One of the potential causes of confusion in reading about business systems which help manage manufacturing planning and control is that there might appear to be distinct, even alternative, approaches being sold under the banners of Supply Chain Management (SCM) and Enterprise Resource Planning (ERP).

So what is the difference between these systems? What happened to change the ERP solutions of the mid-nineties to Supply Chain Solutions? We will try to explain this in here, together with outlining the MLG approach to the subject.

Material Requirements Planning (MRP)

The core of today’s integrated business systems remains the planning engine whose first recorded mention is in the proceedings of the 1960 conference of the American Production and Inventory Control Society. MRP was going to utilise the expanding power of computers to remove the need for thousands of items within manufacturing businesses to be managed by offices full of clerks with desk calculators identifying forward requirements and stock projections at the component level. In future, companies would need only to set out the finished product schedule and the computer would ‘explode’ this into constituent demand, applying lead times, safety stock rules and batching parameters to manage sub-assemblies, components and raw materials.

MRP is the subject of a separate page within this site. <click here>

Management Resource Planning (MRPII)

It is generally recognised now that the early implementations of MRP were not the outstanding success stories envisaged by the pioneers of the approach – led by Oliver Wight, Joe Orlicky and George Plossl. MRP remains to this day one of the prime examples of the ‘rubbish in, rubbish out’ axiom of computer systems and too many of the pioneering projects were caught out by what also remains a problem many years later – the implementations were seen as computer projects and received insufficient management attention to disciplines and processes. 

The pioneers of MRP as a management approach thus returned to the drawing board to address these causes of potential failings. Cynics may feel that the evolution from addressing Material Requirements to an approach focussed on the broader aspects of Manufacturing Resources is just a little too convenient, allowing MRPII to be the way that MRP is made to deliver success. If we put aside such cynicism, however, there is much sense in what was then promoted under this banner. 

The definitive book on the subject was written by Oliver Wight under the wordy title of ‘Manufacturing Resource Planning: MRPII: Unlocking America’s Productivity Potential’ (ISBN-13: 978-0471132745). This was first published in 1981, with one of the major lessons being that of ‘Closed Loop MRP’. Closing the loop became a buzzword for the nineteen-eighties and beyond, and as with most buzzwords, it was often allowed to be promoted as something more complex than its originator had set out.

In simple terms, Closed Loop MRP was the expanded system which provided means of establishing and maintaining plan validity. MRPII was the management approach to running a business around single, achievable plans which are maintained in line with changing circumstances.

Wight identified that MRP must be driven by a valid plan – one that could be achieved given production resources and supplier capability, and which matched forecast sales requirements. (Setting a plan to put stock on the shelves which cannot be sold has never been a good idea.) He also explained that planning systems have to take account of the fact that things change – going so far as to say that scheduling is impossible, given that customer demands change, plant breaks down, components fail inspection and so on. In fact, scheduling is not impossible. All we have to recognise is that we can set a schedule given the information available today, but we will need to react to changes as they happen.

Within the MRPII vision it was recognised that effort must be expended on establishing a valid top level plan and in keeping with the constant search for three-letter acronyms this became the Master Production Schedule, or MPS. Disciplines were defined for the establishment of the MPS, beginning in some businesses with plans set at the product family level and broken down after agreement between Sales and Operations. In Wight’s 1981 book the high-level process was called, perhaps confusingly, Production Planning, but this has evolved (not surprisingly) into Sales and Operations Planning.

Managing the validity of the plan also required system tools for reporting capacity requirements, at each of the three levels of the planning process. Resource Planning was the tool for reporting the load represented by the Sales and Operations Plan at the product family level, Rough Cut Capacity Planning assessed the MPS and Capacity Requirements Planning translated works orders and planned works orders after MRP. Of course, we were advised of the importance of establishing valid plans before MRP. Exploding a basically unachievable plan and generating orders on suppliers before CRP warned of overloads would be folly. By this time we have committed ourselves to inventory – the major cause of excess stocks in nearly all businesses is being behind plan. The MRP packages also grew to provide tracking mechanisms for purchase orders and work-in-progress. In simplest terms, a sudden build-up of arrears means that the plan is no longer achievable and the package providers’ solution to this was the facility for booking operations and reporting any that had not been completed on time.

