ERP - Module 1

Evolution of ERP

The forerunner of present ERP are MRP, MRP II and early versions of ERP

1. Material Requirement Planning (MRP) 1960

MRP Overview

MRP Inputs MRP MRP Outputs

Orders Processing
Forecast
Primary Outputs
- Purchase order schedule
Master - Order Releases
Production - Order amendments
Schedule

Design
Documents
MRP
Bill of Computer Secondary Reports
Materials Program - Planning control reports
- Performance control reports
- Exceptions reports
Inventory
Records

Inventory Reports
Receipts - Inventory
Issues transactions
- Inventory
control reports

MRP Inputs

Master Schedule – consists of

- production schedule – weekly production quantities of various
products and variants
 - planning schedule – schedule of materials issue, fabrication, sub-
assembly, assembly, testing and packing of weekly production
quantities on a time horizon

- delivery schedule – weekly delivery of products to different customers

Bill of Materials (BOM)

- Design parts lists shows the part numbers, drawings, types and
quantities of all parts required for sub assembly and final assembly of
various products and their variants
- Method Engineering group takes the ‘make-or-buy’ decisions and
categorize each part as in-house manufacture or out-sourced item.
- BOM is the summary of the parts and raw materials that are to be
purchased to produce one unit of each product variant.
- Each product variant will have its own BOM
- BOM is the basis for all materials management activities

Inventory Records - shows

- Physical stock of all purchased parts and raw materials at any point of
time.
- Record of all incoming materials and parts
- Record of all materials and parts issued for productions
- Finished goods inventory record shows details of stock, inflow from
assembly and out flow to customers at any point of time.

MRP Processing
- It explode BOM into weekly Gross Requirements by multiplying
BOM of each variant with the production quantities as per Master
Schedule
- It calculates Net Requirement of each part for each week

Net requirement = Gross requirement +

Safety stock -
Stock in hand-
Scheduled receipts
MRP Output

Primary outputs are

- Purchase order schedules.
- Placing actual purchase orders.
- Amending purchase orders if necessary to accommodate change in
master plan

Secondary Reports are

- Planning control reports – summary of materials budget
- Performance control reports – planned vs actual performance of
materials management activities
- Exceptions reports – showing high deviations in performance.

Inventory Reports
- Inventory receipt and issue analysis
- Inventory control analysis (ABC, cost etc)

MRP format

Item number :
Week No. 1 2 3 4 5 6
Gross requirement
Safety stock
Stock in hand
Planned order receipts
Net requirement
Planned issues
Planned order releases

Benefits of MRP 1
1. Attain optimum levels of inventories
2. Capability to keep track of material requirements
3. Capability to incorporate changes in production plan in the
procurement plan, preventing stock of unnecessary items, and
shortage of required items.
4. Capability to manage inventory better at lowest cost
2. Manufacturing Resource Planning (MRP II)

MPR II is an extension of MRP to include production capacities and

production scheduling and integrating it with materials management..

The thrust of MRP II is on capacity planning of different machines and

production facilities and matching it with the load requirement as per
master production schedule.

It will show the necessity to increase production capacities internally or

through out-sourcing.

It will also show imbalanced capacities and idle capacities for management
to take corrective actions to balance capacities to minimize cost of
production.

Next phase of MRPII is for production scheduling and machine loading

schedules to meet the master plan. This will also show the manpower
requirements for various production and assembly facilities.

MRP II also has simulation feasibility. Production changes in master plan to

meet market needs can be simulated and the new capacity requirement can
be checked with available capacity before changing the Master Plan.

3. Enterprise Resource Planning (ERP)

ERP is an extension of MRPII, integrating all functional departments of an

organizations which till now are operating as System Islands
 Problems of System Islands

Production Finance Marketing

Planning

R&D Production Sales &

Distribution

1. Traditionally companies use isolated computer software to manage

different functional areas like Marketing, Finance, HR and Operations

2. There is no common communication link and data interchange

between different departments.

