by March 31, 1998 0 comments

Last month’s column
described the structure of MRPII systems. The column
ended with the statement that such systems suffered from
being too narrow and manufacturing oriented. In this
column, I intend to justify the statement and lead the
way for deriving the structure of an ideal ERP system.

A major problem with pure
MRPII systems was that they were not integrated with the
financial systems used in the organization. Implementers
were prone to treating these systems as separate
subsystems within the same organization. This created a
problem at the point of intersection of the manufacturing
and financial domains. Top management was given a
production and manufacturing plan and asked to approve
it. To approve the plan, top management needed
information from the financial system regarding
receivables and the like. In addition, they wanted
information from the sales systems on current sales level
to cross check with the production plan. But, the
financial and sales systems were treated as separate
systems run by separate teams, creating artificial
barriers to the smooth flow of information.

The two systems often had
widely different interfaces, and generated information in
formats not compatible with each other. Consequently,
information had to be reprocessed and could not really be
considered online. This leads us to one of our first
requirements for a good ERP system–all subsystems
should act as components of a more unified system.

The next problem with MRPII systems
was that they were essentially single manufacturing
centre systems. They assumed that all in-house production
took place under one roof. The models used in these
systems were simply not extensible enough.
For instance, a large company could have one large
central plant producing core components, and multiple
small assembly plants spread geographically. It was quite
a pain extending the MRPII system to cover this
situation. The classic MRPII system would require that
all information be aggregated at the central plan,
production planning and scheduling done, and the plans be
distributed back to the smaller assembly plants.

Classical MRPII systems
also did not pay enough attention to the management of
the total supply chain. MRPII was manufacturing oriented
to an unhealthy degree. To drive home this point, let us
take a look at some hard examples.Given a demand projection,
managements are often faced with a multitude of options.
For instance, the company might be facing a stock
shortage in one state while having excess stock in a
warehouse in another state. Consequently, one is faced
with a manufacture versus transship decision which
requires inputs from the manufacturing, finished stock
inventory, and logistics modules.

Another example relates to
production requirement’s forecasting. MRPII normally
relies on simple statistical models to forecast demand.
Current day demand forecasting makes detailed use of
current sales data, and tries to derive future demand
from this data and current market conditions. This
process encourages the use of human inputs. One possible
way of doing this is to help field sales-staff give their
assessment on how much each key account will purchase in
the next quarter, and then aggregate these estimates.

All this helps us refine
our expectations from enterprise-wide software. We now
expect that ERP software should enlarge its focus from
manufacturing systems alone, and help us take a more
holistic look at the organization. And that’s what I
want to discuss next month in the concluding column of
this series.

The Bottomline—the
transition from MRPII to ERP involves moving from a
manufacturing-only mindset to a total-value-chain

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