ENTERPRISE RESOURCE PLANNING SYSTEMS IN MANUFACTURING:AN EXTERNAL VIEW OF ERP SYSTEMS

AN EXTERNAL VIEW OF ERP SYSTEMS

This section illustrates ERP systems in a larger context. Section 3.1 provides some current thinking on the apparent macroeconomic impacts of IT, with a yet-to-be-proven hypothesis specific to ERP systems. Section 3.2 describes the relationship of ERP specifically with respect to electronic com- merce, supply chains, and individual manufacturing enterprises.

ERP and the Economy

Much has been written and said about the emerging digital economy, the information economy, and the New Economy. It is the authors’ view that the information economy must support and coexist with the industrial economy because certain fundamental needs of mankind are physical. However, while these economies coexist, it is clear that the sources of wealth generation have changed and will continue to change in fundamental ways. In the last 50 years, the U.S. gross domestic product (GDP), adjusted for inflation, has grown more than 500% (Figure 7). While each major industry has grown considerably during that period, they have not grown identically. Confirming that the economy is a dynamic system, the gross product by industry as a percentage of GDP (GPSHR) saw significant changes in the last half of the 20th century (Figure 8). GPSHR is an indication of an industry’s contribution (or its value added) to the nation’s overall wealth. While most goods-based industries appear to move towards a kind of economic equilibrium, non-goods industries have seen tremendous growth. The interesting aspect of ERP systems is that they contribute to both goods- and non-goods- based industries in significant ways. In fact, for manufacturers, ERP plays a critical role in extending the existing industrial economy to the emerging information economy. In the information economy, ERP accounts for a significant portion of ‘‘business applications’’ sales, not to mention the wealth generated by third parties for procurement, implementation, integration, and consulting. While these are important, in this chapter we focus on the use of ERP in manufacturing. Therefore, the following sections describe how ERP and related information technologies appear to impact the goods- producing sectors of the current U.S. economy.

Macroeconomics, the study of the overall performance of an economy, is a continually evolving discipline. Still, while economists debate both basic and detailed macroeconomic theory, consensus exists on three major variables: output, employment, and prices (Samuelson and Nordhaus 1998). The primary metric of aggregate output is the gross domestic product (GDP), which is a composite of personal consumption expenditures, gross private domestic investment, net exports of goods and services, and government consumption expenditures and gross investment. The metric for employ- ment is the unemployment rate. The metric for prices is inflation. While these variables are distinct, most macroeconomic theories recognize interactions among them. It appears that the use of infor- mation technology may be changing economic theorists’ understanding of the interactions among economic variables, particularly for predicting gross domestic product, unemployment, and inflation. It is important to gain a deeper understanding of these changes because their impact would affect government policy decisions, particularly those involving monetary policy and fiscal policy.

In the current record domestic economic expansion, real output continues to increase at a brisk pace, unemployment remains near lows not seen since 1970, and underlying inflation trends are subdued. During this period, inflation has been routinely overpredicted while real output has been underpredicted. Conventional economic theory asserts that as real output increases and unemployment decreases, significant pressures mount and force price increases. Yet, in this economic expansion, inflation remains in check, apparently due in part to IT-enabled growth in labor productivity (Green- span 1999). In the early 1990s, the labor productivity growth rate averaged less than 1% annually. In 1998, that rate had grown to approximately 3%. So what has happened in this decade? In the last 10 years, information technology has enabled companies, most notably manufacturers, to change the way they do business with access to better information (often in real time) and better decision-support technologies. These changes have improved the way manufacturers respond to market wants (i.e., for products) and market demands (wants for products backed by buying power). ERP systems play a significant part in satisfying the latter by enabling better planning and execution of an integrated order fulfillment process. In short, ERP software enables these improvements by providing decision makers in an enterprise with very accurate information about the current state of the enterprise.

Moreover, an increasing number of manufacturers have direct access to demand information from their customers and resource information from their suppliers. In many cases, the customer’s demand information and the supplier’s resource information originate in their respective ERP systems. Just as these data are more accurate for the customer / manufacturer / supplier enterprise, so too is the resulting information flowing up and down the supply chain. For the manufacturer between them, this information enables decision makers to base decisions on accurate external information, as well as accurate internal information. The following remarks by Federal Reserve Chairman Alan Green- span perhaps best capture the essence of this phenomenon (Greenspan 1999):

As this century comes to an end, the defining characteristic of the current wave of technology is the role of information. Prior to the advent of what has become a veritable avalanche of IT innovations, most of twentieth century business decision-making had been hampered by limited information. Owing to the paucity of timely knowledge of customers’ needs and of the location of inventories and materials flows throughout complex production systems, businesses required substantial programmed redundancies to function effec- tively.

Doubling up on materials and people was essential as backup to the inevitable misjudgments of the real-time state of play in a company. Judgments were made from information that was hours, days, or even weeks old. Accordingly, production planning required adequate, but costly, inventory safety stocks, and backup teams of people to maintain quality control and for emergency response to the unanticipated and the misjudged.

