Unit 4

Managing for Competition Chapter 15: ERP and Supply Chain Management

Lesson 45– Introduction to ERP and SCM

Learning Objectives After reading this lesson you would be able to understand A computer system that integrates application programs in

accounting, sales, manufacturing, and the other functions in a firm A segment with the capability needed to manage, schedule, pay,

and hire the people who work for the company Five major components of manufacturing and logistics A segment that includes customer, sales order, and configuration

management Supply chain management

Good morning students, today we are going to discuss about the intersecting topic of Enterprise Resource Planning Systems properly known as ERP. Well my friends, some of you must be having a business background. In fact, all of us in varying measures are aware of the fact that running a business requires a great planning system. What do we expect to sell in the future? How many so we expect to sell in the future? How many people should we hire to handle the Diwali rush? How much inventory do we need? What should we make today? These are all questions that managers need to answer every day. Computers running comprehensive software packages can help. For4 a manager, it is important to understand the best way to solve these planning problems, so the right software can be purchased and configured correctly. An enterprise resource planning (ERP) system, when implemented correctly, links all the areas of the business. Manufacturing known about new orders as soon as they are entered in the system. Sales know the exact status of a customer order. Purchasing knows what manufacturing needs to the minute, and the accounting system is updated as all the relevant transactions occur.

The purpose of this managerial briefing is to provide an overview of what an ERP system is and why it can benefit a company. The current ERP vendors have set new standards in information integration. In the early 1990’s many large companies realized that it was time to update their existing information systems to take advantage of new technologies. Programs written in programming languages such as COBOL, PLI, RPG, and assembler were becoming increasingly expensive to maintain. Further the mainframe computer technology was not cost defective compared to the ever more powerful and inexpensive microprocessor-based computer. Change was inevitable. And SAP offered a comprehensive solution. SAPAG, a German firm, is the world leader in providing ERP software. Its flagship product is known as R/3. The software is designed to operate in a three-tier client/server configuration. The core of the system is a high-speed network of database servers. These database servers are special computers designed to efficiently handle a large database of information. The R/3 applications are fully integrated so that data are shared between all applications. If for example an employee posts a shipping transaction in the sales and Distribution module, the transaction is immediately seen by Accounts payable in the Financial Accounting module, and by inventory management in the materials management module. Much of the success of the product is due to the comprehensive coverage of business applications. In a sense, SAP has changed the face of information technology. Let’s now turn our attention to what are commonly known as:- R/3 APPLICATION MODULES R/3 is built around a comprehensive set of application modules that can be used either alone or in combination. The modules can be used to support processes that span different functional areas in the firm. A significant feature that improves access to information in the system is the data warehouse. In our review of the application modules the make up R/3 the emphasis is placed on what these modules actually do, not on the technical aspects of how they communicate with one another. SAP organizes the R/3 modules in a variety of ways in its documents. In general, there are four major elements to the organization: financial accounting, human resources, manufacturing and logistics, and sales and distribution. FINANCIAL ACCOUNTING

The financial accounting segment of R/3 includes three major categories of functionality needed to run the financial accounts for a company: financials (FI), controlling (co), and asset management (AM). As with all the modules in the R/3 system, the user will find all information current and integrated. Thus an individual manufacturing plant or sales organization can run a profit and loss report at any time during the month and be shown the most up to date information. The controlling category includes costing; cost center, profit center, and enterprise accounting and planning; internal order; open item management; posting and allocating; profitability analysis; and a variety of reporting functions. It also includes a project system to track activity and costs related to major corporate projects, such as the implement of an R/3 system. Also include is a module to add activity based costing (ABC) to other types of costing approaches. The asset management category includes the ability to manage all types of corporate assets, including fixed assets, leased assed, and real estate. It also includes the capital investment management module, which provides the ability to manage, measure, and oversee capital investment programs. HUMAN RESOURCE (HR) The human resources (HR) segment contains the full set of capabilities needed to manage, schedule, pay, and hire the people who make a company run. It includes payroll, benefits administration, applicant data administration, personnel development planning, workforce planning, schedule and shift planning, time management, and travel expenses accounting. Because the structure of most companies shifts frequently, one function in the human resource category provides the ability to represent organizational, charts, including organizational units, jobs, positions, workplaces, and tasks. Capturing data from the human resources module, the SAP business workflow system allows management to define and manage the flow of work required in cross functional business process. MANUFACTURING AND LOGISTICS The manufacturing and logistics segment is the largest and most complex of the module categories. It can be divided into five major components: materials management (MM) octant maintenance (PM) quality management (QM) production planning and control (PP) and a project management system (PS). Each component is divided into a number of subcomponents.

