CHAPTER 6- ENTERPRISE RESOURCE

PLANNING SYSTEMS

Principles of Supply Chain Management:

A Balanced Approach

Prepared by Daniel A. Glaser-Segura, PhD

 Learning Objectives
You should be able to:
– Understand the chase, level and mixed aggregate production
strategies
– Describe the hierarchical operation planning process in terms of
materials planning (APP, MPS, MRP) and capacity planning (RRP,
RCCP, CRP)
– Know how to compute available-to-promise quantities, MRP
explosion and DRP implosion
– Understand the limitation of legacy MRP systems and why
organizations are migrating to integrated ERP systems
– Describe an ERP system, and understand its advantages and
disadvantages
– Understand best-of-breed versus single integrator ERP
implementations

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Chapter Six Outline
• Operations Planning
• The Aggregate Production Plan: Chase, Level, & Mixed Strategies
• Mater Production Scheduling
• Dependent Demand & Independent Demand
• The Bill of Materials
• Materials Requirement Planning
• Capacity Planning
• Distribution Requirement Planning
• Legacy Material Requirements Planning Systems
• The Development of ERP Systems
• Implementing ERP Systems
• ERP Software Applications
• ERP Software Providers

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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Supply Chain Management in Action
Super-Yacht Production Sails with ERP
Visual Controls
Sanlorenzo, the Italian super-yacht manufacturer, says that its Infor
ERP Visual implementation, which went live in January, is bringing the
complexity of its highly customized products under control.
Ermano Porro, Sanlorenzo general manager, explains that the
specialist yacht builder’s move into making 28-35m plastic and
fiberglass yachts, 40m aluminum super-yacht and 44m steel mega-
yacht means it required sophisticated resources planning.
It also needed to improve monitoring of production steps on the shop
floor, and all the way from order to delivery, And the system had to
support a program to optimize and manage custom options in an
engineering-to-order environment.
ERP Visual was chosen for its ability to manage complex
manufacturing environments as well as to streamline order
management and workflow.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Introduction
• Resource Planning – a process of determining the
production capacity required to meet demand.
• To efficiently balance the production plan with capacity.
• Effects how effectively the deployment of resources in
production of goods and services.
• Operations managers are continuously involved in
balance capacity & output.
• Excess in capacity – production cost per unit is high due
to idle workers and machinery
• If workers and machinery are stressed – quality level
may deteriorate.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Matching Supply and Demand
• Suppliers must accurately forecast demand so they can
produce & deliver the right quantities at the right time at
the right cost.
• Suppliers must find ways to better match supply and
demand to achieve optimal levels of cost, quality, and
customer service to enable them to compete with other
supply chains.
• Problems that affect product & delivery will have
ramifications throughout the chain.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Operations Planning
• Operations planning is usually hierarchical & can be divided into
three broad categories:

• Long-range- Aggregate Production Plan (APP) involves the

construction of facilities & major equipment purchase

• Intermediate- Shows the quantity & timing of end items (i.e.,

master production schedule- MPS)

• Short-range- detailed planning process for components & parts to

support the master production schedule (i.e., materials
requirement planning- MRP)

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Operations Planning- Cont.
• Closed-loop MRP- incorporates the aggregate production plan, the
master production schedule material requirements plan, capacity
requirements plan.

• Manufacturing resource planning (MRP-II) incorporates the

business & sales plans with the closed-loop MRP system.

• Distribution requirement planning (DRP) describes the time-

phased net requirements from warehouses & distribution centers
customer demand minus any on hand in-transit inventories.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Aggregate Production Plan
Hierarchical planning- process that translates annual business &
marketing plans & demand forecasts into a production plan for all
products in a plant or facility. Hence, Aggregate Production Plan

Planning horizon of APP- at least one year & is usually rolled forward
by three months every quarter

Costs relevant to the aggregate planning decision include inventory,

setup, machine operation, hiring, firing, training, & overtime costs

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Aggregate Production Plan- Cont.
Three basic production strategies :

1. Chase Production Strategy- Adjusts capacity to match the

demand pattern. Firm hires & lays off workers to match production
to demand. Workforce fluctuates but finished goods inventory
remains constant. Works well for make-to-order firms.
2. Level Production Strategy- Relies on a constant output rate &
capacity while varying inventory & backlog levels according to
fluctuating demand pattern. Workforce levels stay constant & firm
relies on fluctuating finished goods inventories & backlogs to meet
demand. Works well for make-to-stock manufacturing firms.
3. Mixed Production Strategy- To maintain stable workforce core
while using other short-term means, such as overtime, & additional
subcontracting or part time helpers to manage short-term demand.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Master Production Scheduling
Master Production Schedule- A detailed disaggregation of the
aggregate production plan, listing the exact end items to be produced
by a specific period.
More detailed than APP & easier to plan under stable demand.
Planning horizon is shorter than APP, but longer than the lead time to
produce the item.

