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The rapid changes in speed and power of computing hardware, introduction of sophisticated software in Accounting and Finance, growth of businesses in size and complexity are some of the factors that led to evolution of ERP System.
These factors can be grouped into growth of information and communication technology (ICT) and development of business enterprises.
These developments and growth require a system that can provide efficient flow of data in the business and communication environment. This helps in different fields such as accounting, human resource, procurement, inventory management and decision making procedure.
For a business organization to compete effectively with other businesses they need an efficient information system which provides better logistics at a reduced cost. The ERP system was introduced into the market in the late 1980’s and early 1990’s based on the weaknesses of MRPII such as lack of focus in manufacturing, poor budgetary and many others.
The need to introduce new techniques which would integrate transactions of an organization led to the development of ERP system. The ERP system is widely used in large business organizations but lately the vendors of the system are repackaging it for small and medium enterprises (Pandit n.d).
Definition of Legacy Systems
A legacy system is an old or outdated computer system which is used in business organization even with the introduction of modern systems. The system uses old programs, software and hardware which are no longer available in the market.
The legacy systems are usually used because they hold data that cannot be changed to new formats, the application programs cannot be upgraded and because the company may have spent a lot of money and time installing it. However, the available new softwares are designed to import data from the legacy systems.
Most business organizations continue using legacy systems to avoid the expense of installing a new system, the risk of losing data and to avoid interruption of normal flow of work in the organization. Some people believe that the legacy systems are important because they have been tried and have worked for them. Many old organizations rely on legacy systems that were used by their predecessors.
The systems used in the 1960’s were based on inventory control packages; they used programming languages such as COBOL and ALGOL which are no longer used today. Material requirements planning system (MRP) was developed in 1970’s it focused on order launching, product scheduling and interacting with the master planning schedule to produce practical plans.
MRP II System
Manufacturing resource planning (MRP II) was introduced in 1980’s. This system improved the MRP system by adding other departments besides manufacturing such as engineering, accounting, human resource and finance among others into the planning schedule.
The main focus of MRP II was on integrated financial planning, making the manufacturing planning schedule a decision variable and creating capacity resource planning. The software emphasized on optimizing by synchronizing the materials with production requirement (Shehab, Sharp & Spedding 2006).
Definition and Structure of ERP System
Enterprise Resource Planning (ERP) is a computer system that incorporates all procedures and information of an organization into one system. The ERP system integrates all the aspects of a business organization such as marketing, engineering, manufacturing and sales among others into a common system for all.
The system is used to manage business resources both internal and external resources. The software used assists business managers in performing activities such as inventory, order launching and tracking, maintaining financial and human resource systems.
ERP software integrates all facets of an operation, including development, manufacturing, sales and marketing. The software used in ERP system assists in the flow of information between the internal and external processes of the supply chain(Klaus, Roseman &Gable 2000).
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Structure of ERP System
The ERP system is based on the concept of integrating all aspects of an organization while the traditional programs separated them. The ERP system manipulates and organizes data just like any other application but the results are integrated to achieve quick and accurate information for different departments. The results can also be viewed by several users at the same time from different locations (Altekar 2004).
For a system to generate information in this manner it should be flexible so that it can react to the varying needs of an organization. ERP uses a centralized server which serves clients in several locations. The system has to have independent units that can be combined with others or interchanged (modules).
Information should be freely shared and transferred in a centralized manner through a single database. The modules of ERP system include engineering data control, sales, purchase and inventory, MRP, resource flow management and works documentation among others.
The system should be comprehensive and be able to support a variety of functions of the organization. The system should be able to function beyond the boundaries of the organization i.e. it should web-enabled. The ERP system’s operating system is mainly UNIX, Windows NT and Linux (Boykin 2001).
Major stages in the Evolution Process
ERP system has evolved in several stages for more than 40 years. The rapid growth of business organizations and the continuous improvement in CIT has caused the system to be quickly developed. In the early days organization used applications such as Economic Order Quantity.
They developed this application to the widely used Inventory Control packages (IC). In the 1970’s, Material Requirements Planning (MRP) was introduced. MRP was a good tool for management of inventory because it reduced inventory production; it improved coordination, improved customer service and avoided delays.
However, the system was cumbersome, time consuming and did not take into account other organization resources (Filinovich nd).
