Concepts in Enterprise Resource Planning
Concepts in Enterprise Resource Planning
Fourth Edition
Chapter Two
The Development of Enterprise Resource Planning Systems
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Concepts in Enterprise Resource Planning, Fourth Edition
Concepts in Enterprise Resource Planning, Fourth Edition
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Objectives
After completing this chapter, you will be able to:
- Identify the factors that led to the development of Enterprise Resource Planning (ERP) systems
- Describe the distinguishing modular characteristics of ERP software
- Discuss the pros and cons of implementing an ERP system
- Summarize ongoing developments in ERP
Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Concepts in Enterprise Resource Planning, Fourth Edition
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Introduction
- Efficient, integrated information systems are very important for companies to be competitive
- An Enterprise Resource Planning (ERP) system can help integrate a company’s operations
- Acts as a company-wide computing environment
- Includes a database that is shared by all functional areas
- Can deliver consistent data across all business functions in real time
Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
The Evolution of Information Systems
- Silos
- Information systems configuration used until recently
- Companies had unintegrated information systems that supported only the activities of individual business functional areas
- Current ERP systems evolved as a result of:
- Advancement of hardware and software technology
- Development of a vision of integrated information systems
- Reengineering of companies to shift from a functional focus to a business process focus
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Concepts in Enterprise Resource Planning, Fourth Edition
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Computer Hardware and Software Development
- Computer hardware and software developed rapidly in the 1960s and 1970s
- First practical business computers were the mainframe computers of the 1960s
- Over time, computers got faster, smaller, and cheaper
- Moore’s Law
- Number of transistors that could be built into a computer chip doubled every 18 months
Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
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Computer Hardware and Software Development
Concepts in Enterprise Resource Planning, Fourth Edition
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Figure 2-1 The actual increase in transistors on a chip approximates Moore’s Law
Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Computer Hardware and Software Development (cont’d.)
- Advancements in computer software
- 1970s: relational database software developed
- Provide businesses the ability to store, retrieve, and analyze large volumes of data
- 1980s: spreadsheet software became popular
- Managers can easily perform complex business analyses
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Early Attempts to Share Resources
- By the mid-1980s, telecommunications developments allowed users to share data and peripherals on local networks
- Client-server architecture
- By the end of the 1980s, the hardware needed to support development of ERP systems was in place
- By the mid-1980s, database management system (DBMS) required to manage development of complex ERP software existed
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
The Manufacturing Roots of ERP
- Manufacturing software developed during the 1960s and 1970s
- Evolved from simple inventory-tracking systems to material requirements planning (MRP) software
- Electronic data interchange (EDI)
- Direct computer-to-computer exchange of standard business documents
- Allowed companies to handle the purchasing process electronically
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Management’s Impetus to Adopt ERP
- Hard economic times of the late 1980s and early 1990s caused many companies to downsize and reorganize
- Stimulus to ERP development
- Inefficiencies caused by the functional model of business organization
- Silos of information
- Limits the exchange of information between the lower operating levels
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Management’s Impetus to Adopt ERP (cont’d.)
Figure 2-2 Information and material flows in a functional business model
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Management’s Impetus to Adopt ERP (cont’d.)
- Functional model led to top-heavy and overstaffed organizations incapable of reacting quickly to change
- Process business model
- Information flows between the operating levels without top management’s involvement
- Further impetus for adopting ERP systems has come from compliance with the Sarbanes-Oxley Act of 2002
- Requires companies to substantiate internal controls on all information
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Management’s Impetus to Adopt ERP (cont’d.)
Figure 2-3 Information and material flows in a process business model
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
ERP Software Emerges: SAP and R/3
- 1972: five former IBM systems analysts in Mannheim, Germany formed Systemanalyse und Programmentwicklung (Systems Analysis and Program Development, or SAP)
- SAP’s goals:
- Develop a standard software product that could be configured to meet the needs of each company
- Data available in real time
- Users working on computer screens, rather than with voluminous printed output
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
SAP Begins Developing Software Modules
- During their work for German chemical company ICI, Plattner and Hopp had developed the idea of modular software development
- Software modules: individual programs that can be purchased, installed, and run separately, but that all extract data from the common database
- 1982: SAP released its R/2 mainframe ERP software package
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
SAP Begins Developing Software Modules (cont’d.)
