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ERP vs. ERP II vs. ERP III Future Enterprise Applications

May 31st, 2010 by

ERP vs ERP ii vs ERP iiiERP I, ERP II, & ERP III Abstract

ERP applications integrate enterprise operations within and across enterprise legal entities, or company codes.

ERP ii (or ERP 2) applications extend supply functionality to external enterprises (generally vendor-affiliated companies or enterprises) to reduce cost, improve supply chain efficiency, and to perform collaborative innovation. 

ERP iii (or ERP 3) enterprises go to the next level of integrating the ERP and ERP ii functionality to include customers and the sales side of the marketplace into enterprise operations.  Your customers become active participants in your business.

Moving To the Border-less Enterprise

I’ve heard and read lots of material about the enterprise applications and what the next generation of ERP is.  Some have suggested that ERP systems were just manufacturing tools (see e.g. ERPwire article on major differences between ERP vs. ERP ii).  Some suggest ERP ii systems were little more than an extension of ERP functionality to new industry sectors.  In my opinion this is a completely misplaced assessment.  Changing industry sectors does not change what an ERP application does so a broader definition is more appropriate.

Before we go into the details and background of each of the 3 generations of enterprise applications here are my definitions for ERP, ERP ii, and ERP iii systems:

ERP Definition

An ERP (Enterprise Resource Planning) system integrates virtually all operational business functions and processes and automates entries to finance and reporting within the enterprise (the legal entity or entities that make up an entire company no matter where its operations are).  ERP systems focus almost exclusively on operational excellence value propositions of process efficiency and automation.

ERP II (or, in other words second generation ERP, ERP 2) Definition

Through collaboration, SOA, and other interface, data exchange, or interaction methods the ERP ii systems move beyond Enterprise boundaries (or a basic ERP system) and into the vendor space including the supply, design, and engineering collaboration areas. ERP ii systems continue to enhance operational excellence and start to introduce a measure of the innovation value proposition.

ERP III (or, in other words third generation ERP, ERP 3) Definition

Through collaboration, direct contact, social media, and various data streams within and outside of the enterprise ERP iii integrates marketplace fans and critics into the extended ERP and ERP ii organizations.  From this integration of the customer and vendor a constructive dialog and exchange of information is created to innovate, produce, and then sell / distribute better products or services.  This closes the value proposition loop by going outside of the enterprise boundaries and finding ways to bring customer input, needs, wants, and insight into the enterprise.  ERP iii system create a strong synergy between innovation and customer focus.

ERP System Definition or ERP Defined

The acronym ERP literally stands for “Enterprise Resource Planning.”  And this is exactly where I disagree with the ERPwire definition proposal.  Just a manufacturing system is not an “enterprise” system at all.  It is merely a manufacturing system, or an MES (Manufacturing Execution System).

As the university studies and academic literature note, ERP systems are “a single instance of data, a full process chain of dependencies” (see Change Management Strategies and Knowledge Transfer Processes for a Successful SAP Project citing Kallinikos, 2004).

In the ERP industry we (consultants and integrators) frequently refer to any ERP system as a type of “back office” application or system.  By “back office” we are referring to company centered business functions into a single database, or, a single “system of record.”  “Back office” processes are fully within the border and boundary of the enterprise.

In 2000, in an article addressing ERP ii, Gartner noted that they had defined ERP in 1990:

In 1990, Gartner defined ERP, establishing a new vision for the resource planning domain. That vision centered on resource planning and inventory accuracy, as well as visibility beyond the plant and throughout the manufacturing enterprise, regardless of whether the enterprise was a process manufacturer, discrete manufacturer or both. ERP has since appeared in different “flavors.” Extended ERP reflected the fact that many nonmanufacturing industries turned to ERP systems for “backbone” financial transaction processing capabilities (Bond, et. al., 2000 pg. 2, note 2).

That article went on to note that the accepted definition (in 2000 and beyond) had become:

Despite [the] original definition, ERP has become the accepted term for back-office transaction processing systems, regardless of the industry or region (Bond, et. al., 2000 pg. 3).

The definition I have provided is as comprehensive as the original Gartner proposal and includes the later understanding of the application to more industries and business functions.

