HISTORY OF ERP SYSTEMS (STUDY OBJECTIVE 2)
ERP systems can be traced back to software that was developed during the 1960s and 1970s to track inventory in manufacturing companies. The first generation of this software was called materials requirements planning (MRP) software. MRP software of the 1970s allowed plant managers to coordinate the planning of production and raw material requirements. MRP software determined order size and timing of raw materials on the basis of sales forecasts, factoring in lead times for order and delivery of materials.
The typical computer hardware and software of the 1970s that were used to enable an MRP system were mainframe computers, sequential file processing, and electronic data interchange (EDI). The EDI allowed up-to-date information about inventories and status of orders to be processed quickly. As mainframe computers improved in speed and power during the 1980s, MRP software evolved into manufacturing resource planning (MRP II) systems. MRP II was much broader and more encompassing than MRP software. MRP software was intended to provide for the purchase of raw materials to support manufacturing needs. The purpose of MRP II was to integrate manufacturing, engineering, marketing, and finance units to run on the same information system and to use a single database for all of these functions.
As MRP and MRP II systems became more popular in large manufacturing companies, early pioneers of ERP systems were working on a broader concept of information system software. Five former IBM systems analysts created an early version of ERP software in 1972. These five innovators formed a company that was to become Systems, Applications and Products in Data Processing (SAP). SAP designed the first true ERP system, also called SAP®. SAP was intended to integrate all business processes, not just manufacturing, and to make data available in real time. To the financial accounting system, they added modules for materials management, purchasing, inventory management, and invoice verification. SAP release 2, or SAP R/2®, was introduced in 1978. The new version took full advantage of the current mainframe computer technology, allowing for interactivity between modules and additional capabilities like order tracking.
However, ERP software did not become popular in the large corporation software market until the 1990s. In 1992, SAP released its third version of SAP, called SAP R/3®. Two important features led to a tremendous growth in the demand for SAP R/3. First, it used client–server hardware architecture. This setup allowed the system to run on a variety of computer platforms such as Unix® and Windows NT®. This meant that large corporations could use Windows NT based PCs as the client systems. R/3 was also designed with an open-architecture approach, allowing third-party companies to develop software that would integrate with SAP R/3. The success of SAP R/3 led other software developers to create competing products. Companies such as Oracle Corporation, PeopleSoft, J.D. Edwards, and Baan produced competing ERP systems.
During the last half of the 1990s, there was a very rapid growth in the sales of ERP software to Fortune 500 companies. Two major factors contributed to this growth. One was the explosion of e-commerce and the dot-com boom that occurred in the late 1990s. To enable e-commerce and the business process acceleration necessary to meet the demands of e-commerce sales, companies needed integrated systems such as ERP.
A second factor was the valid concern about Y2K compatibility of existing software systems in companies. Many companies were uncertain as to whether their legacy software would work after 1999 or would be Y2K compatible. The concern arose because of an artifact from the early days of programming. The amount of useable memory in the early computers was extremely small compared with computers today. To save memory space, programmers always used only two digits for the year when storing dates. For example, 1999 was stored as “99.” However, when the calendar rolled to 2000, the two digits would not have been sufficient to express the new century dates. Systems professionals were concerned that older legacy systems would process the year “00” as 1900 rather than 2000, or that the system could not even handle “00,” “01,” “02,” and so forth. There was genuine concern that the actual programming logic in those older systems would “blow up” when faced with a 2000 or later date. For example, consider the potential problem if an older computer software system was used to calculate interest due on a note payable. It would calculate this by subtracting dates to determine the number of days and then multiply number of days times interest rate. If the note were issued on December 1, 1999, and due on January 30, 2000, the number of days outstanding should be 60 days. However, an older software system might calculate this as December 1, 1999 minus January 30, 1900, and return a negative number of days.
Therefore, many companies were rapidly trying to replace legacy software in the late 1990s before the year 2000 changeover occurred. Many large companies purchased and implemented ERP systems such as SAP R/3, PeopleSoft, Oracle, and J.D. Edwards. Sales of ERP system software soared and continued to grow until the dot-com bust of 2001. Immediately after the Y2K rush to implement ERP systems, there was a dramatic slowdown in the sale and implementation of ERP systems. At the same time, however, there were many changes occurring in business related to the Internet and e-commerce.
To increase the marketability of their ERP software, ERP providers began modifying their ERP software to include e-commerce capability. During this period, Gartner, Inc., a leading provider of research and analysis of the global IT industry, coined a new name for these evolving ERP systems: ERP II. A major addition to ERP II systems was the ability to support e-commerce. However, the evolution to ERP II included more than simply e-commerce. A whole range of modules to improve the processes between a company and its trading partners is part of an ERP II system. These modules include customer relationship management (CRM) and supply chain management (SCM) modules. These modules will be described in more detail in a later section of this chapter. The evolution of ERP systems into ERP II systems changed the focus of ERP systems from an internal management perspective to an interactive, internal, and external perspective of business processes.