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The Development of Enterprise Resource Planning Systems
inventory-tracking systems to material requirements planning (MRP) software. MRP is
a production-scheduling methodology that determines the timing and quantity of
production runs and purchase-order releases to meet a master production schedule. 23
MRP software allowed a plant manager to plan production and raw materials
requirements by working backward from the sales forecast, the prediction of future
sales. The plant manager first looked at Marketing and Sales’ forecast of customer
demand, then looked at the production schedule needed to meet that demand,
calculated the raw materials needed to meet the required production levels, and finally,
projected the cost of those raw materials. For a company with many products, raw
materials, and shared production resources, this kind of projection was impossible
without a computer to keep track of various inputs.
The basic functions of MRP could be handled by mainframe computers; however, the
advent of electronic data interchange (EDI)—the direct computer-to-computer exchange
of standard business documents—allowed companies to handle the purchasing process
electronically, avoiding the cost and delays resulting from paper purchase order and
invoice systems. The functional area now known as Supply Chain Management (SCM)
began with the sharing of long-range production schedules between manufacturers and
their suppliers.

Management’s Impetus to Adopt ERP
The hard economic times of the late 1980s and early 1990s caused many companies to
downsize and reorganize. These company overhauls were one stimulus for ERP
development. Companies needed to find some way to avoid the following kind of situation
(which they had tolerated for a long time):

Imagine you are the CEO of Mountaineering, Inc., an outdoor outfitter catering to the
young and trendy sportsperson. Mountaineering, Inc. is profitable and keeping pace
with the competition, but the company’s information systems are unintegrated and
inefficient (as are the systems of your competitors). The Marketing and Sales
Department creates a time-consuming and unwieldy paper trail when negotiating and
closing sales with retailers. To schedule factory production, however, the manager of
the Manufacturing Department needs accurate, timely information about actual and
projected sales orders from the Marketing and Sales manager. Without such
information, the Manufacturing manager must make a guess about which products
to produce—and how many—in order to keep goods moving through the production
line. Sometimes a guess overestimates demand, and sometimes it underestimates
demand.
Overproduction of a certain product might mean your company is stuck with a
product for which there is a diminishing market due to style changes or changes in
seasonal demand. When your company stores product—such as hiking boots—as it
waits for a buyer, you incur warehouse expense. On the other hand,
underproduction of a certain style of boot might result in product not being ready
for a promised delivery date, leading to unhappy customers and, possibly, canceled
orders. If you try to catch up on orders, you’ll have to pay factory workers overtime
or resort to the extra expense of rapid-delivery shipments.

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