Introduction to ERP: Benefits of Integrated Systems

CHAPTER 1

INTRODUCTION TO ERP

INTRODUCTION

Information Technology is revolutionizing the way in which we live and work. It is
changing all aspects of our life and lifestyle. The amount of calculation power that is
available to mankind is increasing at an exponential rate. Computers and communication
are becoming integral part of our lives.

To survive, thrive and beat the competition in today’s world, one has to manage the
future. Managing the future means managing the information. IT has many roles to play in
the organization. All organizations have certain objectives and goals to achieve. For any
organization to succeed, all business units or departments should work towards these
common goal. But each department or business function in the organization will have its
own goals and procedures. The departmental objectives can sometimes be conflicting. For
example the finance department might want to cut down the advertising budget, whereas
the marketing department might want more money. Similarly production-planning
department might want to reduce the inventory level, but the production people might
want to reduce the inventory level, but the production people might want to have more
stocks. To success of an organization rests in resolving the conflicts between the various
business functions and making them do what is good for the organization as a whole. For
this, information is critical. Everybody should know what is happening in other parts of the
organization. It is not enough that each department manages its activities efficiently, it
should also help other departments manage their functions efficiently. For these to
happen, the organization should cease to function of islands of information, each working
in isolation. Each and every employee should know what his/her counter-parts are doing,
how his/her actions and decisions will affect the other departments. This kind of
information sharing was difficult in the early days. Now with the advancement in
Information Technology this is possible.

IT has a crucial role to play, both at the organizational level and at the departmental
level. At the organizational level, IT should assist in specifying objectives and strategies of
the organization. IT should aid in developing and supporting systems and procedures to
achieve them. At the departmental level, IT must ensure a smooth flow of information
across departments, and should guide organizations to adopt the most viable business
practices. At this level, IT ensures seamless flow of information across the different
departments and develops and maintains an enterprise-wide database. This database will
eliminate the need of the isolated data islands that existed in each department and make
the organization’s data accessible across the departmental boundaries. The enterprise-
wide data sharing has many benefits like automation of the procedures, availability of
high quality information for better decision making, faster response time and so on.

1.1. EVOLUTION OF ERP

When companies were small and all the different managerial functions managed by a
single person, the decisions were made, keeping in mind the overall company objectives.
But as company grew, managing the entire operations become impossible for a single
person. More and more people were brought in and the different business functions were
given to different individuals. When organization become larger, each person hired people
to assist him/her and the various departments as we see now, evolved. The size of the
department began to increase more and more people were required to do the job.

As the departments become large, they become closed and water tight. Each had their
own set of procedures and hierarchy. People at most levels within a department, would
just collect and pass the information upward. Thus information was shared between
departments only at the top level.

Most developers ended up developing need-based, isolated information systems that
were incompatible and it is no wonder that IT implementations automated only the
existing applications and not the business functions.

The system has work around the core activities of the organization, and should facilitate
seamless flow of information across departmental barriers. Such as systems can optimally
plan and manage all the resources of the organization and hence, they can be called as
Enterprise Resources Planning (ERP) systems.

An Enterprise is a group of people with a common goal, which has certain resources at
its disposal to achieve that goal. The group has some key functions to perform in order to
achieve its goal.

Resources included are money, manpower, material, and all the other things that are
required to run the enterprise.

Planning is done to ensure that nothing goes wrong. Planning is putting necessary
functions in place and more importantly, putting them together.

Therefore Enterprise Resources Planning or ERP is a method of effective planning of all
the resources in an organization.

There are many misconceptions about ERP. The first one is that ERP is a computer
system. Yes, computer and IT are integral parts of an ERP system, but ERP is primarily an
enterprise-wide system, which encompasses corporate mission, objectives, attitudes,
beliefs, values, operating styles and people who make the organization. The second
misconception is that ERP is for manufacturing organizations alone. This assumption is
basically due to the way in which ERP was historically developed from the manufacturing
methods such as MRP (Material Requirement Planning) and MRP II (Manufacturing
Resource Planning.)

1.2. WHAT IS ERP?
(OCT 04,10M)

Enterprise Resource Planning (ERP) covers the techniques and concepts employed for
the integrated management of businesses by the effective use of management resources,
to improve the efficiency of an enterprise.
ERP packages are integrated (covering all business functions) software packages that
support the above ERP concepts. Originally ERP packages were targeted at the
manufacturing industry, and consisted mainly of functions for planning and managing
core businesses such as sales management, accounting and financial affairs, etc.
However in the recent years, adaptation not only to the manufacturing industry, but also
to diverse type of industry has become possible and the expansion of implementation and
use has been progressing on the global level.
ERP software is designed to model and automate many of the basic processes of a
company, from finance to the shop floor, with the goal of integrating information across
the company.

Fig: Integration of information through ERP system

1.3. REASONS FOR THE GROWTH OF THE ERP MARKET
(APR 07, 09, 10; 5M)

There is no doubt that the market for the Enterprise Resource Planning (ERP) systems is
in great demand. Industry analysts are forecasting growth rates of more than 30 % for at
least the next 3 years.
Now why are so many companies replacing their key business systems? The answer is :
• To enable improved business performance
o Cycle time reduction : the time required to contact other department is
reduced.
o Inventory reduction: As the data is integrated there is no need to re enter
the data and the paperless transaction is done using EDI (Electronic Data
Interchange).
o Order fulfillment improvement: There is no conflicts between the
departments like sales and production so order can be made on time.
• To support business growth requirements
o New Products and New Customers : we can grow our organization by
implementing new Products in the market and get the new customers for
that product.
o Globalize the product: We can Globalize the product for International
customers
• To provide flexible, integrated, real-time decision support
o Managers gets the integrated data of different departments at any time to
analyze and to take important decisions at the right time.
• To eliminate limitations in the legacy system:
o Integration of the isolated departments
o Decision support system
o Availability of the right data at right time
o Flexibility to change
o Supporting latest technologies
There are some of the reasons for explosive growth rate of the ERP market and the ERP
vendors. As more and more companies are joining the race, the ERP vendors are shifting
their focuses from big fortune 1000 companies to different market segments like medium
sized companies and small companies. The future will see the battle for market share and
mergers and acquisitions for strategic and competitive advantage. The ultimate winner in
this race will be the customer, who will get the better products and better services at
affordable prices.

1.4. THE ADVANTAGES OF ERP
(OCT 04, 05, 07, 08, APR 08; 7M)

Installing the ERP system has many advantages, some of the direct advantages include
improved efficiency, information integration for better decision making, faster response
time for customer queries, etc. And the indirect benefits include better corporate image,
improved customer goodwill, customer satisfaction, and so on. The following are some of
the direct benefits of the ERP systems.

• Business Integration: The reason why the ERP packages are considered to be
integrated, is the automatic data updation (automatic data exchange among
departmental applications) that is possible among the related business
components. Since conventional company information systems was isolated
departmental functions, almost all were weak in terms of communication and
integration of information. In the case of ERP packages, the data of related
business functions is also automatically updated at the time of transactions
occurs. For this reason, one is able to grasp business details in real time, carry out
the various types of management decisions in a timely manner, based on that
information.
• Flexibility:
o Multilanguage: It supports different languages so that the company can
work in the language they want.

o Multi currency: It also support different currencies so that if the company
is globalize (multinational) then it could have branches in many countries
and for this it should support different currencies.
o Multiple accounting Standards: Organization can have multiple products
and it can have extremely different way of business and information flow
for different products, so there should be different accounting for
calculation of profits, wages, general ledger and so on. Here ERP provide
Multiple Accounting Standards for this type of company. To cope with
company globalization and system unification, this flexibility is essential.
• Better Analysis and planning capabilities: With the Integration of
Information, one can get any information from the enterprise system. Because of
this it became possible to utilize the decision support system and analysis of data
from a variety of dimensions, one is able to give the decision maker the
information they want thus enabling them to make better decisions.

FOR Example:
Problem:
In 2007, our organization has made 35% more profit then the year 2006, now in
2010 the company want same 35% increment in the profit margins, this is the
important task of the managers to cope with.
Solution:
Manager will first analyze the data of 2007 from the Archive such that he will get
the information on the tasks to achieve 35% increment, he will analyze all the
departmental duties assigned that time, To analyze all these information the
manager can take a help of DSS (Decision Support System) system to take the
departmental decision and EIS (Executive Information System) to take the
decision at the organizational level. So the system will help the manager to do the
Planning and also to take better decision to achieve the company’s goal.
• Use of the latest technology: The ERP vendors are very quick to realize that in
order to grow and sustain that growth, they had to embrace the latest
developments in the field of IT. Therefore, they quickly adapted their systems to
take the advantage of the latest technologies like open systems, client/server
technology, Internet/Intranet, e-commerce, etc. It is this quick adaptation to the
latest change in information technology that makes the flexible adaptation to
change in future business environments possible. It is this flexibility that makes
the in-corporation of the latest technology possible during system customization,
maintenance and expansion phases.

