The Essential ERP - Its Genesis & Future
Written By: Predrag Jakovljevic
Published On: December 2000
The Essential ERP - Its Genesis & Future
Integrated enterprise resource planning (ERP) software solutions have
become synonymous with competitive advantage, particularly throughout
the 1990's. ERP systems replace "islands of information" with a single,
packaged software solution that integrates all traditional enterprise
management functions like financials, human resources, and manufacturing
& logistics. Knowing the history and evolution of ERP is essential to
understanding its current application and its future developments. Following
is the genesis of ERP by era.
- Pre-Computer Era
The focus of manufacturing systems in the 1960s was on inventory control.
In those days when a computer would occupy an entire wing of a building
at a local university, most manufacturing companies could not afford to
own one. However, companies were able to afford to keep inventory on hand
to satisfy customer demand. It was the age of the reorder point system
(ROP) where the assumption was that the customer would continue to order
what they had before and the future would look very much like the past.
In most industries this was a valid assumption, since product life cycles
were measured in years.
was regarded as an asset not only on the balance sheet but also in the
mind of the average manager. Therefore, production planners created schedules
and managed materials by hand. In the production control office, the manual
explosion of Bills of Materials (BOMs) often resulted in errors. Index
card files had been used to record material allocations, receipts, and
issues. When the unallocated inventory balance on the card seemed low
for a certain part, a planner would give a card to a buyer, who would
then place a new purchase order. Those card files provided a real help
to a planner as long as each index card had been updated in a timely manner
and put in the right place.
order entry/sales department usually created the plant schedule. As a
result, persons who had little or no access to material availability information
loaded forecasted sales and actual customer orders into the schedule.
This lack of visibility, combined with the cumbersome inventory record-keeping
process, caused frequent schedule changes and delayed customer deliveries.
Often the shop would start an order only to learn that required material
was not available. The resulting excessive work in progress (WIP) and
raw materials tied up unnecessary capital funds and shop floor space,
which ultimately led to a number of other missed opportunities.
- Advent of Computers in Manufacturing
When computers finally became small and affordable enough to be deployed
by an average manufacturing company, the resolution of materials mismanagement
initially gained the highest priority status. Silently, the need to order
only what was really needed crept onto the horizon. No longer could a
company afford to order some of everything. Orders had to be based on
what was being sold. What was already in inventory or committed to arrive
on a purchase order offset this requirement. As a result, Materials Requirements
Planning (MRP) computer systems were developed to provide for 'having
the right materials come in at the right time'. The Master Production
Schedule (MPS) was built for the end items. The MPS fed into the
MRP which contained the time-phased net requirements for the planning
and procurement of the sub-assemblies, components, and raw materials.
- The Initial Impact
The impact that the computer had on material planning and enterprise management
was huge. From the manual planning and huge posting card decks, this new
computer system promised to automatically plan, build, and purchase requirements
based on the items to be shipped, the current inventory, and the expected
arrivals. The posting originally done on the manual input/output cards
was replaced by transactions directly made in the computer and documented
on pick lists. The amount on inventory was visible to anyone with access
to a computer without having to go to the card deck and look it up.
or 'little MRP', represented a huge step forward in the planning process.
For the first time, based on a schedule of what was going to be produced,
which was supported by a list of materials that were needed for that finished
item, the computer could calculate the total need and compare it to what
was already on hand or committed to arrive. This comparison could suggest
an activity to place an order, cancel orders that were already placed,
or simply move the timing of these existing orders. The real significance
of MRP was that, for the first time, the planner was able to answer the
question 'when?'. Rather than being reactive and waiting until the shortage
occurred, the planner could be proactive and time phase orders, including
releasing orders with multiple deliveries.
some simplifying assumptions were needed to allow the computers of the
day to make the required calculations. One was that the orders should
be started at the latest possible date to provide for minimal inventory
while still serving the customer's need on time. This method is referred
to as 'backward scheduling'. Therefore, all orders were scheduled backwards
from the desired completion date to calculate the required start date.
There was no slack time in the schedule and the downside of this assumption
was that if there were any hiccups in the execution of the plan, the order
would most likely be late to the customer. If only one part needed for
the finished part was going to be late, there was no automatic way to
know the impact on the other needed parts. Slack was built into the schedule
through conservative lead times. Despite this drawback, the benefits far
outweighed the costs and more companies began to embrace the tools and
techniques of MRP.