ERP Focuses on the Operational Excellence Value Proposition

To understand the operational excellence perspective see the more detailed explanation of the functions and operations of an ERP system like SAP under the section “What is SAP?” ( ).

I generally try to categorize all system efforts and business functions into one of three “value proposition” buckets:

  • operational excellence (ERP),
  • innovation (ERP ii),
  • and customer focus (ERP iii).

The ERP context is almost exclusively focused on the “operational excellence” portion of business “back office” transactional processing.

ERP vs. ERP ii — What is ERP ii?

The next generations of Enterprise applications, or ERP ii systems, extend the “back office” ERP system processing to the extended supply chain.  They extend the enterprise into the supply chain outside of their legal entity borders as an active participant. This would include VMI (Vendor Managed Inventory) processing and KANBAN type demand and supply signals to vendors for JIT (Just In Time) stock management.  But it goes far beyond that, it is the “innovation” portion of the value proposition that is addressed here.

SAP includes ERP ii type extended supply chain applications like SRM (Supplier Relationship Management), APO (Advanced Planning and Optimization), and PLM (Product Lifecycle Management) to help move the supply chain beyond the enterprise borders.

ERP II Creates Collaboration Hubs Beyond Planning and Distribution Functions

Together with the extended supply chain applications there are a number of various exchanges such as common catalogs that are published to the web and integrate with their customer ordering.   Some examples of external exchanges can be seen in initiatives such as “Covisint” for the automotive industry, or Grainger’s online catalog system (although it is not a competitive based platform like Covisint), and many others.

One of the key functions or features of ERP ii systems is supply chain or vendor collaboration, which extends to engineering design and development.  Most enterprises using SRM systems use this to focus on cost reductions, vendor competition, and supply chain efficiencies.  They are generally geared to the operational excellence system domain but there is a LOT of untapped possibility.

The highest and best use of ERP ii functionality includes active collaboration with vendors to reduce cost, improve quality, reduce extended supply chain cycle times, and even co-engineer (or co-develop) better products and services.

Many ERP ii solutions now include some type of built-in “reverse auctions” where companies can place requirements out for competitive bids in various formats.  These exchanges might include data interchange methods such as EDI (Electronic Data Interchange) or other standards compliant communication protocols, but they are much more, they are active collaboration hubs.  Together with these collaboration hubs, SOA extensions are being used to extend collaboration and engineering design work to the extended supply chain.

How Has SAP Implemented ERP ii System?

SAP has created an entire collaboration network called the SAP Community Network or SCN ( where customers, vendors, consultants, and any interested party can exchange information, ideas, or dialog.  SAP has implemented ERP ii systems internally through the development of specialized vendor partnerships it calls an “Ecohub” (  This is a place where vendors, partners, or other firms with specialized SAP solutions can integrate and promote their offerings to enhance SAP’s various software offerings.  Along with that there are code exchanges, “how-to” articles, discussion forums, and many other types of collaborative information exchanges.  This is similar to what I proposed a few years ago when I wrote “SAP, ERP III, SOA — Learning Organizations through Social Media Collaboration.”

Operational Excellence and Innovation Value Propositions

ERP ii systems integrate the external vendors and suppliers into enterprise processes so that they can directly impact productivity, cost, and efficiency.  Some elements of ERP ii include engineering staff augmentation, free or at a very reasonable rate to the “customer company,” and as a value added service from vendors.  For vendors the ability to augment engineering functions can mean customer retention; for the customer companies this may mean higher quality and lower cost products or services.

SAP’s ERP offerings include PLM (Product Lifecycle Management) with CAD integration for several off the shelf CAD programs.  Although the PLM functionality is primarily used for internal engineering processes it can be pushed out into the extended supply chain for collaborative engineering and design.  That collaboration can be used for innovation if it is properly structured and implemented.  This is in conjunction with other integrated application offerings such as SRM and APO.