1.5. REASONS FOR THE FAILURE OF ERP IMPLEMENTATION

ERP packages if chosen correctly, implemented judiciously and used efficiently, will raise
the productivity and profits of companies dramatically. But many companies fails in this
because of a wrong product, incompetent and haphazard implementation and inefficient
and ineffective usage.
There should be good people who know the business. The vendor should be good and his
package should be the one best suited for the company’s needs. The ERP consultants
should be good. The implementation should be planned well and executed perfectly. The
end-user training should be done so that the people understand the system, and the
effect of their efforts on the overall success of the program.
The introduction of the ERP system will dramatically change the job descriptions and
functions of many employees. Employees who were earlier doing the work of recording
information will, overnight, be transformed into decision makers. For example, in the past
an order entry clerk’s job was to enter the order that came to him. With the
implementation of the good ERP system, the order entry clerk became an action initiator.
As soon as he enters the order into the system, the information is passed onto sales,
distribution and finance modules. The distribution module checks whether the item is in
stock and if available, the item is dispatched and information is sent to the finance
module. If the items are not in stock, then the manufacturing module is given the
information, so that the production can start. The customer is informed about the status
of his order. If the items are shipped, the finance module prepares the invoice and sends
it to the customer. All these action takes place automatically as soon as the order entry
clerk enters the information regarding the order into the system. Thus order entry clerk is
transformed from data entry operator to a decision maker whose action can trigger a
chain of action.

Many employees find this transformation difficult to accept. If the employees are not
given proper training, well in advance, then the system will fail. Another factor is the fear
of unemployment. When procedures become automated, people who were doing those
jobs become redundant. So it is quite natural to have resistance from the employees. But
the same employees can be trained in the new system and can work in more challenging
and stimulating environments. For this also, the employees have to be told, in advance,
as to what will happen and should be given ample time and training to make the
transformation. Without support from the company, even the best system will fail. So it is
very important that the management should take the necessary steps, well in advance, to
remove the fear of, and provide necessary training to their employees.

CHAPTER 2

ENTERPRISE – AN OVERVIEW

INTRODUCTION
(OCT 04, 6M)

What is an enterprise? An enterprise is a group of people with a common goal, which has
certain resources at its disposal to achieve that goal. In the traditional approach the
organization is divided into different units based on the functions they perform such as
manufacturing or production department, the production planning department, the
purchasing department, the sales and distribution department, the finance department,
the R&D department and so on. Each of these departments are compartmentalized and
have their own goals and objectives, which from their point of view are in line with the
organization’s objectives.
Each of these departments function in isolation and have their own systems of data
collection and analysis. So the information that is created or generated by the various
departments, in most cases, are available only to the top management as a summary
reports which is not available to other departments. The result is that instead of taking
the organization towards the common goal, the various departments end up pulling it in
different directions. This is because one department does not know what the other does.
Also sometimes the departmental objectives can be conflicting. For example the sales and
marketing people will want product variety to satisfy the varying needs of the customer.
But the production department will want to limit the product variety to cut down the
production costs. So unless all the departments know what the others are doing and for
what purpose, these kinds of conflicts will arise, thus disrupting the normal functioning of
the organization.
But in enterprise, the entire organization is considered as a system and all the
departments are its subsystems. The information about all the aspects of the organization
is stored centrally and is available to all the departments.

This transparency and information access ensures that the departments no longer work in
isolation pursuing their own independent goals. Each sub system knows what the other
are doing why they are doing it and what should be done to move company towards the
common goal.
The ERP system helps to accomplish this task by integrating the information systems,
enabling smooth and seamless flow of information across departmental barriers,
automating business process and functions and thus, helping the organization to work and
move forward as a single entity.

2.1. INTEGRATED MANAGEMENT SYSTEMS
(OCT 07; 7M)

An Information Systems is an open system that produces information using the input-
process-output cycle. The minimal information system consist of three elements People,
procedures and data. People follow procedures to manipulate data to produce
information. Today Information system is defined as an organized combination of people,
hardware, software, communication networks and data resources that collects, collates,
transforms disseminate(spread information) in an organization.

2.1.1. Management Information Systems
(APR 08; 7M)

It is also called as Information-Reporting systems produce information products that
support many of the day to day decision making needs of the management. Reports,
charts, graphs, displays and responses produced by such systems provide information

that managers have specified in advance. Each department will have its own database
and information systems. These systems will produce different reports of varying detail
that were specified when the system were built.
This method of information gathering has two major disadvantages. One people in one
department do not have any information about what is happening in the other
departments. May be at the top management level the summary reports are being
circulated to other departments also, but these summary reports often fail in capturing
the real picture. The second drawback is that these system gives only the information that
they were designed to produce at the time they were built.
These systems lack the integrated approach. There will be an accounting system for an
finance department, a production planning system for the manufacturing department, an
inventory management system for the stores department, and so on. All these system will
perform in isolation. So if a person wanted some information which has to be derived from
any of these two systems, he has to get the necessary reports from both systems and
then correlate and combine the data.
Because the system works in isolation, collecting and analyzing the data can be difficult
task, since getting information on more than one department can be tedious. No business
executives or decision makers can take good decisions with the isolated data that he gets
from the various reports produced by each department. Even if he collates the data and
produces the information that he requires, he would have lost the valuable time that
could have been better spent in decision making.
An organization cannot function as islands of different departments. The production
planning data is required for the purchasing department. The purchasing details are
required for the finance department and so on. So if all the information islands, which
were functioning in isolation, were integrated into a single system, then the impact of that
would be dramatic.
The three fundamental characteristics of information are accuracy, relevancy and
timeliness. The information had to be accurate, it must be relevant for the decision maker
and it must be available to the decision maker when he need it. Today the time available
for an organization to react to the changing market trends is very short. To survive, the
organization must always be on its toes.

2.2. BUSINESS MODELLING
(OCT 05, 06, 07, 08, 09, APR 08, 09; 5M)

Business Modeling is a representation of the business as one large system showing the
interconnections and interdependencies of the various subsystems and business
processes. Based on the organizations goals, objectives and strategic plans, a business
model consisting of the business processes is developed. These business processes are
controlled by different individuals in the organization to achieve common goals. Based on
the business model the ERP system is developed with the aim of providing the required
information and necessary assistance to the various individuals, to help them perform
their business processes more effectively and efficiently.
In business modeling, we model the business as an integrated system, taking the
processes managing its facilities and materials as resources. Information is very important
resource and is very critical in managing all the other resources.
Thus business model is a representation of the actual business—what are the various
business functions of the organization, how they are related, what are their
interdependencies, and so on. The business model is usually represented in graphical
form using flowcharts and flow diagrams. From the business model, the data model is
created.

2.3. INTEGRATED DATA MODEL
(APR 09, OCT 09; 6M)

One of the most critical steps in the ERP implementation is the creation of an Integrated
Data Model. As we have seen earlier, one of the advantageous of having ERP systems is
that all the employees from the different departments get access to the data i.e. the
integrated data. The company uses these integrated data for its analysis and decision
making.
With the implementation of the ERP systems, the departmental information system and
the departmental databases will have to go. There can no longer be isolated databases,
which cater to the needs of a particular department. All the data has to be from the

integrated database. This approach will reduce the data redundancy and provide updated
information about the entire organization to all employees.
For the integrated database to be effective, it should clearly depict the organization,
reflect the day-to-day transactions and should be updated continuously. At a given time,
the database should give a snapshot of the organization. So if the order is entered, the
sale is done and the goods are dispatched, then database should reflect those changes.
The inventory should be reduced and the account receivable should be increased. All
these thing have to happen instantaneously and automatically. That is the challenge and
that is the advantage of integrated database and the integrated data model. The
integrated data model is derived from the business model.
So when designing the data model for the ERP system, the most important thing that
should be kept in mind is the information integration and the process or procedures
automation. The data model should reflect the organization and it should successfully
depict and integrate the data structure of the entire organization.

CHAPTER 3

ERP AND RELATED TECHNOLOGIES
INTRODUCTION

ERP is an abbreviation for Enterprise Resource Planning and means, the
techniques and concepts for the integrated management of businesses as a whole, from
the viewpoint of the effective use of management resources, to improve the efficiency of
an enterprise.

ERP systems serve an important function by integrating separate business functions—
materials management, product planning, sales, distribution, finance and accounting and
others—into a single application. However, ERP systems have three significant
limitations:

• Managers cannot generate custom reports or queries without help from
a programmer and this inhibits them from obtaining information quickly,
which is essential for maintaining a competitive advantage.
• ERP systems provide current status only, such as open orders. Managers
often need to look past the current status to find trends and patterns
that aid better decision-making.
• The data in the ERP application is not integrated with other enterprise or
division systems and does not include external intelligence.

