For an organisation to have efficient manufacturing activities there must be integration and coordination between the flow of materials, flow of information and the flow of costs. Flow of materials relates to the utilisation of resources these could be materials, machinery, manpower, money, or information. Flow of information relates to the planning and controlling of resources. Without -planning we have no basis for action and no basis for evaluating the results achieved, therefore we have no control over the standards of the products.
In an effective manufacturing organisation each stage of the production process “adds value” to the product, however at each stage of production costs are also accumulated. These costs could relate to the cost of the raw materials, cost of labour or the cost of machine time. The driving force behind keeping control of these costs is the flow of information. Organisation needs to know what products, at what specification are needed for a particular customer. In order to achieve all of the above the introduction of Enterprise Resource Planning (ERP) system is needed.
The focus of my report is going to centre on Enterprise Resource Planning systems within a manufacturing industry. My first experience of an enterprise resource planning system was from my industrial placement at Perkins Shibaura Engines Limited (part of Caterpillar Inc); here I was able to see some of the clear benefits and uses of an Enterprise Resource planning (ERP) system. Below is a diagram illustrating some of the uses of an ERP system that I experienced during my industrial placement.
History of an ERP An ERP system is the latest stage of evolution for business planning system that started over forty years ago. The life of the ERP began with Material Requirements Planning (MRP). MRP systems where developed to help manufacturing companies create better techniques for ordering materials. MRP systems used master schedules, the bill of materials and stock records to ascertain the future requirements.
The developments to the system led to a Closed-Loop MRP which allowed users to easily compare the date of when a product was due to be completed, compared to the date the customer required the item. This was done by taking into account the date the raw material where due to arrive and also factoring the time it took to make or assemble the product. If any dates where out of alignment then the system would alert the user and step could be taken to resolve the issues.
The next stage of evolution came about from the creation of Manufacturing Resource Planning or MRP II. This was simply a growth on the closed-loop MRP with additional functionality that could combine other business process such as business planning, production planning & sales and operations planning. These additional functions where also integrated into financial functions allowing results to be expressed in monetary terms. The ERP systems available today allow for greater financial integration, and incorporation of wider scopes of process within an organisation. One of the most well known and widely used ERP systems available of the market is SAP which is serving more than 43,400 customer’s world wide.
Impacts of an ERP System within the Manufacturing Industry Effect on Inventory Inventory is more of a liability than an asset, having real value only when it is flowing through operation or used to support them. (Sheikh 2003) Many organisations have problems relating to inventory. In accounting terms inventory is seen as an asset on the balance sheet, by having lager amounts of inventory and therefore large amounts of capital organisations are loosing out.
The money “tied-up” within inventory could have been used elsewhere in the business to improve processes and drive cost reduction processes. Large build-ups of inventory can often hide problems with the manufacturing process and result in high levels of scrap material. If a worker discovers a batch of defective parts then they can simply move on to the next batch without raising the issues with management.
An organisation who seems ahead of the game in regards to production is Toyota. Toyota has developed a system of encompassing lean production called the “Toyota Production System” (TPS). This approach is based around two philosophies Jidoka and Just-in-time. The main focus of Jidoka is “quality built in”, if a defective part or a piece of equipment malfunctions then the whole production line stops and the error is communicated to managers and staff via the problem display board. This then allows the error to be corrected stopping a poor quality product be passed to a customer. The second element of the Toyota production system is just-in-time (JIT), the main focal point of this principal is making only what is needed, when it is needed, and in the amount needed.
The success of the Toyota Production system can be seen in the fact that variations of the system have been adopted throughout other large manufacturing organisations. Towards the end of 2006 and the beginning of 2007 Caterpillar Inc implemented a variation of the Toyota Production System throughout the whole of the company. This new company wide process now called the Caterpillar Production System (CPS) still based around the main principals of Jidoka and Just-in-time but also adopting principals to reduce waste such as idle time, rework and excess inventory. CPS was implemented into all process within Caterpillar from process on the shop floor to processes adopted within an office environment. These types of process would not be a viable option for an organisation without the use of ERP systems.
