Chapter 6: ERP Systems

6.1 Introduction

An enterprise resource planning (ERP) system is a software application with a centralized database that can be used to run an entire company. Let’s take a closer look at the definition of each of these components:

• An ERP system

• A software application: The system is a software application, which means that it has been developed with specific logic and rules behind it. It has to be installed and configured to work specifically for an individual organization.

• With a centralized database: All data in an ERP system is stored in a single, central database. This centralization is key to the success of an ERP – data entered in one part of the company can be immediately available to other parts of the company. 

• That can be used to run an entire company: An ERP can be used to manage an entire organization’s operations. If they so wish, companies can purchase modules for an ERP that represent different functions within the organization, such as finance, manufacturing, and sales. Some companies choose to purchase many modules, others choose a subset of the modules. 

An ERP system not only centralizes an organization’s data, but the processes it enforces are the processes the organization adopts. When an ERP vendor designs a module, it has to implement the rules for the associated business processes. A selling point of an ERP system is that it has best practices built right into it. In other words, when an organization implements an ERP, it also gets improved best practices as part of the deal!

For many organizations, the implementation of an ERP system is an excellent opportunity to improve their business practices and upgrade their software at the same time. But for others, an ERP brings them a challenge: Is the process embedded in the ERP really better than the process they are currently utilizing? And if they implement this ERP, and it happens to be the same one that all of their competitors have, will they simply become more like them, making it much more difficult to differentiate themselves?

Registered trademark of SAP

This has been one of the criticisms of ERP systems: that they commoditize business processes, driving all businesses to use the same processes and thereby lose their uniqueness. The good news is that ERP systems also have the capability to be configured with custom processes. For organizations that want to continue using their own processes or even design new ones, ERP systems offer ways to support this through the use of customizations.

But there is a drawback to customizing an ERP system: organizations have to maintain the changes themselves. Whenever an update to the ERP system comes out, any organization that has created a custom process will be required to add that change to their ERP. This will require someone to maintain a listing of these changes and will also require retesting the system every time an upgrade is made. Organizations will have to wrestle with this decision: When should they go ahead and accept the best-practice processes built into the ERP system and when should they spend the resources to develop their own processes? It makes the most sense to only customize those processes that are critical to the competitive advantage of the company.

Some of the best-known ERP vendors are SAP, Microsoft, and Oracle.

Section Attributions

This page titled 6.1 D: ERP Systems is shared under a CC BY license and was authored, remixed, and/or curated by David T. Bourgeois (Saylor Foundation) .

6.2 Application Software

6.2.1 Application Software

The second major category of software is application software. Application software is, essentially, software that allows the user to accomplish some goal or purpose. For example, if you have to write a paper, you might use the application-software program Microsoft Word. If you want to listen to music, you might use iTunes. To surf the web, you might use Internet Explorer or Firefox. Even a computer game could be considered application software.

6.2.2 The “Killer” App

VisiCalc running on an Apple II. (Public Domain)

When a new type of digital device is invented, there are generally a small group of technology enthusiasts who will purchase it just for the joy of figuring out how it works. However, for most of us, until a device can actually do something useful we are not going to spend our hard-earned money on it. A “killer” application is one that becomes so essential that large numbers of people will buy a device just to run that application. For the personal computer, the killer application was the spreadsheet. In 1979, VisiCalc, the first personal-computer spreadsheet package, was introduced. It was an immediate hit and drove sales of the Apple II. It also solidified the value of the personal computer beyond the relatively small circle of technology geeks. When the IBM PC was released, another spreadsheet program, Lotus 1-2-3, was the killer app for business users. 

6.2.3 Productivity Software

Along with the spreadsheet, several other software applications have become standard tools for the workplace. These applications, called productivity software, allow office employees to complete their daily work. Many times, these applications come packaged together, such as in Microsoft’s Office suite. Here is a list of these applications and their basic functions:

• Word processing: This class of software provides for the creation of written documents. Functions include the ability to type and edit text, format fonts and paragraphs, and add, move, and delete text throughout the document. Most modern word-processing programs also have the ability to add tables, images, and various layout and formatting features to the document. Word processors save their documents as electronic files in a variety of formats. By far, the most popular word-processing package is Microsoft Word, which saves its files in the DOCX format. This format can be read/written by many other word-processor packages.

• Spreadsheet: This class of software provides a way to do numeric calculations and analysis. The working area is divided into rows and columns, where users can enter numbers, text, or formulas. It is the formulas that make a spreadsheet powerful, allowing the user to develop complex calculations that can change based on the numbers entered. Most spreadsheets also include the ability to create charts based on the data entered. The most popular spreadsheet package is Microsoft Excel, which saves its files in the XLSX format. Just as with word processors, many other spreadsheet packages can read and write to this file format.

