ISTANBUL KÜLTÜR UNIVERSITY

Faculty Of Engineering and Architecture

Industrial Engineering Department

ENTERPRISE RESOURCE PLANNING

Lecture Notes

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Contents

• Section 1 : ERP - Business with ERP • Section 2 : Marketing and Sales • Section 3 : Production and Materials Management• Section 4 : Accounting and Finance• Section 5 : Introduction to SAP R/3 (the ERP software)

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SECTION 1

Enterprise Resource Planning- Business with ERP

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Business in the Digital AgeBusiness in the Digital Age

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The Business Application Architecture

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Companies in e-CompetitionCompanies in e-Competition

Industrial Age Information Age

A New Business A New Business ModelModel

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Business with ERP

• Businesses exist to make a profit• Businesses strive to provide goods and

services faster and cheaper than competition

• More efficient ways of accessing and sharing information will increase customer service and therefore profits

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What is ERP offering?• ERP is business process infrastructure

– ERP is a software mirror image of the major business processes of a firm, such as customer order fulfillment and manufacturing.

– ERP software automates and integrates the basic processes of a firm, from finance to the shop floor, and eliminate complex, expensive links between computer systems that were never meant to talk to each other.

– provide interorganizational & intraorganizational collaboration & information sharing

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• ERP Business Technology architecture•Business Process Workflow Management

•Functional Information Management–Marketing, Operations, HRM, etc.

•Decision Support Models and Tools•Data Management

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• ERP Functional Architecture– Information Systems Modules

•Human Resources Management•Manufacturing Management•Financial Management•Accounting •Marketing Management•Workflow Management

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Motivation for Implementing ERP

Achieving and maintaining competitive advantage requires better information management:– Information Quality– Information Reliability– Information Access– Information Sharing

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• Firms View ERP As a System:– to provide better information

management– to transform the competitive space– to transform relationships between

•their customers•their suppliers•their competitors

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• Several factors led to development of ERP:

– speed and power of hardware increased, cost and size decreased

– client/server architecture– sophisticated software development– growth of business size, complexity, and

competition– Manage company-wide business operations– Uses a common database and shared

management reporting tools

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Business Processes

• Managers now think in terms of business process

• Take the customer’s perspective

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Logistics in business, the organized movement of materials and, sometimes, people. The term was first associated with the military but gradually spread to cover business activities.Separate activities or functions, all of which fall under a business firm's logistics “umbrella,” include customer service, demand forecasting, documentation flow, interplant movements, inventory management, order processing, packaging, parts and service support, plant and warehouse site selection, production scheduling, purchasing, returned products, salvage… Logistics in military science, all the activities of armed-force units in roles supporting combat units, including transport, supply, signal communication, medical aid, and the like.Components of Logistics It is useful to distinguish four basic elements or functions of logistics: supply, transportation, facilities, and services. (A fifth, management or administration, is common to all organized human activity.) All involve the provision of needed commodities or assistance to enable armed forces to live, move, communicate, and fight.

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For this, company needs to

• Make sure functional areas are integrated• Ensure information on customer

configuration is up-to-date• Ensure manufacturing has configuration

info. from sales• Ensure that, if financing is required,

information from sales is available in accounting

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Functional areas of operation

• Marketing and Sales• Production and Materials Management• Accounting and Finance• Human Resources

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Functional Area Information Systems

• Potential inputs and outputs for each functional area

• Different kinds of data and usage of data

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Marketing and Sales

• Determine pricing• Take customer

orders• Create sales

forecast• Do market research• Promote products

and/or services

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Production and Materials Management

• Production Planning

• Product Information

• Need accurate forecasts from Marketing and Sales

• Compare costs with Accounting

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Accounting and Finance• Record transactions• Summarize data

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Human Resources

• Recruit• Train• Evaluate• Compensate• Retain

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The Manufacturing Roots of ERP

• Materials Requirements Planning (MRP)• Electronic Data Interchange (EDI)• MRP - II• Downsizing and reorganization drove the

impetus for ERP

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ERP and SAP’s R/3

• Software to allow all business areas to be integrated

• Interactive and real-time processing• Users interact with computer screen, not

printed data• Initially introduced R/2• Open architecture• Access common database

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ERP Significance

• Global integration

• Eliminates updating and repairing separate computer systems

• Allows managers to manage, not just monitor

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Cost of ERP

• Large company – $50-500 Million– $30 million in software– $200 million in consulting– $ millions for hardware– Implementation: 4-6 years

• Medium sized companies– $10-20 million– 2 year implementation

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Questions about ERP

• Is it for every company?• Is the software inflexible?• How much profit should you expect?• Why do some have more success?

