6. The Introduction of Enterprise Resource Programs (ERP)
ERP, an enterprise-wide system that integrates the business functions and processes of an organization, typically includes manufacturing, logistics, distribution, inventory, shipping, invoicing, and accounting. ERP requires companies to have the same definitions and the same computer screens across multiple departments. This eliminates the problem of one department presenting from one source and the other department answering from another source of information.
In most companies, ERP is the information backbone or pipeline needed to manage the daily transactions. Many of the internal functions of corporations are supported and shared by ERP systems. The advantage of ERP is that the software combines the data of formerly separate applications. This helps keep information in synchronization across multiple disparate systems. Because it standardizes the process, it will reduce the number of software specialists previously required.
Companies implementing ERP strive to derive the benefit of greater efficiency through integration. Companies can now operate in real time and run data as needed, rather than batch processes performed at the end of the day. To be best-of-breed, it is necessary to operate on event-driven processes that allow the computer to help in the decision process through decision support systems.
When ERP systems operate in real time, they can advise on alternate risk management paths for the enterprise. This will free up the managers’ time in deciding because all departments have the same real-time data. In many best-of-breed companies, the system will make decisions for the projects and show results to the managers. Integration and collaboration across multiple platforms frees up the managers to work on any anomalies.
Material management shares inventory and procurement order information. This allows for production and lead-time changes to be accounted for, increasing profitability for the supplier and the customer. The manufacturer can use material management data to make customer orders specific to CAD drawings, eliminating error.
Production is coordinated, which means less expediting of merchandise from and to the production floor because of an evened-out flow of demand. When customer and supplier collaborate, the demand process begins to match the supply requirements. One reason for this matching of the supply with the demand is the bullwhip effect. This was originally named with the PG and Wal-Mart collaborative efforts.
When suppliers and customers work in silos with little communication between them, the demand volatility for each step in the supply chain increases. This means that the demand volatility increases from the distributor to the customer. The manufacturer has a higher volatility than the retailer. Finally, the raw-material supplier has even higher volatility in the demand stream. This is called the bullwhip effect.
The solution is the use of collaborative technology between all parties in the supply chain. After there is collaboration in the supply chain, each successive partner in the supply chain can visualize the demand from the succeeding partner. There is no guessing or getting caught off guard. Expediting is minimized through information sharing, allowing each company in the supply chain to understand and anticipate changes made at any point in the supply chain. Data housing in the ERP systems can decrease safety stock by 20%. Sometimes this concept is called ERP II, because it involves reaching beyond the original company to the partners.
The collaborative fulfillment process can intelligently commit to delivery dates and increase accuracy. This is called available to promise (ATP) systems that can locate inventory, assets, personnel, and machines in real time. MySAP uses ERP to create collaborative hubs such as these:
• Collaborative Planning, Forecasting, and Replenishment (CPFR) allows the manufacturers to collaborate with their customers. This comes as an added module in some ERP packages. It allows companies to run on exception-based management systems where the entire supply chain sees abnormalities and works on them jointly. This allows both parties to raise revenues, improve service levels, and lower inventory levels while utilizing fewer people in the decision-making and logistics process.
• Vendor-managed inventory (VMI) comes as an added module in some ERP packages. This makes it easier to start the ERP process because a complete user’s guide and instructions of EDI are generally available. The other advantage is that the process is fully integrated into the solution. Some of the development costs of the VMI package can now be defrayed. Another advantage is the community of people using the VMI package. They can be accessed at yearly conferences or through personal contacts to confer about new ideas or productivity tools.
• Enterprise portals increase utility to workflow management. Many of the documents and services can be automated through the Internet. Forms previously filled out by the distributor or retailer can now be filled out by the supplier. This can minimize the use of paper products and greatly enhance the performance of personnel. All new information can be relayed to the customer for promotions, revisions, and acceptance. The web-based tools also offer integration of third-party systems such as 3PLs and Software as a Service (SAAS) vendors. An example of SAAS or on-demand vendors is the CRM vendor SalesForce.com. This type of concept is in growing use in logistics and distribution. It even integrates into the customer’s Facebook or Twitter accounts. The company can farm out the logistic services and distribution (3PLs) or coordinate the entire logistics function with the use of 4PLs. The ERP program can do the same productivity improvement process as SharePoint. It is equipped to facilitate the communication flow, enhancing collaboration.