Plant maintenance supports the activates associated with planning and performing repairs and preventive maintenances. The quality management capability plans and implement procedures for inspection and quality assurance. It is built on the ISO 9001 standard for quality management. Production planning and control supports both discrete and process manufacturing processes. The project management system lets the user set up, manage, and evaluate large, complex projects, whereas the financial costing project system focuses on costs, the manufacturing project system is used for planning and monitoring dates and resources. The system walks the user through the typical project steps: concept, rough cut planning, details planning approval, execution and closing it manages a sequence of activities each with its interrelationships to the others. SALES AND DISTRIBUTION (SD) The sales and distribution (SD) set of modules provides customer management; sales order management; configuration management; distribution export controls, shipping and transportation management; and billing, invoicing, and rebate processing. In sales and distribution, products or services are sold to customers. In implementing the SD module (as in other modules), the company structure must be represented in the system so that for example, R/3 known where and when to recognize revenue. When a sales order is entered it automatically includes the correct information on pricing, promotions, availability and shipping options. Batch order processing is available for specialized industries such as food, pharmaceutical, or chemical. MYSAP.COM – INTRGRATED E – BUSINESS PLATFORM SAP strategy is to build a set of business software solution around the application modules; each of these solutions is designed for a specific purpose. The solutions can all be implemented using an internet interface known as my SAP thus making it possible for users to have the full functionality of the SAP software without requiring the deployment of any special software to the users. We focus on the mySAP supply Chain Management Product (SCM), (SAP) just as we have organized the topics in these chapters organizes its software into planning scenarios that represent the basic needs of the organization. Within mySAPSCM, the planning scenarios are called “collaborative demand planning,” “sales and operations planning, and “collaborative supply and distribution planning.” mySAPSCM Demand planning is

basically a toolkit of statistical forecasting techniques and planning features that helps the user create accurate estimates of future requirements. Sales and operations planning is the entire process of integrating sales and marketing plans with plans for producing products and delivering services. A key element of SAP sales and operations planning is the advanced planner and optimizer functions that are available The final element of my ASPSCM is the collaborative supply and distribution planning functions. ERP: SUCCESS STORIES Like many new technologies, ERP systems have near-magical effects when they work as promised. Managers at companies list dozens of productivity enhancements from ERP systems, including the ability to calculate new process instantly when a single component in a product is changed; more accurate manufacturing cost among different facilities; better electronic data interchange (EDI) with vendors and suppliers; more details forecasting; rapid delivery of customer quotes for special order; and the elimination of bottlenecks and duplicate procedures. IMPLEMENTING ERP SYSTEM SAP has some strong competition. Companies such as oracle, i2 Technologies, and People soft have aggressively gone after the market. SAP though is the market leader with over 44500 sites and over 10,000,000 users worldwide. Implementation of ERP is costly, with the actual cost of the software typically one third or less of the total cost. Large companies, such as Chevron Corp. and Bristol-Myers Squibb, typically earmark $ 250 million or more to implement an ERP system. Implementing these systems does not always work out. A survey conducted by the Harvard Business School revealed that a large percentage of executives had negative feeling toward ERP software. In particular, they felt that (1) ERP technology could not support their business, (2) their organization could not make changes need to extract benefits from the new systems, and (3) ERP implementation might actually damage their business. The same survey indicated that many companies implementing ERP had overrun cost and schedule target and had not achieved the benefits sough. Despite the reservations about ERP most companies surveyed by Harvard were going ahead with ERP initiatives. The most popular reasons cited included a desire to standardize and improve processes, to improve systems integration, and to improve information quality even through there is evidence of many problems with implementing

ERP systems, forms continue in their ERP efforts because of the opportunity for substantial reward.

Supply -chain management. Well dear friends, supply -chain management may be defined as the synchronization of a firm’s processes and those of its suppliers to match the flow of materials, services, and information with customer demand. Supply-chain management has strategic implications because the supply system can be used to achieve important competitive priorities.