Of course there was far more to successful adoption of such systems than the features provided by the package in question. When MRP expanded to MRPII there those who objected very strongly indeed to packages marketed under the MRPII banner. They argued that MRPII was the management commitment to best practice, in particular:

• Valid plans – everyone playing their part in establishing a good assessment of market requirements and agreement on genuine, achievable output. This, of course, often requires challenges to some of the false goals generated by performance targets. A plan has to be a genuine statement of what we intend to do rather than something that we would like to be able to do.

• Data management – all the information used by a planning system has to be accurate and this requires resources dedicated processes that maintain this accuracy. This may take the form of stock control teams to carry out cycle counting, the replacement of production control clerks by people who really can be planners with the authority to establish safety stocks and order sizing rules, or any of a number of other pre-requisites.

• Processes for ongoing management. Managing changes to demand or reacting to production or supplier failings requires processes to maintain the plan, with responsibilities clearly defined.

Of course whether the term ‘MRPII’ could be applied to the systems or not is irrelevant. The management philosophy evolved and was taken on board by some, though sadly not all, of the companies introducing planning and control systems and the systems themselves grew to be richer in facilities.

Enterprise Resource Planning

As the systems grew they expanded outside the scope of manufacturing. One key area was in the management of finished goods inventory in different locations and of distribution between warehouses in these locations. Again the thirst for three-letter acronyms led to the development of Distribution Requirements Planning (DRP) and subsequently, following the development of improved approaches for allocating inventory between locations by Robert Goodell Brown, to DRPII (sometimes called ‘Lean DRP’).

The systems also grew into the financial areas with fully integrated sales and purchase ledgers (‘receivables’ and ‘payables’) feeding the bottom line and balance sheet, Human Resources modules, fleet management, and so on. Thus whether or not Manufacturing Resource Planning was a valid term for the systems focused on manufacturing, the package suppliers sought a term to indicate that they helped with more – that they supported the enterprise as a whole.

The Origins of ‘Supply Chain’

The term ‘Supply Chain Management’ had, of course, been around for some time before it started to be used as a description of any computer systems. In the automotive world one of the lessons brought home by the Japanese-inspired JIT revolution had been the key point that purchasing involves far more than simply negotiating deals with and managing supply from direct suppliers. Ford, GM and other western car manufacturers saw many differences in the approach adopted by their counterparts in Japan. Many of these were cultural – the idea of ‘partnership sourcing’, for example, where the car manufacturers and suppliers worked together to attack quality and cost issues, and then shared the benefits. This was in marked contrast to the established Western approach where cost reductions were negotiated (or, more accurately, imposed) and the suppliers then worked on alone to try to retain some measure of profit from the deal. Inevitably, this meant corners being cut and resultant supply problems. What the Japanese taught us here was that if our suppliers have problems then it is not only they who suffer.

The other key point that purchasing professionals learnt from Japan was that their success was dependent not only on dealings with their direct suppliers, but with the companies further down the procurement cycle who supplied the suppliers! They saw that the companies supplying them with components did not have the same purchasing power in the raw materials market as they themselves. This led to them assisting their suppliers in dealings with providers of, for example, metals, plastics and electronic components. 

They also understood that the people supplying them with assemblies were dependent in turn upon their component suppliers. Most importantly, they understood that the processes by which these components were made had a direct bearing on the car plants’ own costs, quality and delivery reliability. They could only improve these critical elements if they worked with the businesses supplying their own suppliers. We thus began to hear talk of Tier 1, Tier 2, Tier 3 suppliers. Where we had thought of our suppliers as being only those companies with whom we dealt directly, the automotive world taught us differently. Many businesses who did not deal directly with the car manufacturers found themselves being visited by manufacturing engineers from the car plants. These engineers then initiated and supported programmes to address cost and quality. Where we had only previously managed our supplier base, they taught us to think of every link in a chain, hence the term ‘Supply Chain’.

