1A.

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

1. Introduction
2. ERP Evolution
3. The Planning Issues
4. Future Trend and Challenges
5. 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 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.

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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 assumption
Resolution: MRP + CRP = closed-loop MRP
Variation: DRP (when similar principles applied to
distribution and warehouse operations)

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 9

Market
demand
Figure 1

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

Financials
Receivable and payable
Cash management
General ledger
Product-cost accounting
Profitability analysis
Executive information
system

Operations & Logistics Sales and Marketing

Production planning Order management
Materials planning (MRP) Sales management
Inventory management ERP Sales planning Customers
Suppliers Quality management Pricing
Project management After-sales services
Vendor evaluation
Purchasing
Shipping

Human Resources
Payroll
Personal planning
H/R time accounting
Travel expenses
Training

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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 system
Matching business process with ERP
Organizational requirements
Economic/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 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

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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. 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.

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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)

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 Supply Chain Metrics
Measure Description Best-in- Average
Class
Delivery Percentage of orders shipped according to schedule 93% 69%
performance
Fill rate by line Percentage of actual line items filled 97% 88%
item
Source: Supply Chain Council

Perfect order Complete orders shipped on time 92.4% 65.7%

fulfillment
Order fulfillment Time from when an order is placed until it is 135 days 225 days
lead time received by the customer
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 Time required to turn cash used to purchase raw 35.6 days 99.4 days
cycle time materials into cash received from customers
Asset turns Measure of how many times per year assets are used 4.7 turns 1.7 turns
to generate revenue
 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

Manufacturing Sales and

Procurement
cycle distribution cycle
cycle

•Purchase cost of material •Raw materials inventory •Distribution inventory

•Accounts payable •Work-in-process •Accounts receivable
•Finished goods inventory
 ERP View of Cash-to-Cash Time

ERP database

Accounts payable
Purchasing

Inventory

Cash-to-cash cycle
Manufacturing time
Cost of sales

Sales
Sales and distribution

Accounts receivable
 Calculating Cash-to-Cash Time
S
Average daily sales (Sd) Sd 
d

AR
Accounts receivable days (ARd) ARd 
d

Average daily cost of sales (Cd) Cd  S d CS

I
Average days of inventory (Id) Id 
Cd

AP
Accounts payable cycle time (APd) APd 
Cd

Cash  to  cash cycle time  ARd  I d  APd

 Cash-to-Cash Example
S 1,020,000
Sales over last 30 days = $1,020,000 Sd    34,000
d 30

Accounts receivable = $200,000 AR 200,000

ARd    5.88 days
d 34000

Cost of sales = 60% of total sales Cd  Sd CS  34,000(0.6)  20,400

I 400,000
Inventory value = $400,000 Id    19.6 days
Cd 20,400

Accounts payable = $160,000 AP 160,000

APd    7.84 days
Cd 20,400

Cash  to  cash cycle time  ARd  I d  APd  5.88  19.6  7.84  17.64 days
 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 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%

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 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.

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 Figure. 3

Supply Customer
Chain Relationship
Management Management

SCM CRM
Enterprise Customers
Suppliers (ERP)

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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.

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