The Importance of a MRP and ERP in Small Business

Manufacturing And
Enterprise Planning Systems:
Taking Your Company To The
Next Level

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Table of Content
MRP - Why You Need It and What It Can Do for Your Business.............. 3
History And Evolution Of ERP Software From MRP ................................. 8
MRP Software Or ERP Software, Which is Right For You? ...................... 9
MRP Versus ERP ........................................................................................... 11


MRP - Why You Need It and What It Can
Do for Your Business
Most companies start in the same way - a few people have an idea, create a business and
then build the manufacturing processes required to make it happen. The tracking and
reporting on these processes are often a reactive afterthought, usually as a result of
problems caused through a lack of production planning. Does your business suffer from the
same problems and what can an MRP system do about it?

Common problems

As a business grows fragmented processes often develop with it. For example, a production
control department may use an Excel spreadsheet to track orders through the various stages
of manufacture, but this will not talk to sales, stores or dispatch, each of which may have
their own system. Companies have even been known to plan schedules using post-it notes
on a wall! Staff in each department have to continually duplicate data, drastically increasing
the possibility of error. Data is not updated between departments, which often results in
wrong or no information being available when staff need it. Reporting is also an issue, as
collating data across departments and then number crunching to get the required figures
takes time and may even be impossible if the data simply isn't there.

The paper trail generated by each order can also be frightening, as each department
struggles to maintain data integrity on its own localized system and pass information to the
next or previous link in the chain.

One of the biggest areas for potential losses is stores. With no accurate way to forward plan
or purchase, companies often wildly over-stock, tying up significant amounts of cash. Also,
the above mentioned issues of duplicate entry of data and paper trails can require constant
stock checks which take up valuable time and often throw up scarily inaccurate figures.

All of this has a negative knock on effect for management, as they are unable to make
informed decisions without a clear view of the company's position.

How and why MRP should work

MRP, or Materials Resource Planning, takes ownership of the data from the quotation
stage, through the sale, the raising of the works order, through all stages of production
including stores (goods in/out) and subcontracting, through to dispatch and invoicing. By
holding a single source of data all departments should have visibility of relevant
information. As sales orders are loaded on the system, purchasing can immediately see
future requirements plus view an item's order history in order to make informed purchasing
decisions. Additional information such as alternative suppliers and quantity break price
information can also help to bring further purchasing efficiencies.


With purchasing correctly loading orders onto MRP, your stores department will have
visibility of what is arriving and when. Implementing barcode scanners can speed up goods
in/out, assist with providing batch traceability and reduce booking errors across all
departments on the shopfloor. This will filter down to a reduction of stock inaccuracies,
which in turn will require less frequent stock checks, saving further time and resources.

As an order works its way through each stage of the production process, each update to the
system is immediately accessible across the company. Office staff can report more accurate
delivery times to customers, and many companies see a significant reduction on product
lead-times post MRP implementation as stock shortages are reduced/eliminated and all
order-related processes can be enacted quicker.

Once orders have been dispatched and invoiced the MRP system's job is done and it can
pass over data to the accounting system for debt collection/processing.

Why it often doesn't work

The single biggest reason for failure is not having sponsorship from the top. If the IT or
Production Manager is trying to implement a system that the MD/FD or other department
heads do not agree with, then there is little or no hope of getting others on board, or indeed
getting budget allocated to acquire a suitable system. Directors need to drive the system
through the company and, rather than forcing it on an unwilling team of managers they
should concentrate on demonstrating the benefits that will be delivered to each department
and across the company. By their nature, people are resistant to change unless it is clearly
demonstrated to them that they will benefit. Furthermore, in these economically tough
times staff are fearful of anything that can reduce a company's dependence on them.

Choosing the right system can also be a minefield. Remember, the software should be
flexible enough to fit with your business requirements rather than you having to remould
your business in order to work within the constraints of the software. Having said that,
maybe it's time to reassess the way you currently operate. Is it efficient? Does it comply
with some of today's forward thinking strategies such as lean and Six Sigma? Having a
clear view of the goals, both for each department and for the business as a whole is
paramount before you sign on the dotted line.

Many companies delay implementation of a system (even after spending time selecting it)
because they are simply too busy, however this is a false economy leading in ever
decreasing circles. They are busy because they don't have MRP running, so by not
implementing it or by doing so half-heartedly they simply make the situation worse.

