Information is a valuable corporate resource and companies that gather and understand it have a distinct advantage over those that do not. Enterprise Resource Planning, otherwise knows as ERP, is one of the tools enlightened manufacturing firms use to leverage their information into a competitive edge. ERP has helped managers reduce lead times, boost productivity, and dramatically improve customer service and satisfaction.
What is ERP?
ERP is the direct descendant of Material Resource Planning (MRP), a software package that emerged in the 1960s. It helped manufacturing companies plan their activities and track materials. Before then, a number of mechanical systems were used, including card systems and spreadsheets. MRP instead uses computer hardware and software to calculate material needs based on a forecast or actual customer orders. It gave managers the ability to tie purchasing and production activities to future demand.
MRP, which covers only materials, eventually gave way to MRP II, which adds resources such as people, machines, and warehouse space to the mix. After all, these resources are as critical to meeting customer demands as raw materials. MRP II systems are usually a suite of hardware and software applications that track and manage information that supports planning and helps carry out the plan. It can include customer-order management, inventory control, production control, purchasing support, product-data management, finance, and accounting.
ERP arrived on the scene in 1993. It includes all of MRP and MRP II, and adds software applications that track additional outlying functions to manufacturing such as marketing support and post-sale field service. ERP hardware/software is usually built around a relational database and hosted on an open system in a client/server configuration.
Costs and benefits
As a rule of thumb, companies generally spend 1 to 2% of their annual revenues to buy and implement an ERP system. Those costs include hardware, software, training, and consultant assistance. Years ago, costs were evenly divided between hardware, software, and training and implementation. Today, hardware's share has decreased while the labor-intensive training and implementation's share has grown. For large companies, it's not unusual to see the training and implementation costs run several times the software costs due to the large number of people involved. Some ERP vendors catering to smaller companies cap costs at that of the software.
ERP has a strong reputation for providing a good return on investments. It saves companies money through inventory reduction, improved manufacturing productivity, reduced lead times, and fewer disruptions from last-minute changes. It also avoids shortages and other surprises that can lead to short runs, overtime costs to meet orders, and ever-changing priorities.
Most importantly, ERP gives companies a way to improve customer service. For example, shipment dates are readily available and more accurate. Production is more flexible so it can accommodate changes and special requests. This translates into increased sales and market share, generating benefits that easily exceed the savings ERP squeezes from increased manufacturing efficiencies.
New information systems are already available that replace or assist ERP systems. Advanced Planning Systems (APS), for example, consider materials and outer resources simultaneously to plan production. It can be applied to a single plant, to an entire company, or extended to include suppliers, customers, warehouses, and transportation. APS compliments ERP in that it plans production while ERP retains data files and carries out the plan. Supply Chain Management (SCM), on the other hand, goes beyond ERP to plan and manage the total enterprise, from raw materials to manufacturing to distribution and includes customers and suppliers.