ERP vs SCM: What's the difference

This report will first explain the basic functionality of an ERP (Enterprise Resource Planning) system, using SAP R/3 as an example. Then it will contrast SAP with SCM (Supply Chain Management) software such as I2 and Manugistics. Finally, integration between the two types of systems will be examined, as well as future prospects for ERP and SCM vendors.

The most distinguishing characteristic of ERP systems is their comprehensiveness. R/3 broadly covers Sales and Distribution, Business Planning, Production Planning, Shop Floor Control, and Logistics. On the surface, this would seem to cover anything that SCM claims to provide. However, "the devil is in the details". Therefore, it helps to review the relevant functions of R/3 in detail, to be able to contrast to SCM software later. First, Sales and Distribution covers order entry and delivery scheduling. This module also naturally checks on product availability to ensure timely delivery, and checks the customer's credit line. Business Planning consists of demand forecasting, planning of product production and capacity, and the detailed routing information that describes where (in which work cells) and in what sequence the product is actually made.

The capacity and production planning gets very complex, and simulation tools are provided as part of R/3 that can help managers to decide how to overcome shortages in materials, labor, or time. Once the Master Production Schedule is complete, that data is fed into the MRP (Materials Requirements Planning) module. The MRP has three principle pieces of output: An exception report, an MRP list, and order proposals. The exception report brings to attention situations that need attention, such as late delivery of materials, and rescheduling proposals. The MRP list shows the details of shipments and receipts for each product and component. Order proposals are used to order materials and issue production orders.

This naturally leads to Shop Floor Control. The planned orders from the MRP are converted to production orders. This leads to production scheduling, dispatching, and job costing. Finally, the Logistics system takes care of the rest, assuring timely delivery to the customer. Logistics in this case consists of inventory and warehouse management, and delivery. The purchasing function is also usually grouped under logistics. The overall process summary looks like:

1. Sales & Forecasting Data
2. Production & Capacity Planning
3. Production Execution
4. Logistics

This functionality is representative of all the major ERP vendors, including SAP, Oracle, Baan, and PeopleSoft. However, it also seems to be very close in functionality to SCM products such as those from I2 and Manugistics. So what's the difference?

The Manugistics web site (http://www.manugistics.com) has the following description of supply chain management: "Effective supply chain management enables you to make informed decisions along the entire supply chain, from acquiring raw materials to manufacturing products to distributing finished goods to the consumer."

This sounds a lot like what R/3 does also. R/3 has detailed functionality to order needed materials, schedule and track the manufacture of products, and to schedule and track distribution. So really, what's the difference? The description of I2's Rhythm product line (found at http://www.i2.com) is slightly different: "RHYTHM's Supply Chain Planner provides advanced planning capabilities to leading companies in many industries. RHYTHM plans and optimizes the supply chain as a continuous and seamless activity that integrates all planning functions across the supply chain. RHYTHM goes beyond traditional planning solutions like MRP (Manufacturing Resource Planning) and DRP (Distribution Resource Planning) by simultaneously considering demand, capacity and material constraints." This provides a better idea of the chief differences between ERP and SCM systems.

According to a July 1997 study by Gartner Group, "Through 1999, enterprises with multi-echelon distribution networks that have aggregation, disaggregation, balancing or echelon-skipping requirements within the distribution network will need to augment their existing ERP applications with advanced SCP functionality or risk incurring distributions costs that are at least 10 percent higher due to expediting, low order fill rates and inventory imbalances." The study goes on to say that this is caused by the static sourcing tables used in ERP systems. While ERP systems provide a great deal of planning capabilities, the various material, capacity, and demand constraints are all considered separately, in relative isolation of each other. The more leading edge SCM products are able to consider all the relevant constraints simultaneously, and to perform real-time simulations of adjustments in the constraints. ERP systems have a harder time adding this more dynamic functionality because they are chiefly concerned with transaction processing, and also have many more jobs to do than just SCM. Getting answers from an overloaded ERP systems may take hours, whereas getting them from a separate SCM system may take minutes or seconds.
The leading SCM products generally have many other enhancements as compared to the ERP packages. Many employ visible maps of the entire supply chain, showing where problems are. Here is a description of Manugistics latest version: "Navigating your way through mountains of supply chain information is made easier with Supply Chain Navigator's state-of-the-art graphical user interface. This intuitive GUI gives you complete visibility into the inner-workings of the supply chain - through demand, supply, manufacturing scheduling, and transportation - all at your fingertips." Just recently, SAP has added similar functionality. But that functionality is actually an SAP version of the SCM product made by I2, which SAP is selling as a separate module. This is a relatively simplistic explanation of the key differences between the ERP vendors' SCM modules and the leading SCM-only products, but it hits the main points. >>>> Continue

Effective Supply Chain Management

The complexities of getting material ordered, manufactured and delivered overload most supply chain management (SCM) systems.

