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Retail

Enterprise Resource Planning systems or the ERP systems refer to the software packages that integrate all the data and the related processes of an organization into a unified Information System (IS). An ERP system uses a central database that holds all the data related to the various system modules. In order to achieve a seamless integration, an ERP system uses multiple hardware and software components. ERP packages are heavily used by larger retail chains.

Designed to facilitate the administration and optimization of internal business processes across an enterprise, ERP packages have become the competitive tool for most large retail organizations.  An  ERP software uses a single database that allows the different departments to communicate with each other through information sharing. ERP systems comprise of function-components that are designed to interact with the other modules such as the Order Entry, Accounts Payable, Accounts Receivable, Purchasing, Distribution etc.


Components of an ERP system

ERP systems comprise of different modules such as order entry, purchase, sales, finances, inventory management, DRP (Distribution Resource Planning) and human resources. The components are designed to work effortlessly with the rest of the system and provide a consistent user interface throughout the system.

ERP software packages have an enterprise-wide reach that offers cross-functional capabilities to the organization. The different functional departments involved in the operations or inventory processes are integrated into a single system. An ERP package takes care of the various business processes such as order entry, logistics and warehousing. It also caters to the different business functions such as accounting, marketing, strategic management and the human resource management.

Contemporary Challenges to the retail industry

In the current business environment, the retail industry faces two major challenges that threaten its profitability and the long-term survival prospects The two challenges are:

Market competition :

To beat the competitor, retailers have to understand consumer demand at the point of interaction and respond to the various inputs in real time across the enterprise. This calls for a proactive approach on the part of the retail organization to sense the specific requirements of the consumer before other competitors and respond to them in real-time ensuring customer satisfaction in the process.

Moreover, margins in the retail business generally are very low and that removes any scope for wastes or inefficiencies in the business processes. Efficiency is critical to the survival in the retail industry. A proactive approach on the part of the retail organization requires an enterprise-wide monitoring and control of the various business processes that may ultimately lead to the desired efficiencies and long-term customer satisfaction and profitability.

Regulatory pressures :

In order to meet the regulatory standards, the retailers require enterprise-wide process visibility, data access and near-instant performance  reporting. However, the need for flexibility, process efficiency, reliable information, and responsiveness is very hard to achieve given the existing portfolio of legacy, home grown and packaged software applications used by a majority of the retail organizations.


Therefore, a retail business would benefit immensely from an integrated IS infrastructure which continuously monitors and dispatches the necessary information of the flow of goods all on the way from supplier to the cash register and then back to accounting as well as other functions of the retail organization.


A combination of flexibility, process efficiency, reliable information and responsiveness is critical to a retail business and ERP packages have been introduced to tackle the elimination of IT complexity albeit with some implementation challenges to the line of business and IT management staff. 

Integration of the various business functions is an essential prerequisite for synchronization among the different business activities involved in a retail business. A number of large retail chains around the world have already invested in packaged software suites to integrate their core business activities. However, problems with enterprise applications in the retail sector includes : a lot of retailers still using fragmented legacy software applications to manage their core business functions, which results in lower levels of effectiveness and efficiency.

Moreover, a majority of Chief Information Officers (CIO) in the retail sector believes that it is cumbersome to rip and replace their existing information systems handling the routine management of the retail operations.

Most of the existing retail applications used by the businesses lack a comprehensive  approach and require some degree of customization before they can be fully integrated with a business process. Major problem areas in the existing enterprise applications in retail include:

