ENTERPRISE RESOURCE

PLANNING (ERP)
‘USING OPERATIONS RESEARCH FOR ENTERPRISE RESOURCE
PLANNING (ERP)’

Muhammad Muneeb Ur Rehman | Operations Research | May 10, 2016

-What is ERP?
Enterprise resource planning is basically a software architecture or a software solution
that provide manufacturers with the information necessary to effectively manage their
business processes. It facilitates the flow of information between manufacturing,
logistics, finance and human resources functions within a company and as such, is an
enterprise-wide information system. It is fully integrated real-time system which
everybody needs to grow their business. Using a centralized database on a common
computing platform, ERP system components interact with an integrated set of
commonly designed applications, consolidating all business operations into a uniform
system environment.

-PRELIMINARY OBJECTIVE:
ERP enable agility by connecting information from everyone, every department & every
process throughout your entire enterprise. This means up to the moment, it ensures
seamless communication and accurate picture of your valuable resources & the right tools
for better project planning, all leading to confident business decisions early in the
manufacturing process. Precisely its main objective is:

 Easier access to reliable information:-

 ERP systems eliminate the problems previously associated with data
collection: availability, accessibility and compatibility. This can have a significant impact
on the development and with use of OR models.

 Elimination of redundant data and operations:-

With elimination of duplicate data, another dimension of data analysis in
which OR will play an important role in ERP is data mining. Data mining
is the application of advanced OR algorithms, statistical analysis
techniques and artificial intelligence techniques to large quantities of data
in order to discover hidden trends, patterns and relationships.

 Increased efficiency, hence reduced costs:-

Using OR with ERP allows business decisions to be analyzed enterprise-
wide, resulting in time savings, improved control and elimination of
superfluous tasks.

The principal objective of operations research is optimization, i.e. "to perform best under
the given circumstances." This general phenomenon has numerous applications, for
instance, in agricultural planning, biotechnology, data analysis, distribution of goods and
resources, emergency and rescue operations, engineering systems design, environmental
management, financial planning, health care management, inventory control, manpower
and resource allocation, manufacturing of goods, military operations, production process
control, risk management, sequencing and scheduling of tasks, telecommunications, and
traffic control so on & so forth.

-IDEA AND THEORY BEHIND ERP (BACKGROUND):

So, why does any company need an ERP solution? Countless different processes,
activities, and systems are used to run your business & you need to establish numerous
workflows and procedures, some manual and some automated that may or may not be
formally documented. As a result, a variety of departmental applications and legacy
databases those are likely disjointed and not well-integrated.
While this approach may have served its purpose in the past, in today’s dynamic
and highly competitive marketplace, it can seriously hinder productivity, profitability,
and growth. The primary reason an ERP solution is so vital to a company’s success is
efficiency. Cumbersome, error-prone, labor-intensive manual processes can drain both
time and money. Businesses must operate as lean as possible in order to keep the bottom
line in check, and failing to automate critical yet routine business activities makes it
nearly impossible to do that.

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-OPERATION RESEARCH IN THE FIELD OF
ENTERPRISE RESOURCE PLANNING:
The term Operation is used to define all the activities which are directly related to the
Production of goods or services. Operations Management is therefore the function
involved in delivering value to the customers. Hence, Operations Management deals with
the core business activities of an organization. It includes the functions namely
marketing, finance, accounting etc. are also related and support the Operations function
but they are usually managed separately.

The preliminary use of the OR techniques for model construction & and finding out the
optimal solution are listed below;

 Linear mathematical programming methods:-

It consist of first, identifying problem as being solvable by linear programming;
second formulation of unturned problem and then finding the solution by using
established mathematical techniques. It derives its name

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 from the fact that the functional relationship in the mathematical model are linear and
the solution techniques consists of a predetermined mathematical steps i.e. a program.

 Probabilistic methods:-
It covers those problems in which all parameters are not known with certainty.
The solution results are assumed to be known with uncertainty, with probability
that other solution might exist.