There are many technologies that help to overcome these limitations. These technologies,
when used in conjunction with the ERP package, help in overcoming the limitations of a
standalone ERP system and thus, help the employees to make better decisions. Some of
these technologies are:

• Business Process Reengineering (BPR)
• Management Information System (MIS)
• Decision Support System (DSS)
• Executive Information Systems (EIS)
• Data Warehousing
• Data Mining
• On-line Analytical Processing (OLAP)
• Supply Chain Management

Out of the above technologies MIS, DSS and EIS are forerunners of the ERP systems.
Once the ERP system and the other technologies (like Data Warehousing, Data Mining,
OLAP, etc.) are integrated, the MIS or DSS will become redundant as their functions will be
taken care of by the new systems and they will be slowly phased out from the scene.

With the competition in the ERP market getting hotter and hotter, and ERP vendors
searching for ways to penetrate new market segments and expand the existing ones,
tomorrows, ERP systems will have most of these technologies integrated into them. In this
session we will see how each of these technologies are related to ERP systems.

3.1. BUSINESS PROCESS REENGINEERING (BPR)
(OCT.04, 05, 06, 07, 08, APR.08, 09; 7M)

Dr Michael Hammer defines BPR as "... the fundamental rethinking and redesign of
business processes to achieve improvements in performance such as cost, quality, service
and speed."

Information technology is one of the most important tools, which can be used for
making changes in business process. While undergoing BPR, any business organization
should consider the effects of I.T. solution on employees, if the organization will not
bother for these effects then no doubt organization will crash during the initial phase
itself.

In enterprise the reengineering offers advantages like information technologies,
computer network, telecommunication and interfacing of computers at different locations,
powers of DBMS. Business engineering makes the organization more customer focused
and responsive to changes in the market. This is achieved by reshaping corporate
structure around business process.

3.2. MANAGEMENT INFORMATION SYSTEM (MIS)
(OCT 05, 06, 08, 09, APR 10; 7M)

In the past, most payroll systems were data processing systems that did little more
than process time sheets, print payroll checks and keep totals of annual wages and
deductions. This was the case with most other departmental
information systems. As managers began to demand more and better information about
the working of the organization, the data processing systems evolved into management
information systems. For example, a human resource MIS system is capable of predicating
the average number of worker sick days, the amount that must be given as bonus, the
overtime allowances, and so on.

MIS is a computer-based system that optimizes the collection, transfer and
presentation of information throughout an organization, through an integrated structure
of databases and information flow.

The major differences between a management information system and a Data
Processing system are:

(OCT 07, APR 10;5M)

• The integrated database of the MIS enables greater flexibility in meeting the
information needs of the management.
• The MIS supports many functional areas (accounting, marketing, manufacturing,
etc.) whereas data processing systems tend to support a single functional area.
• MIS caters to the information needs of all levels of management whereas data
processing systems focus on departmental-level support.
• Management's information needs are supported on a more timely basis with the
MIS (with its on-line query capability) than with a data processing system.

The main characteristics of the Management Information System are:

• The MIS supports the data processing functions of transaction handling and record
keeping.
• MIS uses an integrated database and supports a variety of functional areas.
• MIS provides operational, tactical and strategic levels of the organization with
timely, but for the most part structured information (ad-hoc query facility is not
available).
• MIS is flexible and can be adapted to the changing needs of the organization.

3.3. DECISION SUPPORT SYSTEM (DSS)
(OCT 04, 06,; 6M)

Managers spend a lot of time and effort in gathering and analyzing information before
making decisions. Decision support systems were created to assist managers in this task.
Decision support systems are interactive information systems, to produce and present
information targeted to support management in the decision-making process.

However, decision-makers, especially at the top management levels, are often con-
fronted with complex decisions. The analysis of such complex decisions which involve
many factors can be difficult for a human being. These types of decisions, and the need
for complex information analysis required for such decision-making, led to the evolution of
decision support systems.

A DSS can help close the information gap and allow managers to improve the quality
of their decisions. To do this, the DSS hardware and software employ the latest
technological innovations, planning and forecasting models, 4th generation languages
and even artificial intelligence. In many cases, DSS facilitates the decision-making
process, helping the decision-makers to choose between alternatives. Some decision
support systems can automatically rank the alternatives, based on the criteria given by
the decision-maker. DSS also help in removing the monotony and tedium of gathering and
analyzing data.

DSS are designed to support decision-making processes involving semi-structured and
unstructured problems. Here, the role of the DSS is to help managers in getting the
information they want in the way they want. For example, a manager wants to reduce
cycle time. He might look at various facts like the availability of raw materials, skilled
personnel, the average machine down time, and so on. So there is no way the system can
anticipate what the manager wants. DSS’s are capable of helping the managers in
making such decisions.

The main characteristics of a DSS are:

• A DSS is designed to address semi-structured and unstructured problems.
• The DSS mainly supports decision-making at the top management level.
• DSS is interactive, user-friendly can be used by the decision-maker with little or
no assistance from a computer professional.
• DSS makes general-purpose models, simulation capabilities and other analytical
tools available to the decision-maker.

A DSS does not replace the MIS; instead a DSS supplements the MIS. There are
distinct differences between them. MIS emphasizes on planned reports on a variety of
subjects; DSS focuses on decision-making. MIS is standard, scheduled, structured and
routine; DSS is quite unstructured and is available on request. MIS is constrained by
the organizational system; DSS is immediate and user-friendly.

3.4. EXECUTIVE INFORMATION SYSTEM (EIS)
(OCT 05, 06, 07; 5M)

The line dividing DSS and EIS is very thin. EIS can be considered as a better and
sophisticated DSS. Top-level executives and decision-makers face many problems and
pressures. They have to make the right decisions at the right time to take the company
forward. In today's competitive world, reaction times are shrinking and time to make
decisions is very less. EIS is a decision support system especially made for senior-level
executives. An EIS is concerned with how decisions affect an entire organization.

An EIS takes the following into consideration:

• The overall vision and mission of the company and the company goals
• Strategic planning and objectives
• Organizational structure
• Crisis management/Contingency planning
• Strategic control and monitoring of overall operations

Executive decision-making also requires access to outside information from
competitors, governmental regulations, trade groups, news gathering agencies, and so
on. A high degree of uncertainty and a future orientation is involved in most executive
decisions. Successful EIS are easy to use, flexible and customizable and use the latest
technological innovations.

3.5. DATA WAREHOUSING
(OCT 05, 06, 08, 09, APR 09; 8M)

If operational data is kept in the databases of the ERP system, it can create a lot of
problems. As time passes, the amount of data will increase and this will affect the
performance of the ERP system. So it is better to archive the operational data once its use
is over. When I say 'the use is over', it does not mean that, the archived data is useless.
On the contrary, it is one of the most valuable resources of the organization. However
once the operational use of the data is over, it should be removed from the operational
databases. For example, once the financial year is over, the daily transactional data can
be archived. Figure 3.1 shows what happens if the data is not archived.

It is evident from the figure that even though the operational data volume is nearly
the same each year, since the data is not archived, the total amount of data that is stored

> Fig. 3.2 Data volume vs.
performance
in the operational database will go on increasing. Figure 3.2 shows the effect of keeping
this huge amount of data in the operational database.

It is clear from the above graph that as the volume of the data in the database
increases, the performance of the database and the related applications decreases. From
the above discussions, it is evident that we should separate the operational data from the

non-operational data. I am not using the term archive data, because if the non-operational
data is archived, there is little or no use for it. But this data is a very valuable resource
and is too precious to be kept in some archive. It is in this situation that a data warehouse
comes in handy.

The reasons to separate the operational data from the analysis data have not
significantly changed with the evolution of the data warehousing systems, except that
now they are considered more formally during the data warehouse building process.
Advances in technology and changes in the nature of business have made many of the
business analysis processes much more complex and sophisticated. In addition to
producing standard reports, today's data warehousing systems support very sophisticated
online analysis, including multi-dimensional analysis.

3.6. DATA MINING
(OCT.06, 07, APR.09; 8M)

Powerful systems for collecting data and managing it in large databases are available
in most organizations. However, the major bottleneck of converting this data into effective
information is the difficulty faced in extracting knowledge about the system from the
collected data. Modeling the investigated system discovering relations that connect
variables in a database are the subjects of data mining.

Data mining is the process of identifying valid, novel, potentially useful and ultimately
comprehensible information from databases that is used to make crucial business
decisions.

