17–1

Operations andSupply Chain Management

CHASE | SHANKAR | JACOBS

14e

17–2

ENTERPRISE RESOURCE PLANNING SYSTEMS

Chapter SeventeenCopyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

17–3

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Learning Objectives• LO17–1: Understand what an enterprise

resource planning (ERP) system is.

• LO17–2: Explain how ERP integrates business units through information sharing.

• LO17–3: Illustrate how supply chain planning and control fits within ERP.

• LO17–4: Evaluate supply chain performance using data from the ERP system.

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.Enterprise Resource Planning

• A comprehensive software approach to support decisions concurrent with planning and controlling the business.

• ERP systems are, first and foremost, integrated.

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AgendaWhat is ERP?

Connecting functional units with ERP

The need for standardization

Support of MPC decisions

Transaction processing

Performance metrics

The ERP experience

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What is ERP?

• ERP may mean different things.– A comprehensive decision support

software that plans and controls

– A software system that integrates all applications from different functional areas Integration through a common database

– Able to facilitate MPC activities

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ERP Vendors

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.What is Required for ERP?

• ERP requires – Consistent numbers across all

applications– Software should be:

Multifunctional (manufacturing, service, etc.) Integrated (handled only once across all

applications) Modular Able to facilitate MPC activities

– Routine decision making– Capacity for all transaction processing

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.ERP and Decision Support

• ERP software – Supports analysis of data for decision

support– Helps make intelligent decisions– Note: People make decisions not software

• Bolt-on software modifies and enables new approaches to decision making

• Modifies existing procedures to make it more efficient

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Decision Support

• Helping users make decisions about running the business–People make the decisions;

software provides them with better tools and information.

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.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.

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ERP Scope

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.What is Data Integration?

Data entered by one functional area updates all other functional areas and the data are processed in real time.

Eliminates reposting of data (errors)

Ensures a common vision

instantly displayed

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MPC Activity SupportForecasting

Production planning

Material planning

Inventory management

MPC Activity Support

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.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?

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.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.

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.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

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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.

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Supply Chain Metrics

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.ERP View of Cash-to-Cash Time

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.Calculating Cash-to-Cash Time

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Average daily sales (Sd)

Accounts receivable days (ARd)

Average daily cost of sales (Cd)

Average days of inventory (Id)

Accounts payable cycle time (APd)

Cash-to-cash cycle time

d

SSd

d

ARARd

CSSC dd

dd C

II

dd C

APAP

ddd APIARtimecyclecashtoCash

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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

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000,3430

000,020,1

d

SSd

daysd

ARARd 88.5

000,34

000,200

400,20)6.0(000,34 CSSC dd

daysC

II

dd 6.19

400,20

000,400

daysC

APAP

dd 84.7

400,20

000,160

daysAPIARtimecyclecashtoCash ddd 64.1784.76.1988.5

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The ERP Experience

• Eli Lilly and Company

– Integration of a global company

– Process improvement

– Simplified training

– Strategic direction

– Organizational flexibility

– Set of global policies

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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.

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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.