7. A Conceptual Model For Erp

1. Aconceptualmodelforenterprise
resource planning (ERP)
Carl Marnewick and Lessing Labuschagne
RAU Standard Bank Academy for Information Technology,
Rand Afrikaans University, Auckland Park, South Africa
Abstract
Purpose– This article seeks to provide a conceptual model that explains the complexity of an
enterprise resource planning (ERP) system to general and project managers in a non-technical manner
that is easily understood.
Design/methodology/approach– The 4Ps business model serves as a starting-point to derive the
ERP model because most managers are familiar with it and can therefore relate to it with ease. An ERP
system is divided into four major components, namely, the software, the customer mindset, change
management, and the flow of processes within it. A fifth component, methodology, encircles these four
components to ensure that they are integrated and implemented in an organised manner.
Findings– ERP is more than just software. Unless a clear understanding exists of the different components
and their integration, ERP projects will continue to be plagued by failure. This model is applicable to any
ERP system as it is generic and vendor-independent and helps in determining the scope of an ERP project.
Research limitations/implications– The suggested model is conceptual in nature and provides a
holistic view of ERP. It does not attempt to provide a detailed, step-by-step approach for implementing
an ERP system.
Originality/value– The conceptual model enables general and project managers to understand ERP
systems better without becoming overwhelmed by product or technical detail. This will facilitate the
successful implementation of ERP systems, thus ensuring project success and, ultimately,
organisational success.
KeywordsManufacturing resource planning, Modelling, Project management
Paper typeResearch paper
Introduction
Most organisations realise the potential of enterprise resource planning (ERP) systems,
yet struggle to materialise real benefits. One out of four ERP projects is over budget
and some 20 per cent are terminated before completion. ERP projects often fail to
achieve business objectives even a year after the system has been implemented. The
return on investment (ROI) also takes six months longer than expected. There are
many reasons that contribute to the low success rates, yet one common aspect that
prevails is a misunderstanding of what ERP entails (ComputerWorld, 2001).
The purpose of this article is to provide a high-level conceptual framework that will
assist in understanding what ERP is and how to go about implementing it. It is
important for general and project managers to understand what ERP is and what the
impact is on the organisation when implementing an ERP system. Since it is a
high-level conceptual model, it will be used by middle to top management as well as
project managers that need to implement an ERP system.
The article starts with a definition of ERP and this definition will be used as the
basis of the conceptual model. An ERP system will be explained by dividing it into four
components and by describing a methodology on how to implement it.
The Emerald Research Register for this journal is available at The current issue and full text archive of this journal is available at
www.emeraldinsight.com/researchregister www.emeraldinsight.com/0968-5227.htm
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Information Management &
Computer Security
Vol. 13 No. 2, 2005
pp. 144-155
qEmerald Group Publishing Limited
0968-5227
DOI 10.1108/09685220510589325

2. What is ERP?
Despite the numerous definitions that can be found in literature, many people still
battle to understand what ERP is. ERP can be defined as:
A packaged business software system that lets an organisation automate and integrate the
majority of its business processes, share common data and practices across the enterprise and
produce and access information in a real-time environment. The ultimate goal of an ERP
system is that information must only be entered once.
It is therefore clear from the above that an ERP system is more than just a product or
software. Based on the definition of ERP, the following section illustrates the four
conceptual components that make up an ERP system.
An ERP model
Nowhere in current literature does a high-level model exist that explains ERP in an
easily understandable format. Many vendors have in-depth brochures and white
papers that explain what their products are capable of, yet some still battle to
comprehend fully what it is. Many people, however, are familiar with the 4Ps
marketing model. The 4Ps marketing model was a general marketing model where the
Ps originally stood for people, product, promotion and price (Alexandrou, 2002). This
model was used extensively during the 1980s and 1990s. Over the years, this model has
been changed to become a business model and was modified by replacing promotion
and price with process and performance. This modified 4P business model was used to
construct the proposed conceptual ERP model because most of the people in
management are familiar with the concept of the 4Ps.
Conceptual components of ERP
The ERP model consists of four components that are implemented through a
methodology. Figure 1 illustrates the integration between the components.
