Understanding ERP and TPS: Systems, Components, Advantages, and Implementation
ERP
What is an ERP System?
Q. Define an ERP System: An Enterprise System is a set of integrated programs that manage a company’s vital business operations for an entire multisite, global organization. An ERP system provides a competitive advantage. It integrates the entire business processes and functions, including integrating the entire multisite of an organization. It also provides real-time monitoring of business processes, functions, and all the business sites. Integration is proved by a single database. An ERP system supports routine business functions (transaction processing) and decision-making processes. An ERP solution is more suited for large business organizations. Also, there are ERP solutions for medium-sized organizations. Most firms purchase rather than build ERP systems. Implementation usually takes 3 to 5 years. Well-known ERP vendors include SAP and Microsoft. Vendors provide customization and support (24-hour help desk). ERP integrates all locations of a business organization, allowing real-time connection with each other. Real-time monitoring of business functions from anywhere. An ERP system will capture a sales order and generate a customer invoice. The shipment process will generate the necessary internal documents needed by staff to pick, pack, and ship the order. General ledger and accounts receivable processes will be invoked to capture the sales order transactions.
Components of an ERP System
Q. Explain components of ERP System: At the core of the ERP system is a database (centralized) that is shared by all users (business processes, functions & sites). It has three major program modules (high-level features) which are integrated: production & supply chain management, CRM & sales, and financial & managerial accounting. Each of these modules consists of several programs (integrated with other programs within the module and with other modules in the ERP system). Each program supports a particular business process. A business function has collections of business processes. The database is hosted at a central site (mainframe computer), and every site is connected to the host computer. These ERP modules are installed at all the business sites. A single database allows real-time monitoring of business functions at all the sites. Modules allow easy customization; clients pick only relevant programs for their business. ERP vendors develop these modules based on industry best practices. The 3 components of the ERP system are:
Production and Supply Chain Management
An ERP system follows a systematic process for developing a production plan that draws on the information available in the ERP system database. The process starts with Sales forecasting to develop an estimate of future customer demand. The Sales and operations plan takes demand and current inventory levels to determine production for future demands. Production capacity and any seasonal variability in demand also need to be considered. Demand management refines the production plan by determining the amount of weekly or daily production needed to meet the demand for individual products. The output is a master production schedule. Detailed scheduling schedules production runs for each product and from one product to the next. Materials requirement planning determines the amount and timing for placing raw material orders with suppliers. Purchasing places purchase orders for raw materials and transmits them to qualified suppliers. Production uses the detailed schedule to plan the details of running and staffing production operations.
Customer Relationship Management and Sales Ordering
CRM: Customer relationship management (CRM) system helps a company manage all aspects of customer encounters, including: Marketing and advertising, Sales, Customer service after the sale, and Programs to retain loyal customers. The main goal of CRM is to learn and understand customer needs, increase customer retention & loyalty. The benefits of CRM: Improved customer satisfaction, Reduced operating cost, ability to meet customer demand, increased customer retention. CRM integrates the functions of product, marketing, and service in an organization. The key features of a CRM system include the following: Contact management, Sales management, Customer support, Marketing automation, analysis.
Sales ordering: A set of activities that must be performed to capture a customer sales order. A few of the essential steps include: Recording items to be purchased, Setting sales price, Recording order quantity, Determining the total cost of the order including delivery costs, Confirming customer’s available credit. Many small-to-midsize businesses are turning to ERP software to make it easier for their large customers to place orders with them.
Financial and Managerial Accounting
The general ledger is the main accounting record of a business. It is often divided into different categories including Assets, liabilities, revenue, expenses, and equity. An ERP system captures transactions entered by workers in all functional areas of the business and creates associated general ledger records to track the financial impact of the transaction. Financial accounting consists of capturing and recording all transactions that affect a company’s financial state and then using these documented transactions to prepare financial statements for external decision-makers such as stockholders, suppliers, banks, and government agencies. These financial statements include the profit and loss statement, balance sheet, and cash flow statement. Managerial accounting provides data to enable the firm’s managers to make decisions about current and future operations and develop overall business strategies.
