1
Chapter 15 – ERP Systems
Instructor Manual
➢ Overview Of ERP Systems. An Enterprise Resource Planning (ERP) system is a
multi-module software system that integrates all business processes and functions
of the entire organization into a single software system, using a single database.
Each module is intended to collect, process, and store data of a functional area of
Modules within the ERP system:
1. Financials
2. Human resources
Data in a(n)
1. Operational database
2. Data warehouse
These components are tightly integrated and affect each other. For example, the
manufacturing modules and data are integrated so that sales personnel can
immediately see production schedule information, and therefore, give customers
more accurate information about product delivery dates.
➢ The History Of ERP Systems. ERP systems can be traced back to software that
was developed during the 1960’s and 1970’s to track inventory in manufacturing
companies. The first generation of this software was called Materials Requirements
Planning (MRP) software. MRP software evolved into Manufacturing Resource
of SAP called SAP R/3. Two important features led to a tremendous growth in the
demand for SAP R/3. It used client-server hardware architecture and it was also
designed with an open-architecture approach, allowing third-party companies to
management (CRM) and supply chain management (SCM) modules.
➢ Current ERP System Characteristics. Because of the decline in the stock market
and the tragic events of September 11, 2001, nearly all companies made drastic
reductions in expenditures on IT systems and software. IT spending on ERP
systems was flat between 2001 and 2003. Beginning in 2004, the amount of IT
spending on ERP systems began to rise again. In 2005, spending on ERP systems
increased above the level in 2004. ERP spending in 2005 was up 16% over 2004.
Some of the reasons for this increased ERP spending are:
▪ ERP systems are so important to daily operations that companies cannot
allow them to become outdated.
systems.
➢ ERP Modules
o Financials. The finance module contains the general ledger and subsidiary
ledgers for processes such as purchases, cash disbursements, sales, cash
receipts, and the remaining processes. The difference between a typical
o Human Resources. This module in an ERP system incorporates all human
resource and payroll processes and data. This would include all employee
information on processes such as performance review, raises, and current wage
and deductions.
o Procurement And Logistics. This ERP module includes all processes related
to the purchase and movement of materials and finished goods. In addition, all
3
module in the ERP system incorporates the appropriate data mining and
analytical tools to provide reports to management
o Supply Chain Management. Supply chain management is the management
and control of all materials, funds, and related information in the logistics process
from the acquisition of raw materials to the delivery of finished products to the
customer buying behavior.
➢ Market Segments Of ERP Systems. Tier One includes software often used by
large, multi-national corporations. Tier Two is software used by mid-size businesses
and organizations.
o Tier One Software. Tier one software is usually implemented in very large
organizations and is extremely expensive. A minimum cost to purchase tier one
ERP software is approximately $350,000. Often the cost of the software with all
desired modules exceeds $1 million and consulting fees to implement the
software can add an extra cost of $1 million or more. The three most popular
ERP systems in tier one are SAP, Oracle, and Peoplesoft.
o Tier Two Software. Tier two ERP software is intended for organizations in the
and a Web browser.
➢ Implementation Issues Of ERP Systems.
o Hiring A Consulting Firm. Very frequently, organizations considering an ERP
o The Best Fit ERP System. While ERP systems encompass all business
processes, each vendor’s software has special areas of strengths. For example,
SAP’s ERP system evolved from Manufacturing Resources Planning (MRP II)
software and therefore has been considered particularly strong in its
manufacturing related modules. Thus, a manufacturing firm might prefer SAP to
o Which Modules To Implement. Each additional module that an organization
chooses to purchase and implement adds cost, implementation time, and
implementation difficulties. For some processes, a company may choose to
keep a legacy system, rather than purchase an ERP module for that set of
o Best Of Breed, Or ERP Module. ERP systems have broad appeal across
many types of organizations and this appeal is accomplished by building ERP
modules around standard, generic business processes. Therefore, some experts
believe that an organization is better served by using the ERP system for many
o Business Process Reengineering. BPR is an important aspect of ERP system
implementation. Since most organizations processes do not match the
processes in the ERP system for any individual module, BPR is usually
undertaken to make the business processes more compatible with the ERP
modules. For example, an organization’s sales and delivery processes may not
currently be done in the same manner as the ERP system was written to handle
5
match those in the ERP system. This BPR not only makes the process more
efficient, but it allows the organization to improve process efficiency by capturing
the extra efficiencies of the advanced IT processes in the ERP system.
o Customization Of The ERP System. Most consultants and experts would
recommend that the number of customizations be limited to the least amount
necessary. The two primary reasons for limiting customization is cost and
o The Costs Of Hardware And Software. Implementation of ERP systems
usually requires the purchase of new computer hardware, systems software,
network equipment and security software. For ERP implementation in large
organizations, hardware costs often exceed one million dollars while in mid-sized
o Testing Of The ERP System. The primary measure of success for ERP
implementation is ERP integration. Because an ERP implementation may
involve much integration of various modules, legacy systems, and modules from
other vendors, it is imperative that these systems be tested extensively prior to
implementation.
o Data Conversion. Conversion from data in legacy systems to RDBMS can be
error prone and time-consuming. Often the data must be cleansed and errors
must be corrected prior to conversion. An ERP system is intended to bring many
o Training Employees. Training is necessary because workers often have to
learn a new set of processes. This is a step that organizations should not take
lightly. Poorly trained employees may prevent the organization from fully
realizing the benefits or the ERP system, and can cause errors and problems in
the processes. Such errors can disrupt business processes and introduce
incorrect data into the system.
o The Methods Of Conversion To ERP Systems. In the Big Bang approach to
implementation, companies implement all modules and all functional areas of the
6
➢ Benefits And Risks Of ERP Systems.
o Benefits Of ERP Systems.
▪ The interactive nature of the modules that allows processes to interact with
each other.
▪ The real-time nature of processing that decreases the total processing time
and allows more immediate feedback to management.
▪ Benefits to companies from the “best practices” nature of the processes in
▪ The capability of ERP systems to grow with the business.
o Risks Of ERP Systems. The implementation risks inherent in an ERP
implementation are very similar to risks of implementing any IT system.
However, the scope, size, and complexity of an ERP system increase many of
these risks. Since the intent of an ERP system is to implement the system
across the entire enterprise and to incorporate all business processes into the
ERP system, the scope, size, and complexity increase tremendously. This large
➢ ERP Systems And The Sarbanes-Oxley Act Of 2002. Segregation of duties is
an important part of internal control that can help prevent errors and fraud.
7
Segregation, and monitoring segregation can be enhanced with ERP systems.
To effectively use this function of an ERP system, there are important steps the
company should accomplish.
1. Establish and maintain a list of incompatible duties.
2. As user ID and passwords are assigned to employees, insure that they are
given access and authority only to those parts of the system required.
This process can assist management in monitoring internal control, monitoring
errors and problems, and monitoring exceptions to internal controls. An ERP
system can also produce other reports related to monitoring internal controls.
The main purpose of these reports is to ensure that transactions are carried out