- 1980s: sales grew rapidly; SAP extended its software’s capabilities and expanded into international markets
- By 1988, SAP had established subsidiaries in numerous foreign countries
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
SAP R/3
- 1988: SAP began development of its R/3 system to take advantage of client-server technology
- 1992: first version of SAP R/3 released
- SAP R/3 system was designed using an open architecture approach
- Open architecture: third-party software companies encouraged to develop add-on software products that can be integrated with existing software
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
New Directions in ERP
- Late 1990s: Year 2000 (or Y2K) problem motivated many companies to move to ERP systems
- By 2000, SAP AG had 22,000 employees in 50 countries and 10 million users at 30,000 installations around the world
- By 2000, SAP’s competition in the ERP market:
- Oracle
- PeopleSoft
- Late 2004: Oracle succeeded in its bid to take over PeopleSoft
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
New Directions in ERP (cont’d.)
- PeopleSoft
- Founded by David Duffield, a former IBM employee
- Today, PeopleSoft, under Oracle, is a popular software choice for managing human resources and financial activities at universities
- Oracle
- SAP’s biggest competitor
- Began in 1977 as Software Development Laboratories (SDL)
- Founders: Larry Ellison, Bob Miner, and Ed Oates
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
New Directions in ERP (cont’d.)
- SAP ERP
- Latest versions of ERP systems by SAP and other companies allow:
- All business areas to access the same database
- Elimination of redundant data and communications lags
- Data to be entered once and then used throughout the organization
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
New Directions in ERP (cont’d.)
Figure 2-4 Data flow within an integrated information system
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
New Directions in ERP (cont’d.)
- Current SAP ERP system: SAP ECC 6.0 (Enterprise Central Component 6.0)
- Sales and Distribution (SD) module
- Materials Management (MM) module
- Production Planning (PP) module
- Quality Management (QM) module
- Plant Maintenance (PM) module
- Asset Management (AM) module
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
New Directions in ERP (cont’d.)
- Current SAP ERP system: SAP ECC 6.0 (Enterprise Central Component 6.0) (cont’d.)
- Human Resources (HR) module
- Project System (PS) module
- Financial Accounting (FI) module
- Controlling (CO) module
- Workflow (WF) module
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
New Directions in ERP (cont’d.)
Figure 2-5 Modules within the SAP ERP integrated information systems environment (Courtesy of SAP AG)
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
SAP ERP Software Implementation
- Not all companies that use SAP use all of the SAP ERP modules
- Company’s level of data integration is highest when it uses one vendor to supply all of its modules
- Configuration options allow the company to customize the modules it has chosen to fit the company’s needs
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
SAP ERP Software Implementation (cont’d.)
- Tolerance groups
- Specific ranges that define transaction limits
- SAP has defined the tolerance group methodology as its method for placing limits on an employee
- Configuration allows the company to further tailor tolerance group methodology
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
SAP ERP Software Implementation (cont’d.)
Figure 2-6 A customization example: tolerance groups to set transaction limits
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
SAP ERP Software Implementation (cont’d.)
- Features of SAP ERP
- First software that could deliver real-time ERP integration
- Usability by large companies
- High cost
- Automation of data updates
- Applicability of best practices
- Best practices: SAP’s software designers choose the best, most efficient ways in which business processes should be handled
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
ERP for Midsized Companies
- By 1998
- Most of the Fortune 500 companies had already installed ERP systems
- ERP vendors refocused their marketing efforts on midsized companies
- SAP All-in-One
- Single package containing specific, preconfigured bundles of SAP ERP tailored for particular industries
- Can be installed more quickly than the standard ERP product
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
ERP for Midsized Companies (cont’d.)
- Application hosting
- Third-party company provides the hardware and software support
- Makes ERP systems like SAP more appealing to midsized companies
- SAP and Oracle are facing competition from smaller providers of ERP software
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Responses of the Software to the Changing Market
- In mid-1990s, many companies complained about the difficulty of implementing SAP R/3 system
- SAP responded by developing Accelerated SAP (ASAP) implementation methodology
- Eases the implementation process
- SAP continues to extend capabilities of SAP ERP with additional, separate products that run on separate hardware and extract data from the SAP ERP system
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Choosing Consultants and Vendors
- One person cannot fully understand a single ERP system
- Before choosing a software vendor, most companies:
- Study their needs
- Hire an external team of software consultants to help choose the right software vendor(s) and the best approach to implementing ERP
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
The Significance and Benefits of ERP Software and Systems
- More efficient business processes that cost less than those in unintegrated systems
- Easier global integration
- Integrates people and data while eliminating the need to update and repair many separate computer systems
- Allows management to manage operations, not just monitor them
- Can dramatically reduce costs and improve operational efficiency
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Questions About ERP
- How much does an ERP system cost?
- Should every business buy an ERP package?
- Is ERP software inflexible?
- What return can a company expect from its ERP investment?
