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How to Use This BookThe intended audience for this book comes primarily from nies in two categories: compa-Companies that recognize the need for better decision-making cesses, enhanced c

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Team-Fly®

ERP: Making It

Happen

The Implementers’ Guide to

Success with Enterprise

Resource Planning

Thomas F Wallace Michael H Kremzar

John Wiley & Sons, Inc.New York • Chichester • Weinheim • Brisbane • Singapore • Toronto

Copyright © 2001 by Thomas F Wallace and Michael H Kremzar All rights reserved.

Published by John Wiley & Sons, Inc.Published simultaneously in Canada

No part of this publication may be reproduced, stored in a retrievalsystem or transmitted in any form or by any means, electronic,mechanical, photocopying, recording, scanning or otherwise, except aspermitted under Sections 107 or 108 of the 1976 United States CopyrightAct, without either the prior written permission of the Publisher, orauthorization through payment of the appropriate per-copy fee to theCopyright Clearance Center, 222 Rosewood Drive, Danvers, MA 01923,

(978) 750-8400, fax (978) 750-4744 Requests to the Publisher for permission should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012,(212) 850-6011, fax (212) 850-6008, E-Mail: PERMREQ@WILEY.COM

This publication is designed to provide accurate and authoritativeinformation in regard to the subject matter covered It is sold with the understanding that the publisher is not engaged in renderingprofessional services If professional advice or other expert assistance

is required, the services of a competent professional person

should be sought

This title is available in print as ISBN 0-471-39201-4

For more information about Wiley products, visit our web site

at www.Wiley.com

PART II—COMPANY-WIDE IMPLEMENTATION

Going on the Air—Supply Chain Integration (Phase II) 243

PART III—QUICK-SLICE IMPLEMENTATION

Plant Floor Organization Formats:

A PPENDIX C

There are so many people to acknowledge when a book like this iscomplete All of those who contributed to the earlier MRPII bookcertainly played a role, albeit indirect, in this new effort Many oth-ers who are active in the field provided insight through their books,papers, or talks For sake of brevity, we are going to focus on thisbook and hope that all of those who built the foundation of the ear-lier works will still feel ownership for this one

As the final draft developed, we asked a handful of people to help

us with input on the quality of our effort Their insightful feedbackhas been extremely important

Chief Operating Officer Principal

Clopay Plastic Products The Oliver Wight

Director of Product Supply Principal

The Procter & Gamble Gray Research

Company

Chief Financial Officer Leader, MIT Integrated

Program

vii

Travis Rushing Bob Stahl

Director, Commercial Principal

Products Product Supply Partners In Excellence

The Procter & Gamble

Company

Our sincere thanks go to all of you for taking the time to pour overthe manuscript and pouring your insights into comments—some-times painful but always helpful Thanks also to the folks at theAPICS Region III Officers Meeting in January, 2001 for their valu-able feedback

There are two individuals who need to be highlighted since theydid so much to pave the way for what all of us are doing today Thelate Oliver Wight must be credited for developing most of the con-cepts in resource planning still in use today Ollie certainly was aninspiration for much that has followed Also, Darryl Landvaterdeveloped the Detailed MRPII Implementation Plan that was fea-tured in the earlier works and now continues to be utilized in thisbook We owe much to these two as well as many others at the OliverWight Companies who have done such good work in developing thewidespread understanding of resource planning

In this book, we quote from an excellent work by Thomas H

Davenport, Mission Critical—Realizing the Promise of Enterprise

Systems. For those digging more deeply into issues related toenterprise-wide software, we highly recommend this book Also,Professor Jeanne W Ross, Center for Information Systems Research

at MIT, shared her thoughts with us on ERP Both of these sourceswere helpful as we wrestled with how best to present the softwareside of the ERP equation

We need to recognize our families for their support and comfortduring this effort Marilyn Kremzar has been putting up with thefrustrations of living with Mike throughout his entire career withP&G and now during this book as well Yes, Marilyn, Mike will re-tire one of these days! Tom acknowledges the enormous contri-butions of his wife of 38 years, Evelyn, in this and so many otherprojects during that time She died during the writing of this book.Last, and most assuredly not least, we’re deeply indebted to theusers, the people in manufacturing companies who’ve made resourceplanning work The early implementers in particular displayed greatviii Acknowledgments

vision and courage to persevere, to take two steps forward and thenmaybe one step back, to keep the faith and to make it happen.Thanks largely to them, a trial-and-error approach to implementingERP is no longer necessary.