Advantages and Disadvantages of ERP Systems
Q. Discuss the advantages (benefits they provide to the organization) and disadvantages (potential problems to overcome) associated with the implementation of ERP systems
Ans. Advantages:
Improved Access to Data for Decision Making
ERP systems operate via an integrated database, using one set of data to support all business functions. It provides efficient support for decision-making and does not need to gather and coordinate data from multiple business functions. Benefits for the organization: seamless organization, swift/effective decision-making, reduces the cost of doing business by a significant amount, better customer service, strengthens relationships (customer/supplier), and generates new business opportunities.
Improvement of Work Processes
ERP systems are built around best practices (vendors do considerable research to define the best business processes.). ERP vendors gather requirements from leading companies (highly competitive companies) within the same industry & combine them with research institutes and industry consultants. The individual application modules are designed to support these best practices, i.e., the most efficient and effective ways to complete a business process. Benefit for the organization: Become competitive – improvement in business processes, which are customer-oriented.
Elimination of Costly, Inflexible Legacy Systems
Adoption of an ERP system enables an organization to eliminate dozens/hundreds of separate systems and replaces them with a single integrated system. These systems are decades old. Original developers are long gone, and the systems are poorly documented. As a result, the systems are extremely difficult to fix when they break, and adapting them to meet new business needs takes too long. They become an anchor around the organization that keeps it from moving ahead and remaining competitive. Benefits for the organization: Significantly reduce maintenance costs, Swiftly adapt and incorporate new features, Effectively support business needs even as these needs evolve.
Upgrade of Technology Infrastructure
With an ERP system, an organization can upgrade and simplify its information technology. When implementing ERP, a company must decide which hardware, operating systems, and databases it wants to use. Eliminate the multiple hardware platforms, operating systems, and databases it is currently using (eliminate several vendors). Benefit for the organization: ERP systems (single vendor) reduce maintenance and support costs, including training needs for IT people.
Disadvantages:
Expensive & Time-Consuming
Getting the full benefits of ERP takes time and money. Need three to five years and spend a lot of money.
Radical Change & Difficult Customization
In some cases, a company has to radically change how the company operates to conform to the ERP’s work process – its best practices. These changes have a drastic impact on long-time employees that they resist change, retire, or leave the company, which has a major impact on the company’s operation. Best practices (ERP) can cause great work disruptions.
Difficulty Integrating with Other Systems
Most companies have other systems that must be integrated with the ERP system, such as financial analysis programs, e-commerce operations, and other applications. Many companies have experienced difficulties making other systems operate with their ERP system. Some companies need additional software to create links.
Risk in Using One Vendor
The high cost to switch to another vendor’s ERP system makes it extremely unlikely that a firm will do so. The vendor may have less incentive to listen and respond after adoption. The high cost to switch also increases risk – in the event the ERP vendor allows its product to become outdated or goes out of business. Selecting an ERP system involves not only choosing the best software product but also the right long-term business partner.
Examples of ERP Systems
Q. Identify examples of ERP System: ERP systems are commonly used in manufacturing companies, colleges and universities, professional service organizations, retailers, and healthcare organizations. A few of the current leading ERP vendors for large organizations and SMEs include: SAP, Oracle, Microsoft, NetSuite, and Ross enterprise.
Transaction Processing Systems (TPS)
Q. Describe Transaction Processing System (TPS)
Ans. Definition – TPS: TPS is an organized collection of people, procedures, software, databases, and devices used to record completed business transactions.