 Inventory methods:-
They are specifically designed for the analysis of inventory problem frequently
encountered by the business firms. This particular business function is singled out
for attention, since it typically represents a significant area of cost for almost
every business. This category is divided into probabilistic and deterministic
techniques.

 Network methods:-
It consist of models that are represented by diagrams rather than strictly
mathematical relationship i.e. pictorial representation of the system under
consideration.
These models can represent either probabilistic or deterministic systems.

The Operations Research oriented approach, this approach is based on the

development of models designed to capture the important aspects of a managerial
decision. Tools such as mathematical programming (e.g. linear programming),
statistical tools (e.g. regression analysis) and simulation are used to analyze the
models and to gain insights to the model and the corresponding problem.

-EXACT PROBLEM DEFINITION:

Problems Faced by Organizations Without having ERP.
An organization having no ERP, will be running on many kinds of software which
usually do not allow interactions. Customization also may be difficult it in some cases.
This will negatively affect the optimized functioning of organization's business activities
that would make a huge impact.

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The organization will be facing a lot of problems in many areas of its functions. The
engineering design of the software will be needed in order to improve the product, and to
follow the client's behavior and choices since the first contact is quite important.
Administration of the different receipts interdependence will be very complex, such as
invoices regarding materials purchases, general expenditures or salaries.

All of these things change when an ERP system is implemented. Information flows
constantly and allows you to follow a client's processes at any moment, no matter which
part of the process they are going through. Purchases and expenditures are registered in a
Centralized Database (i.e. ERP) which allows you to have close control over these
activities. In this regard ERP helps you to prevent possible mishaps.

A powerfully integrated ERP system enables interactions of marketing, sales, quality

control, products processes, supply lines, stocks and many other areas and it can be in a
single database. This will eliminate the occasional loss of and retyping errors. It
integrates all departments and functions across an organization in a single computer
system that is able to serve all those different department's particular needs.

An ERP system also automates business processes by placing them into a useful format
that is standardized and common for the whole organization. Moreover it could even be
used between their suppliers and customers, which makes it a lot easier to manage.

-DETAILED ANALYSIS OF THE PROBLEM:

Requirement Gathering & Decision Making (w.r.t Data) :-
The order fulfillment process, from the acceptance of a customer
order to the delivery of the right product, in the right quantity, at the right time to
the customer has three integrated aspects:

 The data aspect: Data collection, storage, retrieval and analysis.

 The decision-making aspect: Making decisions regarding the usage of

Information, resources and materials.

 The physical aspect: Handling and processing of material (raw material,

parts and finished products).

The first aspect deals with the generation and collection of data such as a new customer
order that enters the system. New data is generated when transactions are taking place,

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new data is also collected from a variety of internal and external sources by data
collection systems.
IN CASE OF URGENCY: Data can be classified based on its importance and urgency.
Urgent data may have to be processed, analyzed and made available to the decision
makers immediately, while important data may wait in storage from where it can be
retrieved for further processing and analysis when needed.
An important step in the design of the order fulfillment process is to decide which of the
decisions to automate, how to do it and how to monitor automated decision making
processes to detect poor performances, and the need to make or to modify an existing
process. The design of the decision-making aspect in the process should therefore focus
on the following:

 The ability of the information system to support automatic decision making.

 Type of decisions to automate.
 The logic used for automated decisions.
 Data required for automated and non-automated decisions.
 The way the data should be collected, processed and presented as.
 Information to support decision making processes.
 The establishment of monitoring and control systems that are needed to.
 Detect problems in the process early on.

Accounting Information System:

The most frequent & commonly used information system is probably the accounting
system, which is a specialized MIS, designed to collect, process, and report information
related to financial transactions. Legal, tax and reporting requirements, as well as the
need to manage and control scarce financial resources of the organization, promoted the
use of accounting systems in organizations. Over the years these systems were extended
to support decision making and performance measurement. Cost accounting is a
collection of models commonly used to support decisions on pricing, outsourcing and
purchasing.
The major components of the accounting information system are:

 The order entry, sales entry system - the system that interface with the customers
and the markets.
 The billing, accounts receivable, cash receipts system - the system that bills
customers, monitors customer accounts, and records cash receipts.
 The purchasing account payable, cash disbursements system - the system that
supports purchasing of goods and services, monitors open payable, and processes
and records of cash disbursements.
 The inventory system - the system that monitors inventory and its value.
 The human resources management system - the system that maintains employee
and payroll records and prepares and records payroll transactions.

