IE 376

PRODUCTION INFORMATION SYSTEMS

Course Notes
Lecture # 7
Enterprise Resource Planning (ERP)

IE 376
Bilkent University
ERP - What is it?

⚫ ERP is a generic term used to describe a

comprehensive information system designed to
integrate all the business processes found in an
enterprise.
⚫ Efficiency and productivity are improved through
the integration of information and the removal of
duplicate information and processes.
What is ERP?

 ERP software is
⚫ Multifunctional
⚫ Integrated
⚫ Modular
⚫ Able to facilitate MPC activities

1a-3
 Multifunctional

 The ability to track financial performance

in monetary terms ($, €, TL)
 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-4
 ERP Scope
Enterprise resource
planning

Manufacturing Human resource

and logistics Enterprise planning models management

Manufacturing Enterprise performance

planning and measures
control
Finance
Sales and operations Data warehousing
planning (front end)

Material and capacity Report generation

planning (engine)
Sales and
Material and vendor marketing
management
Transaction processing
(back end)

1a-5
 Integrated

Data entered by one functional area

updates all other functional areas

Eliminates
Ensures a
reposting of data
common vision
(errors)

1a-6
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-7
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-8
Decision Support

 Helping users make decisions about

running the business
⚫ People make the decisions, software
provides them with better tools and
information

1a-9
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-10
Enterprise Resource Planning (ERP) Systems

⚫ Enterprise Resource Planning Systems is a

computer system that integrates application programs
in accounting, sales, manufacturing, and other
functions in the entire enterprise.
⚫ This integration is accomplished through
⚫ A common database updated realtime
⚫ Application programs (organized as functional components)
⚫ Interface that enable the use of common application programs
⚫ Communication capability thru EDI, Internet, E-Mail, etc.
Reasons for Implementing ERP
⚫ Process Reengineering: Standardize and
improve business processes
⚫ To enable timely and accurate information &
enable effective information exchange and
sharing
⚫ Improve the level of integration within the firm
(across different functions) and across firms.
• The facilitator and driver of the efforts to improve
the management of the extended enterprise
(suppliers, manufacturers, distributors, and
customers) ; i.e. Supply Chain Management
 ANATOMY OF AN ENTERPRISE SYSTEM
Managers and
Stakeholders

Reporting
Applications
Financial
Applications
Sales and
Delivery
Applications
Sales Force Back-office
Central Manufacturing
Customers and Customer Applications Administrators Suppliers
Service Reps Database and Workers

Service
Applications
Inventory
Human and Supply
Resource Applications
Management
Applications

Employees
Harvard Business Review July-Aug 1998
What is Integration?

⚫ Data duplication ⚫ Sales

⚫ Rapid Data Flow ⚫ Production Planning
⚫ Real and Recorded ⚫ Procurement
information ⚫ Quality Control
⚫ Plans and Actuals ⚫ General Accounting
⚫ Cost Accounting
⚫ Productive
Maintenance
⚫ Human Resources
 ERP: Database Model
ITEMS INVENTORY BOM
1. Item Code 1. Quantity on Hand 1. Parent Code
2. Vendor parts 2. Subinventories 2. Alternative BOM
3. Customer Parts 3. Nettable/ATP 3. ECO dates
4. Rounding inventories 4. Fixed/Variable
5. Foreign Names 4. Stock Locators 5. Parametric to operation
5. Stock Adresses Process parameters (pH)

SALES ORDER
VENDORS CUSTOMERS PURCHASE ORDER
1. Customer, Item,
1. Vendor Name 1. Customer Name 1. Vendor, Item,
Qty, Date
2. Vendor Sites 2. Customer Sites Qty, Date
2. Ship-To Address
3. Bank 3. Bank Accounts 2. Qty Tolerance
3. Bill-to Address
Accounts 4. Ship-to Address 3. Date Tolerance
4. Discounts
4. Approved 5. Bill-to Address 4. Budget Accounts
5. Promotions
Supplier Lists 6. E-mail Address 5. Approval,Aggre
6. Quotations
5. E-mail ments
7. Holds
Address
ERP Software Players
ERP Market Leaders in Turkey
▪ SAP
▪ Oracle
▪ GlobalSoft
▪ IAD-CANIAS
▪ NETSIS
▪ LOGO
▪ Microsoft Dynamics
▪ IFS
Advertising View of SAP R/3

SD FI
Sales & Financial
Distribution Accounting

MM CO
Materials Controlling
Mgmt.
PP AM
Production Fixed Assets

SAP R/3
Planning Mgmt.

