Enterprise Resource Planning (ERP)| Cost Accounting

In this article we will discuss about Enterprise Resource Planning (ERP):- 1. Meaning of Enterprise Resource Planning (ERP) 2. Features of Enterprise Resource Planning (ERP) 3. Need 4. Scope 5. Benefits.

Contents:

  1. Meaning of Enterprise Resource Planning (ERP)
  2. Features of Enterprise Resource Planning (ERP)
  3. Need for Enterprise Resource Planning (ERP)
  4. Scope of Enterprise Resource Planning (ERP)
  5. Benefits of Enterprise Resource Planning (ERP)



1. Meaning of Enterprise Resource Planning (ERP):

The power of the Internet and the World Wide Web is revolutionizing the policies, procedures, and in many cases, the entire business models of forward thinking companies and organisations.

To survive and thrive in an intensely competitive environment, decision-makers need to have quick access to the information they need to make the complex business decisions that will enable them to create, maintain and extend competitive advantage.

Success is often influenced by an organization’s ability to quickly and effectively capture, analyse and leverage financial data. Those, who realize the importance of this factor, harness and exploit the power of internet by using Enterprise Resource Planning (ERP).

Enterprise resource planning is a business management system that integrates all facets of the business, including planning, manufacturing, sales, and marketing.

ERP can also be defined as the broad set of activities supported by multi-module application software that helps a manufacturer or other business manager to manage the important parts of its business, including product planning, parts purchasing, maintaining inventories, interacting with suppliers, providing customer service, and tracking orders.

ERP can also include application modules for the finance and human resource aspects of a business. Its purpose is to integrate all departments and functions across the company into a single computer system than can serve all those different departments’ particular needs.

The term Enterprise Resource Planning, thus, signifies an enterprise-wide management system supported by multi-module application software that enables an organisation to manage all facts of its business including product planning, material management, manufacturing, finance and accounting, costing, sales and distribution, assets acquisitions, maintenance and retirements, customer services, reporting, human resource management and so on.

It requires an immense effort to build a single software programme that serves the needs of finance people as well as the heeds of human resource people. Each of these departments typically has their own tailor-made computer systems and software’s.

But ERP combines them all together into a single data base so that the various departments can more easily share information and communicate with each other. This integrated approach can be very beneficial if companies install software correctly.

For example, when a customer places an order, that order starts with a paper document moving-from one basket to another around the company, often being keyed and rekeyed into different departments’ computer systems along the way.

All this causes delays and lost orders, and all the keying into different computer systems may lead to errors. Besides this, no one in the company exactly knows what is the status of the order at any given point because there is no information sharing system. For example, Finance department may not be knowing whether the item has been taken from the warehouse.



2. Features of Enterprise Resource Planning (ERP)
:

Major features of Enterprise Resource Planning (ERP) are:

(i) It provides company-wide integrated information system covering all functional areas like manufacturing, purchases, payables, receivables, inventory, etc.

(ii) It performs core activities and increases customer services thereby projecting the corporate image.

(iii) It bridges the information gap in the organisation.

(iv) It offers a solution for better project management.

(v) It allows for automatic introduction of latest technology like electronic fund transfer, Internet, Video conferencing etc.

(vi) It eliminates the business problems like shortage of materials, inventory problems, prompt delivery etc.

(vii) It provides for improving and refining the business processes.

(viii)It provides complete integration of systems not only across departments, but also across the companies under same management.



3. Need for Enterprise Resource Planning (ERP)
:

Traditionally companies developed computer application for each of the functional areas like general ledger, purchasing, inventory and planning. Systems have always been developed as islands of information where the focus was on functions.

Data was redundant and/or inconsistent and consolidation was not possible. The decision-makers of the organization did not have access to information that could help them take timely decisions and hence managerial control was difficult.

Any change in the business had to be taken care of by modifying the systems that took enormous time and effort. Thus, reaction to change in the constantly changing business environment was difficult. A need was felt for an integrated system that could address these requirements. Companies started investing in an integrated system to derive competitive advantage in the market place.

While the computer application manufacturing packages addressed primarily the requirements of a manufacturing setup, ERP addressed the information requirements of the entire enterprise.

The focus of ERP has not only been on addressing the current requirements of an organization but also on providing the opportunity for continually improving and refining business processes. Since the system was totally integrated, elimination of redundant and inconsistent data followed.




4. Scope of Enterprise Resource Planning (ERP)
:

Various areas normally covered under ERP are:

(i) Financials:

Financial accounting, treasury management, enterprise control and asset management.

(ii) Logistics:

Production planning, materials management, plant maintenance, quality management, project systems, sales and distribution.

(iii) Human Resources:

Personnel management, training and development skills.

(iv) Workflow:

Workflow integrates the entire organisation with flexible assignment of tasks and responsibilities to locations, positions, jobs, groups, or individuals.



5. Benefits of Enterprise Resource Planning (ERP)
:

Integrated, uniform, relevant, and up-to-date information is vital for the very existence of an enterprise. It gives the power to the right person to make decisions at the right time. This is only possible when the entire organization shares the same information and views it in the same perspective. Lack of integration affects other flows like men, machines and money.

ERP brings together people who work on shared tasks within the same enterprise or in their dealings with suppliers and customers. Enterprises have to ensure a smoother flow of information at all levels and between all parts of their organization. Workflow integrates business processes.

Some of the tangible benefits reported by industry are:

a. Reduction of lead time.

b. Expansion of business

c. Increase of inventory turnover.

d. WIP inventory reduced.

