The Essential ERP - Its Genesis & Future

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P.J. Jakovljevic - December 26, 2000

Introduction

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.

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, 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.

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 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.

The 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.

1970s/1980s - 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.

MRP - 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.

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 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.

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 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.

CRP - 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.

At 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.

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. 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.

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. 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.

MRPII - 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.

Available 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.

MRPII 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:

'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.'

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.

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 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.

1990s - 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.

JIT, ATP, and Other Factors

Customers 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.

During 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.

The 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 Defined

APICS defines ERP as follows:

'An 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.'

Impact of the PC

The cost 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.

The changing 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.

2000s - Future of ERP

During the 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.

Capacity Planning

To circumvent 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.

Global Supply Chain Management

While most 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).

The major ERP players already have offerings or strategies addressing this important need (See The Essential Supply Chain and SAP APO - Will It Fill the Gap).

Customer Relation Management

Another important 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.

ERP vendors 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).

Real-Time Performance Analysis

ERP software's 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.

Looking to the Future

Global financial 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 (order qualifiers).

We believe 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.

Summary

Knowing the 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.

Figure 1.

It should 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.

Technology 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.

Glossary

Advanced 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.

APICS: A nonprofit educational organization consisting of over 70,000 members in the production/operations, materials, and, more recently, integrated resource management areas.

Available-to-Promise (ATP): The uncommitted portion of a company's inventory and planned production, maintained in the master schedule to support customer order promising.

Bill of 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.

Business 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.

Capacity 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.

Customer 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.

Discrete Manufacturing: Production of distinct items such as automobiles, appliances, or computers.

Flow Manufacturing: 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 bulk.

Infinite Loading: Calculation of the capacity required at work centers in the time periods required regardless of the capacity available to perform this work.

Just-in-Time (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.

Master 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, and dates.

Material 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.

Manufacturing 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.

Process Manufacturing: Production that adds value by mixing, separating, forming, and/or performing chemical reactions. It may be done in either batch or continuous mode.

Product 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.

Reorder 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.

Routing: 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.

Sales 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.

Supply Chain Management (SCM): The processes from the initial raw materials to the ultimate consumption of the finished product linking across supplier-user companies.

Warehouse 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.

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