ERP systems

JOS VAN HILLEGERSBERG: In this session, we will look at enterprise resource planning systems, because they are a really important component in supply chains. And most companies, if not all companies, have some sort of enterprise resource planning system that really determines what they produce and when they need certain components from their suppliers. And all these systems have to work together to make a supply chain work, so that’s why it’s really important to understand what these systems do and what their challenges are. All these systems need some sort of forecast of the demand from the customers, and that is a really interesting and challenging task.

Without the amount, you have no clue what you should produce and what you should order, so it’s really important to come up with a forecast of demand. In some markets, you can make really accurate forecasts, but in most markets it’s really a challenge. The more accurate you are, the better you can control your production process and the more effective your supply chain will be. You can use all kinds of information to create a good forecast. You can look at historical data, you can look at price data, and you can look at what consumers want.

It’s also important to collaborate together with the marketing department, so that you actually know what kind of marketing campaigns you need to do and what kind of sales promotions are planned, and what will be their impact on the forecast. So you use market analytics. You use all kinds of data, and you can get– and you look at the patterns, the sales patterns. And the more you know about the market and the actual sales, the more you analyse the data, the more you know about factors that impact the actual sales, the better you can make a forecast. And your forecast, your demand forecast, is a very important input to the rest of your requirements planning process.

So if you have this accurate forecast for a certain period of time, you can use that for a next step in your planning. The planning of what you want to produce, and what you are going to order. A very important other element you need is an accurate insight in your inventory. What components, what materials do you have on stock, and where it is located. And in what quantities you have these items on stock. You also need to know what you can order from your suppliers, and what kind of leap times these items will have if you order them.

If you combine all this information, so your demand, and your inventory, and the components you need, then you can come up with an accurate calculation of what you’re going to produce and what you’re going to order. So if you have an accurate picture of your demand, you can create a schedule for your production. This is called a master production schedule. And in some very stable markets, you can make that for a longer period of time, but in most modern markets, it’s not so stable anymore. You have to update and change your mass production schedule quite often. But it’s still important to work from a master production schedule, because you have to plan your capacity, your personnel, and your factories.

And you have to also use this to order from your suppliers. If you have your master production schedule of your different products– so how much of each product will you produced in a certain period of time– you also need to know what components the product is made of. This information is stored in the bill of materials, and the bill of materials contains the quantity of each component that you need to assemble and produce a final product. You need this information to calculate for each production schedule what kind of quantities of components you need to order from your suppliers. Imagine without information systems, it would be impossible to combine all this complex information.

All the demands for different products, the production schedule, your capacity, the leap times from suppliers, if you would all do that manually, it would only be possible for a really simple company. But as soon as your company gets a little bit more complex, you need software to do this for you. There’s a great variety of what we call today Enterprise Resource Planning systems that can do these processes for you. From quite simple and affordable ones, to really complex and expensive ones. But basically, in the core, they all do the same.

What they do is they execute an algorithm, and this algorithm what it basically does is it takes your current demand, the demand forecast, it looks at the various bills of materials of all the products you want to produce, and looks at what you have in your inventory. And it also knows your supply network, so it knows what suppliers you have and what kind of components they can deliver, and also what the various leap times are. And it combines all this information. It calculates what you need to order, when you need to order it, and what you need to produce, so that all the components will be there.

And of course, it tries to minimise stock levels, and to minimise also the risks that you run out of stock. And it maximises the delivery– the availability of products at the time you need them, so that your entire cost will be low, and that you produce what you need and you don’t have too much inventory on stock. This is basically what it does. Of course, it’s much more complex, but the essence is this. And the modern systems also take into account that you have limited capacity, so you cannot just produce whatever you want. You are constrained by the capacity of your resources. And your resources include your people, your equipment, the capability to store items can be constrained.

You can also be constrained by the amount of money you have to buy from your suppliers. So the algorithm’s take this into account, and they come up with a feasible plan. In a supply chain network, all the companies that are active have their own view of the world, and they all run their own ERP requirements systems. And they all have the view of what they think the demand is, and they all have a view of what they think they can get from their suppliers. But of course, they shouldn’t operate in isolation, but they should operate as a joined supply network.

Because they together determine if the products will be successfully created and delivered, or whether some hiccups will emerge that will block the production and delivery of goods. So it’s not just about optimising your own process and your own resources, but it’s about working together across the supply chain and connecting these systems and these plans together, so that the entire supply chain will work. And more and more we’ve come to realise that we shouldn’t be working in isolation, and we shouldn’t not just optimise our own process, but we should connect our demands. We should make our plans together. We should use also information systems that cross and integrate these individual ERP systems.

For example, to make demand forecast together, or to make– to coordinate about what we are going to order, so that upstream in the supply chain, companies can anticipate on what is happening downstream in the supply chain.