Enterprise resource planning (ERP) is the integrated management of main business processes, often in real-time and mediated by software and technology.
ERP is usually referred to as a category of business management software — typically a suite of integrated applications—that an organization can use to collect, store, manage, and interpret data from these many business activities.
ERP provides an integrated and continuously updated view of core business processes using common databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data. ERP facilitates information flow between all business functions and manages connections to outside stakeholders.
Enterprise system software is a multibillion-dollar industry that produces components supporting a variety of business functions. IT investments have become the largest category of capital expenditure in United States-based businesses over the past[which?] decade. Though early ERP systems focused on large enterprises, smaller enterprises increasingly use ERP systems.
The ERP system integrates varied organizational systems and facilitates error-free transactions and production, thereby enhancing the organization’s efficiency. However, developing an ERP system differs from traditional system development. ERP systems run on a variety of computer hardware and network configurations, typically using a database as an information repository.
Two-tier ERP software and hardware lets companies run the equivalent of two ERP systems at once: one at the corporate level and one at the division or subsidiary level. For example, a manufacturing company could use an ERP system to manage across the organization using independent global or regional distribution, production or sales centers, and service providers to support the main company’s customers. Each independent center (or) subsidiary may have its own business models, workflows, and business processes.
Given the realities of globalization, enterprises continuously evaluate how to optimize their regional, divisional, and product or manufacturing strategies to support strategic goals and reduce time-to-market while increasing profitability and delivering value. With two-tier ERP, the regional distribution, production, or sales centers and service providers continue operating under their own business model—separate from the main company, using their own ERP systems. Since these smaller companies’ processes and workflows are not tied to main company’s processes and workflows, they can respond to local business requirements in multiple locations.
Factors that affect enterprises’ adoption of two-tier ERP systems include:
- Manufacturing globalization, the economics of sourcing in emerging economies
- Potential for quicker, less costly ERP implementations at subsidiaries, based on selecting software more suited to smaller companies
- Extra effort, (often involving the use of Enterprise application integration) is required where data must pass between two ERP systems Two-tier ERP strategies give enterprises agility in responding to market demands and in aligning IT systems at a corporate level while inevitably resulting in more systems as compared to one ERP system used throughout the organization.
ERP systems are theoretically based on industry best practices, and their makers intend that organizations deploy them “as is”. ERP vendors do offer customers configuration options that let organizations incorporate their own business rules, but gaps in features often remain even after configuration is complete.
ERP customers have several options to reconcile feature gaps, each with their own pros/cons. Technical solutions include rewriting part of the delivered software, writing a homegrown module to work within the ERP system, or interfacing to an external system. These three options constitute varying degrees of system customization—with the first being the most invasive and costly to maintain. Alternatively, there are non-technical options such as changing business practices or organizational policies to better match the delivered ERP feature set. Key differences between customization and configuration include:
- Customization is always optional, whereas the software must always be configured before use (e.g., setting up cost/profit center structures, organizational trees, purchase approval rules, etc.).
- The software is designed to handle various configurations, and behaves predictably in any allowed configuration.
- The effect of configuration changes on system behavior and performance is predictable and is the responsibility of the ERP vendor. The effect of customization is less predictable. It is the customer’s responsibility, and increases testing activities.
- Configuration changes survive upgrades to new software versions. Some customizations (e.g., code that uses pre–defined “hooks” that are called before/after displaying data screens) survive upgrades, though they require retesting. Other customizations (e.g., those involving changes to fundamental data structures) are overwritten during upgrades and must be re-implemented.
Customization advantages include that it:
- Improves user acceptance
- Offers the potential to obtain competitive advantage vis-à-vis companies using only standard features
Customization disadvantages include that it may:
- Increase time and resources required to implement and maintain
- Hinder seamless interfacing/integration between suppliers and customers due to the differences between systems
- Limit the company’s ability to upgrade the ERP software in the future
- Create over reliance on customization, undermining the principles of ERP as a standardizing software platform
ERP systems can be extended with third–party software, often via vendor-supplied interfaces. Extensions offer features such as:
- Product data management
- Product life cycle management
- Customer relations management
- Data mining