Enterprise Resource
Planning
Integrated System
Chapter 4
Vollmann, Berry, Whybark & Jacobs
MPC
What is ERP?
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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.
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How is ERP described?
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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
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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
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Elimination of redundant processes
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Increased accuracy of information
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Superior processes (best of breed)
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Improved speed in responding to customer
requirements
Routine decision making
goals
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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
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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.)
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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?
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How ERP connects the
functional units
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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.
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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
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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
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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.
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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.
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Data Integration
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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
Procurement
Cycle
Purchase cost of
Material
Accounts Payable
Manufacturing
Cycle
Raw materials inventory
Work in progress
Finished Goods Inventory
Sales/Distribution
Cycle
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)
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Functional Silo Approach –
Manufacturing Operating Cycle
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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
class
Average
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.
cycle – time it takes to
convert cash outflows for raw
materials into cash inflows
 Operating
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)
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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.
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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 ($/Ave daily sales).
Calculating the cash-tocash time
3. Calculate the inventory cycle time. This is the
number of days of inventory relative to the cost of
sales.
Cd = Sd*100*CS
Sd = average daily sales ($/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) = $1,020
Acct Rec. at end = $ 200
Inv. Value at end = $ 400
Cost 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) = $ 35404
Accounts Receivable = $ 3142
Inv. Value at end = $358
Cost 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) = $ 2527
Accounts Receivable = $ 216
Inv. Value at end = $100
Cost 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
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Eli Lilly
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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)
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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.
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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.
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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.
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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.
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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.
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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.
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