Large remnants of information void, of course, still persist and forecasts of future events on which all business decisions ultimately depend are still inevitably uncertain. But the recent years’ remarkable surge in the availability of real-time information has enabled business management to remove large swaths of inventory safety stocks and work redundancies. . . .

Moreover, information access in real-time resulting from processes such as, for example, checkout counter bar code scanning and satellite location of trucks, fostered mark reductions in delivery lead times on all sorts of goods, from books to capital equipment. This, in turn, has reduced the overall capital structure required to turn out our goods and services, and, as a consequence, has apparently added to growth of multi- factor productivity, and thus to labor productivity acceleration.

Intermediate production and distribution processes, so essential when information and quality control were poor, are being bypassed and eventually eliminated.

ERP systems, in part, enable those activities described by Chairman Greenspan by providing two core functions: transaction management and near-term decision support. The objective of transaction management is to track the effect of execution activities on inventories, resources, and orders, while the objective of intermediate-term decision support is to use that and other information to generate accurate plans for sourcing, production, and delivery.

ERP, Supply Chains, and Electronic Commerce

ERP systems do not provide a complete solution for supply chain management (SCM) or electronic commerce. However, especially for manufacturers, the functionality provided by ERP is a necessary (although by no means sufficient) element of both SCM and, therefore, electronic commerce. This section provides definitions of electronic commerce and SCM and explains the relationships among these concepts and ERP.

Electronic Commerce

Ask 10 people to define electronic commerce and you’ll likely get 10 different definitions that reflect the particular biases of those asked. Recognizing the existence of these broad interpretations, this chapter uses an inclusive definition developed by the Gartner Group (Terhune 1999):

Electronic commerce is a dynamic set of technologies, integrated applications, and multi-enterprise business processes that link enterprises together.

The concept of electronic commerce centers on the use of technology, and those technologies tend to be infrastructural in nature. Some obvious current technological issues include network-related subjects (the Internet, the Web, and extranets), security, interoperability of applications software, and the exchange of application-based information within and across enterprises. These integrated appli- cations, which collectively comprise an enterprise’s electronic business or (e-business) environment, include EDI software, supply chain management, ERP, customer relationship management, and en- terprise application integration software. Issues in multienterprise business processes revolve around the different interactions that occur across enterprises. Electronic commerce changes, in part or in whole, the mode of these interactions from paper and voice to networked, digital information flows. The nature of these interactions, and the relationships among trading partners in general, range from coercive to collaborative depending on the general structure and practices of a given industry, the goods and / or services produced, and the impact of information technology on the distribution chan- nels through which those goods and services flow. Recognizing and understanding these distinctions are critical for evaluating the existing and potential impact of electronic commerce across industries.

Manufacturing industries face particular challenges in realizing the benefits of electronic com- merce because of the coupling of goods and information and the coordination required across those domains. Information-intensive industries (e.g., banking, traveling, advertising, entertainment) expe- rience the effects of electronic commerce before materials-intensive industries such as manufacturing, construction, and agriculture. In information-intensive industries, products and services lend them- selves to the technology. In many of these cases, electronic commerce technology simply becomes a new distribution channel for the information product or service. The manufacturing situation is significantly more complex because it requires reconciliation of goods and information. The objective is not to develop new distribution channels per se (the information network does not move goods); the objective is to improve the flow of goods by using the information technology to improve the business practices. Optimizing the flow of goods through distribution channels is one particular type of electronic commerce improvement. By so doing, trading partners can root out the inefficiencies within channels and make them more adaptive to changes in the market. It is precisely those ineffi- ciencies and adaptability that are the foci of SCM.

Supply Chain Management

Supply chain management is one of several electronic commerce activities. Like electronic commerce, SCM has acquired buzzword status. Nonetheless, a common understanding of SCM has emerged through the work of industry groups such as the Supply Chain Council (SCC), the Council on Logistics Management (CLM), and the APICS organization, as well as academia.

SCM is the overall process of managing the flow of goods, services, and information among trading partners with the common goal of satisfying the end customer. Furthermore, it is a set of integrated business processes for planning, organizing, executing, and measuring procurement, production, and delivery activities both independently and collectively among trading partners.

It is important to note a critical distinction here, especially since that distinction is not explicit in the terminology. While SCM is often used synonymously with supply chain integration (SCI), the two terms have connotations of differing scopes. As stated previously, SCM focuses on planning and executing trading partner interactions of an operations nature—that is, the flow of goods in raw, intermediate, or finished form. SCI is broader; it includes planning and executing interactions of any kind among trading partners, and it refers in particular to the development of cooperating technolo- gies, business processes, and organizational structures.

The operations-specific objectives of SCM can only be achieved with timely and accurate infor- mation about expected and real demand as well as expected and real supply. A manufacturer must analyze information on supply and demand along with information about the state of the manufac- turing enterprise. With the transaction management and basic decision support capabilities described earlier, ERP provides the manufacturer with the mechanisms to monitor the current and near-term states of its enterprise. As depicted in the synchronized, multilevel, multifacility supply chain planning hierarchy of Figure 2, ERP provides the foundation for supply chain management activities. Section 1 described the various levels of the hierarchy, and Section 2 described the details of transaction management and decision support.