Note: For the service industry, the master production schedule may just
be the appointment log or book, which ensures that capacity (e.g.,
skilled labor or professional service) is balance with demand.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Master Production Scheduling-Cont.

The MPS is the production quantity to meet demand from all sources &
is used for computing the requirements of all time-phased end items.

Frequent changes to the MPS may create system nervousness-

Situation where a small change in the upper-level-production plan
causes a major change in the lower-level production plan.

Many firms use a time fence system to deal with system nervousness.
A time fence separates the planning horizon into two segments
– Firmed Segment (also-known-as demand time fence), from
current period to several weeks into future. Can only be altered
by senior management.
– Tentative segment (also-known-as planning time fence), from
end of the firmed segment to several weeks farther into the
future.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Master Production Scheduling-Cont.

Available-to-Promise (ATP) Quantities-

The MPS decides whether additional orders can be accepted for
difference between confirmed customer orders & the quantity the firm
planned to produce.

Three basic methods of calculating the available-to-promise quantities:

1. Discrete available-to-promise
2. Cumulative available-to-promise without look ahead, &
3. Cumulative available-to-promise with look ahead.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Master Production Scheduling-Cont.

Discrete Available-to-Promise

1. Add the Beginning Inventory to the MPS for Period 1, subtracting

the Committed Customer Orders.
2. For the next period, subtract the Committed Customer Orders. If
quantity is positive, this becomes the Period 2 ATP. If negative,
subtract enough from the previous period’s ATP to make the
current period’s ATP zero.
3. For subsequent periods, follow Step 2.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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Master Production Scheduling-Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Dependent & Independent Demand

Dependent Demand
Describes the internal demand for parts based on the demand of the
final product in which the parts are used. Subassemblies,
components, & raw materials are examples of dependent demand
items.

Independent Demand
The demand for final products & has a demand pattern affected by
trends, seasonal patterns, & general market conditions.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 The Bill of Materials

Bill of Materials (BOM)

An engineering document that shows an inclusive listing of all
component parts & assemblies making up the final product.

Multilevel Bill of Materials

shows the parent-component relationships & the specific units of
components known as the planning factor. The multilevel bill of
materials can be presented as an indented bill of materials. At each
level of indentation, the level number increases by one.

Super Bill of Materials (AKA planning BOM, pseudo BOM,

phantom BOM, or family BOM) enables the firm to forecast the
total demand end products.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 The Bill of Materials- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 The Bill of Materials- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 The Bill of Materials- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Materials Requirement Planning

MRP- A computer-based materials management system. The

materials requirement plan calculates the exact quantities, need
dates, & planned order releases for subassemblies & materials
required to manufacture the final products listed on .

MRP requires:
– The independent demand information.
– Parent-component relationships from the bill of materials.
– Inventory status of the final product & all of the components.
– Planned order releases (output of the MRP system)

Advantage of MRP- provides planning information

Disadvantage of MRP- loss of visibility, especially acute for
products with a deep bill of materials, & ignore capacity & shop
floor conditions.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
21
 Materials Requirement Planning- Cont.

Terms used in Materials Requirement Planning

1. Parent: Item generating the demand for lower-level components.
2. Components: parts demanded by a parent.
3. Gross requirement: A time-phased requirement prior to netting out
on-hand inventory & the lead-time consideration.
4. Net requirement: The unsatisfied item requirement for a specific time
period. Gross requirement for that period minus the current on-hand
inventory.
5. Scheduled receipt: A committed order awaiting delivery for a specific
period.
6. Projected on-hand inventory: Projected closing inventory at the end
of the period. Beginning inventory minus the gross requirement, plus
the scheduled receipt & planned receipt & planned receipt from
planned order releases.
7. Planned order release: Specific order to be released to the shop or to
the supplier.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Materials Requirement Planning- Cont.

Terms used in Materials Requirement Planning- Cont.