- How long does it take to see a return on an ERP investment?
- Why do some companies have more success with ERP than others?
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
How Much Does an ERP System Cost?
- Size of the ERP software
- Corresponds to the size of the company it serves
- Need for new hardware that is capable of running complex ERP software
- Consultants’ and analysts’ fees
- Time for implementation
- Causes disruption of business
- Training
- Costs both time and money
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Should Every Business Buy an ERP Package?
- Some of a business’s operations, and some segments of its operations, might not be a good match with the constraints of ERP
- Sometimes, a company is not ready for ERP
- ERP implementation difficulties result when management does not fully understand its current business processes and cannot make implementation decisions in a timely manner
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Is ERP Software Inflexible?
- Many people claim that ERP systems, especially the SAP ERP system, are rigid
- Options for customization offered by SAP ERP
- Numerous configuration options that help businesses customize the software to fit their needs
- Programmers can write specific routines using Advanced Business Application Programming (ABAP)
- Once an ERP system is in place, trying to reconfigure it while retaining data integrity is expensive and time-consuming
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
What Return Can a Company Expect from Its ERP Investment?
- ERP eliminates redundant efforts and duplicated data; can generate savings in operations expense
- ERP system can help produce goods and services more quickly
- Company that doesn’t implement an ERP system might be forced out of business by competitors that have an ERP system
- Smoothly running ERP system can save a company’s personnel, suppliers, distributors, and customers much frustration
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
What Return Can a Company Expect from Its ERP Investment? (cont’d.)
- Cost savings and increased revenues occur over many years
- Difficult to put an exact dollar figure to the amount accrued from the original ERP investment
- ERP implementations take time
- Other business factors may be affecting the company’s costs and profitability
- Difficult to isolate the impact of the ERP system alone
- ERP systems provide real-time data
- Improve external customer communications
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
How Long Does It Take to See a Return on an ERP Investment?
- Return on investment (ROI): assessment of an investment project’s value
- Calculated by dividing the value of the project’s benefits by the project’s cost
- ERP system’s ROI can be difficult to calculate
- Peerstone Research study
- 63 percent of companies that performed the calculation reported a positive ROI for ERP
- Most companies felt that nonfinancial goals were the reason behind their ERP installations
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Why Do Some Companies Have More Success with ERP Than Others?
- Usually, a bumpy rollout and low ROI are caused by people problems and misguided expectations, not computer malfunctions
- Executives blindly hoping that new software will cure fundamental business problems that are not curable by any software
- Executives and IT managers not taking enough time for a proper analysis during planning and implementation phase
- Executives and IT managers skimping on employee education and training
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Why Do Some Companies Have More Success with ERP Than Others? (cont’d.)
- Usually, a bumpy rollout and low ROI are caused by people problems and misguided expectations, not computer malfunctions (cont’d.)
- Companies not placing ownership or accountability for the implementation project on the personnel who will operate the system
- Unless a large project such as an ERP installation is promoted from the top down, it is doomed to fail
- ERP implementation brings a tremendous amount of change for users
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Why Do Some Companies Have More Success with ERP Than Others? (cont’d.)
- For many users, it takes years before they can take advantage of many of an ERP system’s capabilities
- Most ERP installations do generate returns
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
The Continuing Evolution of ERP
- Understanding the social and business implications of new technologies is not easy
- ERP systems have been in common use only since the mid-1990s
- ERP vendors are working to solve adaptability problems that plague customers
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Summary
- Speed and power of computing hardware increased exponentially, while cost and size decreased
- Early client-server architecture provided the conceptual framework for multiple users sharing common data
- Increasingly sophisticated software facilitated integration, especially in two areas: A/F and manufacturing resource planning
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Summary (cont’d.)
- Growth of business size, complexity, and competition made business managers demand more efficient and competitive information systems
- SAP AG produced a complex, modular ERP program called R/3
- Could integrate a company’s entire business by using a common database that linked all operations
- SAP R/3, now called SAP ERP, is modular software offering modules for Sales and Distribution, Materials Management, Production Planning, Quality Management, and other areas
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Concepts in Enterprise Resource Planning, Fourth Edition
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Concepts in Enterprise Resource Planning, Fourth Edition
Summary (cont’d.)
- ERP software is expensive to purchase and time-consuming to implement, and it requires significant employee training—but the payoffs can be spectacular
- For some companies, ROI may not be immediate or even calculable
- Experts anticipate that ERP’s future focus will be on managing customer relationships, improving planning and decision making, and linking operations to the Internet and other applications through service-oriented architecture
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Concepts in Enterprise Resource Planning, Fourth Edition
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