As noted elsewhere on this site, one of the difficulties for people beginning to learn about Production and Inventory Planning and Control is the confusion in terminology. The terms Enterprise Resource Planning (ERP) and Supply Change Management (SCM) seem almost interchangeable in some places.
The terms ‘Supply Chain’ and ‘‘Supply Chain’ Management’ are described in the Supply Chain page of this site.
Sometimes the two appear to be recognised as being different – but in what way? One respected journal has even included the question “Do I need to implement ERP before I can introduce Supply Chain systems?” The answer it provides is that “no, we can manage the supply chain without ERP” but it goes on to point out that the data we need to manage our supply chain is held within ERP. Further, it argues, although we could use our legacy systems (spreadsheets and the like) it would be simpler to have one integrated package holding all the information required. In other words, this journal concludes that the ERP system is the Supply Chain system.
However, Supply Chain Management is most definitely not ERP. There are elements of the chain well outside the remit of ERP packages. Further, ‘Management’ and ‘Systems’ are some way apart. We have business strategies which we convert into tactics, policies and processes in all areas of operation – marketing, selling, manufacturing and so on – which then play a part in our procedures, which we execute in part with our systems. All companies do – or should do – lots of work on continuous improvement of their supply chain. This extends from sourcing and working with our suppliers on their own sourcing at one end of the spectrum to deciding how we wish to get our products delivered to the end customer. Many businesses have made great strides in this area through looking at how they can set up a supply model that gives better value to the end customer and a greater return for their own shareholders.
This is the key point here. ERP systems help address that part of the Supply Chain from our direct suppliers, through our own operational processes and thence to our own customers. They offer nothing to improve the supply further up the chain (our customer to end customer) or further back than our own ‘Tier 1’ partners. Critically, there is much more to Supply Chain Management than a planning and control system. Many aspects do not fall within the management information systems field.
Having established that systems promoted as ERP and Supply Chain are the same thing we will limit ourselves to using the term ERP.
Material Requirements Planning (MRP)
The core of today’s integrated business systems remains the planning engine whose first recorded mention is in the proceedings of the 1960 conference of the American Production and Inventory Control Society. MRP was going to utilise the expanding power of computers to remove the need for thousands of items within manufacturing businesses to be managed by offices full of clerks with desk calculators identifying forward requirements and stock projections at the component level. In future, companies would need only to set out the finished product schedule and the computer would ‘explode’ this into constituent demand, applying lead times, safety stock rules and batching parameters to manage sub-assemblies, components and raw materials.
More details of Material Requirements Planning can be found on a separate page within this site.
Management Resource Planning (MRPII)
It is generally recognised now that the early implementations of MRP were not the outstanding success stories envisaged by the pioneers of the approach – led by Oliver Wight, Joe Orlicky and George Plossl. MRP remains to this day one of the prime examples of the ‘rubbish in, rubbish out’ axiom of computer systems and too many of the pioneering projects were caught out by what still remains a problem many years later – the implementations were seen as computer projects and received insufficient management attention to disciplines and processes.
The pioneers of MRP as a management approach thus returned to the drawing board to address the disciplines and processes surrounding the system. Cynics may feel that the evolution from addressing Material Requirements to an approach apparently focussed on the broader aspects of Manufacturing Resources is just a little too convenient, allowing MRPII (i.e. ‘new, improved MRP’) to be the way that Messrs Wight, Orlicky and Plossl and their invention delivered success. If we put aside such cynicism, however, there is much sense in what was then promoted under this banner.
The definitive book on the subject was written by Oliver Wight under the wordy title of ‘Manufacturing Resource Planning: MRPII: Unlocking America’s Productivity Potential’ (ISBN-13: 978-0471132745). This was first published in 1981, with one of the major lessons being that of ‘Closed Loop MRP’. Closing the loop became a buzzword for the nineteen-eighties and beyond, and as with most buzzwords, it was often allowed to be promoted as something more complex than its originator had set out.
In simple terms, Closed Loop MRP was the expanded system which provided the means of establishing and maintaining plan validity. MRPII was the management approach to running a business around a single achievable plan which is maintained in line with changing circumstances.
Wight identified that MRP must be driven by a valid plan – one that could be achieved given the company’s production resources and supplier capability, and which matched, as closely as possible, likely sales demand. (Setting a plan to put stock on the shelves which cannot be sold has never been a good idea. Equally, sucking materials into business in line with the forecast demand for sales of product makes no sense if this forecast exceeds what can be produced.) He also explained that planning systems have to take into account that things change – going so far as to say that scheduling is impossible, given that customer demands change, plant breaks down, components fail inspection and so on. In fact, scheduling is not impossible. All we have to recognise is that we can set a schedule given the information available today, but we will need to react to changes as they happen.
Within the MRPII vision it was recognised that effort must be expended on establishing a valid top level plan and in keeping with the constant search for three-letter acronyms this became the Master Production Schedule, or MPS. Disciplines were defined for the establishment of the MPS, beginning in some businesses with plans set at the product family level and broken down after agreement between Sales and Operations. In Wight’s 1981 book the high-level process was called, perhaps confusingly, Production Planning, but this has evolved (not surprisingly) into Sales and Operations Planning.
Managing the validity of the plan also required system tools for reporting capacity requirements, at each of the three levels of the planning process. Resource Planning was the tool for reporting the load represented by the Sales and Operations Plan at the product family level, Rough Cut Capacity Planning assessed the MPS and Capacity Requirements Planning (CRP) calculated the detailed load on individual pieces or groups of plant resulting from the work orders and planned work orders generated by, and hence ‘after’, MRP. Of course, we were advised of the potential failing of CRP and hence the importance of establishing valid plans before MRP. Exploding a basically unachievable plan and generating orders on suppliers before CRP warned of overloads would be folly. By this time we would have committed ourselves to inventory – the major cause of excess stocks in nearly all businesses is being behind plan. The MRP packages also grew to provide tracking mechanisms for purchase orders and work-in-progress. In simplest terms, a sudden build-up of arrears means that the plan is no longer achievable and the package providers’ solution to this was the facility for booking operations and reporting any that had not been completed on time.
Of course there was far more to successful adoption of such systems than the features provided by the package in question. When MRP expanded to MRPII there were those who objected very strongly indeed to packages marketed under the MRPII banner. They argued that MRPII was nothing to do with system functionality but was the management commitment to best practice, in particular:
Of course whether the term ‘MRPII’ could be applied to the systems or not is irrelevant. The management philosophy evolved and was taken on board by some, though sadly not all, of the companies introducing planning and control systems. During these years the systems themselves grew to be richer in functionality.
Enterprise Resource Planning
As systems grew they expanded outside the scope of manufacturing into other areas. One such area was in the management of finished goods inventory across different locations and of distribution between warehouses in these locations. Again the thirst for three-letter acronyms led to the development of Distribution Requirements Planning (DRP) and subsequently, following the development of improved approaches for allocating inventory between locations by Robert Goodell Brown, to DRPII (sometimes called ‘Lean DRP’).
Systems also developed in the financial areas with fully integrated sales and purchase ledgers (‘receivables’ and ‘payables’) feeding the bottom line and balance sheet, Human Resource modules, fleet management, and so on. Thus whether or not Manufacturing Resource Planning was a valid term for the systems focused on manufacturing, the package suppliers sought a term to indicate that they provided solutions that supported the enterprise as a whole.
In addition there was now so much functionality outside manufacturing that these systems were implemented by many non-manufacturing operations including service companies and government departments. This required the use of ‘Enterprise’ to suit the variety of operations and also satisfy the financial management who were so often responsible for selecting these systems.