QM HR
Quality Human
Mgmt. Resources
PM WF
Plant Mainte-
nance
ABAP/4 Workflow
Development
PS
Project
Workbench IS
System Industry
Solutions
Oracle ERP Cloud
 Web Architecture
How are web sites constructed?

TIER 3 TIER 2 TIER 1

TIER 4 Server
Applications
Database

SOURCE: INTERSHOP
Typical Functional Components
Financial
Accounting

Sales & Distribution Functional

Human Resources
Components

Manufacturing
& Logistics
Financial Accounting

⚫ Financials

⚫ Controlling

⚫ Asset management
Human Resources
⚫ Payroll
⚫ Benefits administration
⚫ Applicant data administration
⚫ Personnel development planning
⚫ Workforce planning
⚫ Schedule & shift planning
⚫ Time management
⚫ Travel expense accounting
Manufacturing & Logistics

⚫ Materials management

⚫ Plant maintenance

⚫ Quality management

⚫ Production planning & control

⚫ Project management
Sales and Distribution
⚫ Prospect & customer management
⚫ Sales order management
⚫ Configuration management
⚫ Distribution
⚫ Export controls
⚫ Shipping and transportation management
⚫ Billing, invoicing, and rebate processing
 The Promise of Integration - SAP R/3 View of Manufacturing
Accounting and Human Resource Management

Sales and Distribution Production Planning Materials Management

Demand management Direct requisition
Sales planning
Profit planning Master planning Purchasing
SOP Inventory management
Rough-cut capacity Goods receipt
Planned requirements planning
Forecasts Material valuation
MRP/Planned orders Invoice verification
Customer order Order Warehouse management
processing - Creation
- Release
Shipping, - Confirmation Quality Management
billing, transport Shop floor control Lot inspection
Capacity leveling Process charting
It’s like they Process planning
programmed an Preventive Maintenance
Operations Management Planned repair
textbook! Project system Emergency
 Looks much like a regular
windows application - in Typical installation -
reality it is very different. •1 database server
•2 application server
•1,000 users

Presentation (User Computers)

Scalability -
Application Server(s)
Ability to
match the
Database Server(s) processing
requirements
to the needs of
the
organization

Is this state of the art software? Transaction processing vs intelligent planning systems?
Enterprise Resource Planning

Headquarters
Supply Chain
EDI
Sales Info Vendors
Internet
Host / ERP

EDI
Forecasting Internet
Systems

Manufacturing Plant

Advanced
EDI Host / ERP Exchange
Planning Internet OMS Portal
System
EDI
Internet POS
Scanner Data
TMS
Manufacturing
Execution
System Retail Customers
With POS Scanners
RFDC or Barcode EDI EDI RFDC or Pager
Scanner or Pager Internet Internet
or RFDC or RFDC

YMS Transportation
YMS
Transportation Warehouse Warehouse to Customer
Warehouse EDI
Manufacturing to Warehouse
(WMS) Internet (WMS)
RFDC

RFDC RFDC

Scanners
 Overview
⚫ What is ERP ?
⚫ It attempts to integrate all departments and functions across a
company onto a single computer system that can serve all
those different departments’ particular needs.
⚫ How can ERP improve a company’s business
performance?
⚫ How long will an ERP project take?
⚫ The important thing is not to focus on how long it will take
(real transformational ERP efforts usually run between one to
three years, on average) but rather to understand why you
need it and how you will use it to improve your business.
Will ERP fit the ways
I do business?

