An integrated information system will ABC to the business processes of all the departments and facilitate timely and accurate information flow among them.
Here is the example integration between sales and finance department.
Tracing the Evolution of ERP:
ERP integrates and automates most aspects of the working of an enterprise. It is a landmark in the enterprise-wide integration of business processes through information systems. However, it is not the first attempt to do so.
The need and attempt to integrate the working of an enterprise began in the 1960s with systems that integrated only a part of an enterprise.
Predecessors of ERP Systems:
The use of information systems to integrate some business processes within an enterprise began with inventory control systems in the 1960s. In the 1970s, organizations wanted to integrate inventory management and production planning. Therefore, materials requirement planning (MRP) systems originated.
In the 1980s, MRP evolved into manufacturing resource planning (MRP II) systems that led to ERP systems in the late 1990s. During the evolution from inventory control systems to ERP systems, the number of integrated business processes in an enterprise has increased. Let us discuss each predecessor of ERP systems in detail.
Inventory Control Systems
Inventory control systems are stand-alone software applications that automate the control and management of the inventory in an enterprise. These systems helped simplify the sales, purchase, and production business processes to some extent.
Although the inventory control systems were useful, they had several limitations. For example, they were not able to generate production schedules based on current inventory level. To facilitate such tasks, inventory control systems needed to be integrated with production planning processes. This led to the development of MRP systems.
Materials Requirement Planning (MRP) Systems:
MRP systems are software applications that integrate inventory control and production planning. The aim of an MRP system is to produce a detailed material requirement plan for the production of items based on various inputs, such as bill of material (BOM) and master production schedule (MPS). The outputs of the MRP system determine what material is procured when and in how much quantity so as to finish the manufacturing of the end-product on time.
Although MRP systems helped in production planning, they were prone to incorrect input due to human error, such as unrealistic lead-time estimates or inaccurate data. They also ignored factors such as constraints on the available capacity of human, material, and cost resources. As a result, sometimes they generated plans and schedules that were difficult to achieve.
Understanding ERP:
After using MRP II, organizations wanted to broaden the coverage of business processes and to use MRP II in sectors other than manufacturing. This led to the development of ERP. ERP was an extension of MRP II, providing broader coverage of business processes and applicability to sectors other than manufacturing.
ERP can be defined as a way to plan (P) integration of business processes and information across departments in an enterprise (E) for efficient utilization of resources (R) including human, material, and cost. Before discussing the benefits of ERP, let us understand the associated terminology confusions.