What are ERP (Enterprise Resource Planning) Systems?

ERP or Enterprise Resource Planning systems is one of those terms that we tend to throw out there and expect everyone to know what we're talking about. When you here the acronym, think of a huge software application that performs many different business functions. The term itself is somewhat vague and to find out what the capabilities of any particular ERP system, you have to ask a lot of questions. No two ERP systems are the same.

Enterprise Resource Planning (ERP) had its beginnings back in the late 1970s or early 1980s. Back then, it was simply called Materials Requirement Planning (MRP) and had the capability to plan efficiently while considering bills of materiel quantities, scrap and yield factors, various lead times, various lot sizes, minimum and maximum quantities, safety stocks and safety lead times.

Later on in the 1980s, MRP II cam along and added master scheduling, forecasting, customer service, order entry, capacity requirements planning, procurement, production control, inventory management, standard costing and accounting. The goal of MRP and MRP II was to allow companies to react and re-plan as it received feedback on performance against plan.

In the 1990s MRP II evolved into ERP, Enterprise Resource Planning. ERP included functionality for quality management just-in-time manufacturing, financial planning and budgeting, executive support systems, EDI (electronic data interchanage), sales support systems, manufacturing executive systems, logistics, plant and equipment maintenance, and advanced planning systems.

Over the years, more and more functionality has been included into ERP systems. Now we have collaborative planning, forecasting and replenishment features, supplier relationship management, CRM (customer relationship management). Additionally, there is the internet and mobile devise functionality being added all of the time.

Investments in ERP systems require significant resources, both time and money. We recently learned that one Government contractor had already spent $7 million and wasn't finished. A typical ERP project involves re-engineering business processes and selecting and implementing commercially available software packages from vendors such as SAP, Oracle, and Deltek. Costs include:

• Preparation of request for proposal
• Current state assessment: The process of documenting the entity's current business process. This activity is sometimes called mapping, developing an "as-is" baseline, flow-charting, or determining current business process structure.
• Process re-engineering: The effort to re-engineer the entity's business process to increase efficiency and effectiveness. This activity is sometimes called analysis, determining "best-in-class", profit/performance improvement development, or developing "should-be" processes.
• Restructuring the work force: The effort to determine what employee makeup is necessary to operate the re-engineered business process.

Generally Accepted Accounting Standards (see ASC 720-45) require that the cost of business process re-engineering activities, whether performed internally or by third parties, is to be expensed as incurred. The cost of software development on the other hand, whether acquired or developed in-house, must be capitalized (see ASC 350-40). Therefore it is important to properly segregate the software component from the re-engineering activities of ERP development.