An Introduction to ERP by 429Q5yoN

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									                                      An Introduction to ERP

What is ERP

Enterprise Resource Planning (ERP), is a software driven business management system which
integrates all facets of the business, including planning, manufacturing, sales, and marketing. The
business environment has become increasingly complex and the marketplace has changed from
local to global. Management is under constant pressure to improve competitiveness by lowering
operating costs and improving logistics. Organizations therefore have to be more responsive to
the customer and competition. ERP as a business solution aims to help the management by
setting better business practices and equipping them with the right information to take timely
decisions.

Evolution of ERP

The history of ERP can be traced back to the 1960’s, when the focus of systems was mainly
towards inventory control. Most of the systems software were designed to handle inventory based
in traditional inventory concepts. The 1970’s witnessed a shift of focus towards MRP (Material
Requirement Planning). This system helped in translating the master production schedule into
requirements for individual units like sub assemblies, components and other raw material
planning and procurement. This system was involved mainly in planning the raw material
requirements.

Then, in 1980’s came the concept of MRP-II ie the Manufacturing Resource Planning which
involved optimizing the entire plant production process. Though MRP-II, in the beginning was an
extension of MRP to include shop floor and distribution management activities, during later years,
MRP-II was further extended to include areas like Finance, Human Resource, Engineering,
Project Management etc. This gave birth to ERP (Enterprise Resource Planning) which covered
the cross-functional coordination and integration in support of the production process. The ERP
as compared to its ancestors included the entire range of a company’s activities.

ERP addresses both system requirements and technology aspects including client/server
distributed architecture, RDBMS, object oriented programming etc.

Evaluation Criteria

Some important points to be kept in mind while evaluating an ERP software include

• Functional fit with the Company’s business processes

• Degree of integration between the various components of the ERP system

• Flexibility and scalability

• User friendliness

• Ease of implementation

• Ability to support multi-site planning and control

• Technology - client/server capabilities, database independence, security
• Availability of regular upgrades

• Amount of customization required

• Local support infrastructure

• Reputation and sustainability of the ERP vendor

• Total costs, including cost of license, training, implementation, maintenance, customization and
hardware requirements.

Implementation

No ERP software can benefit an organization unless it is implemented well. Implementation costs
are typically twice or even thrice the cost of the product.

ERP implementation costs can be segregated as under

Technical costs

• Hardware, software and communication
• Technical and functional personnel deputed for implementation

Data creation costs

• Creation of master files
• Conversion of data from legacy systems & building interfaces

Training costs

• Education and training of personnel in use of the ERP system
• Consultancy fees given to outside professionals

Apart from the vendor itself several consultants also provide implementation support.
Implementation involves customization of the ERP package to suit the user requirements. This
requires a thorough understanding of the technical aspects of the ERP package as well as the
functional aspects of the business.

Under the traditional approach organizations used to construct a ‘to-be’ model which defined how
the business processes are to be structured and implementation was preceded by a Business
Process Re-engineering exercise. Many a times this caused incompatibility between the ‘to-be’
model and the ERP functionality. This led to more customizations, longer implementation time
frames, higher costs and loss of user confidence.

The current approach is to have a concurrent Business Process Re-engineering exercise during
the ERP implementation. The focus has shifted from business process improvement to technical
improvement and vice-versa depending on the situation. Cases where focus would be more on
business process improvement are

• Organization is in a state where improvements to business processes are required.

• Large customizations are necessary without improvement to business process
• High level of integration with other systems are required

• Multiple sites have to be implemented.

• Cases where focus would be more on technical improvements are

• Change-minded organization with firm decision making process

• Company operates according to common business practices.

• Single site has to be implemented.

• Improvements in business processes are not required immediately

The ERP market

During the last 3-4 years the ERP market witnessed considerable growth rates driven mainly by
the Y2K crisis. ERP companies including SAP, PeopleSoft, Oracle and Baan etc have recorded
consistent growth in revenues, which were well above the 20% mark.

However, recent trends in the industry indicate a slowdown in the traditional ERP market. The
slowdown has been attributed to the Y2K crisis, which is round the corner and the stagnant world
economy. Growth rates which were as high as 40% per annum is expected to slowdown
considerably to around 15-20%.