Thomas F Wallace Michael H Kremzar Cincinnati, Ohio

Acknowledgments ix

TE AM

Team-Fly®

How to Use This Book

The intended audience for this book comes primarily from nies in two categories:

compa-Companies that recognize the need for better decision-making cesses, enhanced coordination, and greater responsiveness bothinternally and within their extended supply chain

pro-Companies that have installed an enterprise-wide software systemand now realize that they need to change their businesses pro-cesses to gain major benefits from their investment in software.The people who should read all or part of this book include:The executive in charge of the entire business unit (general manager,president, chief executive officer): Read at a minimum Chapters 1,

2, and 3 to understand the basic concepts of ERP and the scope ofthe project It should prove helpful to read Chapter 8 on Sales &Operations Planning and Chapter 13 on an implementation ap-proach called Quick Slice Finish with Chapter 16 for some insightinto the full potential of ERP, which is enormous

The chair of the executive steering committee (described in Chapter6): Read all chapters

Members of the executive steering committee (described in Chapter6): Read Chapters 1, 2, 5, 6, and 7 and the part of Chapter 11 that

xi

deals with implementing Sales & Operations Planning Further, ifimplementation is being done on a Quick-Slice basis (defined inChapter 2), they should read Chapters 13 and 14 Here also, Chap-ter 16 should prove to be of interest.

All members of the ERP Project Team: Read all chapters

We prepared this book to be useful either as selective reading forthose who need only specific pieces of information, or as a virtualchecklist for those who need to know every step Those of us whohave been through ERP implementations with the Second Edition ofthis book have found that it was the book most often referred to.Even after the project is well underway, we suspect you’ll probablyfind yourself opening this book and referring to specific subjects.Lastly, while this book does cover every aspect of implementingERP, it does not tell you every step, every report, or every piece ofdata required You will need more than this one book to do the en-tire project Our job here has been to give you the working knowl-edge to know what needs to be done Each company will design thedetails of the project to reflect its individual business, people, andchallenges but the implementation path described here is for everycompany

Go make it happen!

xii How to Use This Book

PART I

Introduction

The answer is that Enterprise Resource Planning (ERP) is notsoftware One more time: ERP is not software There’s a lot of sloppyterminology flying around today in the business press, and one mis-nomer is to label enterprise-wide transaction processing softwaresystems as ERP These software packages support effective resourceplanning and make much of it feasible, but they don’t truly do it Plusthese packages contain many business processes other than resourceplanning.

Therefore, we need to trot out another acronym that does refer tosoftware: ES This stands for Enterprise System or Enterprise Soft-

ware In his book Mission Critical,iauthor Thomas H Davenport scribes enterprise systems as “packages of computer applications thatsupport many, even most, aspects of a company’s information needs.”That makes sense to us Now for another distinction: Not all ERPbusiness functions are contained in the typical Enterprise Software

de-3

(ES) suite Similarly, the typical ES contains software support forbusiness processes that are not a part of ERP In Figure 1-1, we cansee that distinction graphically Please note the three areas on that di-agram The rightmost part of the figure refers to those functions con-tained within a typical ES that are not part of ERP; the leftmost area

is for those ERP functions not normally supported by an ES; thearea of overlap in the center references those ERP functions typi-cally supported by Enterprise Software

Now let’s take a look at just what this ERP thing is all about

WHATISENTERPRISERESOURCEPLANNING

ANDWHATDOESITDO?

Enterprise Resource Planning (ERP)—and its predecessor, facturing Resource Planning (MRP II)—is helping to transform ourindustrial landscape It’s making possible profound improvements in

Sales and Operations Planning

Advanced Planning Systems

Supplier Rating Systems

Performance Metrics

ERP PROCESSES FOUND IN A TYPICAL ES:

Master Production Scheduling Rough-Cut Capacity Planning Material Requirements Planning Capacity Requirements Planning Distribution Requirements Planning Customer Order Entry and Promising

NON-ERP PROCESSES FOUND IN A TYPICAL ES:

Accounts Receivable Accounts Payable General Ledger Cash Management Customer Relations Management Human Resources Data Warehousing

the way manufacturing companies are managed It is a strong tributor to America’s amazing economic performance of the 1990sand the emergence of the New Economy A half century from now,when the definitive industrial history of the twentieth century is writ-ten, the evolution of ERP will be viewed as a watershed event Let’sdescribe Enterprise Resource Planning as:

con-An enterprise-wide set of management tools that balances mand and supply,

de-containing the ability to link customers and suppliers into a plete supply chain,

com-employing proven business processes for decision-making, andproviding high degrees of cross-functional integration amongsales, marketing, manufacturing, operations, logistics, purchasing,finance, new product development, and human resources, therebyenabling people to run their business with high levels of customerservice and productivity, and simultaneously lower costs and in-ventories; and providing the foundation for effective e-commerce.Here are some descriptions of ERP, not definitions but certainlygood examples

Enterprise Resource Planning is a company increasing its sales by

20 percent in the face of an overall industry decline Discussing howthis happened, the vice president of sales explained: “We’re captur-ing lots of business from our competitors We can out-deliver ’em.Thanks to (ERP), we can now ship quicker than our competition,and we ship on time.”