3. They operated in ‘Business Functions’ and not on ‘Business Processes’.

4. ‘Business Functions’ are confined with in the boundaries of each

Department as departmental activities or tasks, where as ‘Business Process’
is an end to end process comprising of a chain of related activities that cut
across several departments as cross functional activities.

BUSINESS PROCESSES - ‘Business Process’ means a group of related tasks that

together ‘add value to the customer’. It is an ‘end to end’ process

Example: In a fan manufacturing company, the activities associated with executing an

order from a dealer /distributor (customer) is as follows.

The business process is ‘Order fulfillment Process’

Present System

Presently tasks associated with executing the order are distributed among the following
departments

Sales Dept - receive and scrutinize the order from a

 distributor, prepare ‘Delivery Advice’,
send it to Finance for approval

Finance Dept - check the credit status of the distributor,

Approve Delivery Advise, send it to
Stores

Stores - After receiving the Delivery Advice, check stock.

- If in stock, draw from store and deliver
to ‘Packing& Dispatch’ dept.
- if not in stock, inform Production Control

Packing & dispatch - Pack and prepare Delivery

Papers for transporter, request
Finance dept to arrange
insurance
Finance Dept - arrange insurance, and give approval
for dispatch

Transport dept- arrange transportation.

Executing an order from a distributor is an end to end Business Process, namely ‘Order
fulfillment process’, from the time distributor places an order to the time he receives the
goods.

Analysis of business process shows

- it is spread across several departments in the organization as tasks
- improving one or more tasks need not add value to customer, ie. Increase his
satisfaction level.
- ‘business process’ ie ‘order fulfillment process’ is effectively invisible,
fragmented across several departments.
- no person is accountable to this ‘process’.
- it is an orphan, left unmanaged
- yet business processes are the heart of the enterprise – to increase customer
satisfaction, remain competitive and make profit

Result: Dealer does not know when he will get his consignment. His contact person in
the sales dept also does not know. He is left unsatisfied. Improving any of the tasks in the
process chain does not ‘add value to customer’, i.e. improve his satisfaction level.

Re-engineered business process

All departments are connected by an ERP software, through a net work of terminals.
ERP packages are usually implemented only after re-engineering exercise.
Sales department
A sales staff designated ‘Customer Support Executive’ receive an order from a
distributor
1. He checks the stock level and the credit status of the dealer on his terminal.
2. If stock is available and credit status is OK, ‘post’ a ‘Delivery Advice’ on the terminal
with all technical and commercial details.
3. Check the packing schedule on his terminal, allot the next available slot for packing
that ‘Delivery Advice’.
3. Next check the transporters schedule and block the consignment as per ‘Delivery
Advice’ in the next scheduled departure of the truck to the town of the dealer.
4. Inform customer the planned date of dispatch.
5. When actual dispatch takes place, inform him the transporters name, L.R no. and
expected date of arrival of the consignment in his town.

His actions 1 to 3 are all cross functional activities, ie of stores, packing and dispatch,
finance and transport.

The actual task is executed by concerned departments as per the work schedule on the
terminal (assigned by sales staff) for each ‘Delivery advice’.

Result
# The company has highly satisfied dealer, who in turn will increase sales and profit to
company.

# Management can any time monitor the ‘business process’ and device methods to
improve it

# Each department is responsible to carry out the work as per schedule on the terminal

#The company has a cross functional and flat structure, which is highly efficient and cost
effective.

(Problems of system islands – continued)

5. Decision making by management was difficult because, information

were scattered across several functional areas, departments and offices
across the organization.
6. The reliability of information was also questionable, it may or may not
be as on date. eg. Stock level of an item

7. Data integrity was also very poor. Same data has different values in
different department eg. Inventory cost of Finished goods will be different
with Marketing, Stores and Accounts Departments.
8. Integrating all these functional areas to achieve common corporate
objectives was also a difficult task

Need for Data Integration and interface through Enterprise Wide

Software Solution

- To enhance competitiveness, it was essential to integrate all the

above functions into one software across the entire enterprise so the
correct decisions can be taken at the correct time from the correct and
reliable information.