There are two critical databases: TPS’s operational database stores all the current year’s business transactions, Data warehouse or historical database (all the other years’ transactions). Every organization has a TPS (manual or automated). TPS captures and processes business transactions (detailed data) necessary to update records about the fundamental business operations of the organization. Every processed transaction reflects the current financial status of the organization. TPS includes sales, order entry, inventory control, payroll, accounts payable, accounts receivable, and general ledger, etc. A TPS can be on its own stand-alone or can be integrated TPS. E.g., accounts receivable, accounts payable, inventory sales, payroll, etc. Vs. accounting system or ERP system. Large business organizations have Integrated TPS. TPS systems support business processes that enable firms to do business with their customers and suppliers. Definition – Transaction (with automated TPS): Event or process initiated or invoked by a user or computer program, Regarded as a single unit of work and requiring a record to be generated for processing (updating records) in a database, Such event, which is regarded as a single unit of work, must either be processed in their totality or rejected as a failed transaction. An organization’s TPS supports the routine (day-to-day or business operation) activities that occur in the normal course of business. Processes that enable to do business with customers: routine (day-to-day) activities, business operations or process. Business operations & TPS example; cash sales (POS/EFT system), take customer order (Customer Order system), manage inventory in the warehouse (Inventory Control System), prepare weekly or fortnightly pays for employees (Payroll Systems), process customer payments (Accounts Receivable System), make payments to suppliers (Accounts Payable Systems), prepare monthly/yearly accounts; and prepare monthly and yearly cash flow, profit and loss account, and balance sheet (General Ledger System) etc. TPSs help a company add value to its products and services. (lower price, higher quality, better service (through enhanced productivity or unique product). TPSs- Capture and process detailed business transactions (data) to update records about fundamental business operation. Capture -Input (manual or automated) into these systems are basic business transactions; cash sale, customer order, purchase order, time card, customer payment etc. TPS process detailed data- six activities; data collection (capture), data editing, data correction, data manipulation, data storage, and creating documents/reports. TPS provides data for other business processes (other business systems) These are decision-making processes; TPS provides access to the firm’s business (transaction) data through operational and historical databases or data warehouses. Data marts (subset of historical or data warehouse). The other business systems are Management Information System/Decision Support System (MIS/DSS), Special-purpose information systems (Expert System (ES), Executive Support System (ESS) and knowledge system (KS). Without TPS, it is difficult to have other enterprise systems since they are dependent upon the captured business transactions (business data).
Activities Common to All Transaction Processing Systems
Q. Identify and explain the 6 activities common to all transaction processing systems
Ans. Routine activities include: Data collection, editing, correction, manipulation, storage & documents/reports.
Data Collection
Capturing and gathering all data necessary (Manually/automation) to complete the processing of a transaction. Data should be collected at its source and should be recorded accurately & in a timely fashion with minimal manual effort and in an electronic/digital form that can be directly entered into the computer. This approach is called source data automation.
Data Editing
An important step in processing transaction data is to check data for validity and completeness to detect any problems, a task called data editing. E.g., Quantity and cost data must be numeric, and names must be alphabetic.
Data Correction
It is not enough simply to reject invalid data. The system should also provide error messages that alert those responsible for editing the data. Error messages must specify the problem so that proper corrections can be made. Data correction involves Re-entering data that was not typed or scanned properly.
Data Manipulation
It’s a process of performing calculations and other data transformations relating to business transactions. It can include Classifying data, performing calculations, summarizing results & storing data in the organization’s database for further processing.
Data Storage
It involves updating one or more databases with new transactions. After being updated, these data can be further processed and manipulated by other systems so that it is available for management reporting and decision-making. A transaction processing system’s database has a major impact on other business systems and decision-making processes.
Document Production and Reports (Output)
It involves Generating output records, documents, and reports. These can be Hard/soft copy: i.) A report on outstanding invoice balance can be a soft copy displayed by the Account receivable system. ii.) A pay slip is an example of a hard-copy document produced by a payroll system. Often, results from one TPS flow downstream to become input to other systems.
Characteristics of a TPS
Q. Explain the characteristics of a TPS:
Rapid Response
Fast performance (customers must not wait). Very critical to have a rapid response time. Throughput – Number of transactions they can process in a given period of time. Business hours – swift processing, no delays. Peak time – handle the volume of transactions without the system crashing.
