ISTANBUL KÜLTÜR UNIVERSITY Faculty Of Engineering and Architecture                                       ISTANBUL KÜLTÜR UNIVERSITY Faculty Of Engineering and Architecture Industrial Engineering Department Lecture Notes ENTERPRISE RESOURCE PLANNING

Contents Section 1 : ERP - Business with ERP Section 2 : Marketing and Sales Section 3 : Production and Materials Management Section 4 : Accounting and Finance Section 5 : Introduction to SAP R/3 (the ERP software) Spring 2006

SECTION 1 Enterprise Resource Planning - Business with ERP Spring 2006

Business in the Digital Age Spring 2006

The Business Application Architecture Spring 2006

Companies in e-Competition A New Business Model Information Age Industrial Age Spring 2006

Business with ERP Businesses exist to make a profit Businesses strive to provide goods and services faster and cheaper than competition More efficient ways of accessing and sharing information will increase customer service and therefore profits Spring 2006

What is ERP offering? ERP is business process infrastructure ERP is a software mirror image of the major business processes of a firm, such as customer order fulfillment and manufacturing. ERP software automates and integrates the basic processes of a firm, from finance to the shop floor, and eliminate complex, expensive links between computer systems that were never meant to talk to each other. provide interorganizational & intraorganizational collaboration & information sharing Spring 2006

ERP Business Technology architecture Business Process Workflow Management Functional Information Management Marketing, Operations, HRM, etc. Decision Support Models and Tools Data Management Spring 2006

ERP Functional Architecture Information Systems Modules Human Resources Management Manufacturing Management Financial Management Accounting Marketing Management Workflow Management Spring 2006

Motivation for Implementing ERP Achieving and maintaining competitive advantage requires better information management: Information Quality Information Reliability Information Access Information Sharing Spring 2006

Firms View ERP As a System: to provide better information management to transform the competitive space to transform relationships between their customers their suppliers their competitors Spring 2006

Several factors led to development of ERP: speed and power of hardware increased, cost and size decreased client/server architecture sophisticated software development growth of business size, complexity, and competition Manage company-wide business operations Uses a common database and shared management reporting tools Spring 2006

Business Processes Managers now think in terms of business process Take the customer’s perspective Spring 2006

Logistics in business, the organized movement of materials and, sometimes, people. The term was first associated with the military but gradually spread to cover business activities. Separate activities or functions, all of which fall under a business firm's logistics “umbrella,” include customer service, demand forecasting, documentation flow, interplant movements, inventory management, order processing, packaging, parts and service support, plant and warehouse site selection, production scheduling, purchasing, returned products, salvage… Logistics in military science, all the activities of armed-force units in roles supporting combat units, including transport, supply, signal communication, medical aid, and the like. Components of Logistics It is useful to distinguish four basic elements or functions of logistics: supply, transportation, facilities, and services. (A fifth, management or administration, is common to all organized human activity.) All involve the provision of needed commodities or assistance to enable armed forces to live, move, communicate, and fight. Spring 2006

For this, company needs to Make sure functional areas are integrated Ensure information on customer configuration is up-to-date Ensure manufacturing has configuration info. from sales Ensure that, if financing is required, information from sales is available in accounting Spring 2006

Functional areas of operation Marketing and Sales Production and Materials Management Accounting and Finance Human Resources Spring 2006

Functional Area Information Systems Potential inputs and outputs for each functional area Different kinds of data and usage of data Spring 2006

Marketing and Sales Determine pricing Take customer orders Create sales forecast Do market research Promote products and/or services Spring 2006

Production and Materials Management Production Planning Product Information Need accurate forecasts from Marketing and Sales Compare costs with Accounting Spring 2006

Accounting and Finance Record transactions Summarize data Spring 2006

Human Resources Recruit Train Evaluate Compensate Retain Spring 2006

The Manufacturing Roots of ERP Materials Requirements Planning (MRP) Electronic Data Interchange (EDI) MRP - II Downsizing and reorganization drove the impetus for ERP Spring 2006

ERP and SAP’s R/3 Software to allow all business areas to be integrated Interactive and real-time processing Users interact with computer screen, not printed data Initially introduced R/2 Open architecture Access common database Spring 2006

Spring 2006

Spring 2006

ERP Significance Global integration Eliminates updating and repairing separate computer systems Allows managers to manage, not just monitor Spring 2006

Cost of ERP Large company $50-500 Million $30 million in software $200 million in consulting $ millions for hardware Implementation: 4-6 years Medium sized companies $10-20 million 2 year implementation Spring 2006

Questions about ERP Is it for every company? Is the software inflexible? How much profit should you expect? Why do some have more success? Spring 2006

SECTION 2 Marketing and Sales Spring 2006

Marketing Personnel make decision on : What products should we produce? How much of each product should we produce? How are our products best promoted and advertised? How should our products be distributed? What price should we charge? Spring 2006

Fitter Snacker’s Sales Process Quote Sales Order Pick, Pack and Ship Invoice Payment Returns Warehouse Accounting Receiving Fitter Snacker’s Sales Process Spring 2006