Research organizations, academic institutions and commercial organizations create and
store huge amounts of data each day. It becomes impossible for human analysts to cope
with such overwhelming amounts of data.

Two other problems that surface when human analysts process data are:

• The inadequacy of the human brain when searching for complex multifactorial
dependencies in the data
• The lack of objectiveness in analyzing the data.

One additional benefit of using automated data mining systems is that this process has a
much lower cost than hiring an army of highly trained (and paid) professional statisticians.
While data mining does not eliminate human participation in solving the task completely,
it significantly simplifies the job and allows an analyst, who is not a professional in
statistics and programming, to manage the process of extracting knowledge from data.

3.7. ON-LINE ANALYTICAL PROCESSING
(OCT.06, 09, APR.10; 6M)

OLAP can be defined in five words—Fast Analysis of Shared Multidimensional
Information.

FAST means that the system is targeted to deliver most responses to users within about
five seconds, with the simplest analysis taking no more than one second and very few
taking more than 20 seconds. ANALYSIS means that the system can cope with any
business logic and statistical analysis that is relevant for the application and the user, and
keep it easy enough for the target user. SHARED means that the system implements all

the security requirements for confidentiality (possibly down to cell level) and, if multiple
write access is needed, concurrent update locking at an appropriate level.
MULTIDIMENSIONAL means that the system must provide a multidimensional
conceptual view of the data, including full support for hierarchies and multiple hierarchies.
INFORMATION is refined data that is accurate, timely and relevant to the user.

Simply put, OLAP describes a class of technologies that are designed for live ad-hoc data
access and analysis. While transaction processing (OLTP) generally relies solely on
relational databases, OLAP has become synonymous with multidimensional views of
business .data. These multidimensional views are supported by multidimensional
database technology and provide the technical basis for calculations and analysis
required by Business Intelligence applications.

3.8. SUPPLY CHAIN MANAGEMENT
(OCT.08, APR.08, 10; 7M)

A supply chain is a network of facilities and distribution options that performs the
function of procurement of materials, transformation of these materials into intermediate
and finished products, and the distribution of these finished products to customers.
Supply chains exist in both service and manufacturing organizations, although the
complexity of the chain may vary greatly from industry to industry and firm to firm.

Traditionally, marketing, distribution, planning, manufacturing, and the purchasing
organizations along the supply chain operated independently. These organizations have
their own objectives which are often conflicting. Marketing's objective of high customer
service and maximum sales revenue conflict with manufacturing and distribution goals.
Many manufacturing operations are designed to maximize throughput and lower costs
with little consideration for the impact on inventory levels and distribution capabilities.
Purchasing contracts are often negotiated with very little information beyond historical
buying patterns. The result of these factors is that there is not a single, integrated plan for
the organization—there are as many plans as businesses. Clearly, there is a need for a
mechanism through which these different functions can be integrated*together. Supply
chain management is a strategy through which such integration can be achieved.

CHAPTER 4

MANUFACTURING PERSPECTIVE

4.1. MATERIALS REQUIREMENT PLANNING (MRP)

Initially, manufacturers viewed MRP as a better method for ordering components than the
independent demand inventory models they had been using during the 1950s and 1960s.
However, it has evolved into a comprehensive priority planning system. MRP provides a
method that helps keep order due dates valid, even after the orders have been released
to the shop floor or outside vendor. MRP systems can detect when the due date of an
order—the date the order is scheduled to arrive—is out of alignment with its need date—
the date the order is actually required.

During the 1970s and 1980s, techniques for helping to plan capacity requirements
were tied up with MRP. Tools were developed to support the planning of aggregate
production levels and the development of anticipated production schedules. Systems to
aid in executing the plans were incorporated—shop floor control for the 'in-house factory'
and vendor scheduling for the 'outside factories'. The expanded MRP system became
known as closed loop MRP, because it provided feedback from the execution function to
the planning functions, so manufacturers could change plans when necessary. Eventually,
practitioners expanded closed loop MRP to provide the ability to translate the operating

plan—expressed in manufacturing terms such as units and kilograms—into financial terms
—rupees—and have the capability to simulate the effects of various plans in terms of both
units and rupees. The new system, which was called Manufacturing Resource Planning
(MRP-II), was a comprehensive approach for the effective planning of all the resources of a
manufacturing organization.

An MRP system requires 3 types of information:

• Master Production Schedule (MPS)
• Bill of Material (BOM)
• Inventory Records (IR)

The MPS is a detailed production schedule for finished goods or end items that
provides the major input to the materials requirement planning process. Associated with
each finished product is a BOM, which describes the dependent demand relationships
that exist among the various components—raw materials, parts, subassemblies, etc.—
comprising the finished product. The entire set of BOMs for the company's finished
products is called the BOM file. Inventory status data for each product or component such
as stock-on-hand, stock-on-order, etc. are provided by the inventory records, which also
contain planning factors like lead-time, safety stock, re-order level, and so on.

MRP logic uses the MPS, the BOM file and the inventory records to determine
the following for all components:

• Planned order quantities
• Planned order release dates (to shop floor/suppliers)
• Planned order due dates

The MRP system calculates the release dates and the due dates taking into
consideration the lead-times required to produce or procure the components and by
recognizing the order in which they are assembled into the finished product. If the MRP
process is carried out in conjunction with capacity planning, the production facility should
have the capacity to complete the orders on time.

4.2. BILL OF MATERIAL (BOM)

A BOM defines the relationship of components to end items. The BOM identifies all
components used in the production of an end item, the quantity required, and the order in
which the components are assembled. For example, consider an office chair. The chair is
composed of a seat cushion, back cushion, adjuster mechanism, base unit, wheels, and
fasteners. To manufacture the chair the wheels, base unit, and adjuster mechanism are
assembled into a chair frame, to which the base cushion and back cushion are attached.
All the fasteners are identical, there are 11 of them for this chair.

Fig : Bill of material for a chair

All items appearing below the final product (office chair in this case) in a BOM, are
referred to as components, whether they are raw materials or component parts or
subassemblies. In the above figure, all items with the exception of the 'Office chair', are
components. The term- parent component describes a component at one level in the
BOM, that is composed of components from the next lower level in the BOM. The lower
level components are called child components.

4.3. MANUFACTURING RESOURCE PLANNING (MRP-II)

MRP was originally developed as a computer system that was limited to materials
planning. As computer technology and MRP systems developed, it became clear that MRP
systems maintain extensive information that can be used for other company functions.
For example, MRP systems maintain accurate inventory information. Combining this
information with cost data, allows accounting personnel to have accurate inventory
information, in meaningful financial terms. Rather than having separate production and
accounting systems, a company can expand MRP to meet the requirements of both the
systems.

MRP-II is an expansion of closed loop MRP for managing an entire manufacturing
company. MRP-II systems provide information that is useful to all functional areas and
encourage cross-functional interaction. MRP-II supports sales and marketing by providing
an order-promising capability. Order promising is a method of tying customers' orders to
finished goods in the MPS. This allows sales personnel to have accurate information on
product availability and gives them the ability to give customers accurate delivery dates.
MRP-II supports financial planning by converting materials schedules into capital
requirements. A company can use MRP-II to simulate the effects of different master
production schedules on material usage, labor, and capital requirements. MRP-II provides
the purchasing department with more than just purchase requisitions. The long-range
planned order release schedules can be used to provide the purchasing department with
information for developing long-range buying plans. It is now common for suppliers to
directly access a customer's MRP-II system to receive up-to-date information on the
customer's planned material needs. Information in the MRP-II system is used to provide
accounting with information on material receipts to determine accounts payable. Shop
floor control information is used to track workers' hours for payroll purposes.

Manufacturing is the central function in a manufacturing company. The information
required to successfully plan and schedule production is valuable to the other (supporting)
functions in the company. MRP-II systems increase a company's efficiency by providing a
central source of management information.

4.4. MAKE-TO-ORDER (MTO) AND MAKE-TO-STOCK (NITS)

One way to classify the manufacturing operations is by the amount of processing the
product requires, after the company receives an order from a customer. At one end of the
processing spectrum is the make-to-order (MTO) company. This company does not begin
processing the material for the component or product until it has received an order from
the customer. In some cases, the company may not even procure the material and
components until after it receives the order. This type of manufacturing operations is
practiced when the company competes on the basis of product customization and serves
its customer base by providing unique and/or highly specialized items. The MTO company
also bases its production planning on firm customer orders.

At the opposite end of the spectrum is the make-to-stock (MTS) company, which
manufactures products and places them in inventory before it receives customers' orders.
Either the customer purchases the products directly from the inventory at a retail outlet,
or the company ships the product 'off-the-shelf from the finished goods inventory at the
factory or at a distribution centre. MTS companies rely heavily on market analysis and

demand forecasting in planning the production of their products with respect to the
product mix and volume.

