Enterprise Resource Planning (ERP)

Integration
Information Technology And Supply Chain

The rapid development of computer and information technology over the last two
decades has also contributed positively to the growth of ERP. Tasks that were
previously limited to mainframe computers are today easily implemented on servers
and desktop computers that cost only a fraction of the capital investment
previously needed. Information systems that were previously off-limits are now
accessible to many smaller organizations. ERP is expected to remain the key building
block of global business management information systems. As the global business
environment continues to change, ERP is expected to evolve to become more
flexible to adapt to mergers and acquisitions and to provide more real-time
monitoring and response.
Objective of an ERP System
It coordinate a firm’s entire business, from supplier evaluation to customer invoicing.
ERP systems are umbrella systems that tie together a variety of specialized systems.
A centralized database is used to assist the flow of information among business
functions.
ERP systems usually provide financial and human resource (HR) management
information.
The Aggregate Production Plan
Aggregate production planning is a hierarchical planning process that translates annual
business plans and demand forecasts into a production plan for all products

Aggregate production plans are typically stated in terms of product families or groups. A product
family consists of different products that share similar characteristics, components or
manufacturing processes

The APP disaggregates the demand forecast information it receives and links the long-range
business plan to the medium-range master production schedule
The Chase Production Strategy
The pure chase production strategy adjusts capacity to match the demand pattern
Using this strategy, the firm will hire and lay off workers to match its production rate to demand
The workforce fluctuates from month to month, but finished goods inventory remains constant
The pure chase strategy obviously has a negative motivational impact on the workers,
and it assumes that workers can be hired and trained easily to perform the job
In this strategy, the finished goods inventories always remain constant but the workforce
fluctuates in response to the demand pattern
This strategy works well for make-to-order manufacturing firms since they cannot rely on finished
goods inventory to satisfy the fluctuating demand pattern
The Level Production Strategy
A pure level production strategy relies on a constant output rate and capacity while varying
inventory and backlog levels to handle the fluctuating demand pattern

Using this strategy, the firm keeps its workforce levels constant and relies on fluctuating
finished goods inventories and backlogs to meet demand

This strategy works well for make-to-stock manufacturing firms, which typically emphasize
immediate delivery of off-the-shelf, standard goods at relatively low prices
The Mixed Production Strategy
Instead of using either the pure chase or level production strategy, many firms use
a mixed production strategy that strives to maintain a stable core workforce while
using other short-term means such as overtime, an additional shift,
subcontracting or the hiring of part-time and temporary workers to manage
short-term high demand

Usually, these firms will then schedule preventive maintenance holding these as
finished goods inventory during the off-peak demand periods
Master Production Scheduling -MPS
The master production schedule is a time-phased, detailed disaggregation of the
aggregate production plan, listing the exact end items to be produced
It is more detailed than the aggregate production plan

The MPS planning horizon is shorter than the aggregate production plan’s

For the service industry, the master production schedule may just be the
appointment book or scheduling software, which is created to ensure that
capacity in the form of skilled labor matches demand
Master Production Schedule Time Fence

The master production schedule is the production quantity required to meet demand
from all sources and is the basis for computing the requirements of all time-phased end
items
The material requirements plan uses the MPS to compute component part and
subassembly requirements
Frequent changes to the MPS can be costly and may create system
nervousness
System Nervousness can be defined as a situation wherein a small change in the upper-
level production plan causes a major change in the lower-level production plan
Master Production Schedule Time Fence

Many firms use a time fence system to deal with this problem
The time fence system separates the planning horizon into two segments: a firmed and a
tentative segment
A firmed segment is also known as a demand time fence, and it usually stretches from the
current period to a period several weeks into the future A firmed segment stipulates that the
production plan or MPS cannot be altered except with the authorization of senior management
The tentative segment is also known as the planning time fence, and it typically stretches from the
end of the firmed segment to several weeks farther into the future
Beyond the planning time fence, the computer can schedule the MPS quantities
automatically, based on existing ordering and scheduling policies
The Bill of Materials
The bill of materials (BOM) is an engineering document that shows an inclusive
listing of all component parts and subassemblies making up the end item