By extending engineering or collaboration functions outside of the enterprise, but still within the supply chain, innovation can be introduced into the ERP ii enterprise (see the entire series on Process Execution of Business and IT Innovation).   However, the primary feature of ERP ii systems is the additional operational excellence that is brought about by extended supply chain processing.  Very few companies have succeeded at collaborating with the extended supply chain by introducing extended engineering capabilities, or vendor insight to produce significant innovation.  Most ERP ii systems only work to extend the supply chain beyond the boundaries of the enterprise for cost savings and efficiencies (operational excellence).

Using SOA (Service Oriented Architecture) for Creating ERP ii and ERP iii Enterprises

The promise of ERP ii system success that moves toward ERP iii (discussed in a moment) is SOA or Service Oriented Architecture.

In layman’s terms, SOA is the ability to create a set of “talking points” from any internal system to external systems. 

They are the data structures and data schemas that are published for other systems to interact with and begin to create the framework for the “borderless enterprise.”

ERP iii Defined, What is ERP iii and How Does it Go Beyond ERP ii?

ERP iii addresses the final domain of enterprise class applications by addressing the customer focus value proposition.  It is the extension of technology capabilities which brings collaboration with customers and the broader marketplace into the enterprise system.  This goes way beyond what we currently refer to as CRM (Customer Relationship Management) systems of today.  Today’s CRM applications still operate within the walls of the enterprise and are generally used for managing the sales force rather than moving the enterprise out into the wider marketplace and to direct interaction with customers.

ERP iii from a high level is fairly easy to define, however what it looks like in a few years is difficult to predict.  The areas that ERP iii touches are in a rapid state of change because of the dynamic nature of social media and the global marketplace.

ERP iii Defined

  • ERP applications integrate enterprise operations within and across enterprise legal entities, or company codes.
  • ERP ii applications extend supply functionality to external enterprises (generally vendor-affiliated companies or enterprises) to reduce cost, improve supply chain efficiency, and to perform collaborative innovation.
  • ERP iii enterprises go to the next level of integrating the ERP and ERP ii functionality to include customers and the sales side of the marketplace in general.

The end state of the ERP iii enterprise would include a dialog between customers (and potential customers), the ERP organization, and the extended supply chain so that even suppliers would participate in the sales side of the marketplace.  Because there is little or no information in the marketplace about ERP iii direction and design I am offering a more detailed definition here:

Through collaboration, direct contact, social media, and various data streams within and outside of the enterprise ERP iii integrates marketplace fans and critics into the extended ERP and ERP ii organizations.  From the integration of customers and vendors beyond the enterprise boundaries a constructive dialog or information exchange is created to innovate, produce, and then sell (or distribute) better products or services.

ERP iii will create the “borderless enterprise” by bringing together a host of technology sources such as:

  • Collaboration tools (within the enterprise and across the supply chain and marketplace)
  • Social media
  • Internet technologies
  • SOA
  • Smart information integration and synthesis (specialized search with analytics or within specific information domains).  An early example of this type of search is a web service called “Lijit.”  Lijit allows you to manually assign searchable information sources for a customized, high value “search engine.”
  • Extended marketing analytics that are “like” tracking cookies but less invasive and use additional sources of information and research beyond the web (a good example is like grocery store checkout programs that automatically print coupons on the back of your store receipts based on what you just purchased).
  • Direct customer collaboration (we see early examples of this in the Dell “designed by me” and “I made Windows 7” television commercial marketing campaigns).

The Future of ERP iii Systems

Within the extended SAP enterprise (which is my area of expertise) I see many of the seeds of ERP iii germinating and beginning to grow.  Even though the initial “green shoots” are there for an ERP iii revolution I don’t anticipate that occurring for several years within SAP.

Today SAP has:

  • Very active, country specific SAP User Groups (xSUG, in America is it ASUG) with “influence councils”
  • Community forums (previously mentioned)
  • “Mentor Groups” within the community network.

While these all contain the seeds of ERP iii outlets I do not see a lot of the raw material being converted into application enhancements to directly address business marketplace demands.  There are still way too many technical solutions and not enough for genuine business needs.

ERP iii integrates marketplace fans and critics into the extended ERP and ERP ii organizations to innovate, produce, and then sell (or distribute) “customer-centric” products or services.