4.5. ASSEMBLE-TO-ORDER (ATO)

Another variation of the manufacturing operations is the assemble-to-order (ATO)
company. The assemble-to-order company manufactures standardized, option modules
according to the forecasts it has made and then assembles a specific combination, or
package of modules, after receiving the customer's order. The classic example is the
automobile manufacturer. After receiving orders from a host of dealers, the manufacturer
specifies the exact production schedule for the automobiles. The schedule is based on the
options ordered by the customers—automatic transmission or manual transmission, air
conditioning, standard or digital control panel, leather, cloth or vinyl seating, and so on.
Many components for assembling the automobiles would have been ordered or started
into production before receiving the customer's order, based upon demand forecasts.
Thus, the major processing that remains when the orders come in is assembly. This
approach shortens the time between placement of the order and delivery of the product—
cycle time

4.6. ENGINEER-TO-ORDER (ETO)

Yet another variation of the manufacturing operations is the engineer-to-order (ETO)
company. The engineer-to-order company is the ultimate in product variety, product
customisation and flexibility. In this mode of operation, anything will be manufactured as
per order—but at a price. The expensive clothing of the 'bold and beautiful' is an example
of this kind of production. Products are made for each customer and even the minute
details, for example, the texture and feel of the cloth, the color of the threads, the size of
the collar and so on will differ from one customer to another, depending upon the
customer's preferences. So the manufacturer cannot keep anything in inventory, he will
have to order only once the customer has given his/her specifications. Obviously, the cost
of production will be highest in this mode of production.

4.7. CONFIGURE-TO-ORDER (CTO)

Along the broad spectrum of make-to-order manufacturing, there is a growing
convergence between strictly assemble-to-order (limited options and features) and
completely engineer-to-order (just about anything goes, at a cost) environments. This
evolving environment is often referred to as configure-to-order. Using a rules-based
product configuration system, configure-to-order (CTO) manufacturers are able to simplify
the order entry process and retain engineer-to-order (ETO) flexibility, without maintaining
bills of materials for every possible combination of product options.

CHAPTER 5

ERP MODULES
INTRODUCTION

All ERP packages contain many modules. The number and feature of the modules vary
with the ERP package.

The most common module we will see are:

• Finance
• Sales & Distribution
• Human Resources
• Plant Maintenance
• Quality Management
• Material management
• Manufacturing management, etc

5.1. FINANCE MODULE

This section provides an overview of the financial solutions in most of the ERP
packages. In today's business enterprise, you need to know that your financial decisions
are based on today's data, not numbers from records closed a month ago, or even a week
ago. And you need to know that this same 'today's' data represents every segment of
your organization's activities, whether your enterprise stretches across a room or around
the globe. This is essential, because the most efficient way to get your enterprise to
where you want it tomorrow is to know exactly where it is today.

Whatever be the financial goals of your organization, the financial application
components of the ERP solutions work hand-in-hand to improve the bottom line. This is
true because the financial functionality is tightly integrated across all business areas and
all geographic areas. This tight integration includes all the other different modules, from
materials management to human resources to logistics. Because the ERP system
automatically links related areas, it eliminates the need to repeat procedures. You enter
your data only once. Within the ERP system, all areas work in concert, creating a new
level of efficiency in handling your financial data.

The finance modules of most ERP systems provide financial functionality and analysis
support to thousands of businesses in many countries across the globe. These ERP
systems include not only financial application components, but also Human Resources,
Logistics, Business Workflow and links to the Internet. Hundreds of business processes are
covered in these systems.

The finance modules of most ERP systems will have the following sub-
systems:

□ Financial Accounting (General Ledger, Accounts Receivable /Payable, Special
Ledgers, Fixed Asset Accounting, Legal Consolidation)
□ Investment Management (Investment Planning/Budgeting/Controlling,
Depreciation Forecast/Simulation/Calculation)
□ Controlling (Overhead Cost Controlling, Activity-Based Costing, Product Cost
Accounting, Profitability Analysis)
□ Treasury (Cash Management, Treasury Management, Market Risk Management,
Funds Management)
□ Enterprise Controlling (Executive Information System, Business Planning and
Budgeting, Profit Centre Accounting)

5.1.1. Financial Accounting

The objective of a good financial accounting system is to provide company-wide control
and integration of financial information that is essential to strategic decision-making. The
Financial Accounting Module of an ERP system, gives you the ability to centrally track
financial accounting data within an international framework of multiple companies,
languages, currencies, and charts of accounts. For example, when raw materials move
from inventory into manufacturing, the system reduces quantity values in inventory and
simultaneously, subtracts values for inventory accounts in the balance sheet. Most of the
Financial Accounting modules comply with international accounting standards, such as
GAAP and IAS. They also fulfill the local legal requirements of many countries.

5.1.1.a. General Ledger
(OCT.04, 05, 06, APR.10; 6M)

The General Ledger (GL) is essential to the financial accounting system and to strategic
decision-making. Through active integration with business processes in logistics and in
the accounting sub-ledgers, the GL serves as a central pool of financial data for financial

reporting as well as for other accounting areas. However, the origin of centrally stored
data can still be traced at any time by drilling down on data from a given transaction.

The General Ledger supports all the functions needed in a financial accounting system.
This includes flexible structuring of the chart of accounts at the group and company level,
distributed application scenarios, real-time simultaneous update of sub-ledgers and the
general ledger, elimination of time-consuming reconciliation, and parallel views of data, in
both the general ledger and the managerial accounting applications. The GL provides
document parking, posting, reporting, and an integrated financial calendar for automating
periodic activities. The system also provides summary information from other components
at a user-defined level of detail. By creating combinations of entered data, you generate
data summaries, that can be used in planning, allocation, distribution and reporting.

5.1.1.b. Accounts Receivable and Payable

This module provides financial information about all outstanding credits that we have
given to our customers the due dates for the credits and also the credit limit to particular
customer. It also provides the information about all outstanding debits (amount to be
given) should be return to the supplier after purchase of raw material, it also stores
information on due dates to credit the suppliers account.

ERP systems offer a financial overview of global business partner relationships, in the
Accounts Receivable and Payable functions. These sub-ledgers are integrated, both with
the General Ledger and with, areas in Sales and Distribution and Materials Management,
where financial data originates. Accounts Receivable and Payable transactions are
performed automatically, when related processes take place in other modules. This
module uses standard business rules for procedures ranging from data entry and
reporting, to processing payments and bank transactions. Accounts Receivable and Pay-
able functions include Internet integration, document management, full support for EDI
processing, including automatic integration with cash management and flexible reporting
using customer and vendor information systems. The module also provides, enterprise-
wide credit management with workflow integration, payment automation with EFT and
check processing, and document parking with various approval procedures.

5.1.1.c Asset Accounting

Asset accounting, manages the company's fixed assets. Within the Financial Accounting
system, Asset Accounting serves as a sub-ledger to the General Ledger, providing
detailed information on asset-related transactions. Asset Accounting also provides
integration with Plant Maintenance for management of machinery and equipment,
management of leased assets and assets under construction, mass processing with
workflow integration, and interactive reporting.

5.1.1.d Legal Consolidation

Consolidated financial statements need to be integrated effectively with operational data
at the individual company level. By using different valuation methods, you can plan
balance sheet strategies to suit the company's requirements. The Legal Consolidation
sub-system is closely linked to the Financial Accounting system, permitting direct data
transfer, from individual statements into the consolidated report. This eases the workload
of the staff and reduces data entry errors. In addition to the consolidated statements
required by law, Legal Consolidation also allows you, to create multiple views of your
consolidation data. With these views you can generate reports about legal entities or
segments of your business.

5.1.2 Controlling

The controlling system gathers the functions required for effective internal cost
accounting. It offers a versatile information system, with standard reports and analysis
paths for the most common questions. In addition, there are features for creating custom
reports to supplement standard reports.

5.1.2.a Overhead Cost Controlling

Many organizations experience a significant increase in the percentage of indirect costs,
which cannot be directly assigned to either the products manufactured, or to the services
rendered. While cost monitoring and optimization may be quite advanced in production
areas, transparency is often lacking in overhead cost areas. The Overhead Cost
Controlling subsystem focuses on the monitoring and allocation of overheads.

5.1.2.b Cost Centre Accounting

Cost centre accounting analyses where overheads occur within the organization. Costs are
assigned to the sub-areas of the organization where they originated. The system offers a
wide variety of methods for allocating posted amounts and quantities. In particular,
activity accounting permits, the allocation of great many costs to products, based on cost
sources and enabling assignments, which were not previously possible.

5.1.2.c. Overhead Orders

Overhead orders subsystem collects and analyses costs, based on individual internal
measures. This system can monitor and automatically check budgets assigned to each
measure.