However, the market is also witnessing new avenues like the emergence of SMEs (Small and
Medium Enterprises – turnover of $50mn to $500mn) as a major ERP spender with significant
demand for module specific implementation. As the Fortune 500 market for product license
revenue becomes saturated, larger ERP firms are shifting their focus to the middle market. Also,
other areas like Supply Chain Management (SCM), Customer Relationship Management (CRM),
extended ERP and Web enabled ERP are catching attention.

During the year 1998 the total ERP market is estimated to be around $17.5bn by IDC a growth
rate of around 26%yoy. The ERP market is widely spread with the top ten players accounting for
almost 48% of the total market the rest of the market is accounted for by the small and regional
players.

However, the top end of the market is captured by a few players. SAP, the market leader,
accounts for 17% of the total market (1998). Other major players include Baan, Oralce,
PeopleSoft etc.

The top 10

$ bn                                       Total market          % Share
SAP                                                       2.95             16.86
People Soft                                               1.00              5.71
Oracle                                                    0.92              5.26
McKesson                                                  0.85              4.86
J D Edwards                                               0.62              3.54
Misys                                                     0.49              2.80
BaaN                                                      0.48              2.74
GEAC                                                      0.46              2.63
JBA                                                                      0.37                           2.11
System Software Associates                                               0.24                           1.37
Others                                                                   9.12                          52.11
Total                                                                   17.50                      100.00
Source IDC
Figures include 1998 license and maintenance revenues


The total license revenue market is estimated at $6758mn during 1998 according to AMR. The
license revenue market has been posting consistent growth of over 40%yoy during the last 4-5
years. However these growth rates are expected to slow down considerably.

ERP market forecast - license revenues

$ mn                   1994           1995             1996             1997             1998             1999E              2000E
SAP                          352.0        669.0           942.0          1,221.0           1,908.0             2,800.0         3,700.0
% yoy                                        90.1          40.8            29.6                 56.3              46.8               32.1
Oracle                       103.0        209.0           341.0           533.0             667.0                850.0         1,100.0
% yoy                                     102.9            63.2            56.3                 25.1              27.4               29.4
Peoplesoft                    69.0        139.0           253.0           433.0             668.0              1,000.0         1,400.0
% yoy                                     101.4            82.0            71.1                 54.3              49.7               40.0
BaaN                          60.0        112.0           240.0           437.0             651.0                950.0         1,200.0
% yoy                                        86.7         114.3            82.1                 49.0              45.9               26.3
JD Edwards                   108.0        134.0           180.0           249.0             325.0                400.0           550.0
% yoy                                        24.1          34.3            38.3                 30.5              23.1               37.5
Others                       978.0      1,187.0       1,444.0            1,989.0           2,539.0             2,900.0         3,750.0
% yoy                                        21.4          21.7            37.7                 27.7              14.2               29.3
Total                    1,670.0        2,450.0         3,400.0          4,862.0           6,758.0             8,900.0        11,700.0
% yoy                         59.0           46.7          38.8            43.0                 39.0              31.7               31.5


Source: AMR, Company reports


ERP market by functional modules

The main modules in any ERP application include Finance and accounting, customer order
management, MRP, Materials management, Decision Support/ data Warehousing and Non ERP
applications.

During 1998 finance and accounting accounted for 30% of the total license revenues. According
to AMR this figure is expected to grow at a CAGR of more than 40% in the next 2-3 years to
contribute 33% of the total revenues.

While customer order management and MRP account for another 30% of the total license
revenues material management account for another 11%.

ERP market by functional areas

$ mn                                    1996             1997             1998             1999                2000           2001
Finance & accounting                          934.0        1,336.0             1,910.0      2,712.0             3,824.0        5,354.0
% yoy                                                            43.0            43.0            42.0                 41.0           40.0
Customer order management                     505.0             682.0           928.0       1,253.0             1,678.0        2,232.0
% yoy                                                            35.0            36.1            35.0                 33.9           33.0
MRP                                     557.0        721.0         952.0       1,257.0      1,684.0       2,239.0
% yoy                                                 29.4             32.0      32.0             34.0          33.0
Material                                392.0        516.0         696.0        940.0       1,250.0       1,663.0
% yoy                                                 31.6             34.9      35.1             33.0          33.0
Decision support                        179.0        234.0         307.0        399.0         519.0         674.0
% yoy                                                 30.7             31.2      30.0             30.1          29.9
Non-ERP Apps                            890.0       1,159.0      1,567.0       2,144.0      2,952.0       4,091.0
% yoy                                                 30.2             35.2      36.8             37.7          38.6
Total                                  3,457.0      4,648.0      6,360.0       8,705.0     11,907.0      16,253.0
% yoy                                                 34.5             36.8      36.9             36.8          36.5