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SECTION 2

Marketing and Sales

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Marketing Personnel make decision on :

• What products should we produce?• How much of each product should we

produce?• How are our products best promoted and

advertised?• How should our products be distributed?• What price should we charge?

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Fitter Snacker’s Sales Process

QuoteQuote

SalesOrderSalesOrder

Pick,Pack and

Ship

Pick,Pack and

Ship

InvoiceInvoice

PaymentPayment

ReturnsReturns

Sales

Warehouse

Accounting

Receiving

Fitter Snacker’sSales Process

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Problems with Fitter Snacker’s Sales process:

• Sources:– Three unintegrated systems

• Sales Order System• Warehouse System• Accounting System

– Manual handling of transactions– Information not available in “real time”

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Sales and Distribution with ERP

• SAP Sales and Distribution Process

Pre-Sales ActivitiesSales Order Processing

DeliveryBilling

Inventory Sourcing

Payment

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Pre-Sales Activities

• Inquiry or Quote (binding)(araştır & fiyat ver)

• Marketing Activities– Tracking Contacts

• Sales Calls• Visits• Mailings

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Sales Order Processing

• Activities required to record a sales order• Incorporate data from inquiry or quote• Automated Pricing and Discounting• Automate Credit Check

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Inventory Sourcing

• Check of inventory, orders and production to see if order can be delivered when customer desires

• Includes shipping and considers weekends/holidays

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Delivery

• Releasing documents to warehouse to initiate pick, pack and ship

• Sequenced and grouped for warehouse operation efficiency

• Materials Management module carries out picking, packing and shipping

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Billing

• Sales order data copied to invoice• Can be printed and mailed, faxed or

transmitted electronically• Accounting records updated

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Payment

• Payment may be physical check or electronic

• Cash debited and customer account credited

• Quick processing avoids credit check problems

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Sales Order Entry in SAP R/3

Sold-to partyP.O. NumberRequired Delivery DateMaterialOrder Quantity

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Master Data

• Master data is stored in a central database that is accessed by all modules

• Customer Master Data and Material Master Data are primary data sources for Sales Order Processing

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Document Flow in SAP R/3

All documents related tooriginal sales order

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Document Flow

• Sales order process creates numerous documents- Sales Order - Invoice- Delivery - Payment- Goods Issue - RMA

• Document Flow links all documents related to a sales order

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Customer Relationship Management (CRM)

• ERP provides means to manage all data relating to a customer to improve the quality of the interaction

• CRM Activities include:– One-to-One Marketing– Sales Force Automation– Sales Campaign Management– Marketing Encyclopedias– Call Center Automation

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CRM Benefits

• Lower Costs due to better use of sales and marketing resources

• Higher Revenue by improving the effectiveness of marketing efforts

• Improved strategy and performance measurement by changing management and staff focus

CRM software builds on ERP data to improve marketing effectiveness

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Production and Materials Management at Fitter Snacker

• Must answer the following questions:– How much of each bar should be

produced?– What quantities of raw materials should

be ordered?– When should raw materials be ordered

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General Approaches to Production

• Make-to-stock: Items produced in anticipation of orders

• Make-to-order: Items produced to meet specific customer orders

• Assemble to order: Final product assembled from make-to-stock items

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Fitter Snacker Manufacturing Process

Raw

Mat

eria

l War

ehou

se Mixer

Mixer

Mixer

Mixer

Form Bake Pack

Fin

ishe

d G

oods

War

ehou

se

Snack Bar Line

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Fitter Snacker Production Problems

• Communications– Marketing does not share data with production

(sales promotions and large, unexpected orders)

• Inventory– True inventory status not known– No real-time data on actual sales

• Accounting and Purchasing– Difficulty forecasting raw material and labor

costs– Adjusting accounts for actual vs. standard costs

time consuming and done infrequently

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SECTION 3

Production and Materials Management

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Production Planning Process

• Work from sales forecast to create aggregate production plan

• Break down aggregate plan into more specific plans

• Use production plan to determine raw material requirements

toplu

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SAP R/3 Approach to Production Planning