Highly Reliable
Mission-critical system: Must be available for the entire business hours. Web-based TPS 24/hours a day. Organizations heavily rely on their TPS; a breakdown will disrupt the business operations or even stop the business. For a TPS to be effective, its failure rate must be very low. If a TPS does fail, then quick and accurate recovery must be possible. This makes well-designed backup and recovery procedures essential. Have a disaster recovery plan.
Inflexibility in Processing
With a TPS, every transaction will be processed in the same way regardless of the user, the customer, or the time of day. If TPS were to be flexible, there would be too many opportunities for non-standard operations. For example, a commercial airline needs to consistently accept airline reservations from a range of travel agents. Accepting different transaction data (data must be the same including format) from different travel agents would be a problem.
Controlled Processing
The processing in a TPS must support an organization’s operations. For example, if an organization allocates roles and responsibilities to particular employees, then the TPS should enforce and maintain this requirement.
Data Integrity
TPS must handle hardware or software problems without corrupting data. i) Input validation. ii.) Multiple users must be protected from attempting to change the same piece of data at the same time (two operators cannot sell the same seat on an airplane).
Ease of Use
TPS users are the ground-level staffs who perform routine business operations (non-technical). TPS should be simple for them to understand, protect them from data-entry errors as much as possible, and allow them to easily correct their errors.
Modular Growth
TPS should be flexible; able to add and enhance with new features and technologies. I) TPS should be capable of growth at incremental costs, rather than requiring a complete replacement. II) It should be possible to add, replace, or update hardware and software components without shutting down the system.
Importance of TPS in Relation to Other ES
Q. Explain the importance of TPS in relation to other ES
Routine
TPS supports routine business operations (sales order, A/C, A/P, inventory control, purchase, payroll); collects and processes data on business transactions only. MIS/DSS – use data from TPS to provide summarized information for managers to make decisions and manage the routine business operations. (less routine support). SIS- use data from TPS (and MIS/DSS) to help make future business decisions (add a new process/operation) e,g. PacknSave (sell fuel), warehouse (pharmacy) (no routine support).
Decision Support
TPS does not directly support decision-making but provides data (business transactions- stored in operational database). MIS/DSS (a level above TPS) supports operational decision-making processes, produce reports (use business transaction data- stored in operational database) which provide insight into business operations, manager’s use the reports to make, implement and monitor decisions. Decisions made impact the operational level or transaction processing level. SIS supports mainly executive decision-making processes; executives plan and make decisions for long-term business success; impacts the entire organization. SIS produces reports using business transaction data from the operational database (TPS), including data or reports from MIS/DSS.
Input/Output
TPS; deals with hundreds and thousands of inputs/outputs on a daily basis; these are business transactions e.g., sales order (input) and customer invoice (output); use to update the record in the database. MIS/DSS; input is summarized data from TPS; outputs are reports. SIS; input is summarized data from TPS/MIS/DSS; outputs are business vision plan or strategic plan, and long-term business goals/objectives).
Processing/Analysis
TPS; normal calculations (*,+,-,/), update, sort, and classify records e.g., provide a total cost for the customer, provide a total daily sales figure. MIS/DSS; does calculations, summary, and analysis to produce reports; more complex than TPS; average, count, sales by product or salesperson; what-if-analysis, Goal seek analysis. SIS; complex calculation and analysis to discover relationships and trends in data.
Procedures to Safeguard TPS
Q. Identify and discuss the procedures to safeguard TPS:
Business Continuity Planning (BCP)
Identification of the key business processes that must be restored first in the event of a disaster. Specification of what actions should be taken and who should take them to restore operations. Disaster recovery plan: actions that must be taken to restore computer operations and services in the event of a disaster-Firm’s plan to recover data, technology, and tools that support critical systems and necessary IS components (network, database, hardware, software, and operating system). TPS must have a disaster recovery plan. Avoid lengthy disruption in business operations (if not, it creates a serious cash flow problem and easily puts firms out of business). Regularly update the disaster recovery plan. Disaster recover service providers. Backups-Backups must have continuous backup of TPS; off-site storage of a copy of backup data. Full backup – backup of every file in the system (at the end of the day). Differential backup – backup only files that are new or changed since the last full backup. Incremental backup- includes recent files that never have been backed up. Continuous backup- real-time streaming method that records all system activity as it occurs.