It shows the parent-component relationships and the exact quantity of each

component, known as the planning factor, required for making a higher-level part or
assembly
Material Requirements Planning - MRP
Dependent demand is a term used to describe the internal demand for parts based
on the independent demand of the final product in which the parts are used
Once the independent demand of the final product is known or forecasted, the
dependent demand item requirements can be exactly calculated using material
requirements planning (MRP) software, along with when the items should be
assembled or purchased
Material requirements planning is a software-based production planning and
inventory control system that has been used widely by manufacturing firms for
computing dependent demand and timing requirements
 Material Requirements Planning - Evolution

With the advent of computer and information technologies, the span of

MRP evolved to include aggregate production planning, master
production scheduling and capacity requirements planning to become
closed-loop MRP
It further evolved into manufacturing resource planning (MRP-II) by
including other aspects of materials and resource planning
A complete MRP-II system consists of many modules that enable the firm
to book orders, schedule production, control inventory, manage
distribution and perform accounting and financial analyses
This new generation of MRP system is known as the enterprise resource
planning (ERP) system that integrates organization-wide activities,
including operations and facilities that are located in different countries
from the head office
MRP Working
Material requirements planning is used to calculate the exact quantities, need dates
and planned order releases for components and subassemblies needed to
manufacture the final products listed on the MPS

MRP begins the computation process by first obtaining the requirements of the final
product (the Level 0 item on the BOM) from the MPS to calculate the
requirements of Level 1 component
MRP – Input - Output
For MRP, a dependent demand management system, to work effectively, it requires
The independent demand information (the demand for the final product or service
part) from the MPS
Parent-component relationships from the bill of materials, including the planning
factor and lead-time information
The inventory status of the final product and all of the components
MRP takes this information to compute the net requirements of the final product
and components called Planned Order Releases, is the most important output of
the MRP
Capacity Planning
Capacity refers to a firm’s labor and machine resources
It is the maximum amount of output that an organization is capable of completing
in a given period of time
Capacity planning follows the basic hierarchy of the materials planning system
At the aggregate level, Resource Requirements Planning (RRP), a long- range
capacity planning module, is used to check whether aggregate resources are
capable of satisfying the aggregate production plan
Capacity Strategy
Capacity expansion or contraction is an integral part of an organization’s
manufacturing strategy
A Lead capacity strategy is a proactive approach that adds or subtracts capacity in
anticipation of future market conditions and demand, whereas
A Lag capacity strategy is a reactive approach that adjusts its capacity in response to
demand
A lead capacity strategy is a proactive approach that adds or subtracts capacity in
anticipation of future market conditions and demand, whereas a lag capacity
strategy is a reactive approach that adjusts its capacity in response to demand
Distribution Requirements Planning
Distribution requirements planning (DRP) is a time-phased finished-goods inventory replenishment
plan in a distribution network
DRP is a logical extension of the MRP system, and its logic is analogous to MRP
Distribution requirements planning ties the physical distribution system to the manufacturing
planning and control system by determining the aggregate time-phased net requirements of the
finished goods, and provides demand information for adjusting the MPS
A major difference between MRP and DRP is that while MRP is driven by MPS to compute the
time-phased requirements of components, DRP is driven by customer demand of the finished goods
Hence, MRP operates in a dependent demand situation, whereas DRP operates in an independent
demand setting
Information Technology And Supply Chain

The rapid development of computer and information technology over the last two
decades has also contributed positively to the growth of ERP. Tasks that were
previously limited to mainframe computers are today easily implemented on servers
and desktop computers that cost only a fraction of the capital investment
previously needed. Information systems that were previously off-limits are now
accessible to many smaller organizations. ERP is expected to remain the key building
block of global business management information systems. As the global business
environment continues to change, ERP is expected to evolve to become more
flexible to adapt to mergers and acquisitions and to provide more real-time
monitoring and response.
The development of Enterprise resource planning systems

•While traditional or legacy MRP systems continue to be used and modified to

include other functional areas of an organization, the emergence and growth of
supply chain management, e-commerce, and global operations have created the
need to exchange information directly with suppliers, Customers, and foreign

Kashif Shafiq
branches of organizations. the concept of the manufacturing information system
thus evolved to directly connect all functional areas and operations of an
organization and, in some cases, its suppliers and customers via a common
software infrastructure and database. This type of manufacturing information
system is now commonly referred to as ERP.
•The typical ERP system is an umbrella system that ties together a variety
of specialized systems, such as production and inventory planning,
purchasing, logistic, human resources, finance, accounting, customer

