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The Fundamentals of Enterprise Resource Planning [ERP]



To be truly competitive, manufacturing companies must deliver products on time, quickly, and economically. The set of business processes known as Enterprise Resource Planning [ERP] has proven to be an essential tool in achieving these objectives. Their capabilities offer a means for effectively managing the required resources: materials, labor, equipment, tooling, engineering specifications, space, and money. For each of these resources, ERP can identify what’s required, when it’s needed, and how much is needed. Having matched sets of resources at the right time and the right place is essential for an economical, rapid response to customer demands.

There’s a lot of sloppy terminology flying around today in the business press, and one misnomer is to label enterprise-wide transaction processing software systems as ERP. These software packages support effective resource planning and make much of it feasible, but they don’t truly do it. Plus these packages contain many business processes other than resource planning.



What is Enterprise Resource Planning [ERP]?It is an enterprise-wide set of management tools that balances demand and supply, containing the ability to link customers and suppliers into a complete supply chain, employing proven business processes for decision-making, and providing high degrees of cross-functional integration among sales, marketing, manufacturing, operations, logistics, purchasing, finance, new product development, and human resources, thereby enabling people to run their business with high levels of customer service and productivity, and simultaneously lower costs and inventories; and providing the foundation for effective e-commerce.


The logic of ERP is quite simple; it’s in every cookbook. The Sales & Operations Plan says that we’re having Thanksgiving dinner on the third Thursday in November. The master schedule is the menu, including turkey, stuffing, potatoes, squash, vegetables, and all the trimmings. The bill of material says, “Turkey stuffing takes one egg, seasoning, and bread crumbs”. The routing says, “Put the egg and the seasoning in a mixer”. The mixer is the work center where the processing is done.

In manufacturing, however, there’s a lot more volume and a lot more change. There isn’t just one product, there are many. The lead times aren’t as short as a quick trip to the supermarket, and the work centers are busy with lots of jobs. Thanksgiving won’t get rescheduled, but customers sometimes change their minds and their orders may need to be re-sequenced. The world of manufacturing is a world of constant change, and that’s where ERP comes in.


Strategic Planning and Business Planning

Strategic planning defines the overall strategic direction of the business, including mission, goals, and objectives. The business planning process then generates the overall plan for the company, taking into account the needs of the marketplace (customer orders and forecasts), the capabilities within the company (people skills, available resources, technology), financial targets (profit, cash flow, and growth), and strategic goals (levels of customer service, quality improvements, cost reductions, productivity improvements, etc.). The business plan is expressed primarily in dollars and lays out the long term direction for the company. The general manager and his or her staff are responsible for maintaining the business plan.


Sales and Operations Planning

Sales & Operations Planning (S&OP) addresses that part of the business plan which deals with sales, production, inventories, and backlog. It’s the operational plan designed to execute the business plan. As such, it is stated in units of measure such as pieces, standard hours, and so forth, rather than dollars. It’s done by the same group of people responsible for business planning in much the same way. Planning is done in the aggregate—in broad categories of products—and the focus is on volume, not mix. It establishes an aggregate plan of attack for sales and marketing, engineering, manufacturing and purchasing, and finance.


Demand Management

Forecasting/Sales Planning – Forecasting/sales planning is the process of predicting what items the sales department expects to sell and the specific tasks they are going to take to hit the forecast. The sales planning process should result in a monthly rate of sales for a product family (usually expressed in units identical to the production plan), stated in units and dollars. It represents sales and marketing’s commitment to take all reasonable steps to make sure the forecast accurately represents the actual customer orders to be received.

Customer Order Entry and Promising – Customer order entry and promising is the process of taking incoming orders and determining specific product availability and, for a make-to-order item, the product’s configuration. It results in the entry of a customer order to be built/produced/shipped, and should also tie to the forecasting system to net against the projections. This is an important part of an ERP system; to look at the orders already in the system, review the inventory/backlog, available capacity, and lead times, and then determine when the customer order can be promised. This promise date is then entered as a customer commitment.


Rough-Cut Capacity Planning

Rough-cut capacity planning is the process of determining what resources [the “supply” of capacity] it will take to achieve the production plan [“demand” for capacity]. The process relies on aggregate information, typically in hours and/or units, to highlight potential problems in the plant, engineering, finance, or other areas prior to the proposed schedule being approved.


Master Scheduling

Master scheduling addresses mix: individual products and customer orders. It results in a detailed statement of what products the company will build. It is broken out into two parts—how many and when. It takes into account existing customer orders, forecasts of anticipated orders, current inventories, and available capacities. This plan must extend far enough into the future to cover the sum of the lead times to acquire the necessary resources. The master schedule must be laid out in time periods of weeks or smaller in order to generate detailed priority plans for the execution departments to follow. The sum of what’s specified in the master schedule must reconcile with the Sales & Operations Plan for the same time periods.


Material Requirements Planning [MRP]

Material Requirements Planning starts by determining what components are required to execute the master schedule, plus any needs for service parts/spare parts. To accomplish this, MRP requires a bill of material to describe the components that make up the items in the master schedule and inventory data to know what’s on hand and/or on order. By reviewing this information, it calculates what existing orders need to be moved either earlier or later, and what new material must be ordered.


