What is SAP for a layman? - by Rohit Vij Aug, 1998
This article attempts to explain SAP to a layman. It goes down to throw some light on what is Business Process Re-engineering and how ERP software packages help in substantial changes that end up giving significant benefits.
What does it stand for, and what really is it?
SAP is an 'Enterprise Resourse Planning' application software (Its a product of a German company called SAP AG, and the product is actually called SAP R/3). In business/technical language, when we would say that companies 'implement' SAP, it would mean that they buy this software, and some more hardware (like computers, servers and networking equipment like VSATs- depending on their requirement), and hire consultants from a consulting firm (like Anderson Consulting, KPMG, IBM, HCL, etc.) who would actually do the implementation. When a company would implement SAP, it would primarily involve, among other things, mapping of that company's business processes (the way it does business) on to the business model as given by SAP. The job of the SAP consultants is to Configure the application to start representing the entire business gamut of the company. On one hand, it would involve understanding the different areas of business and operation of the client company, like Financial Management, Sales and Distribution, Production Planning, Materials Management, etc. On the other, they would know exactly what functionality does SAP have to offer in all these areas. Then, they would 'Customise' the SAP software as per the company's structure. To some extend, the client company is expected to adapt SAP business processes, and to some extend, SAP changes to suit the company's way of doing business.
The technical side
The technical folks put in data like name and addresses of customers from old software which the company was earlier using, in to SAP; and to make SAP run concurrently with oher application-software in certain areas, which the company may still choose to retain.Then there could be peculiar requirements in printing of bills, for example, which may need intervention to suit the company's exact requirements; and reports that the managers could need out of the data generated from day to day activities, which may be very critical to their decision making.There could be further technical issues like connecting the company (read SAP) with Electronic Data Interchange (and lately with Web based systems) to its customers and suppliers, and other business associates. Expertise could be required to connect SAP with other SAP systems, for the size of the companies where software like SAP are implemented could span different geographical locations, even different continents.
ERP: Roots in Re-engineering
ERP has its roots in a management concept called Re-engineering. The focus is to derive substantial improvements from changing the processes (software, or no software), rather than going after incremental imrovements in each step of the business activity. The following will briefly explain the evolution of business processes so as to appreciate the complexity of a big business. To understand this, lets go back to the days of Adam Smith (a 1776 thinker, forbearer of todays management consultants, and some say- the father of the Capitalism). He explained his principle of Division of Labour in his book ‘Wealth of Nations’. As an example of how process change could effect business, we will begin to see from a small example how Division of Labor transformed the manufacturing process. This will be followed by more processes that evolved over time, in the benefit of more large and complex businesses.
Division of Labor
We all would know what division of labour is : break a difficult work into small, easy steps, and each person does only one work. For example, take a popular example of manufacture of a pin. Consider two factories engaging ten people each to manufacture pins. In the first one, each person starts to draw the wire, cut it, points it, grinds it, makes the head, pack it, etc. In the second, each person does just one job; example, of cutting the wire, one after the other, and pass it on to another who only points them, etc.
It was observed by Adam Smith that just by following a different management concept (the latter one), the output of the latter factory was more than the former by an order of 100s of times. This was an example of process Re-engineering
We have been following this method of division of labour to increase our productivity for 100s of years now. This is true for most of our activities, whether manufcaturing or insurance. Each person has a small, fixed thing to do, the work is fragmented. But as a result of these efforts, a greater objective is getting fufiled, and most of our institutions, businesses and corporations running. Further, down the decades the business management concepts continued to evolve:
Railroad bureaucracy
Birth of modern business bureaucracy: Railroad companies were first examples of industrial organisations growing beyond the span of a person's control. Command and control structures were established, where in certain rules had to be followed for safer and predictable running of trains in both the directions on single-track lines. Lines of authority and reporting were clearly drawn out.
Assembly line manufacturing techniques
Henry Ford refined on the Smith's concept. The Assembly line simply brought the work to the worker. And the worker had to install a single part in a prescribed manner. In the 19th Century, meatpackers used overhead trolleys to move carcasses along as they cut them; while food canners used conveyor belts to process food. But Henry Ford took the concept to a higher level.
Mass Production
Alfred Sloan of GM applied principle of division of labour to management. It resulted in division of professional labour in parallel with the division of manual labour that had already taken place on the factory floor. Large organisation (at GM) was broken down into divisions and managers would oversee them by looking at production and financial numbers.
Controlling, Planning and Auditing
In the 1960s, finally, through elaborate planning exercises, senior managers determined the businesses in which they wanted to be in, how much capital they should allocate to each, and what returns they would expect the operating managers of these businesses to deliver to the company.
Spread of the Model
The organisational model, developed in the US, spread rapidly to Europe and then to Japan. Designed for a period of heavy and growing demand, and therefore accelerating growth, this form of coprorate organisations suited the circumstances of the post war time perfectly. Deprived of material goods, first by Depression, and then by the war,customers were more than happy to buy whatever companies offered them. Rarely did they demand high quality and service. Any house, any car, any refrigerator were infinitely better than none at all.
Capacity
Capacity was a major concern. To be able to add capacities only when needed, companies developed budgeting, planning and control. The pyramidal organisational structure of most organisations was suitable to adding more people at the bottom when required and fill up the management layers above. With more machines and automation, companies got encouraged to break down more of their white collar work into small, repeatable tasks.
Downsides
Overall processes of producing a product or delivering a service became increasingly complicated.
Managing it became more difficult.
It needed more people at the middle of the corporate organisation.
Senior management got separated from customers, and bothered only about numbers.
To be cont.......