• Within the Mobile Supply Chain, new paradigms of integration allow people to plan and execute decisions at alternate mobile points. There is no downtime for trying to contact and send information because it is sent in real time. Management can monitor all activities collectively and get the best consensus decisions. This moves into the world of “on-device” and “on-demand” computing. On-demand runs as SAAS architecture. Management executes and pays for only what is used. The software is generally hosted as an icon on the desktop that loads and executes with a click, which is how it came to be known as cloud computing.
• On-device computing allows for instant contact with employees through the information backbone ERP. Management can communicate immediately with employees using PDAs, iPads, Blackberries, and any other mobile device. Hard copies are not necessary, which cuts down on the amount of printing necessary. In manufacturing, any problems in production are corrected immediately from the assembly line by contacting the correct person via mobile device. Any conversation to select parties can be immediately sent to the manager, alerting the sales force of any designing changes that can be notified and approved immediately.
Business Processes and Analytics Features That Can Add to the ERP Software Solution
• Business Intelligence (BI)
• Artificial Intelligence (AI)
• Business Process Management (BPM)
• Data Warehouse (DW)
• Document Management (DM)
• Enterprise Document Management (EDM)
• Enterprise Asset Management (EAM)
• Field-Service Management
• Knowledge Management (KM)
• Supply Chain Management (SCM)
• Partner Relations Management (PRM)
• Portfolio Management
• Product Development
• Product Lifecycle Management (PLM)
• Risk Management
• SRM Supplier Relations Management
• Workflow Management
CRM Features
• Marketing Management
• Sales Management
• Order Management
• Product Configuration
• Order Fulfillment
• Customer Management
• Contact Management
• Customer Self-Service
• Account Management
• E-mail Tools
• E-Marketing Tools
• E-Selling Tools
• E-Fulfillment Tools
• E-Service Tools
• Mobile Sales
• Case Management
• Web Storefront Tool
• Marketing-Campaign Management
• Marketing Resource Management
• Mobile Access
• Opportunity Management
• Pricing
• Rental Management
• SFA (Sales Force Automation)
• Sales Management
• Sales-Process Management
• Searchable Knowledge Base
• Marketing Intelligence (Analytics)
• Service Intelligence (Analytics)
• Service Management
• Sales-Order Management
• Target Marketing
• Targeted Offers
Financials Features
• Accounts Payable
• Accounts Receivable
• Activity-Based Costing
• Advanced Allocations
• Asset Management
• Balanced Scorecard
• Bank Reconciliation
• Budgeting
• Cash Management
• Cost Management
• Expense Management
• Financial Intelligence (Analytics)
• Fixed-Asset Management
• General Ledger
• Invoicing/Billing
• Properly Management
• Risk Management
• Tax Management
• Treasury Management
• Employee Benefits and Compensation
• Employee Event Management
• Employee Self-Service
• HR Management
• Manager Self-Service
• Payroll
• Performance Management
• Personnel Administration
• Recruitment
• Talent Management
• Tax Administration
• Time and Labor/Attendance
• Time Management
• Training
• Work-Force Planning
Manufacturing Features
• Capacity Requirements Planning (CRP)
• Engineering Change Management (ECM)
• Forecasting and Planning
• Job Costing and Analysis
• Job Shop Floor Control
• Manufacturing and Production Cost Analysis
• Master Production Scheduling (MPS)
• Material Requirements Planning (MRP)
• Product Data Management (PDM)
• Quality Management (QM) and Quality Assurance
• ATP (Available to Promise)
• Bin Management
• Capacity Requirement Planning CRP
• Collaborative Supply Chain CR, JIT, VMI, CPFR
• CTP (Capable to Promise) Inventory
• Demand Planning
• Distribution Management
• E-Design
• E-Procurement
• E-Supplier Portals
• Event Management
• Inventory Management
• Lead-Time Management
• Lean Manufacturing
• Logistics Management
• Manufacturing
• Manufacturing Intelligence (Analytics)
• Material Requirement Planning (MRP)
• Network Management
• Network Simulation (Analytics)
• Online Auction
• Private Exchange
• Purchasing
• Procurement
• Production Scheduling
• Promotions Management
• Purchase-Order Processing
• Quality Management
• Replenishment
• RMAs (Return Materials Authorizations)
• Sales-Order Management
• Serial and Lot Tracking
• Shop Floor Management
• Supply Chain Planning (SCP)
• Supplier Certification Program Vendor Performance Tracking
• Supplier Certification Program Carrier Performance Tracking
• TMS Transportation Management Systems
• WMS Warehouse Management Systems
The Quantifiable Benefits of an ERP System
The following sections describe the quantifiable benefits companies can reap from an ERP system.