Capacity Requirements Planning [CRP]

Capacity Requirements Planning takes the recommended needs for manufactured items from MRP and converts them to a prediction of how much capacity will be needed and when. A routing that defines the operations involved is required, plus the estimate of time required for each. A summary by key work center by time period is then presented to compare capacity needed to capacity available.


Plant Scheduling

Plant scheduling utilizes information from master scheduling and MRP to develop start and completion times for jobs to be run. The plant scheduling process can be as simple as lists derived directly from the master schedule or as complex as utilizing sophisticated finite scheduling software to simulate various plant schedules to help the plant and scheduling people select the best one.

Furthermore, a company must also monitor the flow of capacity by comparing how much work was to be completed versus how much The Fundamentals of Enterprise Resource Planning has actually been completed. This technique is called input-output control, and its objective is to ensure that actual output matches planned output.


Supplier Scheduling

Suppliers also need valid schedules. Supplier scheduling replaces the typical and cumbersome cycle of purchase requisitions and purchase orders. Within ERP, the output of MRP for purchased items is summarized and communicated directly to suppliers via any or all of the following methods: the Internet, an intranet, electronic data interchange (EDI), fax, or mail. Long term contracts define prices, terms, conditions, and total quantities, and supplier schedules authorizing delivery are generated and communicated at least once per week, perhaps even more frequently in certain environments. Supplier scheduling includes those changes required for existing commitments with suppliers—materials needed earlier than originally planned as well as later—plus any new commitments that are authorized.

To help suppliers do a better job of long-range planning so they can better meet the needs of the company, the supplier scheduling horizon should extend well beyond the established lead time.


Execution and Feedback

The execution phase is the culmination of all the planning steps. Problems with materials or capacity are addressed through interaction between the plant and the planning department. This is done on an exception basis, and feedback will only be necessary when some part of the plan cannot be executed. This feedback consists of stating the cause of the problem and the best possible new completion date. This information must then be analyzed by the planning department to determine the consequences. If an alternative cannot be found, the planning department should feed the problem back to the master scheduler. Only if all other practical choices have been exhausted should the master schedule be altered. If the master schedule is changed, the master scheduler owes feedback to sales if a promise date will be missed, and sales owes a call to the customer if an acknowledged delivery date will be missed.

By integrating all of these planning and execution elements, ERP becomes a process for effectively linking long-range aggregate plans to short-term detailed plans. From top to bottom, from the general manager and his staff to the production associates, it ensures that all activities are in lockstep to gain the full potential of a company’s capabilities.


The reverse process is equally important. Feedback goes from bottom to top on an exception basis—conveying unavoidable problems in order to maintain valid plans. It’s a rack-and-pinion relationship between the top level plans and the actual work done in the plant.


Financial Integration

In addition to ERP’s impact on the operations side of the business, it has an equally important impact on financial planning. By including the selling price and cost data, ERP can convert each of the unit plans into dollars. The results are time-phased projections of dollar shipments, dollar inventory levels, cash flow, and profits.

Incorporating financial planning directly with operating planning produces one set of numbers. The same data is driving both systems—the only difference being the unit of measure. Too often financial people have had to develop a separate set of books as they couldn’t trust the operating data. Not only does this represent extra effort, but frequently too much guesswork has to be applied to determine the financial projections.


ERP Simulation

In addition to information for operational and financial planning, simulations represent the third major capability of ERP. The ability to produce information to help answer “what if” questions and to contribute to contingency planning is a valuable asset for any manager to have. What if business increases faster than expected? What if business goes as planned, but the mix of products shifts sharply? What if our costs increase, but our prices do not? Do we have enough capacity to support our new products and maintain sales for current ones? These are common and critical issues that arise in manufacturing companies. A key part of the management job is to think through alternative plans. With ERP, people can access the data needed to help analyze the situation, play “what if,” and, if required, initiate a better plan.


Where To Learn About ERP/MRP?

Here are some good resources for ERP learning materials that I could find so far. I am and this site has nothing to do with them. They are mentioned here just for best use of informational purposes only. It is never intended to such business affiliation in any meanings.
Phone: 800-444-2742
ERP Services offered: Public classes, in-company classes, education materials, on-line bookstore.

Buker, Inc. []
Phone: 800-654-7990
ERP Services Offered: In-company and public classes, education materials, consulting.

R.D. Garwood, Inc. []
Phone: 800-241-6653
ERP Services offered: In-company and public classes, education materials, consulting.

Gray Research []
Phone: 603-522-5310
ERP Services offered: ERP consulting, ERP software evaluations, software for Sales Operations Planning. The reference document, MRP II Standard System, is available from this Web site.

Richard C. Ling, Inc. [contact:]
Phone: 919-304-6459
ERP Services offered: Education and consulting focused primarily on Sales & Operations Planning.

Partners for Excellence
Phone: 603-528-0840
ERP Services offered: In-company classes, educational materials, consulting.

Bob Stahl [contact:]
Phone: 508-226-0477
ERP Services offered: In-company classes, educational materials, consulting.

The Oliver Wight Companies []
Phone: 800-258-3862
ERP Services offered: In-company and public classes, education materials, consulting.

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