Sales and Operations Planning

Demand Management

MRPDetailedScheduling

Sales Forecasting

PurchasingProduction

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Sales Forecasting

Jan. Feb. March April May JunePrevious Year (cases) 5734 5823 5884 6134 6287 6435Growth: 3.0% 172 175 177 184 189 193Base Projection (cases) 5906 5998 6061 6318 6476 6628Promotion (cases) 500Sales Forecast (cases) 5906 5998 6061 6318 6476 7128

Sales Forecasting

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Sales and Operations Planning

Sales and Operations Planning Jan. Feb. March April May June1) Sales Forecast 5906 5998 6061 6318 6476 71282) Production Plan 5906 5998 6061 6318 6900 67003) Stock Level 0 0 0 0 424 -44) Working Days 22 20 22 21 23 215) Capacity (Shipping Cases) 7333 6667 7333 7000 7667 70006) Utilization 81% 90% 83% 90% 90% 96%7) NRG-A (cases) 70.0% 4134 4199 4243 4423 4830 46908) NRG-B (cases) 30.0% 1772 1799 1818 1895 2070 2010

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Demand Management

Week 1 Week 2 Week 3 Week 4 Demand Management 1/2 - 1/5 1/8 - 1/12 1/15 - 1/19 1/22 - 1/26 1/29 - 1/31 2/1 - 2/2 Monthly Demand NRG-A 4134 4134 4134 4134 4134 4198

NRG-B 1772 1772 1772 1772 1772 1799 Working Days in Week 4 5 5 5 3 2 Working Days in Month 22 22 22 22 22 20 MPS NRG-A 752 940 940 940 Weekly Demand NRG-B 322 403 403 403

Demand Management Jan 2 Jan 3 Jan 4 Jan 5 Jan 6 Monthly Demand NRG-A 4134 4134 4134 4134 4134

NRG-B 1772 1772 1772 1772 1772 Working Days in Month 22 22 22 22 22 MPS NRG-A 188 188 188 188 188 Daily Demand NRG-B 81 81 81 81 81

Week 5

984422

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Material Requirement Planning - MRP

• Bill of Material (BOM)• MRP Record

Oats Lead Time = 2 weeks Week 1 Week 2 Week 3 Week 4 Week 5MPS NRG-A 752 940 940 940 984(cases) NRG-B 322 403 403 403 422MPS NRG-A 108 135 135 135 142(500 lb. batches) NRG-B 46 58 58 58 61Gross Requirements (lb) 44,070 55,087 55,087 55,087 57,667Scheduled Receipts 44,000 44,000Planned Receipts 88,000 44,000 44,000On Hand 11,650 11,580 493 33,406 22,319 8,652Planned Orders 88,000 44,000 44,000

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ERP in Supply Chain Management

Supplier

Raw

Mat

eria

ls

Manufacturer Wholesaler Retailer

Cus

tom

erGoods Goods Goods Goods Goods

$$ $ $ $

Information Information Information Information Information

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Supply Chain Management and ERP

• ERP not required for Supply Chain Management (SCM)

• ERP can facilitate sharing information in real time

• Use of internet can reduce communication costs

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Providing Production Data to Accounting

• Production data does not get entered into an ERP system directly– Many methods of gathering shop floor

data are available– ERP allows shop floor data to be

collected once for production and accounting purposes, and data is consistent in both areas

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SECTION 4

Accounting and Finance

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Accounting and Finance

• Accounting system data is used:

– By decision-makers throughout a company to plan and manage day-to-day activities

– By managers to make long-range operating forecasts

– By accountants to generate a company’s financial statements and other reports

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Basic Financial Statement

• Balance Sheet: shows company’s financial health at a point in time

• Income Statement: shows a company’s sales, cost of sales and profit or loss for a period.

• “Closing the books” means checking to see that financial statements are accurate and up to date. Usually done quarterly or monthly.

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Using ERP for Accounting and Finance

• Unintegrated systems usually require research effort by accountants to assemble required data

• ERP systems capture accounting data in real time as business transactions occur– Transfer of finished goods from

assembly line to warehouse results in changes to Accounting records as well as Materials Management records.

