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1A. Enterprise Resource Planning (ERP)

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.

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1A. Enterprise Resource Planning (ERP)

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  1. 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.

  2. Enterprise Resource Planning (ERP) JD Edwards Assignment: Access the websites of these leading ERP software vendors and learn their product offerings.

  3. ERP Systems (by Chen, 2001)Business Process Management Journal • Introduction • ERP Evolution • The Planning Issues • Future Trend and Challenges • Conclusion

  4. 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.

  5. 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.

  6. 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).

  7. 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

  8. 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)

  9. Market demand Production Marketing Finance Production Plan (SOP) Master Production Schedule Rough-cut Capacity Planning Capacity Requirements Planning Materials Requirements Plan (MRP) Shop-floor Systems Vendor Systems Figure 1 Resource Planning

  10. 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).

  11. Financials Receivable and payable Cash management General ledger Product-cost accounting Profitability analysis Executive information system Operations & Logistics Production planning Materials planning (MRP) Inventory management Quality management Project management Vendor evaluation Purchasing Shipping Sales and Marketing Order management Sales management Sales planning Pricing After-sales services ERP Customers Suppliers Human Resources Payroll Personal planning H/R time accounting Travel expenses Training Figure 2

  12. 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 internalresources, ERP strives to plan and schedule supplier resource as well, based on dynamic customer demands and schedule.

  13. 3. ERP Planning Issues • Assessing needs & choosing a “right” ERP system • Matching business process with ERP • Organizational requirements • Economic/strategic justification

  14. 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

  15. 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

  16. 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.

  17. 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.

  18. 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)

  19. Supply Chain Metrics Source: Supply Chain Council

  20. 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 Sales and distribution cycle Manufacturing cycle Procurement cycle • Purchase cost of material • Accounts payable • Raw materials inventory • Work-in-process • Finished goods inventory • Distribution inventory • Accounts receivable

  21. ERP View of Cash-to-Cash Time • ERP database Accounts payable Purchasing Inventory Cash-to-cash cycle time Manufacturing Cost of sales Sales Sales and distribution Accounts receivable

  22. Calculating Cash-to-Cash Time Average daily sales (Sd) Accounts receivable days (ARd) Average daily cost of sales (Cd) Average days of inventory (Id) Accounts payable cycle time (APd)

  23. Cash-to-Cash Example Sales over last 30 days = $1,020,000 Accounts receivable = $200,000 Cost of sales = 60% of total sales Inventory value = $400,000 Accounts payable = $160,000

  24. 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.

  25. 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%

  26. 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.

  27. Supply Chain Management Customer Relationship Management SCM CRM Enterprise (ERP) Customers Suppliers Figure. 3

  28. 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.

  29. 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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