Production Finance Marketing

Planning

Central Data Base

Sales &
R&D Production Distribution

- Thus ERP software was developed with the objective of integration

and co-ordination of all functional areas of an enterprise to achieve
global competitiveness in every respect.
- It is based cross functional ‘Business Processes’
- It increases data integrity and data reliability
- All data are centralized
- Data are captured at the point of origin.
 Evolution of ERP – Summary

Time System Description

line
1960s Inventory Inventory identification, stock level monitoring, demand
Management planning, set inventory levels- maximum, minimum and
& Control safety levels, trigger reorder processing, monitor and control
usage, stock reconciliation, periodic reporting system
1970s Material Integrate materials management with production process, raw
Requirement materials and parts issue and purchase based on production
Planning(MRP) schedule, product configuration and current stock level.
Flexibility to meet changing production demand.
1980s Manufacturing In addition to MRP, the application included production
Resource planning, scheduling, machine loading, routing, capacity
Planning planning and monitoring, performance monitoring and control
(MRP II) and all activities related to production processes
1990s Enterprise Provided central Data Base and integrated ‘business process’
Resource based application software, covering the whole enterprise
Planning including Operations, Finance, Materials, Marketing, R&D,
(ERP) Marketing, Customers, Suppliers, Logistics etc with analytical
and decision support capabilities.

Difference between traditional MIS and ERP

Traditional MIS ERP

Operate inside each department. Operate across several departments through

the enterprise

Enterprise data is to be compiled with the Enterprise data is readily available

help of Departmental MIS.

Only ready made, specified information are Any type of information from any where
available across the enterprise is available

Data capturing is done at several places Data capturing is done only at one place,
at the place of it origin

Data reliability is very poor and may not be Real time data with high reliability
real time.

Same data/information is stored in several All Data are stored in one place with high
places (departments) resulting in data consistency
 duplication and poor data consistency

Data access from other departments is very All have access to required information and
limited. data

The summary MIS at corporate level based The information at corporate level is real
on departmental MIS may not reflect the time, accurate and gives correct picture of
real picture in totality the business

Decisions made may be delayed and poor Quick and correct decisions can be made
due to delay in compiling MIS or wrong
information and data

Traditional MIS is very poor in three ERP ranks very high all the three
fundamental characteristics of information fundamental characteristics of information.
viz. Accuracy, Relevancy and Timeliness.

Business Modeling
(refer fig 1.5 page -10 ERP by Alexis Leon)
The first step of ERP is Business Modeling, ie. creating a new Business model replacing
existing activity oriented ‘intra - departmental Business Functions’ to process oriented
‘cross functional- inter departmental Business Processes’

The entire operations of the whole enterprise is split into several ‘Business Processes’
managing all resources like ‘men, material, machine and money’ to achieve the enterprise
goal

Eg. customer order fulfillment, employee wage payment

These processes are represented by Process flow charts.

Next step is to establish interrelationship and interdependencies of different departments

in each Process using a suitable diagram.

Process Flow Charts and corresponding ‘Relationship Diagrams’ constitute the new
Business Model for ERP

1. Integrated Data Modeling

ERP uses integrated data for its analysis and decision making. Departmental data is
neither collected nor used.

Every body has access to integrated data for decision making or performing his job.
It reduces data redundancy and all data are up to date and accurate.

At any time, the data base will give a snap shot of the organization

E.g. when a delivery is made to the customer, several data is updated simultaneously and
automatically like stock level, a/c receivable, orders executed, pending orders, cumulative
sales in number and value and even Profit figure at that point of time if required.

