• What are enterprise resource planning (ERP) systems and why are they important?
• How are supply chains enabled and improved via ERP systems?

400 word response

Jacobs, F. R. & Chase, R. B. (2014). Operations and Supply Chain Management (14^th ed). New York, NY: McGraw-Hill

The term enterprise resource planning (ERP) can mean different things, depending on one’s viewpoint. From the view of managers in a company, the emphasis is on the word
planning; ERP represents a comprehensive software approach to support decisions concurrent with planning and controlling the business. On the other hand, for the information technology community, ERP is a term describing a software system that integrates application programs in finance, manufacturing, logistics, sales and marketing, human resources, and other functions in a firm. This integration is accomplished through a database shared by all the functions and data-processing applications. ERP systems typically are very efficient at handling the many transactions that document the activities of a company. For our purposes, we begin by describing our view of what ERP should accomplish for management, with an emphasis on planning. Following this, we describe how the ERP software programs are designed and then provide points to consider in choosing an ERP system. Our special interest is in how the software supports supply chain planning and control decisions.

exhibit 17.1

Major ERP Vendors

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ERP systems allow for integrated planning across the functional areas in a firm. Perhaps more importantly, ERP also supports integrated execution across functional areas. Today, the focus is moving to coordinated planning and execution across companies. In many cases, this work is supported by ERP systems.

Consistent Numbers

ERP requires a company to have consistent definitions across functional areas. Consider the problem of measuring demand. How is demand measured? Is it when manufacturing completes an order? When items are picked from finished goods? When they physically leave the premises? When they are invoiced? When they arrive at the customer sites? What is needed is a set of agreed-on definitions that are used by all functional units when they are processing their transactions. Consistent reporting of such measures as demand, stockouts, raw materials inventory, and finished goods inventory, for example, can then be accomplished. This is a basic building block for ERP systems.

Strategy

Companies implementing ERP strive to derive benefits through much greater efficiency gained by an integrated supply chain planning and control process. In addition, better responsiveness to the needs of customers is obtained through the real-time information provided by the system. To better understand how this works, we next describe features of ERP software.

Software Imperatives

There are four aspects of ERP software that determine the quality of an ERP system:

1.The software should be multifunctional in scope with the ability to track financial results in monetary terms, procurement activity in units of material, sales in terms of product units and services, and manufacturing or conversion processes in units of resources or people. That is, excellent ERP software produces results closely related to the needs of people for their day-to-day work.

2.The software should be integrated. 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 updated as well. This eliminates the need for reposting data to the system. Integration also ensures a common vision—we all sing from the same sheet of music.

3.The software needs to be modular in structure so it can be combined into a single expansive system, narrowly focused on a single function, or connected with software from another source/application.

4.The software must facilitate basic planning and control activities, including forecasting, production planning, and inventory management.

An ERP system is most appropriate for a company seeking the benefits of data and process integration supported by its information system. Benefit is gained from the elimination of redundant processes, increased accuracy in information, superior processes, and improved speed in responding to customer requirements.

An ERP software system can be built with software modules from different vendors, or it can be purchased from a single vendor. A multivendor approach can provide the opportunity to purchase “best in class” of each module. But this is usually at the expense of increased cost and greater resources that may be needed to implement and integrate the functional modules. On the other hand, a single-vendor approach may be easier to implement, but the features and functionality may not be the best available.

Routine Decision Making

It is important to make a distinction between the transaction processing capability and the decision support capability of an ERP system. Transaction processing relates to the posting and tracking of the activities that document the business. When an item is purchased from a vendor, for example, a specific sequence of activities occurs. The solicitation of the offer, acceptance of the offer, delivery of goods, storage in inventory, and payment for the purchase are all activities that occur as a result of the purchase. The efficient handling of the transactions as goods move through each step of the process is the primary goal of an ERP system.

Transaction processing

This is the posting and tracking of the detailed activities of a business.

