Enterprise resource planning (ERP) refers to a computer information system that integrates all the business activities and processes throughout an entire organization. ERP systems incorporate many of the features available in other types of manufacturing programs, such as project management, supplier management, product data management, and scheduling. The objective of ERP is to provide seamless, real-time information to all employees throughout the enterprise. Companies commonly use ERP systems to communicate the progress of orders and projects throughout the supply chain, and to track the costs and availability of value-added services.
ERP systems offer companies the potential to streamline operations, eliminate overlap and bottle-necks, and save money and resources. But ERP systems are very expensive and time-consuming to implement, and surveys have shown that not all companies achieve the desired benefits. According to the online business resource Darwin Executive Guides, it is "a tall order, building a single software program that serves the needs of people in finance as well as it does the people in human resources and the warehouse… To do ERP right, the ways you do business will need to change and the ways people do their jobs will need to change too. And that kind of change doesn't come without pain."
ERP is a part of an evolutionary process that began with material requirements planning (MRP). MRP is a computer-based, time-phased system for planning and controlling the production and inventory function of a firm-from the purchase of materials to the shipment of finished goods. It begins with the aggregation of demand for finished goods from a number of sources (orders, forecasts, and safety stock). This results in a master production schedule (MPS) for finished goods. Using this MPS and a bill-of-material (a listing for all component parts that make up the finished goods), the MRP logic determines the gross requirements for all component parts and subassemblies. From an inventory status file, the MRP logic deducts the on-hand inventory balance and all open orders to yield the net requirements for all parts. Then all requirements are offset by their lead times to provide a date by which an order must be released in order to avoid delaying the production of finished goods.
From this MRP logic evolved manufacturing resource planning (MRP II). Before MRP II, many firms maintained a separate computer system within each functional department, which led to the overlap in storage of much of the firm's information in several different databases. In some cases, the firm did not even know how many different databases held certain information, making it difficult, if not impossible, to update it. This could also cause confusion throughout the firm if different units (such as engineering, production, sales, and accounting) held different values for the same variables. MRP II expands the role of MRP by linking together such functions as business planning, sales and operations planning, capacity requirements planning, and all related support functions. The output from these MRP II functions can be integrated into financial reports, such as the business plan, purchase-commitment report, shipping budget, and inventory projections. MRP II is capable of addressing operational planning in units or financial planning in dollars, and has a simulation capacity that allows its users to analyze the potential consequences of alternative decisions.
The next step in the evolutionary process was enterprise resource planning (ERP), a term coined by the Gartner Group of Stamford, Connecticut. ERP extends the concept of the shared database to all functions within the firm. By entering information only once at the source and making it available to all employees, ERP enables each function to interact with one centralized database and server. Not only does this eliminate the need for different departments within the firm to reenter the same information over and over again into separate computer systems, but it also eliminates the incompatibility that was created by past practice.
ERP is a hybrid of many different types of software, incorporating many of the features available in other programs. ERP provides a way to keep track of materials, inventory, human resources, billing, and purchase orders. It is also useful for managing various types of orders, from mass-customized orders where daily or weekly shifts occur within the plant or multiple plants, to products that are made-to-stock, made-to-order, or assembled-to-order.
Higher-level ERPs employ design engineering and engineering change control modules. These modules facilitate the development of new product-engineering information and provide for modification of existing bills of material, allowing engineers to support working models of items and bills of material prior to their production releases.
It is important to understand that ERPs are not cheap to implement and operate, nor can they be implemented overnight. Owens-Corning spent more than $100 million over the course of two years installing one of the most popular ERP systems, SAP AG's R/3 system. Microsoft spent $25 million over 10 months installing R/3. Chevron also spent $100 million on installation. Apparently, however, the benefits of ERP implementation and use can be enormous. Microsoft used it's ERP system to replace 33 different financial tracking systems used in 26 of its subsidiaries, with an expected savings of $18 million annually. In the same respect, Chevron expected to recoup its $100 million investment within two years.
Owens-Corning's aim was to offer buyers one-stop shopping for insulation, pipes, and roofing material. Use of the R/3 facilitated this goal by allowing sales representatives to quickly see what products were available at any plant or warehouse. Analog Devices use the R/3 to consolidate the products stored at its warehouse, thereby creating an international order-processing system that can calculate exchange rates automatically. ERP and supply chain management.
When ERP systems first appeared, they acted as the connection between front-office operations (e.g., sales and forecasting) and the day-to-day functions of manufacturing. As ERP technology has advanced, the systems have increasingly incorporated logistics and warehousing capabilities, further connecting them with the supply chain. Some ERP systems offer Internet functionality, which can provide real-time connectivity from suppliers to the end customer.
The result of ERP use is more than an automation of existing processes-it is a significantly new way of doing business that enables a firm to respond to market changes more rapidly and efficiently. This can apply to service firms as well as manufacturers. Many ERP packages also let the user track and cost service products in the same way they compute the cost of making, storing, and shipping physical products.
R. Anthony Inman
Revised by Laurie Hillstrom
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