MATERIALS REQUIREMENT PLANNING (MRP), ENTERPRISE RESOURCE PLANNING/ENTERPRISE RESOURCE MANAGEMENT (ERP/ERM), AND SUPPLY CHAIN MANAGEMENT (SCM) SYSTEMS

8.12 MATERIALS REQUIREMENT PLANNING (MRP), ENTERPRISE RESOURCE PLANNING/ENTERPRISE RESOURCE MANAGEMENT (ERP/ERM), AND SUPPLY CHAIN MANAGEMENT (SCM) SYSTEMS

The concept of the supply chain is interrelated with the computerization of its activities as they have evolved over the last 50 years. S e e H u g o s (2003) and Sheikh (2003) for background details.

T H E EVOLUTION OF C O M P U T E R I Z E D S U P P L Y CHAIN A I D S Historically, many supply chain activities were m a n a g e d with inefficient and ineffec-

tive paper transactions. Since the early business utilization of computers, attention has

b e e n given to the automation of processes along the supply chain. The first software programs appeared in the 1950s and the early 1960s and supported short s e g m e n t s along the supply chain. Typical examples are i n v e n t o r y - m a n a g e m e n t systems, schedul- ing, and billing. The major o b j e c t i v e w a s to r e d u c e costs, e x p e d i t e processing, and decrease errors. Such applications w e r e d e v e l o p e d in the functional areas i n d e p e n - dently of each other.

I t s o o n b e c a m e clear that there w e r e i n t e r d e p e n d e n c i e s b e t w e e n s o m e supply chain activities. Early on, for instance, it was realized that production s c h e d u l e s are directly related to inventory m a n a g e m e n t and purchasing plans. T h e material require- m e n t s planning ( M R P ) m o d e l was d e v i s e d i n the 1960s. Since this m o d e l o f t e n required daily updating, the n e e d for computer support was obvious. This resulted in commercial M R P software packages.

M R P s y s t e m s i n v o l v e i n v e n t o r y m o d e l s w i t h l e a d times, a m a s t e r p r o d u c t i o n s c h e d u l e of all final products (which m a y be d e m a n d forecast-driven), and bills of materials for every assembly. T h e bills of materials are a list of all the c o m p o n e n t s of an

assembly or final product. They form a tree structure of interrelated parts from the tini- est parts to the major assemblies that form each final product. The M R P system takes

a p r o p o s e d production schedule of final products and, using lead times and existing inventory records, backtracks through the records to create a parts explosion, which is

a list of b a t c h e s of parts that m u s t be p r o d u c e d , and w h e n , to m e e t the l e a d - t i m e requirements of the parts and final products. Ideally a s m o o t h production plan is gen- erated, utilizing a factory's overall capacity at as c l o s e to 100 per c e n t as possible. Capacity requirements planning ( C R P ) was d e v e l o p e d t o s m o o t h out the M R P plan based on a factory's specific and overall machine center capacities.

While M R P packages were useful in many cases, helping to drive inventory levels

d o w n and streamlining portions of the supply chain, they o f t e n failed. O n e of the major reasons for their failure was the realization that schedule/inventory/purchasing opera- tions are closely related to b o t h financial and labor resources. This realization resulted in an e n h a n c e d M R P m e t h o d o l o g y and software called manufacturing requirements planning, or M R P II.

D u r i n g this e v o l u t i o n , i n f o r m a t i o n s y s t e m s b e c a m e m o r e and m o r e integrated. This led to the concept of enterprise resource planning ( E R P ) , which concentrated on integrating enterprise transaction-processing activities. Later, E R P was e x p a n d e d to include internal suppliers and customers, and then external suppliers and customers, in

471 P A R T 111 ' COLLABORATION, COMMUNICATION, ENTERPRISE DECISION SUPPORT SYSTEMS, AND KNOWLEDGE MANAGEMENT

WHY I N T E G R A T I O N ?

Creating a twenty-first-century enterprise cannot be d o n e e f f e c t i v e l y with functionally o r i e n t e d t w e n t i e t h - c e n t u r y c o m p u t e r t e c h n o l o g y . D i f f e r e n t d e p a r t m e n t s using f u n c - tional s y s t e m s m a y be unable to c o m m u n i c a t e with e a c h o t h e r in the s a m e language. Worse yet, crucial sales, inventory, and p r o d u c t i o n data o f t e n h a v e to be painstakingly

e n t e r e d m a n u a l l y i n t o s e p a r a t e c o m p u t e r s y s t e m s e a c h t i m e a p e r s o n w h o is n o t a member ofa specific department needs ad hoc information related to the specific department. I n m a n y c a s e s e m p l o y e e s simply d o not get t h e i n f o r m a t i o n they n e e d , o r they get it w h e n it is t o o late.

S a n d o e and S a h a r i a ( 2 0 0 1 ) list t h e f o l l o w i n g m a j o r b e n e f i t s o f i n t e g r a t i o n (in order of importance):

• Tangible benefits: inventory reduction, p e r s o n n e l reduction, productivity

i m p r o v e m e n t , o r d e r - m a n a g e m e n t i m p r o v e m e n t , financial close-cycle i m p r o v e - ments, IT cost reduction, p r o c u r e m e n t - c o s t reduction, c a s h - m a n a g e m e n t

i m p r o v e m e n t s , r e v e n u e and profit increases, transportation logistics-cost reduc- tion, m a i n t e n a n c e reduction, and o n - t i m e delivery i m p r o v e m e n t .

6 Intangible benefits:

i n f o r m a t i o n visibility, n e w and/or i m p r o v e d processes, cus- t o m e r r e s p o n s i v e n e s s , standardization, flexibility, g l o b a l i z a t i o n , and b u s i n e s s performance.

N o t e that in b o t h t y p e s of benefits, m a n y i t e m s are directly related to i m p r o v e d S C M . For a further discussion of t h e i m p r o v e m e n t s integration has p r o v i d e d to S C M , s e e the white paper "Competition's New Battleground: The Integrated Value Chain" at www.cambridgetechnology.com.

INTEGRATING THE SUPPLY CHAIN For g e n e r a t i o n s t h e various links of c o m p a n y supply chains w e r e m a n a g e d i n d e p e n -

d e n t l y o f e a c h other . H o w e v e r , s i n c e t h e 1950s, and t h a n k s t o t h e i n t r o d u c t i o n o f

c o m p u t e r - b a s e d i n f o r m a t i o n systems, c o m p a n i e s h a v e started to integrate these links. Integration was facilitated by the n e e d to streamline o p e r a t i o n s in order to m e e t cus- t o m e r d e m a n d s in the areas of product and service costs, quality, delivery, technology, and cycle time brought about by increased global c o m p e t i t i o n . Furthermore, the n e w

f o r m s o f o r g a n i z a t i o n a l r e l a t i o n s h i p s and t h e i n f o r m a t i o n r e v o l u t i o n , especially t h e Internet and electronic c o m m e r c e , brought S C M t o the forefront o f attention. S e e D S S in A c t i o n 8.22.