Business Systems – Operations Management Session 7c.pdf · 2 Business Systems - Operations Management Session 7 Enterprise Resource Planning 3 Printing your Digital Photos • What

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Business Systems - Operations ManagementSession 7 Enterprise Resource Planning

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Business Systems Business Systems ––Operations ManagementOperations Management

Facilitator:Facilitator:Dr. Jonathan FarrellDr. Jonathan Farrell

Session 7 - Enterprise Resource Planning

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This EveningThis Evening’’s Programs Program

• Enterprise Resources Planning (ERP)• The origins of ERP (MRP, MRP II)• Case Study – Dalrymple Bay Coal Terminal (refer to the Folder

of Readings) • OPT (Optimised Production Technology) principles• ERP Systems (web-integrated ERP, supply chain ERP, the

Internet, etc.)

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Printing your Digital PhotosPrinting your Digital Photos

• What was the cheapest price?• What was the most expensive price?• What was the reason, if any, for variation?• Was there any perceived difference in quality?• What about “traditional” methods e.g.

– The local Chemist shop– A Photo print shop?– Mail order?

• What lessons can be learned?

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Pricing Pricing -- 4 x 6 prints4 x 6 prints

Chemist shop – 0.15 to 0.45

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PhotoM

ax

Megap

ixels

Chemist

Shop

Austw

ide

Harvey

Norm

an

Snapfi

sh - U

S

FujiColo

ur

Michae

ls

Photol

ab

Print@

Kodak

Frogprin

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Fotofast

Micros

oft/Kod

ak

The Edg

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Some DefinitionsSome Definitions

Supply Chain:Supply Chain: The linked set of resources and processes that begins with the sourcing of raw material and extends through the delivery of end items to the final customer. It includes vendors, manufacturing facilities, logistics providers, internal distribution centres, distributors, wholesalers and all other entities that lead up to final customer acceptance.

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Some Definitions (cont.)Some Definitions (cont.)

Supply Chain Management:Supply Chain Management: The coordinated set of techniques to plan and execute all steps in an organisation’s network used to acquire raw materials from vendors, transform them into finished goods, and deliver both goods and services to customers. It includes chain-wide information sharing, planning, resource synchronisation and performance measurements.

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Some Definitions (cont.)Some Definitions (cont.)

Logistics:Logistics: The linked set of resources used in moving and storing material at the required location and time, both external (vendors, customers, distribution centres and transportation providers) and internal (production, material movement and storage).

Value Chain:Value Chain: The linked set of activities within a supply chain that actively add value to the product or service

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The Value ChainThe Value Chain

Firm Infrastructure

Human Resource Management

Technology Development

Procurement

InboundLogistics Operations Outbound

LogisticsMarketing

& Sales Service

Primary Activities

Support Activities

Margin

Margin

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Measures of Supply Chain PerformanceMeasures of Supply Chain Performance

External:External: Customer SatisfactionCustomer Satisfaction

Supplier SatisfactionSupplier Satisfaction

Internal:Internal: Factory or Service Delivery System Factory or Service Delivery System EfficiencyEfficiency

Inventory LevelsInventory Levels

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Formulas for Measuring Formulas for Measuring SupplySupply--Chain PerformanceChain Performance

• One of the most commonly used measures in all of operations management is “Inventory Turnover”

• In situations where distribution inventory is dominant, “Weeks of Supply” is preferred and measures how many weeks’ worth of inventory is in the system at a particular time

valueinventory aggregateAverage

soldgoodsofCost turnoverInventory =

weeks52soldgoodsofCost

valueinventory aggregateAveragesupplyofWeeks ⎟⎟

⎠

⎞⎜⎜⎝

⎛=

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Example of Supply Chain PerformanceExample of Supply Chain Performance

An organisation announces their cost of goods sold for the year was $160m and their inventory is $35m. They normally have an inventory turnover ratio of 10. How does this year compare?

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Example of Measuring Example of Measuring Supply Chain Performance (Cont.)Supply Chain Performance (Cont.)

= $160/$35= 4.57

Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.

