Enterprise Resource

Planning

MPC 6th Edition

Chapter 1a

McGraw-Hill/Irwin Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.
Enterprise Resource Planning

A comprehensive software approach to

support decisions concurrent with
planning and controlling the business.

ERP systems are, first and foremost,

integrated.

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Agenda

1a-3
What is ERP?

 ERP software is
 Multifunctional
 Integrated
 Modular
 Able to facilitate MPC activities

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Multifunctional

 The ability to track financial

performance in monetary terms ($, €)
 Can track purchasing activity in
material units (pounds, kilos, tons)
 Follows sales in terms of products or
services
 Reports manufacturing activity in terms
of products, resources, or people

1a-5
 ERP Scope
Enterprise resource
planning

Manufacturing Human resource

and logistics Enterprise planning models management

Manufacturing Enterprise performance

planning and measures
control
Finance
Sales and operations Data warehousing
planning (front end)

Material and capacity Report generation

planning (engine)
Sales and
Material and vendor marketing
management
Transaction processing
(back end)

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Integrated

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Modular

 Functional units (finance, sales,

manufacturing, etc.) are narrowly
focused
 Functional units can be combined to
create a single system
 Software from other sources can be
connected as well

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1a-9
Process Standardization

 Without standard terminology,

integration is impossible
 What is demand?
 What is inventory?
 How are exchange rates determined?
 What transfer costs apply (for internal
transactions)?
 What labor rates are applied?

1a-10
Decision Support

 Helping users make decisions about

running the business
 People make the decisions, software
provides them with better tools and
information

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Transaction Processing

 An ERP system is designed to

process business transactions in real
time, working from a single database
 Data warehouse software may be
added to facilitate queries not built
into the ERP system

1a-12
Performance Metrics

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Integrated Supply Chain
Metrics
 Developed by the Supply Chain
Council
 Designed to measure the impact of
decisions on the entire supply chain
 Avoids development of functional silos
by developing metrics that reflect the
entire supply chain

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 Supply Chain Metrics
Measure Description Best-in- Average
Class
Delivery Percentage of orders shipped according to 93% 69%
performance schedule
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 35.6 days 99.4 days
cycle time raw materials into cash received from
customers
Asset turns Measure of how many times per year assets 4.7 turns 1.7 turns
are used to generate revenue
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 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
– Average payment period for material

Procurement Manufacturing Sales and

cycle cycle distribution cycle

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

•Accounts payable •Work-in-process •Accounts receivable
•Finished goods inventory

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 ERP View of Cash-to-Cash
Time ERP database

Accounts payable
Purchasing

Inventory

Cash-to-cash
Manufacturing cycle time
Cost of sales

Sales
Sales and
distribution

Accounts receivable

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 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

Accounts payable cycle time (APd) AP

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

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 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
Inventory value = $400,000
Cd  S d CS  34,000(0.6)  20,400
Cost of sales = 60% of total sales
I 400,000
Id    19.6 days
Accounts payable = $160,000 Cd 20,400
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

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The ERP Experience

 Eli Lilly and Company

 Integration of a global company
 Process improvement
 Simplified training
 Strategic direction
 Organizational flexibility
 Set of global policies

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Concluding Principles
 Redundant transactions must be reduced
or eliminated.
 To maintain data accuracy and realize
efficiencies, information must be
captured at the initial entry, using
documented processes.
 Processes need to be changed to
support the data needs of the ERP
system–hardware and software alone
isn’t sufficient.

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Concluding Principles
 The company must define a
comprehensive set of performance
measures, with policies and goals that
correspond to these measures.
 IT economies of scale can be
obtained from supporting fewer
hardware and software platforms.

1a-22
 Quiz – Chapter 1a
 To free the ERP system for basic applications, a _______
_______ is often used to capture, manage, and analyze
data.
 For a firm with average daily sales (Sd) of $200,000, current
inventory (I) of $1,000,000, and cost of sales (CS) of 50%,
what is the average days of inventory (Id)?
 Which of the following actions would be likely to increase
the cash-to-cycle time for a firm?
• Increasing the cost, but not the price, of the product
• Taking advantage of “early pay” discounts with suppliers
• Revaluing inventory to reflect reductions in purchasing prices

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