Published by MBA Skool Team, Published on January 25, 2013
What is ERP and why is it needed?
ERP, a term started by the Gartner Group in the 1990’s. It stands for Enterprise Resource Planning. It is an integrated software which allows any firm to use a common platform to manage all its departments.
The ERP software can be used to handle:
Supply Chain Management
Customer Relationship Management
ERP brings with it a host of advantages:
Efficient and faster mode of communication when multiple component suppliers are involved.
Increased revenue for manufacturers as well as suppliers - Increased speed of information flow and transparency helps to release redundancies and blocking of capacity.
Improved financial flows help suppliers to ease their fund flow and thereby make them more committed to follow work schedules and provide on time delivery.
It provides simultaneous data which are commonly use across departments, making it available to the right people at the right time.
Reduced supply chain risk and scope to delineate risks.
Increased business for suppliers as the network is exposed to better information on their offering and capability.
No platform investment cost for additional participants.
Minimal business process change enforced.
Minimal internal resource requirement for change over.
Ease of training and adoption.
However, the ERP softwares are typically heavy products. Using them in-house requires a certain amount of IT expertise in the firm. Like installation, maintenance, up gradation of the ERP softwares requires people who are well versed with the system. This job cannot be entirely outsourced since the ERP network forms the backbone of any firm. Hence, some extra spending on employing IT personals has to be borne by the company, even though IT might not be the core-competency of the firm.
In House ERP
Currently all the ERP solutions provided are in house in nature. The hardware and software maintenance is all done at the company which uses the ERP software.
Some major disadvantages of the in house ERP would be
In-house ERP solutions would prove costlier in the long run.
It would require separate IT man power to maintain, upgrade the ERP architecture.
It would not be possible to access the in-house ERP system from remote locations. Thus it is not suitable for workers who work from home or are on business tours. Also geographically distributed business units would face an issue.
Once an ERP system is installed at an organization, it usually means the organization has to stick to that ERP particular vendor, since it is difficult to migrate heavy ERP systems from one system to another. This acts as a single vendor lock-in.
What’s the big thing about Cloud?
Most of us use computers isn’t it? What’s the most annoying thing you face while using computers?
Is it the complexity of assembling your desktop when you shift it? Or is it the Windows crash you had faced and lost some important data? Is it the softwares you need to install to view that new epub file? Or is it the antivirus updates that keep nagging each time you are working on that all important presentation?
Well, take all these annoying stuff off yet still use similar computing powers. That’s Cloud Computing in a nutshell!!!
Cloud computing gives you just an interface to use all your softwares and store data. The maintenance of the softwares as well as hardwares is taken care of by the service provider. You need not even have a CPU. A thin client and a high speed internet connection would be enough to get things going.
Also with the advent of smart phones and other PDA’s, using a common data pool has become all the more relevant. You use your data and softwares across all platforms, from any device, across geographies; that’s the ideal situation that anyone can dream of.
Cloud based ERP
This is a relatively new concept; however it is gaining prominence because of a multitude of factors:
The initial cost of setting up the cloud based solutions is lower than the traditional in-house ERP softwares.
Scalability is a big advantage in case of cloud based ERP solutions. If the company wishes to add new vendors, suppliers or new players into its ERP system, all it has to do is provide a login username and password to the new player. There is no requirement of additional setup or hardware. This saves a lot on the cost of infrastructure as well as man power required for set up or training purposes.
Cloud based ERP solutions have a very high uptime, up to 99.98%. Hence, it would be available almost 24x7. This is a necessity for any company where SCM Operations are carried on. Comparatively, traditional ERP systems are susceptible to crashes and require more time for maintenance and upgrades.
Cloud based solutions are also advantageous as it provides service over geographically distributed areas and devices. Thus it can be accessed from any remote locations unlike the in-house ERP products.
It is easier to provide upgrades and data backups to cloud based products. Thus the IT staff can concentrate more on catering to the core competencies of the company rather than worrying about ERP updates and patches.
Over time, the IT infrastructure cost, the IT manpower cost goes down for the company. All these additional savings would help the company in the long run.
Shifting to a Cloud Based ERP
Some of the current vendors providing cloud solutions on ERP are as follows:
DataXstream virtualised SAP and others
IT departments in the future can make considerable savings by switching from in-house systems to cloud-based software-as-a-service (SaaS) systems. A sample study which shows the cost savings of this approach would certainly vouch for cloud based solutions:
ERP Software Cost Comparison
Of late, big players like Oracle are targeting SMEs and other small businesses to scale their business. For this to be successful, a primary shift is required as far as traditional ERP softwares are built. Low cost, scalable solutions need to be developed to cater to this market segment which does not have the financial capabilities as well as the needs of big manufacturing houses which use the traditional ERP softwares. Cloud based ERP solutions are a right way in such ventures.
However, cloud based approaches also do have some disadvantages:
In case of proprietary data which the firms cannot share, cloud based ERP solutions can be a problem. Security threats related to sharing such data on Cloud servers is a major cause of concern.
Such an approach has a very high dependency on network connections. Thus it would not be the ideal solution in regions and factories where internet connectivity is unstable.
There are few variants of such products in the market. This is because it is a relatively new concept and established players are yet to enter into the market landscape.
ERP products are highly customised products. However, since cloud solutions follow a generic approach, high customisations for each and every client might not be suitable. This might be an issue in some cases.
Future Way ahead and the long run
The past decade has clearly proven how IT solutions can improve and streamline the delivery process of any firm. In the upcoming future, IT will be increasingly perceived as a cost driver which would improve upon the efficiency of a firm as well as reduce the cost incurred by the firm. Challenging as it may seem, this is one of the key expectations which the industry has. With the ever increasing number of smart devices in the market and the rapid improvements in networking technologies, information flow across platforms and geographies would be the key factor which would determine the performance of any IT architecture.
Using cloud based ERP solutions is a step towards this direction. Though the technology in this field is still in its nascent stage, it does hold a lot of promise.
This article has been authored by Sayan Chakrabarti from SJMSOM IIT Bombay.
Views expressed in the article are personal. The articles are for educational & academic purpose only, and have been uploaded by the MBA Skool Team.
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