Apart from these tangible benefits, there are intangible benefits like:

a. Better customer satisfaction

b. Improved vendor performance

c. Increased flexibility

d. Reduced quality costs

e. Improved resource utility

f. Improved information accuracy

g. Improved decision-making capability.

Traditionally it has been manufacturing enterprises that are looking to improve efficiency, lower costs and increase profitability. The manufacturing industries that have successfully implemented ERP are in the automotive, consumer goods, chemical and pharmaceutical sectors.

Other diverse enterprises such as banking and insurance, health care, telecom and utilities have also realized that ERP is a beneficial package for solving their problems also. These enterprises have found that the basic core business processes in the area of financials, logistics and human resources are not different than in the manufacturing segment.

With the liberalization of Indian economy and the consequent competition, enterprises in India have realized the need to adopt ERP solutions. Though infrastructural bottlenecks like telecom and power exist, a number of enterprises have found innovative methods to overcome these problems and implement ERP successfully.

The fact that technological advancements in India have kept pace with innovations elsewhere in the world has helped the advancement of ERP in India. Customers in fields such as automobiles, steel and pharmaceuticals have already realized that integrated systems have provided tangible benefits to their organizations.

ERP helps in determination of cost of products correctly. In case of multi-national companies and multi-site manufacturing and distribution environment, it simplifies the procedures by allowing one plan to manage companies.

It enables the companies to efficiently deliver the right product from right warehouse to the right customer at right time. It enables quick response to changes in business operations and market conditions. It helps to achieve competitive edge by improving business processes. It also improves production planning.

ERP benefits in detail are discussed as under:

(i) Integrates Financial Information:

Through the adoption of ERP and web-enabled applications, the efficiency of accounting procedures improves significantly. To speed up the flow of information to and from its different locations/departments, and to enable timely decision-making, companies implement an ERP system centred around financial applications; including payables, general ledger and fixed assets.

Users can generate their own reports by themselves in real time, instead of having to turn to Information System (IS) department to generate those very same reports. Managers can conduct online inquiries, if they see variances in their statements while comparing actual with their budgets, and discover what is causing the variance.

On one hand, accounting department saves time as they do not have to respond to as many inquiries from different managers and this time can be spent on more value-added activities.

On the other hand different managers manage their operations more effectively. ERP also enhances operational efficiencies by automating resources-heavy and time consuming manual and paper-based procedures. ERP significantly helps in receivables management, financial analysis and purchasing

(ii) Helps in Product Costing:

ERP supports advanced costing methods including standard costing, actual costing and activity-based costing. All these costing methods and information can be fully integrated with financial database. ERP facilitates costing analysis and helps in identifying the areas for cost reduction and control.

(iii) Inventory Management:

ERP helps the manufacturing process flow more smoothly, and it improves visibility of the order fulfillment process inside the company. That can lead to reduced work-in-progress inventory, and it can help users better plan deliveries to customers, thus reducing the finished inventory at the warehouses.

ERP is beneficial for multi-national, multi-company, and multi site manufacturing and distribution environments. This system simplifies complicated logistics by allowing one to plan and manage companies in different countries as a single unit.

(iv) Distribution and Delivery:

ERP helps in defining logistics processes, flexibility and efficiently to deliver the right product from the right warehouse to the right customer at the right time. For the customer, the most important element is the quality of one time delivery.

If the product is delivered late, it does not matter how well the product has been made. Applications support automatic or manual load planning, transportation planning for in-house vehicles or third party agents.

(v) E-commerce:

Integrating ERP and E-commerce requires careful planning, which is the key to get integrated system on the right track. E-commerce means IT departments need to build two channels of access to ERP systems—one for customers (other-wise known as business-to-consumer) and one for suppliers and partners (business to business).

These two sections want two different types of information from ERP system. Consumers want order status and billing information, and suppliers and partners want just about everything else.

ERP is a result of the modern organizations’ attitude towards how their information systems are to be configured to the new business focuses. Merely automating systems is no longer the cure. The major bottleneck in getting to build software and systems solutions for emerging ERP needs is integration.

Disparate elements of an organization have to be linked together so that whenever a change in an external ‘pull’ takes place, the enterprise is able to adjust to it immediately and effectively.

This proactive adaptability of an enterprise around redefined business objectives is called EWI (or enterprise-wide integration). The trend today is that many organizations are changing from function-oriented businesses to process-driven entities. ERP systems enable this not only at the information systems level but also at the applications level.

The areas of ERP deal with manufacturing as well as with finance. For an ERP solution, human resource is as germane to the whole scheme of things as distribution. In fact, the various vendors who provide ERP solutions do so in the modular manner.

And this is the beauty of the whole system. ERP packages are mostly built on the objective-oriented programming (OOP) approach. Odysse and ERP software systems are examples of this approach. This is a major advantage to users and developers alike.

Another important factor is adaptability. Protean, a package from the US-Based Marcam Corporation provided a solution to a nationwide chain of bakery stores in no time at all by putting this adaptability feature to work. The company was able to effect a specific customer requirement of change in bag size from 3 lb to 2 lb in minutes as compared to the hours it would have taken earlier.

This was done right down to the production level with the help of a single click of the mouse. By changing a single characteristic-bag size of the product in the manufacturing module of the package, the entire process got updated accordingly. ERP also helps in getting the most out of databases and ensuring that an open system approach actually works, especially where JIT (Just in Time) is in operation.


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