Let me give you an OVERVIEW OF SUPPLY-CHAIN MANAGEMENT

OVERVIEW OF SUPPLY-CHAIN MANAGEMENT The basic purpose of supply-chain management is to control inventory by managing the flows of materials. Inventory is a stock of materials used to satisfy customer demand or support the production of goods or services. Inventory exists in three aggregate categories, which are useful for accounting purposes. 1. Raw materials (RM) are inventories needed for the production of goods or services. 2. Work-in-process (WIP) consists of items such as components or assemblies needed for a final product in manufacturing.

3. Finished goods (FG) in manufacturing plants, warehouses, and retail outlets are the items sold to the firm’s customers.

We shall now try to answer the following question:

What is the best way to control suppliers in a complex supply chain?

SUPPLY CHAIN

An important part of SCM is provision of the information needed for planning and managing the supply chain. This information comes from internal and external sources and is disseminated to decision makers through ERP systems, which often contain supply-chain management modules. The supply chain for a firm can be very complicated, because many companies have hundreds, if not thousands, of suppliers. The performance of numerous suppliers determines the inward flow of materials. The performance of firm’s marketing, production, and distribution

processes determines the outward flow of products. Imagine the chaos if all the firm’s suppliers acted independently and never adjusted to changes in the firm’s schedules. Hence, management of the flow of materials is crucial. Friends, let’s now focus our attention on the:-

SUPPLY CHAINS FOR SERVICE PROVIDERS Supply-chain management is just as important for service providers as it is for manufacturers. Service providers must purchase the equipment, supplies, and services they need to produce their own services. Generally, a service provider’s supply chain must be designed so that the right resources and tools are available to perform a service. Supply-chain management offers service providers the opportunity to increase their competitiveness. Can you tell me as to what is the best approach for developing an integrated supply chain? DEVELOPING INTEGRATED SUPPLY CHAINS Traditionally, organizations have divided the responsibility for managing the flow of materials and services among three departments: purchasing, production, and distribution.

1. Purchasing is the management of the acquisition process, which includes deciding which suppliers to use, negotiating contracts, and deciding whether to buy locally.

2. Production is the management of the transformation processes devoted to producing the product or service.

3. Distribution is the management of the flow of materials from manufacturers to customers and from warehouses to retailers, involving the storage and transportation of products.

Materials management is concerned with decisions about purchasing materials and services, inventories, production levels, staffing patterns, schedules, and distribution. Developing an Integrated supply chain Phase 1:

Independent Suppliers Purchasing Production Distribution Customers supply-chain entities. Phase 2: Internal Suppliers

Purchasing Production Distribution Customers (internal supply chain) Materials management department

Integration Phase 3: Supply-chain Suppliers Internal supply Customers Integration chain

Integrated supply chain

MANAGING THE CUSTOMER INTEFACE

Now we explore the impact of the Internet on the order-placement and the order-fulfillment processes.

ORDER-PLACEMENT PROCESS

The order-placement process involves the activities required to register

the need for a product or service and to confirm the acceptance of the order.

The Internet provides the following advantages for a firm’s order-placement process.

1. COST REDUCTION: Using the Internet can reduce the costs of processing orders.

2. REVENUE FLOW INCREASE: A firm’s Web page can allow customers

to enter credit card information or purchase-order numbers as part of the order-placement process.

3. GLOBAL FLEXIBILITY: Another advantage the Internet has provided

firm’s is the opportunity to accept orders 24 hours a day. 4. PRICING FLEXIBILITY: Firms with their products and services posted

on the Web can easily change prices as the need arises, thereby avoiding the cost and delay of publishing new catalogs.

ORDER-FULFILLMENT PROCESS

The order-fulfillment process involves the activities required to deliver a product or service to a customer.

Now we will focus on information sharing, the placement of inventories, and

postponement.

1. INFORMATION SHARING: The Internet provides a quick and efficient means to share information along the supply chain. Within a firm, ERP systems facilities the flow of information across functional areas, business units, geographic regions, and product lines.

Can you tell me your opinion about whether the distribution centers should be added to position inventory closer to the customer?

2. INVENTORY PLACEMENT: A fundamental supply-chain decision is where to locate an inventory of finished goods. The issue for any firm producing standardized products is where to position the inventory in the supply chain.