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A second objective of an ERP system is decision support. Decision support relates to how well the system helps the user make intelligent judgments about how to run the business. A key point here is that people, not software, make the decisions. The system supports better decision making. In the case of purchasing an item, for example, the amount to purchase, the selection of the vendor, and how it should be delivered will need to be decided. These decisions are made by professionals while ERP systems are oriented toward transaction processing. But over time, they evolve using decision logic based on parameters set in the system. For example, for items stored in inventory, the specific reorder points, order quantities, vendors, transportation vendors, and storage locations can be established when the items are initially entered in the system. At a later point, the decision logic can be revisited to improve the results. A major industry has been built around the development of bolt-on software packages designed to provide more intelligent decision support to ERP systems.

Decision support

This is the ability of the system to help a user make intelligent judgments about how to run the business.

LO17–2

Explain how ERP integrates business units through information sharing.

HOW ERP CONNECTS THE FUNCTIONAL UNITS

A typical ERP system is made up of functionally oriented and tightly integrated modules. All the modules of the system use a common database that is updated in real time. Each module has the same user interface, similar to that of the familiar Microsoft Office products, thus making the use of the different modules much easier for users trained on the system. ERP systems from various vendors are organized in different ways, but typically modules are focused on at least the following four major areas: finance, manufacturing and logistics, sales and marketing, and human resources.

One can see the evolution of ERP systems in much the same way as car models evolve at automobile manufacturers. Automobile manufacturers introduce new models every year or two and make many minor refinements. Major (platform) changes are made much less frequently, perhaps every five to eight years. The same is true of ERP software. ERP vendors are constantly looking for ways to improve the functionality of their software, so new features are often added. Many of these minor changes are designed to improve the usability of the software through a better screen interface or added features that correspond to the “hot” idea of the time. Major software revisions that involve changes to the structure of the database, changes to the network and computer hardware technologies, though, are made only every three to five years. The basic ERP platform cannot be easily changed because of the large number of existing users and support providers. But these changes do occur.

Exhibit 17.2 depicts the scope of ERP applications. The diagram is meant to show how a comprehensive information system uses ERP as its core or backbone. Many other software-based functions may be integrated with the ERP system but are not necessarily included in the ERP system. The use of more specialized software such as decision support systems can often bring significant competitive advantages to a firm. The following brief descriptions of typical module functionality give an indication of how comprehensive the applications can be.

Finance

As a company grows through acquisition, and as business units make more of their own decisions, many companies find themselves with incompatible and sometimes conflicting financial data. An ERP system provides a common platform for financial data capture, a common set of numbers, and processes, facilitating rapid reconciliation of the general ledger. The real value of an ERP system is in the automatic capture of basic accounting transactions from the source of the transactions. The actual order from a customer, for example, is used not only by manufacturing to trigger production requirements, but also becomes the information for updating accounts payable when the order is actually shipped.

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exhibit 17.2

The Scope of ERP Applications

Manufacturing and Logistics

This set of applications is the largest and most complex of the module categories. The system components discussed in this section of the book are concentrated in this area. Typical components include:

Process

•Sales and operations planning coordinates the various planning efforts including marketing planning, financial planning, operations planning, and human resource planning.

•Materials management covers tasks within the supply chain, including purchasing, vendor evaluation, and invoice management. It also includes inventory and warehouse management functions to support the efficient control of materials.

•Plant maintenance supports the activities associated with planning and performing repairs and preventative maintenance.

•Quality management software implements procedures for quality control and assurance.

•Production planning and control supports both discrete and process manufacturing. Repetitive and configure-to-order approaches are typically provided. Most ERP systems address all phases of manufacturing, including capacity leveling, material requirements planning, just-in-time (JIT), product costing, bill of materials processing, and database maintenance. Orders can be generated from sales orders or from links to an Internet site.

•Project management systems facilitate the setup, management, and evaluation of large, complex projects.

Sales and Marketing

This group of system components supports activities such as customer management; sales order management; forecasting, order management, credit checking configuration management; distribution, export controls, shipping, transportation management; and billing, invoices, and rebate processing. These modules, like the others, are increasingly implemented globally, allowing firms to manage the sales process worldwide. For example, if an order is received in Hong Kong, but the products are not available locally, they may be internally procured from warehouses in other parts of the world and shipped to arrive together at the Hong Kong customer’s site.