Data models are represented by tables, fields, views, domain etc

2. Program Model
(refer fig 1.5 ERP by Alexis Leon)
Program model is the responsibility of ERP vendor. It consists of Programs, Functions,
Data Capture and Display screens etc

Early and New ERP packages

SAP (System, Applications and Products in Data Processing)

1. SAP – R/1 : (R= Real Time) 1973 – Integrated SAP’s financial accounting
software with other functional areas to get and Enterprise wide software
2. SAP – R/2 : 1980s, Developed ERP package for mainframe platform
applications, and for multinational customers in different languages
3. SAP – R/3 : 1990s , Developed Client- Server version of R/2 – used Relational
Database and uniform graphical interface with capability to run on any make of
computers- The emphasis shifted from main frame computing to new generation
three tier client server architecture of Data Base, Applications and User Interface.
4. my SAP Business Suit : early 2000s , used the popularity of internet to with
strong focus on business applications. It contained 5 business application ERP,
CRM, SCM, SRM, PLM (Product Life Cycle Management)
5. my SAP ERP – late 2000s, it is the latest version of ERP software application
powered by SAP Net Weaver platform. It is a comprehensive software application
covering Analytics, Financials, HRM, Operations, Marketing and Corporate
Service facility. It covers all industries in medium to large industries across the
globe. This package is also available as SAS (Software As a Service) to eliminate
capital investment on the software
6. SAP Business One and mySAP All-in-one: late 2000s, special packages
developed by SAP for SME s to minimize IT investment. These are scaleable
versions, which can be expanded as the business grows. It is also available as
SAS.
 ERP Products and Markets

5 Major players dominated 74% of the market in 2007

SAP 42 %
Oracle 19 %
Sage Group 6%
Microsoft 4%
SSA Global 3%

(Among the earlier players, J.D. Edwards was bought by People Soft which in turn was
bought by Oracle. About Baan ?)

Total value of ERP world market in 2007 was about USD 25 billion

Operating system and Data base

Two popular operating systems for ERP implementation ate Windows and Unix

In Data Base, Oracle dominate with above 70% market share. Microsoft’s SQL Server
is a distant second.

Over View of ERP Packages - Major Players and Products in ERP market

1, SAP (System Applications and Products) - Germany

SAP – my SAP ERP-

my SAP ERP – late 2000s, it is the latest version of ERP software application
powered by SAP Net Weaver platform. It is a comprehensive software application
covering Analytics, Financials, HRM, Operations, Marketing and Corporate Service
facility. It covers all industries in medium to large industries across the globe. This
package is also available as SAS (Software As a Service) to eliminate capital
investment on the software

SAP - Business One and mySAP All-in-one

SAP Business One and mySAP All-in-one: late 2000s, special packages developed by
SAP for SME s to minimize IT investment. These are scaleable versions, which can be
expanded as the business grows. It is also available as SAS.

SAP – Industry Specific Products

Financial Services
o SAP for banking
o SAP for insurance
Public Services
o SAP for Defense and Securities
 o SAP for Health care
o SAP for higher education etc
Service Industries
o SAP for Logistics service providers
o SAP for Media
o SAP for retail etc
Manufacturing Industries
o SAP for Aero space and defense
o SAP for Automotive
o `SAP for oil and gas etc

2. Oracle Corporation - USA

With the acquisition of J.D Edward and PeopleSoft, Oracle offers comprehensive range
of applications
1. Oracle E-Business Suit
It is the first internet based ERP and continues to evolve next generation of
business application
Can be implemented on module basis as the business expands and capability to
change
Applications include
- advanced procurement, contracts, corporate performance management, Customer
data management, CRM, financials, HRM, intelligence, interaction center,
learning cycle management, logistics, maintenance, manufacturing, marketing,
order management, product life cycle management, projects, sales, SCM,
transportation etc.

2. JD Edward enterprise
They are set of industry specific applications suited for organizations that
manufacture, distribute and service products.

3. People Soft Enterprise

IT is an application that offer web service integration with multi-vendor, home
grown ERPs.

4. JD Edward World
Biult for IBM i series data bases, offering web enables management of plants,
inventories, equipments, finance and people

5. Siebel
Oracle Siebel is a CRM application with specific needs of 20 industries, supporting J2EE
and .NET
6. Oracle Fusion Application
It is a next generation application designed with best features of all the above. It
is more flexible and have collaborative business processes infused with intelligent and
interpreted information.