- The Next Development
As more people learned how to utilize this material planning methodology,
they quickly realized something else very important was missing. It did
not suffice to have all the parts to get the job done, sufficient plant
capacity was needed as well. The idea of closing the loop with a capacity
plan was introduced and 'closed loop MRP', 'big MRP', or Capacity Requirements
Planning (CRP) was born.
the same time, computers were increasing in power and decreasing in price.
The computing capacity to do the extra mathematical computations was affordable
and available. Now, not only could the materials be calculated, but also
a capacity plan based on those material plan priorities could be created.
In addition to the bills of materials needed for each of the finished
parts, defined paths for the production process were necessary. Defined
paths for the production process, commonly called 'routings', specified
the machines or group of machines (work centers) to be used to build the
parts so that capacity and load could be planned and scheduled.
critical assumption needed to complete the computations of the computers
of the day was that infinite capacity existed at each of these work centers
to satisfy this calculated demand when it was required. Infinite capacity
is not an accurate reflection of reality, and this drawback in the use
of MRP/CRP remains present till today. However, for the first time, reports
were available where the overload conditions could be identified and proactively
resolved for each machine. This allowed the preparation of plans and options
to address the overload situation before the problem occurred. Typically,
lead times were long enough to allow work centers to smooth out unbalanced
workloads in the short term and still support the overall required completion
of the work order.
the BOM explosion and time phasing of materials and capacity had been
accomplished through MRP/CRP, other problems on the shop floor became
evident. While planners created a feasible schedule, with all the right
material on its way or in stock, one would discover that maintenance on
a critical piece of equipment had been overlooked or that skilled production
workers were unavailable. Therefore, planning of all manufacturing resources,
other than materials and nominal capacity, became the 1st priority.
- Connecting Manufacturing and Finance
Once again the technology improved simultaneously with the realization
that as every piece of inventory moved, finances moved as well. For example,
if a part was received at the factory, not only should the inventory on
hand go up but also there should be a corresponding increase in the raw
material inventory asset on the financial books. This is balanced by an
increase in the liability level in the accounts payable account. As a
group of parts moves to the shop floor to build the finished product,
the raw material asset should go down and the work in process asset should
go up. The labor and overhead charges from the shop floor personnel also
are added to the work in process asset account with an offset to the accounts
payable account. When the finished part completes it route through the
shop, the work in process asset account goes up. As the finished product
is sold, the finished good asset account goes down and the accounts receivable
asset account goes up. Consequently, at every step of the way, as the
inventory moves, financial accounting moves with it - in duplicate - with
balanced credits and debits.
technology now had the power and was affordable enough to track this inventory
movement and financial activity. As a result, the basic programs for manufacturing
were integrated into one package using a common database that could be
accessed by all users. These were the first Manufacturing Resource Planning
(MRPII) packages, used predominantly by discrete manufacturers
(See Glossary). Since MRP assumes infinite capacity
and strict adherence to schedule dates, process and flow manufacturers
(See Glossary) found little use for it. They instead
focused their efforts during the same time on other aspects of the supply
chain, particularly forecasting, purchasing, and distribution.
does not mean that MRP was done incorrectly the first time, it is rather
its significant evolution. MRPII closed the loop with the financial accounting
and financial management systems. The American Production and Inventory
Control Society (APICS) defines MRPII as follows:
for the effective planning of all resources of a manufacturing company.
Ideally, it addresses operational planning in units, financial planning
in dollars, and has a simulation capability to answer "what if" questions.
It is made up of variety of functions, each linked together: business
planning, sales and operations planning, production planning, and the
execution support systems for capacity and material. Output from these
systems is integrated with financial reports such as the business plan,
purchase commitment report, shipping budget, and inventory projections
in dollars. MRPII is a direct outgrowth and extension of closed loop
For the first
time, a company could have an integrated business system that provided
visibility to the requirements of material and capacity driven from a
desired operations plan, allowed input of detailed activities, translated
all this activity to a financial statement, and suggested actions to address
those items that were not in balance with the desired plan. Good information
leads to good decisions, and therefore these integrated, closed-loop information
systems provided a competitive advantage.
other functional areas of companies had also been requesting help from
data processing departments, today known as Management Information Systems
(MIS), Information Systems (IS), or Information Technology (IT) departments.