Enterprise Resource Planning is a Fortune 50 corporation ing enormous cost savings and acquiring a significant competitiveadvantage The vice president of logistics stated: “ERP has providedthe key to becoming a truly global company Decisions can be madewith accurate data and with a process that connects demand andsupply across borders and oceans This change is worth billions to us

achiev-in sales worldwide.”

Enterprise Resource Planning is a purchasing department

gen-Enterprise Resource Planning 5

erating enormous cost reductions while at the same time increasingits ability to truly partner with its suppliers The director of purchas-ing claimed: “For the first time ever, we have a good handle on our fu-ture requirements for components raw and materials When ourcustomer demand changes, we—ourselves and our suppliers—canmanage changes to our schedules on a very coordinated and con-trolled basis I don’t see how any company can do effective supplychain management without ERP.”

That’s ERP Here’s how it came to be

THEEVOLUTION OFENTERPRISERESOURCEPLANNING

Step One—Material Requirements Planning (MRP)

ERP began life in the 1960s as Material Requirements Planning(MRP), an outgrowth of early efforts in bill of material processing.MRP’s inventors were looking for a better method of ordering mate-rial and components, and they found it in this technique The logic

of material requirements planning asks the following questions:

• What are we going to make?

• What does it take to make it?

• What do we have?

• What do we have to get?

This is called the universal manufacturing equation Its logic plies wherever things are being produced whether they be jet aircraft,tin cans, machine tools, chemicals, cosmetics or Thanksgivingdinner

ap-Material Requirements Planning simulates the universal facturing equation It uses the master schedule (What are we going

manu-to make?), the bill of material (What does it take manu-to make it?), and ventory records (What do we have?) to determine future require-ments (What do we have to get?)

in-For a visual depiction of this and the subsequent evolutionarysteps, please see Figure 1-2, a modified version of a diagram in CarolPtak’s recent book on ERP.ii

6 ERP: M I H

Step Two—Closed-Loop MRP

MRP quickly evolved, however, into something more than merely abetter way to order Early users soon found that Material Require-ments Planning contained capabilities far greater than merely givingbetter signals for reordering They learned this technique could help

to keep order due dates valid after the orders had been released to production or to suppliers MRP could detect when the due date of

an order (when it’s scheduled to arrive) was out of phase with its need

date (when it’s required)

Enterprise Resource Planning 7

Figure 1-2

ERPMRP IIClosed-Loop MRP

MRPEVOLUTION OF ERP

This was a breakthrough For the first time ever in manufacturing,there was a formal mechanism for keeping priorities valid in a con-stantly changing environment This is important, because in a man-ufacturing enterprise, change is not simply a possibility or even aprobability It’s a certainty, the only constant, the only sure thing.The function of keeping order due dates valid and synchronized with

these changes is known as priority planning.

So, did this breakthrough regarding priorities solve all the lems? Was this all that was needed? Hardly The issue of priority isonly half the battle Another factor—capacity—represents anequally challenging problem (See Figure 1-3.)

prob-Techniques for helping plan capacity requirements were tied inwith Material Requirements Planning Further, tools were devel-oped to support the planning of aggregate sales and production lev-els (Sales & Operations Planning); the development of the specificbuild schedule (master scheduling); forecasting, sales planning, andcustomer-order promising (demand management); and high-level re-source analysis (Rough-Cut Capacity Planning) Systems to aid in exe-cuting the plan were tied in: various plant scheduling techniques forthe inside factory and supplier scheduling for the outside factory —the suppliers These developments resulted in the second step in thisevolution: closed-loop MRP (See Figure 1-4.)

Closed-loop MRP has a number of important characteristics:It’s a series of functions, not merely material requirements planning

It contains tools to address both priority and capacity, and to port both planning and execution

sup-It has provisions for feedback from the execution functions back tothe planning functions Plans can then be altered when necessary,thereby keeping priorities valid as conditions change

8 ERP: M I H

Figure 1-3 Priority vs Capacity