At the other end of the spectrum we all learned that we must ensure that our business provides good service to the end customer. Understanding exactly what our market demanded of us meant that we could not limit ourselves to simply serving the people who bought from us – if they lost market then so would we. The additional complications of the Forrester Effect (time lags and distorted reaction to demand changes at each step in the distribution channel) all led to the understanding that the supply chain from end customer back through to our own business, and then back to the point where raw materials came out of the earth had to be managed.

So Why Did ERP Systems Become Supply Chain Systems?

Now comes the requirement for a healthy cynicism.

ERP had been the accepted term for a while. Of course, anyone who is promoting their company's products likes to be able to tell the world about something new every now and again so in the absence of any revolutionary breakthrough another new name for the old approach was the obvious step forward. 

‘Supply Chain Management’ as a term existed; it meant something and it was part of a vital lesson. Furthermore, it had credibility! Obviously any system used for planning and recording the activities of buying from suppliers and selling to customers could be considered as providing management of the supply chain. 

So, then, what happened to change all these systems packages from ERP to Supply Chain? Quite frankly, nothing. The packages did not change one bit. Purchasing professionals managing their suppliers with their existing ERP system may have been excited when they saw that the company had bought a new ‘Supply Chain’ offering. They were disappointed soon afterwards when they still couldn’t do anything other than record details of their ‘Tier 1’ suppliers and manage orders on those suppliers. They couldn’t see materials in the supply chain and identify, for example, that their supplier of pressed components wasn’t giving sufficient visibility of requirements to the people providing sheet steel. Even with a system purporting to address the ‘chain’ they were limited to managing a single link.

All that had actually changed with the adoption of this new term by the software industry was the promotional literature and the overhead slides in sales presentation and product training materials. Let this act as a lesson to all watchers of the software market – beware new names! It is easier to come up with a catchy new title than a revolutionary new approach. Where ERP was seen as dated and the package providers wanted something new to sell, they were faced with a choice – develop a new set of techniques and incorporate them in new systems or dress up the old tools with a new name. 

Cynical, yes, but a certain amount of cynicism is needed in this world. 

Should We Manage The Chain?

Yes, of course. Managing our supply chain means looking after all aspects of serving our customers. Working backwards this then encompasses:

• The processes by which we have our goods or services delivered to the customer.
• Any manufacturing processes we may undertake in our own operation.
• The procurement of products, components and raw materials.

Because this is a ‘chain’ we must consider the full length of the chain – that is, delivery to end customer all the way back to the earliest steps in raw materials being extracted from the earth. Every link in this chain can have a bearing on our success or failure and, as we all know, a chain is only as strong as its weakest link.

Sadly, but not surprisingly, there remains a mass of confusion over whether Supply Chain Management and ERP are the same thing. One respected journal has even included the question “Do I need to implement ERP before I can introduce Supply Chain systems?” The answer it provides is that “no, we can manage the supply chain without ERP” but it goes on to point out that the data we need to manage our supply chain is held within ERP. Further, it argues, although we could use our legacy systems (spreadsheets and the like) it would be simpler to have one integrated package holding all the information required.

In other words, this journal concludes that the ERP system is the Supply Chain system. However, Supply Chain Management is most definitely not ERP. There are elements of the chain well outside the remit of SAP, Baan, JD Edwards, Oracle Manufacturing, Microsoft Dynamics and their competitors. ‘Management’ and ‘Systems’ are some way apart. We have business strategies which we convert into tactics, policies and processes in all areas of operation – marketing, selling, manufacturing and so on – which then play a part in our procedures, which we execute in part with our systems. All companies do – or should do – lots of work on continuous improvement of their supply chain. This extends from sourcing and working with suppliers on their own sourcing at one end of the spectrum to deciding how we wish to get our products delivered to the end customer. Many businesses have made great strides in this area through looking at how they can set up a supply model that gives better value to the end customer and a greater return for their own shareholders.

This is the key point here. ERP systems help address that part of the Supply Chain from our direct suppliers, through our own manufacturing processes (if we do any manufacturing) and thence to our own customers. They offer nothing to improve the supply further up the chain (our customer to end customer) or further back than our own ‘Tier 1’ partners. Critically, there is much more to Supply Chain Management than a planning and control system – many aspects do not fall within the management information systems field.