Summary

In short, companies that need an MRP system but refuse to adopt run the risk of being
overtaken by competitors or even failing altogether. Companies that adopt the wrong
system, or do not fully embrace implementing a selected system run a similar risk. The
ones that will be successful are those that make the decision, stick with it and implement a
system in a swift but structured approach. Gone are the days when the market was limited

to a few traditional systems costing a six figure sum. A well implemented system does not
have to cost a fortune and will be able to deliver quantifiable return on investment in a very
short space of time.


Key things you should know about an
MRP System
An MRP System (Materials Requirements Planning) helps a manufacturing company
utilize built-in scheduling logic to manage the flow of materials in the manufacturing
operation. Companies are looking at ways to reduce inventory costs, drive down lead times
while improving customer service, improve the manufacturing process and improve
product quality. Using an MRP system, a manufacturer can become much more efficient
and better plan the needs for resources, both in terms of materials as well as capacity within
the factory and better serve the customer.

There are two types of MRP Systems that can be discussed. First is Material Requirements
Planning and the second is Manufacturing Resource Planning or MRPII. A traditional MRP
System is one where the software uses the Bills of Materials, Inventory levels, and the
Master Production Schedule to calculate and plan the need for replenishment orders. An
MRPII system is a system that plans many more functions of the entire manufacturing
process, including Capacity Requirements planning, Master Production scheduling, Plan
Simulations and all the aspects of the classic MRP system.

Most systems today are MRPII based systems, so from this point forward, if we are
referring to an MRP System, we are really discussing MRP II systems as that is what is
presently offered in the market and includes the earlier aspects of MRP.

Researching an MRP System often brings about a lot of questions and uncertainty. Not so
much about the planning system and how it calculates the requirements, that is usually just
a calculation that you can get from a good Material Requirements Planning book from any
bookstore or online. Really, the question usually comes about as to where the differences
are between the material requirements planning systems.

Essentially, the key differentiators of these systems would be the ease of their ability for
them to allow you to see the multiple layers of planning. But even more, the ease in which
you can keep the data clean. With thousands of parts and possibly thousands of Bills of
Materials (along with the many variations), you will need to be able to easily update or
even mass update parts, BOMs, routings and all of the detail surrounding them.

MRP System as part of an ERP solution

As most manufacturing system software is a subcomponent of ERP (Enterprise Resource
Planning), it is worth looking at how the materials planning aspect of the ERP interacts
with the rest of the system. For example, how well does the system communicate order
requirements to the shop floor control system? How well does the Product Data
Management aspect of the ERP interact with the Bills of Material module? How well does

the inventory control system work with the Quality Management system? For example, if
you receive inventory into the system, is there a way to isolate it from the MRP System
while it undergoes quality inspections?

When looking at requirements planning systems the real concern is how the users will use
it. It needs to be as simple as possible to interact with from a user perspective. However, it
needs to be able to drive all of the capacity and material plans that you need to run the
business. An important thing to try is to let your material planning or purchasing people try
out the system during the demo phase. They won't be able to run the system without help,
but at least they can get a feel for the screens and the depth of information provided.

Another important tip is to make sure that all of your people who are interacting with the
system, such as buyers, planners, and inventory managers all have training on the concepts
of MRP. This will help them get up to speed quickly once a new system is in place.

Your Future MRP System

When you get down to a short list of vendors, it would be a great idea to start looking at the
quality of the information from your existing MRP System. Clean up the Bills of Materials.
Obsolete any that are out of date. Ensure that your inventory counts are accurate. Make sure
that your customer orders are clean and old back-orders that will never ship are closed. You
should begin the cleanup of the data in the source system long before you even think about
transferring it to the new system. If you do it a little at a time over a period of months, by
the time you are ready to migrate the data to the new system, you will be ready to utilize the
new system immediately. At some point the data needs to be clean, it might as well be now.

Lastly, find out early from the software provider of the new system what additional data
elements you will need to support their system. You may not be capturing that data
currently, so start building the list now. Moving to a new MRP system does not need to be
difficult, but it will take some cleanup and planning.

What if you cannot make a decision on an MRP solution?

We know how hard it is to try and make a software selection on your own, but if you want
to really be successful and choose the perfect fit software for your organization, you will
need to find the right guidelines to help you be successful.