Problems with Fitter Snacker’s Sales process: Sources: Three unintegrated systems Sales Order System Warehouse System Accounting System Manual handling of transactions Information not available in “real time” Spring 2006

Sales and Distribution with ERP SAP Sales and Distribution Process Pre-Sales Activities Sales Order Processing Delivery Billing Inventory Sourcing Payment Spring 2006

Inquiry or Quote (binding)(araştır & fiyat ver) Marketing Activities Pre-Sales Activities Inquiry or Quote (binding)(araştır & fiyat ver) Marketing Activities Tracking Contacts Sales Calls Visits Mailings Spring 2006

Sales Order Processing Activities required to record a sales order Incorporate data from inquiry or quote Automated Pricing and Discounting Automate Credit Check Spring 2006

Inventory Sourcing Check of inventory, orders and production to see if order can be delivered when customer desires Includes shipping and considers weekends/holidays Spring 2006

Delivery Releasing documents to warehouse to initiate pick, pack and ship Sequenced and grouped for warehouse operation efficiency Materials Management module carries out picking, packing and shipping Spring 2006

Billing Sales order data copied to invoice Can be printed and mailed, faxed or transmitted electronically Accounting records updated Spring 2006

Payment Payment may be physical check or electronic Cash debited and customer account credited Quick processing avoids credit check problems Spring 2006

Sales Order Entry in SAP R/3 Sold-to party P.O. Number Required Delivery Date Material Order Quantity Spring 2006

Master Data Master data is stored in a central database that is accessed by all modules Customer Master Data and Material Master Data are primary data sources for Sales Order Processing Spring 2006

Document Flow in SAP R/3 All documents related to original sales order Spring 2006

Document Flow Sales order process creates numerous documents Sales Order - Invoice - Delivery - Payment - Goods Issue - RMA Document Flow links all documents related to a sales order Spring 2006

Customer Relationship Management (CRM) ERP provides means to manage all data relating to a customer to improve the quality of the interaction CRM Activities include: One-to-One Marketing Sales Force Automation Sales Campaign Management Marketing Encyclopedias Call Center Automation Spring 2006

CRM Benefits Lower Costs due to better use of sales and marketing resources Higher Revenue by improving the effectiveness of marketing efforts Improved strategy and performance measurement by changing management and staff focus CRM software builds on ERP data to improve marketing effectiveness Spring 2006

Production and Materials Management at Fitter Snacker Must answer the following questions: How much of each bar should be produced? What quantities of raw materials should be ordered? When should raw materials be ordered Spring 2006

General Approaches to Production Make-to-stock: Items produced in anticipation of orders Make-to-order: Items produced to meet specific customer orders Assemble to order: Final product assembled from make-to-stock items Spring 2006

Fitter Snacker Manufacturing Process Raw Material Warehouse Mixer Form Bake Pack Finished Goods Warehouse Snack Bar Line Spring 2006

Fitter Snacker Production Problems Communications Marketing does not share data with production (sales promotions and large, unexpected orders) Inventory True inventory status not known No real-time data on actual sales Accounting and Purchasing Difficulty forecasting raw material and labor costs Adjusting accounts for actual vs. standard costs time consuming and done infrequently MRP allows plant manager to plan production and raw materials for many periods. It works backwards from a sales forecast to create a production schedule. From there, given supplier lead times and finished product recipes, MRP works backwards to schedule raw material purchases. This is impossible to figure w/o a computer. Spring 2006

SECTION 3 Production and Materials Management Spring 2006

Production Planning Process toplu Work from sales forecast to create aggregate production plan Break down aggregate plan into more specific plans Use production plan to determine raw material requirements Spring 2006

SAP R/3 Approach to Production Planning Sales and Operations Planning Demand Management MRP Detailed Scheduling Sales Forecasting Purchasing Production Spring 2006

Sales Forecasting Spring 2006

Sales and Operations Planning Spring 2006

Demand Management Spring 2006

Material Requirement Planning - MRP Bill of Material (BOM) MRP Record Spring 2006

ERP in Supply Chain Management $ $ $ $ $ Goods Goods Goods Goods Goods Raw Materials Customer Supplier Manufacturer Wholesaler Retailer Information Information Information Information Information Spring 2006

Supply Chain Management and ERP ERP not required for Supply Chain Management (SCM) ERP can facilitate sharing information in real time Use of internet can reduce communication costs Spring 2006

Providing Production Data to Accounting Production data does not get entered into an ERP system directly Many methods of gathering shop floor data are available ERP allows shop floor data to be collected once for production and accounting purposes, and data is consistent in both areas Spring 2006

SECTION 4 Accounting and Finance Spring 2006

Accounting and Finance Accounting system data is used: By decision-makers throughout a company to plan and manage day-to-day activities By managers to make long-range operating forecasts By accountants to generate a company’s financial statements and other reports Spring 2006

Basic Financial Statement Balance Sheet: shows company’s financial health at a point in time Income Statement: shows a company’s sales, cost of sales and profit or loss for a period. “Closing the books” means checking to see that financial statements are accurate and up to date. Usually done quarterly or monthly. Spring 2006

