An IT strategy needs to start with supply management’s goals and objectives. These goals and objectives can include reducing cycle time, streamlining the procure-to-pay process, reducing transaction costs, leveraging the supply base, and reducing inventories. All stakeholders should be consulted to identify additional requirements, which must be factored into the requirement for the technology.
Assessment of current systems
As the IT selection process begins, documenting what systems are currently installed, the functionality they provide, and the total cost to maintain those are critical steps in establishing the baseline for evaluating alternative technologies. Comparing current functionality to the future state identifies the gaps and drives identification of the various alternatives available to improve performance. Understanding functionality of the current system helps to identify current capabilities and required additional options, such as upgrades to the current system, to obtain the future state. The total cost to maintain the current operating environment needs to be estimated. The current total cost is the baseline to compare the return on investment for new technology. As with any investment, a business case and budget should be developed. This will validate the need for the solution and ensure agreement on the estimated return on investment. Assessing the current systems will help build the business case by providing:
- An understanding of the ability to link systems and the availability of data needed to facilitate the new solution.
- A perspective on what alternative solutions may already exist in-house.
- An understanding of the resources required to implement the system and train resources.
Before selecting appropriate IT solutions, organizations should analyze what is available, the scope of coverage of various solutions, and current trends. For example, many solutions are now cloud-based, and will not require extra in-house servers.
However, they may create higher variable costs.
There are a variety of solutions available in the market that cover the supply management process, including specification management, the requisition process, sourcing, negotiations, contract management, order management, receipt, payment, and supplier evaluation
To analyze the offerings, organizations should understand their needs and how they match the possible solutions. Specifically, consider the type of need, such as tactical, content-related, something to be used for analysis purposes, and/ or a system(s) to be used for collaborative efforts. Also consider the internal and external stakeholders who will need to access the tool. In other words, do suppliers and subsidiaries, or only internal resources, need access? Finally, consider how the potential solutions match and can link with current systems, and the availability of necessary data to support the potential tool.
Once the needs are defined, there are still a variety of options available to obtain the needed solution. Enterprise resource planning (ERP) systems can cover a broad array of solutions. ERP refers to a computer software package that integrates process and data across various functions within an organization (ISM Glossary 6th edition). It may be used to enable processes such as forecasting, materials management and supply management. Alternatively, single solutions may cover one aspect of the process or a suite of solutions with broader coverage. Finally, organizations can consider industry consortiums or even seller sites for certain aspects of the supply management process
Once requirements are defined, supplier selection can take place. For technology solutions, suppliers should be evaluated on the following criteria:
Evaluate the functional capabilities of the tool. For an e-RFP tool, this functionality can include areas such as e-RFP creation, supplier tracking, reporting, document management, and proposal analysis.
Consider the base of the solution, such as architecture, operating system, server requirements, interfaces, scalability and disaster recovery. Increasingly, systems are run in the cloud, rather than residing on an organization’s server. Data security and back-up should be considered (Whitfield 2013).
Assess the organization’s reputation, customer base, experience and financial stability.
Pricing information should provide visibility into areas such as development cost, implementation support, licensing fees, maintenance fees and training. For cloud-based systems, consider how much of the fee is fixed and how much is based on your actual usage, and how your usage is likely to change over time. The switching costs of moving your data from one supplier to another may be high if you do not have the internal capability to do this.
There are other issues to consider in the SDLC process. Within supply management, there is the sourcing decision or, more specifically, a question of whether to purchase an existing software product, develop a customized system, or contract with an applications service provider (ASP), which offers software as a service (SaaS). SaaSrefers to “an organization that provides software applications over the internet for use by its customers for a fee. SaaS has become the industry-preferred term, generally replacing the earlier term application service provider (ASP).”6 An ASP is “an organization that provides software applications over the internet.”7 Regardless of the choice, the system development life cycle does not actually change; it is merely adjusted. Concepts for the software still must be considered, as well as the analysis of an organization’s requirements, expertise in systems development, and cost. With the availability of IT systems today, most organizations choose to outsource a stand-alone system or use SaaS. Design, development, and testing are replaced with the evaluation of potential purchased products or SaaS. Compatibility of the new software with existing systems is certainly a key factor. The advantage of SaaS is lower cost, which helps small- and medium-sized businesses. The SaaS provider also offers the expertise and performs upgrades as needed along with maintenance, security, and 24/7 technical support.
Planning stages of the SDLC
The planning stages of the SDLC are of prime importance, for analysis and design must be performed properly to ensure success downstream. Good planning helps reduce errors and minimize the chances for missing production and/or service schedules.