= $160/$35= 4.57

Since the company’s normal inventory turnover ration is 10, a drop to 4.57 means that the inventory is not turning over as quickly as it had in the past. Without knowing the industry average of turns for this company it is not possible to comment on how they are competitively doing in the industry, but they now have more inventory relative to their cost of goods sold than before.

valueinventory aggregateAveragesoldgoodsofCost

turnoverInventory =

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Types of Supply ChainsTypes of Supply Chains

EfficientEfficient Designed to minimise costDesigned to minimise cost

Maintain high utilization of resourcesMaintain high utilization of resources

Minimize inventoryMinimize inventory

Suppliers chosen on costSuppliers chosen on cost

ResponsiveResponsive Designed to minimise lead timesDesigned to minimise lead times

Responsive to unpredictable demandResponsive to unpredictable demand

Excess capacity Excess capacity

High buffer stocks / modulesHigh buffer stocks / modules

Suppliers chosen on speed / flexibilitySuppliers chosen on speed / flexibility

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Matching the Supply Chain Matching the Supply Chain to the Product or Serviceto the Product or Service

Efficient Supply Efficient Supply ChainChain

Responsive Responsive Supply ChainSupply Chain

Functional ProductsFunctional Products Innovative ProductsInnovative Products

Mismatch

Mismatch Match

Match

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The meaning of MRPThe meaning of MRP

MRP

Deciding the volume and timing of materials flow in dependent demand conditions

Demand for products and services

The The operationoperation’’s s customerscustomers

Supply of products and services

The The operationoperation’’s s resourcesresources

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The Process of MRPThe Process of MRP

Explode the master production schedule.

Identify what parts and assemblies are required.

Check whether the required parts and assemblies are available.

For every part or assembly that is required, but not available, identify when work needs to be started for it to be made available by its due date

Generate the appropriate works and purchase orders.

Repeat the process for the next level of the bill of materials.

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Customer orders

Master production schedule

Forecast demand

Bill of materials

Inventory records

Purchase orders

Materials plans

Works orders

Material requirements

planning

Material Requirements Planning (MRP)Material Requirements Planning (MRP)

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Master Production Schedule (MPS)Master Production Schedule (MPS)

Forecast demand

R & D demand

Promotion requirements

etc.

Known orders

Master production schedule

Sister plant demand

Key capacity

constraints

Spares demand

Safety stock requirements

Inventory levels

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The concept ofThe concept of MRP IIMRP II

Marketing Finance

Design Operations

Central database

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ERP integrates the information that reconciles the organisation and supply of an operation’s products and

services with the demand for them

Operations resources Customer requirements

DemandSupplyThe informational ability to deliver

products/servicesThe operation The

market

Enterprise Resource PlanningEnterprise Resource Planning

Required time, quantity and quality

of products and services

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ERP ERP -- What is it?What is it?

– ERP is a generic term used to describe a comprehensive information system designed to integrate all the business processes found in an enterprise.

– Efficiency and productivity are improved through the integration of information and the removal of duplicate information and processes.

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The Development of ERPThe Development of ERP

Material Requirements

Planning (MRP)

Manufacturing Resource Planning (MRP II)

Enterprise Resource Planning (ERP)

Web-integrated Enterprise Resource Planning (Collaborative Commerce,

c-commerce)

Increasing integration of information systems

Incr

easi

ng im

pact

on

the

who

le s

uppl

y ne

twor

k

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Sales/Distribution and Manufacturing Sales/Distribution and Manufacturing Features of ERPFeatures of ERP

• Real-time Available to Promise & scheduling.• Multi-national and multi-site distribution• Integration with financial module• MRP or Kanban logic• Configurable BOM (by order)• Engineering change control (date oriented)• Backflush for raw and in-process stocking locations• Interactive planning function• Operations splitting and overlapping

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Managing Enterprise SystemsManaging Enterprise Systems

Customers Suppliers Managers and Stakeholders

Employees

Human resource

management applications

Reporting applications

Sales force and customer service

reps

Central

database

Service applications

Sales and delivery

applications

Back office administration and

workers

Financial applications

Manufacturing applications

Inventory and supply

applications

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Underpinning the Supply Chain with an Underpinning the Supply Chain with an Effective ArchitectureEffective Architecture

• Many organisations use a combination of ERP systems and best of breed technology.

• Given the scope of business functions within internal supply chains, and the need to integrate processes and provide visibility and across the extended supply network, the information technology requirements are extremely complex.