8. Time bucket: Time period used on the MRP. Days or weeks.
9. Explosion: The process of converting a parent item’s planned
order releases into component gross requirements.
10. Planning factor: Number of components needed to produce a unit
of the parent item.
11. Firmed planned order: Planned order that the MRP computer logic
system does not automatically change when conditions change to
prevent system nervousness.
12. Pegging: Relates gross requirements for a part to the planned
order releases the reverse of the explosion process.
13. Low-level coding: assigns the lowest level on the bill of materials to
all common components to avoid duplicate MRP computations.
14. Lot size: The order size for MRP logic
15. Safety Stock: Protects against uncertainties in demand supply,
quality, & lead time.
Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Capacity Planning

Excess (or insufficient) capacity prevents firm from taking advantage

of the efficiency of manufacturing planning & control system.
Resource Requirement Planning (RRP), a long-range capacity
planning module, checks whether aggregate resources are
capable of satisfying the aggregate production. Resources
considered include gross labor hours & machine hours.
Medium-range capacity plan, or rough-cut capacity plan (RCCP),
used to check feasibility of MPS. Converts MPS from production
needed to capacity required, then compares it to capacity
available.
Capacity requirement planning (CRP) is a short-range capacity
planning technique that is used to check the feasibility of the
material requirements plan.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Capacity Strategy
• Balancing capacity with demand is an intricate
management decision – effects firm’s competitiveness
• Short and medium term capacity increased thru’
overtime, additional shifts & sub-contracting
• Long term capacity increased thru’ new manufacturing
techniques, hiring additional workers and adding new
machines and facilities.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Capacity Strategy – cont.
• Lead capacity strategy – a proactive approach that adds
or subtracts capacity in anticipation of future market
conditions and demand. (Aggressive approach but may
result in excess inventory and idle capacity)
• Lag capacity strategy – a reactive approach that adjusts
its capacity in respond to demand. (Conservative
approach that may result in lost opportunity)
• Match or tracking capacity strategy – a moderate
strategy that adjusts capacity in small amounts in
response to demand and changing market conditions

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Distribution Requirement Planning
• A time-phased finished-goods inventory replenishment
plan in a distribution network.
• An extension of the MRP and it ties the physical
distribution system to the manufacturing planning and
control system
• Determine the aggregate time-phased net requirement of
finished goods
• Provides demand information for adjusting the Master
Production Schedule
• Driven by customer demand of the finished goods

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 The Legacy Material Requirements
Planning (MRP) Systems
Materials Requirement Planning (MRP) systems- first choice in the
U.S. for planning & managing purchasing, production, & inventories.

By end of the 20th century, U.S. business was changing.

– Firms were building multiplant international sites,
– Executives spent more time dealing with international
subcontractors, currencies, & languages.
– Existing MRP systems could not handle added tasks.

Enterprise resource planning (ERP) systems were made to replace

legacy MRP systems & coordinate information requirements for
purchasing, planning, scheduling & distribution in a complex global
environment.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Development of Legacy MRP
Systems- Cont.
Materials Requirement Planning (MRP) Process
– Uses information from bills of material, master production
schedules, & inventories to compute planned order releases of
dependent demand items.
– Links the internal operations of an organization, such as
purchasing, production, inventory control & material planning.
– Does not, however, provide production or capabilities analysis,
nor does it probe the impact of changes in production levels on
financial results.
– Closed-Loop MRP- An attempt to further develop MRP into a
more formal planning & control system, & was a natural
extension of the MRP system.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Development of Legacy MRP Systems-
Cont.
Manufacturing Resource Planning MRP II-
Was the next development of the closed-loop MRP system in which:
– Business & sales plans were incorporated.
– A financial function was added to link financial management to
operations, marketing, & other functional areas.
MRP II now includes other functions of the organization.
Problems with MRP II:
– Primarily focuses on one unit’s internal operations.
– Lacks capability to link the operations of firm’s foreign branches.
– Lacks capability to deal directly w/supply chain members.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Development of Legacy MRP
Systems
Legacy MRP systems which were implemented in the 1960s, 1970s &
1980s, describe an older information system at a production scheduling
operational level within an organization.
– MRP systems lasted beyond their intended life span.
– Communication between legacy systems is limited.
– Visibility across functional areas is restricted.
– Lack analytical capabilities.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Development of Legacy MRP Systems-
Cont.
Planning Horizon

Long Range
(More than 1 year)
Product Group/Families

Medium Range
(6 – 18 months)
End items/Level 0

Short Range
(Day/Week)
Components/Subassemblies

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Development of Enterprise Resource
Planning
What is ERP and how did it come about?
– ERP system is an umbrella system tying a variety of specialized
systems, (i.e., production & inventory, purchasing, logistics, HR,
finance, accounting, customer relationship, & supplier
relationship management).

– ERP utilizes a centralized & shared database system to tie the

entire organization together in which information is entered once
at the source & made available to all users.

