through understanding the history and evolution of ERP systems and their current architectures. The advantages and disadvantages of the ERP systems will impact their penetration in this new market. The market position and general strategy of the major systems providers in preparation for this push are described. The chapter concludes that the growth and success of ERP adoption and development in the new millennium will depend on the legacy ERP system’s capability of extending to Customer Relationship Management (CRM), Supply Chain Management (SCM) and other extended modules, and integration with the Internet-enabled applications.

Introduction

The unprecedented growth of information and communication technologies (ICT) driven by microelectronics, computer hardware and software systems has influenced all facets of computing applications across organizations. Simultaneously the business environment is becoming increasingly complex with functional units requiring more and more inter-functional data flow for decision making, timely and efficient procurement of product parts, management of inventory, accounting, human resources and distribution of goods and services. In this context, management of organizations needs efficient information systems to improve competitiveness by cost reduction and better logistics. It is universally recognized by large and small-to medium-size enterprises (SME) that the capability of providing the right information at the right time brings tremendous rewards to organizations in global competitive world of complex business practices. Starting in the late 1980s and the beginning of the 1990s new software systems known in the industry as enterprise resource planning (ERP) systems have surfaced in the market targeting mainly large complex business organizations. These complex, expensive, powerful, proprietary systems are off the-shelf solutions requiring consultants to tailor and implement them based on the company’s requirements. In many cases they force companies to reengineer their business processes to accommodate the logic of the software modules for streamlining data flow throughout the organization. These software solutions, unlike the old, traditional in-house- designed company specific systems, are integrated multi-module commercial packages suitable for tailoring and adding “add-ons” as and when required. The phenomenal growth of computing power and the Internet is bringing ever more challenges for the ERP vendors and the customers to redesign ERP products, breaking the barrier of proprietorship and customization, and embracing the collaborative business over the intranet, extranet and the Internet in a seamless manner. The vendors already promise many “add-on” modules, some of which are already in the market as a sign of acceptance of these challenges by the ERP vendors. It is a never-ending process of reengineering and development bringing new products and solutions to the ERP market. ERP vendors and customers have recognized the need for packages that follow open architecture, provide interchangeable modules and allow easy customization and user interfacing.

ERP Systems Defined

Enterprise resource planning systems or enterprise systems are software systems for business management, encompassing modules supporting functional areas such as planning, manufacturing, sales, marketing, distribution, accounting, financial, human resource management, project management, inventory management, service and maintenance, transportation and e-business. The architecture of the software facilitates transparent integration of modules, providing flow of information between all functions within the enterprising a consistently visible manner. Corporate computing with ERPs allows companies to implement a single integrated system by replacing or re- engineering their mostly incompatible legacy information systems. American Production and Inventory Control Society (2001) has defined ERP systems as “a method for the effective planning and controlling of all the resources needed to take, make, ship and account for customer orders in a manufacturing, distribution or service company.” We quote several definitions from the published literature to further explain the concept: “ERP (enterprise resource planning systems) comprises of a commercial software package that promises the seamless integration of all the information flowing through the company–financial, accounting, human resources, supply chain and customer information” (Davenport, 1998). “ERP systems are configurable information systems packages that integrate information and information-based processes within and across functional areas in an organization” (Kumar & Van Hills gersberg, 2000). “One database, one application and a unified interface across the entire enterprise” (Tadjer, 1998). “ERP systems are computer-based systems designed to process an organization’s transactions and facilitate integrated and real-time planning, production, and customer response” (O’Leary, 2001). The concept of the ERP system can be illustrated, following Davenport (1998), with the diagram in Figure 1.

Evolution of ERP Systems

The evolution of ERP systems closely followed the spectacular developments in the field of computer hardware and software systems. During the1960s most organizations designed, developed and implemented centralized computing systems, mostly automating their inventory control systems using inventory control packages (IC). These were legacy systems based on programming languages such as COBOL, ALGOL and FORTRAN. Material requirements planning (MRP) systems were developed in the 1970s which involved mainly planning the product or parts requirements according to the master production schedule. Following this route new software systems called manufacturing resources planning (MRP II) were introduced in the1980s with an emphasis on optimizing manufacturing processes by synchronizing the materials with production requirements. MRP II included areas such as shop floor and distribution management, project management, finance, human resource and engineering. ERP systems first appeared in the late 1980s and the beginning of the 1990s with the power of enterprise-wide inter-functional coordination and integration. Based on the technological foundations of MRP and MRP II, ERP systems integrate business processes including manufacturing, distribution, accounting, financial, human resource management, project management, inventory management, service and maintenance, and transportation, providing accessibility, visibility and consistency across the enterprise. During the 1990s ERP vendors added more modules and functions as” add-ones” to the core modules giving birth to the “extended ERPs.” These ERP extensions include advanced planning and scheduling (APS), e-business solutions such as customer relationship management (CRM) and supply chain management (SCM). Figure 2 summarizes the historical events related with ERP.

