Enterprise Resource Planning
MPC 6
thEdition
Chapter 1a
Enterprise Resource Planning
A comprehensive software approach to support decisions concurrent with
planning and controlling the business.
ERP systems are, first and foremost,
integrated.
Agenda
What is ERP?
Connecting functional units with ERP The need for standardization
Support of MPC decisions Transaction processing
Performance metrics
What is ERP?
¢
ERP software is
l
Multifunctional
l
Integrated
l
Modular
l
Able to facilitate MPC activities
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
ERP Scope
Manufacturing and logistics
Manufacturing planning and
control
Sales and operations planning (front end) Material and capacity
planning (engine) Material and vendor
management (back end)
Enterprise resource planning
Enterprise planning models Enterprise performance
measures Data warehousing Report generation
Transaction processing
Human resource management
Finance
Sales and marketing
Integrated
Data entered by one functional area updates all other functional areas
Eliminates reposting of data (errors)
Ensures a common
vision
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
Forecasting Production planning
Material planning Inventory management MPC Activity
Support
Process Standardization
¢
Without standard terminology, integration is impossible
l
What is demand?
l
What is inventory?
l
How are exchange rates determined?
l
What transfer costs apply (for internal
transactions)?
Decision Support
¢
Helping users make decisions about running the business
l
People make the decisions, software
provides them with better tools and
information
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
Performance Metrics
Functional Silos – Each area is responsible for optimizing its own operation, with no consideration
for how the overall firm is affected
Purchasing pursues cost
rather than quality
Manufacturing builds long runs rather
than
responding to customers
Distribution focuses on cost of delivery
stages instead of total system
costs
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
Supply Chain Metrics
Source: Supply Chain Council
Measure Description Best-in-
Class
Average
Delivery performance
Percentage of orders shipped according to schedule
93% 69%
Fill rate by line item
Percentage of actual line items filled 97% 88%
Perfect order fulfillment
Complete orders shipped on time 92.4% 65.7%
Order fulfillment lead time
Time from when an order is placed until it is received by the customer
135 days 225 days
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
cycle time
Time required to turn cash used to purchase raw materials into cash received from
customers
35.6 days 99.4 days
Asset turns Measure of how many times per year assets 4.7 turns 1.7 turns
Cash-to-Cash Cycle Time
¢
Integrates the finance function with
purchasing, manufacturing, and sales/
distribution
Procurement
cycle Manufacturing
cycle
Sales and distribution cycle
Cash-to-cash cycle time = Inventory days of supply + Days of sales outstanding – Average payment period for material
ERP View of Cash-to-Cash Time
ERP database Accounts payable
Inventory
Cost of sales
Sales
Accounts receivable Purchasing
Manufacturing
Sales and distribution
Cash-to-cash cycle time
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)
d Sd = S
ARd = AR Sd
CS S Cd = d
d
d C
I = I
d
d C
AP = AP
Cash-to-Cash Example
000 , 30 34
000 , 020 ,
1 =
=
= d Sd S
ARd = AR
Sd = 200, 000
34000 = 5.88 days 400 , 20 )
6 . 0 ( 000 ,
34 =
=
= S CS Cd d
C days I I
d
d 19.6
400 , 20
000 ,
400 =
=
=
C days AP AP
d
d 7.84
400 , 20
000 ,
160 =
=
=
days AP
I AR
time cycle
cash to
Cash− − = d + d − d = 5.88+19.6−7.84 =17.64
Sales over last 30 days = $1,020,000 Accounts receivable = $200,000
Inventory value = $400,000
Cost of sales = 60% of total sales Accounts payable = $160,000
The ERP Experience
¢
Eli Lilly and Company
l
Integration of a global company
l
Process improvement
l
Simplified training
l
Strategic direction
l
Organizational flexibility
l
Set of global policies
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.
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.
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