History And Evolution Of ERP Software
From MRP
The history and evolution of ERP dates back to the time of existence of MRP. Enterprise
Resource Planning system has evolved from the Manufacturing Requirement Planning
(MRP II). ERP software has expanded from coordination of manufacturing processes to the
integration of enterprise wide backend processes. The history and evolution of ERP goes
back to the 1960s when the systems were designed to help in the manufacturing processes.
MRP was developed in the 1970s and then MRP II was developed. The Material Resource
Planning software was helpful in the manufacturing processes but the other sector did not
benefit from it. MRP required large technical expertise like machines and manpower. It
involved a lot of costs and practical problems. MRP application took care of the production
planning, reporting, raw material purchasing, inventory status and delivery methods.

Earlier on, Inventory Management and Control application in the 1960s was introduced to
take care of the inventory management. It was used for keeping the targets, monitoring
usages, reporting, analyzing inventory status, etc. This was followed by MRP applications
and then the Enterprise Resource Planning or ERP. This is the history and evolution of ERP
software. ERP software was introduced in the 1990s with modular applications. It is
module based application software which streamline the flow of data between the various
functional departments in an organization.

ERP integrates the different departments such as inventory control, accounting, human
resources, product planning, sales, etc. They all have a single database which leads to
efficient communication. ERP was used by most of the big organizations. With successful
implementation, the organizations realized a change in their business environment and
information flow for the better. The working process improved and increased the
organization's efficiency and profitability. This is how the popularity of Enterprise
Resource Planning increased after the history and evolution of ERP.

Due to the huge investment involved in implementing ERP, the small and medium
enterprises could not afford to implement ERP. But as ERP has evolved, the trend is that
even the medium scale companies are now implementing ERP. The vendors are working at
cost effective ERP software which can match the medium company budget. With web
based software now available, the prices are cheaper and they target the small and medium
scale companies. ERP keeps evolving and the latest trends are to reduce the expenditure
involved to realize the benefits with low implementation costs. The ERP implementation
time is being reduced and need based applications are more in demand.

Companies are looking at need based applications rather than buying the whole package.
The latest web technologies have made it possible to make this process online for easy
access from any part of the world. Open Source ERP has reduced the costs and made it
more flexible. It does away with the hefty license fees and vendor dependence. The
evolution of ERP has made it possible for the small and medium enterprises to implement


ERP and realize its benefits. ERP has been transforming itself since the history and
evolution of ERP over the past years.

MRP Software Or ERP Software, Which is
Right For You?
You are the operator of a small to medium size manufacturing company. Your business has
some maternity and you have systems in place and working. A business analysis reveals
that your firm is facing some stagnation for the immediate future, so you begin to look for
ways to optimize what you have. Software immediately comes to mind, as you currently
use computers in your operation, but not necessarily in a cohesive and coordinated way.

As you begin your research, and begin contacting possible vendors, you notice some
recurring buzz word-abbreviations; MRP, MRP II, and others. Lets explore some of these
look at how you can determine if they are suitable for you. Lets begin with MRP, or
Material Resource Planning. As the name implies, the function of this type of
manufacturing software is to enable the business to have the materials on hand in a timely
and efficient manner. This type of software can also be handily for a small to medium size
company because the Bill of Material, the basic building block of MRP software can serve
dual purpose as a shop router. Many systems include routers, but many less sophisticated
companies, have managed with just the basics.

A major weakness of MRP software is that it did not function well or often at all for
capacity planning. This led to the dynamic duo of the MRP system sheparded by a
buyer/planner. While one of the main reasons for the purchase of Manufacturing Software
was to realize labor reduction, MRP's inherent weakness became a buyer/planners job
security. This does however work well with some companies, so even though MRP
software is not an all encompassing solution it may just work for you.

Next is MRP II, which grew out of MRP as an answer to the question of how to use MRP
software to make other business decisions. These decisions included how to not only ensure
materials were available on time, but how to capture manufacturing costs, how to account
for the materials, and how to manage payment of materials. MRP II software was thus not
materials focused software solution, but a big picture solution that piece by piece brought in
the entire organization.

As can be expected, MRP II is also more labor and capital expensive to deploy. As with
MRP software, there is still the basic core of setting up the Bill of Material, however, the
bill of material and supporting systems require not only more labor hours to set up, but
inputs from other disciplines as well. Accounting now gets a major piece of setting up
financial systems. These are not limited to accounting, but also ties into manufacturing
engineering on the floor, where accounting and manufacturing develop standard costs.


These costs can then be used to drive cost improvements and it this synergy that justifies
the increased costs of setting the MRP II software in place.


MRP Versus ERP
Many companies mistakenly believe or are steered into the decision by consultants with a
vested interest that they need ERP over an MRP system. But what is the difference and
where do you draw the line between those that need it and those that don't?