TPS Audit (Ensure Continuous Security)
A check of a firm’s TPS systems to prevent accounting fraud and loss of data privacy. Every organization Must have an on-going audit of TPS. The audit can be performed by an Internal audit group or an external audit group. A TPS audit attempts to answer 4 questions: Does the system meet its business requirements? What procedures and controls have been established? Are the procedures & controls properly being used properly? Are the information systems and procedures producing accurate and honest reports?. A TPS audit must also examine the distribution of output documents and reports-Highlight if appropriate people can execute key system functions. Assess the training need. A TPS audit will identify and recommend areas of improvement.
Testing (4th Phase of SDLC)
Desk checking – reviewing the code to spot logic errors. Structured walk-through – A group of three to five IT staff members involved in code review (involve project team members and may include other programmers, analyst (not working on the project). The group identifies errors, applies quality standards, and verifies that the program meets the requirements of the design specification. Errors identified are easier to fix, still in the coding stage Unit testing, Integration testing, Systems testing, Acceptance testing.
SDLC approach requires developing testing and documentation throughout the project (in all 5 phases). SDLC planning phase (two key documents)-Business case, Feasibility study report. SDLC Analysis phase: Requirements document-DFD diagrams, Development strategy. SDLC Design Phase: Design specifications- Interface, (input), Output (reports), Pseudocode, Data modeling or database design (ERD), Systems architecture. Documentation (4th phase of SDLC): SDLC Implementation-Test cases (Documentation). Unit test (evidence)- Iteration build (evidence), Integration (evidence), Systems tests (evidence), Acceptance test (evidence), program documentation, Systems documentation, Operations documentation, User documentations. SDLC support and security phase: Document all bugs reported (Bug tracking systems), Documentation of all maintenance work, Disaster recovery plan, Security plan, Backup plan.
Change (Cut) Over to New TPS (4th Phase of SDLC)
Has to happen properly: Direct cutover, Parallel operation, Phased operation, Pilot operation.
Practices to Test TPS
Q. Discus the practices that can be applied to test TPS.: Testing (4th phase of SDLC)-Desk checking – reviewing the code to spot logic errors. Structured walk-through: A group of three to five IT staff members involved in code review (involve project team members and may include other programmers, analyst (not working on the project). The group identifies errors, applies quality standards, and verifies that the program meets the requirements of the design specification. Errors identified are easier to fix, still in the coding stage. Unit testing, Integration testing, Systems testing, Acceptance testing.
Traditional Transaction Processing Methods and Objectives
Q.Explain traditional transaction processing methods and objectives.
Ans. Batch processing systems: On-line entry with delayed processing. On-line transaction processing (OLTP):(Real-Time Systems). The first transaction processing systems used batch processing. That is, all transactions for a period of time would be collected in a group (called a batch), input & processed as a unit. This was normally done at regular intervals, such as every hour, day, or week. The biggest problem with batch processing is that the master file is never current. Although this is okay for some applications, such as processing end-of-semester grades or payroll, it is unacceptable for others, such as financial transactions. Think about the problems that would arise if your bank only processed deposits and withdrawals once a day! However, batch processing is fast and cost-effective for many applications. Online transaction processing is interactive & each transaction is processed as it occurs. Files are always current when online processing is used. The drawback to OLTP is the high costs associated with the necessary security & fault tolerance features. When online entry with delayed processing is used, data is input as the transaction occurs and is stored online, but files are not updated. Files are updated later in batch. For example, orders taken over the phone may be entered into the system but not processed until a slow time, such as at night.