Source: AMR


ERP market by functional areas

% of total                           1996          1997         1998          1999         2000          2001
Finance & accounting                        27.0      28.7             30.0      31.2             32.1          32.9
Customer order management                   14.6      14.7             14.6      14.4             14.1          13.7
MRP                                         16.1      15.5             15.0      14.4             14.1          13.8
Material                                    11.3      11.1             10.9      10.8             10.5          10.2
Decision support                             5.2          5.0           4.8          4.6           4.4           4.1
Non-ERP Apps                                25.7      24.9             24.6      24.6             24.8          25.2
Total                                   100.0        100.0         100.0        100.0         100.0         100.0


Source: AMR


Inhibitors

After posting significant gains for a 3-4 years the ERP market may be heading towards a
slowdown. Except for SAP most other players have witnessed a slowdown in revenue growth.

The main constraints to growth for the sector can be classified as:

            Saturation of the certain horizontal applications including Finance and accounting, MRP
             etc which accounted for nearly 45% of the ERP revenues during 1998.

            Saturation of large customers. Most of the Fortune 500 companies and companies
             having revenues over $1bn have already implemented ERP.

            Though the medium enterprises provide a good opportunity for growth, pricing for these
             companies will have to be highly competitive and margins may come under pressure.
             Thus smaller players who have a cost advantage will have an edge over the others.

            With the Y2K round the corner, companies decision pattern have taken a shift more
             towards Y2K and EURO related issues rather than ERP and most CIOs have postponed
             their decision.

Drivers
The market for ERP, however does not sound so depressing. Companies still have growth
avenues which include:

           Less penetrated modules within the ERP suite, both horizontal and vertical. The new
            horizontal areas include E-commerce, Customer relationship management, Supply chain
            management, plant maintenance, field service, data warehousing, product data
            management, service contract management, warehousing & distribution,, transportation
            management etc. Among the vertical application are industries such as retail, utilities,
            insurance, and government organizations.

           The mid market segment presents immense opportunities. However, the margins from
            SMEs will be far below that from the larger players. Another problem that the SMEs
            present is the low transaction (order) size and the difficulty of reaching out to these
            players. Also they are relatively less sophisticated on the technology side.

           Another major demand driver will be the e-commerce wave. As more and more company
            move towards e-commerce it becomes necessary to implement ERP solutions.

ERP In India

Until recently Indian organizations were in a sellers market and operating in a regulated
environment. They grew by managing the environment, rather than innovating and improving
internal efficiencies. The customer was taken for granted and quality was available only at a
premium. With globalization and gradual lifting of regulation, there is a paradigm shift in running
the business. Indian companies now need to increase customer focus, improve speed of delivery,
be cost competitive and provide value for money (improved quality at lower price).

Indian companies therefore need to implement ERP systems for improving their business
processes and becoming more competitive in the global environment. Though ERP
implementation is costly and time consuming, it has several benefits which will help recover these
costs in the long run.

According to NASSCOM, during the year 1998-99, the Indian ERP market has been estimated at
R5200mn compared to Rs2800mn in the previous year ie a growth of 85%yoy. The growth in the
export market was far higher and more than doubled during the same time period. According to
the NASSCOM, by the end of FY2001-02, the total Indian ERP market is expected to multiply by
nearly 4 times and reach Rs65bn compared to Rs13.4bn in 1998-99.

The Indian ERP market

Rs mn                  Domestic        % yoy          Exports       % yoy       Total         % yoy
1995-96                       500.0                         700.0                   1,200.0
1996-97                       900.0            80.0       1,800.0      157.1        2,700.0       125.0
1997-98                      2,800.0       211.1          3,400.0       88.9        6,200.0       129.6
1998-99                      5,200.0           85.7       8,200.0      141.2       13,400.0       116.1
1999-2000                   10,000.0           92.3      15,000.0       82.9       25,000.0           86.6
2000-01                     18,000.0           80.0      28,000.0       86.7       46,000.0           84.0
2001-02                     25,000.0           38.9      40,000.0       42.9       65,000.0           41.3


Source: NASSCOM


Market players and profiles
While 52% of the total market is accounted for by the unorganised and small players the rest is
accounted for by around 10 major players. SAP contributes 17% of the total revenues followed by
People Soft, Oracle, Baan and J D Edwards.