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Underpinning the Supply Chain with an Underpinning the Supply Chain with an Effective Architecture (cont.)Effective Architecture (cont.)

• The market for Collaboration tools is still relatively new, withmany immature products.

• No vendor alone is offering a complete solution • A combination of several tools and vendors provide the best

options at present.

• The first step is for any organisation is to “put its own house in order”.

• Streamline processes and technology across all of the supply chain functions, from sales to planning to manufacturing.

• Develop a clear vision across all the components of the Supply Chain Model and the relationships that are required to integrate all of the components

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Internal IntegrationInternal Integration

• Every organisation will continue to have functional, geographic and organisational silos in some form or fashion.

• However, there are different strategic imperatives and processes that are required across the supply network functions .

• The way that each organisational node interacts with the rest of the organisation, and the way that information is managed across the organisation needs to be optimised.

• The first step in this process is to ensure that the organisation has synchronised the internal IT Architecture.

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Internal Integration (cont.)Internal Integration (cont.)

• Historically, organisations have focused on data warehouses, integrated business reporting, and ERP implementations.

• Some organisations invested large amounts of money on complex ERP systems:

• In most instances the ERP implementations solved a number of problems, but focused predominately on the core transactional processes.

• The ERP implementations often included interfaces to legacy systems or best of breed solutions to provide additional functionality outside of the processes enabled within these coresystems.

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The Bullwhip Effect The Bullwhip Effect O

rder

Q

uan t

ity

Time

Retailer’s Orders

Ord

e r

Qua

n tity

Time

Wholesaler’s Orders

Ord

e r

Qua

n tity

Time

Manufacturer’s Orders

The magnification of variability in orders in the supply-chainThe magnification of variability in orders in the supply-chain

A lot of retailers each with little variability in their orders….

A lot of retailers each with little variability in their orders….

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to greater variability for a fewer number of wholesalers, and…

…can lead to even greater variability for a single manufacturer.

…can lead to even greater variability for a single manufacturer.

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Reducing the Bullwhip EffectReducing the Bullwhip Effect

1. Increase Operational Effectiveness1. Increase Operational Effectiveness

-- Reduce information flow times e.g. EDIReduce information flow times e.g. EDI

-- Reduce economies of scale (e.g. fixed costs of ordering)Reduce economies of scale (e.g. fixed costs of ordering)

-- Purchase in batches of 1 Purchase in batches of 1

2. Information Sharing2. Information Sharing

-- Share consumption information upstreamShare consumption information upstream

-- Share availability information downstreamShare availability information downstream

3. Channel Alignment3. Channel Alignment

-- CoCo--ordinate replenishment decisionsordinate replenishment decisions

-- Partnership Partnership See also pp 467 – 475 of Slack et al

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Case Study Case Study ––Dalrymple Bay Coal Terminal Dalrymple Bay Coal Terminal

(DBCT)(DBCT)

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Dalrymple Bay Coal Terminal Dalrymple Bay Coal Terminal ––Some QuestionsSome Questions

• What do you see are the challenges facing DBCT management in 1999 / 2000 (the timeframe of this case study)?

• What areas of opportunity can you identify for optimising DBCT’scoal supply chain?

• If you were the external consultant asked to “carry out a strategic review of DBCT’s IT”, what recommendations would you give?

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Where is DBCT Now?Where is DBCT Now?

• ERP system was implemented (JD Edwards Operations, Supply, Finance, HR, Payroll)

• Sophisticated Scheduling System (Minetrak from Comlabs) implemented – Planning, Production & Scheduling

• IT Infrastructure substantially upgraded (LAN 10Mb to 100Mb, VLAN installed, Pentium 4 Servers and desktops, etc.)

• Capital Works - Stage 6 of the Terminal completed in 2003 ($115m) – taking capacity to 55.5 mtpa

• First quarter of 2004 saw an unprecedented boom in demand for coal exports. Further expansion was undertaken taking capacity to 60 mtpa – more is needed.

• April 2005 – Approval given to increase capacity by 25% over the next 4 years

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Optimised Production Technology (OPT)Optimised Production Technology (OPT)-- GoldrattGoldratt’’s Theory of Constraintss Theory of Constraints

ConstraintsConstraints = anything that limits performance - the weakest links

ThroughputThroughput = the rate at which the system generates money through sales

Throughput speedThroughput speed = how long it takes the product to get through the manufacturing process

OPTIMUM PRODUCT MIX : focus on constraint(s)

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GoldrattGoldratt’’ss Theory of ConstraintsTheory of Constraints

• Bottlenecks govern both throughput and inventory in the system.

