Supply Chain Information Systems
Supply Chain Information Systems
CHAPTER 1
Supply Chain
Information Systems
The ability to access global production and services has revolutionized
business. Supply chain networks move inventories of various kinds from
source to consumption. Being able to work with producers around the
world provides opportunities to balance low cost with risk mediation.
While logistics usually is associated with moving material, supply chains
today can include intangibles such as services as well as inventories of
goods. Using the Internet enables linking together supply chain networks
in practically any business application, production or services.
Organizations such as Dell and Hewlett-Packard have operated col-
laborative supply chains with each partner focusing on a few key strategic
activities. Supply chains also include organizations such as the military
and nonprofit organizations like the Red Cross and Red Crescent. In the
retail arena, Walmart has been very successful in the past in linking thou-
sands of sources with their millions of customers. Organizations such
as Bank of America have viewed their service operations as key to their
success and evaluate their entire service supply chain seeking to apply
the same general principles as lean manufacturing, focusing on provid-
ing maximum value at minimum overall cost. Information systems are
needed to make these supply chains work.
• Product development
• Procurement to include outsourcing/partnerships
• Manufacturing
• Physical distribution
• Customer relationship management (CRM)
• Performance measurement
one of the six elements given earlier. Each supply chain organization will
find that they are best served by various combinations of these software
products. Furthermore, as technology evolves, new software is developed
to serve specific needs as information systems continue to evolve.
A supply chain management stream can be divided into three main
streams: product, information, and finances.
A number of supply chain systems have evolved over the decades. The first
was materials requirements planning (MRP). This was extended to include
planning schedules (often labeled MRP-II). Enterprise requirements
The term “MRP” is used as a general term to include all MRP versions,
namely, MRP-I (i.e., materials requirements planning), Closed-loop MRP
(i.e., MRP-I with capacity planning and shop floor management), and
MRP-II (i.e., Closed-loop MRP integrated with the other functions such as
finance and marketing).1 The concept of an integrated information system
took shape on the factory floor. Manufacturing software developed dur-
ing the 1960s and 1970s, evolving from simple inventory tracking systems
to materials requirements planning (MRP) software. MRP at its core is a
time-phased order release system that schedules and releases manufacturing
work orders and purchase orders, so that subassemblies and components
are available at the assembly station when they are required. Some of the
benefits of MRP are reduction of inventories, improved customer service,
and enhanced efficiency and effectiveness. MRP software allows a plant
manager to plan production and raw materials requirements by working
backward from the sales forecast, the prediction of future sales. Thus, the
manager first looks at marketing and sales forecasts of demand (what the
customer wants), the production schedule needed to meet that demand,
calculates the raw materials needed to meet production, and projects raw
materials purchase orders to suppliers. For a company with many products,
raw materials, and shared production resources, this kind of projection was
impossible without a computer to keep track of various inputs.
Electronic data interchange (EDI), the direct computer-to-computer
exchange of standard business documents, allowed companies to handle the
purchasing process electronically, avoiding the cost and delays resulting from
paper purchase order and invoice systems. SCM began with the sharing of
long-range production schedules between manufacturers and their suppliers.
The MRP system should provide four basic items of information: when
to place the order, how much to order, who to order from, and when the
items need to be on hand. MRP systems are used to acquire or fabricate
component quantities on time both for internal purposes and for sales and
distribution. MRP is a planning instrument geared exclusively to assembly
operations. Each manufacturing unit informs its suppliers what parts it needs
and when it requires them. The main aim for evolution of MRP was to tackle
the problem of “dependent demand,” that is, determining how many of a
particular component is required knowing the number of finished products.
The next stage of MRP-II evolution was just-in-time (JIT) method-
ology in the late 1980s. MRP-II (manufacturing resource planning) is a
method to plan all resources for a manufacturer. A variety of business func-
tions are tied into MRP-II systems, including order processing as in MRP,
business planning, sales and operations planning, production planning,
master production scheduling, capacity requirements planning, and capac-
ity planning. MRP-II systems are integrated with accounting and finance
subsystems to produce reports including business plans, shipping budgets,
inventory projections, and purchase plans. A major purpose of MRP-II is to
integrate primary functions (i.e., production, marketing, and finance) and
other functions such as personnel, engineering, and purchasing into the
planning process to improve the efficiency of the manufacturing enterprise.
Many within the operations management field consider ERP as a
natural extension of MRP-II. The APICS Association for Operations
Management definition for ERP is a method for effective planning and
control of all resources needed to take, make, ship, and account for cus-
tomer orders.2 There is at least some truth to this view, but ERP systems
are even more comprehensive than simply on manufacturing operations.