- Inventory pooling: A reduction in inventory and safety stock

because of the merging of variable demands from customers. - Forward placement: Locating stock closer to customers at a

warehouse, distribution centers, wholesaler, or retailer.

- Vendor-managed inventories: An extreme application of the forward placement tactic, which involves locating the inventories at the customer.

- Continuous replenishment: AVMI method in which the supplier

monitors inventory levels at the customer and replenishes the stock as needed to avoid shortages.

3. POSTPONEMENT: Assemble-to-order and mass customization firms

use a tactic called postponement, which refers to delaying the customizing of a product or service until the last possible moment.

Postponement can be extended to the distribution channel.

Channel assembly is the process of using members of the distribution channel as if they were assembly stations in the factory.

Now let us turn our attention to:- MANAGING THE SUPPLIER INTERFACE The application of ERP has forced firms to reengineer their enterprise processes to take advantage of large, integrated information systems. Now we will discuss electronic purchasing (e-purchasing), the considerations firms make when selecting suppliers or outsourcing internal processes, the implications for centralized buying, and the reasons why value analysis is important. E-PURCHASING

We will discuss four approaches to e-purchasing: electronic data interchange, catalog hubs, exchanges, and auctions.

- Electronic data interchange (EDI): A technology that enables the transmission of routine business documents having a standard format from computer-to-computer over telephone or direct leased lines.

- Catalog hubs: An approach to e-purchasing that is used to reduce the costs of placing orders to suppliers as well as the costs of the goods or services themselves.

- Exchange: An electronic marketplace where buying firms and selling together to do business.

- Auction: An extension of the exchange in which firms place competitive bids to buy something.

Can you tell me as to what criteria should be used to select suppliers and how should suppliers be certified? We shall discuss in detail. SUPPLIER SELECTION AND CERTIFICATION Purchasing is the eyes and ears of the organization in the supplier marketplace, continuously seeking better buys and new materials from suppliers. Consequently, purchasing is in a good position to select suppliers for the supply chain and to conduct certification programs. SUPPLIER SELECTION To make supplier selection decisions and to review the performance of current suppliers, management must review the market segment it wants to serve and relate their needs to the supply chain. Three criteria most often considered by firms selecting new suppliers are price, quality, and delivery. The benefits of fast, on-time delivers also apply to the manufacturing sector. Many manufactures demand quick, dependable deliveries from their suppliers to minimize inventory levels. A fourth criterion is becoming very important in the selection of suppliers – environmental impact. Many firms are engaging in green purchasing, which

involves identifying, assessing, and managing the flow of environmental waste and finding ways to reduce it and minimize its impact on the environmental. SUPPLIER CERTIFICATION Certification typically involves site visits by a cross-functional team from the buying firm who do an in-depth evaluation of the supplier’s capability to meet cost, quality, delivery, and flexibility targets from process and information system perspectives. Let us see as to how can purchasing power be used effectively in a supply chain? SUPPLIER RELATIONS The nature of relations maintained with suppliers can affect the quality, timeliness, and price of a firm’s products and services. Competitive orientation: A supplier relation that views negotiations between buyer and seller as a zero-sum game: Whatever one side loses, the other side gains; short-term advantages are prized over long-term commitments. Cooperative orientation: A supplier relation in which the buyer and seller are partners, each helping the other as much as possible. Now let us turn to attention to the question as to what are the implications for supply-chain management of outsourcing an activity? OUTSOURCING A special case of the cooperative orientation is outsourcing. The decision to outsource an activity sometimes referred to as the make-or-buy decision. Outsourcing has direct relevance for supply-chain management because of its implications for control and flexibility. DEGREE OF SOURCING CONTROL The more important the activity is for the achievement of the firm’s competitive priorities, the greater the degree of control the firm will want. FLEXIBLITY TO CHANGE THE SUPPLY CHAIN A firm has a more flexible arrangement with a supplier if it has a short-term agreement with it. If market needs change, or the supplier experiences business difficulties, the firm will have a more difficult time changing suppliers if it has a long-term commitment. Long-term arrangements should be used only when the firm is confident that the supplier will fit into its long-term strategic plans.

