ENTERPRISE RESOURCE PLANNING SYSTEM

Enterprise Resource Planning Meaning

There are various ways in defining an enterprise resource Planning System. This is how it has been defined by American Inventory and Production Control System (APICS) dictionary: Enterprise Resource Planning: An accounting oriented information system for identifying and planning the enterprise-wide resources to make, ship and account for customer orders. Again in Internet encyclopedia, it has defined as: An enterprise planning system is an integrated computer based application used to manage internal and external resources, including tangible assets, financial resources, material and human resources. Basically, an ERP combines several traditional management functions into a logical integrated system and facilitate flow of information across these functions. It is designed to model and automate basic processes across the organization over a centralized database and eliminates the need of disparate systems maintained by various units of the organization. Figure below shows how information is integrated in a typical organization using a ERP system.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

ERP system is thus a mirror image of the major business processes of an organization. Need for Enterprise Resource Planning - Why ERP ? Separate systems were being maintained during 1960/70 for traditional business functions like Sales & Marketing, Finance, Human Resources, Manufacturing, and Supply Chain Management. These systems were often incongruent, hosted in different databases and required batch updates. It was difficult to manage business processes across business functions e.g. procurement to pay and sales to cash functions. ERP system grew to replace the islands of information by integrating these traditional business functions.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

The successful implementation of an ERP system will have many advantages, as indicated below:

Business integration and Improved Data Accuracy: ERP system is composed of various modules/ sub modules where a module represents a particular business component. If data is entered in one module such as receiving, it automatically updates other related modules such as accounts payable and inventory. This updating occurs at real time i.e. at the time a transaction occurs. Since, data needs to be entered only once at the origin of transaction, the need of multiple entries of the same data is eliminated. Likelihood of duplicate/ erroneous data is, therefore, minimized. The centralized structure of the data base also enable better administration and security provisions, which minimizes loss of sensitive data.

Planning and MIS: The various decision support tools like planning engines and simulations functions, form integral part of an ERP system which helps in proper utilization of resources like materials, human resources and tools. Constrained based planning help in drawing appropriate production schedules, thereby improving operation of plant and equipment. As a part of MIS, an ERP system, contains many inbuilt standard reports and also a report writer which produce ad hoc reports, as and when needed.

Improved Efficiency and Productivity: In addition to provision of improved planning, ERP system provides a tremendous boost to the efficiency of day to day and routine transactions such as order fulfilment, on time shipment, vendor performance, quality management, invoice reconciliation, sales realization, and cash

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

management. Cycle time is reduced for sales to cash and procurement to pay sequences.

Establishment of Standardized Procedures: ERP system is based on processes of international best practices, which are adopted by the organizations during implementation. Department silos are purged and maverick practices are done away with. Because of top down view available to management, chances of theft, fraud and obsolescence are minimized.

Flexibility and technology: Due to globalized environment, where production units, distribution centers and corporate offices reside in different countries, organizations need multi currency, multi language and multi accounting modes, in an integrated manner. These provisions are available in most of the ERP systems, particularly in products offered by tier 1 and tier 2 vendors. ERP vendors are also quick to adopt latest technologies, from mainframe to client server to internet. Unlike a bespoke system, Upgrading to latest technology for a running ERP system is uncomplicated, involving mostly adoption of service packs and patches.

Conclusion Although ERP provides many advantages; its implementation is a strategic decision, involving significant resources (both financial and human), proper evaluation and business process re-engineering. There must be commitment from all levels. A failed implementation may lead to bankruptcy of an organization.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Sales Order Analysis

The costing module is one of the important controlling modules which enables effective intern

provided by this module. The cost accounting module is highly integrated with budget and ge as sales, procurement, warehousing, shop floor and bill of materials. Cost Accounting module: Cost accounting module consists of following functionalities: 1. Overhead Cost controlling. 2. Cost price calculation. 3. Hours accounting. 4. Activity based costing. Overhead Cost controlling: Overhead cost, which is an indirect cost, can not be directly assigned to the products manufactured or services rendered. Sometime, overhead cost is a significant percentage of overall cost. This functionality helps in defining allocation relations in the form of surcharge / rate applicable to various cost centers which in turn is comparable to budgeted surcharge/ rates. The overhead cost control thus helps to monitor and allocate of indirect cost. Cost price calculation: Under cost price calculation functionality, simulation (such as to make or subcontract), and calculation of price for standard and customized items are performed. This functionality is crucial in determining the lowest price limit for which a product is profitable. The cost price for standard item is calculated based on the following: 1. Material cost: Which may be latest procurement price or simulated purchase price. 2. Operation cost which may consist of labor and machining cost.
FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