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  The general ledger, financial reporting system - the system that maintains the
general ledger and prepares accounting reports.
 The integrated production system - the system that collects, processes and records
production costs.

The accounting information system is a very important source of information for the
management of the order fulfillment process. However, the information generated by this
system should be well understood to avoid misinterpretation and unambiguous decisions.
For example traditional cost accounting models tend to assume that mainly production
volume, direct material and direct labor influence costs. This assumption was valid when
the level of automation on the shop floor was low and direct material and direct labor
costs were the major cost components of a manufacturing organization. Furthermore,
some cost accounting models are based on the assumption that direct labor is flexible,
and its level of usage can be easily changed with the production volume. Today with the
advance manufacturing technology direct labor costs are frequently just a fraction of the
total cost of a product or a service and it is pretty much fixed, at least in the short range.

ESTIMATION/FORECASTING:
This actually works on the probabilistic technique of OR as mentioned earlier, which
covers the issues of estimation where all the parameters are not known with certainty. An
ideal information system provides only high quality information that is understandable,
valid, relevant, accurate and complete. In reality some information is simply not available
and the best we can do is to estimate it. This is particularly true when future events are
considered. For example information about future interest rates, future inflation rates and
future money exchange rates is important for investment decisions. Information about
future demands and future competition is important for marketing decisions and
information about future absenteeism of employees and future breakdown of machines is
important for production planning.

However, exact information of this type is simply not available and the best we can do is
to try and forecast it. Forecasting is an art as well as a science. Some people can forecast
future events with a remarkable accuracy, based on their experience and intuition. For
example, some farmers are known to forecast the weather with pretty good results
without using any sophisticated models, computation or computers. In this book,
however, we concentrate on forecasting models that are frequently used to support the
order fulfillment process, and we will focus on the techniques that are embedded in the
Operations Trainer. These techniques are based on time series analysis, i.e. an attempt to
forecast the future based on the analysis of past data.

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GRAPH SHOWING FORECAST

In most organizations manufactured goods are made of purchased parts and raw
materials which make the triggering decision even more complicated. Management can
decide to trigger the purchasing activities based on a demand forecast, but to start
production and assembly only when firm customer orders exists. The designer of the
order fulfillment process has several alternatives to initiate purchasing orders and
production orders, for example:

 Issue purchasing orders and production orders based only on firm customer
orders.

 Issue purchasing orders and production orders based on demand forecasts;

maintain inventories of some purchased raw materials and parts.

 Issue purchasing orders based on the current inventory of these purchased parts
and raw materials and issue production orders based on firm customer orders.

COST CONSIDERATIONS:
Cost is an important performance measure especially in for-profit organizations. Since
profit per product unit is defined as the difference between the selling price of the product
and its cost, to increase profits organizations can increase the selling price, decrease the
cost or try to do both. In a competitive market the selling price affect the volume of sales.
Although the exact relationship between the selling price and sales is hard to predict, it is
possible that increase in selling price in an effort to increase profit per product unit may
cause a decrease in sales and consequently the total profit will not increase, or worth, it
might even decrease.

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A safer way to increase profit is therefore to reduce the cost of products. Reduced costs
can translate to higher profit per unit by keeping the selling price constant or it can be
translated into higher total profits by reducing the selling price per unit and increasing
total sales. In both cases the key to increased profit is lower cost.

