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Enterprise resource planning

Enterprise resource planning as a term derives from material resource planning. Enterprise resource planning systems (ERP) are management information systems that integrate and automate many of the business practices associated with the operations or production aspects of a company. These typically include manufacturing, logistics, distribution, inventory, shipping, invoicing , and accounting. Enterprise Resource Planning or ERP software can aid in the control of many business activities, like sales, delivery, billing, production, inventory management , and Human Resource Management Systems.

They are often called back office systems indicating that customers and the general public are not directly involved. This is contrasted with front office systems like customer relationship management systems that deal directly with the customer.

ERPs are cross-functional and enterprise wide. All functional departments that are involved in operations or production are integrated in one system. In addition to manufacturing, warehousing, and shipping, this would include accounting, human resources, marketing, and strategic management.

In the early days of business computing, companies used to write their own software to control their business processes. This is an expensive approach. Since many of these processes occur in common across various types of businesses, common reusable software may provide cost-effective alternatives to custom software. Thus some ERP software caters to a wide range of industries from service sectors like software vendors and hospitals to manufacturing industries and even to government departments.


Because of their wide scope of application within the firm, ERP software systems rely on some of the largest bodies of software ever written. Implementing such a complex and huge software system in a company usually involves an army of analyst s, programmers, and users, and often comprises a multi-million dollar/yen/euro project in itself for bigger companies, especially transnationals .

Enterprise resource planning systems are often closely tied to supply chain management systems. Supply chain management software can extend the ERP system to include links with suppliers.

To implement ERP systems, companies often seek the help of an ERP vendor or of third-party consulting companies. Consulting in ERP involves two levels, namely business consulting and technical consulting. A business consultant studies an organisation's current business processes and matches them to the corresponding processes in the ERP system, thus 'configuring' the ERP system to the organisation's needs. Technical consulting often involves programming. Most ERP vendors allow changing their software to suit the business needs of their customer.


The benefits from enterprise resource planning are claimed to include:

  • lower inventory carrying costs
  • lower ordering costs
  • lower production costs
  • lower accounting and record keeping costs
  • lower transportation costs
  • lower investment in equipment
  • lower investment in plant
  • lower investment in land
  • reduced assembly-line down-times
  • more flexible production processes
  • more efficient lot sizes and scheduling
  • reduced errors due to poor co-ordination
  • the cost and efficiency improvements (mentioned above) could increase profitability or increase market share (at a lower price)
  • reduced number of stock-outs
  • reduced fulfillment times
  • increase process transparency for the customer
  • allow greater product customization, and thereby better match the exact needs of the customer
  • the customer satisfaction improvements (mentioned above) could increase sales volume, increase sales revenue (due to a higher effective price , ie. - no discounts), increase market share, and increase profitability


The limitations and pitfalls of the enterprise resource planing are claimed to be:

  • the systems can be very expensive to install and maintain
  • some systems can be difficult to use
  • the system is no better than the weakest link in the chain - a problem in one department or at one of the partners will affect all the other participants

If the ERP system is integrated with a supply chain management system, other potential problems include:

  • the system is vulnerable to a strike or labour problem at any one link in the chain
  • there can be transportation inefficiencies if small lots of product are transported several times before reaching the consumer/user
  • once a system is established, switching cost are very high for any one of the partners (reduced flexibility and strategic control at the corporate level)
  • the blurring of company boundaries can cause problems in accountability, lines of responsibility, and employee morale
  • there is a resistance to sharing sensitive internal information, information that may be essential to the process
  • there are compatibility problems with the various legacy systems of all the partners
  • customers may order more than they require (as in the boom and bust of 2001)

ERP vendors

Vendors of popular ERP software include : Baan, J.D. Edwards, Lawson Software, Oracle Applications, PeopleSoft, SAP.

Open source ERP

Since 2000 several ERP Systems have been available for free as Open Source Systems under a royalty-free Open Source License. The packages currently available in stable productionized versions include Compiere and SQL Ledger. A new ERP System ZERP is also in rapid development. As in the case of software from vendors, end-users can customize these systems to suit their own needs. ERP5 is yet another GPL'd system worth considering.

See also

Last updated: 10-24-2004 05:10:45