Systems were developed for support of each major functional area. As an
example, Accounting and Finance had a set of programs that helped it manage
the general ledger, accounts payable & receivable, as well as capital
assets and financial reporting. These accounting programs were combined
to form an integrated system for accounting, likewise MRPII integrated
the manufacturing programs. Sales, Engineering, Purchasing, Logistics,
Project Control, Customer Service, and Human Resources followed suit and
each developed their own sets of integrated computer systems. Unfortunately,
these disparate systems were unable to interact and exchange information.
Information exchanges between these systems, often time consuming and
error prone, were by interface programs.
- Enterprise Resource Planning
By the time each functional area of a company had developed its integrated
software program, the need for tightly integrating them became obvious.
The next major shift during the late 1980s and early 1990s was that 'time
to market' was becoming increasingly short. Lead times expected by the
market continued to shorten and customers were no longer satisfied with
the service level that was considered world class only a few years earlier.
ATP, and Other Factors
were demanding to have their products delivered when, where, and how they
wanted them. Companies were therefore compelled to develop and embrace
the philosophies of Just in Time (JIT) and supplier partnerships as a
way to remain competitive.
the same time frame, the cost of goods sold was shifting drastically from
labor to purchased materials. Consequently, planners needed to know materials
allocations or finished goods' available-to-promise (ATP) values, immediately
after customer order entry. On the other hand, buyers needed to know the
sales plan several months in advance in order to negotiate prices for
individual materials. Empowerment of employees was needed to provide the
agility that was required to compete in the market.
need to develop a system with tightly integrated programs that would use
data stored on one common database and would be used enterprise-wide (actions
in one department's program driving actions elsewhere), became the highest
priority for IT professionals. No longer was it tolerable to submit a
request to the IT department and wait several man-months of programming
time to obtain this critical information. This common-database, company-wide
integrated system was named Enterprise Resource Planning (ERP).
ERP as follows:
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 MRPII system in
technical requirements such as graphical user interface (GUI), relational
database management system (RDBMS), use of fourth-generation language
(4GL), and computer-aided software engineering (CASE) tools in development,
client/server architecture, and open-system portability.'
of the PC
of technology continued to plummet and the advent of the personal computer
(PC) revolutionized once again the face of business management systems.
At a fast pace, the large inflexible mainframes were replaced by new client/server
technology. The power of these small PCs exceeded the power of the large
mainframes that were routine only a few years earlier. It became possible
to run a fully integrated MRPII system on a small PC.
pace of technology had once again leveraged forward the planning and control
systems in recognition of a real business need. In addition, unlike previous
evolutions, the ERP software vendors offered these critical business applications
also to non-manufacturing companies.
ERP is far
more than just MRPII which runs on a client/server architecture. ERP encompasses
all the resource planning for the enterprise including product design,
warehousing, material planning, capacity planning, and communication systems,
to name but a few. These critical business issues affect not only manufacturing
companies but also all companies that desire to achieve competitiveness
by best utilizing their assets, including information. In other words,
ERP systems help companies become leaner by integrating the basic transaction
programs for all departments, allowing quick access to timely information.
However, ERP inherited MRPII's basic drawbacks, which are the assumption
of infinite capacity and the inflexibility of scheduling dates, preventing
companies from taking full advantage of speedy information flow.
- Future of ERP
last three years, the functional perimeter of ERP systems began an expansion
into its adjacent markets, such as supply chain management (SCM), customer
relationship management (CRM), product data management (PDM), manufacturing
executions systems (MES), business intelligence/data warehousing, and
e-Business. The major ERP vendors have been busy developing, acquiring,
or bundling new functionality so that their packages go beyond the traditional
realms of finance, materials planning, and human resources.
MRPII's capacity planning limitations, planners turned to various ways
of off-line capacity planning: either manually, with the help of spreadsheet
programs, or with the help of new advanced planning and scheduling (APS)
systems. APS systems are designed as bolt-ons with the idea of plugging
into an ERP system's database to download information and then create
a feasible schedule within identified constraints. The new schedule can
then be uploaded into the ERP system thereby replacing the original MRP
results. These APS systems typically offer simulation ("what if") capabilities
that allow the planner to analyze the results of an action before committing
to that action through the ERP system. Some of these systems go one step
further by offering optimization capabilities. They automatically create
multiple simulations and recommend changes in the supply chain within
the existing constraints.