Kashif Shafiq
relationship management, and supplier relationship management.
Generic ERP system

Operations

Sales and
Engineering
Marketing

Kashif Shafiq
Central
Customer
Database
Supplier relationship
and Servers Management
Relationship
Management
Finance and
Human Accounting
resources Head
quarters
and
Branches
Implementing Enterprise Resource
Planning Systems
•Implementing an ERP system has been proven to be a real challenge for
many companies. Two primary requirements of successful
implementation of ERP are computer support and accurate, realistic
inputs. Instead of complete implementation of the entire system at
once, some firms choose to implement only those application or
modules that are absolutely critical to operations at that time. Additional

Kashif Shafiq
modules are then added in a preplanned second phase. This ensures
that the system can be implemented as quickly as possible while
minimizing interruption of the existing system. However, many
implementations have still failed due to variety of reasons. Some of the
more common reasons for failed ERP implementations follow:
•Lack of top management commitment: while management may be willing
to set aside sufficient funds to implement a new ERP system, it may not
take an active role in providing ongoing encouragement during the
implementation process. Often, this lead users to revert to the old processes
or systems because of their lack of knowledge and interest to learn the
capabilities of the new ERP system.

•Lack of adequate resources: Implementing a new ERP system is a long term

Kashif Shafiq
commitment requiring substantial capital investment. Although the cost has
become more affordable due to the rapid advent of computer technology,
full implementation may still be out of reach for many small organizations.
In addition, small firms may not have the necessary workforce and
expertise to implement the complex system.
•Lack of proper training: many employees may already be familiar with
their legacy MRP systems. Thus, when a new ERP system is
implemented, top management may assume that users are already
adequately prepared and underestimate the training required to get the
new system up running. Lack of financial resources can also reduce the
amount of training available for its workforce.

•Lack of communication: lack of communication within an organization

and/or between the firm and its ERP software provider can also be a
major hindrance for successful implementation. Lack of communication

Kashif Shafiq
usually results in the wrong specifications and requirements being
implemented.
•Incompatible system environment: In certain cases, the firm’s
environment does not give ERP a distinct advantage over other systems.
For example, there is no distinct advantage for a small family-owned used
car dealer in a small town to implement an expensive new ERP system.
Advantages Of Enterprise Resource
Planning Systems
•The primary advantage of ERP over the legacy MRP system is that ERP
uses a single database and a common software infrastructure to provide
a broader scope and up-to-date information, enabling management to
make better decisions that can benefit the entire supply chain.

Kashif Shafiq
•ERP helps organizations reduce supply chain inventories due to the
added visibility throughout the entire supply chain.
•ERP systems also help organizations to standardize manufacturing
processes.
•ERP enables an organization, especially a multi-business-unit enterprise,
to efficiently track employees’ time and performance and to communicate
with them via a standardized method.
Disadvantages of enterprise resource planning system

•A substantial capital investment is needed to implement the system.

considerable time and money must be set aside to evaluate ERP
software applications and their suppliers, to purchase the necessary
hardware and software, and then to train employees to operate the new

Kashif Shafiq
system.
•The software is designed around a specific business model based on specific
business processes. Although business processes are usually adopted based on best
practices in the industry. The adopting firm must change its business model and
associated processes to fit the built-in business model designed into the ERP system.

Kashif Shafiq
Thus, the adopting firm must restructure its processes to be compatible with the new
ERP system. This has resulted in a very unusual situation where a software system
determines the business practices and processes a firm should implement, instead of
designing the software to support existing business practices and processes.
Enterprise Resource Planning
Software Applications
•Although each ERP software provider configures its products differently
from its competitors, some common modules of ERP systems are
described here:

Kashif Shafiq
• Accounting and finance: This module assists an organization in
maintaining  financial control and accountability. It tracks accounting and
financial  information such as revenues, costs, assets, liabilities, and
other accounting  and financial information of the company.
•Customer relationship management: This module provides the
capability to manage customers. It enables collaboration between the
organization and its customers by providing relevant, personalized, and
up-to-date information. it also enables customers to track sales orders.
•Human resource management: It assists an organization to plan, develop,
and  control its human resources. It allows the firm to deploy the right
people to support its overall strategic goals and to plan the optimal
workforce levels based on production levels.

