A Typical ERP Business Scenario to Explain Why ERP is Required.jpg

The very basic question to any beginners is why Enterprise Resource Planning also called ERP is required? To answer this, let's examine this typical business scenario.

Suppose a client approaches sales team asking for a particular product. The sales team contacts to inventory department to check the availability of the product. To their surprise, sales team found out that the product is out of stock. Before we actually see in detail, what ERP is and how ERP can help in your business process, we will understand how different departments are involved in the whole business process, right from the ordering of the raw material to manufacturing goods to delivering final goods to the customer.

Here is the whole process that is followed by any business unit.

  1. Client contacts the sales team to check the availability of the product
  2. Sales team approaches the Inventory department to check for the availability of the product
  3. The In case the product is out of stock, the sales team approaches the Production Planning Department to manufacture the product
  4. The production planning team checks with inventory department for availability of raw material
  5. If the raw material is not available with inventory, the Production Planning team buys the raw material from the Vendors
  6. Then Production Planning forwards the raw materials to the Shop Floor Execution for actual production
  7. Once ready, the Shop Floor Team forwards the goods to the Sales Team
  8. Sales Team who in turn deliver it to the client
  9. The sales team updates the finance with revenue generated by the sale of the product. Production planning team update the finance with payments to be made to different vendors for raw materials. 

That is a typical business process for any manufacturing company. Some key inferences one could derive from the scene would be.

  • It has many departments or business units
  • These departments or business units continuously communicate and exchange data with each other
  • The success of any organization lies in effective communication, and data exchange, within these departments, as well as associated third party such as vendors, outsourcers, and customers.

Based on the manner in which communication and data exchanged is managed. Enterprise systems can be broadly classified as

  1. Decentralized System
  2. Centralized System which is also called as ERP

Decentralized System

Let's look at Decentralized system first, in a company with Decentralized System of Data Management, there are two major problems

  • Data is maintained locally at the individual departments
  • Departments do not have access to information or data of other departments

To identify problems arising due to decentralized Enterprise management system lets look at the same business process again. The customer approaches the sales team for a product, but this time around he needs the product, on an urgent basis.

  • Numerous disparate information system generates individually over time which is difficult to maintain
  • Integrating the data is time and money consuming
  • Inconsistencies and duplication of data
  • Lack of timely information leads to customer dissatisfaction , loss of revenue and reputation
  • High Inventory, material, and human resource cost.

These are some major drawbacks for which we need a solution. Well, the Solution lies in Centralized Systems i.e. ERP.

Centralized System

In a company, with Centralized System of Information and Data Management.

  • Data is maintained at a central location and is shared with various Departments
  • Departments have access to information or data of other Departments

Let’s look at the same business process again to understand how a Centralized Enterprise System helps to overcome problems posed by a Decentralized Enterprise System.