Using ERP for Accounting and Finance Unintegrated systems usually require research effort by accountants to assemble required data ERP systems capture accounting data in real time as business transactions occur Transfer of finished goods from assembly line to warehouse results in changes to Accounting records as well as Materials Management records. Spring 2006

SAP R/3 Modules and Accounting Sales and Distribution (SD) Production Planning (PP) Materials Management (MM) Financial Accounting (FI) Controlling (CO) Human Resources (HR) Asset Management (AM) MRP allows plant manager to plan production and raw materials for many periods. It works backwards from a sales forecast to create a production schedule. From there, given supplier lead times and finished product recipes, MRP works backwards to schedule raw material purchases. This is impossible to figure w/o a computer. Spring 2006

Credit Management Companies routinely sell to customers on credit Sellers must manage credit to avoid default by customers Sellers manage customer credit using credit limits Accurate and timely data required to manage credit Spring 2006

Product Profitability Analysis Accurate data required to properly determine the profitability of a company’s products Inaccurate data can result from: Inconsistent record keeping Inaccurate inventory-costing systems Problems consolidating data from subsidiaries Spring 2006

Inconsistent Record Keeping Companies may have divisions that keep records in different systems or with different structures Summarizing the data to provide management summaries may require additional processing by middleware systems (e.g. spreadsheets) Spring 2006

Inventory Costing A manufactured items costs consist of three elements: Cost of raw materials Cost of direct labor Cost of overhead (utilities, general factory labor, supplies, manager’s salaries, storage and insurance costs) Spring 2006

Inventory Costing Direct costs (material and direct labor) can be associated with products or batches of materials relatively easily Indirect costs (overhead) are difficult to assign to particular products or batches, but are a significant portion of a product’s cost Spring 2006

Distribution of Indirect Costs Indirect costs are frequently allocated based on machine hours or labor hours used to make a product Standard costs are used to adjust accounting records for changes due to production and sale of products Cost variances must be recorded to reconcile actual and standard costs Spring 2006

ERP and Inventory Cost Accounting Adjusting accounting records for cost variances can be difficult with unintegrated information systems ERP systems are configured with methods for computing variances so that the process is automated Real time data in ERP systems means that accurate cost data will be available Spring 2006

Activity-Based Costing (ABC) and ERP In ABC, “activities” associated with overhead-cost generation are used to allocate costs more precisely Defining “activities” to relate overhead costs to products can be difficult ABC requires more record keeping, which can be simplified using an ERP system Spring 2006

Problems in Closing Books Currency Translation – Daily fluctuation of exchange rates more easily handled by ERP systems Intercompany Transactions – Companies cannot make profits by selling products to themselves, so profits can’t be recorded from intercompany sales Spring 2006

Management Reporting with ERP Document Flow allows for better management of the numerous transactions that are related to a customer order Spring 2006

Management Reporting and Analysis Storing accounting records in a database allows for easier analysis Data warehousing provides separate, summarized data for reporting to avoid disruption of transaction processing SAP R/3 provides specialized information systems for analysis (LIS, SIS) Spring 2006

SECTION 5 ERP Software : Introduction to SAP R/3 Spring 2006

SAP – an ERP Software SAP AG produced an ERP program called R/3 Purchasing ERP software is expensive, with spectacular payoffs and challenging implementation The future of ERP will focus on: managing customer relationships improving planning and decision making linking operations to the Internet focusing on smaller companies Spring 2006

Spring 2006

ERP Industry 70% of Fortune 500 have implemented includes MSFT, IBM, and APPLE 30-40%+ annual revenue growth for last 5 years partly attributable to Y2K re-engineering Major players SAP ---33% of market PeopleSoft JDEdwards, Baan, Oracle, SCT, SGAI Spring 2006

ERP Market Figures 1996 worldwide revenues (only license sales): $4.8 Billion Spring 2006

Spring 2006

Spring 2006

Spring 2006

Spring 2006

Spring 2006

Spring 2006

Spring 2006

Spring 2006

SAP R/3 Basis System Hardware Operating Systems Databases Dialog UNIX Systems Data General HP (Intel) IBM (Intel) Hardware AT&T Bull/Zenith Compaq Sequent SNI . . . Bull Digital HP IBM SNI SUN IBM AS/400 Operating Systems AIX Digital UNIX HP-UX SINIX SOLARS Windows NT OS/400 DB2/400 ADABAS D DB2 for AIX INFORMIX-OnLine 7 ORACLE 7 ADABAS D MS SQL Server 6.0 ORACLE 7 Databases Dialog SAP-GUI Windows 3.11, Windows 95, Windows NT, OS/2-Warp Basis System Application Architecture With the SAP R/3 Basis System, applications can run on different hardware and system platforms with higher performance, and can be adapted to users’ specific requirements. Windows 3.11, Windows 95, Windows NT, OSF/Motif, OS/2-Warp, Macintosh Languages ABAP/4, C, C+ + Spring 2006