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Human Resources

This set of applications supports the capabilities needed to manage, schedule, pay, hire, and train the people who make an organization run. Typical functions include payroll, benefits administration, hiring procedures, personnel development planning, workforce planning, schedule and shift planning, time management, and travel expense accounting.

Customized Software

In addition to the standard application modules, many companies utilize special add-on modules that link to the standard modules, thus tailoring applications to specific needs. These modules may be tailored to specific industries such as chemical/petrochemical, oil and gas, hospital, or banking. They may also provide special decision support functions such as optimal scheduling of critical resources.

Even though the scope of applications included in standard ERP packages is very large, additional software will usually be required because of the unique characteristics of each company. A company generates its own unique mix of products and services that are designed to provide a significant competitive advantage to the firm. This unique mix of products and services will need to be supported by unique software capability, some of which may be purchased from vendors and some that will need to be custom designed. Customized software applications are also widely used to coordinate the activities of a firm with its supply chain customers and suppliers.

Data Integration

The software modules, as described earlier, form the core of an ERP system. This core is designed to process the business transactions to support the essential activities of an enterprise in an efficient manner. Working from a single database, transactions document each of the activities that compose the processes used by the enterprise to conduct business. A major value of the integrated database is that information is not reentered at each step of a process, thus reducing errors and work.

Transactions are processed in real time, meaning that as soon as the transaction is entered into the system, the effect on items such as inventory status, order status, and accounts receivable is known to all users of the system. There is no delay in the processing of a transaction in a real-time system. A customer could, for example, call into an order desk to learn the exact status of an order—or determine the status independently through an Internet connection. From a decision analysis viewpoint, the amount of detail available in the system is extremely rich. If, for example, one wishes to analyze the typical lead time for a make-to-order product, the analyst could process an information request that selects all of the orders for the product over the past three months, calculate the time between order date and delivery date for each order, and finally average the time for the whole set of orders. Analyses, such as this lead time, can be valuable for evaluating improvements designed to make the process more responsive, for example.

Real time

As soon as a transaction is entered the effect is known by all users of the system.

To facilitate queries not built into the standard ERP system software, a separate data warehouse is commonly employed. A data warehouse is a special program (often running on a totally separate computer) that is designed to automatically archive and process data for uses that are outside the basic ERP system applications. For example, the data warehouse could, on an ongoing basis, perform the calculations needed for the average lead time question. The data warehouse software and database is set up so that users may access and analyze data without placing a burden on the operational ERP system. This is a powerful mechanism to support higher-level decision support applications. See the nearby OSCM at Work box titled “Open Information Warehouse.”

Data warehouse

A special program that is designed to automatically capture and process data for uses that are outside the basic ERP system applications.

A good example of a company making use of a data warehouse is Walmart. Walmart is now able to put two full years of retail store sales data online. The data are used by both internal Walmart buyers and outside suppliers—sales and current inventory data on products sold at Walmart and Sam’s Club stores. Vendors, who are restricted to viewing products they supply, use a web-based extranet site to collaborate with Walmart’s buyers in managing inventory and making replenishment decisions. A vendor’s store-by-store sales results for a given day are available

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OSCM AT WORK

Open Information Warehouse

Any modern database will let you easily formulate an SQL query like “What sales did my company have in Italy in 1997?” A report generated in response to such a query could look like this:

REGION	Q1	Q2	Q3	Q4	TOTAL
Umbria	1,000	1,200	800	2,000	5,000
Toscana	2,000	2,600	1,600	2,800	9,000
Calabria	400	300	150	450	1,300
Total	3,400	4,100	2,550	5,250	15,300

But things get more complex if, for instance, we then want to use this answer as the basis for drilling down to look at the sales for different quarters and sales representatives in the various regions. Drilling down means descending through an existing hierarchy to bring out more and more detail.

