Enterprise Resource

Planning
History of organizational
systems
 Calculation systems
 Functional systems

 Integrated systems
Calculation systems

 1950-80
 Single purpose

 Eliminate tedious human work

 Examples: Payroll, General ledger,

Inventory
 Technology used: Mainframes,
magnetic tapes, batch processing
Functional systems

 1975-20??
 Use computers to improve operations

 Applications: Human resources, order

entry, manufacturing resource
planning
 Technologies: Mainframes, PC’s,
LAN’s
Minicomputer
Integrated systems
or
Enterprise Resource
Planning System
 What is ERP?
It represented and represents a
comprehensive software (a data
base) approach to support
decisions in the enterprise
(concurrent with planning and
controlling the business)
It also describes a software
system that integrates application
programs in many functional
areas.
The integration is made through a
data base shared by all functions
and data processing applications
in the firm.
 Consistent Numbers
 ERP requires consistent definitions of
such measures as Demand, Stock-outs,
Raw Material, Work-in-Process, and
Finished Goods inventory.
 It should also include all costs
associated with inventories.
 How is ERP described?
 An enterprise wide set of management tools that
help balance supply & demand
 Contain the ability to link customers and suppliers
into a complete supply chain.
 Employ proven business procedures (best of breed)
for decision making.
 Provide high cross-functional integration.
 Enable people to run the business with high
customer service, lowering cost/inventories and
provide a foundation of e-commerce.
 Software imperatives
 Should be multifunctional in scope with the ability
to track financial results in $ terms, procurement in
units of material, etc.
 Should be integrated. A transaction should have all
other related functional components changed as
well.
 It should be modular in structure so that it can be
combined into a single system.
 It should facilitate classic manufacturing planning
and control (forecasting, SOP-Sale and Operations
Planning) activities.
 Savings in ERP
 Elimination of redundant processes

 Increased accuracy of information

 Superior processes (best of breed)

 Improved speed in responding to customer

requirements
 Routine decision making
goals
 An efficient handling of the transactions as goods
move through the process is a primary goal of an
ERP system.
 Another goal is to provide Decision Support (relates
to how well the system helps the user make
intelligent judgments about how to run the
business). There are several software packages that
help provide intelligent decision support to ERP
systems.
 Key considerations when
choosing ERP software
 Complexity of the business, degree of
vertical integration, internationalization.
 Size of the business
 Degree of functionality needed.
 Differences in the conversion system
(discrete manufacturing used or process
manufacturing or both, which is difficult to
accommodate with a single system).
 The uniqueness of the firm processes. Are
there unique costumer information requirements?
 Key considerations (Cont.)
 The alignment of the processes with the
needs of the firm. The alignment of the
manufacturing planning and control modules with the
needs of the firm. E.g.: are the mechanism for
aggregating demand for foresting purposes adequate?
 The capital available for implementing the
system.
 Computer hardware and telecommunications.
 Existing hardware compatible? Where is the
industry going? Need to be state of the art?
 How ERP connects the
functional units
 Modules are focused in four areas: Finance,
Procurement, Manufacturing & Logistics,
Sales & Marketing, Human Resources. Firms
make many minor changes and major ones
every 5-8 years.
 FINANCE An ERP system provides a
common platform for financial data capture
and a common set of processes that will
facilitate rapid reconciliation of the general
ledger .
 How ERP connects the
functional units
 MANUFACTURING AND LOGISTICS (MPC). It is
the largest and more complex. Components are:
• SOP coordinating marketing, operations, financial and
human resources planning
• Materials management, covering tasks within the
supply chain (purchasing, vendor evaluation and
invoice management).
• Plant maintenance
• Quality management
• Production planning and control
• Project management
 SALES AND MARKETING, This
group of systems support customer
management, sales order
management, forecasting, credit
checking configuration, distribution,
export controls, shipping,
transportation; billing, invoicing.
 Human Resources

 They include the systems necessary to:

Manage, Schedule, Pay, Hire, Train.
 Functions include payroll, benefits
administration, applicant data
administration, development planning,
workforce planning, schedule and shift
planning, time management, and travel
expense accounting.
 An ERP Example: Before
ERP
Orders
Parts
Sends report Customer
Demographic
Sales Dept. Files Customers