Earlier Prediction of Shortages As ERP systems are integrated through all functions of the organisation it can use information help by the various functions or departments to ensure that all plans are consistent and ensure that target can be met. For example if the sales team have forecast the production of 400 of “typeZ” engine over the next 6 months then the ERP system can check the delivery schedules of all the parts on the bill of materials for a “typeZ” engines to make certain that there will be sufficient stock to produce the engine. If a shortage is likely to occur then the system can inform the material planner so that new raw materials can be sourced and consequently preventing long lead times to the customers as well as stoppages on the shop floor due to insufficient materials.
The implementation of an ERP system can lead to dramatic improvements in customer service levels (33% Improvement), Inventory Levels (40% reduction) and production costs (20% reduction) Many large organisations will often offer a range of products to its customers with each range having slightly different bills of materials or requirement for each customer. To complete this process without the aid of an ERP system would be very demanding and time consuming for the people involved.
Demand Management One of the main functionalities of an enterprise resource system is demand management. Demand management encompasses the areas of advertising, pricing and promotion, forecasting expected and order delivery date promising. Demand management requires a lot of information to be collected, this could be information regarding product availability or information from customers regarding the number of orders that they anticipate they will make. Demand management is highly focused around quality, inaccurate sales forecasting or errors in manufacturing lead-times, this can lead to problems serving customers. In order to combat such problems there is often a need to hold safety stock which increases inventory and a need to increase lead times which may cause problems with customers.
The forecast of a product demand is the basis for most planning decisions. Planning decisions regarding all aspects of products will all be based on a function of customer demand. Forecasts are used within the organisation to help make or justify decisions to enter new markets. If demand would be too low in a particular market then it would make no sense for an organisation to enter that market. Forecasts can also be used to ascertain short term fluctuations in demand. This can allow organisation to make decisions concerning the number of workers needed and whether they need to increase the number of temporary labour in order to meet a sudden increase in demand. Demand management can also allow organisations to plan for economic downturn or period of trough when they will face issues regarding demand of their product.
Demand management is something that can be completed without the use of an enterprise resource planning system but the implications of using the systems allow the process to be completed more accurately as all the information is available within one system. Although an ERP system would not stop an organisation’s need for safety stock it could reduce the amount needed as an organisation for always have an up to date forecast of sales. One of the benefits of an ERP system is that can automatically keep suppliers up to date with current stock levels and place order for raw materials when stock are low. This again can free up more for time for the logistics department to focus on planning.
Benefits of an ERP system The benefits of an organisation using an ERP system are vast. Enterprise resource planning systems use centralised databases that all departments can access. This decreases the amount of data duplication reducing the cost of storage of the data and allows users to spend more time analysing the data rather than collecting the data. In the past accounting figures were not based on the same information as manufacturing figures, this was due to the fact that the information was seen not to be accurate because it was created by engineers rather than accountants. In an ERP system all departments would use the same information to make decisions. The finance department would be able to see the number of engines sold to their customers, they would also have each access to the bill of material (from the engineering department) for each engine and the cost of each item (from the purchasing department) and therefore would be able to calculate the cost of the engines
Companies without an ERP system will often not properly master schedule or plan; they will simply wait and react to customer orders. This type of organisation will often only focus of the short run simply only looking at one order and will do what ever it takes to meet that particular order whether that means increasing the workforce or having to quick order a raw material from a supplier at a higher cost. Organisations that operate unplanned, reactive production will often face higher costs than organisations that have planned production.
The common database and simulation capabilities of an ERP system allows managers to respond quickly and make decision based on “what-if” scenarios at numerous levels of details. For example a manager would be able to quickly decide on the product mix to maximise profits given different levels of forecasts from the sales teams, or evaluate the cost relating in the introduction of a third shift with a factory to meet the demands of its customers.
An ERP system can be used in the business planning process, the ERP system will already have data relating to current stock levels, forecasted sales results, and future planned price reductions. With this type of information being pulled from all function areas of the organisation the business plan become more accurate and allows for better decision making. A major advantage of an ERP system is when it is combined with the Just-in-time (JIT) method of production. JIT implementation allows the whole processes of manufacturing planning and control to become agile so that it can quickly respond to the need and demands of its customers.