7. Oracle Accelerate
Designed for SMEs
- it has pre integrated, industry specific, tailor made functionality
- fast set up wizard – answer about 90 questions in the wizard for set up and run
- embedded database and middleware technology – simplifying the set up
- Award wining software support

Benefits of ERP implementation

1, Direct benefits
1. Information integration – It has centralized data base with automatic data
updating on real time basis, integrating all functional areas across the enterprise.
The data available has high reliability, consistency and accessibility across the
enterprise.
2. Reduction in cycle time – from the time of receiving the order and delivery of
product - achieved through better management of inventories, production
capacities and market information.
3. On time shipment – Achieve capability to deliver customer specific products
with the lead time of standard product through supply chain management and
logistics.
4. High Resources Utilization and Operational Efficiency : Achieve optimum
capacity utilization through improved planning and scheduling capability.

5. Increased Flexibility – ERP packages are flexible to operate on diverse

multinational environment with different languages, currencies, accounting
standards, tariffs etc. One system can operate across the world, meeting customer
diverse customer needs.

6. Better Analysis and Decision making Capability – Built in analytical

capability and data reliability enable executives to plan better and take prompt
decisions.\

7. Use of latest technology – ERP is capable of adapting to using latest technologies

like internet, intranet, e-commerce, mobile technologies, bar code, RF and WiFi
technologies etc.

.
 8. High accountability for all business processes adding value to customer.

2, Indirect Benefits
1. Better corporate image
2. Improved customer good will and satisfaction
3. Improved supplier relations and supplier performance
4. Better compliance with statutory requirements like disclosures, taxes, duties etc
5. Improved information visibility and accessibility

Risks of ERP

3 basic sides of ERP implementation and People (69%), Processes (18%) and
Technology (13 %)and the risks (shown as percentage) are also associated with these
factors

People Risk (69%)

People means – Management, Implementation team, Employees, Consultants and

Vendors

Management – ERP system definitely change the way people work and take decisions.
Intra departmental working will change to cross functional interdepartmental working
and decision making. Clearly defined Change Management Policies are to be evolved
and documented by the management with fixed targets and tight controls.

Project Team – Project team is the core group knowledgeable of all the functional areas
and specially trained in ERP implementation.

Training – Every body must be aware of ERP through awareness program and trained in
their areas how to implement and use ERP. Training must also reduce their resistance to
change.

Implementation Team – ERP implementation team shall be as large as possible so that

every body gets involved and own the implementation in their business process areas.

Employee Re-location and retraining – Development of new processes will result in new
job description, for which employees are to be retrained and re-located.

Consultants – Consultants are knowledgeable of the ERP packages, need not necessarily
know the companies operations. Hence they can create confusion by incorporating
processes that are not relevant or applicable.

Vendors – Fly by night vendors may leave the company with out continued support and
soft ware up gradation.
Process Risks (18%)
ERP will introduce hundreds of new business processes and eliminate several existing
activities. The areas of Process risks are Program Management, BRP, Stage transition and
Benefit realization
Program Management – Problems associated with integrating all functional areas into
one system.

BRP- Designing of new business processes are efficient and trouble free which give
dramatic improvement in performance ( at least above 50%)

Stage transition – the problems related to the transition stage when both old and new
system co-exist.

Implementation risks – caused by long implementation time, high investments,

unreasonable deal line, scope creep etc

Benefit realization- Steps to be taken if the indented benefits are not realized.

Technology Risks (13%)

Technology is changing rapidly. The risk associated with it are

- software functionality – capability to meet increasing business needs
- technological obsolesce – of the ERP package itself.
- Operations and maintenance issues

Managing Risks
1. Find potential failure points or risks
2. Analyze them to find the extend of damage it can cause.
3. Asses the probability of its occurrence.
4. Based on the above, prioritize the risks.
5. Reduce risk by what ever action is possible