Enterprise resource planning

Feb 23rd 2009
From Economist.com

Enterprise resource planning (ERP) is the setting up of electronic information systems throughout an organisation in such a way that disparate parts of the organisation are brought together, parts that may rarely in the past have had access to information about each other—manufacturing, for instance, and customer relationship management (CRM).

ERP software, designed to implement this, acts as a sort of central nervous system for the corporation. It gathers information about the state and activity of different parts of the body corporate and conveys this information to parts elsewhere that can make fruitful use of it. The information is updated in real time by the users and is accessible to all those on the network at all times.

Just as the central nervous system’s capacity can at times seem to transcend the collective capacity of its individual parts (a phenomenon that we call consciousness), so too can that of ERP systems. They (as it were) make the corporation self-aware. In particular, ERP systems link together information about finance, human resources, production and distribution. They embrace stock-control systems, customer databases, order-tracking systems, accounts payable, and so on. They also interface when and where necessary with suppliers and customers.

The interlinking of ERP systems can be extraordinarily complex. Firms usually start with a pilot project before implementing a group-wide scheme.

The history of ERP is the history of SAP (System Analyse und Programmentwicklung), a German software company that in the 1990s established an extraordinary dominance in the market for ERP systems. SAP was set up by three engineers in Mannheim in 1972. Their aim was to help companies link their different business processes by correlating information from various functions and using it to run the whole business more smoothly.

SAP’s software was designed to be modular so that a company’s systems could be rapidly adapted to take account of growth and change. It was so successful in recognising and meeting business’s it needs that by the late 1990s SAP’s share of the market for ERP systems was greater than that of its five nearest rivals put together. Its systems were reckoned to be running in at least half of the world’s 500 largest companies.

Its extraordinarily rapid growth at the time (an annual average rate of increase in sales of over 40%) was backed by a marketing strategy that encouraged management consultants to implement SAP systems within client firms. Many consultants set up specialist SAP departments for the purpose. Without this support in implementation, there might have been a crippling bottleneck in the growth of SAP’s business.

The ERP systems market itself grew rapidly as firms saw the benefits to be gained from consolidating information about their geographically and functionally dispersed bits and pieces. ERP systems enabled them to have a view of their organisation as a whole that they had never previously enjoyed. It was a bit like seeing the early colour photographs of earth taken from outer space.

For a number of reasons, these systems were initially most popular with large multinationals:

• they had advanced it infrastructures on which they could run the systems;

• they were keen to standardise their diverse range of business processes;

• they had the staff necessary to manage the systems once they were up and running.

As this big-company market became saturated, ERP systems providers began to look at how they might adapt their products to suit smaller organisations.

Further reading

James, D. and Wolf, M.L., “A Second Wind for ERP”, McKinsey Quarterly, No. 2, 2000

Shtub, A., “Enterprise Resource Planning: the Dynamics of Operations Management”, Kluwer Academic Publishers, 1999