Enterprise Resource PlanningIntegrated SystemChapter 4

Vollmann, Berry, Whybark & Jacobs

MPC

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:

le migliori prodotte) 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 (esempi: leggere pp.115-117).

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 (guadagni) 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 sistema

di trasformazione manifatturiera (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 (in pratica “soluzione dei conflitti”) of the general ledger (cioè “libro mastro”).

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 ?PORTAFOGLIO), 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.

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.

Data Integration

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 onere on the operating system.

“Functional Silo” forse nel senso che

evidenzia la serialità delle tre funzioni Approach – Manufacturing Operating Cycle

ProcurementCycle

ManufacturingCycle

Sales/DistributionCycle

Purchase cost of Material

Accounts Payable

Raw materials inventory

Work in progress

Finished Goods Inventory

Distribution Inventory

Accounts Receivable

Functional Silo Approach – Manufacturing Operating Cycle

Purchasing – buy lowest price at the specified quality (also assuring delivery schedules, reliability, responsiveness, cioè letteralmente “sensibilità”).

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 SCCouncil

Measure Description Best in

classAverage

Delivery performance

What percentage of orders shipped to schedule

93% 69%

Perfect order fulfillment

How many orders filled and shipped on time

92.4% 65.7%

Order fulfillment lead time

Time from when order is placed to where it is received by customer

135 days

225 days

Warranty cost as % revenue

Actual warranty expense/revenue 1.2 % 2.4 %

Cash-to-cash cycle time

Amount of time it takes to turn cash used to purchase materials into

cash from customer

35.6 days

99.4 days

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 row mat, WIP, FG finished goods, 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 ricavi 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 quanti giorni di vendita valgono I miei

crediti cioè quanto devo aspettare per recuperarli 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 quanti giorni di vendita vale l’attuale livello di scorte in termini di costo di produzione cioè quanto devo aspettare per recuperare il costo di produzione delle scorte

I = Current value (costo) of total inventory

Id = average days of inventory

Calculating the cash-to-cash time

4. Calculate the average days of accounts payable. quanti giorni di vendita vale il credito di cui ho goduto in termini di costo di produzione cioè quanti giorni di vendita ho prodotto con il credito di cui ho

goduto da parte dei fornitori

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 = quanti giorni devo aspettare per recuperare I crediti + quanti ne devo aspettare per recuperare il costo delle scorte - quanti ne recupero prima di pagare contanti ai fornitori

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

Sales (30 days – in 000) = $1,020Acct Rec. at end = $ 200Inv. Value at end = $ 400Cost 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) = $ 35404Accounts Receivable = $ 3142Inv. Value at end = $358Cost 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

= 32.39 + 4.5 – 128.25 = - 91.36

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) = $ 2527Accounts Receivable = $ 216Inv. Value at end = $100Cost 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

= 23.23 + 11.96 – 29.67 = 5.52

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.