3. Subcontracting rate. 4. Surcharges for coverage of overhead such as management cost / inspection cost. For calculation of cost price for customized items, project specific rates and surcharges are applicable. Cost price calculation also forms basis of calculation of valuation price (where a surcharge is added such as warehouse transfer surcharge) which in turn is used for internal financial transactions such as inventory transfer, Work in progress inventory. Sales price or suggested retail price where a sales price surcharge is added to cost price is also derived from this functionality. A typical flow chart for calculation of cost and sales price is as follows:

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Hours Accounting: This functionality is used to account for employees and machine cost and charge these costs to appropriate production orders. Hours spent can either be entered directly or the system can automatically back flush an estimated hour, on completion of an operation. When hours are posted, financial transactions are created in general ledger. Hours accounting is normally done through a working timetable and normal and overtime rates can be defined in the system. It is also possible to enter estimated / budgeted number of working hour for an employee or a work centre for a particular period (such as month / year) and compare the estimated / budgeted hours with actual hours.
FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Activity based costing: This is an extension of traditional system of distribution of overhead allocation, where only a few allocation bases are used. This functionality helps in controlling cost objects (which may be anything like products, services, projects, distribution channel) with their cost drivers, through a bill of activities and activity results. Thus, this functionality determines the consumption of business process by products, customers and other cost objects based on the cost drivers and helps in monitoring and controlling cross departmental business process.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Material Resource Planning

Bill of Material (BOM) is a base functionality of setting up production module of an ERP system. A manufactured item consists of components, which are used to build the product through production operation(s). The main use of BOM is to define product structure of a manufactured end item. Routing is another important base of production module, which defines the method of

manufacturing. Method or route to be followed for manufacturing a product is a prerequisite f setting up production module.

Bill of Materials: Any manufacturing process goes through various phases of production and each phase, components (either work in progress or purchased) are needed. BOM details

components required at various phases or levels of operations (either single level or multi leve In a multi level BOM, a parent / child relationship between successive levels is formed. BOM is used both for production and planning purpose, as specified below:

1. Defining a production bill of materials: The end item is described at highest level of BOM. Levels of BOM are defined indicating materialrouting relationship at every level of operation. Thereafter, components are added at each level. An existing BOM can be easily modified to create a newer version of BOM. An Engineering Bill of Material from Engineering Data Management module may also be copied to make a production BOM. A generic BOM may also be modified to make a customized product with the help of Configuration Management module. 2. Defining a planning bill of materials: Production of similar items (such as garments of same type but of different sizes) is linked through

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

aggregate relationship under planning bill of material so that their long term plan of production/ subcontracting are not done separately. Loops in BOM - While defining multi-level production bills of material, the user may mistakenly link a higher level item to its component at a lower level. This creates a data error and triggers an infinite loop for the manufactured item. This mistake is detected through utilities, which normally forms part of the module.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Scheduling Aspect
Routing - The objectives of Routing module are: 1. All tasks required to manufacture an item are determined. 2. The work centers related to these tasks are identified. 3. The sequence of task linked operations to be carried out on work centers or sub contracting work centers are established. Department - An organizational unit that carries out a specific set of tasks. A department can be of various types such as work centre, service centre, sales office etc. Work Centre - A Work Center is a place where production activities are performed. Resources (like men and/or machines) are linked to a work centre. Thus, a Work center is a group of resource units used as a functional planning unit. . Work centers may be departmental work centre or sub contracting work center. Task - This term is used to describe any activity carried out on the shop floor. Work centers and machines (for machine tasks) are used to define tasks. Task may be of various types such as production, repair etc. Work centre Task relationship - The task is linked to the work center if the work center is able to executing the task. Details such as set up time, production rate etc. are maintained under this relationship. Routing Code - The routing code identifies a routing sheet. Multiple (alternative) routings are possible for each standard manufactured item. A routing selection can depend on the order quantity, which is called the Order