Supply Chain Management
traditional ERP software enables the integration and management of critical
data within enterprises, companies have increasingly recognized the need
to deploy more advanced software systems that manage the global supply
chain by enhancing the flow of information to and from customers, suppliers
and other business partners outside the enterprise. More recently, the
availability and use of the Internet has created a demand for software
that operates across the Internet and intranets. This global logistics
concept merged with above described constraint-based optimization solutions
called advanced planning systems (APS) and specialized warehouse management
software (WMS), resulting in SCM (See Advanced
Planning and Scheduling: A Critical Part of Customer Fulfillment).
ERP players already have offerings or strategies addressing this important
need (See The
Essential Supply Chain and SAP
APO - Will It Fill the Gap).
area of functional expansion is in the front office/customer relationship
management (CRM) arena. Customers are demanding applications and tools
that allow them to link back-office ERP systems with front-office CRM
systems. They are also demanding enhanced capabilities for e-Business,
especially business-to-business (B2B) and business-to-customer (B2C) electronic
commerce. The leading ERP vendors have begun to discern the opportunity
these products present and the benefit potential for organizations implementing
them. CRM has gone from a vast field of point solutions to suites of customer
care applications covering sales force automation (SFA), field service,
telesales, call center, marketing automation, etc.
have explored various routes to penetrate the CRM and e-Commerce markets,
such as developing in-house products (SAP, with its telesales module and
mySAP.com portal), acquiring point specialists to augment their offering
(Oracle through its acquisitions of Versatility for call center, Tinoway
for field service, and Concentra for its product configurator module),
merging full suites (Baan with its acquisition of Aurum in 1997, and PeopleSoft
with its acquisition of Vantive in 1999), and partnering with CRM and
e-Commerce leaders (J.D. Edwards with Siebel and Ariba, and SAP with Recognition
Systems Group for its market campaigns module).
scope will go beyond traditional transactional business functions by enabling
organizations to deliver real-time performance analysis directly on the
desktops of CFOs, CEOs, and business managers. Major ERP vendors have
been shifting focus from routine users' transaction requirements to the
overall organization's business imperatives, thereby helping lines-of-business
become more knowledgeable and proactive. Instead of requiring a collection
of processes, the system should appear to each user as a vast source of
information. While relational databases, currently used by ERP systems,
are good at retrieving a small number of records quickly, they are not
good at retrieving a large number of records and summarizing them on request.
Therefore, major ERP vendors have been increasingly embracing OLAP (On
Line Analytical Processing) tools, that provide a high-level aggregated
view of data.
to the Future
capabilities (including support for the Euro), product data management
(PDM), advanced planning and scheduling (APS), warehouse management systems
(WMS), product configurators via the Web, supply chain management (SCM),
customer relationship management (CRM), e-Commerce, business intelligence
(BI), and component (object-oriented) architecture will remain the order
winners for the next two years. After that period of time, we believe
these functional and technological features will be demoted into commodities
that, within the next two years, ERP will be redefined as a platform for
enabling e-business globally. Originally focused on automating the internal
processes of an enterprise, ERP systems will begin to include customer
and supplier-centric processes as well. ERP software suites will become
universal business applications that will encompass front-office, business
intelligence, and e-commerce/supply chain management, and ERP will no
longer be an acronym sufficient enough to cover it, so we would like to
suggest a new acronym - iERP, meaning inter(net)-enterprise resource planning.
history and evolution of ERP is essential to understand its current application
and its future developments. ERP is an important step in an ongoing evolution
of computer tools that began in the 1960s, as depicted in Figure 1. Each
evolutionary step is built on the fundamentals and principles developed
within the previous one.
be noted that the underpinning of the most sophisticated business applications
systems today remains the same mathematical model introduced in the first
MRP systems. This model of "what do I need, what do I already have, and
what do I need to get and when" will be the backbone of the integrated,
Internet-enabled supply chain.
can never totally replace an effective demand management process. Therefore
we regard as frivolous some analysts' predictions of ERP's demise. The
fundamental shortcomings of ERP revealed by the advance of technology
and increasing customer demands are addressed by extended ERP point solutions
(bolt-on's), and ERP vendors are expected to continue their quest for
delivering more complete solutions.
Planning System (APS): A decision support system that allows manipulation
of the data and viewing of possible changes without disrupting operations.
It helps a company plan all aspects of the supply chain, including transportation
of products, forecasting of product demand, sales and stocking, stocking
of finished goods, scheduling of finished goods production, scheduling
of materials and resources in the production facility, and scheduling
of vendors to supply the plant or warehouses with materials.
A nonprofit educational organization consisting of over 70,000 members
in the production/operations, materials, and, more recently, integrated
resource management areas.