A clear mapping results, as can be seen in Table I, when this conceptual model is
compared to the 4Ps model.
Figure 1.
Conceptual components of
ERP
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3. Methodology encircles all four of the components to illustrate that each component is
addressed and implemented in an integrated manner. The next section briefly
describes each of the four components.
The software component
The software component of the ERP model is the component that is most visible to the
users and is therefore seen as the ERP product. It consists of several generic modules,
some of which are listed below:
(1)Finance. The finance module is usually the backbone of the ERP system. It
includes concepts such as the general ledger, accounts receivable, accounts
payable, fixed assets and inventory control.
(2)Human resources (HR). HR forms an integral part of an ERP system. HR
administration automates personnel management processes, including payroll,
recruitment, business travel and vacation allotments. It focuses on the
automation of HR tasks from the employer’s viewpoint. The focus of the
administration function is to empower employees to manage their own
employment terms and conditions. Mundane tasks like the allocation of leave
days to an employee can be predetermined and assigned to an employee.
The payroll is usually integrated with the finance module and handles all the
accounting issues and preparation of cheques related to employee salaries,
wages and bonuses.
(3)Supply chain management (SCM). SCM is the oversight of materials,
information and finances as they move in a process from supplier to
manufacturer to wholesaler to retailer to consumer (Alexandrou, 2002). SCM
involves coordinating and integrating these flows both within and among
companies.
SCM flows can be divided into three main flows:
.
the product flow;
.
the information flow; and
.
the finances flow.
The product flow includes the movement of goods from a supplier to a
customer, as well as any customer returns or service needs. The information
flow involves transmitting orders and updating the status of delivery. The
financial flow consists of credit terms, payment schedules, and consignment
and title ownership arrangements.
(4)Supplier relationship management (SRM). With an increasing reliance on
contractors and suppliers for material, logistics and manufacturing capacity,
the ability to manage these relationships has become critical. To maximise
The 4Ps ERP conceptual model
People Customer mindset
Product Software
Process Change management
Performance Process flow
Table I.
Applying the 4P model to
the ERP model
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4. profitability, companies must be able to select the right suppliers quickly,
establish strategic relationships and effectively collaborate with them as they
help meet business goals. SRM describes the practices needed to establish the
business rules for extended interaction with the suppliers of products and
services. SRM enables companies and their suppliers to collaborate on strategic
sourcing and procurement, while managing the overall process from an
enterprise-wide perspective (Ganeshan and Harrison, 1995).
(5)Customer relationship management (CRM). CRM is a term for methodologies,
software and usually internet capabilities that help an enterprise manage
customer relationships in an organised and efficient manner (Lalakota and
Robinson, 1999). An enterprise builds a database about its customers. This
database describes relationships in sufficient detail so that management,
salespeople and customer service representatives can access information, match
customer needs with product plans and offerings, remind customers of service
requirements and know what other products a customer had purchased.
(6)Business intelligence (BI). BI applications are decision support tools that enable
real-time, interactive access, analysis and manipulation of mission-critical
corporate information (Cherry Tree & Co., 2002). Users are able to access and
leverage vast amounts of information to analyse relationships and understand
trends that ultimately support business decisions. These tools prevent the
potential loss of knowledge within the enterprise that results from massive
information accumulation that is not readily accessible or in usable form.
The different software components of an ERP system illustrate clearly that an ERP system
is more than just the financial side, but includes components such as CRM and SCM.
Process flow
The second component in the conceptual model is the process flow within an ERP
system.
Process flow deals with the way in which the information flows among the different
modules within an ERP system. This forms a very important part of understanding
ERP systems. Figure 2 illustrates the master process flow, showing how information
flows within and between the different modules.
Before an ERP system can be implemented in an organisation, the business
processes must be modelled and, if need be, reengineered to allow smooth integration.
The implementation of ERP systems can often be compared to the proverbial square
peg in a round hole situation. The following are some examples to illustrate the process
flow within each of the software components:
.
Finance. An organisation places an order using the purchase order process. The
stock or goods purchased through the purchase order process are delivered to the
organisation and are allocated as stock in the inventory. If a purchase is a capital
expense, such as vehicles or buildings, the item will be transferred to fixed assets.