⚫ Either change the business process to

accommodate the software (which means
important changes in long-established ways of
doing business and shake up important
peoples’ roles and responsibilities)

⚫ Or modify the software to fit the process

(customizations), which will slow down the project,
could introduce bugs into the system and make
upgrading the software difficult
What is SAP Best Practices?

Cost
• SAP Best Practices is Pragmatic
methodology
the sound foundation
for prepacked ready-to-
use business solutions SAP
Best Practices
• SAP Best Practices Extensive
documentation
Proven
preconfiguration
covers well-proven
business scenarios Time Risk
Components
that help to exploit the
potentials of SAP ERP ⚫ Extensive preconfiguration to set up

• Flexible building block

a) the complete system landscape
b) end-to-end business scenarios
technology enables
⚫ Detailed documentation on settings &
you to implement and processes
adapt your solution in a
⚫ Clear methodology: comprehensible step-
very flexible way
by-step approach
SAP Best Practices for SCM 5.0

Scenarios for the Consumer Goods Industry

◼ Make-to-Stock
◼ Order Fulfillment with rules-based availability check
◼ Vendor-Managed Inventory
◼ Responsive Replenishment
◼ ATP with Product Allocation

Scenarios for Automotive Suppliers

◼ Advanced Repetitive Manufacturing
◼ Supplier-Managed Inventory
◼ Release Processing
◼ Service Parts Order Fulfillment
◼ KANBAN Replenishment

Scenarios for High Tech

◼ Make-to-Order with Capacity Check
◼ Make-to-Order with Component Availability Check
◼ Responsive Replenishment
◼ Contract Manufacturing Procurement and Supply Network Inventory
ERP: Project Management and
Consultancy

⚫ Needs Assesment (AS-IS)

⚫ Process Reengineering (TO-BE)
⚫ Business Reqirements Mapping (Fit-Gap)
⚫ Business Requirements Scenarios
⚫ Test Setup
⚫ Test
⚫ Live Setup
⚫ Data Convergence
⚫ Live Support
ERP : Project Management and
Consultancy
Steering Committee

Project Sponsor

Project Manager Project Manager

ERP Firm Corporate

Consultants Team Leaders Team Leaders

Team Members Team Members

Key Users Key Users
What does ERP really cost?

⚫ The total cost of ownership (TCO) of ERP,

including hardware, software, professional
services, and internal staff costs
⚫ Among the 63 companies surveyed, the average
TCO was $15 million (the highest was $300
million and lowest was $400,000)
⚫ Modular add-ons and integration will
dominate the ERP market
The hidden costs of ERP

⚫ Training
⚫ Integration and testing
⚫ Data conversion
⚫ Data analysis
⚫ Consultants
⚫ Implementation teams can never stop
ERP Cost
ERP: Project Management and
Consultancy

Operating
Capital Cost Rent
Expense 3% 2%
16%

Employee Consultant
16% 63%
ERP: The Realities

⚫ ERP Work, but costs are high (83% would

purchase the same app again)
⚫ ERP vendors force the customers to change
business processes to match their software.
⚫ Many users report being disappointed by
post-implementation costs, turnaround time,
and upgrade impact.
⚫ Low return on Maintenance expenses
⚫ The first budgeted cost is the foreseen part of
an iceberg
Case Study: Nestle USA

⚫ In June 2000, Nestle USA signed a $200

million contract with SAP (an additional $80
million for consulting and maintenance) to
install an ERP system for its global enterprise
(200 operating companies and subsidiaries in
80 countries)
ERP Failures

⚫ Hewlett Packard went live with SAP in 2004, a project that cost $30
million. As soon as it went live, 20% of its customer orders
disappeared in between the legacy order-entry system and the SAP
system costing HP $160 million.
⚫ MillerCoors’ implementation of SAP took 2.5 years costing them $63
million. In 2016, the company sued the consulting company HCL for
$100 million as it failed to meet the deadline and deliver what it had
promised. The project involved heavy customization.
⚫ Between 2000 and 2001, Nike spent $400 million dollars updating
their supply chain system and ERP implementation. They
implemented a new demand-planning software without testing and
everything went wrong. They ended up ordering low-selling shoes
rather than high demand ones, crashing the entire supply chain.
APICS Explanations
1. Lack of top management commitment,

2. Lack of education of those who use the system,

3. An unrealistic master production schedule,

4. Inaccurate data, including bills of material and

inventory records.