(ATP): The uncommitted portion of a company's inventory and planned
production, maintained in the master schedule to support customer order
Material (BOM): A listing of all the subassemblies, intermediates,
parts, and raw materials that go into a parent assembly showing the quantity
of each required to make an assembly.
Intelligence (BI): Sets of tools that provide graphical analysis of
business information in multidimensional views thus enabling people to
make better decisions and improve their business processes.
Requirements Planning (CRP): The function of establishing, measuring,
and adjusting limits or levels of capacity. The term CRP in this context
refers to the process of determining in detail the amount of labor and
machine resources required to accomplish the tasks of production.
Relationship Management (CRM): Software systems that range from simple,
off-the-shelf contact management solutions to high-end interactive selling
suites that combine sales, marketing, and executive information tools.
These include product configuration, quote and proposal management, and
marketing encyclopedias. Some systems extend functions to include complex
pricing, promotions, commission plans, team selling, and campaign management.
Enterprise-level solutions installed at large companies with hundreds
or even thousands of users have capabilities for call center/help desks,
field service, forecasting, and analysis.
Manufacturing: Production of distinct items such as automobiles, appliances,
A form of manufacturing organization, in which machines and operators
handle a standard, usually uninterrupted, material flow. The operators
generally perform the same operations for each production run. A flow
shop is often referred to as a mass production shop or is said to have
a continuous manufacturing layout. Each product, though variable in material
specifications, uses the same flow pattern through the shop. Production
is set at a given rate, and the products are generally manufactured in
Loading: Calculation of the capacity required at work centers in
the time periods required regardless of the capacity available to perform
(JIT): A philosophy of manufacturing based on planned elimination
of all waste and continuous improvement of productivity. It encompasses
the successful execution of all manufacturing activities required to produce
final product, from design engineering to delivery and including all stages
of conversion from raw material onward.
Production Schedule (MPS): The anticipated build schedule for those
items assigned to the master scheduler. It is a set of planning numbers
that drives material requirements planning (MRP). It represents what the
company plans to produce expressed in specific configurations, quantities,
Requirements Planning (MRP): A set of techniques that uses bill of
material data, inventory data, and master production schedule to calculate
requirements for materials. It makes recommendations to release replenishment
orders for materials. Further, because it is time-phased, it makes recommendations
to reschedule open orders when due dates and need dates are not in phase.
Execution System (MES): A factory floor information and communication
system with several functional capabilities. It includes functions such
as resource allocation and status, operation/detailed scheduling, dispatching
production units, document control, data collection and acquisition, labor
management, quality management, process management, maintenance management,
product tracking and genealogy, and performance analysis. It ca provide
feedback from the factory floor on a real-time basis. It interfaces with
and complements ERP systems.
Manufacturing: Production that adds value by mixing, separating,
forming, and/or performing chemical reactions. It may be done in either
batch or continuous mode.
Data Management (PDM): A system, which controls all product-related
data and associated workflow processes within an enterprise. Product data
management systems replace paper-based processes and information storage
with a single, centralized data repository that enables authorized users
throughout a company to access and update current product information,
while ensuring they follow specific procedures. PDM vendors recently have
emphasized the similarities between PDM and groupware technology appropriate
to a range of business environments. Besides ensuring data integrity using
relational database technology, both include workflow and Web-based applications
that ease collaboration efforts.
Point (ROP) System: Inventory method that places an order for a lot
whenever the quantity on hand is reduced to a predetermined level known
as the reorder point.
Information detailing the method of manufacture of a particular item.
It includes the operations to be performed, their sequence, the various
work centers involved, and the standards for setup and run time.
Force Automation (SFA): Technology used to improve the efficiency
and effectiveness of the sales force by streamlining and speeding up processes
and eliminating errors. It allows the sales force to access up to date
information of customer accounts and pricing. It also eradicates errors
involved with placing orders.
Chain Management (SCM): The processes from the initial raw materials
to the ultimate consumption of the finished product linking across supplier-user
Management System (WMS): Systems that integrate work performed within
warehouses and distribution centers with a transactional-type information
system. Simple storage and retrieval of materials is superseded by strategies
to increase throughput and productivity by managing the full range of
warehouse resources to effectively manage warehouse business processes
and direct warehouse activities, including receiving, put away, picking,
shipping, and inventory cycle counts. Most support radio-frequency communications,
allowing real-time data transfer between the system and warehouse personnel.