In the early days of the industrial revolution the direct cost of labor and material was far
more significant than the indirect costs. Most of the workforce was employed on
dedicated manufacturing processes producing a single product and it was possible to trace
the use of purchased materials to each of the limited number of end products. Today’s
manufacturing processes are capital intensive, flexible and complex. Different products
or different models of the same product share many parts and materials and the same
facilities are used for the production of different products. The cost of management and
other overhead costs are substantial while the cost of direct labor and material is hard to
allocate. Furthermore, direct labor and material may represent a small fraction of the total
cost of a product unit. The result is that the cost estimates produced by the cost
accounting system may lead to the wrong decisions when competition is based on cost.

Another problem with traditional cost accounting systems is the separation of total cost to
a fixed cost component and a variable cost component. Direct labor and material cost are
often considered variable costs. Theoretically management can control the variable cost
by changing the actual level of production. In reality, management ability to control this
cost by adjusting direct labor to the level of production may be limited. When the daily
fluctuations in the level of production are significant, and the production processes
require a trained workforce, at least inthe short run direct labor cost may be pretty much
constant.

OUTSOURCING:

Capacity, measured in terms of the maximum possible output level of the order
fulfillment process for a given period, is limited in most organizations due to limited
resources (facilities, machines, workers, etc.). In the short run, additional capacity can be
obtained by increasing the utilization of existing resources (e.g. working overtime or
extra shifts). In the long run capacity expansion is possible by adding resources to the
order fulfillment process, (e.g. hiring and training new employees, purchasing, installing
and operating new machines, and building new facilities). Most organizations use
external sources of capacity and only few organizations are completely self-supported.
Most organizations that deliver goods and provide services purchase some materials,
parts and services from outside sources. This process is known as outsourcing.

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To ensure that outsourcing enhances the competitiveness of the order fulfillment process,
the following points should be carefully evaluated:

 Which materials, parts and services should be purchased (known as Make or Buy
Decision)

 How to select the suppliers and what kind of relationship to establish with them,
this is known as ‘Supplier Management’.

 What quantities to order, when to place new orders, and how to manage the stocks
of purchased goods and materials, this is known as ‘Inventory Management’

 COST AND VOLUME: when the cost of in house manufacturing is too high, or
the volume of demand for a given part or service is too low to justify the initial
investment in facilities, machines and training of the workforce, outsourcing may
be the way to improve cost based competition. Break even analysis is frequently
used to analyze the cost aspect of make or buy decisions. In this analysis the
purchase cost per unit (Cp) is multiplied by the required volume (Q) and this total
cost of outsourcing (Q*Cp) is compared to the total cost of manufacturing
calculated as the cost of manufacturing a unit (Cm) times the volume (Q). If the
difference (Q*Cp- Q*Cm) is smaller than the initial investment (I) required to
start in house manufacturing, outsourcing is preferred, as it strengthens the cost
based competitiveness of the organization.

 DEMAND PATTERN: when the demand for a part or service is widely fluctuating
or seasonal, in house manufacturing may not be justified, especially if it requires
investment in special machines, equipment and facilities that might be idle for a
substantial part of the time.

 TIME: outsourcing may be preferred when the lead-time of buying is substantially

lower than the lead-time of manufacturing. In this case outsourcing may enhance
the time-based competitiveness of the organization.

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 RELATION BETWEEN TOTAL COST & VOLUME

-CONCLUSION:
Now we can clearly get the idea that using simple Operations Research techniques how
we could model an ERP and get to the optimized solution by integrating all the necessary
information centrally. Precisely, by contrast of having data distributed throughout a
number of separate databases, all information is now integrated & located in a single
place. All the data is now kept consistent and up-to-date. Basically without a centrally
integrated system like ERP, it’s not easy to survive for an enterprise to work consistently
& increase their productivity in terms of business. Thereby, Operations Research
provides you with the optimal results and feasible solutions while modeling or
constructing your ERP. It plays a vital role in resource planning & management for an
enterprise, with easy access to desired information, removing redundancy of data &
ultimately minimizing the overall cost of the procedure.

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Reference (source): *Operations Management For
Dummies
BY Mary Ann Anderson, MSE, Edward J. Anderson, Geoffrey
Parker

*ProfitPoint

* Mathworld.Wolfram

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