  • Outdated architecture: Most of the legacy enterprise applications in retail have an outdated architecture that is inflexible and rigid. This inflexibility and rigidity pose a challenge to the business efficiency. The lack of flexibility prevents the legacy software to be used with the contemporary products available in the market that may add muscle to the retail operations. Today’s business environment demands real time adaptability from the software systems.
  • Limited scope: Most of the legacy systems were designed to take care of specific problems tasks and as a result, lacked an enterprise-wide approach to the problem solving process. This makes such systems unsuitable for use in the contemporary business environment that is highly competitive in nature. Modern businesses require an enterprise-wide approach to retail management process and legacy systems fall short of such a requirement.
  • High maintenance costs: Legacy information systems are costly to maintain The cost component is high because such systems are no longer used in the industry and requires specialized personnel for maintenance purposes. Moreover, the maintenance cost of legacy systems keeps on increasing with the passage of time. The older an information system is, the higher its associated maintenance costs are to be borne by the retail business.
  • Integration and scalability problems: Legacy software does not allow addition and integration of new applications. This prevents such systems from scaling up or integrating with similar systems used by the associates or business partners. Such integration and scalability problems tend to multiply as the size and scope of retail operations increases.
  • Increased risk to the business: A combination of old and new information systems makes the whole system susceptible to failure or crash. The heterogeneity in the system is the primary cause of risk. The solution lies in a close knit, homogeneous information system that can integrate seamlessly with other such systems in real time while imparting the much-needed stability to the whole system.

Advantages of Using a Retail ERP Suite

Primary advantages:

  • Retail specific components:  – Unlike a general ERP package, retail ERP suite offers retail centric components that are customized to meet the specific requirements of a retail organization in an effective and efficient manner. This makes a retail ERP suite much more suitable to meet the specific requirements of a retail organization.
  • Segment specific expandability option:  – Within the retail sector, there is a wide variety of different segments that vary in their nature and scope of operations. A retail ERP package has provisions to meet the varying needs of the different segments within the retail sector.
  • Support for the store system:  – Retail ERP suite offers support for the store systems that form the pivot of a retail business. The critical functions include keeping track of the inventory, ordering and replenishing, loss prevention and task management. This makes retail ERP system suited to the specific needs of a retail organization.

Secondary advantages:

  • Configuration and scalability:  – A good retail ERP system allows a high degree of customization and is easily scalable to attune itself to the size of the organization and its level and scope of operations. Such configuration and scalability prove to be a boon in managing the retail operations across an enterprise. This allows a retail ERP system to grow with the organization.
  • Phased implementation support:  – Modern retail ERP systems provide support for phased implementation. This feature allows the software package to be implemented in a step-by-step incremental manner rather than in one go. This makes the transition to an ERP package a lot easier. This feature allows the users to acclimatize themselves to an ERP package that may initially seem complicated to use.
  • Support for advanced functionality: – Modern retail ERP systems provide support for advanced functionalities that is helpful in the decision making process such as formulating pricing strategies, merchandise planning, inventory optimization and store execution. The advanced functionalities help the users formulate business strategies to introduce efficiencies in the critical business processes. The top management uses this feature to set the benchmarks and achieve the desired results.
  • Workflow automation and enterprise process management:  – Modern retail ERP packages offer workflow automation and enterprise process management to make the workflow smooth and seamless across the entire enterprise. This allows the management to monitor and keep track of the workflow while also undertaking the enterprise process management leading to the identification and removal of any inconsistencies in the business process.
  • Technology and application integration:  – A good retail ERP system allows technology and application integration to allow a platform independent, seamless transfer of processes across different modules running on different technologies in an enterprise-wide environment that may include interaction with legacy systems and external entities such as the suppliers and the customers. Such integration provides the critical enterprise-wide view to the management.

Disadvantages of using a retail ERP suite:

The success of a retail ERP suite depends on the IT skills and the experience of the workforce, including training on the utilization of the information system in an effective and efficient manner. Many companies cut costs by reducing the training budgets for the retail ERP suite. Privately owned small enterprises are often short of funds and this leads to a situation that personnel often operate their ERP system with inadequate education in utilizing the ERP package to its full potential. The common disadvantages of using a retail ERP package are a result of the lack of training of the employees to utilize the information system to the full extent.