SAP

SAP pioneered Enterprise Resource Planning. The company’s R/3 System, a family of integrated
components such as Production, Sales and Distribution, Controlling and Human Resources can
be used as a whole or individually. R/3 is also internet-compatible and can be easily combined
with other types of software or customers’ own systems.

Probably the only leader, SAP, according to AMR has a market share of 33% which is higher
compared to the next 4 competitors put together. The company has more than 19,300 employees
worldwide. The company’s R/3 system is in use in more than 107 countries.

Operations

During 1998, the company reported revenues of DM8.5bn registering a growth of 41%yoy. Net
profit growth, however, where lower at 14%yoy compared to the previous year. The company
continued to gain market share despite stiff competition in the ERP market. According to
Advanced Manufacturing Research (AMR) SAP's market share in the enterprise software market
in 1998 was 33 %, a gain of two percentage points over 1997. The company has specified the
following growth engines for the future:

          Constantly expanding and improving the R/3 family of Enterprise Resource Planning
           software products
          Developing and marketing complete, specialized industry solutions based on the R/3
           System
          Broadening the product offering with New Dimension products. The New Dimension
           products shown below are business solutions that are independent of R/3 and span
           system platform, enterprise, and organizational boundaries:
          Supply Chain Management software
          Customer Relationship Management software
          Business Intelligence software

Financial highlights (bn DM)

Year             Sales       % change          Profits    % change       Employees      % change
1998               8.465                40.7      1.052          13.7           19308              50.2
1997               6.017                61.7      0.925          62.9           12856              39.7
1996               3.722                38.1      0.568          40.2            9202              34.2
1995               2.696                47.2      0.405          44.1            6857              31.1
1994               1.831 -                        0.281              -           5229


Source: Company reports


BAAN

Baan is one of the world’s leading providers of scalable enterprise business solutions. The
company was founded in 1978 by Jan & Paul Baan. Currently, more than 2,800 of its enterprise
systems have been implemented at approximately 5,000 sites in more than 80 countries across
the world. It has more than 4,500 employees worldwide.
It delivers a comprehensive and flexible suite of enterprise business applications that address the
complete value chain, from Enterprise Resource Planning (ERP) and supply chain management,
to customer interaction software.

The company’s flagship product, BAAN IV, is a suite of open-systems-based, software
applications for enterprise information management. The software enables companies to manage
all aspects of the business; from sales forecasting and inventory control, to manufacturing,
distribution, and finance in one, integrated environment.

The foundation for the products is Orgware, a suite of tools and methodologies which reduce the
time and costs associated with implementation and enable continuous improvement. With
Orgware, Baan is enabling a new paradigm called Dynamic Enterprise Modeling, which delivers a
framework for insuring that enterprise applications are in close alignment with an organization’s
changing processes and business model.

The company’s software applications include Baan Manufacturing, Baan Project , Baan Finance,
Baan Service, Baan Process, Baan Distribution & Transportation, BaanSYNC family, Aurum
Customer Enterprise, Aurum Interactive Selling Solution.

The company also provides dynamic enterprise modeling solutions which include Enterprise
Modeler, Enterprise Performance Manager, Enterprise Reference Models, Enterprise
Implementor.

People soft

PeopleSoft is co-founded by Dave Duffield (President, Chief Executive Officer - owns 28% of the
company) and Ken Morris (Senior Vice President, Chief Technology Officer). The company
started its operations in 1987 to design Client/server applications. In 1988, the first product
Peoplesoft HRMS for Human resources market was released and today commands more than
50% of the human resources market.

Currently the company provides e-Business and analytic applications for human resource
management, financials, distribution, manufacturing, and supply chain, along with a range of
industry-specific solutions. The company has more than 3,000 customers, and an employee
strength of more than 6,000.

Its products include PeopleSoft 7.5, PeopleSoft Materials Management, PeopleSoft
Manufacturing, PeopleSoft Distribution, PeopleSoft Financials, PeopleSoft HRMS, PeopleSoft
Supply Chain Management And People Tools.

JD Edwards

J D Edwards, formed on March 17, 1977 was co-founded by Jack Thompson , Dan Gregory and
C. Edward McVaney making J D Edwards. Edward is the Chief Executive Officer who owns
more than 30% of the company. The company has more than 4100 employees and operations
spanning 48 countries.

								
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