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Quantity Dependent Routing. A routing code is needed to be linked to the manufactured item. Routing Operation Here, series of routing steps that are carried out successively to produce an item is defined. The operations are identified by serial number, which indicates sequence of operations for the associated manufacturing process. The main flow between business objects in Routing module is depicted below

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Production Aspect
Every organization that is engaged in production, sale or trading of Products holds inventory in one or the other form. While production and manufacturing organizations hold raw material inventories, finished goods and spare parts inventories, trading companies might hold only finished goods inventories depending upon the business model. When in case of raw material inventory management function is essentially dealing with two major functions. First function deals with inventory planning and the second being inventory tracking. As inventory planners, their main job consists in analyzing demand and deciding when to order and how much to order new inventories. Traditional inventory management approach consists of two models namely:

EOQ - Economic Order Quantity Continuous Ordering Periodic Ordering

1. EOQ: Economic Order Quantity method determines the optimal order quantity that will minimize the total inventory cost. EOQ is a basic model and further models developed based on this model include production Quantity Model and Quantity Discount Model. 2. Continuous Order Model: works on fixed order quantity basis where a trigger for fixed quantity replenishment is released whenever the inventory level reaches predetermined safety level and triggers re ordering.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

3. Periodic System Model: This model works on the basis of placing order after a fixed period of time.

EOQ Model

Example: Biotech.Co produces chemicals to sell to wholesalers. One of the raw material it buys is sodium nitrate which is purchased at the rate of $22.50 per ton. Biotechs forecasts show a estimated requirement of 5,75,000 tons of sodium nitrate for the coming year. The annual total carrying cost for this material is 40% of acquisition cost and the ordering cost is $595. What is the Most Economical Order Quantity ?

D = Annual Demand C = Carrying Cost S = Ordering Cost D = 5,75,000 tons C =0.40(22.50) = $9.00/Ton/Year S = $595/Order
FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

= 27,573.135 tons per Order. This model pre supposes certain assumptions as under:

No safety Stocks available in inventory. No Shortages allowed in order delivery. Demand is at uniform rate and does not fluctuate Lead Time for order delivery is constant One order = One delivery no shortages allowed. This model does not take into account other costs of inventory such as stock out cost, acquisition cost etc to calculate EOQ.

In this model, the demand increases for production the inventory gets depleted. When the inventory drops to a critical point the re order process gets triggered. New order is always place for fixed quantities. On receipt of the delivery against the order the inventory level goes up. Using this model, further data extrapolation is possible to determine other factors like how many orders are to be placed in a year and what is the time lapse between orders etc. EOQ For Production Lot: This model is also used to determine the order size and the production lot for an item to be produced at one stage of production and stored as work in progress inventory to be supplied to the next state of production or to the customer.

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Financial Aspect
Accounts payable and Accounts receivable modules are two important execution modules under finance segment of an ERP system. Financial relationship with vendors who are providing input to the organization in the form of goods and services are maintained in Accounts Payable (AP) module. On the flip side, the financial connection with customers who use output of the organization, are dealt through Accounts receivable (AR) module. Both these modules maintain personal accounts either of debtors or creditors and maintain various sub ledgers such as control account, currency fluctuation accounts etc. as an integral part of General Ledger (GL). Accounts Payable Module (AP) - This module provides the functionality to enter, monitor, maintain and process for payment of invoices and credit notes, that the organization received from its vendors. The key functionality of this module is as follows: 1. Immediate registration of incoming invoices 2. Tracking & Authorization of incoming invoices 3. Entry of order-based and sundry invoices 4. Automatic matching of invoices with receipts 5. Separate procedure for approval of invoices that exceeded the user tolerances 6. Self-Billing Invoices this is suitable for JIT environment where receipt of goods automatically generates approved invoices in the system which is paid through remittances and supplier need not send any invoice. 7. Accounts Classification for reconciliation

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Master data set up of AP: The initial set up of AP module is critical for its proper functioning, where following parameters are needed to be defined: 1. Blocking codes for blocking an invoice, Aging analysis periods for outstanding invoices of vendors, tolerated price difference limit for approving invoices (by users and vendors), whether matching with receipt is manual or automatic. 2. Linking ACP with GL through a schedule of Chart of accounts to which various transactions originating from AP are posted. Some of these accounts are I) control accounts ii) anticipated payment iii) invoice accrual IV) price difference and v) payment difference. Automatic Matching of Invoices: This is an important functionality of AP module, through which invoices from vendors are automatically matched with purchase orders and receipt. A typical flow chart for automatic matching is as follows:

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Accounts Receivable Module (AR) - This module helps in tracking all the invoices that is awaiting payment from customers. The key functionalities of ACR are: 1. Accounts classification for reconciliation & Control. 2. On-line credit management. 3. Reminder letters with varying degrees of severity. 4. Aging Analysis reports for review. 5. Interest for late payments. 6. Customer statements. ACR Master Data set up 1. Defining chart of accounts for linking to GL such as i) control account ii) discount account iii) advance receipts iv) unallocated receipts. 2. Terms of Payment parameters such as I) credit period ii) cash discount iii) payment days iv) tolerance for discount. 3. Free definable problem types to exclude invoices from reminding and direct debits 4. Flexible periods for aging analysis 5. Currency / Payment Differences 6. Default Data - for Tax Calculation level. Credit Control: An important feature of this module is to monitor invoices overdue for payment and generate reminder letters for sending to customers. In case the invoice is still not paid, increasingly urgent reminders are generated in the system subsequently at a predefined interval. The system also maintains a credit diary, which contains details of all unpaid invoices whether due for payment or not.
FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Financial accounting module of an ERP package provides company wide control and integrati accounting data within a framework of multiple companies, languages and currencies. The General Ledger (GL) module is the heart of finance package of an ERP system. Through

finance modules such as accounts payable, accounts receivable, cash management, GL provid

and other purpose. One of the important functions of GL is to real time update of sub ledger, t planning, control and reporting. The important components of GL are: 1. GL master data set up. 2. GL integration set up with logistics modules. 3. Period and year closing. Integration with other modules: Some of the modules, integrated with GL are: 1. Accounts payable for purchase invoices, credit notes. 2. Accounts receivable for sales invoice, credit notes and adjustment. 3. Cash management wherefrom payment details are transferred to GL. 4. Asset management for transferring depreciation details. 5. Cost accounting for allocation of cost. GL master data set up: One of the important processes of GL is setting up chart of Accounts, which is a complete structure of ledger accounts used by the organization. Chart of Accounts can be flexibly structured both at a parent and individual company level. Chart of Account may also be defined separately for statutory purpose as well as well as for the purpose of reporting to management. In some packages, the concept of dimension is used which gives a vertical view on ledger account. Another important parameter of GL is transaction type which
FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

identifies different categories of transactions such as journal voucher, sales invoice, cash, and corrections. Other important parameters of GL are i) parent company and company parameters (this will contain accounts for profit and loss, currency fluctuations etc. ii) Periods (Fiscal and Tax), iii) Tax code by countries GL integration set up with logistics modules: Integration mapping scheme needs to be defined for posting of logistics transactions into finance. Examples of logistics transactions (for different transaction origins) that result in a corresponding financial transaction and for which corresponding chart of accounts are needed to be defined, are given below: 1. Purchases - i) Making and releasing of a purchase order ii) receiving materials against the purchase order iii) inspection and approvals of the received materials iv) registration of the supplier invoice in logistics. 2. Sales - i) Making of a sale order ii) releasing of the same to warehousing iii) issuing material against the resultant warehouse order iv) release the issue order to invoicing. 3. Inter Depot Transfers - i) Making of an inter-depot transfer manually or transfer the same from planning ii) issue materials from the issuing warehouse iii) receiving materials in the receiving warehouse. 4. Issues for subcontract orders - i) Making of a production order ii) making subcontract purchase order based on the production order iii) initiate inventory issue to the subcontractor, iv) issue of inventory v) receive subcontracted item, vi) completion the production order v) closing the production order. 5. Cycle Counting - i) Generate cycle count orders ii) approve cycle count orders iii) process cycle count orders.
FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

Period and Year Closing: If a period or year is past its end date, it needed to be closed and the result is to be posted in next period/ year. Before closing any period it is necessary to check the status of the period. Next, auditing, reconciliation, passing of final correction entries and rebuilding of ledger history is carried out. In the last part of this process, closing of the periods, final closing of the periods and closing the year and and archiving of data is done. A typical flow diagram of closure of period and year, is given below:

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh

ENTERPRISE RESOURCE PLANNING SYSTEM

FUTURE LIGHT PVT. LTD. SCO 13-14,Sec-34/C Chandigarh