I doubt that the integration of more social media will move the ERP iii needle much further.  SAP like any other company that embarks on this type of transformational exercise must begin to use their well established outlets to drive innovation and to meet marketplace requirements (see the entire series on Process Execution of Business and IT Innovation).

Social Media and ERP iii

Social media outlets like Facebook, Twitter, and other resources will need to become more sophisticated to produce meaningful differences in business-centered innovation or customer focus.  That sophistication for business will mean finding a means to use those outlets for genuine business competitive advantage.

It will take business some time to find new ways to tap into the collective marketplace consciousness through social media in spite of the massive number of what I refer to as “snake oil” salespeople.  Social media in the enterprise will not be useful until the snake oil sales finally align actual business needs to areas of the enterprise (sales, marketing, HR recruiting, etc.) that align with business goals and directions (see Social Media Fads and the Risk to the Enterprise).

Before ERP iii systems are ready for the extended marketplace and for customer interaction it will require “back office” integration with social media (see ERP III – Is the Integration of Collaboration the Future of Enterprise Applications).

As social media and collaboration tools mature over the next 10 or more years then corporations will finally build the ERP iii systems for integration into the wider marketplace.  By then the ERP ii systems will have finally matured to the point that some of them can provide meaningful integration between the enterprise, the entire supply chain and the sales side of the marketplace in general.

ERP, ERP ii, and ERP iii Conclusion

Considering this specialized class of business systems through the lens of the high level value propositions of

1) operations,

2) innovation, and

3) customers;

here is my summary:

ERP (Enterprise Resource Planning)

Primarily focused on the “back office” with a heavy emphasis on operations, automation, cost control, financial activity, and lagging business indicators of performance.

ERP ii (the second generation of Enterprise Resource Planning)

Extends “back office” processing functions and operations into the extended supply chain with a heavy emphasis on supply chain automation, additional efficiency, more cost control, and some vendor collaboration for limited innovation.  This area of the application moves into the “last mile” of improvements that can be more expensive to implement and yield lower returns.  However, carried out properly with significant supply chain collaboration and joint engineering or development efforts this can provide new / innovative products or services addressing both lagging indicators of cost control and efficiency while exploring leading indicators of new products or services.

ERP iii (the next generation of Enterprise Resource Planning)

This will encompass the integration of social media with new marketplace intelligence and analytics into the ERP ii enterprise.  With a very simply “hub and spoke” idea, the enterprise will constitute the “hub” and the extended supply chain vendors, engineers, and designers, together with customers and market analysis as some of the “spokes.”  This will be enabled by the ERP application that is extended with collaboration and social media tools.  The ERP, ERP ii, and ERP iii functions will all be integrated with new analytics and “smart source” search methods to integrate and synthesize trend, market, and product or service information.  This will close the loop on the ERP ii innovation and will bring a new customer focused business paradigm into the enterprise that goes far beyond today’s CRM applications.

ERP iii state companies will be marketplace disrupters who are agile, nimble, and global.  They will be able to spot emerging trends and unmet customer demands (needs or wants) far more quickly and with greater ability than their peers.  From those trends and customer needs these companies will be able to quickly execute innovation programs to develop new products and services to quickly fill those customer demands.  The most advanced of these new “disruptive innovators” will be the companies who can intelligently synthesize all of the various data points to understand customer demands that are not even articulated.


Bond, B., Genovese, Y., Miklovic, D., Wood, N., Zrimsek, B., and Rayner, N. (2000). ERP Is Dead — Long Live ERP II; Gartner Publications.

Kallinikos, J. (2004), “Deconstructing Information Packages. Organizational and Behavioral Implications of ERP Systems.” Information Technology and People, Vol. 17, No. 1, pp. 8-30.

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Define SAP

November 16th, 2009 by

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SAP Defined – What is SAP?

There are two ways to define SAP.  The first SAP definition is related to the company itself and the next is the name of the application software.  What is SAP?

Very Brief History of the SAP Name and the Company

SAP is defined in literal terms from a German translation of Systeme, Anwendungen und Produkte in der Datenverarbeitung as Systems, Applications, and Products in Data Processing.  The company’s main product is “R/3” for “Realtime” and “3 tier” processing architecture consisting of application, database, and presentation layer (or GUI / user interface).