5.1.2.d. Activity-Based Costing

The goals of the entire organization, should come before the goals of individual
departments, when it comes to business process reengineering. The Activity-Based
Costing module, is a response to the growing need for monitoring and controlling cross-
departmental business processes, in addition to functions and products. Seeing costs from
a new perspective, substantially enhances organizational transparency in overhead areas.
The system automatically determines the utilization of business processes by products,
customers, and other cost objects based on the cost drivers taken from the integrated
accounting environment. This, significantly reduces the effort involved in maintaining a
business process model in a separate system.

5.1.2.e. Product Cost Controlling

Product cost controlling module determines, the costs arising from manufacturing a
product, or providing a service. Plan and standard values, serve in valuating warehouse
stock and for contrasting revenues received with costs." In addition, the values in Product
Cost Controlling, are crucial for determining the lowest price limit for which a product is
profitable. Simulations illustrate the effects of changes in production methods on the cost
of goods manufactured.

5.1.2.f. Cost Object Controlling

Cost object controlling helps you monitor manufacturing orders. Integration with the
logistics components results in a logistical quantity flow, that provides instant information
on actual cost object costs, allowing ongoing costing calculations at any time. Follow-up
calculations determine and analyze the variances between actual manufacturing costs,
and the plan costs resulting from Product Cost Planning.

5.1.2.g. Profitability Analysis

Profitability analysis subsystem examines the sources of returns. As part of sales
controlling, Profitability Analysis is the last step in cost-based settlement, where revenues
are assigned to costs according to the market segment. You can define any market
segment—distinguishing, for example, between products, customers, orders, sales
organizations, distribution channels and business areas—and evaluate it, according to
contribution and revenue margins. Information from Profitability Analysis, frames
important decisions in areas such as determining prices, selecting customers, developing
conditions and choosing distribution channels.

5.1.3. Investment Management
(OCT.07; 7M)

Investment management provides extensive support for investment processes right from
planning through settlement. Investment management facilitates investment planning
and budgeting at a level higher than that needed for specific orders or projects. You can
define an investment program hierarchy using any criteria—for example, department-
wise. As a result of subsequently assigning specific investment measures (internal orders
or projects), to positions in the hierarchy, you are kept up-to-date about available funds,
planned costs, and actual costs already incurred from internal and external activities. The
investment program allows you to distribute budgets^ which are used during the capital
spending process. The system helps you monitor, and thereby avoid, budget overruns.

Investment Management provides tools, enabling you to plan and manage your capital
spending projects right from the earliest stage. In the initial stage of the capital spending
process, you enter the application for the spending project as an appropriation request.
You define your own evaluation and approval process, during which the system keeps a
detailed history of the status of the appropriation request. You transfer the data from the
appropriation request, to the investment measure, when the request is approved for
implementation. You enter detailed plan values in the appropriation request, and its
different variants, for use in the pre-investment analysis.

Depending on their complexity, investment measures that need to be monitored
individually can be represented either as internal orders or projects. These internal orders
or projects, provide the means for actually carrying out the capital investment; that is,
they serve as the objects for collecting primary and secondary costs, for calculating
overhead and interest, for managing down payments and commitments, and for handling
other related tasks. As the result of having an asset under 'construction assigned to it, the
investment measure also benefits from all of the required asset accounting functions.
Settlement is both flexible and almost fully automatic. This kind of settlement ensures a
complete integration with business planning and control, and provides consistently up-to-
date values. Investment Management module recognizes the importance of the asset
accounting aspects of investment measures. The system automatically separates costs
requiring capitalization from costs that are not capitalized, debiting the correct costs to
the asset under construction. For different accounting needs, the system can use different
capitalization rules for making the split. At its completion, the investment measure can be
settled to various receivers by line item. Asset accounting provides precise proof of origin
for all transactions affecting acquisition and production costs.

Budgeted balance sheets and cost planning are always based on current values.
Planned depreciation values for investment measures and appropriation requests, can be
transferred directly to ongoing overhead cost planning. The system recalculates expected
depreciation amounts whenever planning data is updated.

5.1.4. Treasury Module
(OCT.04, 06; 8M)

You can gain a significant competitive advantage by efficiently managing the short,
medium, and long-term payment flows and the resulting risk exposure. Tasks such as

short-term monitoring and concentration of bank account balances, medium-term
planning, and forecasting of incoming and outgoing resources in accounts receivable and
payable, to a long-term view of areas such as materials management and sales, underline
the importance of integrating information from various company divisions. Linking these
operating divisions to realized and planned financial transactions and positions in
Treasury, has a significant impact on the company's success. Such integration also
facilitates management and control of cash flows, and risk positions through all the
divisions in the company. The Treasury component provides you with a basis for effective
liquidity, portfolio and risk management.

5.1.4.a. Cash Management

The cash management subsystem, allows you to analyse financial transactions for a given
period. Cash Management also identifies, and records future developments for the
purposes of financial budgeting. The company's payment transactions are grouped into
cash holdings, cash inflows and cash outflows. Cash Management provides information on
the sources and uses of funds to secure liquidity inorder to meet payment obligations
when they become due. Cash Management also monitors and controls incoming and
outgoing payment flows, and supplies the data required for managing short-term money
market investments and borrowing. Depending on the time period under review, a
distinction is made between cash position, short-term cash management and medium and
long-term financial budgeting. The Cash Management component thus ensures that all
information relevant to liquidity is available to you for analysis purposes, creating a basis
for the necessary cash management decisions.

5.1.4.b. Treasury Management

In your role as treasurer, you> take the results of your current liquidity, currency, and risk
positions and consider the conditions prevailing on the money and capital markets, before
implementing concrete decisions in the form of financial instruments in Treasury
Management. The Treasury Management component offers functions for managing
financial deals and positions, from trading to transferring data to Financial Accounting.
Treasury Management also supports flexible reporting and evaluation structures for
analysing financial deals, positions and portfolios. For short-term liquidity and risk
management, you can use the money market, or foreign exchange transactions, to
smooth out liquidity squeezes and gluts, or to eliminate currency risks. Securities and
loans come into play in the medium and long-term.

Derivative financial instruments facilitate active management of interest rate and
currency risks. The trading area contains functions for recording financial deals, exercising
rights, performing evaluations and calculating prices (for example, option price
calculator). In back office processing, you enter the additional data required for
processing deals (such as account assignment and payment details) and generate
automatic confirmations. Position management functions, such as securities account
transfers or corporate actions relating to securities, are also supported in the back office
area. The general ledger is updated in the accounting area, which also offers flexible
payment processing functions in addition to valuation and accrual/ deferral methods. By
using common organizational elements throughout, various organizational structures can
be represented in the system, such as a central enterprise-wide treasury department or
'in-house banks'. This also ensures full integration of Treasury ir*to other modules of the
system.

5.1.4.c. Market Risk Management

Market risk management plays a vital role within Treasury, in ensuring your company's
competitiveness. The process involves a complex feedback loop encompassing data
collection, risk measurement, analysis and simulation as well as active planning of
financial instruments. This process dovetails closely with other treasury and corporate
functions. Market Risk Management acts as an integrated, central risk control station with
monitoring and management functions. Access to information on current and future cash
flows and on financial deals already processed, is an absolute must. As a result, Cash
Management, which pools all cash flows from the business sectors, such as sales and

distribution or purchasing, forms the basis. Consequently, all cash flows from the
company's operating business can be accessed for the purposes of risk management.
Furthermore, all financial transactions managed in Treasury Management can be
evaluated together witlTthe cash flows generated by the various operating divisions. The
component provides various measurements for analysing and assessing interest rate and
currency risks. Mark-to-market, effective rate and effective yield calculations are based on
up-to-the-minute market data, uploaded via data feed, and financial transactions or
positions. By simulating market data, you can determine the risk structure of 'what-if
analyses (such as crash scenarios or worst case scenarios). You can also measure and
compare the impact of alternative hedging strategies, using simulated transactions.

5.1.4.d. Funds Management

Funds management subsystem supports your funds management process from budgeting
all the way through to payments, including monitoring expenditures, activities, resources
and revenues. Budgets are entered for areas of responsibility that can cover as many
management levels, as you require. Funds centres and their hierarchical structure provide
a base for top-down budgeting and represent responsibility areas within budget control.
The system enables you to control your various funds commitments and determine how
much of your budget has already been utilized via availability checking. The information
system can supply you with information at any time, on when, where, and how your funds
commitments arose. Analyses by responsibility area and commitment items allow you to
identify any budget bottlenecks.

5.1.5. Enterprise Controlling

Enterprise controlling comprises of those functions that will optimise shareholder value,
while meeting internal objectives for growth and investment. This modules usually include
executive-Information System, Business Planning and Budgeting, Consolidation, and Profit
Centre Accounting.

