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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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