The Evolution of ERP

The Evolution of ERP Introduction

By

Raja Mohan Ivaturi [email protected]

Mr. Raja Mohan Ivaturi is a Gold Medalist graduate from Andhra University and is post graduate from IIT Kharagpur. He is certified CPIM by APICS, USA and Certified Implementer of ERP (CIERP) by CIBRES, USA. He is also a certified member of the Project Management Institute (PMI). Raja Ivaturi has over 19 years of Experience including over 12 years in ERP. He has worked with multiple ERP applications in various capacities across the globe. He can be reached at [email protected]

ePathfinders is a research Organization aimed at ERP research. With a team comprising of professionals engaged with various ERP applications for over 10 years and experience spreading across conceptualizing, designing, developing, implementing, upgrading and supporting various ERP products, ePathfinders shares knowledge on various aspects of ERP world. We share information about ERP lifecycle covering various aspects that help ERP professionals and user community for making critical ERP decisions and supporting the ERP applications in use.

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Introduction In the earlier days of Manufacturing there was no concept of planning in advance. After receiving a job order in the shop floor, a Foreman was typically the end responsible person for planning and executing how to make the item, what tools to use, and whom to assign for executing the work. Foreman used to be the troubleshooter when the workers face problems, either with machines, or about how to execute certain activity etc. For any major changes such as changing the layout, proposing a new machine, changing the design of the product Engineer came in to picture. This practice continued as long as it was possible, because those were the times when what ever was produced was sold and supplier was at the dictating position. So the long time taken for planning and making the item was not at all an issue. However with time, the situation was gradually changing and very soon the industry realized that the process of making items for fulfilling an order was taking long time and in that way they cannot meet the demand. It was also experienced that there was repetitive effort while planning for materials, other resources and for ways to make the items. Then onwards the Manufacturing Planning systems went through progressive refinement in the last 5 decades.

Inventory Management using Bill of Material The first popular methodology that was evolved was called the Bill of Material approach. This approach was evolved based on the observation that the demand for items can be calculated from the demand of the assemblies/ Products where the items are used. To explain this principle, let us take an example of making a standard reading table whose design is assumed to be fixed. The table needs 4 legs, one polished top, and fixtures for connecting the legs to the top. The assumption is that these parts are available through purchase as and when required and the needed effort is only to assemble the parts. So you know that irrespective of the number of tables ordered, the parts needed for each table remains same. Here you must have noticed that the demand for the dining table cannot be calculated because it depends on how customers order for the dining tables. But the demand for the parts used to make the dining table can be calculated based on the orders for dining table. The list of parts for the table can be recorded as for one table; you need 4 legs, one polished top and 8 fixtures. This is nothing but a bill of materials for table. Now, if you get an order for 100 tables, you know that you need to purchase 400 legs, 100 polished tops and 800 fixtures. If you already have 50 legs, 500 fixtures and 150 polished tops in stock, your net purchase requirements will be 50 legs (100‐50) and 300 fixtures (800‐ 500) only. Even though the concept of Bill of material is not so simple, the example helps understand the basics of this approach. The Refined BOM used to have the following major information: Material requirements for unit of Main item. Name of the component item


Quantity of component item Any scrap factor that must be taken in to account while calculating the material requirement. Expiry information: The date up to which the design is valid or used by the manufacturer In 1960’s the BOM approach soon became the main input for Inventory Control. For many years, Inventory control was thought as sufficient in manufacturing planning and execution.