Transforming from informal system to formal system.

“Systems don’t generate results; people do”.
 Some Dos and Don’ts

⚫ Do the sequence of activities in the proper order.

⚫ Do cost-justify an ERP system.

⚫ Don’t attempt to implement an ERP system

without the complete support and understanding

of top management.
The Fundamental Flaw of MRP
… an MRP system is capacity-insensitive, and properly so,
as its function is to determine what materials and
components will be needed and when, in order to execute a
given master production schedule. There can be only one
correct answer to that, and it cannot therefore vary
depending on what capacity does or does not exist.
– Orlicky 1975

⚫ But, lead times do depend on loading when capacity is finite

⚫ Incentive to inflate lead times
⚫ Result is increased congestion, increased WIP, decreased
customer service
 ERP: Major Limitations
⚫ Planning Velocity
⚫ Sequential planning of distribution and manufacturing
⚫ Sequential planning of material and capacity
⚫ Only soft constraints
⚫ Unidirectional propagation
⚫ Long processing time
⚫ Planning Validity and Optimality
⚫ No demand prioritization
⚫ No pre-allocation of limited supply (first come, first
serve!!)
⚫ Fixed lead times
⚫ Fixed sourcing
⚫ Very limited what-if capabilities
Supply Chain Technology:
Information Systems
⚫ More than 80% of companies view information systems
as crucial or very important in achieving world-class
performance.
⚫ How to start integration: Most Fortune 500 companies
have implemented or currently implementing ERP.
⚫ Backbone database management

⚫ Facilitate real time information exchange and updates

⚫ Facilitate transactions within the company or across

the supply chain.
⚫ Does it really resolve the challenge? Does it improve
planning and optimization of supply chain operations?
 How effective are ERP
Systems:
ERP Systems viewed not very effective!

Financial Mgmt.& Accounting 3.3

Order Processing 3.1

Revenue Chain Management 2.9

Supply Chain Execution 2.7

Supply Chain Planning 2.4

Human Resource Management 2.4

0 1 2 3 4 5
Source: Deloitte Consulting Not Effective Very Effective

• Implement ERP systems integrated with specific applications: Almost 70%

of companies have gone or are going in this direction
 Three Key Dimensions
in Re-Planning Capabilities

⚫ Speed
⚫ Quality / Optimality
⚫ Exhaustiveness

ERP Logic Has Severe Limitations

in ALL Dimensions
Contribution

The biggest contribution of ERP

systems is the concept of the
integrated or common database.
ENTERPRISE fundamentals

1-65
Digital Enterprise Model

▪ Knowledge Management
& Business Intelligence

▪e-business

1-66
 Supply Chain Planning: Why do companies
need it?
Balance & optimize supply and demand

Customers

Storage
DEMAND

Locations

SUPPLY
Plants

Suppliers
SAP SCM – Where does it fit
SAP Business Suite

SAP PLM

Maintenance & Quality

Distribution Management
SAP ERP
Purchase Order
Management
SAP Financials SAP
SRM CRM

Sales Order &

Human Resources
Corporate Services
Operations

Inventory & Production

SAP SCM

SAP NetWeaver
 The Complete SCM Solution
Measure
Supply Chain Performance Management
Dyn. Supply Chain Cooperation

Plan

Dyn. Supply Chain Cooperation

Vendor
Demand Planning Supply Network Customer
(DP) Planning
(SNP)
Private Private
Exchanges Exchanges
Source Make Deliver
Supplier
Relationship Availability Check
Production Planning/
Management
Detailed Scheduling
(ATP)
(SRM) Transportation Planning
Scheduling agreement (PP/DS) (TP/VS)
Partner release Partner

Monitor
Supply Chain Event Management