Checks for Parts

Calls back “Not in stock”
Accounting “We ordered the parts”
Files

Accounting
Sends report
Invoices
Sends report
accounting
Ships parts
Vendor
Warehouse
Order is placed
“We Need parts #XX”
with Vendor
Inventory
Purchasing Files
Files “We ordered the parts”
Purchasing
19
 An ERP Example: After
ERP
Orders
Parts Inventory Data
If no parts,
order is placed
Customers Sales Dept. through DB Accounting

Financial Data exchange;

Books invoice against PO

Order is submitted
to Purchasing. Database
Purchasing record Books inventory
order in DB against PO

Order is placed
with Vendor

Warehouse
Vendor Purchasing

Ships parts
20
And invoices accounting
 Customized Software
 In addition to the standard application
modules, many companies use add-on
modules such as APO (Advance Planning
and Optimizing) that allow the firm to
search for ‘optimal’ solutions.
 Other Customized software are widely used to
coordinate the activities of a firm with its
supply chain customers and suppliers.
 Who are the main ERP
vendors?

 Baan
 JD Edwards
 Oracle
 PeopleSoft
 SAP

22
 Performance Metrics to Evaluate
Integrated System Effectiveness

 From the database, transactions document each of

the activities that compose the processes used by
the firm to conduct business.
 Transactions are processed in real time.
 To facilitate queries not built into the standard
software, a separate data warehouse (100+
terabytes) is commonly employed. Many times it is
run independently of the ERP system so as not to
place a burden on the operating system.
 “Functional Silo” Approach –
Manufacturing Operating
Cycle

Procurement Manufacturing Sales/Distribution

Cycle Cycle Cycle

Raw materials inventory

Purchase cost of Distribution
Material Inventory
Work in progress
Accounts Payable Accounts
Finished Goods Inventory
Receivable
 Functional Silo Approach –
Manufacturing Operating
Cycle
 Purchasing – buy lowest price at the
specified quality (also assuring delivery
schedules, reliability, responsiveness).
 Manufacturing – make the product at the
lowest possible cost (minimum equipment
downtime, high equipment/labor utilization,
specified quality)
 Functional Silo Approach –
Manufacturing Operating Cycle
 Distribution – Move the product from the
manufacturing site to the customer at the
lowest possible cost (move materials into and
out of the firm – logistics). Should be
integrated with other objectives such as lower
inventories, faster response times, customer
service.
 What performance metrics evaluate
ERP system effectiveness? From
SC Council
Measure Best in Average
Description class

Delivery What percentage of orders shipped 93% 69%

performance to schedule
Perfect order How many orders filled and shipped 92.4% 65.7%
fulfillment on time
Order fulfillment Time from when order is placed to 135 225
lead time where it is received by customer days days
Warranty cost as Actual warranty expense/revenue 1.2 % 2.4 %
% revenue
Cash-to-cash Amount of time it takes to turn cash 35.6 99.4
cycle time used to purchase materials into days days
cash from customer
 Cash-to-cash cycle time

 Integrates
purchasing, manufacturing,
and sales/distribution.

 Operating cycle – time it takes to

convert cash outflows for raw
materials into cash inflows
 Calculation of cash-to-cash cycle
time
 Accounts payable – it is dependent on the
credit terms that purchasing negotiates with
suppliers, states the current money that the
firm owes its suppliers (Credit to the
company).
 Inventory account – value of the entire
inventory within the company (RM, WIP, FG,
Distribution inventory). Value depends on
quantities and the cost (depends on all three
areas – purchasing, manufacturing, and
sales)
 Calculation of cash-to-cash cycle
time