• Do not balance capacities, balance the flows.

Theory of Constraints:Theory of Constraints:• Identify the system constraints (bottlenecks).• Decide how to eliminate the system constraints.• Subordinate everything else to that decision.• Eliminate the system constraints.• Go back to Step 1.

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GoldrattGoldratt’’ss Rules of Production SchedulingRules of Production Scheduling

1. Balance material flow rather than the capacity

2. Utilisation of a non-bottleneck is not determined by its own resource, but by some other system constraint

3. Utilisation, and full employment of a resource, are not synonymous

4. An hour lost on a bottleneck resource, is an hour lost on all the system

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GoldrattGoldratt’’ss Rules of Production Scheduling Rules of Production Scheduling (cont.)(cont.)

5. An hour saved on a non-bottleneck resource is just a mirage

6. Bottlenecks govern both system throughput and inventory accumulation

7. Transfer batch need not be equal in size to process batch

8. Lot sizes should be variable, not fixed

9. Planning schedules should be established by considering all constraints of the system. Delays are often a function of the scheduling, and cannot necessarily always be predetermined

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CommentsComments

• 100% use of all resources?– not necessary; only for constraint!

• Averaging utilisation?– not an optimal solution: constraint sets the

pace.

• Performance measures as policy constraints

• The “Drum, Buffer, Rope” concept is used to explain the planning & control approach

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Information TechnologyInformation Technology

1. Information flows

2. Information intensity - how much do we need?

3. Information and competitive advantage - M Porter

4. Information and industry structure

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TaskF

TaskE

TaskD

TaskA

TaskB

TaskC

Rawmaterialsinventory

Work inprocess inventory

Finishedgoods

inventory

Control

InputsInputsOutputOutput

goods or service movementgoods or service movementInformation flowInformation flow

The Information Flow

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Information Intensity MatrixInformation Intensity Matrix

Information intensity of the value chain

Information content of the producthigh

low high

low

Oil refineryOil refinery BankingBanking

CementCement SoftwareSoftware

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ITIT’’s Relevance in the Value Chains Relevance in the Value Chain

• Inbound logistics• Operations• Outbound logistics• Marketing• Service

• Company infrastructure• Human resources• Systems & technology• Procurement

Primary activities

Support activities

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IT Creating Competitive AdvantageIT Creating Competitive Advantage

• Lowering costsProduct expenses e.g. inventory controlSales expenses e.g. e-commerce

• Enhancing differentiatione.g. customisation

• Changing competitive scopee.g. global co-ordination

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ITIT’’s Impact on Industry Structures Impact on Industry Structure

Suppliers

New entrants

Buyers

Substitutes

Industrycompetitors

Intensityof rivalry

Bargaining powerof suppliers

Bargaining powerof buyers

Threat ofnew entrants

Threat ofsubstitutes

M. PorterM. Porter

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ITIT’’s Impact on Industry Structures Impact on Industry Structure

• How does IT change the balance of power in supplier relationships?

• How does IT change the balance of power in customer relationships?

• How does IT impact on barriers to entry?

• How does IT impact on the rivalry within the industry?

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Electronic CommerceElectronic Commerce

Electronic Commerce:Electronic Commerce: ““The use of The use of computer applications communicating computer applications communicating over networks to allow buyers and sellers over networks to allow buyers and sellers to complete a transaction or part of a to complete a transaction or part of a transactiontransaction””

EE--Operations (eOperations (e--Ops):Ops): ““the application of the application of the Internet and its attendant technologies the Internet and its attendant technologies to the field of operations managementto the field of operations management””

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The InternetThe Internet

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The InternetThe Internet

0100200300400500600700800900

10001100

1997 1998 1999 2000 2001 2002 2003 2004 2005 2006

million users worldwide

Source:Source: Internet World Stats Internet World Stats -- http://http://www.internetworldstats.com/stats.htmwww.internetworldstats.com/stats.htm

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The Context of EThe Context of E--Ops Ops

Business ModelBusiness Model

“How do we make our money?”

OperationsOperations

“How do we manage production of the product or service?”

