A Typical ERP Business Scenario to Explain Why ERP is Required

The very basic question to any beginners is why Enterprise Resource Planning also called ERP is required? To answer this, let’s examine this typical business scenario.

Suppose a client approaches sales team asking for a particular product. The sales team contacts to inventory department to check the availability of the product. To their surprise, sales team found out that the product is out of stock. So next time this don’t happen, they have to introduce a SAP ERP tool. Before we actually see in detail, what ERP is and how ERP can help in your business process, we will understand how different departments are involved in the whole business process, right from the ordering of the raw material – to manufacturing goods – to delivering final goods to the customer.

Here is the whole process that is followed by any business unit.

1. Client contacts the sales team to check the availability of the product
2. Sales team approaches the Inventory department to check for the availability of the product
3. In case the product is out of stock, the sales team approaches the Production Planning Department to manufacture the product
4. The production planning team checks with inventory department for availability of raw material
5. If raw material is not available with inventory, the Production Planning team buys the raw material from the Vendors
6. Then Production Planning forwards the raw materials to the Shop Floor Execution for actual production
7. Once ready, the Shop Floor Team forwards the goods to the Sales Team
8. Sales Team who in turn deliver it to the client
9. The sales team updates the finance with revenue generated by the sale of the product. Production planning team update the finance with payments to be made to different vendors for raw materials.
10. All departments approach the HR for any Human Resource related issue.

That is a typical business process for any manufacturing company. Some key inferences one could derive from the scenario would be.

• It has many departments or business units
• These departments or business units continuously communicate and exchange data with each other
• The success of any organization lies in effective communication, and data exchange, within these departments, as well as associated third party such as vendors, outsourcers, and customers.

Based on the manner in which communication and data exchanged is managed. Enterprise systems can be broadly classified as

1. Decentralized System
2. Centralized System which are also called as ERP.

Decentralized System

Let's look at Decentralized system first, in a company with Decentralized System of Data Management, there are two major problems

• Data is maintained locally at the individual departments
• Departments do not have access to information or data of other departments

To identify problems arising due to decentralized Enterprise management system lets look at the same business process again. The customer approaches the sales team for a product, but this time around he needs the product, on an urgent basis.

Since it is a decentralized process, the Sales Team do not have any real-time information access to the products availability. So they approach the Inventory department to check the availability of the product. This process takes time and customer chooses another vendor leading to loss of revenue and customer dissatisfaction.

Now, suppose the product is out of stock and the Sales Team approaches the Production Planning team to manufacture the product for future use. Production Planning Team checks the availability of the raw materials required. In a decentralized system, raw material information is separately stored by Production Planning as well as Inventory Department. Thus, data maintenance cost (in this case Raw Material) goes up.

The raw material information is available in two different departments Inventory as well as Production Planning. When sales team check a particular raw material required to manufacture the product, it shows the raw material is available as per the inventory, but as per the database of the production planning team, the raw material is out of stock. So, they go ahead and buy the raw material. Thus, material as well inventory cost goes up. Once the raw material is available, the shop floor department suddenly realizes they are short of workers they approach the HR, who in turn hire temporary employees at higher than market rates. Thus LABOR Cost Increases. The production planning department fails to update the finance department on the materials they have purchased. The finance department defaults the payment deadline set by the vendor causing the company loss of its reputation and even inviting a possible legal action.

These are just a few of many problems with decentralized systems. Some Major problems with the decentralized system are –

• Numerous disparate information system generates individually over time which are difficult to maintain
• Integrating the data is time and money consuming
• Inconsistencies and duplication of data
• Lack of timely information leads to customer dissatisfaction , loss of revenue and reputation
• High Inventory, material, and human resource cost.

These are some major drawbacks for which we need a solution. Well the Solution lies in Centralized Systems i.e. ERP.

Centralized System

In a company, with Centralized System of Information and Data Management.

1. Data is maintained at a central location and is shared with various Departments
2. Departments have access to information or data of other Departments

Let’s look at the same business process again to understand how a Centralized Enterprise System helps to overcome problems posed by a Decentralized Enterprise System.

In this Case, all departments update a Central Information System.

• When Customer approaches the sales team to buy a product on an urgent basis. The Sales Team has real-time information access to the products in inventory which is updated by the Inventory Department in the Centralized System
• Sales Team respond to customer request on time leading to Increased Revenue and Customer Delight.
• In case, manufacturing is required the Sales Team update the Centralized Database, so that all the department remain informed about the product status.
• Production Planning Department is auto updated by the Centralized Database for requirements. Production Planning Team checks the availability of the raw materials required via Central Database, which is updated by the Inventory Department.
• Thus, Data Duplication is avoided, and accurate data is made available. The Shop Floor Team update their Man Power Status regularly in the Central Database, which can be accessed by the HR department.
• In case of shortage of workforce, HR team starts recruitment process with considerable lead time to hire a suitable candidate at market price.Thus labor cost goes down.
• While vendors can directly submit their invoices to the Central Enterprise System, which can be accessed by the finance department. Thus, payments are made on time, and possible legal actions are avoided
• SAP software is a type of Centralized System. SAP System is most popularly used ERP software.

Key benefits of the centralized system are:

• It Eliminates the duplication, discontinuity and redundancy in data
• Provides information across departments in real time.
• SAP System is Provides control over various business processes
• Increases productivity, better inventory management , promotes quality , reduced material cost, effective human resources management, reduced overheads boosts profits
• Better customer interaction and increased throughput. It also improves customer service
• Hence, a centralized enterprise management system is required.
• SAP Software is a centralized enterprise management system also known as Enterprise Resource Planning.