ERP is Enterprise Resource Planning. It is very essential to have centralized system in a business. Each unit in the business need to integrated so that all the unit in the business work in sync with each other. This will help them operate from various locations. Let us understand the ERP using following business scenario.
Consider the above business scenario : As shown in the business process
1.The customer will call the sales team for a product
2.The Sales team will contact the Inventory and will realize that product is out of stock
3.The Sales team will call Production Planning to inform that the product is out of stock and needs to be produced
4.The Production planning team will contact Inventory to check for the raw materials
5. If raw materials are not available then the production planning will call the vendors and place an order for raw materials
6. The production planning will contact the floor execution team to actually start the production once the raw materials are procured
7.Once the product is ready the production team will call sales team and update the products are available
8. Sales team call the customer to inform that product is now ready
9. Production planning team, sales team, vendor details will be again updated in the finance department.
The above example is a typical business scenario in any organization. Main understanding that can be derived from the above example are
1. Any business or an Enterprise have many business units or Departments
2. Each business units will communicate with each other constantly for various reasons
3. They constantly exchange information and data with each other
4. Any business can be successful if the communication between different department and also with the third party (vendors, customers) are very effective
Based on these observations we can divide any business into two types:
1. Decentralised systems
2. Centralised systems (ERP)
In a company using decentralized data systems data will be managed locally at individual stores or departments. The people in one department will not have access to the data in the other department. They communicate to each other either through phone or mail to make the work done. If the company has one or two department it is to some extent manageable, however it won’t be very efficient. It can be efficient only when there is sharing of data and synchronization of the communication will happen.
Disadvantages of Decentralized systems.
If we take same business scenario of decentralized system as in the diagram. When the customer calls sales team for the product, the sales team have no idea regarding the product. The sales team will have to call up the inventory to check for the availability. The sales team doesn’t have access to the real time data of the inventory. This creates lot of confusion. Also, the inventory has to check for the product and they have to get back to the sales team, this will take lot of time. The customer might choose another product by that time. The customer will be lost in this process. The time taken is more. This might even lead to customer dissatisfaction which might affect the sales. It will also affect the revenue if sales goes down.
Again if sales team checks the production planning team for the product the production planning team will again contact the Inventory team to check for the raw material to produce new products. The inventory team will have to check the raw material in stock required for the product. The inventory and production planning should maintain the same data separately. This will cause a huge maintenance. Data maintenance cost will go up. They have to buy the raw material immediately ,that will lead to increase of material cost. Again if production planning team realizes that they have shortage of workers to fulfill the sudden requirement they will have to hire workers, which leads to hiring employees immediately which leads to increase in the labor cost.
If we list all the disadvantages together from the above scenario of decentralized system, we can conclude as below:
1. Creates lot of confusion in communicating between various departments
2. Might lose customers and reputation of the company
3. Leads to customer dissatisfaction
4. Affects the revenue
5. Sales might go down
6. Data maintenance cost will go up
7. Increased material and inventory cost
8. Increased labor cost
These are some of the disadvantages listed as above. The solution to the above problem is centralized systems which are nothing but ERP’s. ERP is a centralized systems which is nothing but Enterprise resource planning. ERP’s comes as better solution for business which will address almost all the issues that are faced in decentralized business scenarios. The diagram given below will explain how the centralized business works.
Advantages of Centralized systems :
1. The centralized ERP will help to communicate with the various departments very easily
2. Real time data is accessible by all the departments at any point of time
3. Since data is maintained centrally and will be accessed by all the departments, the data maintenance cost will be reduced
4. Data redundancy of data will be avoided.