Enterprise Applications--The Genesis and Future, Revisited Part One: 1960s--Pre-Computer Era

Enterprise Applications—The Genesis and Future, Revisited
Part One: 1960s—Pre-Computer Era
P.J. Jakovljevic - March 31, 2004

History

Integrated enterprise resource planning (ERP) software solutions have become synonymous with competitive advantage, particularly throughout the 1990s. The idea behind ERP systems was to replace "islands of information" with a single, packaged software solution that integrates all traditional enterprise management functions like financials; accounting; payroll; human resource (HR) management; and manufacturing and distribution, and thereby ensure enterprise-wide transaction system coherency. Knowing the history and evolution of ERP within the broader enterprise applications concept is essential to understanding its current use and its future developments. The following is the genesis of enterprise applications by era.

1960s—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 or a government building, most manufacturing companies could not afford to own one. However, manufacturing companies had to be able to afford to keep enough inventory on hand to satisfy customer demand. It was the age of the reorder point system (ROP, see Glossary* for definition of terms in italics) where the assumption was that the customer would continue to order what they had before and the future would consequently look very much like the past. In most industries this was a valid assumption though, since product life cycles were measured in years, which was competitive enough in those days.

Moreover, inventory 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 manually, whereby, in the production control office, the manual explosion of bills of materials (BOMs) often resulted in errors, since pesky index card files were 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 then put back in the right place, which would be far from guaranteed.

Further, the order entry/sales department usually created the plant schedule (for the items manufactured in-house) in those days. 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 missed or delayed customer deliveries. Often the shop would start an order only to learn that required material was not available. As a result, the ensuing excessive work in progress/process (WIP) and raw materials tied up unnecessary capital funds and shop floor space, which ultimately led to a number of other missed opportunities.

This is Part One of a six-part note.

Part Two will cover the 1990s.

Part Three will discuss the 2000s.

Parts Four and Five will discuss ERP evolution.

Part Six will look at the future.

*There is a Glossary for the terms italicized throughout this article.

1970s/1980s—Advent of Computers in Manufacturing

When computers finally became small and affordable enough to be deployed by an average manufacturing company, their use for resolution of materials mismanagement initially gained the highest priority status. Silently, the need to order only what was really needed crept into the mindset of manufacturers. No longer could a company afford to order some of everything', since orders had to be based only on what was being sold, while what was already in inventory or committed to arrive on a purchase order or through internal manufacturing order would offset this requirement. As a result, materials requirements planning (MRP) computer systems were developed to provide for "having the right materials arrive in at the right time", while the master production schedule (MPS) was built for the end items and finished goods. 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 and ingredients.

MRP—The Initial Impact

The impact that the computer had on material planning and enterprise management was immense. From the manual planning and huge inventory posting card decks, this new computer system promised to automatically plan, build, and purchase requirements based on the finished products to be shipped, the current inventory on hand, the allocated inventory for other orders, 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 supposedly visible to anyone with access to a computer without having to go to the card deck to look it up.

MRP, 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 parts 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 then suggest an activity to place an order, cancel orders that were already placed, or simply move the timing (i.e., expedite or delay) of these existing orders. The real significance of MRP was that, for the first time, the planner was able to answer the questions "what?", "when?" and "how much?". In other words, 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. Indeed, the enterprise systems currently in use by most large corporations worldwide are an evolution of the MRP systems, one of the first being devised by IBM and the US tractor maker J I Case. The early MRP systems were indeed a sort of a quantum leap, given they had managed to regiment former chaotic manual systems, to a degree.

Nevertheless, 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 sake 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. Also, there was no inherent 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. Further, if only one part needed for the finished product was going to be late, there was no automatic way to know the impact on the other needed parts. Therefore, slack was built into the schedule through conservative, often unjustifiably pessimistic lead times. Despite this drawback, the benefits far outweighed the costs and more companies began to embrace the tools and techniques of MRP.

CRP—The Next Development

As more people learned how to utilize this material planning methodology, they quickly realized something else very important was missing. Namely, it did not suffice to have all the parts to get the job done, since sufficient plant capacity was needed as well. Thus, 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.

At the same time, computers were increasing in power and decreasing in price—a trend that has continued till nowadays. Thus, 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 BOMs 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, production lines, and so on) to be used to build the parts and the operations to be performed on them, so that capacity and workload could be planned and scheduled.

Yet, another 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. Unfortunately, infinite capacity is not an accurate reflection of reality, and this drawback in the use of traditional 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 or work center. This had at least allowed some 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.

Still, after the BOM explosion and time phasing of materials and capacity had been accomplished through MRP/CRP, other problems on the shop floor became evident. Namely, 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 first priority at this stage.

MRPII—Connecting Manufacturing and Finance

For sure, the implications of the use of computers in manufacturing have relatively quickly reached beyond the factory floor. Once again the technology improved simultaneously with the realization that as every piece of inventory moved, financial transactions occurred or moved as well. For example, if a part was received at the factory or warehouse, not only should the inventory on hand quantity 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 (AP) 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 WIP asset should go up. The labor and overhead charges from the shop floor personnel also are added to the WIP asset account with an offset to the AP account. When the finished part completes it route through the shop, the WIP asset account goes up. Conversely, as the finished product is sold, the finished good asset account goes down and the accounts receivable (AR) 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. After all, the principles of checks and balances and of double entry bookkeeping were established by old Venetians.

Available information technology (IT) 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. Since MRP assumes infinite capacity and strict adherence to schedule dates, process and flow manufacturers have 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. For more details on peculiarity of these manufacturing environments, see Process Manufacturing Software: A Primer, What Makes Process Process?, and Pull versus Push: a Discussion of Lean, JIT, Flow, and Traditional MRP.

MRPII did not mean that MRP was done incorrectly the first time, but rather it was its significant evolution that incorporated more resources and continuous monitoring of planned versus actual results. MRPII closed the loop with the financial accounting and financial management systems. The American Production and Inventory Control Society (APICS) defines MRPII in its dictionary, 10th edition, as follows:

"A method 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 MRP."

In other words, 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 were to provide a competitive advantage.

Meanwhile, 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 IT departments. Systems were developed for support of each major functional area. As an example, accounting and finance departments had a set of programs that helped it manage the general ledger (GL), accounts payable and receivable, cash flow management, as well as capital assets and financial reporting. These accounting programs were combined to form an integrated system for accounting, like MRPII already integrated the manufacturing programs. Sales, engineering, purchasing, logistics, plant maintenance, project control, customer service, and human resources departments 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 enabled by application programming interface (API) programs.

This concludes Part One of a six-part note.

Part Two will cover the 1990s.

Part Three will discuss the 2000s.

Parts Four and Five will discuss ERP evolution.

Part Six will look at the future.

Sources and Recommended Further Readings

1. ERP: Tools, Techniques, and Applications for Integrating the Supply Chain. Second Edition; Carol A. Ptak, CFPIM, CIRM, and Eli Schragenheim; The St. Lucie Press/APICS Series on Resource Management; 2nd Edition, 2003
   
   
2. Selected Readings in ERP; APICS Complex Industries SIG, 1999
   
   
3. Maximizing Your ERP System: A Practical Guide for Managers; Dr. Scott Hamilton; McGraw-Hill Trade, 2002
   
   
4. APICS Dictionary; 10th Edition