The need to integrate financial resources with manufacturing activities resulted in the evolution of MRP II. The system was capable of planning all the organization’s resources. Its main purpose was to integrate functions such as production, marketing, finance with human resource, purchasing and inventory into the planning process.
As a result of the weaknesses of MRP II such as focusing on planning and scheduling of internal resources, the ERP System was developed in the late 80’s and early 90’s (Sudalaimuthu & Vadiyu ).
The ERP system which focuses on integration of internal and external resources was introduced, and it included functions such as order management, quality control, asset management and human resource management among others.
Further development of ERP system has included functions such as supply chain management, sales and e-commerce. The ERP system has been termed as a ‘Do-it-all’ system because it integrates the entire organizational functions in one system (Davenport 1999).
Main Features of Present day ERP Systems
The ERP packages vendors offer almost similar packages to the market. However, the basic feature of an ERP system such as BI, CRM and SCM are included. One should opt for a package that is easy to use for all levels of work in an organization. Business Intelligence (BI) is a new component of ERP System.
It assists users to share and analyze data collected in the system. This feature helps in report making which assist decision makers and improve performance. Another feature of ERP system is the Customer Relationship Management (CRM), it helps improve customer service organizing the needs of customers, responding to customer orders and creating marketing campaigns (Rashid, Hossain & Patrick 2002).
Financial Management (FM) is most used tool in ERP. It includes general ledger, accounts payable and receivable, fixed asset management and billing.
The FM should be able to support several currencies such as US dollar, Euro, SA Rand and many others. Human Capital Management (HCM) deals with human resource management matters such as payroll, time and labor tracking, performance management and many others.
Operations is another feature of ERP which helps to simplify manufacturing operations. The main tools used here are product data management, forecasting and shop-floor control.
Finally, Supply Chain Management (SCM) improves the flow of materials in the supply chain. This feature can be divided into supply chain planning, logistics and procurement (Broatch 2001).
Main ERP Vendors in the Market today
There are five major vendors controlling about 60%-70% of the global market. The big five as they are commonly referred to are, SAP, Oracle, PeopleSoft, Baan and J.D. Edwards. Each vendor has a specialty in one or two modules that they offer. For example, Baan specializes in manufacturing, PeopleSoft in human resources
Management, SAP in logistics and Oracle in financials (Gable & Stewart 1999).
Besides the big five, there are smaller sized upcoming vendors competing for the same market. To stay on top of the competition the vendors have to keep updating and improving their products. SAP AG which owns the R/3 products was started in 1972 in Germany.
It launched its first ERP product (R/2) in 1979, which later improved in 1992 to R/3. SAP is the world’s largest ERP vendor with a market share of about 36%. SAP has over the years added other modules such SCM to make it the broadest supplier of ERP modules (Gable & Stewart 1999).
Oracle Corporation was founded in 1977 in the US, it is known for its flagship product Oracle Application. It has more 50 modules of ERP under finance, accounts, human resources, supply chain and front office among others. Oracle competes and partners with SAP, Baan and PeopleSoft in the ERP market.
PeopleSoft was founded in 1987 in California, it specializes in human resource and financial management modules. PeopleSoft competes closely with SAP and Oracle who are the market leaders. Its flagship product is PeopleSoft8 which is a pure internet-based system. It has a market share of about 10% and is third after Oracle Corporation (Rashami 2006).
The Baan Company was founded in 1978 in Netherlands, it has a market share of about 5%. Baan offers tools in finance, procurement, distribution and planning among others. Its flagship product is Baan ERP which was launched in 1998, its best known for aerospace, automotive and defense software.
Finally J.D. Edwards & Co was founded in 1977 in Denver. Their flagship product is OneWorld which is capable of running in multiple platforms. It has modules for finance, manufacturing, distribution and human resources (O’Leary 2000).
The aim of ERP system implementation is in establishing connections between all the departments and creating the unified information storage that keeps all the necessary information about the company, its services, production and the performance of all the departments (Kuldeep 2000).
ERP solutions are developed for business organization and industries for the purpose of computerization of the working system. ERP was used by large scale organization in the past but now SMEs are adopting the use of ERP system for production and services.
The ERP system implementation gives a possibility to use one integrated program instead of several independent ones. Using ERP system it’s possible to manage handling, logistics, billing, accounting and many other functions of an organization (Bruch & Vinnincheko 2006).
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