Inventory Reduction
Improved planning and scheduling practices typically lead to inventory reductions of 20% or better.(1) In manufacturing, deliveries can be coordinated to actual need dates, and the bill of material is mated with inventory more readily over disparate sites. In distribution, a good supply chain solution and integration with suppliers can lead to a 1% to 2% inventory savings above and beyond the TMS savings for the inbound freight.
The additional productivity that ERP offers beyond Certification, VMI, WMS, and TMS programs adds 1% to inventory savings. Improved procurement practices lead to better vendor negotiations for prices, typically resulting in cost reductions of 5% or better. Valid schedules permit purchasing departments to focus on vendor negotiations and quality improvement rather than expediting shortages and getting material at premium prices.
Labor Cost Reductions
Improved manufacturing practices lead to fewer shortages and interruptions and to less rework and overtime. Typically labor savings is a 10% reduction in direct and indirect labor cost.(1) This savings is generated mostly in the office workforce and not so much in the distribution centers. At Do it Best Corp., the entire number of employees is 1,400, with around 800 in distribution. The 10% productivity pertains to roughly half this number because the other half is the professional staff and managers. The average wage is roughly $16 per hour. With an additional 25% for the perks and insurance, the wage increases to $20 per hour. The Lean Savings in dollars of labor time saved is 10% × $16 × 300 × 40 × 52 = $1,248,000.
Improved Customer Service
Improved coordination of sales and production leads to better customer service and increased sales. Improvements in managing customer contacts, making and meeting delivery promises, and shorter order-to-ship lead times will lead to higher customer satisfaction and repeat orders. Combining these improvements in customer services can lead to fewer lost sales and actually increase sales by 10% or more.
Improved Accounting Controls
Improved collection procedures can reduce the number of days of outstanding receivables, thereby providing additional available cash. The improvements include fast, accurate invoice creation directly from shipment transactions; timelier customer statements; faster credits to customer accounts for returns; faster return adjustments into inventory; faster credits from the supplier; faster follow-through on delinquent accounts; and being able to spot delinquency faster in an effort to avoid customer nonpayment. Credit checking during order entry and improved handling of customer inquiries further reduces the number of problem accounts. Improved credit management and receivables practices typically reduce outstanding receivables by 18% or better. This is when to use the applications in the ERP system to minimize the days in receivables. We used the e-commerce alternative with shareware.
The Lean Savings for the inbound freight of ERP:
• Inventory reduction is 1% × $195.7 million inventory = $1,960,000 reduction in inventory.
• Carrying cost reduction is $521,360.
• Freed-up cost of capital is .02 × $1,960,000 = $39,200.
• New inventory is at $194,040,000.
• The new turns are $931,000,000 / $194,040,000 = 4.80 turns.
• The Lean Savings in dollars of labor time saved is 10% × $16 × 300 × 40 × 52 = $1,248,000.
• Total Lean is $1,808,560.
The Green Savings:
• Damaged inventory cost represents .75% of $1,960,000 inventory = $14,700.
• Obsolete inventory cost reduction is 9% of inventory reduction = $176,400.
• Total Green is $191,100.
Total savings for the ERP Lean and Green from ERP is $1,999,660.
In summary, ERP efficiencies make a company lean. The Lean component will make a company green because it is using fewer resources and more efficient processes. Fewer people and less material and space will be needed to run the business with fewer wastes.
ERP’s Sustainable Drive to Green
It is becoming an increasing responsibility for ERP systems to measure the sustainable metrics of the new green initiative. The systems need to save the details for the carbon labeling and carbon footprint metrics, which can be shared among the trading partners.
Make no mistake; ERP providers are making great strides in building their sustainability offerings. SAP has received countless awards and recognitions for its sustainability efforts. Its annual Sustainability Report highlights these achievements, and the company’s recent acquisition of Clear Standards continues to support this trend.
SAP is not alone in these environmentally friendly endeavors. Oracle has teamed with ESS and Zogix, both of which specialize in carbon management and sustainability software, to enhance its offerings in the areas of sustainability reporting, planning, and management.
