Enterprise Resource Planning (ERP) systems are developed primarily for transaction processing, data collection and data reporting. By design ERP systems are designed to broad in their breadth of offering which results in being shallow in depth of specialized functionality such as Inventory Planning and Optimization.
Often there is a misconception that Inventory Planning & Optimization software performs the same functions as the MRP (material requirements planning) module, the Item Master modules and ordering module of an ERP system. Some of these differences between an ERP and the value of Inventory Planning and Optimization Solutions are explained in this document.
good way to introduce Inventory Planning and Optimization (Inventory management)
may be by quoting a well known Supply Chain book: "Competitive advantage will
increasingly stem from a firm's ability to deliver the right product to the
right place at the right time, at the right price. Recent studies show that
customers are increasingly substituting brand loyalty for availability" (Source:
M. Christopher, Logistics and Supply Chain, 2nd Ed, Prentice Hall).
implication is that companies with superior supply planning and execution systems
will end up getting the lion's share of the market. As Forrester Research notes,
"As the flow of goods more closely matches demand conditions, companies are
able to trim inventories, improve customer satisfaction, and avoid nasty surprises"
(Source: C. Mines, Six New Technologies to Boost Business Results,
Forrester Research, May 2002)
addition current trends around inventory management are:
Manual inventory reduction policies
These crude policies have come at a cost to customer service levels.
Mass customization - The range and variety of products
available to customers is unprecedented.
Shorter product life cycles When demand does not
meet forecasts, inventory write-offs are the result.
Market leaders invest heavily in technology and advanced planning
systems - Leading companies like Wal-Mart and Dell, who make
use of advanced SCM solutions have higher inventory turns than their industry
- Inventory Turns
Gamble - 6.43
Johnson - 3.07
||Dell - 64.34
||K-Mart - 4.39
Zacks investment Services and Forrester Research Figure 1 Inventory Turns
widely Differ in Industries
Since 1998, Retailers, Distributors and Manufacturers having been introducing supply chain management (SCM) software, specifically designed to enable firms to better manage the planning (SCP software) and execution (SCE software) of supply chain functions. Figure 2 shows the various functional options available in the SCM market. The black eclipse shows the area of Inventory Planning and Optimization.
click on image
SCM applications marketplace source: Piper Jaffrey Inc.)
Main vendors in this space, such as SAP APO (Advanced Planning & Optimization), i2 Technologies, JustEnough, E3, and Manugistics are referred to in this document. Whilst some of the above companies provide tools in other aspects of SCM, the document limits its scope to the Inventory Planning and Optimization area.
This is Part One of a three-part article. Part Two will discuss Inventory Planning & Optimization Solutions. Part Three will present the Business Case for implementing these solutions and detail The Bottom Line.
ERP Systems Today
systems were developed in the 1970's to allow large companies to automate the
processing of transactions related to business functions like finance, order
processing, human resources and material requirements planning. Companies like
SAP, Baan and JD Edwards were among the first
to explore these opportunities. ERP systems were designed to allow a single
software package to replace disparate and obsolete software within the corporation.
The late 1990's saw a huge growth in the adoption and implementation of supply chain planning systems. ERP vendors have added new SCM modules onto their core product suites and are aggressively marketing this new functionality.
Research recently estimated that through 2006, ERP revenue growth rates would
be 10% compounded annually. However, of this, the majority of revenue will come
from SCM and CRM (customer relationship management) modules. The SCM market
on the other hand has been growing at close to 50% annually since 1998 (Source:
J.Surmacx, Mix and Match ERP, cio.com June 2002). Where SCM was once
viewed as a means to gain competitive advantage, companies now see it as a necessary
extension of an ERP system.
Forrester Research recently stated, there were a six "ripening technologies"
that they noted would "intersect with business technologies". The 1st mentioned
was "Coordinating Supply and Demand Chains", wherein it was stated that "smart
agent software would become event driven and self-regulatingnew continuous
demand management applications and practices that predict, manage and reduce
variability on the demand side." (Source: C. Mines, Six New Technologies
to Boost Business Results, Forrester Research, May 2002)
The following reasons outline why ERP vendors have added SCM functionality to their product:
ERP systems were developed for transaction processing, data collection and
data reporting. Users who accessed the ERP database looking to make critical
supply chain decisions where overwhelmed by the sheer volume of content.
Assumptions regarding operating constraints such as lead times and safety
stock are often hard-coded in ERP systems. Inflexible plans created under
these conditions are not favorable to optimizing results for a Customer's
particularly unique complexities.
ERP systems normally employ some flavor of MRP (Material Requirements Planning)
or MRP-II (Manufacturing Resources Planning) for internal supply chain planning.
Unfortunately these methodologies are sequential in nature, which makes them
unsuitable for considering multiple dynamically changing constraints such
as varying lead times and incorporating real demand into their equations.
Plans created by
sequential techniques are rarely optimal on the first attempt. Because organizational
requirements change consistently, sequential planning can never produce a truly
optimal plan for any useful period of time.
concludes Part One of a three-part article.
Two will discuss Inventory Planning & Optimization Solutions.
Three will present the Business Case for implementing these solutions and detail
The Bottom Line.
Hooiman is a respected and successful consultant with over 28 years
of industry experience in the areas of business process consulting, quality
and strategic planning. He is currently a Senior Consultant with the Solutions
Group, a business process consulting company. Mr. Hooiman is accomplished in
Kaizen, PS 9000, Lean Manufacturing, and Six Sigma as well as working to install
ISO 9000 and develop strategic plans in both manufacturing and technology companies.