The stock items in the inventory can be sold to a customer. The process is the
sales order process. The inventory levels are adjusted as stock flows in and out.
A sales invoice is generated and accompanies the goods to the customer. This
invoice will be the proof that the customer received the delivered goods and owes
the company money.
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5. Figure 2.
Master process flow
diagram
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6. The above-mentioned process also forms part of the SCM component. The
organisation needs to pay its creditors for the goods it received and the
organisation must also make sure that it collects its debt from its debtors. All the
entries of the modules described above will be made in the general ledger.
.
HR. HR administration involves the organisation’s internal activities. Information
gathered from HR administration is populated into the payroll system itself. This
information, as well as that gathered from the self-service HR module, influences
the payroll. Information such as a new employee’s salary package will be pulled
from the HR administration module. Changes made by the employee in the
self-service HR module are also reflected in the payroll module. Interaction
between the payroll and the self-service HR module is a continuous process.
.
SCM. The stock levels in the inventory control trigger the generation of a
purchase order. The stock levels are determined through demand planning. An
order for the required stock is placed with the supplier. This order placement can
be a physical order or an e-commerce transaction between the organisation and
the supplier.
The supplier delivers the required stock to the organisation and uses supply
and transportation planning to optimise delivery to the organisation. The stock
from the supplier will be delivered at a predetermined price, as negotiated in the
SRM component. The delivery time and duration will also be governed by the
SRM component.
.
SRM. The SRM process begins with a design and engineering phase. This phase
establishes the minimum requirements and specifications of a product. It also
defines the criteria the supplier must fulfil. These criteria form the basis for the
tendering process. Different suppliers will tender and submit documentation
based on the criteria. A selection will be made and a preferred supplier chosen.
A contract is drafted between the parties. The procurement process is
determined and forms part of the bigger SCM process. Ongoing management of
the supplier and its services will continue and adjustments will be made to
accommodate changes and shortfalls.
.
CRM. The first and most important process within CRM is to gather all relevant
information for a specific customer. This process is tedious and cumbersome and
involves sources such as spreadsheets and users’ personal information
management utilities. Business decisions will be based on this information.
Once all the relevant information has been gathered, it needs to be maintained.
This is crucial, as no organisation can afford to make decisions based on old and
wrong information. A central database is instituted where all the information is
stored and maintained through a chosen CRM tool.
The CRM tool organises the information in a structured way so that the
information is easily accessible. The information can be viewed using either web
interface or a client-server application. The information related to a specific
customer will be viewed differently by each user, for example the customer call
centre will want to view the problem history of a specific customer, whereas the
salespeople will want to see all products sold to a customer.
.
BI. A vast amount of data are stored within the organisation and can be found
within the ERP system itself or within planning and forecasting, which forms
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7. part of SCM. The main purpose of BI is to accumulate the data and process it into
useful information. The data are accumulated through different BI tools, such as
data mining and data warehousing.
The information is stored in a presentable manner and the relevant people
access it using an interface that is easy to use, such as a web-based or graphical
interface. The information can be viewed from the internet or within the
company.
Figure 2 clearly shows that all the software components of an ERP system are
integrated and that the information flows from one software component to another. It is
also clear that a vast amount of information flows between the different modules. It is
easy for a user of the ERP system to make errors. The advantage of an ERP system is
that information is entered only once. This minimises the risk of human error.