Originally the company was founded by five (5) prior IBM employees in 1972 who wanted to create a real-time business data system.  The first name chosen for the company was not Systeme, Anwendungen und Produkte in der Datenverarbeitung (or SAP) but instead, what we know as the global ERP powerhouse of SAP was originally called Systemanalyse und Programmentwicklung or in English, Systems analysis and program development.


German SAP web site

Wikipedia SAP Germany History

SAP water

What is SAP?

The Second SAP definition is Based on What the Product Is and Does.  

The definition of SAP as its software products includes the name of the flagship global ERP product.  SAP’s primary flagship ERP software, or Enterprise Resource Planning system, is an integrated set of modules and functions for nearly every major business process imaginable.  SAP’s global ERP system also includes a comprehensive set of industry solutions for major industry verticals.  

SAP’s ERP system contains special subsets of software functions that are divided into processing modules.  For example there are modules for Sales and Distribution (SD), Materials Management (MM), Finance (FI), Controlling (CO), Production Planning (PP), Human Resources (HR), Quality Management (QM), Warehouse Management (WM), Plant Maintenance (PM), Project Systems (PS), Asset Management (AM), Treasury (TR), and many other modules.

A very simple, very standard order to cash process (SD and FI) overview in SAP. 

When you create a sales order all of the order data is passed into the delivery document to the customer (it does not have to be re-entered).  As the delivery document is processed by shipping on hand stocks or inventory amounts are reduced and accounting documents are automatically generated in the background related to a reduction in inventory.  Afterward a customer invoice is generated from the delivery document (again, without re-entering the original order data) and then additional accounting documents are generated related to the customer invoice.  Once the customer payment is received, offsetting or clearing accounting documents are generated as the cash is posted to the customer account.  Open customer receivables are reduced and the order process for this one simple example is complete.

Inventory and Material Requirements Planning (MM, PP, and FI) during the Order Process.

As necessary, throughout the process when inventory is reduced to a certain level then MRP (Material Requirements Planning) runs planning for the replenishment of materials and MRP II (Manufacturing Resource Planning) is carried out to ensure that there is capacity in the manufacturing facility to replenish stocks.  These replenishment and scheduling activities depend on the settings you make for how they behave and how the “master data” is set up to process those system settings.  When MRP runs, depending on the system settings, production orders or purchasing documents are created to replenish or produce stocks.  Each of these processes has their own details and all of the associated accounting entries related to the procurement or production of stocks and materials are automatically carried out.

SAP Global Sourcing and Operational Options.

As an example scenario if the company is a multinational with raw materials or subcomponents sourced from China or some other country the transactions can be carried out in their native language and currency.  The shipment of raw materials may be sent to a sub-assembly factory in Italy where the system plans production capacities and schedules materials, people, machines, or other resources based on the receipt of materials, current production backlog, end customer order requirements, and other factors.  This may include receiving other components or other sub-assemblies from still more countries, or locally to Italy.  The system can also process these transactions in the local language and currency as well.  Depending on the method the organization handles exchange rate differences the exchange rates are determined and all accounting entries are automatically generated for currency gains or losses depending on the processing of goods or services to and from the organizations involved.  From there, the transportation time and shipping requirements with foreign trade, customs, duties, tariffs, and legal export or import requirements may also be processed or you may wish to use a freight forwarder.  The Italian subassemblies may be shipped to still another country where the final product is assembled and then shipped the final country for customer delivery, or, they may be shipped direct to the customer and the order taking company receives the inter-company “vendor” invoicing while also invoicing the customer and collecting the cash.  

SAP Multi-National Tax and Financial Benefits.

All of these transactions can be carried out in such a way as to maximize tax benefits from each country or processing facility and to ensure that currency advantages are accounted for.  Behind this there are accounting documents for each of these transactions which are automatically created and posted to the proper accounts in the proper legal entities.  Appropriate country reporting and tax requirements are also taken care of depending on business needs.

