Inside a Red Wing shoe factory.  Photo by Nina Hale, cc license.

The supply chain – a term used to describe all the activities needed to bring goods to market, is a natural beneficiary of a good ERP system because the supply chain extends from one end of an enterprise to another. Often the individual parts of a supply chain run on their own systems – a system for raw materials, another for planning finished goods production and deployment, and so on. It’s possible to have three or four separate systems running different parts of the supply chain. With an ERP system, all parts of the supply chain are connected to one another.

All of the costs and activities associated with each part of the supply chain are in one place, and they are mutually dependent on one another as either inputs or outputs. It is at least theoretically the logical software equivalent of the connected enterprise. And if the enterprise is truly connected and coordinated, then theoretically there is never any wasted inventory, lost sales, out of stocks, overproduction, late deliveries, etc.

A good ERP system will coordinate the supply chain like this:

  • It will have a sales forecasting module that allows users to source historical sales data and model it to derive projected sales;
  • The projected demand, by day, week, and month, will automatically determine quantities of raw materials needed, where, and when;
  • The required materials will automatically be converted to purchase orders for those raw materials;
  • The projected demand will determine a production schedule by plant and a schedule of where the finished goods are to be shipped;
  • Sales orders are received, checked, confirmed, and sent to the warehouse or distribution center for shipment;
  • Sales orders will “consume” a sales forecast so that managers can track shipments against projected sales;
  • Sales orders will be routed for delivery via the most efficient method of transportation and transportation providers will be confirmed and scheduled;
  • Inventory will be shipped to distribution centers according to the geographic demand of product;
  • Distribution centers will receive sales orders for shipment, and shipments to customers will recorded, posted to financials, and used to generate an invoice;
  • Warehousing and transportation costs will be posted back to the financial system and the corresponding accounts payable will be created.

For more on this topic, Gartner has some interesting research here.