• Presentation: This class of software provides for the creation of slideshow presentations. Harkening back to the days of overhead projectors and transparencies, presentation software allows its users to create a set of slides that can be printed or projected on a screen. Users can add text, images, and other media elements to the slides. Microsoft’s PowerPoint is the most popular software right now, saving its files in PPTX format.

• Some office suites include other types of software. For example, Microsoft Office includes Outlook, its e-mail package, and OneNote, an information-gathering collaboration tool. The professional version of Office also includes Microsoft Access, a database package. (Databases are covered more in a different chapter)

Microsoft popularized the idea of the office-software productivity bundle with their release of Microsoft Office. This package continues to dominate the market and most businesses expect employees to know how to use this software. However, many competitors to Microsoft Office do exist and are compatible with the file formats used by Microsoft (see table below). Recently, Microsoft has begun to offer a web version of their Office suite. Similar to Google Drive, this suite allows users to edit and share documents online utilizing cloud-computing technology. Cloud computing will be discussed later in this chapter.

Comparison of office application software suites

6.2.4 Utility Software and Programming Software

Two subcategories of application software worth mentioning are utility software and programming software. Utility software includes software that allows you to fix or modify your computer in some way. Examples include antivirus software and disk defragmentation software. These types of software packages were invented to fill shortcomings in operating systems. Many times, a subsequent release of an operating system will include these utility functions as part of the operating system itself.

Programming software is software whose purpose is to make more software. Most of these programs provide programmers with an environment in which they can write the code, test it, and convert it into the format that can then be run on a computer.

6.2.5 Sidebar: “PowerPointed” to Death

As presentation software, specifically Microsoft PowerPoint, has gained acceptance as the primary method to formally present information in a business setting, the art of giving an engaging presentation is becoming rare. Many presenters now just read the bullet points in the presentation and immediately bore those in attendance, who can already read it for themselves.

The real problem is not with PowerPoint as much as it is with the person creating and presenting. Author and thinker Seth Godin put it this way: “PowerPoint could be the most powerful tool on your computer. But it’s not. It’s actually a dismal failure. Almost every PowerPoint presentation sucks rotten eggs.”[1] The software used to help you communicate should not duplicate the presentation you want to give, but instead it should support it. I highly recommend the book Presentation Zen by Garr Reynolds to anyone who wants to improve their presentation skills.

Software developers are becoming aware of this problem as well. New digital presentation technologies are being developed, with the hopes of becoming “the next PowerPoint.” One innovative new presentation application is Prezi. Prezi is a presentation tool that uses a single canvas for the presentation, allowing presenters to place text, images, and other media on the canvas, and then navigate between these objects as they present. Just as with PowerPoint, Prezi should be used to supplement the presentation. And we must always remember that sometimes the best presentations are made with no digital tools.

6.2.6 Sidebar: I Own This Software, Right? Well . . .

When you purchase software and install it on your computer, are you the owner of that software? Technically, you are not! When you install software, you are actually just being given a license to use it. When you first install a software package, you are asked to agree to the terms of service or the license agreement. In that agreement, you will find that your rights to use the software are limited. For example, in the terms of the Microsoft Office Excel 2010 software license, you will find the following statement: “This software is licensed, not sold. This agreement only gives you some rights to use the features included in the software edition you licensed.”

For the most part, these restrictions are what you would expect: you cannot make illegal copies of the software and you may not use it to do anything illegal. However, there are other, more unexpected terms in these software agreements. For example, many software agreements ask you to agree to a limit on liability. Again, from Microsoft: “Limitation on and exclusion of damages. You can recover from Microsoft and its suppliers only direct damages up to the amount you paid for the software. You cannot recover any other damages, including consequential, lost profits, special, indirect or incidental damages.” What this means is that if a problem with the software causes harm to your business, you cannot hold Microsoft or the supplier responsible for damages.

6.2.7 Applications for the Enterprise

As the personal computer proliferated inside organizations, control over the information generated by the organization began splintering. Say the customer service department creates a customer database to keep track of calls and problem reports, and the sales department also creates a database to keep track of customer information. Which one should be used as the master list of customers? As another example, someone in sales might create a spreadsheet to calculate sales revenue, while someone in finance creates a different one that meets the needs of their department. However, it is likely that the two spreadsheets will come up with different totals for revenue. Which one is correct? And who is managing all of this information?