Information System ArchitectureInformation System Architecture

“The set of tools used to support processes.”

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WebWeb--Based Business ModelsBased Business Models

Three broad types:Three broad types:

1.1. InformationalInformational

2.2. ValueValue--AddingAdding

3.3. TransactionalTransactional

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WebWeb--BasedBased Business Models Business Models ––InformationalInformational

• The web site provides information about a topic, product or service

• No fees are charged• No restrictions are placed on access• Examples:

– vendors providing product / service information, – non-profit organisations, associations, community-

based groups, etc.

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WebWeb--Based Business Models Based Business Models ––ValueValue--AddingAdding

• The web site provides services / information which complements (adds value to) other products and / or services provided by the organisation

• This could include: – Parcel tracking by a courier– Order tracking– Membership information e.g. Qantas Frequent Flyer– Software / hardware support for an IT vendor– Access to news & related information– Keeping track of investment portfolio

• Access is usually restricted to paying customers

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WebWeb--Based Business Models Based Business Models ––TransactionalTransactional

• Products & services are offered for sale on the web page.

• They may be delivered by traditional means e.g. overnight delivery

• Or they could be delivered electronically e.g. software / information download

• Examples:– Qantas & Virgin – airline ticket purchase– Harvard Business Review Online – purchase

articles– Most Banks – banking transactions

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WebWeb--BasedBased Business ModelsBusiness Models

Model

Example

Marketplace

eBay

Aggregator

Amazon

Alliance

AOL

Value Chain

Dell Computers

Distributive Network

UPS

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shopfront(front-end engagement)

internal business processes

( silos?)

backendsystems / processes supply

chain

some IT systemsome IT system

B2B B2B trading trading

B2B B2B trading trading

website

or

is this….a bolt-on?how far back does it reach?

TTo o IIntegrate, or not?ntegrate, or not?

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•• Doing old things in new waysDoing old things in new ways•• Doing away with some old Doing away with some old

things altogetherthings altogether•• New routes to marketNew routes to market•• Entirely new marketsEntirely new markets•• Entirely new products and Entirely new products and

servicesservices•• Wider reachWider reach

•• Working smarterWorking smarter•• Better serviceBetter service•• Mass customisationMass customisation•• New aNew allianceslliances•• Shortening supply chainsShortening supply chains•• Going directGoing direct

ItIt’’s really about s really about rere--engineering engineering the the company to take advantage of a company to take advantage of a new new

technologytechnology

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Competitive advantage is the gap between cost and priceCompetitive advantage is the gap between cost and price

This gap can be influenced by:1. Operational effectiveness (focus on cost)

2. Strategic positioning (focus on distinctive competencies)

The Internet and Competitive The Internet and Competitive AdvantageAdvantage

Porter, Michael E.. (2001), Porter, Michael E.. (2001), ““Strategy and the InternetStrategy and the Internet””, , Harvard Business ReviewHarvard Business Review, 79(3), pp62, 79(3), pp62--7878

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The Internet The Internet –– A Strategic ViewA Strategic View

Positive:Positive: Enables reconfiguration of existing industries that have been constrained by high costs of communication, gathering information or making transactions, e.g. distance learning, catalogue retailers

Negative:Negative: Buyers power increased Reduced need for infrastructureReduced barriers to entryThe internet is an open system Easy to switch suppliers using the internetmore competition due to expanded geographic marketInternet strategies reduce variable costs, leading to price competition.Although sales can be expanded, it is at the expense of profite.g Car retailing


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TThe he FFutureuture

• The Internet rarely nullifies sources of competitive advantage in an industry, e.g. unique products, proprietary content, superior service etc

• The Internet itself will be neutralised as a source of advantage

• Buyers will value a combination of on-line and personal services

• Procurement will be a combination of traditional channels for customised items and the web for commodities


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The Future (cont.)The Future (cont.)

• Successful companies will find creative ways to combine traditional and web technologies

• The “new economy” is merely the “old economy” with access to new technology

• The established companies and dot-coms will progressively merge

• The fundamentals of competition remain the same

• Shift thinking from “e-business” to “business”

Documents

Business Systems – Operations Management Session 7c.pdf · 2 Business Systems - Operations Management Session 7 Enterprise Resource Planning 3 Printing your Digital Photos • What