ERP Systems and Organizations

It is generally a misleading perception that implementing an ERP system will improve organizations’ functionalities overnight. The high expectation of achieving all-round cost savings and service improvements is very much dependent on how good the chosen ERP system fits to the organizational functionalities and how well the tailoring and configuration process of the system matched with the business culture, strategy and structure of the organization. Overall an ERP system is expected to improve both backbone and front-end functions simultaneously. Organizations choose and deploy ERP systems for many tangible and intangible benefits and strategic reasons. In many cases the calculation of return on investment (ROI) is weighted against the many intangible and strategic benefits. The benefits that an industry standard ERP system may bring to organizations are shown in Table 1.To reap the benefits of ERP systems, however, organizations need to overcome certain problems and disadvantages, which are listed in Table 2.

It was estimated that the spending on ERP systems in 1998 was aboutUS$17 billion following annual growth rates ranging from 30% to 50%.Companies also spend a multiple of licensing costs on services related to implementation and maintenance of the software. The worldwide license and maintenance revenue for ERP systems was US$21.5 billion in 2000, which represented a growth of 13.1% from the 1999 market value of $US19 billion (Broatch, 2001). The continued growth of the ERP systems market is attributed to the fact that the vendors are adding applications such as supply chain management, customer relationship management and the integration of Internet-enabled applications for e-business. More than 60% of the Fortune 1000 companies have installed or are in the process of implementing packaged ERP systems to support their back-end business activities (Kraft, 2001). These packages implemented by the Fortune 1000 companies run well over the IT budgets for most SMEs. ERP vendors are targeting this untapped SME market with supposedly scaled-back systems suitable for smaller firms by offering simple, cheaper and pre-configured easy-to-install solutions within budget and time constraints. For some vendors this may lead to offering centrally managed Internet-enabled ERP-system-based services for SMEs to accessed use anytime from anywhere. An ERP system is required to have the following characteristics:

• Modular design comprising many distinct business modules such as
• Financial, manufacturing, accounting, distribution, etc.
• Use centralized common database management system (DBMS)
• The modules are integrated and provide seamless data flow among the modules, increasing operational transparency through standard interfaces
• They are generally complex systems involving high cost
• They are flexible and offer best business practices
• They require time-consuming tailoring and configuration setups for integrating with the company’s business functions
• The modules work in real time with online and batch processing capabilities
• They are or soon they will be Internet-enabled
• Different ERP vendors provide ERP systems with some degree of specialty but the core modules are almost the same for all of them. Some of the core ERP modules found in the successful ERP systems are the following:
• Accounting management
• Financial management
• Manufacturing management
• Production management
• Transportation management
• Sales & distribution management
• Human resources management
• Supply chain management
• Customer relationship management
• E-Business

The modules of an ERP system can either work as stand-alone units or several modules can be combined together to form an integrated system. The systems are usually designed to operate under several operating platforms such as UNIX, MS Windows NT, Windows 2000, IBM AIX, and HP- UNIX Systems. SAP AG, the largest ERP vendor, provides a number of modules with its famous R/3 ERP system, which are shown in Table 3. New modules are introduced by SAP and other vendors in response to the market and technological demand such as the Internet technology.8 Rashid, Hossain & Patrick Enterprise systems employ thin client/server (C/S) technology or client/fat server (C/FS) architecture, creating a decentralized computing environment. In a C/S system a number of client devices operated by end users such as desktop PCs request services from application servers, which in turn get the requested service-related information from the database servers. The requests may be simple data files, data values, communication services, transaction processing or master file updates. The general practice is to have three-tier architecture such as in Figure 3. In this three-tier system the user interface runson the client. To run ERP systems relatively powerful PCs (clients) and powerful servers are required where most of the hundreds of thousands of operations are performed. The client/server system functions are performed following three layers of logic:

Presentation Layer: Graphical user interface (GUI) or browser for data entry or accessing system functions

Application Layer: Business rules, functions, logic, and programs acting on data received/transferred from/to the database servers

Database Layer: Management of the organization’s operational or transactional data including metadata; mostly employs industry standard RDBMS with structured query language (SQL) provisions This logical arrangement helps the ERP user interface to run on the clients, the processing modules to run on the middle-tier application servers, and the database system to run on the database servers.

Summary and the Future

The major industrial information systems manufacturers that emerged from the 1980s and early 1990s defined the history of the development of ERP systems. Hence the major providers are representatives of certain industries as much as competitors in a common marketplace. To this extent there are still opportunities for new ERP vendors to emerge from industries that so far have-not contributed to the ERP phenomenon. Some obvious examples are the aerospace industry, the finance industry and the logistics industry. Analysis of the market penetration of ERP systems shows clearly that the current players have to downsize their products and offerings to be attractive to SMEs. There appears to be no public discussion as to how this will be achieved and whether it requires a significant change in software architecture. This situation again is an opportunity for smaller players to seize the day and offer smaller systems running on smaller hardware platforms more efficiently. These innovators will ultimately take the lead in the ERP software market as large systems will not produce the continual income stream that small, robust, easy-to-use systems can achieve. Importantly these attributes contribute to a system becoming ubiquitous in the same way that Microsoft has achieved ubiquity for its operating system.