Other major disadvantages of using an ERP package include:

  • Lack of price differentiation: ERP vendors usually charge annual license fee that has to be paid periodically and is independent of the size or profitability of the company using the ERP. This lack of price differentiation proves to be a barrier for the Small and Medium Enterprises (SME) wishing to use the retail ERP systems.
  • High installation costs:  ERP systems are quite expensive to install and maintain.
  • Non-customized technical support: The callers often end up getting replies from the technical support personnel that are inappropriate to their corporate structure. This non-customized approach proves to be a barrier to address the unique problems in retail ERP implementation faced by a company.
  • Security concerns: Using an ERP package gives rise to a number of security issues. For example, telling a non-programmer how to change a database on the fly, at a company that requires an audit trail of changes so as to meet some regulatory standards might be tricky. Enforcing various security protocols while an ERP package is in use proves to be difficult since an ERP package shares a lot of data among its various components.
  • Low flexibility:  - One of the main causes for the failure of ERP systems is that they are often seen as too rigid and difficult to adapt to the specific workflow and business process needs of the client companies. The workflow and business process needs differ from one organization to the other. This calls for minute customization by the user organization that may not be allowed by the ERP package.
  • Situation misfit: An ERP package may prove to be a misfit in a particular situation. Many companies end up re-engineering their business processes to fit the "industry standards" prescribed by the ERP system and this frequently leads to a loss of competitive advantages. Ideally, an ERP package should suit the requirements of a company and not the other way around.
  • Limited scope for customization: The ERP software packages allow only a limited scope for customization. Some customization in the ERP package may involve making changes to the ERP software structure that are not allowed under the license agreement. This can make the situation of the ERP package user very difficult indeed.
  • Complex usage: ERP systems can be complicated to use. In order to utilize an ERP package to its full potential, the users are required to undergo considerable training which obviously costs time and money.
  • High restrictions: Some ERP systems are too restrictive and do not allow much flexibility in terms of the implementation and usage of the software package. These restrictions prove to be a bottleneck in efficient use of this resource in streamlining the business process.
  • Weakest link problem:  An ERP system can suffer from the "weakest link" problem where inefficiency in one department or partner may affect the other parties. An ERP package spans an entire organization while aiming to streamline the business process as a whole and introduce efficiencies that ultimately lead to an increase in the bottom line or profits of the retail organizations. The integration of different components produces more problems due to the weakest link effect.
  • High switching costs: Once a system is established, switching costs are quite high for any one of the partners involved. This leads to reduction in flexibility and strategic control at the corporate level. The high switching costs can be attributed to the fact that installation of an ERP package involves considerable investment of both time as well as the money.
  • Reduced departmental insulation:  The blurring of company boundaries can cause problems in accountability, lines of responsibility, and lead to reduction in the employee morale. Since an ERP package spans an entire organization, its implementation integrates the different departments in such a way that no department works in isolation from the rest of the organization.
  • Requiring total transparency:  Resistance in sharing sensitive internal information between departments can reduce the effectiveness of the ERP package. An ERP package is designed in such a way that seamless information interchange between the different departments is an essential prerequisite to achieve its full benefits.
  • Compatibility issue: There are frequent compatibility problems with the various legacy systems of the business partners. A company may have installed the latest ERP package but it has to be compatible with the legacy systems used by its associates or business partners.
  • Overkill: An ERP system may be over-engineered relative to the actual needs of the customer. Such a situation may be called overkill since an organization may not require the functions or capabilities extended by an ERP system.


SWOT Analysis of Retail ERP Systems

WEAKNESSES

Expensive to procure

Requires significant employee training

Compatibility issues with other/legacy systems

Security concerns

STRENGTHS

Provides an enterprise-wide view of the workflow

Allows integration with systems of associates and business partners

Facilitate routine decision making

Allow streamlining of business processes

THREATS

Opposition to globalization and transnational movement of goods

Increasing complexity systems

Divided opinion over the Return-On-Investment (ROI) from such tools

Security concerns regarding sharing of data over a network

OPPORTUNITIES

Booming retail sector in the emerging global markets

The retail sector is overlooked by the major ERP solution providers

High efficiencies become critical in the retail sector due to the cut-throat competition and paper-thin margins

Main Components of Retail ERP System

The main components of a retail ERP system include the following:

Merchandise management:

      • It constitutes the primary component of a retail ERP system that supports the merchandise management operations undertaken by the retailers. This component includes activities such as the setting up, maintenance and management of the retail outlet, keeping track of the prices of the items, inventory, and the different vendors etc. This component of the Enterprise Resource Planning (ERP) system also offers some key reporting functions as well as the allied business intelligence modules.
      • The merchandise management component also offers an integrated interface to the other retail  applications thereby acts as a bridge between the different retail applications supported by the retail ERP suite and aims at facilitating more efficient retail operations. Merchandise may be defined as any product, service, idea or entity of value that can be offered to someone in the market at a specific price and to satisfy a genuine need or want of the consumers. A typical retail chain offers hundreds of thousands of different products to the customers. All such products may be termed as merchandise since they are of an economic value to the customer who pays for such products to satisfy his/her needs or wants.
      • The merchandise management component takes care of all the activities related to the management of the merchandise offered for sales at the retail store. In a nutshell, the Merchandise management component of an Enterprise Resource Planning (ERP) package covers all the activities centered on the merchandise offered at the retail store.

Retail planning:

  • This element of the ERP system allows the retailers to undertake the planning activities at a large as well as a small scale as per the need of the situation. It focuses on the different strategies to be employed in order to help the retail store in increasing the sales of the merchandise. The retail -planning component focuses on achieving the economies of scale and attaining the desired efficiencies by increasing the merchandise sales at the retail chain.
  • This component helps the retailers in planning the various sales and promotional events aiming at boosting or increasing the sales of the merchandise offered at the store. In this way, retail planning forms an important and critical component of the retail ERP systems as it performs the critical function of offering the planning activities that may be undertaken at the micro as well as macro level to give a push to the merchandise sales at the retail store.
  • The retail-planning component is extensively used by the middle and the upper management in formulating favorable promotional strategies to stimulate the sales and ensure increase in inventory turns at the retail store. Hence, retail planning may be called as a critical component of the retail ERP systems.

Supply chain planning and execution:

      • It provides support to the internal as well as the external supply chain process. It covers both the planning and the execution part of the supply chain management in retail. Supply chain forms the backbone of the retail operations. The supply chain represents the flow of information, finances, and materialss as they move in a process from the supplier to the wholesaler to the retailer and finally to the end-user or the consumer of merchandise.
      • Supply chain planning and execution is an integral part of the retail ERP system. Retailers aim to take advantage of the operational synergies. To meet the requirements of such retail chains, the supply chain planning and execution component of the retail ERP systems allow the retailers to keep track of the entire supply chain beginning at the manufacturer and ending at the consumer.
      • It allows a retailer to keep track of all the activities and processes comprising of  the supply chain of the merchandise offered at the retail store. This helps retailers run their businesses in an effective and efficient manner by closely monitoring their supply chains and ensuring its management in a smooth and efficient manner to ensure profitability in the business.


 

Store operations:

  • Element of the ERP system takes care of all the operations related to the store management function. The store operations are central to a retail chain since the retailers keep the majority of their inventory at the stores. Moreover, the store operations are unique to the retail ERP systems as the other ERP packages do not offer such a comprehensive component like the store operations as offered by a retail ERP system.
  • The store operations component includes the store specific inventory management, sales audit, returns management, perishables management and the labor management. The store operations component can also include the customer management and the associated promotion execution systems.

Corporate administration:

  • This component aims to serve the information needs of the administration and usually includes the process management and compliance reports required by the top management for the decision-making purposes. This feature also includes other corporate financial reports such as the accounts receivable, , accounts payable, general ledger and the asset management reports.
  • The corporate administration component may also include the corporate-level Human Resource Management (HRM) systems. Thus we can see that the corporate administration component plays a critical role in providing the necessary information for the top management to get a general idea of the health of the retail business by way of the various financial reports generated by this component provided in the retail ERP systems.
  • The corporate administration component can be termed as the eyes and ears of the top management in the retail business. This component makes the necessary data available which are required to provide an insight into the financial health of a retail business. Moreover, this component of the retail ERP system is used for generating specific compliance reports submitted to the industry watchdog or other monitoring agency that may require reporting of such data on a periodic basis. These reports not only help the management in meeting the mandatory disclosure norms but also in formulating effective management strategies to achieve the desired results in terms of sales or profits that are calculated using the same financial indicators.