In the following example, we drill down through the sales hierarchy (sales representatives in Toscana). Signore Corleone’s sales do not appear to have been affected by the holiday season in the third quarter.

SALES	Q1	Q2	Q3	Q4	TOTAL
S. Paolo	500	600	300	500	1,900
S. Vialli	700	600	200	700	2,200
S. Ferrari	600	700	400	700	2,400
S. Corleone	200	700	700	900	2,500
Total	2,000	2,600	1,600	2,800	9,000

At this point, you can switch to another dimension—for instance, from sales representative to product sold. This is often referred to as slice and dice.

PRODUCT	Q1	Q2	Q3	Q4	TOTAL
X-11	2,000	2,500	1,500	3,550	9,550
Z-12	1,400	1,600	1,050	1,700	5,750
Total	3,400	4,100	2,550	5,250	15,300

From the standpoint of a data analyst, it can now be useful to check sales of particular products in each region. SAP allows the end user to do this easily using the data warehouse approach implemented within the system.

Source: This example was taken from C. Heinrich and M. Hofmann, “Decision Support from the SAP Open Information Warehouse,” SAP website, www.sap.com.

to vendors by 4 A.M. the following day. The database is more than 130 terabytes in size. Each terabyte is the equivalent of 250 million pages of text. At an average of 500 pages per book, a terabyte is a half-million books. For Walmart as a whole, that is about 20 major university libraries.

LO17–3

Illustrate how supply chain planning and control fits within ERP.

HOW SUPPLY CHAIN PLANNING AND CONTROL FITS WITHIN ERP

ERP is concerned with all aspects of a supply chain, including managing materials, scheduling machines and people, and coordinating suppliers and key customers. The coordination required for success runs across all functional units in the firm. Consider the following simple example to illustrate the degree of coordination required.

Simplified Example

Ajax Food Services Company has one plant that makes sandwiches. These are sold in vending machines, cafeterias, and small stores. One of the sandwiches is peanut butter and jelly (PBJ). It is made from bread, butter, peanut butter, and grape jelly. When complete, it is wrapped in a standard plastic package used for all Ajax sandwiches. One loaf of bread makes 10 sandwiches, a package of butter makes 50 sandwiches, and containers of peanut butter and jelly each make 20 sandwiches.

Consider the information needed by Ajax for planning and control. First Ajax needs to know what demand to expect for its PBJ sandwich in the future. This might be

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forecast by analyzing detailed sales data from each location where the sandwiches are sold. Because sales are all handled by sales representatives who travel between the various sites, data based on the actual orders and sales reports provided by the reps can be used to make this forecast. The same data are used by human resources to calculate commissions owed to the reps for payroll purposes. Marketing uses the same data to analyze each current location and evaluate the attractiveness of new locations.

Freshness is very important to Ajax, so daily demand forecasts are developed to plan sandwich making. Consider, for example, that Ajax sees that it needs to make 300 PBJ sandwiches to be delivered to the sales sites this Friday. Ajax will actually assemble the sandwiches on Thursday. According to the usage data given earlier, this requires 30 loaves of bread, 6 packages of butter, and 15 containers of peanut butter and jelly. Freshness is largely dictated by the age of the bread, so it is important that Ajax works closely with the local baker because the baker delivers bread each morning on the basis of the day’s assembly schedule. Similarly, the delivery schedules for the butter, peanut butter, and jelly need to be coordinated with the vendors of these items.

Process

Ajax uses college students who work on a part-time basis to assemble the sandwiches. A student can make 60 sandwiches per hour and sandwiches must be ready for loading into the delivery trucks by 4:00 p.m. on the day prior to delivery. Our 300 sandwiches require five hours of work, so any one student doing this work needs to start at or before 11:00 a.m. on Thursday to make the sandwiches on time.

An ERP system is designed to provide the information and decision support needed to coordinate this type of activity. Of course, with our simplified example, the coordination is trivial, but consider if our company were making hundreds of different types of sandwiches in 1,000 cities around the world, and these sandwiches were sold at hundreds of sites in each of these cities. This is exactly the scale of operations that can be handled by a modern ERP system.

