Information Technology

May 17, 2006
ERP: Where is it heading to?

Ranga Pothula

NEW DELHI -- Manufacturers are under constant pressure from customers, shareholders, and suppliers to continuously improve, make better products faster and more efficiently. To compete in a dynamic environment and global challenges, requires tremendous agility. Successful companies must be able to respond quickly and cost-effectively to change. This is true, whether the change involves shifting customer demands, supply chain partners, modifications to a business model or business process, business expansion and the need for new initiatives like outsourcing, or evolving regulatory pressures imposed by financial markets, industry groups, and government bodies.

Manufacturers need to convert their factories into responsive, demand-driven, profit-making enterprises by optimising their manufacturing operations. Their competitive advantage and survival depends on the use of information systems and technology.

Necessity of ERP Systems

Intense global competition and mass customisation has realised the need for having better systems that can provide quick and reliable information across the complete value stream.

ERP (Enterprise wide Resource Planning) systems have become synonymous with competitive advantage, particularly throughout the 1990s. ERP systems replace isolated information with a single, packaged software solution that integrates all traditional enterprise management functions like financials, human resources, and manufacturing and logistics. Started with an IT application to handle the inventory problems of the enterprise in 1960, the ERP systems brought a common information database that helped business functions of the organisation to shift their thinking to an organisation or enterprise focus rather than a departmental focus.

Many companies have implemented ERP applications; either developed in-house or off-the-shelf products from ERP vendors, with a hope to become more responsive to the customer needs and enhance their business.

ERP: Investment Justified?

Even though ERP systems resolved the internal issues within an enterprise, the industry did not really perceive the complete benefits of implementing such a system, as these systems were blind toward understanding the parameters outside the four walls of the enterprise. That resulted in a real necessity to have application over the ERP systems, to increase the value of the core ERP systems. Vendors started building strategic applications around ERP, and called them Extended ERP or ERPII, which brought a dynamic new way of conducting business, by having real time collaboration with partners, suppliers and customers. This enabled enterprises to react quickly to changes in the market place and become more agile. Applications such as supply chain management (SCM), supplier relationship management (SRM), customer relationship management (CRM), product life cycle management (PLM) helped in collaborative planning and scheduling, collaborative forecasting, collaborative product development, etc. The complete value chain from supplier-manufacturer-customer has become more dynamic and responsive to the needs of their end customers. Most of the ERP vendors have geared up to the needs of the customers by increasing their product breadth and providing a complete end-to-end solution to meet the customer demands.

Challenges for future

The challenge for many IT managers is to justify the cost of huge IT investment and show the real RoI from implementing these applications. Some of the key challenges and market trends in the ERP space are:

Embracing the new demand drivers: Even though packaged ERP systems provide off-the-shelf best practice solutions of the industry, they may not provide 100 percent support to all the features required for all the vertical industries. Also, there would be some regulatory requirements that need to be addressed in the applications as and when they are introduced by the regional or global bodies/authorities. In addition, the customers will have some specific practices that they deserve to retain, and hence would customise the packaged ERP applications to their needs. ERP vendors are constantly demanded by their customers to handle these requirements; generic, specific and regulatory, in their next releases. One of the key challenges for most of the ERP vendors is to provide the value addition to their active customers by providing these enhancements to the product, both functional and usability features in their upcoming releases

Complexity of integrations: Most of the customers presently have disparate applications on different technology platforms, built with different tools, and purchased from different vendors, and not working seamlessly. One of the key challenges of the IT managers is to make these applications integrated well and work in tandem.

A study from AMR indicates that a ‘demand-driven enterprise’ can further drive revenues and profitability. By improving the critical business processes that increase responsiveness, speed, and agility, demand-driven supply network (DDSN) can directly impact the key drivers of financial performance -- faster growth, higher profitability, and improved capitalisation.

At every stage, enterprises have to not only re-look into the process capabilities but also technology infrastructure that help them to get real time information across supply network. Software vendors have to look into the solutions to embrace the concept of DDSN and enable the enterprises to become more demand centric. Analysts indicate that half of all the companies do not have a clear visibility across their supply network, inspite of having IT systems such as ERP, SCM, PLM, CRM, SRM, as they lack proper integrations of all of them. However, within the next three years, 30 percent of the companies will move toward making their technologies work in collaboration with all their business partners. Hence, the major challenge is to provide seamless integration between extended ERP applications, which can help the enterprises become a demand-driven organisation. The next generation of enterprise applications will need to embrace better architectural capabilities to make the integrations more plug and play, rather than tight point-to-point integrations.

Service oriented architecture: One of the key market trends is the technology transformation to a service-oriented architecture (SOA) that will have the largest effect on redefining the ERP market. As indicated by analysts, service-oriented architecture will transform software from an inhibitor to an enabler of business change, by 2015. SOA will shift revenue from packaged software to subscription services and from monolithic suites to composite applications.

SOA is an approach to designing, implementing, and deploying information systems such that the system is created from components implementing discrete business functions. These components called “services” can be distributed across geography, enterprise, and can be reconfigured into new business process as needed. The services are “loosely coupled” allowing for much more flexibility than older technologies with respect to re-using and re-combining the services to create new business functions both within and across organisation.

The business component architecture forms the foundation of its specialised versions: service-oriented and event-driven architectures. A service-oriented architecture reduces complexity, eliminates point-to-point integrations and introduces flexibility through process-driven applications. This provides agility to meet the ever-changing needs of the plant, business unit, enterprise and out into the supply chain. It provides a more controlled and secure environment to meet the requirements of regulatory issues. Most of the vendors are in the process of transforming their technology architecture into service oriented architecture.

Vendor consolidation: Other important market trend that will be seen in the late 2000 is the vendor consolidation. This consolidation among mid-market vendors will continue as per Forrester Research. Providing a strategic product direction will become important to the vendors to give the comfort level to their existing customers and new accounts. Some challenges to the vendors is to invest in merging the overlapping products and ensure a smooth migration path to their existing customers.

The future goal of most of the ERP vendors is to provide an enhanced value of the installed systems, by bringing in the real value proposition to the existing customers as well as to the new customer, by enhancing the product with additional features, both functional, technical and usability. The technology transformation to service oriented architecture will bring more flexibility to the users in bringing more agility to their ever changing needs. Lowering the Total cost of ownership of ERP applications and reducing the complexity of IT infrastructure will become the primary focus both to vendors and customers.

(The author is director, development, SSA Global Technologies.)