Material Requirement Planning (MRP) However when the manufacturing activities were gradually growing complex, the Shop floor people realized that just knowing Bill of material does not help the total planning, because of the fact that Bill of Materials tells only the information about material requirements. Equally important factor is the information on Process of manufacturing such as manufacturing activities to be performed, the time taken for each activity, sequence in which they need to be performed etc. It is obvious that similar to Bill of materials, the process definition also remains same, irrespective of the orders of course with some exceptions when different processes may have to be adopted based on the quantities. So the process definition, which is also known as routing, became an input to Planning. In 1970’s the concept arrived to a complete shape and was known as Material requirement planning. This Planning is popularly known as MRP. A refined MRP briefly takes the demand, important item related information ( such as Ordering rules, safety stock , Inventory information ), Bill of Material ,routing and existing Shop floor schedule as inputs. Based on the demand and other supporting information MRP Calculates the requirements for each component item that is required to make the order quantity of end item Calculates the time taken to make the order quantity of the end item. Calculates the needed hours of Man, tools and Machines for making the Order quantity of end item Any exceptions Any reschedule recommendations to the existing shop floor schedule ( by comparing the demand quantities and dates with the current scheduled dates and quantities of the item) Net requirements of each component item, (by comparing the gross requirements with the existing inventory.)

Manufacturing Resource Planning (MRPII) The concept of MRP seemed to be complete and perfect, but some more inputs were identified as essential for reasonably realistic planning. The original MRP as defined was looking at the Material requirements and Process requirements as the major deliverables from the planning process. However this information is not sufficient to go ahead with production. For example, what if you do not having sufficient finance to perform the production to meet the demand, even if you have material and machines to make the item?


Similarly how will you tackle the sudden break down of a critical machine while executing the manufacturing process? In fact the planning needs the output information from the shop floor execution as the input to re‐plan according to the current shop floor condition. Based on such realizations, MRP was continuously refined. After a decade MRP reached such as stage that it was entirely different from what was originally defined as MRP. So a new name MRP II was coined. MRP II is defined as Manufacturing resource Planning. Major identification of MRP II is through the integrated planning involving all possible functions in an Industry, which need not always be a Manufacturing Industry. In addition to exploiting all the features of earlier planning versions such as traditional Inventory control and, MRP , MRP II focused on ensuring the integration between various functions such as Planning, Engineering design, Production , Purchase, Sales, Marketing, Finance, and Human resources. The seamless integration that was the main feature of MRPII ensured that the planning was more meaningful with more transparency to all the stakeholders of the business. Even though theoretically it is possible to plan manually , it was concluded that the practice of applying the principles of MRP ,MRP II and ERP was almost impossible without the help of software. The integration among all the functions was also made easy through planning software.

Enterprise Resource Planning (ERP) In the early 1990’s, increased complexity of businesses and the need to integrate all the functions within an enterprise to sustain in the dynamic environment lead to development of what is called Enterprise Resource planning (popularly known as ERP). ERP was extension of MRP II to cover the range of activities within any enterprise.

EVOLUTION OF MANUFACTURING SYSTEMS

ERP II ERP MRP II MRP IC 1960

1970

1980

1990

2000


Figure : Evolution of Manufacturing Systems

Major contributors that made the ERP Solutions as complex are, 1. The priorities of various functions are always overlapping and the software is expected to support the integration among all the functions. A design may be impractical but will be realized only when the design is submitted to production. If there were access of design details to the production engineer in the earlier stages, the wrong (or less feasible or impractical) design can be prevented in advance. Similarly if the Sales personnel have access to production schedule, they can make the reasonable order promises based on the expected deliveries from the schedules. At the time of sales order entry, you can stop the order taking if the customer is overdue to the company (A piece of information that is known to Accounts personnel). 2. In addition to supporting the basic processes of MRP II, ERP was expected to take care of other issues such as a. Software in different languages i. Software interface, error and other messages and Help Documentation must look in the language that is preferred by the customer. ii. Certain languages such as Arabic, Chinese needed additional efforts and technologies to support the Software accessing in these languages. b. Software was expected to support various trade laws that are locally influenced. c. The cross border logistic activities needed certain features such as the ability to support multiple currencies, currency conversions, methodologies to support corrections and writing off currency differences etc. In addition specific features such as Import and export rules were required. 3. ERP software solutions were expected to be generic which must be more or less readily used by the customers with minimum modifications to the software. TO make it simple to the customer, it will be very complex for the vendors to develop such software. APICS defined ERP as an accounting‐oriented information system for identifying and planning the enterprise wide resources needed to take, make, ship, and account for customer orders. An ERP system differs from the typical MRP II system in technical requirements such as graphical user interface, relational database, use of fourth‐generation language, and computer‐aided software engineering tools in development, client/server architecture, and open‐system portability. The marking line between ERP and MRP II was very vague and even APICS could not clearly distinguish what makes ERP different from MRP II.


