Chapter 9:

Enterprise Resource Planning

Chapter 9: Enterprise Resource Planning 1

Introduction

Chapter 9: Enterprise Resource Planning 2

Elf Aquitaine
 Diversified French company with
interests in petroleum products,
chemicals, and pharmaceuticals.
 Experiencing problems with the flow of
critical information across and within its
12 business units.
 Ordering and production, and sales
forecasting and budgeting were not
integrated with one another.
Chapter 9: Enterprise Resource Planning 3
Elf Aquitaine continued
 Compounding the problem, each of the
12 business units developed a unique
approach for tracking and reporting
financial data.
 To address these problems and better
integrate the flows of data, Elf Atochem
decided to implement SAP’s R/3 ERP
system.
Chapter 9: Enterprise Resource Planning 4
Elf Aquitaine continued
 Elf Atochem chose to focus on four key
processes: materials management,
production planning, order
management, and financial reporting,
rather than trying to implement ERP
across the entire organization.
 Decided to implement the system in
one business unit at a time.
Chapter 9: Enterprise Resource Planning 5
Elf Aquitaine continued

 Using this phased implementation

approach, Elf Atochem was able to roll
out its ERP system ahead of schedule
and under budget.
 The primary benefit Elf Atochem has
achieved is that it now has the real-
time information needed to link sales
and production planning.
Chapter 9: Enterprise Resource Planning 6
National Semiconductor

 National Semiconductor’s CIO, has a

rather non-traditional view of the role
of IT.
 Rather than viewing IT as a support
function, IT is part of the business that
creates technology solutions that in
turn position the company to capitalize
on business opportunities.
Chapter 9: Enterprise Resource Planning 7
National Semiconductor continued
 Maintaining the existing legacy systems left
little time or money for new systems
development.
 National decided to focus its efforts on three
key areas: purchasing, inventory
management, and maintenance management.
 Considered adopting SAP’s R/3 system.
 In the end National chose IFS as its ERP
vendor.

Chapter 9: Enterprise Resource Planning 8

MRP for Dependent Demand

Chapter 9: Enterprise Resource Planning 9

MRP for Dependent Demand:
Background
 Independent Demand
 automobiles, televisions, cartons of ice cream
 demand often occurs at constant rate
 Dependent Demand
 most raw materials, components, and subassemblies
 demand often occurs in lumps
 Materials Requirements Planning (MRP)
 designed when lumps in demand are known about
before hand

Chapter 9: Enterprise Resource Planning 10

Constant and Lumpy Demands

Chapter 9: Enterprise Resource Planning 11

Relationship Between Finished Item Inventory and
Raw Material/Subassembly Item Inventory (ROP)

Chapter 9: Enterprise Resource Planning 12

Relationship Between Finished Item Inventory and
Raw Material/Subassembly Item Inventory (MRP)

Chapter 9: Enterprise Resource Planning 13

The Boardsports Company

Component Lead Time

Sidewalk Special 1 week
Fiberglass board 3 weeks
Wheel assembly 1 week
Wheel mount stand 4 weeks
Wheel 1 week
Locknut 1 week
Spindle 2 weeks
Chapter 9: Enterprise Resource Planning 14
Skateboard Product Tree

Chapter 9: Enterprise Resource Planning 15

Material Requirements of
Sidewalk Special

Fiberglass boards: 1  number of specials

Wheel assemblies: 2  number of specials
Wheels: 2  number of wheel assemblies
Spindles: 1  number of wheel assemblies
Locknut: 2  number of wheel assemblies
Wheel mount stand: 1  number of wheel
assemblies

Chapter 9: Enterprise Resource Planning 16

Material Required to Produce 50
Sidewalk Specials

Fiberglass boards: 1  number of specials = 1  50 = 50

Wheel assemblies: 2  number of specials = 2  50 = 100
Wheels: 2  number of wheel assemblies = 2  100 = 200
Spindles: 1  number of wheel assemblies =1  100 = 100
Locknut: 2  number of wheel assemblies = 2  100 = 200
Wheel mount stand:
1  number of wheel assemblies = 1  100 = 100

Chapter 9: Enterprise Resource Planning 17

 Delivery 50 Sidewalk Specials in
Week 10
Week
1 2 3 4 5 6 7 8 9 10
Sidewalk Specials 50
Date needed 50
Boards Order date 50 3 week lead time
Date needed 100
Wheel assembly Order date 100
Date needed 200
Wheels Order date 200
Date needed 100
Spindles Order date 100
Date needed 100
Mounting stands Order date 100
Date needed 200
Locknuts Order date 200

Chapter 9: Enterprise Resource Planning 18

Time-Scaled Assembly Chart for
Skateboard

Chapter 9: Enterprise Resource Planning 19

The Mechanics of MRP

Chapter 9: Enterprise Resource Planning 20

Primary Inputs to MRP System

 Master Production Schedule

 Bill of Materials File
 Inventory Master File

Chapter 9: Enterprise Resource Planning 21

Schematic of MRP System

Chapter 9: Enterprise Resource Planning 22

Master Production Schedule

 Based on actual customer orders and

predicted demand
 Indicates when each ordered item will
be produced

Chapter 9: Enterprise Resource Planning 23

Bill of Materials (BOM)
 Indicates all the raw materials,
components, subassemblies, and
assemblies required to produce an item
 Shows way a finished product or parent
item is put together from individual
components
 Parent item shown at highest level or
level zero