Several developments have reshaped the organization and changed the nature of the linkages among organizations. While information sharing has long been central to efficient supply management, the advances in technology are the driving force behind competitive strategies. Today’s leading organizations use social media to create relationships and cloud computing to improve responsiveness, and the internet has made this possible. Still, an important piece of the supply chain as it relates to the use of technology is the implementation of the tried and true xRP systems. xRP is an “acronym for “x requirements planning” systems where the “x” may be materials, enterprise, or distribution.”8 These systems are the backbone of any organization and will be discussed in the following section, beginning with an overview of materials requirement planning (MRP).
Evolution of Information Technology Systems9 Materials Resource Planning (MRP) Systems
One of the earliest IT systems that helped to streamline purchasing processes and make supply management professionals’ work easier was material resource planning (MRP) systems. MRP systems offer “a methodology for defining the raw material requirements for a specific item, component, or subassembly ordered by a customer, or required by a business process. Materials resource planning systems will usually define what is needed, when it is needed and, by having access to current inventories and pre-existing commitment of that inventory to other orders to other customers, will indicate what additional items need to be ordered to fulfill this order.”10 Many MRP software applications can automatically place raw material orders to the preferred supplier via fax, email, or electronic data interchange (EDI). In 1981, MRP was extended to manufacturing resource planning (MRP II), which is “a method for the effective planning of all resources used in a manufacturing organization. Ideally, it addresses operational planning in units and financial planning in dollars, and has a simulation capacity to answer ‘what if’ questions. It is comprised of a variety of functions, each linked together:
- business planning,
- sales and operations planning,
- production planning,
- master production scheduling,
- material requirements planning,
- capacity requirements planning, and
- execution support systems for capacity and materials.
What is Enterprise resource planning (ERP) and how does it work
Enterprise Resource Planning (ERP) Systems Enterprise resource planning (ERP) systems have a much broader scope than MRP or MRP II, covering basic functions of all types within an organization. The systems generally refer “to a particular type of computer software package that integrates various functions within an organization. It may be used to enable processes such as forecasting, materials management, and purchasing.”12 Companies of all sizes, governments, nonprofits, and healthcare providers are examples of organizations that use ERP systems. Essentially, an ERP system has the capability to track people, processes, and technology. The goal for ERP adopters is to increase revenues through better customer relationship management, and improve efficiency and decision-making. Typically, these systems use multiple components of software and hardware to achieve integration within an organization and between organizations, albeit the use of a single software package has significant advantages associated with it. One of the key elements of an ERP system is the use of unified databases to store data for the various modules of the system.
How to Use Enterprise resource planning (ERP) Software
For a software package to be considered an ERP system, it must provide functionality in a single system that would normally be covered by two or more systems. For example, one of the more common ERP systems, SAP, offers the integration of a multitude of functions, including supply management, manufacturing, service, sales, finance, and human resources.13 See Figure 9-2 for an illustration. Such an integration eliminates the need for interfaces (and their coding) between multiple stand-alone systems.
Benefits of Enterprise resource planning (ERP) Software
ERP systems include both back-office systems, which do not directly involve customers and the general public, and front-office (or customer-/supplier-facing) systems that deal directly with customers or suppliers. The customer management module, for example, deals with customer needs. It can help an organization collect customer opinions through social media and manage its call center. The goal is to provide 24-hour access to customers, both new and existing. It allows for improved retention of customers through better relationship management and niche marketing. When operating effectively, the module can reduce the cost of sales by allowing customers to handle sales themselves. Customers can access products at any time and even configure their own orders. The ultimate goal is to secure a competitive advantage.
The supply management module of an ERP system is an important tool for today’s supply management professional. Depending on the system, this may be referred to as supply management or procurement, but the essential functionality should be consistent: automatic order placement and tracking, supplier pricing, master contracts, inventory replenishment, and materials forecasting. A key consideration with ERP is that it is simply another tool for the supply management professional to ensure timely delivery of quality goods and services when needed and avoid shortages.
ERP can provide the following benefits:
- Operational efficiency.
- Reports for decision-making.
- Improved customer service.
- A link to suppliers.
Examples of Enterprise resource planning (ERP) Software
ACH Food Companies Inc., with 1,000 employees and US$1 billion in annual sales, implemented an ERP system in two waves. The new system integrated the “hodgepodge” of “poorly integrated applications.” As a result, ACH benefitted considerably with visibility to all inventories across the organization, KPIs, and improved consistency of information for better decision-making. Finished goods inventories dropped by 20 percent and new product development took 75 percent less time.14,15
However, ERP as a stand-alone system is still expensive to implement and has limitations based on the ability of the software provider to customize. Companies have found it difficult to measure return on investment (ROI) because there are no tools or techniques available. And, some organizations find it difficult to adapt ERP to its business flows and processes. If they attempt to fit their organizations into ERP, companies could lose a competitive advantage.
There are also organizations with multiple business units or departments that operate with independent resources, missions, and chains-of-command, which make consolidation into one enterprise system difficult. Thus, companies need to carefully go through the software development life cycle (SDLC) process to determine if ERP is a right fit for them.