Precisely how all of these calculations are made is, of course, the main focus of this section of the book. All of the details for how material requirements are calculated, capacity is planned, and demand forecasts are made, for example, are explained in great detail.

SAP Supply Chain Management

In this section we see how SAP, a major ERP vendor, has approached the details of supply chain planning and control. Here, we are using SAP to show how one vendor organizes the functions. Other major vendors like JDA Software, Oracle, and Microsoft each have a unique approach to packaging supply chain software.

SAP divides its supply chain software into four main functions: supply chain planning, supply chain execution, supply chain collaboration, and supply chain coordination. Current information about products is on vendors’ websites, and readers are encouraged to download the white papers that describe a vendor’s current thinking. These publications are informative and indicate where a vendor will move in the future. Moreover, comparing/contrasting this information can be very educational—and help in making key choices as to which business processes can be supported by standard (plain vanilla) software.

The supply chain design module provides a centralized overview of the entire supply chain and key performance indicators, which helps identify weak links and potential improvements. It supports strategic planning by enabling the testing of various scenarios to determine how changes in the market or customer demand can be addressed by the supply chain. Here, for our simplified example of Ajax food services, we could evaluate the relative profitability of particular market channels and locations such as vending machines versus shops in train stations.

Collaborative demand and supply planning helps match demand to supply. Demand-planning tools take into account historical demand data, causal factors, marketing events, market intelligence, and sales objectives and enable the supply chain network to work on a single forecast. Supply planning tools create an overall supply plan that covers materials management, production, distribution and transportation requirements, and constraints. Here Ajax would be able to anticipate the demands for each kind of sandwich in each location and plan replenishments accordingly.

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SAP Supply Chain Execution

Materials management shares inventory and procurement order information to ensure that the materials required for manufacturing are available in the right place and at the right time. This set of applications supports plan-driven procurement, inventory management, and invoicing, with a feedback loop between demand and supply to increase responsiveness. In this set of applications, Ajax would plan for all the sandwich components to be delivered to the right places at the right times. Inventories might be maintained on some items such as peanut butter, while others such as bread might be planned on a just-in-time basis.

Collaborative manufacturing shares information with partners to coordinate production and enable everyone to work together to increase both visibility and responsiveness. These applications support all types of production processes: engineer-to-order, assemble-to-order, make-to-order, and make-to-stock. They create a continuous information flow across engineering, planning, and execution and can optimize production schedules across the supply chain, taking into account material and capacity constraints. Here Ajax might do joint planning with key suppliers and perhaps organize the planning of special promotions.

Collaborative fulfillment supports partnerships that can intelligently commit to delivery dates in real time and fulfill orders from all channels on time. This set of applications includes a global available-to-promise (ATP) feature that locates finished products, components, and machine capacities in a matter of seconds. It also manages the flow of products through sales channels, matching supply to market demand, reassigning supply and demand to meet shifts in customer demand, and managing transportation and warehousing. Clearly all these logistics activities are critical to Ajax in order to deliver fresh sandwiches in the right amounts.

SAP Supply Chain Collaboration

The inventory collaboration hub uses the Internet to gain visibility to suppliers and manage the replenishment process. Suppliers can see the status of their parts at all plants, receive automatic alerts when inventory levels get low, and respond quickly via the Web. The hub can also be integrated with backend transaction and planning systems to update them in real time. Here Ajax could provide real-time inventory views to its suppliers—not only of material suppliers, but also of downstream inventories (i.e., sandwiches).

Collaborative replenishment planning is particularly useful in the consumer products and retail industries. These applications allow manufacturers to collaborate with their strategic retail customers to increase revenue, improve service, and lower inventory levels and costs. They enable an exception-based collaborative planning, forecasting, and replenishment (CPFR) process that allows the firm to add retail partners without a proportional increase in staff. This set of applications would be particularly useful to Ajax as it grows its global business and adds new channels of distribution.

Vendor managed inventory (VMI) is a set of processes to enable vendor-driven replenishment that can be implement