ERP systems are found in practically all types of large organizations,
• Scheduling
• Process management
• Document control
• Data collection/acquisition
• Labor management
• Quality management
• Production unit dispatch
• Maintenance management
• Product tracking
• Performance analysis
• Resource allocation and tracking
An MES can interact between the organizational ERP and the shop
floor, taking production orders from the ERP and allocating machines
and labor to tasks or products. Real status from the shop floor in turn
is passed on to the ERP to update resource availability, track products
and inventory, and record production. Logistics functions in the ERP
include plant production scheduling, shipping, and inventory. The MES
will translate that to execution in the form of dispatching, detailed pro-
duction scheduling, and tracking materiel.
• Accuship
• GEOCOMtms
• HighJump (acquired Pinnacle)
• Infor
• i2 Technologies
This list includes the two flagship ERP vendors: Oracle and SAP. It
also demonstrates the volatility of the industry, showing a number of
acquisitions. Other means of TMS acquisition include in-house develop-
ment, hosting by an ASP, or software as a service. Firms also have options
with respect to software within specific branches of the organization, or
enterprise-wide support.
ERP
system. ERP systems are thus less flexible. But the benefits of integration
are usually much greater than the costs of conformity.
Data can be entered once, at the most accurate source, so that all users
share the same data. This can be very beneficial, because shared data is used
more and by more people, which leads to much more complete and accu-
rate data. As errors are encountered, users demand corrections, but this is
limited because a set of procedures is needed to ensure that changes do not
introduce new errors. This makes it harder to make corrections, but again,
this added inconvenience is usually well worth the gains of data integration.
ERP systems also can provide better ways of doing things. This idea
is the essence of best practices, a key SAP system component. The down-
side to best practices is that they take a great deal of effort in identifying
the best way to proceed with specific business functions, and that they
often can involve significant change in how organizational members do
their work. Further, as with any theory, what is considered best by one is
often not considered best by all.
ERP systems are usually adopted with the expectation that they are
going to yield lower computing costs in the long run. Ideally, adopting
one common way of doing things is simpler and involves less effort to
provide computing support to an organization. In practice, savings are
often not realized, due to failure to anticipate all the detailed nuances of
user needs, as well as the inevitable changes in the business environment
that call for different best practices and computer system relationships.
Training needs are typically underbudgeted in ERP projects. Further-
more, these training budgets don’t usually include the hidden costs of
lost productivity as employees cope with complex new systems. Table 1.2
recaps these pros and cons of ERP systems.
The key rationales for implementing ERP systems are the following:
Initially, fear of Y2K was a major concern. The Swedish survey was
later than the one in the United States, and that might explain the lower
rating for this item in the Swedish study. The later Korean study did not
ask about this dated issue. The U.S. response was actually neutral (only
slightly higher than 3), but Y2K clearly was a factor in ERP adoption in
the mid- to late-1990s. However, more important reasons were always
present. In the first two studies, replacing legacy systems received a high
positive response. The desire to simplify and standardize systems had the
second highest rating in the first two studies and had the highest rating in
the later Korean study.
There were two other reasons that received relatively high ratings
in the United States (a bit lower in Sweden). These were to improve
interactions with suppliers and customers, which is one way to gain
strategic advantage. The supply chain aspects of ERP have led vendors
to modify their products to be more open, although work continues
to be needed in this direction (and seems to be proceeding). Link-
ing to global activities was slightly positive in the U.S. survey, more
negative in the Swedish study, and relatively higher in the Korean
study.
Three other potential reasons received low ratings in both studies.
Pressure to keep up with competitors received neutral support in the U.S.
study. Ease of upgrading systems is a technical reason that received neu-
tral support both in the United States and in Sweden. Restructuring the
organization was rated lower.
From these studies, we infer that ERP systems are an important means
to upgrade the quality of information systems. They can provide orga-
nizations with coordinated systems that have higher-quality data. Once
the kinks are worked out, this information may be available in a more
responsive way. Not all evidence indicates lower costs, but most evidence
does indicate higher-quality information systems.
ERP and SCM: Originally ERP tools were not considered for
SCM and thus the information flow between various members of
the supply chain was slow. This was because until the late 1990s
the concentration of organizations was on improving the internal
efficiency alone. Organizations however, soon realized that although
internal efficiency is important, its benefit would be limited unless
complemented by increased efficiency across the supply chain. They
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Conclusion
In the past, vertical integration was a way to gain efficiency in supply
chains. Today, vertical integration doesn’t work as well, because specialty
organizations have developed to perform specific tasks very efficiently.
Efficiency is gained today through supply chains linking specialists
throughout the vertical business hierarchy.
A number of software systems are available to support supply chains.
This chapter reviewed MRP, APS, and ERP. OLM software was briefly
described as an example of other software support. ERP systems were
initially focused on integrating internal operations. Their high invest-
ment cost and often rigid procedures made them barriers to effective
supply chain linkage. However, recent trends show movement toward
more open systems that allow closer coordination across supply chains.
One way to accomplish this efficiency would be through all elements in
a supply chain adopting the same ERP vendor products, as well as soft-
ware enhancements. However, this is not economically viable for most
supply chain components. Many suppliers may not have the millions