Enterprise Resource Planning

In the 1990s, the need to bring the organization’s information back under centralized control became more apparent. The enterprise resource planning (ERP) system (sometimes just called enterprise software) was developed to bring together an entire organization in one software application. Simply put, an ERP system is a software application utilizing a central database that is implemented throughout the entire organization. Let’s take a closer look at this definition:

• “A software application”: An ERP is a software application that is used by many of an organization’s employees.

• “utilizing a central database”: All users of the ERP edit and save their information from the data source. What this means practically is that there is only one customer database, there is only one calculation for revenue, etc.

• “that is implemented throughout the entire organization”: ERP systems include functionality that covers all of the essential components of a business. Further, an organization can purchase modules for its ERP system that match specific needs, such as manufacturing or planning.

Registered trademark of SAP

ERP systems were originally marketed to large corporations. However, as more and more large companies began installing them, ERP vendors began targeting mid-sized and even smaller businesses. Some of the more well-known ERP systems include those from SAP, Oracle, and Microsoft.

In order to effectively implement an ERP system in an organization, the organization must be ready to make a full commitment. All aspects of the organization are affected as old systems are replaced by the ERP system. In general, implementing an ERP system can take two to three years and several million dollars. In most cases, the cost of the software is not the most expensive part of the implementation: it is the cost of the consultants!

So why implement an ERP system? If done properly, an ERP system can bring an organization a good return on their investment. By consolidating information systems across the enterprise and using the software to enforce best practices, most organizations see an overall improvement after implementing an ERP. Business processes as a form of competitive advantage will be covered in a different chapter.

6.2.8 Sidebar: Y2K and ERP

The initial wave of software-application development began in the 1960s, when applications were developed for mainframe computers. In those days, computing was expensive, so applications were designed to take as little space as possible. One shortcut that many programmers took was in the storage of dates, specifically the year. Instead of allocating four digits to hold the year, many programs allocated two digits, making the assumption that the first two digits were “19″. For example, to calculate how old someone was, the application would take the last two digits of the current year (for 1995, for example, that would be “95″) and then subtract the two digits stored for the birthday year (“65″ for 1965). 95 minus 65 gives an age of 30, which is correct.

However, as the year 2000 approached, many of these “legacy” applications were still being used, and businesses were very concerned that any software applications they were using that needed to calculate dates would fail. To update our age-calculation example, the application would take the last two digits of the current year (for 2012, that would be “12″) and then subtract the two digits stored for the birthday year (“65″ for 1965). 12 minus 65 gives an age of -53, which would cause an error. In order to solve this problem, applications would have to be updated to use four digits for years instead of two. Solving this would be a massive undertaking, as every line of code and every database would have to be examined.

This is where companies gained additional incentive to implement an ERP system. For many organizations that were considering upgrading to ERP systems in the late 1990s, this problem, known as Y2K (year 2000), gave them the extra push they needed to get their ERP installed before the year 2000. ERP vendors guaranteed that their systems had been designed to be Y2K compliant – which simply meant that they stored dates using four digits instead of two. This led to a massive increase in ERP installations in the years leading up to 2000, making the ERP a standard software application for businesses.

6.2.9 Customer Relationship Management

A customer relationship management (CRM) system is a software application designed to manage an organization’s customers. In today’s environment, it is important to develop relationships with your customers, and the use of a well-designed CRM can allow a business to personalize its relationship with each of its customers. Some ERP software systems include CRM modules. An example of a well-known CRM package is Salesforce.

6.2.10 Supply Chain Management

Many organizations must deal with the complex task of managing their supply chains. At its simplest, a supply chain is the linkage between an organization’s suppliers, its manufacturing facilities, and the distributors of its products. Each link in the chain has a multiplying effect on the complexity of the process: if there are two suppliers, one manufacturing facility, and two distributors, for example, then there are 2 x 1 x 2 = 4 links to handle. However, if you add two more suppliers, another manufacturing facility, and two more distributors, then you have 4 x 2 x 4 = 32 links to manage.

A supply chain management (SCM) system manages the interconnection between these links, as well as the inventory of the products in their various stages of development. A full definition of a supply chain management system is provided by the Association for Operations Management: “The design, planning, execution, control, and monitoring of supply chain activities with the objective of creating net value, building a competitive infrastructure, leveraging worldwide logistics, synchronizing supply with demand, and measuring performance globally.”[2] Most ERP systems include a supply chain management module. 

This section titled 6.2: Application Software is shared under a CC BY-SA license and was authored, remixed, and/or curated by David T. Bourgeois (Saylor Foundation)