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SAP R/3 Modules and Accounting

• Sales and Distribution (SD)• Production Planning (PP)• Materials Management (MM)• Financial Accounting (FI)• Controlling (CO)• Human Resources (HR)• Asset Management (AM)

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Credit Management

• Companies routinely sell to customers on credit

• Sellers must manage credit to avoid default by customers

• Sellers manage customer credit using credit limits

• Accurate and timely data required to manage credit

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Product Profitability Analysis

• Accurate data required to properly determine the profitability of a company’s products

• Inaccurate data can result from:– Inconsistent record keeping– Inaccurate inventory-costing systems– Problems consolidating data from

subsidiaries

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Inconsistent Record Keeping

• Companies may have divisions that keep records in different systems or with different structures

• Summarizing the data to provide management summaries may require additional processing by middleware systems (e.g. spreadsheets)

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Inventory Costing

• A manufactured items costs consist of three elements:– Cost of raw materials– Cost of direct labor– Cost of overhead (utilities, general

factory labor, supplies, manager’s salaries, storage and insurance costs)

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Inventory Costing

• Direct costs (material and direct labor) can be associated with products or batches of materials relatively easily

• Indirect costs (overhead) are difficult to assign to particular products or batches, but are a significant portion of a product’s cost

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Distribution of Indirect Costs

• Indirect costs are frequently allocated based on machine hours or labor hours used to make a product

• Standard costs are used to adjust accounting records for changes due to production and sale of products

• Cost variances must be recorded to reconcile actual and standard costs

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ERP and Inventory Cost Accounting

• Adjusting accounting records for cost variances can be difficult with unintegrated information systems

• ERP systems are configured with methods for computing variances so that the process is automated

• Real time data in ERP systems means that accurate cost data will be available

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Activity-Based Costing (ABC) and ERP

• In ABC, “activities” associated with overhead-cost generation are used to allocate costs more precisely

• Defining “activities” to relate overhead costs to products can be difficult

• ABC requires more record keeping, which can be simplified using an ERP system

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Problems in Closing Books

• Currency Translation – Daily fluctuation of exchange rates more easily handled by ERP systems

• Intercompany Transactions – Companies cannot make profits by selling products to themselves, so profits can’t be recorded from intercompany sales

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Management Reporting with ERP

• Document Flow allows for better management of the numerous transactions that are related to a customer order

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Management Reporting and Analysis

• Storing accounting records in a database allows for easier analysis

• Data warehousing provides separate, summarized data for reporting to avoid disruption of transaction processing

• SAP R/3 provides specialized information systems for analysis (LIS, SIS)

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SECTION 5

ERP Software : Introduction to SAP R/3

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SAP – an ERP Software

• SAP AG produced an ERP program called R/3

• Purchasing ERP software is expensive, with spectacular payoffs and challenging implementation

• The future of ERP will focus on:– managing customer relationships– improving planning and decision making– linking operations to the Internet– focusing on smaller companies

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ERP Industry

• 70% of Fortune 500 have implemented– includes MSFT, IBM, and APPLE

• 30-40%+ annual revenue growth for last 5 years– partly attributable to Y2K re-engineering

• Major players– SAP ---33% of market– PeopleSoft– JDEdwards, Baan, Oracle, SCT, SGAI

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ERP Market Figures

• 1996 worldwide revenues (only license sales): $4.8 Billion

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SAP R/3 Basis System

Windows 3.11, Windows 95, Windows NT, OSF/Motif, Windows 3.11, Windows 95, Windows NT, OSF/Motif, OS/2-Warp, Macintosh OS/2-Warp, Macintosh

ABAP/4, C, C+ +ABAP/4, C, C+ +

DialogDialogSAP-GUISAP-GUI

LanguagesLanguages

Windows 3.11Windows 3.11, , Windows 95, Windows 95, Windows NT,Windows NT,

OS/2-WarpOS/2-Warp

ADABAS DADABAS DDB2 for AIXDB2 for AIX

INFORMIX-OnLine 7INFORMIX-OnLine 7ORACLE 7ORACLE 7

ADABAS DADABAS DMS SQL Server 6.0MS SQL Server 6.0

ORACLE 7ORACLE 7DB2/400DB2/400

AIXAIXDigital UNIXDigital UNIX

HP-UXHP-UX

SINIXSINIXSOLARSSOLARS Windows NTWindows NT OS/400OS/400

HardwareHardware AT&TAT&TBull/ZenithBull/Zenith

CompaqCompaq

SequentSequentSNISNI. . .. . .

Data Data GeneralGeneral

HP (Intel)HP (Intel)IBM (Intel)IBM (Intel)

BullBullDigitalDigital

HPHP

IBMIBMSNISNISUNSUN

UNIX SystemsUNIX SystemsIBMIBM

AS/400AS/400

OperatingOperatingSystemsSystems

DatabasesDatabases