How do enterprise systems help businesses achieve operational excellence?

Around the globe, companies are increasingly becoming more connected, both internally and with other companies. If you run a business, you’ll want to be able to react instantaneously when a customer places a large order or when a shipment from a supplier is delayed. You may also want to know the impact of these events on every part of the business and how the business is performing at any point in time, especially if you’re running a large company. Enterprise systems provide the integration to make this possible. Let’s look at how they work and what they can do for the firm.

1. What are Enterprise Systems?

Imagine that you had to run a business based on information from tens or even hundreds of databases and systems, none of which could speak to one another. Imagine your company had 10 major product lines, each produced in separate factories, and each with separate and incompatible sets of systems controlling production, warehousing, and distribution.

At the very least, your decision making would often be based on manual hard-copy reports, often out of date, and it would be difficult to understand what is happening in the business as a whole. Sales personnel might not be able to tell at the time they place an order whether the ordered items are in i nventory, and manufacturing could not easily use sales data to plan for new production. You now have a good idea of why firms need a special enterprise system to integrate information.

Chapter 2 introduced enterprise systems, also known as enterprise resource planning (ERP) systems, which are based on a suite of integrated software mod­ules and a common central database. The database collects data from many divisions and departments in a firm and from a large number of key business processes in manufacturing and production, finance and accounting, sales and marketing, and human resources, making the data available for applications that support nearly all an organization’s internal business activities. When new information is entered by one process, the information is made immediately available to other business processes (see Figure 9.1).

If a sales representative places an order for tire rims, for example, the sys­tem verifies the customer’s credit limit, schedules the shipment, identifies the best shipping route, and reserves the necessary items from inventory. If inven­tory stock is insufficient to fill the order, the system schedules the manufacture of more rims, ordering the needed materials and components from suppliers. Sales and production forecasts are immediately updated. General ledger and corporate cash levels are automatically updated with the revenue and cost in­formation from the order. Users can tap into the system and find out where that particular order is at any minute. Management can obtain information at any point in time about how the business is operating. The system can also generate enterprise-wide data for management analyses of product cost and profitability.

2. Enterprise Software

Enterprise software is built around thousands of predefined business pro­cesses that reflect best practices. Table 9.1 describes some of the major business processes that enterprise software supports.

Companies implementing this software first have to select the functions of the system they wish to use and then map their business processes to the predefined business processes in the software. (One of our Learning Tracks shows how SAP enterprise software handles the procurement process for a new piece of equip­ment.) Configuration tables provided by the software manufacturer enable the firm to tailor a particular aspect of the system to the way it does business. For example, the firm could use these tables to select whether it wants to track rev­enue by product line, geographical unit, or distribution channel.

If the enterprise software does not support the way the organization does business, companies can rewrite some of the software to support the way their business processes work. However, enterprise software is unusually complex, and extensive customization may degrade system performance, compromising the information and process integration that are the main benefits of the sys­tem. If companies want to reap the maximum benefits from enterprise soft­ware, they must change the way they work to conform to the business pro­cesses defined by the software.

To implement a new enterprise system, Tasty Baking Company identified its existing business processes and then translated them into the business pro­cesses built into the SAP ERP software it had selected. To ensure that it obtained the maximum benefits from the enterprise software, Tasty Baking Company de­liberately planned for customizing less than 5 percent of the system and made very few changes to the SAP software itself. It used as many tools and features that were already built into the SAP software as it could. SAP has more than 3,000 configuration tables for its enterprise software.

Leading enterprise software vendors include SAP, Oracle, IBM, Infor Global Solutions, and Microsoft. Versions of enterprise software packages are designed for small and medium-sized businesses and on-demand software services run­ning in the cloud (see the chapter-opening case and Section 9-4).

3. Business Value of Enterprise Systems

Enterprise systems provide value by both increasing operational efficiency and providing firmwide information to help managers make better decisions. Large companies with many operating units in different locations have used enter­prise systems to enforce standard practices and data so that everyone does busi­ness the same way worldwide.

Coca-Cola, for instance, implemented a SAP enterprise system to standardize and coordinate important business processes in 200 countries. Lack of stan­dard, companywide business processes had prevented the company from using its worldwide buying power to obtain lower prices for raw materials and from reacting rapidly to market changes.

Enterprise systems help firms respond rapidly to customer requests for in­formation or products. Because the system integrates order, manufacturing, and delivery data, manufacturing is better informed about producing only what customers have ordered, procuring exactly the right number of components or raw materials to fill actual orders, staging production, and minimizing the time that components or finished products are in inventory.

Alcoa, the world’s leading producer of aluminum and aluminum products with operations spanning 31 countries and more than 200 locations, had ini­tially been organized around lines of business, each of which had its own set of information systems. Many of these systems were redundant and inefficient. Alcoa’s costs for executing requisition-to-pay and financial processes were much higher, and its cycle times were longer than those of other companies in its in­dustry. (Cycle time refers to the total elapsed time from the beginning to the end of a process.) The company could not operate as a single worldwide entity.

After implementing enterprise software from Oracle, Alcoa eliminated many redundant processes and systems. The enterprise system helped Alcoa reduce requisition-to-pay cycle time by verifying receipt of goods and automatically gen­erating receipts for payment. Alcoa’s accounts payable transaction processing dropped 89 percent. Alcoa was able to centralize financial and procurement activ­ities, which helped the company reduce nearly 20 percent of its worldwide costs.

Enterprise systems provide much valuable information for improving management decision making. Corporate headquarters has access to up-to- the-minute data on sales, inventory, and production and uses this information to create more accurate sales and production forecasts. Enterprise software includes analytical tools to use data the system captures to evaluate overall organizational performance. Enterprise system data have common standard­ized definitions and formats that are accepted by the entire organization. Performance figures mean the same thing across the company. Enterprise sys­tems allow senior management to find out easily at any moment how a par­ticular organizational unit is performing, determine which products are most or least profitable, and calculate costs for the company as a whole. For example, Alcoa’s enterprise system includes functionality for global human resources management that shows correlations between investment in employee train­ing and quality, measures the companywide costs of delivering services to employees, and measures the effectiveness of employee recruitment, compen­sation, and training. The Interactive Session on Management describes more of these benefits in detail.

Source: Laudon Kenneth C., Laudon Jane Price (2020), Management Information Systems: Managing the Digital Firm, Pearson; 16^th edition.