Kashif Shafiq
•Manufacturing: It schedules materials and tracks production, capacity,
and the flow of goods through the manufacturing process. It may even
include the capability for quality planning, inspection, and certifications.

•Supplier relationship management: This module provides the

capability to manage all types of suppliers. It automates processes and
enables the firm to more effectively collaborate with all its suppliers
corporate-wide. It also monitors supplier performance and tracks
delivery of goods purchased.

Kashif Shafiq
•Supply chain management: This module handles the planning, execution, and control of
activities involved in a supply chain. It assists the firm to strengthen its supply chain
networks to improve delivery performance. It may cover various logistics functions,
including transportation, warehousing, and inventory  management. In this context,

Kashif Shafiq
supply chain management refers to logistics management in which the focus is the
distribution of finish goods. The supply chain management module creates value by
allowing the user to optimize its internal and external supply chains. Effective supply chain
management requires the organization to have comprehensive management information
systems to synchronize plans with customers and suppliers, collaborate in real time,
execute plans, handle changes, and measure supply chain performance.
Enterprise Resource Planning Software Providers

Choosing an appropriate ERP software package can be a very challenging task

SAP, Oracle, PeopleSoft, J.D. Edwards, and Baan are among the most popular
ERP providers.

Kashif Shafiq
•SAP AG
SAP AG, a German firm, is the world’s leading ERP software provider and world’s third-
largest software provider. Its flagship product is known as R/3. more than 17,500
organizations in 120 countries have used its products- including major multinational
firms such as Baxter Healthcare, Chevron, Colgate—Palmolive, Exxon, IBM, and
Microsoft. Five former IBM system engineers founded SAP in 1972. The company
employs about 28,000 people in more than fifty countries. It is headquartered in
Walldorf; Germany, with U.S. operations headquartered in Newtown Square,
Pennsylvania. One of SAP’s latest product offerings is the mySAP business suite, a
family of business solution, and an integration and application platform
Oracle
The Oracle Corporation” was founded in the late 1970s by Larry Ellison, Bob Miner,
and Ed Oates. The focus of the company has been to provide business applications that
utilize relational databases for storing information. Oracle technology is used in nearly

Kashif Shafiq
every industry around the world and in almost all Fortune 100 companies. Today,
Oracle continues to be the world’s leading supplier of information management
software. It is the world’s second largest software company, after Microsoft. However,
it is ranked behind SAP in the sales of ERP applications. Oracle was one of the first
software companies to develop and deploy 100 percent Internet-enabled enterprise
software across its entire product line. Today, Oracle serves over 13,000 customers
running its applications.
PeopleSoft
PeopleSoft, Inc., headquartered in Pleasanton, California, was founded
by Dave Duffield and Ken Morris in 1987. The primary focus Of the
Company has been to build client/server business applications instead

Kashif Shafiq
of focusing on applications for the traditional mainframe computers.
PeopleSoft’s first product was a human resources application on a
client-server platform introduced in 1988. Today, the company is a
leader in the human resources application market. PeopleSoft serves
customers around e globe, including Analog Devices, corning, Cyber
International, PepsiAmericas, and Sprint.
J. D. Edwards
J. D. Edwards,” founded in 1977 by Jack Thompson, Dan Gregory, and Ed
McVaney, is headquartered in Denver, Colorado. It is one of the world’s
leading developers of agile software solutions, providing cutting-edge,

Kashif Shafiq
collaborative technology that runs global businesses and integrates processes
across multiple systems and supply chain partners. J. D. Edwards designs all
of its software solutions to be open, scalable, and flexible, so that they can
be integrated with software applications from other vendors. Their
business-to-business software applications enable users to engage in
collaborative commerce with their customers, supplies, and other supply
chain partners.
Baan
Baan was founded in 1978, with headquarter in the Netherlands and a
current work-force of approximately 2,800 employees serving a
worldwide customer base. Baan designed its application based on a

Kashif Shafiq
framework of open, flexible, and easy-to-configure components that
allow individual applications to be configured to different industry
processes. Baan provides application solutions to more than 15000
customer sites worldwide.