Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin

Enterprise Resource Planning

MPC 6th Edition

Chapter 1a

1a-2

Enterprise Resource Planning

A comprehensive software approach to support decisions concurrent with planning and controlling the business.

ERP systems are, first and foremost, integrated.

1a-3

Agenda

1a-4

What is ERP?

ERP software is MultifunctionalIntegratedModularAble to facilitate MPC activities

1a-5

Multifunctional

The ability to track financial performance in monetary terms ($, €)

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-6

ERP Scope

Manufacturing and logistics

Manufacturing planning and

control

Sales and operations planning (front end)

Material and capacity planning (engine)

Material and vendor management (back end)

Enterprise resource planning

Enterprise planning models

Enterprise performance measures

Data warehousing

Report generation

Transaction processing

Human resource management

Finance

Sales and marketing

1a-7

Integrated

1a-8

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-9

1a-10

Process Standardization

Without standard terminology, integration is impossibleWhat is demand?What is inventory?How are exchange rates determined?What transfer costs apply (for internal

transactions)?What labor rates are applied?

1a-11

Decision Support

Helping users make decisions about running the businessPeople make the decisions, software

provides them with better tools and information

1a-12

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-13

Performance Metrics

1a-14

Integrated Supply Chain 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

1a-15

Supply Chain Metrics

Sou

rce:

Sup

ply

Cha

in C

ounc

il

Measure Description Best-in-Class

Average

Delivery performance

Percentage of orders shipped according to schedule

93% 69%

Fill rate by line item

Percentage of actual line items filled 97% 88%

Perfect order fulfillment

Complete orders shipped on time 92.4% 65.7%

Order fulfillment lead time

Time from when an order is placed until it is received by the customer

135 days 225 days

Warranty cost Warranty expenses as a % of revenue 1.2% 2.4%

Inventory Days of supply held in inventory 55 days 84 days

Cash-to-cash cycle time

Time required to turn cash used to purchase raw materials into cash received from customers

35.6 days 99.4 days

Asset turns Measure of how many times per year assets are used to generate revenue

4.7 turns 1.7 turns

1a-16

Cash-to-Cash Cycle Time

Integrates the finance function with purchasing, manufacturing, and sales/distribution

Procurement cycle

Manufacturing cycle

Sales and distribution cycle

•Purchase cost of material•Accounts payable

•Raw materials inventory•Work-in-process•Finished goods inventory

•Distribution inventory•Accounts receivable

Cash-to-cash cycle time = Inventory days of supply + Days of sales outstanding – Average payment period for material

1a-17

ERP View of Cash-to-Cash Time

ERP database

Accounts payable

Inventory

Cost of sales

Sales

Accounts receivable

Purchasing

Manufacturing

Sales and distribution

Cash-to-cash cycle time

1a-18

Calculating Cash-to-Cash Time

Average daily sales (Sd)

Accounts receivable days (ARd)

Average daily cost of sales (Cd)

Average days of inventory (Id)

Accounts payable cycle time (APd)

Cash-to-cash cycle time

d

SSd

CSSC dd

dd C

II

dd C

APAP

ddd APIARtimecyclecashtoCash

1a-19

Cash-to-Cash Example

000,3430

000,020,1

d

SSd

400,20)6.0(000,34 CSSC dd

daysC

II

dd 6.19

400,20

000,400

daysC

APAP

dd 84.7

400,20

000,160

daysAPIARtimecyclecashtoCash ddd 64.1784.76.1988.5

Sales over last 30 days = $1,020,000

Accounts receivable = $200,000

Inventory value = $400,000

Cost of sales = 60% of total sales

Accounts payable = $160,000

1a-20

The ERP Experience

Eli Lilly and CompanyIntegration of a global companyProcess improvementSimplified trainingStrategic directionOrganizational flexibilitySet of global policies

1a-21

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.

1a-22

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.

1a-23

Quiz – Chapter 1a

To free the ERP system for basic applications, a _______ _______ is often used to capture, manage, and analyze data.

For a firm with average daily sales (Sd) of $200,000, current inventory (I) of $1,000,000, and cost of sales (CS) of 50%, what is the average days of inventory (Id)?

Which of the following actions would be likely to increase the cash-to-cycle time for a firm?

• Increasing the cost, but not the price, of the product

• Taking advantage of “early pay” discounts with suppliers

• Revaluing inventory to reflect reductions in purchasing prices