Extended ERP ERP Could attend the most wanted needs of Business in 1990’s such as reliable delivery commitments, high quality, low and controlled inventory and reasonably low prices etc. But the competitive advantage too vanished. Many performance capabilities that previously provided distinct competitive advantage became normal expectations. Capabilities such as reliable delivery commitments, high quality, and low prices became the minimum to participate, not the Order winners previously experienced. The competition within manufacturing industry has created many new concepts, business models, and techniques that have influenced the evolution of Extended ERP. Major factors that contributed the evolution of Extended ERP are : 1. Requirement to focus on the core strength and grow family of partners that work together to deliver the end product and share directly or indirectly the revenue and competitive advantage. This is because it was practically impossible to maintain strength in all areas that are needed to satisfy the expectations of customer. 2. A trend that forced to adopt what is called Mass customizations. Customers expect a unique combination of features from a product and at the same time do not want to wait for the long production and delivery cycles. This situation led to Mass customization and soon became mandatrory for the vendors. The Mass customization principles were even applied to financial services on certain areas such as “Instant approval of loan, instant opening of account etc. Similarly industries such as Automotives devised mechanisms to deliver the vehicles in days to the customer. 3. Trend to avoid interaction with systems for long and expect the system to have enough intelligence to perform most of the work. If there are certain rules followed while scheduling the machine and man resources, why can’t you expect the System to follow the same and generate the best schedule? The user interferes with the system only on exceptions for which no business rule has been defined for scheduling. Another example that supports this trend is configuring the Production BOM based on the choice of customer. If the vendor knows what are the combination of features that can be offered for a computer, the tool called configuration must generate the Part list that makes the item as per the options of customer. 4. Urge for Work flow based applications. Even while refining the processes in a company through techniques such as Business Process re‐engineering, the main focus for improvement was on logistic activities and the indirect functions such as administrative functions were not focused heavily for improvement in the earlier times. Once the logistic processes were matured enough the focus shifted to improving the administrative processes. Rule based work flow mechanisms were expected to take care of routine administrative activities and only interference on exception was required. For example, there is a work flow having steps Raise requisition, approve requisition, raise purchase order, receive goods and make the payment. There is a business rule which says, requisition for purchasing items of Class A can be approved as long as the latest consumed budget level is more than the needed purchase value. This is a rule based on which the purchase requisitions can be


approved by the software automatically and move the control to the next step ( say print purchase order). 5. Use of the Internet rapidly increased in the mid 1990’s. People quickly became Internet literate and Internet became part of life for them. Users liked the Web Browser. Using web browser was simple, and over time, only two versions of the browser (only one version that is, Microsoft Internet Explorer) had the majority of market share. The demand for the business systems to utilize these browsers started to grow and continues to this day. Manufacturing Industry, ever under competitive pressure recognized the cost reduction possibilities of using the Internet. The possibility of cost effective Electronic Data Interchange (EDI) seemed possible. Visionaries saw the possibility of speeding up the business‐to business (aka B2B) buying and selling processes and reducing the cost of each business transaction. The Internet made Supply‐Chain Management to be simpler. Those who wanted to grab the market early started making applications compatible to Internet and instrumental in making extended ERP’s. In summary, Extended ERP is a subsequent outcome of progressive refinement of planning systems through MRP, MRPII, and ERP. In addition, it reflects the influences of relatively modern philosophies such as JIT/ Lean manufacturing as well as taking advantage of the latest technologies. Since it is based on proven good business practice, adapting to Extended Enterprise resource planning is an opportunity to reexamine and compare an enterprise in terms of competitiveness and world‐class performance. Extended Enterprise Resource Planning also known as ERP II is the result of years of trial and error, innovative thinking and leveraging of ever growing technology. The business concepts incorporated in ERP II continue to produce tremendous competitive advantage and economic benefit to the manufacturing industries.


The Evolution of ERP

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