5.1.5.a. Executive Information System

The executive information system provides an overview of the critical information
necessary to manage the organization. This component integrates data from other ERP
components, and non-ERP data sources both inside and outside the enterprise. Drill-down
reporting and report portfolio are available to evaluate and present the data. In drill-down
reporting, you can analyze the data interactively. Exceptions can be defined in order to
highlight areas of concern. The drill-down reports can also be made available in the
graphical report portfolio for less experienced users. The report portfolio is aimed at users
with basic knowledge of the system who wish to access information put together for their
specific needs.

5.1.5.b. Business Planning and Budgeting

Business planning and budgeting supports the management teams of business units and
groups in the calculation c "■ business targets, such as return on investment. This
module also supports central investment planning, budget release and tracking. This
module automatically transfers data about investment requirements from transaction
applications, and provides extensive analysis functions for budget monitoring.

5.1.6. Profit Centre Accounting

Profit centre accounting analyses the profitability of internal responsibility centers. A
company's organizational structure is represented in the form of a profit centre hierarchy,
with the profit centre as the smallest unit of responsibility. All business transactions in
Financial Accounting, Materials Management, Asset Management, and Sales and
Distribution, which affect profits, are automatically reflected in Profit Centre Accounting. It
is also possible to analyze selected balance sheet items by profit centre and use them for
calculation of ratios (such as ROI). Profit centre planning is part of total corporate
planning. Profit centers, in particular, emphasize the integration aspect of corporate
planning, as plans from other application areas can be combined, extended and altered in
this module. Profit centre related postings can be analyzed through the system's standard
reports and facility, to create custom reports for special analyses. There is also a provision
to provide profitability information to appropriate management and controlling depart-
ments.

5.2. SALES AND DISTRIBUTION

In today's global business environment, the one thing companies can count on is rapid
change—and the new opportunities and challenges that change is sure to bring. New
competition pushes businesses to achieve higher levels of service, while evolving
technology compresses product life cycles and forces companies to adopt new
technologies or risk losing market share. In this ever-changing environment, keeping a
competitive edge means being able to anticipate and respond quickly to changing
business conditions. To keep pace with these rapid changes, companies need an
integrated and flexible enterprise system that supports all aspects of their business with
state-of-the-art functionality. This innovative solution should upgrade effortlessly and
interface easily with third-party applications, as well as have the ability to incorporate
existing systems while extending its reach to the Internet and e-commerce.

Inquiry

Quotation

Sales

Contract

Order

MATERIAL
Shipping Delivery
MANAGEMENT

Billing Invoice

FINANCIAL
ACCOUNTING

Fig: Sales and Distribution Module

With today's business environment characterized by growing competition, shrinking
cycle times and the accelerating pace of technological innovation, companies' are

increasingly being forced to streamline business processes. In a world in which it is no
longer enough to simply have the best product, these companies are focusing on core
competencies and closer partnerships over the whole supply chain. Here, increased
efficiency in sales and distribution is a key factor to ensure that companies retain a
competitive edge and improve both profit margins and customer service. In helping
business to 'beat them on delivery', the sales and distribution modules of many ERP
vendors offer a comprehensive set of best-of-breed components for both order and
logistics management. Many of these systems are tightly integrated with the Distribution
Requirements Planning (DRP) engine of the 'for just-in-time' deliveries. This integration
enables the mapping and supply of single-site or multi-site organizations and the
definition of relationships in a company's internal supply chains. Developing precise
logistics planning for just-in-time deliveries, this system can also generate replenishment
orders by using defined warehouse requirements.

The following are the sales related business transactions:

• Sales queries, such as inquiries and quotations
• Sales orders
• Outline agreements, such as contracts and scheduling agreements
• Delivery/Shipment
• Invoicing/Billing
• After sales support

During sales order processing, the following basic functions are carried out:

• Inquiry handling
• Quotation preparation and processing
• Contracts and contract management (order management)
• Monitoring the sales transactions
• Checking for availability
• Transferring requirements to materials planning (MRP)

• Scheduling the delivery
• Calculating pricing and taxes
• Checking credit limits
• Invoicing /Billing

• Creating printed or electronically transmitted documents (confirmations, and so
on)

Depending on how your particular system is configured, these functions may be
completely automated or may also require some manual processing. The data that results
from these basic functions (for example: shipping dates, confirmed quantities, prices and
discounts) is stored in the system where it can be displayed and, in some cases, changed
manually during subsequent processing. The sales and distribution module very actively
interacts with the Material Management and Financial Accounting modules for delivery
and billing.

Typically, a Sales and Distribution module will contain the following sub-
systems:

• Master Data Management
• Order Management
• Warehouse Management
• Shipping
• Billing
• Pricing
• Sales Support
• Transportation
• Foreign Trade

5.2.1. Master Data Management

This is module which keeps all the information about products, customers, required raw
material and suppliers. This information is made available to the decision makers
whenever required. Master data management system also provide the automatic
generation of reports, contracts and billing. The data about products, services and
business partners provides the basis for sales processing. Automatic sales processing
using ERP system, like accounting and material management also can access master
data.

5.2.2. Order Management

This module usually includes Sales Order" Management and Purchase Order Management
and supports the entire sales and purchase processes from start to finish. With companies
today being confronted with increasingly demanding customers and increasingly complex
buying and selling organizations, both internally and externally, Order Management
combines the provision of efficient management solutions with the possibility of
anticipating and responding quickly to changes in global business conditions.

5.2.2.a. Sales Order Management
(OCT.07, 09; 7M)

Credit Checking, Inventory Availability
Pricing & Checking
Discounting

Material Sales
Management, Order Quotation/
Warehousing Entry Contracts
and Invoicing

Change Order Order History
Management/ Statics
return handling

Applications in sales order management (Fig. 5.3) represent a company's most important
point of contact with the customer. These applications allow a company to manage sales
operations quickly and efficiently and provide comprehensive solutions for the
management of quotes, orders, contracts, prices and customer discounts. Through the
use of templates, the system streamlines order entry procedures to manage products
ranging in complexity from standard stocked items to those that are engineered-to-order.
The system can also customize and streamline order entry procedures to the specific
requirements of both an individual business and its customers. Intelligent pricing and
discount strategies that are accompanied by simulation capabilities to support 'what-if
scenarios and are available for multi-currency environments. On-line Available-to-Promise
calculations ensure that there is sufficient product availability for a specific customer and,
if so, to identify exactly where and when that product is available. Built-in contract and
release management system evaluates whether or not customer contract agreements are
being met with and incorporates multilevel customer credit reviews and substantial order

blocking functionality. Evaluation of sales performance is possible through extensive
report capabilities that retrieve both current and past information that concern orders,
cancellations, budgets and revenues. Rebate and commission control enables the
automatic calculation of employee and supplier commissions to reward achieved targets
based on predefined agreements and customer bonuses, or rebates to reward customers
for purchasing certain quantities. Electronic Data Interchange (EDI), streamlines
communication throughout a company's entire supply-chain, from customer to supplier.
The system should support standard business documents such as orders and invoices,
along with general information such as project information and product specifications. A
good system will have tools and features for Sales Force Automation (SFA) and customer
service. These tools include the tracking and tracing of appointments, schedules and
follow-ups, plus product and sales feasibility information.

5.2.2.b. Purchase Order Management
(OCT.08, APR.08; 7M)

Schedule Planning/ Source
Requisition
Definition Shop Floor Information

Request For
Quotation

Purchase Order Purchase
Schedule

Purchase Contract

Warehouse Orders

Fig: Purchase flow

Purchase order management is increasingly essential in today's ever more competitive
business environment because it enables a company to make the correct purchase
decisions about quality and price, where quality refers to supply lead-time as well as to
the (to be purchased) product itself. Purchase order management includes online
requisitioning, centralized contract management, just-in-time schedules and vendor
management. Offering access to an approved supplier list, purchase order management
enables a purchase quotation to be sent to multiple suppliers. The purchase contract
information is made available to the people in the purchasing department. This
information will help in supplier selection and provide an insight as to which suppliers can
supply items with the right specifications, in the shortest period of time. The system will
have facility to generate purchase contracts. Purchase requisition is a function that is
used in the purchase process. Purchase requisitions allow companies to enter non-system-
planned requirements for various types of items. Requisitioning can be linked to workflow
for authorization purposes and to approve suppliers. Schedules can be used, instead of
orders,- to provide detailed purchase and delivery information. These schedules are
generated in contracts in just-in-time environments—in which customer service, in-time
delivery and cost reduction are all-important—and can be sent through the supply chain
by means of EDI communication. In addition, schedules are fully linked with other
modules of the system. Sophisticated vendor management tools allow companies to
check the reliability and performance of vendors. The vendor rating system can handle
both objective and subjective criteria. Objective criteria are tracked and traced

automatically by the system and can include information about receipts, quality approval,
invoicing and purchase-order confirmation. Subjective criteria are determined by the user.
Together, these criteria enable companies to make the right purchase decisions with
regard to quality, price and delivery. Purchase Order Analysis enables historical as well as
statistical data to be used to assist in the analysis of purchase activities.

