All technical inventions are created and applied in an attempt to solve a real-world problem. The evolution of Enterprise Resource Planning (ERP) demonstrates this fact. Due to ERP's success in effectively integrating isolated multiple information systems and its ability to improve operations efficiencies, ERP has recently become very popular within the business community.
SAP, one of the largest ERP providers, states on its website that a key feature of its ERP product, mySAP, is "completely integrated business processes to handle the full scope of financial, human resource, corporate service and operations management." In addition, the website states, "mySAP ERP extends the ERP environment system into a truly collaborative environment, accessible to the organization as well as customers, partners, and suppliers (SAP, 2003)."
The evolution of ERP solutions has a long history. This paper presents a discussion of the evolution of ERP, which has existed in concept since the 1960's and has since evolved into a leading method of integrating business systems and improving production.
In 1960's the focus of ERP was on inventory control (Pacific Institute of Management, 2002). Most software packages were designed to handle inventory based on traditional inventory concepts. In 1970, the focus shifted to MRP (Material Requirement Planning), which translated the market schedule built or the and time into phased net requirement or sub-assemblies components and raw material planning and manufacturing procurement.
In 1980's the concept of MRP II (Manufacturing Resource Planning) was created as an extension of MRP at shop floor distribution activities. By the 1990's, MRP II had expanded to cover areas like engineering, finance, human resource, project management, and more.
According to Pacific Institute of Management (2002), "Today the global market size of ERP is $20 Million with a consist growth rate of 35% over the past four years. There are many global ERP vendors and software solutions suppliers like BaaN, Oracle Applications, JD EDword, Peoplesoft, QAD Mfg./Prod., MAMIS, Mak ESS, entensia and many more and hundreds of small global and local vendors are in this field.
II. Critical Context
Until 1972 ERP was just an idea -- it had no name or classification -- that companies had to integrate all departments and functions in order to increase revenues and strengthen the business. In 1972, five managers at IBM decided to develop this concept. They resigned from IBM and created a company that is today known as SAP (Systems, Applications and Products). SAP became the first company to develop and implement ERP specific software and applications. Today, it is the global leader in ERP software.
Since the birth of SAP, ERP has evolved in many ways. Many new ideas have stemmed from SAP, leading to new concepts that revolve around the concept of integrating departments, including Manufacturing Resource Planning (MRP) and Material Requirements Planning (MRPII). MRP and MRPII concentrate more on the manufacturing industry.
ERP has evolved dramatically over the past decade. The basic concept has not changed, but the technical and design of ERP is constantly changing. Experts predict that ERP will continue to evolve in the future. However, it appears that while technical knowledge may be very different in the future, the goals of ERP will remain the same.
The first stage of ERP was Material Requirements Planning (MRP) (Mining Enterprise Solutions, 2000). In the early stages of ERP, businesses kept raw material on stock, using a simple re-ordering system, in which they would buy more products if their inventory dropped below a minimum stocking quantity or re-order point. This method was effective for production lead companies that could sell everything they produced, and did not have to change their product or production plan very often. However, this system generated a great deal of loss for many businesses. Therefore, in the 1970's, thins began to change. Production was no longer as straightforward as it had been in the past, and inflation began to have a significant influence on inventory.
Inventory is considered part of a business' current assets and is located on the balance sheet. Businesses use valuable working capital to purchase inventory yet they do not turn it into income until their products have been consumed in production and sold. With an increased awareness of the need to show a greater return on capital employed, businesses today drive to reduce this inventory, especially since it costs money to unload it, put it away, pick it, load it, and buy it.
Thus, the beginnings of ERP focused on MRP, simply aiming to base the purchasing plan of the company on the production plan. Instead of having inventory available, the idea was to have inventory available when production required it and then only in the quantities needed for production.
The first MRP systems focused on the production plan. Companies took the bill of materials, which was an actual list of materials needed to build a product, for a standard production batch and multiplied it by the number of batches to be produced in the plan. From this raw material requirements list, the current inventory of raw materials was then subtracted and the balance of requisite raw materials prior to production was ordered. According to Mining Enterprise Solutions (2000), "In its extreme form MRP goes out the window and you end up with just-in-time (JIT), which is where you only order things at the time you need them, and only take delivery of them when the product is being produced."
According to Mining Enterprise Solutions (2000), "A computer system which takes the demand forecast, converts it to a production plan, takes, quantities and production dates from the production plan, multiplies them with the raw materials quantities from the BoM, subtracts the current inventory, takes delivery lead times into account and spits out a purchase order is essentially a basic MRP system."
Early ERP researchers recognized that MRP worked well, as long as the production plan did not change. However, the production plan often changes. MRP II (which stands for manufacturing resource planning) evolved from this concept, extending MRP to manage changes in the production plan, and the fact that that some of the raw materials in a company's BoM are made in its production facilities.
MRP II basically creates commands to delay or stop delivery on purchases if a purchase order includes unnecessary products. It also creates production orders for the intermediates, which are produced in-house rather than purchased. These commands are fed back to the production plan, which in turn generates more requirements.
According to Mining Enterprise Solutions (2000), "There is more: why does the production plan change? The production plan should be based upon a sales and marketing plan for the company so that it has the right things to sell at the right time, and so the production planning itself should be based on the expected demand - if it is not, then the company is usually known as 'production driven'. There is an age-old truth that marketing and sales are the sworn enemies of production planners and the two never talk. This is why we invented forecasts. The idea is that you take sales of years past, manipulate them with mathematical operators and they tell you what you will need next year."
Realistically, a company's sales figures may be distorted by many factors, including a shortage of products and managerial demands. Therefore, businesses must have a comprehensive demand plan that includes all these factors in a manufacturing requirement plan and then gives it to the production planners to turn into a production plan. ERP software vendors reached the point of managing all of this by the mid-1980's.
At this point, the general concentration of production into fewer sites and the tendency to just have distribution operations in many countries, a need for DRP came about. This tendency in Europe increased as the transport system improved, the markets became more and more accessible to each other through political union, the reduction of customs formalities and the disappearance of local product differences, made it simple to produce in less places.
According to Mining Enterprise Solutions (2000), "If you have a production site with a warehouse, and a regional resupply depot which is a warehouse and a local distribution operation with its own warehouse then the supply chain is getting fairly long. Understanding demand becomes more difficult because the guys at the local warehouse re-order when they feel they need it, and then this causes the guys at regional resupply to reorder and all of a sudden there is massive demand at the production site and the production plans are changed and then it turns out that everybody had tons of stock already, and now we just have more, and we cannot sell it either."
Therefore, the next stage in the evolution of ERP systems was to manage distribution planning. The key is to locate demand where it occurs, resolve it back through the 'supply chain' to the point of replenishment and keep the whole system well balanced. At this point, a well-implemented ERP system…