CENTRALIZED VERSUS LOCALIZED BUYING When an organization has several facilities (e.g., stores, hospitals or plans), management must decide whether to buy locally or centrally. This decision has implications for the control of supply-chain flows. Centralized buying has the advantage of increasing purchasing clout, savings can be significant, often on the order of 10 percent or more. Increased buying power can mean getting service, ensuring long-term supply availability, or developing new supplier capability. Probably the biggest disadvantage of centralized buying is loss of control at the local level. Now let us examine as to how the suppliers can get involved in valve analysis to benefit the supply chain? VALUE ANALYSIS A systematic effort to reduce the cost or improve the performance of products or services, either purchased or produced, is referred to as value analysis. It is an intensive examination of the materials, processes, information systems, and flow of material involved in the production of an item. Benefits include reduced production, materials, and distribution costs; improved profit margin; and increased customer satisfaction. Value analysis can focus solely on the internal supply chain with some success, but its true potential lies in applying it to the external supply chain as well. An approach that many firms are using is called early supplier involvement, which is a program that includes suppliers in the design face of a product or service. Suppliers provide suggestions for design changes and materials choices that will result in more efficient operations and higher quality. In the automotive industry, an even higher level of early supplier involvement is known as presourcing. Whereby suppliers are selected early in a vehicle’s concept development stage and are given significant, if not total, responsibility for the design of certain components or systems. MEASURES OF SUPPLY-CHAIN PERFORMANCE We relate some commonly used supply-chain performance measures to several important measures. INVENTORY MEASURES All methods of measuring inventory begin with a physical count of units, volume, or weight. However, measures of inventories are reported in three basic ways: average aggregate inventory value, weeks of supply and inventory turnover.

1. Average aggregate inventory value= (Number of units of items A typically

on hand) (Value of each unit of item A) + (Number of units of item B typically on hand) (Value of each unit of item B) Average aggregate inventory value 2. Weeks of supply =

Weekly sales (at cost)

Annual sales (at cost) 3. Inventory turnover = Average aggregate inventory value. PROCESS MEASURES Supply-chain managers monitor performance by measuring costs, time, and quality. Supply-chain process measures Order placement Order fulfillment Purchasing 1.Percent of orders Percent of incomplete Percent of suppliers taken accurately orders shipped delivers on time 2.Time to complete Percent of orders Suppliers lead times the order-placement shipped on time process 3.Customer satisfaction Time to fulfill the order Percent defects in purch- with the order-placement -ased materials and service process Percent of returned items Cost of purchased materials

or botched service and services Cost to produce the item or service Customer satisfaction with the order-fulfillment process LINKS TO FINANCIAL MEASURES Managing the supply chain so as to reduce the aggregate inventory investment will reduce the total assets portion of the firm’s balance sheet. An important financial measures is return on assets (ROA), which is net income divided by total assets. Weeks of inventory and inventory turns are reflected in another financial measures, working capital, which is money used to finance ongoing operations. Increases in inventory investment requires increased payments to suppliers. Managers can also reduce production and material costs through effective supply-chain management. Supply-chain performance measures related to time also have financial implications. The Internet has brought another financial measure related to time the forefront: cash-to-cash, which is the time lag between paying for the materials and services needed to produce a product or service and receiving payment for it. The shorter the time lag, the better the cash flow position of the firm. SUUPLY-CHAIN LINKS TO OPERATIONS STRATEGY Operations strategy seeks to link the design and use of a firm’s infrastructure and processes to the competitive priorities of each of its product or services so as to maximize its potential in the marketplace. A supply chain is a network of firms. We shall discuss two distinct supply-chain designs and demonstrate how they can support the operations strategies of firms. Dear friends, at this point in our discussion, let me draw a comparison between the EFFICIENT and RESPONSIVE SUPPLY CHAINS. I tell you, it’s going to be an immensely enjoyable discussion. So, fasten your seat belts and pay attention. Here we go. EFFICIENT VERSUS RESPONSIVE SUPPLY CHAINS