Chapter 9: Enterprise Resource Planning 24

Bill of Materials continued

 Parts that go into parent item are

called level 1 components and so on
 Production planners explode BOM for
level zero item to determine the
number, due dates, and order dates of
subcomponents

Chapter 9: Enterprise Resource Planning 25

Product Structure Tree

Chapter 9: Enterprise Resource Planning 26

Inventory Master File
 Detailed information regarding the quantity of
each item, on hand, on order committed to
use in various time periods
 MRP system using inventory master file to
determine the quantity available for use in a
given period
 If sufficient items not available, the system
includes the item on the planned order
release report

Chapter 9: Enterprise Resource Planning 27

 Low-Level Coding

Original product tree Low-level-coded product tree

structure structure

Chapter 9: Enterprise Resource Planning 28

MRP System Outputs
 Order Action Report
 which orders are to be released and
canceled during the current time period
 Open Orders Report
 which orders to expedite or deexpedite
 Planned Order Release Report
 time-phased plan for orders to be
released in future time periods
Chapter 9: Enterprise Resource Planning 29
MRP Computations
 Process all items in BOM level-by-level
 For each item at a level
 determine time phased gross requirements
 subtract on-hand and on-order amounts from
gross requirements to determine net
requirements
 apply lot-sizing rule to determine lot size
 offset the order release for lead time yielding
time-phased planned order releases

Chapter 9: Enterprise Resource Planning 30

MRP Computations continued

Net requirements for planning period = gross requirements

for planning period - planned on hand at planning period

Planned on hand at planning period = current on hand +

scheduled receipts prior to planning period - scheduled
requirements prior to planning period

Chapter 9: Enterprise Resource Planning 31

MRP Computations continued
Zero-Level
Week 1 2 3 4 5 6 7 8 9 10 11 12
Gross requirements 50 150 50 100 100
On hand 400 400 400 350 350 350 200 200 200 150 50 50 50
Net requirements -- -- -- -- -- -- -- -- -- -- -- 50
Planned order receipts 50
Planned order releases 50
Lead time = 3 weeks

Level 1
Week 1 2 3 4 5 6
9 7
10 11 8 12
Gross requirements 50 200
On hand 50 50 50 100 100 100 100 100 100 100 50 100
Net requirements 150
Planned order receipts 50
Planned order releases 250
Lead time = 4 weeks

Chapter 9: Enterprise Resource Planning 32

MRP Extensions

Chapter 9: Enterprise Resource Planning 33

Capacity Requirements Planning

 Capacity Using Overall Factors

 production standards used to convert MPS
into loads on each work center
 loads assumed to fall in same period as
finished goods in MPS
 Bills of Capacity
 same as capacity using overall factors but
instead of using historical ratios, uses the
BOM and routing sheets

Chapter 9: Enterprise Resource Planning 34

Enterprise Resource Planning (ERP)

 MRP II extends MRP systems to share

information with other functional areas
 Key component of MRP II is storing
operational information centrally
 ERP systems seek to integrate all business
activities and processes throughout the
organization
 Goal is to provide real-time information to all
employees that need it

Chapter 9: Enterprise Resource Planning 35

Typical ERP System

Chapter 9: Enterprise Resource Planning 36

The ERP Industry

 Forrester Research estimates that the

overall market for ERP software and
services was $21 billion in 2004.
 Estimates are overall spending on ERP
systems will increase 4.2% annually
through 2008, spending on maintenance
will increase at almost double this rate,
or 7% annually through 2008.

Chapter 9: Enterprise Resource Planning 37

Figure 9.12 Market share (based on 2004 revenues) of five top ERP
vendors.

Other, 18.7%
SSA Global,
3.3%
Microsoft, 3.4% SAP, 44.0%

Sage Group,
6.1%
Oracle, 24.6%

Chapter 9: Enterprise Resource P 38

lanning
Implementing ERP Systems
 Key drivers for the strong interest in
ERP include:
 The desire to standardize and improve
business processes.
 The desire to integrate the organization’s
existing information systems.
 The need for better and more timely
information.
 The need to comply with Sarbanes-Oxley.
Chapter 9: Enterprise Resource Planning 39
Implementing ERP Systems
continued
 One to three years to implement an ERP system.
 Actual costs of implementing an ERP are driven by a
number of factors including:
 The number of employees that will be using the system.
 The number of modules that will be implemented.
 The extent to which the organization attempts to integrate
its ERP system with an internal intranet.
 How much the organization’s processes must be modified
to conform with the ERP system.
 The amount of consulting and training required
 The extent to which the organization’s existing data must
be converted to conform to the data requirements of the
new ERP system.
Chapter 9: Enterprise Resource Planning 40
Implementation Approaches
 The “Big Bang” approach: this approach
organizations implement the new ERP
system all at once and scrap their existing
legacy systems.
 The “United Federation” approach: this
approach business units/divisions are free to
implement independent systems but
common processes such as financial
reporting are linked across the enterprise.
 The “Test the Waters” approach: focus of this
approach is on a few key processes.

Chapter 9: Enterprise Resource Planning 41

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Chapter 9: Enterprise Resource Planning 42