5.2.3. Warehouse Management

This module provides real-time information about inventory levels across the enterprise
and tools to manage the daily operational needs of single-site or multiple-site four-wall
warehouses. Coordination of an organization's warehouse network is one of today's most
important business needs and requires an understanding of the relationship between the
different organizational units such as warehouses, production facilities, sales offices, and
purchase offices. The actual transfer of goods can be handled through the Warehouse
Management application. The various components of a good Warehouse Management
application will be designed to meet a wide range of warehousing needs, such as the
mapping of internal goods flow within warehouses and the monitoring of all warehouse
inventory transactions. In addition, these components are centralized for- areas that
include production, sales, purchase projects and service and provide companies with the
tools to inform customers about where (the company's or the customer's) goods are
located, the number of goods on hand, current storage conditions and projected delivery
schedules.

Components of a good Warehouse Management Application include the
following:

□ Inventory Planning Comprises all planned inventory movements, which enable
the accurate forecasting of trends and the consequent adjustment of reordering
points, safety stock, lead-times for orders and service levels. Inventory planning
also allows the commitment of inventory to a specific customer order—'hard
allocation'—so that customers receive the right order in the right quantity at the
right time.
□ Inventory Handling Allows for monitoring of all warehouse order scenarios such
as the receipt, issue and transfer of inventory. Functions include the previously
mentioned expanded capabilities such as cross-docking, receipt by back-flushing,
rules-based replenishment of inventory, picking and wave-picking optimization,
assembly and multi-level packaging. To ensure fast communication with suppliers
and customers, advanced shipping notifications can be received or sent by means
of Electronic Data Interchange (EDI), which enables shipments to be received and
allocated ahead of time.
□ Intelligent Location Assignment Used to create intelligent storage put-away
lists, which enable the storage of goods that are automatically inspected for
quality and the detection of dedicated locations by criteria such as item, storage
conditions, packaging definitions, size restrictions and location availability.
□ Inventory Reporting This function permits full visibility of inventory at single or
multiple sites and provides a company with the tools to give customers accurate
delivery dates. The system's extensive reporting capabilities also enable
consigned" goods management.
□ Inventory Analysis This module enables the analysis of information that result
from warehousing activities and the use of feedback in process optimization. In
addition, inventory analysis supports inventory forecasting, inventory valuation,
ABC analysis and slow-moving analysis.
□ Lot Control This facility offers lot tracking and tracing, so that a company can
trace all the raw materials and finished goods that its products require. In a
business world where customers demand product responsibility, lot control helps
to store product quality data and meet ISO9001 certification standards.
□ Distribution Data Collection This is an essential element in paperless
warehousing that provides the communications link between storage and shipping
systems and warehousing equipment like bar-coding scanners.

5.2.4. Shipping
(APR.09; 6M)

The shipping module supports the following functions:

• Monitoring dates of orders due for delivery
• Creating and processing deliveries
• Planning and monitoring work lists, for shipping activities.
• Monitoring material availability and processing outstanding orders.
• Picking (can be linked to the Warehouse Management System)
• Packing deliveries.
• Information support for transportation planning.
• Support for foreign trade requirements.
• Printing and sending shipping output Data update in goods issue.

The 'Delivery note' is the central shipping document. When a delivery is created (at the
shipping point), shipping activities such as picking and delivery scheduling are initiated
and monitored, and the data generated during shipping processing is recorded Depending
on your requirements, you can create deliveries automatically using work lists, or
manually. You can make agreements with your customers for complete and partial
deliveries and for order combinations. The monitoring functions allow you to monitor
created deliveries and outstanding sales activities.

5.2.5. Billing

A business transaction is completed for Sales and Distribution once it has been billed. The
ERP systems support billing functions like issuing of invoices on the basis of goods and
services, issuing of credit and debit memos based on corresponding requests and
Performa invoices, canceling billing transactions, giving rebates, transferring billing data
to Financial Accounting, Purchasing and so on. The billing system is integrated with the
other modules like Financial Accounting, so that the documents are automatically gener-
ated.

5.2.6. Pricing

The term pricing is used broadly to describe the calculation of prices (for external use by
customers or vendors) and costs (for internal purposes, such as cost accounting). The
pricing module keeps the information about the prices of the various items, the details
about the quantity discounts, the discounts to the different customer categories and so on
and enables the organization to generate documents like quotations, delivery notes,
invoices and so on. Also, since this information is available to all the sales people, they
can make better decisions thus improving the sales performance.

5.2.7. Sales Support

The Sales Support component helps the sales and marketing department to support your
existing customers and, at the same time, to develop new business. Sales Support
provides an environment where all sales personnel— both the field sales people and the
staff in the sales office—can contribute to and access valuable information about
customers, sales prospects, competitors and their products, and contact people.

The Sales Support function has a rich tool set that will help in creating direct mailings to
develop new business as well as to consolidate the existing customer base. On the basis
of the sales information already stored in the system, you can create address lists of the
customers and sales prospects whom you wish to target with your direct mailing
campaign.

5.2.8. Transportation

Transportation is an essential element of the logistics chain. It effects both inward and
outward movement of goods. Effective transportation planning is required to ensure that
shipments are dispatched without delay and that they arrive on schedule. Transportation
costs play a considerable role in determining the price of a product. It is important that
these transportation costs are kept to a minimum, in order to keep the price of a product
competitive. Efficient planning and processing of transportation contributes to keeping
these costs down. The aim of the transportation element of the SD System is to provide
basic functions for*transportation, like transportation planning and processing, freight

calculation, freight settlement, customer freight calculation, customer freight invoicing as
well as functions for service agent selection.

The transportation functionality fulfills the requirements in the areas of
transportation planning and processing, for both inbound and outbound
shipments. You can control and monitor the entire transportation process
from the planning stage right through to the dispatch of the goods from your
shipping point (outbound shipment) or the vendor location (inbound shipment) and their
arrival at the customer location (outbound shipment) or your
plant (inbound shipment).

5.2.9. Foreign Trade

In domestic, and increasingly, in international trade, you are required by the authorities to
adhere strictly to the laws and regulations. The growing tendency towards the formation
of trade areas is a further challenge to a company operating on4, a worldwide basis. The
entire logistics chain, from the import of raw materials, finished and unfinished goods, to
the sale of goods and the transfer of data to materials management and financial
accounts, is significantly influenced by foreign trade activities. These main tasks in foreign
trade processing can be carried out using the foreign' trade system.

5.3. MANUFACTURING

Manufacturers are measured by their ability to react quickly to sudden, often
unpredictable change in customer demand for their products and services. Manufacturing
applications are focused on the customer. These manufacturing applications should allow
an easier exchange of, information throughout the entire global enterprise, or at a single
site within a company. These applications should provide a wealth of feature/function,
broad scope of coverage, operational stability and a platform-independent architecture.
These capabilities empower an enterprise to achieve productivity gains, adopt forward-
thinking technologies and implement process reengineering. As a company's internal
processes become more sophisticated or as market forces change, these solutions should
be capable of meeting the challenge. The manufacturing system should be integrated
with the other modules of the package.

Regardless of how manufacturers view their internal operations, to the customer, it
boils down to quick response to customer demand in two fundamental ways—
Manufacturers either make products to stock prior to receipt of a customer order, or they
make and ship the products upon receipt of a customer order. Manufacturers must
accomplish this task quickly, efficiently and cost effectively to remain profitable and
competitive.

Today, companies must be able to deliver customer-specific products with the lead-
time of standard, off-the-shelf products. To help manage product and market shifts, the
Manufacturing module provides the freedom to change manufacturing and planning
methods, as and when they need a change. The Manufacturing modules of most ERP
vendors, do not limit businesses to a single manufacturing method, such as make-to-stock
or make-to-order. Instead, many manufacturing and planning methods can be combined
within the same operation, with unlimited flexibility to choose the best method—or
combination of methods—for each product, at each stage throughout its life cycle.

The manufacturing module should enable an enterprise to marry technology with
business processes to create an integrated solution. It must provide the information base
upon which the entire operation should be run. It should contain the necessary business
rules to manage the entire supply chain process, whether within a facility, between
facilities, or across the entire supply chain.

Introduction to ERP: Benefits of Integrated Systems

Introduction to ERP: Benefits of Integrated Systems

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