SAP Configuration or System Setup to Support Business Processes

Within each step of these processes there are “configuration” options which are the numerous settings of options on how each step in the process will behave.  Layered on top of that configuration there is master data that interacts with those configuration settings and determines a finer level of actions or behaviors within each step and specific to each peice of master data, for example: you might maintain separate data requirements for each customer, each vendor, each material or service, pricing, etc…  If the SAP application is still not able to handle a very specific business or country requirement SAP provides what they call “user exits” or in newer versions of the software there are “enhancement points”.  These are places in the SAP standard coding where you can “exit” the standard processing and then influence, change, add additional data to the processing stream, and then re-enter the standard SAP application code. 

As another example, at each step of the process there are alternates or options that can be set up with configuration or with master data to allow for alternate processing options. If a supplier is not able to fulfill part of an order an alternate supplier might automatically be chosen based on certain rules, or depending on the capacity of a manufacturing facility some of the subassembly processing might be moved from Italy to France.  And each of these steps can be reported on, evaluated for efficiency, or given global consolidation in such a way as to help with vendor price negotiations.  

This complexity and the deep business knowledge that it requires is why ERP consultants such as those who work with SAP are highly paid.  As a result of the low barriers to entry it is also a prime target for fraud and cheats which is why many companies are disappointed with the lack of results they expect. 

For more information on some of the tactics and strategies these frauds use to cheat you, and some of the steps to combat them, see the article “Screening and Interview Methods to Find the Right SAP Consultant” and review the other information on this site.

What are “SAPS”?  Or, in other words, SAPS defined

SAP Application Performance Standard (SAPS) is an SAP centered benchmark that defines how effectively database and application hardware can process several SAP transaction strings.  These transaction strings are in the SAP SD (Sales and Distribution) module.  The measurement has the following characteristics [FN1] :

100 SAPS is defined as 2,000 fully business processed order line items per hour.

In technical terms, this throughput is achieved by processing 6,000 dialog steps (screen changes), 2,000 postings per hour in the SD Benchmark, or 2,400 SAP transactions.

In the SD benchmark, fully business processed means the full business process of an order line item: (1) creating the order, (2) creating a delivery note for the order, (3) displaying the order, (4) changing the delivery, (5) posting a goods issue, (6) listing orders, and (7) creating an invoice.

SAP Application Performance Standard (SAPS) are a performance benchmark often used for sizing SAP hardware.  Many hardware vendors have defined SAPS as the processing standard for benchmarking against competitors [FN2]. 

SAP maintains lists of certified hardware solutions and their performance benchmarks. As part of this industry standard, and to maintain the real-world usefulness of the benchmarking data SAP periodically updates the benchmark requirements [FN3] :

Important note: On January 1, 2009, the SAP SD Benchmark was updated. Alongside the upgrade to SAP Business Suite 7 and the SAP enhancement package 4 for SAP ERP 6.0, a number of additional, necessary updates were implemented. Business changes constantly, for example, Unicode and the use of the new general ledger are now common practice for SAP customers across all industries, and the SAP standard application benchmarks need to reflect this change. The updates are transparent; that is, the steps of the benchmark scenario remain unchanged. Please be aware that these changes make the SD benchmark more resource-intensive, which has a direct impact on the benchmark results.

SAP maintains a list of the standards and key requirements for their benchmarking.  Vendor hardware requirements and vendor results are performed using either the 2 tier or 3 tier approaches for measuring hardware performance.  The SAPS are defined primarily in these two types of tests [FN4] :

  • Two-tier, in which the presentation layer runs on a separate server, application and database on one central server
  • Three-tier, in which the presentation layer, application layer and database layer each run on separate physical servers


[FN1] SAP Application Performance Standards:  Measuring in SAPS. (retrieved 12/16/2010)

[FN2]  For example, see this Oracle publication promoting their recent performance achievement based on SAPS transaction processing. (retrieved 12/16/2010)

[FN3] List of performance results for various hardare platforms in SAPS and with transaction processing details. 

2 tier hardware results: (retrieved 12/16/2010)

3 tier hardware results: (retrieved 12/16/2010)

[FN4] Running a Stadard SAP Application Benchmark (retrieved 12/16/2010)

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