1.3 Enterprise Resource Planning—The Big Picture

Information is power—the power to make good decisions and more. Information emerges from data, one of your company’s most important assets. What type of data are we talking about? Customer data, product data, inventory data, employee data, supplier data, and more—they are all critical to developing a winning competitive strategy and executing to strategy. You name the value-added business process, and you can bet that data drives it.

Managing data for good decision-making and effective process management has, however, always been a challenge. As recently as the 1990s, managers across an organization often used siloed information to make decisions. Each function (e.g., accounting, human resources, marketing, and supply chain) had its own legacy, best-of-breed information system. Sadly, the systems didn’t talk to each other. The result: Each manager used different data stored in different databases to make decisions.

You may be thinking, “That doesn’t make any sense.” If so, you’d be right. ERP systems were developed to solve this problem.

What Is ERP?

What exactly is an ERP system? According to Investopedia, an Enterprise Resource Planning (ERP) system is a “management software that integrates a business’s essential departments.”1

How does an ERP system integrate essential departments? ERP systems begin with a single relational database. This database is surrounded by functional application programs that you use to manage value-added processes like inventory or order management across the business. These application programs take data from and feed data into the database (see Figure 1.1).

Simply put, an ERP system is your company’s relational nervous system. It enables everyone to work off a single set of data. By sharing accurate data in real-time, you can improve functional and cross-functional decision-making. Here’s the key: You enter information once and everyone who needs it to make a decision can easily find and use it. If you want to know how much inventory is in a warehouse, if an order has been shipped, where a truck is, or if a supplier has been paid, you simply look up the answer in the ERP system.

You can even give customers and suppliers access to the information they need to work more productively with you. Of course, this works both ways. Your best customers and suppliers may invite you to link with their ERP systems.

ERP: A Brief History

Turn the clock back 50 years, and you probably wouldn’t recognize the computing landscape. Mainframes—expensive, room-sized computers with less computing power than the smartphone you hold in your hands—dominated. Managers struggled to grasp and control complex, data-intensive supply chain processes. Heuristics (aka rules of thumb) and a mix of experience and intuition guided most decision-making.

By the 1980s, the personal computer began to enable companies, regardless of size, to employ computing power to improve decision-making. Lotus Software introduced the first spreadsheet software in 1983. For the next decade, if you worked for a small to midsize company, you likely managed inventory and other key supply chain activities using homegrown or proprietary spreadsheets. At large, resource-rich companies, you likely adopted best-of-breed software solutions. These applications were designed for specific activities (e.g., accounting, finance, inventory planning, or warehouse management). Regrettably, even the solutions relied on localized data. Worse, they didn’t talk to each other. Decision-making was siloed and fragmented.

By the 1990s, ERP systems began to emerge. The goal: Provide an integrated enterprise software platform. Early ERP systems were expensive, hard to implement, and offered an unfriendly user experience. Researchers at Penn State evaluated the state of ERP implementation at the end of the 1990s. They couldn’t find a single successful implementation (i.e., one that was on time, on budget, and worked)! Indeed, Hershey’s late 1990s $112 million implementation put ERP in the headlines for all the wrong reasons! When ERP went live, operations crashed, keeping Hershey from delivering $100 million worth of Kisses and Jolly Ranchers for the 1999 holiday season.2

Today, mid-to-large-size companies worldwide rely on ERP systems to manage their supply chain networks. These ERP systems offer decision support and improved efficiencies that were unimaginable but highly sought after only a few years ago. The journey to today’s capabilities, however, has not been easy. This reality describes most ERP implementations—they aren’t easy (see Table 1.2).

To give you some perspective on ERP system evolution and impact, let’s look at two SCM examples.

Taming Complexity in Manufacturing

Imagine being responsible for assembling a Boeing 787. Here are a few facts to keep in mind.

• As many as 45 different companies around the world supply the major components of Boeing’s 787 Dreamliner.

• Each 787 is built from 2.3 million parts.

• Boeing produced over 340 commercial aircraft in 2021, including multiple versions of the 787, 737, 767, and 777. Some parts are common across these different aircraft, and others aren’t.

You could never manage this level of complexity in your head. Heuristics might help, but the task would still be overwhelming. The good news: Modern IT in the form of material requirements planning (MRP) and enterprise resource planning (ERP) does most of the hard work needed to manage dependent demand inventory. You can use these systems to build production plans, generate purchase orders, and track inventories whether or not your company produces tens or thousands of items.

MRP systems first emerged in the 1960s and evolved gradually as computing power increased (see Figure 1.2). Early adoptions were slow, and most companies lacked the information integrity and operating discipline needed to really take advantage of MRP software. Throughout the 1970s, success stories started to emerge. By the early 1980s, MRP had begun to catch on, and by the early 2000s, MRP modules were embedded in ERP systems. Today, they are used by over 80 percent of high-performing manufacturers. You will learn more about MRP systems in Topic 5.

Streamlining the Purchasing Process

The purchasing process begins when an end user identifies a need and communicates that need to you. Imagine that research and development (R&D) needs a 3D printer for use in prototyping new parts. What information is exchanged?

• R&D sends you a purchase requisition describing the 3D printer’s specs.

• As soon as you approve the purchase requisition, you let R&D know the acquisition is underway.

• Once you place the purchase order (PO), you inform R&D that a 3D printer is on its way.

• You also notify accounts payable that an invoice will arrive shortly.

• If there is a delay, you inform R&D that the 3D printer will not arrive on time. R&D will let you know if you should expedite the order.

• When the printer arrives, receiving verifies that the printer is in good condition, shares the receiving report with you and accounts payable, and arranges for installation.

• Once the 3D printer is installed, accounting pays the supplier, and you evaluate the supplier and close the order.

In the old days, you had to do all of this via phone or internal memos—a process that burned time and introduced errors. Today, you can use an ERP system to keep every decision maker across your organization informed. For instance, once you approve the purchase requisition, the ERP system automatically notifies R&D, receiving, and accounts payable. When your colleagues receive the printer and invoice, they simply pull up the PO number in the ERP system, peruse the complete record, and take appropriate action. Information sharing is as easy as that—and it makes streamlining processes easy as well!

Expected Growth in ERP Usage

Most of the largest and best-run business worldwide use ERP systems. Manufacturers lead the way in ERP adoption, representing about 47 percent of the ERP user base. And the market is growing. In 2019, the global ERP market was about $39 billion in software revenue. By 2026, the global ERP market is expected to reach about $78 billion.4 Revenue growth comes from two sources.

1. New Adoptions: Small and midsize companies that outgrow their spreadsheet and entry-level best of breed systems often upgrade to ERP to improve processes, productivity, and competitiveness. Indeed, the growth in cloud-based software and scale-as-you-grow options is making ERP more accessible.

2. Upgraded Capabilities: Up to 50 percent of all companies anticipate updating or upgrading their ERP systems soon. For instance, 53 percent of UK CIOs expect to invest in more intelligent ERP systems that include artificial intelligence, big data, and machine learning capabilities.5

If you decide to explore ERP adoption, you have many options. Hundreds of software providers exist. The market is highly fragmented, but you will recognize the names of some of the biggest ERP providers: Epicor, IFS, Infor, Microsoft, Oracle, Sage, SAP, and Workday.