The fact is, most systems are just not up to handling all the variables up and down the supply chain.

For years, it was thought that it was enough for manufacturers to have an MRP or ERP system that could help answer fundamental questions such as:

• What are we going to make?
• What do we need to make the products?
• What do we have now?
• What materials do we need, and when?
• What resources/capacity do we need and when?

Manufacturers need to know a lot more today to have a truly effective supply chain. There are a number of fundamental weaknesses in the old system logic. Many planning and scheduling systems in use today assume that lead times are fixed, queues do not change, queues must exist, capacity is infinite and backward scheduling logic will produce valid load profiles and good shop floor schedules. These assumptions are totally illogical, and following them causes many schedule compliance problems. An effective fix is first to streamline operations and then to apply predictive, preventive forms of advanced planning and scheduling.

SCM involves two flows. Information flow signals the need to start the flow of material. In a supply chain, the fast flow of high-quality information and material is inextricably linked and of paramount importance to SCM success. Untimely or low-quality information virtually guarantees poor performance.
Manufacturers need to develop flexible supply chain processes that can adapt to the needs of various customer segments. They must also develop supply chain strategy, processes and supporting systems that conform to current and future requirements.

Generally, an effective SCM approach must focus on:

• Flexible supply and production processes that can very quickly respond to changing customer demand
• A short-cycle, demand-driven order-to-delivery process
• Accurate, relevant information that is available on demand throughout the supply chain, there are some absolutely critical and predictive questions your system should accurately and quickly answer:

• When will specific orders really ship?
• Which orders will be late?
• Why will these orders be late?
• What are the specific problems that are delaying the schedule?
• What are the future schedule problems and when will they occur?
• What is the best schedule that can be executed now?

If management can answer predictive questions, its decisions will greatly improve. Preventive actions can offset what were once unforeseen problems. The supply chain will be managed more effectively and improve chances of gaining a competitive advantage.

In the early 1980s, with the introduction of just-in-time production to the United States, many were convinced that pull signals (kanbans) and instant material deliveries would eradicate the need for MRP. The announcement of MRP’s death was premature, except for firms with simple products and absolute control of supplier deliveries. Those with more complex products requiring more supply sources for more parts discovered that longer lead times and demand and supply variability were still issues to be dealt with. Simply put, the more diverse your product line and the more complex your products, the more valuable MRP is for planning raw material needs.

This is not to say pull logic is not useful for raw material planning, because it is. Yet for most, it is not necessary (or desirable) to put every part number from every supplier on a pull system. Scheduling production with MRP push logic, however, is like pushing a rope. You don’t know what direction it will go. Pull systems will eventually dominate the entire supply chain—to customers and from suppliers, as well as internal material movement. Yet, MRP can, and must, coexist with pull scheduling. Cycle time compression should be the first objective in the order-to-delivery process. Midrange manufacturers often have limited clout with suppliers, making across-the-board mandatory lead-time reductions unlikely. While there are many ways to work out mutually beneficial and necessary improvements with suppliers, the real enemy is time. The alternative is to work selectively on supply improvements while using a rationalized inventory deployment strategy to support the first objective—reducing order-to-delivery cycle time. Good collaborative forecasting, good planning and realistic replenishment scheduling are essential to effective SCM. Further improvements come from redesigning supplier links to make them firm, fast and flexible for the benefit of the entire supply chain. During the transformation, companies have learned the value of minimizing cycle time and having predictable schedules, especially with mass customization. Both are necessary for effective supply chain performance.

Effective Supply Chain Management
by Ayhan Akkaya Performance Improvement

Ayhan Akkaya is an ERP/SAP Consultant based in Ottawa, Ontario. He can be reached at (613) 715-1536