Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin
Enterprise Resource Planning
MPC 6th Edition
Chapter 1a
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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
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What is ERP?
ERP software is MultifunctionalIntegratedModularAble to facilitate MPC activities
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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
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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
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Integrated
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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
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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?
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Decision Support
Helping users make decisions about running the businessPeople make the decisions, software
provides them with better tools and information
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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
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Performance Metrics
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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
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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
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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
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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
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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
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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
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The ERP Experience
Eli Lilly and CompanyIntegration of a global companyProcess improvementSimplified trainingStrategic directionOrganizational flexibilitySet of global policies
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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.
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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.
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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