Environment best suited for efficient supply chains

Factors Efficient supply chains Responsive supply chains Demand Predictable; low forecast errors Unpredictable; high forecast errors Competitive Low cost; consistent quality; Development speed; fast delivery priorities on-time delivery times; customization; volume flexibility; high-performance design quality New-product Infrequent Frequent introduction Contribution Low High margins Product variety Low High THE DESIGN OF EFFICIENT AND RESPONSIVE SUPPLY CHAINS The higher in an efficient supply chain that a firms is, the more likely it is to have a line flow strategy that supports high volumes of standardized products or services. DESIGN FEATURES FOR EFFICIENT AND RESPONSIVE SUPPLY CHAINS Factor Efficient supply chains Responsive supply chains Operations strategy Make-to-stock or standardized Assemble-to-order,

make-to-order Services; emphasize high-volume, Or customized Standardized products, or services emphasize

product or Services. Service variety Capacity cushion Low High Inventory Low; enable high inventory turns As needed to enable fast

investment delivery time. lead time Shorten, but do not increase costs Shorten aggressively. Supplier selection Emphasize low prices; consistent Emphasize fast delivery time; quality; on-time delivery customization; volume flexibility; high-performance design quality Time to pose a question, dear friends. Could you tell me What causes supply-chain dynamics? Well, let’s see. SUPPLY-CHAIN DYNAMICS Supply chain often involve linkage among many firms. Each firm depends on other firms for materials, services, and information needed to supply its immediate customer in the chain. What causes supply-chain dynamics? The causes are both external and internal. EXTERNAL SUPPLY-CHAIN CAUSES Typical disruptions include the following.

1. Volume changes: Customers may change the quantity of the product or service they had ordered for a specific data or unexpectedly demand more of a standard product or service.

2. Product and service Mix changes: Customers may change the mix of items in an order and cause a ripple effect throughout the supply chain.

3. Late delivers: Late delivers of materials or delays in essential services can force a firm to switch its schedule from production of one product model to another.

4. Underfilled shipments: Suppliers that send partial shipment do so because of disruptions at their own plants.

INTERNAL SUPPLY-CHAIN CAUSES Typical internal supply-chain disruptions include the following:

1. Internally generated shortages: There may be a shortage of parts manufactured by a firm because of machine breakdowns or inexperienced workers.

2. Engineering changes: Changes to the design of products or services can have a direct impact on suppliers.

3. New product or service introductions: New products or services always affect the supply chain.

4. Product or service promotions: A common practice of firms producing standardized products or services is to use price discounts to promote sales.

5. Information errors: Demand forecast errors can cause a firm to order too many, or too few, materials and services.

Let us now focus on:-

SUPPLY-CHAIN SOFTWARE

Supply-chain software provides the capability to share information with suppliers and customers and make decisions affecting the internal and external supply chains. Supply-chain applications are often a part of enterprise resource planning (ERP) systems or can be purchased independently from a variety of vendors.

The system has the following modules:

1. Order Commitment: Accepts customers order, allocates resources to ensure that delivery is possible, and commits the firm to a specified delivery date.

2. Transportation Managements: Schedules freight movements, provides routing capability, allocates resources, and tracks shipments worldwide.

3. Purchasing management: Links to suppliers to share information and manage procurement contracts.

4. Demand management: Provides multiple forecasting algorithms and causal modeling to assist in estimating demands, allowing for management overrides to incorporate real-time customer information.

5. Vendor-Managed Inventory: Coordinates the replenishment of inventories stored at the customer’s site.

6. Replenishment Planning: Facilities the order-fulfillment process by orchestrating the flow of inventory through the various stocking points in the distribution channel and allocates inventories among customers when shortages exist.

7. Configuration: Enables the assemble-to-order strategy by checking for the availability of all components before accepting an order and facilitates the substitution of components or features based on availability.

8. Material planning: Determines the replenishment of components and assemblies to support the master schedule of finished products.

9. Scheduling: Provides multisided schedules with the capability to reschedule as needed.

10. Master planning: Offers optimization tools to allocate and coordinate limited resources across the distribution network based upon user strategies.

11. Strategic Planning: Provides tools for designing global supply chains, which assist in deciding inventory levels and the appropriate product mix across the distribution network and the best production and storage locations subject to customer and resources constraints.

Dear friends, thus we have been able to visualize the rather fascinating process of SUPPLY-CHAIN MANAGEMENT ACROSS THE ORGANIZATION. Indeed, Supply chains permeate the entire organization. It is hard to envision a process in a firm that is not in some way affected by a supply chain.

Supply-chain management is essential for manufacturing as well as service firms. With that, we have come to the end of today’s discussions. I hope it has been an enriching and satisfying experience. See you around in the next lecture. Take care. Bye.