1A. Enterprise Resource Planning (ERP)

Homework problems: 1,3,4,5,6,9,10.

Reading:

Chen, I.J., “Planning for ERP Systems: Analysis and Future Trend," Business Process Management Journal, Vol. 7, No. 5, 2001, pp. 374-386.

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Enterprise Resource Planning (ERP)

Assignment: Access the websites of these leading ERP software vendors and learn their product offerings.

JD Edwards

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ERP Systems (by Chen, 2001)Business Process Management Journal

1. Introduction2. ERP Evolution3. The Planning Issues4. Future Trend and Challenges5. Conclusion

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1. Introduction

ERP represents a comprehensive information technology approach that brings all of an organization’s information, including all data related to sales and order management, manufacturing operations, financial systems, human resources, and marketing and distributions into a central repository. See Figure 2.

When implemented successfully, an ERP can link all areas of an enterprise with external suppliers, alliances, and customers into a tightly integrated system with shared data and visibility.

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ERP AttributesEssential attributes of ERP systems include:

(1) multifunctional in scope, (2) integrated in that when a transaction or piece of data representing an activity of the business is entered by one of the functions, data regarding the other related functions are changed as well, (3) the software is modular in structure and all modules of the system use a common database that is updated in real time, and (4) the software facilitates manufacturing planning and control (MPC) activities including forecasting, sales and operations planning, inventory management, etc.

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Benefits and Markets

ERP markets: $15 billion in 1997; $20 billion in 2001; $29 billion in 2006; $44 billion in 2010.Potential benefits:

Drastic decline in inventory ($146 billion/year).Breakthrough reduction in working capital.Abundant information about customer wants and needs.Ability to view and manage extended enterprise.Reduced capacity-related costs ($240 billion/year).

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Implementation Success/Failure

ERP success/failure:40% achieved partial implementation 60-90% do not achieve return on investment 20% total failure/abandoned 50+% failure rate 90% late or over-budget

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2. ERP Evolution

Pre-MRP: techniques designed for independent-demand items were used to handle subassembly and components (dependent demand) which resulted in excessive inventory and/or stock-out.MRP (Orlicky, 1975)

Limitation: unlimited capacity assumptionResolution: MRP + CRP = closed-loop MRPVariation: DRP (when similar principles applied to distribution and warehouse operations)

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Figure 1

Marketing

Production

Finance

ProductionPlan (SO

P)

Market

demand

Master

ProductionSchedule

Materials

Requirem

entsPlan (M

RP)

Rough-cut

Capacity

Planning

Capacity

Requirem

entsP

lanning

Shop-floor

System

sVendor

System

s

Resource

Planning

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2. ERP Evolution (Continued)

MRP II (manufacturing resources planning), coined by Wight 1982,1984. See Figure 1.

ERP (1990s) coined by Gartner group of Stanford, Connecticut.

ERP systems started to soar in 1994 when SAP released its next-generation software known as R/3. It also marked a shift in technology platforms from the mainframe to the UNIX-based client-server architecture (market-pull and technology-push).

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Figure 2

FinancialsReceivable and payableCash managementGeneral ledgerProduct-cost accountingProfitability analysisExecutive information system

Sales and MarketingOrder managementSales managementSales planningPricingAfter-sales services

Operations & LogisticsProduction planningMaterials planning (MRP)Inventory managementQuality managementProject managementVendor evaluationPurchasingShipping

Human ResourcesPayrollPersonal planningH/R time accountingTravel expensesTraining

ERP CustomersSuppliers

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2. ERP Evolution (Continued)

Just as MRP was a new philosophical approach to manufacturing at the time of its introduction, a key underlying principle of ERP is the recognition that the whole supply chain, and not solely the manufacturing firm, is the basis for today’s competition.While MRPII has traditionally focused on the planning and scheduling of internal resources, ERP strives to plan and schedule supplier resource as well, based on dynamic customer demands and schedule.

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3. ERP Planning Issues

Assessing needs & choosing a “right” ERP systemMatching business process with ERPOrganizational requirementsEconomic/strategic justification

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Planning--Needs Assessment

Needs include specific ERP modules, subsystems, hardware, personnel, etc.Convincing reasons:

Use of multiple points of input with duplicated effortExtensive resources for maintenance and supportIncompatibility of several information systemsLegacy incapable to support organizational needsUnable to respond easily to questions and information requested by key customers/suppliers. Consideration to reengineer its business process

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Planning--Choosing the right ERP

Top management must first examine firm’s current competitive position in relation to its desired position in competitive priority, market segments, customer requirements, characteristics of manufacturing process, supply chain strategy, etc.Define “should-be-state” and envision life after to allow for the identifications of all benefits, which become the yardstick of performance

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Matching Business Process with ERP

ERP designed for solving the fragmentation of information over many legacy in large organization. Information system development in the past vs. ERPWhile customization of ERP installation is allowed, major modifications are complex, impractical, and costly. It can also jeopardize the key benefits of integration as well.Most successful companies reengineered their business before ERP installation. e.g. HP/Compaq and IBM.

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Organizational Requirements

Common problems: Dept. work toward their own sets of objectives (“functional silo”), performance measurement and rewards are functional not global.