Customer mindset
The third proposed component of the ERP model is the customer’s mindset. Resistance
kills many ERP projects. A proposed ERP system may hold great promise, but often
fails to consider how the users are likely to view this so-called improvement (Maurer,
2002). ERP systems remove the old tried-and-true ways of working which users
understand and are comfortable with, even though some of these existing,
cobbled-together legacy systems are not all that good. When users are asked to give
up what they know and what they can rely on, they will resist. For any ERP project to
succeed, the users must buy into the new ERP system. A paradigm shift or customer
mindset change must be achieved. This has to be done at three levels (Swartz and
Orgill, 2000):
(1)User influence. To ensure that the users fully understand the necessity of using
the system correctly all the time, a needs analysis should be done to evaluate the
users’ technical skills, their existing job processes and the impact the system
will have on their jobs (Fister Gale, 2002). Training should include information
about their new roles and responsibilities, the business objectives of the
initiative and the projected benefit to the company. According to Fister Gale
(2002), ERP is more than a new software system. It is a culture change. If
training does not cover why each task is important and how every transaction
is part of a larger process, then the users are less likely to use the system
correctly or consistently. Training plays a major role in the operation of the
ERP system after implementation. One of the major advantages of an ERP
system is increased productivity. This can only be acquired once the user is
trained sufficiently on the use of the ERP system. Users should not be expected
to be able to perform immediately at the same level of productivity as on the old
legacy system.
(2)Team influence. A typical ERP project involves internal people from a number of
departments within an organisation, as well as many external people in the form
of consultants and vendors. A primary reason for unsuccessful ERP
implementations is the inability of this disparate group to come together in a
focused, team-oriented manner. All too often the team membership polarises into
“us-versus-them” factions and the project degenerates into mass finger pointing.
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8. and teams develop a strong partnership and a shared commitment to the success
of the ERP implementation. Without this joint commitment to work together, any
attempt to implement an ERP system will result in failure (Web, 1998).
Consultants play a major role and key partnerships at every level will be
required to maintain the cohesiveness of the team. When possible, the consultants
should be incorporated directly into the team. This requires major trust on the
part of the organisation.
(3)Organisational influence. The users will be expected to work twice as hard
during the implementation of the system. They still need to do their normal
operational work to make sure the business continues to run smoothly and
they need to give inputs to the different project teams of which they are a
part. This causes the users to become overworked, tired and stressed. It must
be pointed out to the users right at the start what the issues will be during
implementation, and the rewards must be clearly stated. It will be necessary
to remind the users regularly of the benefits of installing the ERP system
(Urwin, 2001).
The culture within an organisation also plays a major role and influences
the individual user. ERP systems break down all functional barriers within
an organisation and users are required to be multi-skilled and
multi-managed. This means that it is often difficult to implement an ERP
system in an organisation with strict hierarchical structures and line
reporting. The culture of the organisation must first be changed for the ERP
system to be successful.
Change management
Change management plays a major role in the successful implementation of an ERP
system and is the fourth component in the ERP model. Change needs to be managed at
several levels.
User attitude
Resistance to change is one of the major issues that all ERP projects will face (Fister
Gale, 2002). It is important to get the users to buy into the ERP project if it is to succeed.
It is also a reality that not everyone will be delighted with this new project. User
attitude change management focuses on managing the users’ expectations and on
converting the non-believers to believers and supporters of the system. What the
organisation needs is people to understand what it is all about, to like the new system,
to take part in making it a success and to have confidence in the project team.
This means creating strategies that speak to the employees in their own language to
help them understand why the changes are necessary to the organisation. More time
should be spent in communicating to the employees the business case for the change
than on the often mind-numbing details of the ERP process itself.
Project changes
All ERP projects are subject to scope change at some time during the lifecycle. The key
to successful ERP implementation is to manage the change of scope process effectively
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9. The Project Management Body of Knowledge (PMBOK) defines scope change
control as:
.
influencing the factors which create scope changes to ensure that changes are
beneficial;
.
determining that a scope change has occurred; and
.
managing the actual changes when and if they occur.
A project scope change control will define the procedures by which the project scope
may be changed. These scope changes must go through a system of approval against
the original ERP modelling and design. This ensures that the proposed changes are
necessary and appropriate and that the integrity of the ERP system is maintained.
These changes may have an impact on the contractual time and budget agreements.
It is therefore crucial for every ERP project to have sign-off of the deliverables. Any
changes to these deliverables can and will have an impact on the project itself.
Business process changes
ERP systems bring with them business process changes. The key business drivers
forcing business process changes are replacing legacy systems, gaining greater control
and managing globalisation across the enterprise. The change must happen for three
reasons: stringent business conditions accentuated by channel and brand proliferation,
the pressures of managing globally and the intense service demands by customers.
