The below figure shows the conceptual model on which ERP theory is based. ERP defines the five measures that govern business policies:
- Process-based flat organization
- Assemble-to-order or Make-to-order philosophy
- Empowered employees
- Customer and supplier integration
- Sophisticated IT systems
These business policies lead to critical elements for the ERP system. The success of ERP depends on the level of its adoption in the organization.
ERP can be defined in the following ways by keeping the above-mentioned concept in mind :
- It is a planning methodology or philosophy that is based on the smooth integration of all the business processes of an enterprise.
- It is a set of software casing major business areas e.g. economics, plans, sales, materials, manufacturing, distribution, all so tightly integrated with one another that any business activity recorded at one place is immediately reflected in all other places.
- It is the finest expression of the consistency of Info-tech and business. An enterprise-wide system with enabling technology and effective managerial tool for integrating all the levels and improving report ability.
The above definitions explain the fundamental design feature of ERP as a system-based business solution. ERP integrates the various departments and functions throughout the organization. It attempts to comprehend everything into a single system that can serve every department and functional needs. While doing so, it focuses on the business plan areas and addresses those problems with an integrated planning approach.
To understand how ERP is a system based business solution, we have to first critically examine the two key words ‘System’ and ‘solution’.
In the present context, we can say that ERP is a system for a specific set or arrangement of elements that are organized to accomplish a pre-defined goal through the processing of information. This goal invariably could be to support an existing business function, improve the transparency of data, improve efficiency in business, improve decision-making, and provide improved customer satisfaction. The key resource elements of such a system are hardware, software, users, databases, etc.
A business solution can be explained as a framework encompassing strategy, organization structures, key performance indicators, measurements, and IT, which must be aligned to the business processes. Conventionally, there are three kinds of business processes- acquiring and paying for input resources, converting inputs into finished goods and services provided.
Thus ERP as a combination of system and business solution provides the user with a productive planning tool.