14e

Operations and
Supply Chain
Management
CHASE | SHANKAR | JACOBS
17–1
 ENTERPRISE
RESOURCE
PLANNING
SYSTEMS

Chapter Seventeen
McGraw-Hill/Irwin Copyright © 2014 by The McGraw-Hill Companies, Inc. All rights reserved.
17–2
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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.
17–3
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Enterprise Resource Planning
• A comprehensive software approach to support
decisions concurrent with planning and
controlling the business.

• ERP systems are, first and foremost,

integrated.

17–4
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Agenda
What is ERP?

Connecting functional units with ERP

The need for standardization

Support of MPC decisions

Transaction processing

Performance metrics

The ERP experience

17–5
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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

17–6
 ERP Vendors

Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
17–7
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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

17–8
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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

17–9
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Decision Support
• Helping users make decisions about
running the business
– People make the decisions; software
provides them with better tools and
information.

17–10
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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.

17–11
 ERP Scope

Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
17–12
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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 Ensures a common

reposting of data vision instantly
(errors) displayed

17–13
 Forecasting
Forecasting

Material
Material
planning
planning
Support
MPC Activity
MPC Activity Support

management
manageme
Inventory
Inventory
planning
planning
Production
Production

Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
17–14
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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?

17–15
 Integrated Supply Chain

Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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.

17–16
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Cash-to-Cash Cycle Time
• Integrates the finance function with
purchasing, manufacturing, and
sales/distribution
Cash-to-cash cycle time = Inventory days of supply + Days of sales
outstanding – Average payment period for material

Procurement Manufacturing Sales and distribution

cycle cycle cycle

• Purchase cost of • Raw materials • Distribution inventory

material inventory • Accounts receivable
• Accounts payable • Work-in-process
• Finished goods
inventory 17–17
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Performance Metrics
Functional silos – Each area is responsible for optimizing its own operation, with no
consideration for how the overall firm is affected.

Manufacturing builds long Distribution focuses on cost

Purchasing pursues cost
runs rather than responding of delivery stages instead of
rather than quality.
to customers. total system costs.

17–18
 Supply Chain Metrics

Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
17–19
 Time
ERP View of Cash-to-Cash

Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
17–20
 Calculating Cash-to-Cash

Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Time
S
Average daily sales (Sd) Sd 
d
AR
Accounts receivable days (ARd) ARd 
d

Average daily cost of sales (Cd) Cd  S d CS

I
Average days of inventory (Id) Id 
Cd

Accounts payable cycle time (APd) AP

APd 
Cd

Cash-to-cash cycle time Cash  to  cash cycle time  ARd  I d  APd

17-21
17–21
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
Cash-to-Cash Example
• Sales over last 30 days = $1,020,000 S 1,020,000
Sd    34,000
d 30

• Accounts receivable = $200,000 AR 200,000

ARd    5.88 days
d 34,000

• Inventory value = $400,000 Cd  S d CS  34,000(0.6)  20,400

• Cost of sales = 60% of total sales I 400,000

Id    19.6 days
Cd 20,400

• Accounts payable = $160,000 APd 

AP 160,000
  7.84 days
Cd 20,400

Cash  to  cash cycle time  ARd  I d  APd  5.88  19.6  7.84  17.64 days

17-22
17–22
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
The ERP Experience
• Eli Lilly and Company
– Integration of a global company
– Process improvement
– Simplified training
– Strategic direction
– Organizational flexibility
– Set of global policies

17–23
 Copyright © 2014 by McGraw Hill Education (India) Private Limited. All rights reserved.
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.
17–24
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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.

17–25