Supplier Management Enterprise resource planning (ERP) Software
As organizations have optimized their supply bases and created strategic relationships with key suppliers, many are employing supplier relationship management (SRM) software. An SRM system can offer many benefits, including the ability to source and select materials quickly and to monitor supplier quality. SAP Ariba offers an end-to-end supplier management solution that enables the efficient management of supplier information, lifecycles, performance, and risk, all conveniently integrated in one place.
Grupo Posadas, a leader in the Mexican hotel industry, needed a strategic sourcing process to improve spend visibility, create spend metrics, centralize pricing, and consolidate its supply management function. It chose a sourcing solution from SAP Ariba and can now manage its spend categories more effectively. Grupo Posadas estimates that it has saved 18 percent and “corporate spend under contract negotiations (has increased) by 25 percent,” according to Fausto Jimenez, the strategic sourcing vice president at the time. Better visibility of corporate procurement and high levels of compliance to service level agreements have enabled the company to analyze corporate spending more easily and to source more strategically. Purchase orders and processing times are tracked more easily, and suppliers can quickly confirm order availability so stockouts can be detected sooner
Warehouse Management Systems Enterprise resource planning (ERP) Software
A warehouse management system (WMS) is “computer software designed specifically for managing the movement and storage of materials throughout the warehouse.”18 A WMS can assist with receiving, picking, shipping, put-away, and packing activities. The benefits of a WMS include an increase in the following:
- Ability to trace inventory.
- Visibility of inventory in the system.
- Inventory accuracy.
- Order fulfillment capacity, accuracy, and speed.
- Speed of order pick times.
- Space utilization.
- Labor productivity. WMS is also offered as SaaS, which minimizes implementation costs, eliminates time set aside for upgrading, and can be paid for on a monthly basis.
Customer Relationship Management Enterprise resource planning (ERP) Software
Customer relationship management (CRM) is “an industry term for software solutions that help organizations manage customer relationships in an organized way and which includes all aspects of interaction an organization has with its customer, whether sales- or service-related.”20 These solutions can help organizations in a number of ways. One important benefit is that products and services can be provided that meet the customers’ precise wants and needs. This can lead to better sales forecasting and resource management, as well as improved profitability. CRM also can improve customer retention through better relationship management and niche marketing. When operating effectively, CRM helps businesses increase revenues and gain competitive advantage by:
- Offering services and products that are exactly what the organization’s customers want.
- Providing better customer service.
- Cross-selling products more effectively.
- Assisting sales staff to close deals faster.
- Retaining existing customers and discovering new ones
Distribution Requirements Planning Enterprise resource planning (ERP) Software
Distribution requirements planning (DRP) is a“supply chain management term for the time-based demand from the distribution center to balance the customer fill rate against inventory investment.” This will inform the organization about what products are on hand to fulfill existing requirements and what needs to be shipped from the distribution center. Distribution resource planning or DRPII is “a time-phased computerized inventory system to replenish inventory in multi-echelon warehousing systems. It includes planning for warehouse space, manpower requirements, transportation alternatives, and financial flows
From Enterprise resource planning (ERP) to Cloud
A recent development has been cloud computing, which refers to access to software, computing, and data storage through a network. Organizations may purchase a license to use ERP software and install it on their computers, but all access is through the internet. Organizations may work directly with the software supplier or use SaaS on a subscription basis. While many organizations today still have a traditional ERP with an on-site license, the second most common deployment is on-demand SaaS, according to a 2011 study. Total cost of ownership, lower start-up costs, and more frequent updates were primary considerations in the decision to implement SaaS
Enterprise resource planning (ERP) and Implementation Considerations
For organizations considering a traditional ERP system or one that is subscription-based, they also must ensure that strategic thinking is a part of these implementations. Regardless of how thorough an implementation is, it must be of strategic value to be worthwhile. Where an organization is and where it wants to be in a market must first be determined before it decides the best way to get there. Technology should be considered an enabler and not a final solution. If business strategies can be defined and developed, then it is likely a technology tool can help deliver it. Organizations also need to consider the cost of either the traditional or subscription-based system, data integrity, and security. An on-site solution requires the purchase of a license while SaaS, as mentioned earlier, is typically paid for through a subscription. In today’s environment, organizations often run ERP along with other applications, so compatibility with other systems must be considered. Along with cost, data integrity is always an issue. Problems can occur due to human error or errors when data is transmitted from one computer to another. To avoid these issues, it is important for an ERP system to back up data regularly and include error-detection and correction capability. The organization should also have processes in place to prevent the input of invalid data as well as security mechanisms in place to control access to the data. Finally, security concerns must be addressed regardless of application. On-site systems are vulnerable unless completely contained, which is unlikely. However, potential SaaS providers must be thoroughly investigated to ensure their financial viability and integrity.