– The emergence & growth of supply chain management, e-

commerce, & global operations have created the need to
exchange information directly with suppliers, customers, &
foreign branches of organizations.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
33
Development of Enterprise Resource
Planning- Cont.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 The Rapid Growth of ERP

The use of ERP has gradually spread from manufacturing

to the service sector & has become commonly used in
many university classrooms.

Contributing factors of rapid ERP growth:

– Firms replaced legacy MRP systems with efficient ERP
systems to reduce costs & deal w/Y2K problem.
– Information systems that were previously off limits are now
accessible to smaller organizations.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Implementing ERP Systems

Research analysts & industrial practitioners are still

debating the usefulness of ERP, as well as the
advantages & disadvantages of using best-of-
breed solution and single integrator solution.

Best-of-breed- use best application for each

supply chain function
– Problem: multiple databases may have to
be used to link the multiple applications from
different vendors.
Single integrator- applications from one vendor.
– Problem: A user’s processes must conform
to the approaches used in the software logic.
Conforming a company’s process to a
software program is a radical departure from
conventional practice.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Implementing ERP Systems- Cont.

Some observations on ERP Implementation

Some firms only implement modules deemed absolutely

critical- Additional modules are added in a second phase.

Many implementations have failed due to:

– Lack of top management commitment
– Inaccurate & unrealistic inputs
– Lack of adequate resources
– Lack of proper training
– Lack of communication
– Incompatible system environment

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 Advantages & Disadvantages of ERP

Advantages
• Uses single database & common software infrastructure
• Communicates with supply chain members
• Helps reduce supply chain inventories. Supply chain visibility
leads to reductions of the bullwhip effect (buildup of supply
chain safety stock inventories)
• Standardizes processes & eliminates redundant resources while
increasing productivity
• Tracks employees’ time & performance
• Integrates financial, production, supply,
• & customer information.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
38
 Advantages & Disadvantages of ERP-
Cont.
Disadvantages

• Substantial capital investment is needed to implement the system.

The average total cost of ERP ownership was $15 million.
• Software is designed around a specific business model based on
specific business processes. The adopting firm must change its
business model & associated processes to fit the built-in business
model designed into the ERP system.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 ERP Software Applications

ERP consists of many modules that are linked together to access &
share the same database.

Most ERP software providers design their products to be compatible

with their competitors’ products. The most common ERP modules are:
– Accounting & finance
– Customer relationship management
– Human resource management
– Manufacturing
– Supplier relationship management
– Supply chain management

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 ERP Software Providers

• SAP AG, a German firm, is the world’s leading ERP software provider &
the world’s third-largest software provider.
• Flagship product is known as R/3
• Used in more than 17,500 firms in 120 countries and employs about
28,000 people in more than fifty countries.
• In 1973 SAP launched R/1 software, R/2 in 1979, and R/3 in 1992. R/3
has been dominant ERP product for almost a decade.
• In early 2003, SAP introduced my SAP ERP which includes support for
corporate services, such as real estate & travel management.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 ERP Software Providers- Cont.

• Oracle is the world’s leading supplier of information management

software, world’s 2nd largest software company, & serves over 13,000
customers.
• Oracle’s strategy focuses on five principles: globalization, simplification,
standardization, automation, innovation.
• Five comprehensive product lines: Oracle9i Database, Oracle9i e-
Business Suite, Oracle9i Application Server, Oracle9i Collaboration Suite,
& Oracle9i Developer Suite.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 ERP Software Providers- Cont.

• People Soft-. Primary focus of the company has been to build client/server
business applications. First product made in 1988 was an HR application.
• Leader in the human resources application market serves customer around
the globe.

• J.D. Edwards- world’s leading developer of agile software. Has over 6,500
customer worldwide. Designs all of its software solutions to be open,
scalable, & flexible.
• In August 2003, J.D. Edwards was acquired by PeopleSoft.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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 ERP Software Providers- Cont.

• Baan (of SSA)- possesses a workforce of approximately 2,800

employees. It is part of the Production Management division of Invensys
PLC, Its ERP product consists of a framework of open, flexible, & easy-
to-configure components that allow individual applications to be
configured to different industry processes.
• Baan provides application solutions to more than 15,000 customer sites
worldwide.
• iBaan solutions, includes Enterprise, Customer Relationship
Management, Product Life Cycle Management, Supply chain
Management, Business Intelligence, OpenWorldX, & Dynamic Enterprise
Modeling.

Principles of Supply Chain Management: A Balanced Approach by Wisner, Leong, and Tan.
© 2005 Thomson Business and Professional Publishing
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