 Cost of sales – depends on costs that are

incurred throughout the firm. This is
expressed as a % of total sales (depends on
all the direct costs associated with making
and distributing the product).
 Sales are the total revenues for a period of
time.
 Accounts receivable are the amount owed by
its customers.
Calculating the cash-to-cash
time
1 How long does it take for a firm to
convert sales into cash?
Number of days in accounts receivable
Sd= S/d
S = sales over d days ($)
Sd= average daily sales ($/day)
 Calculating the cash-to-cash
time
2. Calculate the average days of accounts
receivable (# of days it will take to get my
sales back).
ARd = AR/Sd
where
AR = accounts receivable ($)
Sd= average daily sales ($/day)
ARd = average days number of
accounts receivable ($/Ave daily sales).
 Calculating the cash-to-
cash time
3. Calculate the inventory cycle time. This is the
number of days of inventory relative to the cost of
sales.
Cd = Sd*100*CS
Sd = average daily sales ($/day)
CS = Cost of sales as %
Cd = average daily cost of sales ($/day)

Id = I/Cd
I = Current value of total inventory
Id = average days of inventory
 Calculating the cash-to-cash
time
4. Calculate the average days of accounts payable.
APd = AP/Cd
where

AP accounts payable $
APd = average days of accounts payable
Cd = average daily cost of sales $/day
 Calculating the cash-to-cash
time
CCT = ARd + Id - APd

CCT = AR/Sd + [I/Cd - AP/Cd]

Sales (30 days – in 000) = $1,020

Acct Rec. at end = $ 200
Inv. Value at end = $ 400
Cost of sales = 60%
Accounts payable = $ 160
Sd=1020/30 = 34($/d) Cd = 34*0.6 = 20.4 ($/d)

CCT = 200/34 + 400/20.4 - 160/20.4

= 5.88 + 19.6 – 7.84 = 17.64 (d)
 Calculating the cash-to-cash time

CCT = ARd + Id - APd DELL Oct 2003 Annual

CCT = AR/Sd + I/Cd - AP/Cd

Sales (365 at end) = $ 35404

Accounts Receivable = $ 3142
Inv. Value at end = $358
Cost of sales = 82%
Accounts payable = $ 10201
Sd=35404/365 = 97 Cd = 97*0.82= 79.54

CCT = 3142/97 + 358/79.54 - 10201/79.54

 Calculating the cash-to-cash time

CCT = ARd + Id - APd GATEWAY Sep 2003 (9)

CCT = AR/Sd + I/Cd - AP/Cd

Sales (272 at end) = $ 2527

Accounts Receivable = $ 216
Inv. Value at end = $100
Cost of sales = 90%
Accounts payable = $ 248
Sd=2527/272 = 9.3 Cd = 9.3*0.9= 8.36

CCT = 216/9.3 + 100/8.36 - 248/8.36

Experience with ERP
 Eli Lilly
 Process improvement
• Customer service level
• Consistently meeting customer needs related to the
delivery of products.
• Goal to all customers is to fully satisfy valid orders
100% of the time.
• Order management and lead time definitions (p.
126)
 Training
 Information technology
 Organization flexibility
Lessons learned at Scotts
that can help others in ERP
 Ensure top management visible
support of the project.
 Hold the line on project scope and
management expectations
 Assign ownership of deliverables to
business leaders.
 Effective change management and
user training.
Lessons learned at Scotts
that can help others in ERP
 Have a solid project plan down to the
people level so that everybody is
accountable responsabile.
 Manage to critical path delivery dates
and make timely decisions.
 Get management performance
objectives and deliverables from the
start.
 A full time project team is required.
 Lessons learned at Scotts
that can help others in ERP
 Locate the project team together in an open
space.
 Avoid interfaces when possible and do not
change software source code from the
vendor.
 Always challenge consultants to do better
than the timelines.
 Ensure knowledge transfer from consultants
to internal employees.
Lessons learned at Scotts
that can help others in ERP

 Write procedures and ensure they are

part of end-user training
 When possible change processes
before technology.
 Do not underestimate the ‘people
change’ side of the question.
Other ERP principles
 To achieve efficiencies, redundant
transactions must be reduced.
 Data accuracy and efficiencies can be
realized if info is captured at the initial
entry.
 Computer hardware & implementing
software is only part. Processes need
to be changed so as to support the
ERP system.
Other ERP principles

 Company must define a comprehensive

set of performance measures together
with policies & goals that correspond to
those measures.
 IT economies of scale can be obtained
from the need to support fewer software
and hardware platforms with ERP
implementation.