1 A Enterprise Resource Planning ERP Reading Chen

1 A. Enterprise Resource Planning (ERP) Reading: Chen, I. J. , “Planning for ERP Systems: Analysis and Future Trend, " Business Process Management Journal, Vol. 7, No. 5, 2001, pp. 374 -386. Homework problems: 1, 3, 4, 5, 6, 9, 10.

Enterprise Resource Planning (ERP) JD Edwards Assignment: Access the websites of these leading ERP software vendors and learn their product offerings. 2

ERP Systems (by Chen, 2001) Business Process Management Journal 1. 2. 3. 4. 5. Introduction ERP Evolution The Planning Issues Future Trend and Challenges Conclusion 3

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. 4

ERP Attributes Essential 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. 5

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). 6

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 7

2. ERP Evolution Pre-MRP: techniques designed for independentdemand 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 assumption Resolution: MRP + CRP = closed-loop MRP Variation: DRP (when similar principles applied to distribution and warehouse operations) 8

Figure 1 Resource Planning Rough-cut Capacity Planning Capacity Requirements Planning Marketing Shop-floor Systems Market demand Production Plan (SOP) Master Production Schedule Materials Requirements Plan (MRP) Production Vendor Systems Finance 9

2. ERP Evolution (Continued) MRP II (manufacturing resources planning), coined by Wight 1982, 1984. See Figure 1. ERP (1990 s) 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 clientserver architecture (market-pull and technologypush). 10

Figure 2 Financials Receivable and payable Cash management General ledger Product-cost accounting Profitability analysis Executive information system Suppliers Operations & Logistics Production planning Materials planning (MRP) Inventory management Quality management Project management Vendor evaluation Purchasing Shipping ERP Sales and Marketing Order management Sales planning Pricing After-sales services Customers Human Resources Payroll Personal planning H/R time accounting Travel expenses Training 11

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. 12

3. ERP Planning Issues Assessing needs & choosing a “right” ERP system Matching business process with ERP Organizational requirements Economic/strategic justification 13

Planning--Needs Assessment Needs include specific ERP modules, subsystems, hardware, personnel, etc. Convincing reasons: Use of multiple points of input with duplicated effort Extensive resources for maintenance and support Incompatibility of several information systems Legacy incapable to support organizational needs Unable to respond easily to questions and information requested by key customers/suppliers. Consideration to reengineer its business process 14

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 15

Matching Business Process with ERP designed for solving the fragmentation of information over many legacy in large organization. Information system development in the past vs. ERP While 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. 16

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. 17

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-tocash cycle time, etc. (see Figure 1 A. 3) 18

Source: Supply Chain Council Supply Chain Metrics 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 4. 7 turns to generate revenue 1. 7 turns

Cash-to-Cash Cycle Time • Integrates the finance function with purchasing, manufacturing, and sales/distribution Cash-to-cash cycle time = Inventory days of supply + Days of sales outstanding – Avg. payment period for material Procurement cycle • Purchase cost of material • Accounts payable Manufacturing cycle • Raw materials inventory • Work-in-process • Finished goods inventory Sales and distribution cycle • Distribution inventory • Accounts receivable

ERP View of Cash-to-Cash Time ERP database Purchasing Accounts payable Inventory Manufacturing Sales and distribution Cost of sales Sales Accounts receivable 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)

Cash-to-Cash Example 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

Economic/Strategic 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. 24

4. Future Trend and Challenges Advanced Planning and Scheduling (APS) in SCM Employ 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% 25

4. Future Trend and Challenges Customer Relationship Management (CRM) in SCM Keeping a customer is more profitable than acquiring a new one Those improve customer loyalty are 60% more profitable CRM (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. 26

Figure. 3 Supply Chain Management Customer Relationship Management SCM Suppliers CRM Enterprise (ERP) Customers 27

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. 28

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. 29