Although SAP and Oracle are the market leaders in ERP solutions, other options are available to meet the sustainability needs of businesses. Web-based tools such as Netsuite, Acumatica, and Nolapro and add-on solutions like Microsoft’s Environmental Sustainability Dashboard are also available, being marketed primarily to medium-sized companies or divisions of larger corporations.
With Microsoft’s Dynamics software they discuss the three elements of sustainability that constitute a corporate evaluation model measured by the so-called “triple bottom line,” covering a company’s impact on people, planet, and profit, respectively.
The reporting frameworks from the Global Reporting Initiative’s (GRI’s) G3 Guidelines provide an indication of what the core performance indicators are for economic, environmental, financial, and social sustainability. The GRI created a table that shows the key performance indicators for each of the four core performance indicators. The indicators are Economic, Environmental, Financial, and Social Sustainability.
Large or small, these solutions face similar challenges, including the rather tedious task of gathering data. Sustainability initiatives typically run the full length of a company’s supply chain. So to really track and report success of corporate sustainability initiatives, these systems require complex streams of data. These streams include collecting product and SKU-level waste data from manufacturing sites, securing consignment-level emissions figures from transport providers, obtaining “real-time” energy consumption information from relevant utilities, and so on.(1)
One of the challenges in collecting this data is agreeing on scope and data standards. Interestingly enough, although the importance of common standards is universally recognized, there is no single standards-setting body or process with certified vendors in place today. Partners along the supply chain can agree to use a common dashboard of carbon pollutants and environmentally friendly processes. These standards can also be brought up in the common industry standards writing committees such as the American Hardware Manufacturer Association (AHMA).
Although the International Organization for Standardization is involved, it will be a long time before ISO standards proliferate; in the meantime, there is a need to drive consensus across nongovernmental groups to gain critical mass. Accenture is currently working with the World Economic Forum to address this need with organizations such as the World Business Council for Sustainable Development, the Carbon Trust and Business for Social Responsibility.(1)
Collecting and processing the green data across the supply chain is where the ERP platforms will make sustainable planning possible. The data can be shared with collaborative partners in real time to augment the collective responsibility of each partner to the reduction of emissions across the entire supply chain. The database for green sustainability indexes would not be possible without ERP systems. With these systems comes the creation of systems like ABC accounting, in which each unit or process is connected to the energy-generation process.
“SAP’s customers,” according to SAP, “produce one-sixth of the world’s carbon emissions.” Anything SAP can do to support sustainability, efficiency, and other green concepts could have a profound effect on its customers, and therefore a significant quantity of the world’s emissions. And, because one of the main goals of SAP’s sustainability initiative is to build software solutions that can lower these emissions while supporting more efficient and responsible use of other scarce resources like water, enterprise software companies like SAP can indeed become leaders in these efforts. For the moment, sustainability in the context of SAP is a maturing movement. In March of 2009, SAP announced plans to reduce its greenhouse gas emissions down to its year-2000 levels by the year 2020.
The Collaborative Sustainability Scorecard or KPI
Through the collaboration of many, there now exists a scorecard that can measure the success of a company’s ERP system. It is a rough sketch of some of the key performance indicators or metrics that can be used by any company. These metrics can also be shared with suppliers and customers so that each member of the supply chain is on the same page.
The Recycle, Disposal, and Hazardous Metrics of Green
• Ratio of recycled waste to discarded waste
• Dollar amount of vendor return of faulty products
• Percent by vendor for vendor return of faulty products
• Dollar amount of refurbishing of damaged products
• Percent by vendor for refurbishing of damaged products
• Dollar amount of disposal in dump bins of damaged products
• Percent by vendor for disposal in dump bins of damaged products
• Hazardous waste disposal
• Nonhazardous waste disposal
Transportation Metrics of Green
• Miles per ton weight traveled
• Cost per route traveled to deliver goods
• Vendor fuel cost
• Vendor comparison by percentage of the cost of fuel
• Vendor comparison of revenue and fuel cost
• Cost of truck fuel
Utilities Metrics of Green
• Electric energy usage
• Fuel energy usage
• Water usage
See the Procter & Gamble KPIs Excel Spreadsheet(2)
• Improve environmental KPI
• Measure the environmental footprint
• Supplier Environmental Sustainability Scorecard
• Energy use
• Water use waste disposal
• Greenhouse gas emissions
(2) To access the spreadsheet, go to www.pgsuplidor.com and create an account.