ERP stands for Enterprise Resource Planning and is an information system designed to
coordinate the resources, information and processes within an organisation. It comprises of
a common database that provides interfaces and information to every department within the
business. Depending on which definition of MRP you follow there are different
interpretations - Materials Requirement Planning (MRP) and Manufacturing Resource
Planning (MRP II), which then evolved into ERP. As ERP systems have developed some
have moved away from their manufacturing roots. This has resulted in failed
implementations due to the chosen ERP system's processes not matching the business
requirements.

ERP covers areas such as:

 Accounting (nominal ledger, fixed assets, accounts sales/purchase ledger etc)
 Human resources (payroll, time sheets, training etc)
 Manufacturing (bill of materials, QC, managing the manufacturing process etc)
 Supply chain (stock control, purchasing, scheduling)
 CRM (sales and marketing, support and customer service)
 Project management (managing costs, time and activities)
 Data warehousing (document management)

Most of these areas are already covered either partially or completely by MRP. The
perceived benefit of ERP is to have a single solution to manage an entire company's
information structure and processes. There is generally a reduction of data duplication as
information is entered only once, and users often benefit from a common interface, thereby
reducing training. A single solution only requires a single vendor, potentially ironing out
data conflicts between different applications. Or at least this is the idea.

Any system - MRP or ERP - needs to also provide security at user level to ensure that the
right employees have access to the right information. Each and every section mentioned
above needs the ability to either block access or provide read-only access.

So where does MRP stop and ERP start?

MRP systems focus on the processes from quote, sales, raising works orders, stock control,
purchasing and all stages of manufacturing through to invoicing, but traditionally tend to
exclude processes such as CRM and accounting. These lines have been increasingly blurred
in recent years as systems rely on similar database structures. Previously an MRP, CRM


and accounting system may have each relied on their own bespoke databases, requiring
significant customisation and consultancy from the relevant vendors in order to get the
systems communicating together. With some systems today running on platforms such as
SQL Server it is now much easier to set up permanent, stable data links between systems.
In fact many companies offer seamless interfaces between key applications such as MRP
and accounts.

There are caveats to the above. The statement often given that 'we are the authors and can
provide a single source solution' is often a falsehood. Many systems have evolved through
acquisition of companies that produce one element (such as CRM) and trying to integrate it
to the core system, rebranding it in the process to disguise its origins. More often than not
the end result is a mixture of two or more systems which may not be very stable, have a
different user interface to the rest of the system and do not provide the completely seamless
solution they aspire to.

Implementation

Due to its breadth of coverage across an organisation, the problems associated with
implementing ERP over MRP will be greater by default, potentially increasing risk of
failure. More departments are affected, and legacy data for each area of the business needs
to be manipulated into a format where it can be migrated, assuming that this is possible at
all. The scale of the task can also be too daunting for some, with many failed installations
occurring due to incorrect or lack of use of the system. The setup of the system is also
important. Many make the mistake of mirroring the setup of their legacy systems, which
may require considerable customisation of the new system and runs the risk of carrying on
the mistakes of yesteryear.

Of course, at this point you have already parted with your cash, spending tens or even
hundreds of thousands of pounds, so many companies feel compelled to shoe-horn their
company to fit the system.

While many implementers successfully adopt the approach of switching all applications
over to a new single system, for others this can prove too much in one hit. A more flexible
system would allow companies to implement at their own pace rather than forcing them to
go live across all departments from day one. Many start with concepts that are simple to
understand such as stock control or purchasing before implementing complex routings or
full MRP part ordering.

After Go-live

Companies often fail to take into account the ongoing costs associated with traditional
MRP/ERP software. You cannot compare it to off-the-shelf products like MS Office which,
once paid for you just get on and use. As staff leave, their replacements require training,
perhaps off-site. Many systems require days of training per module, so if a staff member
covers more than one department you may have to consider several days out of their
schedule as well as the daily training rate.


Furthermore, you will invariably want to customise elements of the system or generate
bespoke reports, which often requires consultancy services from the vendor. Every time
you need to store or analyse data differently there may be a costly invoice tied to it. Many
vendors are service-led in the fact that they cannot survive on the initial sale value alone -
they have to generate revenue through ongoing annual 'value added services', training and
consultancy. The industry standard for calculating maintenance renewal cost is generally
anywhere from around 15%-22% of the initial software cost - the more enterprise-wide the
software, the higher the initial cost, the higher the ongoing maintenance contracts.


The Importance of a MRP and ERP in Small Business

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