What exactly is Enterprise Resource Planning (ERP)? Everyone seems to have his or her own definition. There is a decent amount of information on the Internet, but ERP implementations can be very different depending on a company’s needs. This tends to cause confusion and leaves many people feeling as though they don’t understand how ERP works, and furthermore how it can be helpful to their business.
First, let’s take a step back and take a basic look at ERP in a manufacturing environment. Think about all the various processes that are necessary to run a business: inventory, order management, accounting, human resources, marketing, customer relationship management and more. At a basic level, ERP integrates all of these functions together to help streamline processes and make information readily accessible throughout the organization.
There are a number of ERP business applications that facilitate replenishment within the manufacturing business. The four standard applications that support the buying and selling of product are: Inventory Management, Purchase Order, Sales Order and MRP.
1. Inventory Management
For any company that sells or manufactures a product, an inventory management system is a critical component of the ERP system. When a company receives a purchased product, that product should immediately be updated in the inventory management system. On a perpetual basis, the system should keep track of the current quantity and value of inventory on-hand.
Every company’s goal is to have the right amount of inventory to fulfill the customer’s expectation, while also maximizing the company’s profits. Manufacturing companies maintain a proper level of safety stock to help mitigate the risk of stockouts, so that they can fulfill their customer’s orders in a timely manner.
2. Purchase Orders
The ERP purchase order system keeps track of what’s been ordered, what’s been received, and what’s still open, etc. A company sends a purchase order to a supplier to request product. When a purchase order is received from a customer, the company enters a corresponding sales order to fulfill the customer’s purchase request.
When a company wants to order product from their suppliers, a purchase order system can provide information on what product has been ordered in the past from that supplier. Looking at purchase order history, a company can see exactly what they bought last year, what they paid for the product and if the product was delivered on a timely basis.
When a company receives a customer’s purchase order for a manufactured product, the ERP Bill of Materials (BOM) system is referenced to help determine what materials are required to manufacture the product.
3. Sales Orders
An internal sales order document is created as soon as a purchase order is received from the customer. The sales order details the ordered product, quantity to be delivered, pricing, delivery date and other terms and special customer requests.
When the materials needed to manufacture the product are available, a sales order is converted into a work order and a picking ticket is generated. These documents provide direction to the shop floor regarding the product to make and what materials are needed to make it.
When product is available to ship, a pick list directs which sales orders are to be filled based upon the order’s ship date and customer priority. The ERP sales order system also considers shipping lead-time, which is used to calculate the ship date.
4. Materials Requirement Planning (MRP)
The ERP materials requirement planning system helps companies plan what raw materials and finished goods will be required to fulfill a customer’s order. MRP calculates what materials need to be purchased or what products will be manufactured. MRP also calculates when those materials/products need to be purchased and/or manufactured, based on a variety of factors, such as: on-hand inventory, open purchase orders, open sales orders, open work orders and forecasts.
The challenge with many MRP systems is that they assume that the company has an infinite capacity to make products regardless of how much is ordered or how much is needed to manufacture a product. Since planning with an infinite capacity often creates overstocked inventory levels; an advanced planning & scheduling (APS) system becomes a necessary component to have linked to the MRP system. APS allows for finite and constrained capacity planning. Without APS, the delivery of purchased materials doesn’t necessarily match the production capacity and schedule of the shop floor. The result is that too much is ordered too soon and inventory levels increase.
With all four of these basic components in ERP software, a manufacturing company can streamline their processes and use information more effectively throughout the organization. As ERP software continues to adopt new technologies, such as cloud, mobile, analytics, big data, and more, it will continue to improve and become an even more efficient and effective tool for manufacturing businesses.
Joey Skinner is a senior product manager with Eide Bailly. Dan Milne is a partner with Eide Bailly.
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