With globalisation has come price pressure, as customers insist that manufacturers
produce higher-quality goods with shorter delivery times and lower prices. Companies
must have a more accurate and timely information flow to meet these demands (Hooks,
2002).
The organisation must keep in mind that the business processes will be under
constant change. The business processes will change as the ERP system is installed
and also as the ERP system evolves and matures. The business processes will also
change as the users become familiar with the system.
System changes
The fourth module in the change management component involves the review of
current version management. Most organisations have implemented some form of
version management processes to preserve the integrity of custom software developed
within an organisation. At the same time, organisations have established a formal
promotion protocol to manage the testing and release of custom-developed software.
When ERP applications are introduced, a number of new change management issues
are encountered that are associated with maintaining and reconciling custom and
packaged applications.
Generally speaking, version management helps an organisation to manage
effectively version control and security issues that are typical to a software
development and maintenance project.
An effective change management strategy will improve an organisation’s change
analysis capabilities and provide more fluid and efficient change
implementation/migration processes.
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10. ERP methodology
Methodology refers to a systematic approach to implement an ERP system that will
ensure the proper integration of the four components illustrated in Figure 1. The ERP
methodology component builds on the theory that an enterprise can maximise its
returns by maximising the utilisation of its fixed supply of resources (Bruges, 2002).
The five steps that make up the ERP methodology are: pre-implementation,
analysis, design, construction and implementation. These five steps transcend the
program management, change management, system installation and process redesign
needs, and are illustrated in Figure 3.
The following is a brief discussion on each of the steps.
Pre-implementation phase
Pre-implementation planning helps to identify the operational needs, business drivers,
strategic plans and other factors that will define the scope and objective of the ERP
solution. During the pre-implementation planning process, expectations for benefits
realisation, magnitude of change, change ownership, process redesign and
functionality delivery options are identified.
Analysis phase
The analysis phase evaluates the organisational baselines that form the foundation for
process redesign, the system build and change management. A system build
determines the software components of the ERP system and how these components
interact with each other. Business processes are analysed to understand the current
conditions. Functional and technical requirements are reviewed to determine the
system build needs. Cultural and workforce skill evaluations are performed to identify
workforce transition requirements.
Design phase
The design phase incorporates direction-setting information from the
pre-implementation phase and baseline information from the analysis phase to
create new designs for a desired future state.
Figure 3.
ERP methodology
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11. Construction phase
The construction phase takes products from the design process to create tangible
operational processes and information system support. As the process model begins to
crystallise, the process model and the information system build are evaluated against
each other.
Implementation phase
The implementation phase prepares for the final ERP solution deployment. Final
changes are made to business processes, policies, and procedures and system builds to
prepare for a go-live. Go-live occurs when the ERP system is used within the
organisation as the system to perform all the duties and processes as determined by the
design phase. Once a go-live occurs, a post-implementation audit is performed to
measure the effectiveness of the ERP solution in meeting its goals and objectives.
A measuring mechanism must be in place to measure the result of the
implementation phase against the aims and goals of the pre-implementation phase.
This measuring tool is the link between the pre-implementation phase and the
implementation phase.
The methodology comes full circle when the inputs of the first phase influence the
results of the implementation phase.
Conclusion
It is important for general and project managers to understand ERP and the impact of
ERP systems on the organisation. This conceptual model provides management with a
basic and high-level model that explains the different components of an ERP model as
well as a methodology to implement an ERP system. This model can be applied to any
ERP system and the ERP vendor is irrelevant.
The value of this conceptual model is that it simplifies ERP and reduces ERP
systems to manageable and understandable components. This simplicity will enable
project managers to focus their attention on all four components and not just the
software component. This is very important because the software component is often
perceived as the whole ERP system. This is one of the reasons why ERP projects fail.
It must be noted that the conceptual model focuses only on current ERP systems
and does not take into account the ERP II or any development beyond ERP. By nature
of being a conceptual model, this model does not provide any in-depth analysis of ERP
systems.
It is clear from the current research that there is a need for a framework to
implement ERP systems. Future research by the authors will focus on linking ERP
projects to organisational strategies and devising a framework for the implementation
of ERP systems using portfolio and program management.
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