1a-2 Enterprise Resource Planning A comprehensive software approach to support decisions concurrent with planning and controlling the business. ERP systems are, first and foremost, integrated.
1a-3 Agenda What is ERP?Connecting functional units with ERPThe need for standardizationSupport of MPC decisionsTransaction processingPerformance metricsThe ERP experience
1a-4 What is ERP? ERP software is Multifunctional Integrated Modular Able to facilitate MPC activities
1a-5 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
1a-6 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
1a-7 Integrated Data entered by one functional area updates all other functional areas Eliminates reposting of data (errors) Ensures a common vision
1a-8 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
1a-9 ForecastingProduction planning Material planning Inventory management MPC Activity Support
1a-10 Process Standardization Without standard terminology, integration is impossible What is demand? What is inventory? How are exchange rates determined? What transfer costs apply (for internal transactions)? What labor rates are applied?
1a-11 Decision Support Helping users make decisions about running the business People make the decisions, software provides them with better tools and information
1a-12 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
1a-13 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
1a-14 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
1a-15 Supply Chain Metrics Source: Supply Chain Council MeasureDescriptionBest-in- Class Average Delivery performance Percentage of orders shipped according to schedule 93%69% Fill rate by line item Percentage of actual line items filled97%88% Perfect order fulfillment Complete orders shipped on time92.4%65.7% Order fulfillment lead time Time from when an order is placed until it is received by the customer 135 days225 days Warranty costWarranty expenses as a % of revenue1.2%2.4% InventoryDays of supply held in inventory55 days84 days Cash-to-cash cycle time Time required to turn cash used to purchase raw materials into cash received from customers 35.6 days99.4 days Asset turnsMeasure of how many times per year assets are used to generate revenue 4.7 turns1.7 turns
1a-16 Cash-to-Cash Cycle Time Integrates the finance function with purchasing, manufacturing, and sales/distribution Procurement cycle Manufacturing cycle Sales and distribution cycle Purchase cost of material Accounts payable Raw materials inventory Work-in-process Finished goods inventory Distribution inventory Accounts receivable Cash-to-cash cycle time = Inventory days of supply + Days of sales outstanding – Average payment period for material
1a-17 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
1a-18 Calculating Cash-to-Cash Time Average daily sales (S d ) Accounts receivable days (AR d ) Average daily cost of sales (C d ) Average days of inventory (I d ) Accounts payable cycle time (AP d ) Cash-to-cash cycle time
1a-19 Cash-to-Cash Example 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
1a-20 The ERP Experience Eli Lilly and Company Integration of a global company Process improvement Simplified training Strategic direction Organizational flexibility Set of global policies
1a-21 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.
1a-22 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.
1a-23 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 (S d ) of $200,000, current inventory (I) of $1,000,000, and cost of sales (CS) of 50%, what is the average days of inventory (I d )? 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