E.g., purchasing, manufacturing, sales, distribution, etc.Top management commitment: funding, identify brightest people, organize interdisciplinary team, serve on steering committee, support education program, job changes/elimination, etc.Endorse the formal system will be used to manage and evaluate (reward) the extended enterprise.

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Supply Chain Performance Metrics

The Supply Chain Operations Reference model (SCOR) is a process reference model that has been developed and endorsed by the Supply-Chain Council as the cross-industry standard diagnostic tool for supply-chain management. SCOR enables users to address, improve, and communicate supply-chain management practices within and between all interested parties. The SCOR metrics include performance measures such as on-time delivery, order fill rate, order lead time, days of supply, quality/warranty cost, cash-to-cash cycle time, etc. (see Figure 1A.3)

Supply Chain MetricsSo

urce

: Sup

ply

Cha

in C

ounc

il

Measure Description Best-in-Class

Average

Delivery performance

Percentage of orders shipped according to schedule 93% 69%

Fill rate by line item

Percentage of actual line items filled 97% 88%

Perfect order fulfillment

Complete orders shipped on time 92.4% 65.7%

Order fulfillment lead time

Time from when an order is placed until it is received by the customer

135 days 225 days

Warranty cost Warranty expenses as a % of revenue 1.2% 2.4%

Inventory Days of supply held in inventory 55 days 84 days

Cash-to-cash cycle time

Time required to turn cash used to purchase raw materials into cash received from customers

35.6 days 99.4 days

Asset turns Measure of how many times per year assets are used to generate revenue

4.7 turns 1.7 turns

Cash-to-Cash Cycle Time• Integrates the finance function with purchasing,

manufacturing, and sales/distribution

Procurement cycle

Manufacturing cycle

Sales and distribution cycle

• Purchase cost of material• Accounts payable

• Raw materials inventory• Work-in-process• Finished goods inventory

• Distribution inventory• Accounts receivable

Cash-to-cash cycle time = Inventory days of supply + Days of sales outstanding – Avg. payment period for material

ERP View of Cash-to-Cash Time

ERP database

Accounts payable

Inventory

Cost of sales

Sales

Accounts receivable

Purchasing

Manufacturing

Sales and distribution

Cash-to-cash cycle time

Calculating Cash-to-Cash Time

Average daily sales (Sd)

Accounts receivable days (ARd)

Average daily cost of sales (Cd)

Average days of inventory (Id)

Accounts payable cycle time (APd)

dSSd

dARARd

CSSC dd

dd C

II

dd C

APAP

ddd APIARtimecyclecashtoCash

Cash-to-Cash Example000,34

30000,020,1

dSSd

daysd

ARARd 88.534000

000,200

400,20)6.0(000,34 CSSC dd

daysCII

dd 6.19

400,20000,400

daysCAPAP

dd 84.7

400,20000,160

daysAPIARtimecyclecashtoCash ddd 64.1784.76.1988.5

Sales over last 30 days = $1,020,000

Accounts receivable = $200,000

Cost of sales = 60% of total sales

Inventory value = $400,000

Accounts payable = $160,000

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Economic/Strategic Justification

Justification is needed not just because of the enormous investment ($2 to $4 million for small and over $1 billion for large firms), it helps identify all the potential profits. Economic AND strategic benefits such as improved response to customer demands, strengthened supplier relationships, streamlined communication and real-time access to operating and financial data.

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4. Future Trend and Challenges

Advanced Planning and Scheduling (APS) in SCMEmploy advanced math model and algorithms to develop optimal or nearly optimal plans. Draw upon the massive transactional data from an ERP (e.g., Wal-Mart’s store-by-store sales data are available to suppliers/vendors by 4 a.m. the following day)Benefits:

Improved fill rate and on-time delivery (30%)Reduced order cycle time (50%)Reduced inventory (50%)Payback in one year and as much as 300%

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4. Future Trend and Challenges

Customer Relationship Management (CRM) in SCMKeeping a customer is more profitable than acquiring a new one Those improve customer loyalty are 60% more profitableCRM (one-to-one marketing) is a customer-centric business model that utilizes data mining capabilities of ERP to uncover customer profiles, profitability, purchasing patterns. (e.g. Amazon.com)Customer-centric approach: finding products to fit customer needs, instead of findings customers to fit the products. Estimated market of $9 billion in 2008.

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Figure. 3

Customers Suppliers

Enterprise(ERP)

Customer Relationship Management

Supply ChainManagement

SCM CRM

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4. Future Trend and Challenges

Continuous Improvement with ERP-enabled processes“unanticipated” benefits go beyond inventory reduction, improved customer services, etc.“Synergy” created and manifested by new technology and processes can bring unprecedented capabilities.“learning organizations” are better positioned to develop unprecedented competencies provided by ERP.Behavior changes and employee resistance.

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Additional Company Experience with ERP

Muscatello, J., Small, M., and Chen, I.J. “Implementing Enterprise Resource Planning (ERP) Systems in Small and Midsize Manufacturing Firms,” International Journal of Operations and Production Management, Vol. 23, No. 8, 2003, pp. 850-871.