MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING

ERP, MRP & MRP II

INTRODUCTION

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

ENTERPRISE RESOURCES PLANNING (ERP)

DEFINITION
According to Webopedia.com, Enterprise resource planning (ERP) is business process
management software that allows an organization to use a system of integrated applications to
manage the business and automate many back office functions related to technology, services
and human resources.
ERP software integrates all facets of an operation, including product planning, development,
manufacturing, sales and marketing.
ERP software is considered an enterprise application as it is designed to be used by larger
businesses and often requires dedicated teams to customize and analyze the data and to handle
upgrades and deployment. In contrast, Small business ERP applications are lightweight
business management software solutions, customized for the business industry you work in.

Figure 1 Concept of Enterprise Resource Planning (ERP)

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

Other than that, Managerial Accounting book, Crosson Needles, 8th Edition defined that ERP is
the systems combine the management of all major business activities with support activities to
form one easy-to-access, centralized data warehouse.

EVOLUTION OF ENTERPRISE RESOURCE PLANNING (ERP)

ERP (Enterprise Resource Planning) is the
evolution of Manufacturing Requirements
Planning (MRP) II.
From

business

perspective,

ERP

has

expanded from coordination of manufacturing

MRP-II

processes to the integration of enterprisewide backend processes. From technological

aspect,

ERP

has

evolved

from

legacy

implementation to more flexible tiered clientserver architecture.

ERP

MRP
Handling
over
inventories
Figure 2 Evolution of ERP

The following table summarizes the evolution of ERP from 1960s to 1990s.
Timelin
e

System

Description

1960s

Inventory
Management &
Control

The combination of information technology and business

processes of maintaining the appropriate level of stock in a
warehouse. The activities include identifying inventory
requirements, setting targets, providing replenishment
techniques and options, monitoring item usages, reconciling
the inventory balances, and reporting inventory status.

1970s

Material
Requirement
Planning (MRP)

MRP utilizes software applications for scheduling production

processes. MRP generates schedules for the operations and
raw material purchases based on the production
requirements of finished goods, the structure of the
production system, the current inventories levels and the lot
sizing procedure for each operation.

1980s

Manufacturing
Requirements
Planning (MRP II)

MRP II utilizes software applications for coordinating

manufacturing processes, from product planning, parts
purchasing, inventory control to product distribution.

1990s

Enterprise

ERP uses multi-module application software for improving the

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

Resource
Planning (ERP)

performance of the internal business processes.

ADVANTAGES AND DISADVANTAGES OF ERP

Enterprise Resource Planning (ERP) software is considered as one of the complete business
software in todays competitive environment. An ERP solution allows you to have an integrated
view of all your Business Processes and other sub-processes which further allows efficiency and
effectiveness in achieving your business goals.

ADVANTAGES

1.

Better
organizational
control, especially in large companies,
where the volume of information is more
than in a small company.

1. The high cost of implementation and

maintenance. (High initial investment)

Duplication of information is

3. It is necessary to train all employees in

the company so that the system is
used efficiently. This is a cost for the
company as well as the time and effort
needed for it.

2.
avoided.
3.

Improved communication,
both internally and externally.

4.

Company
profitability
analysis can be carried out to analyse
where costs are higher and where there
are more sales.

5.
6.

7.

DISADVANTAGES

Improved decision-making
process within the company.
The company is able to
react better to any unforeseen problem
or situation.

2. Adaptation to the hardware in the

company.

4. Integration with other applications in

the enterprise needed.
5. Inflexibility of the system, because this
is a generic system.
6. There are few experts in this system.
7. If the system is not applied correctly, it
can be very detrimental to the
company.

Better use of time.

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

MATERIAL REQUIREMENT PLANNING (MRP)

Success of an operation department of any organization is dependent upon an efficient
production plan. One of the key essential of a production plan is material and manufacturing
planning system. Material requirement planning plays a pivotal role in assembly-line production.
Material requirement planning is a system based approach, which organizes all required
production material.

DEFINITION
Material requirement planning is an information system for production planning based on
inventory management. The basic components of material planning are:

Material planning provides information that all the required raw material and products are
available for production.

Material planning ensures that inventory levels are maintained at its minimum levels. But
also ensures that material and product are available whenever production is scheduled,
therefore, helping in matching demand and supply.

Material planning provides information of production planning and scheduling but also
provides information around dispatch and stockin

HOW DOES MRP WORKS

MRP works backward from a production plan for finished goods to develop requirements for
components and raw materials. MRP begins with a schedule for finished goods that is converted
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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

into a schedule of requirements for the subassemblies, the component parts, and the raw
materials needed to produce the final product within the established schedule. MRP is designed
to answer three questions: what is needed? how much is needed? and when is it needed?"
MRP INPUT
The information input into MRP systems comes from three main sources:
The bill of materials is a listing of all the raw materials, component parts, subassemblies,
and assemblies required to produce one unit of a specific finished product. MRP uses the bill
of materials to determine the quantity of each component that is needed to produce a certain
number of finished products. From this quantity, the system subtracts the quantity of that
item already in inventory to determine order requirements.
The master schedule outlines the anticipated production activities of the plant. Developed
using both internal forecasts and external orders, it states the quantity of each product that
will be manufactured and the time frame in which they will be needed. The schedule must
cover a time frame long enough to produce the final product.
The inventory records file provides an accounting of how much inventory is already on
hand or on order, and thus should be subtracted from the material requirements. The
inventory records file is used to track information on the status of each item by time period.
This includes gross requirements, scheduled receipts, and the expected amount on hand.

MRP PROCESSING
Using information from MRP input, MRP system determines the net requirements for raw
materials, component parts, and subassemblies for each period on the planning horizon.
MRP processing first determines gross material requirements, then subtracts out the
inventory on hand and adds back in the safety stock in order to compute the net
requirements.

MRP OUTPUT

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

The main outputs from MRP include three primary reports and three secondary reports.
The primary reports consist of: planned order schedules, which outline the quantity and
timing of future material orders; order releases, which authorize orders to be made; and
changes to planned orders, which might include cancellations or revisions of the quantity or
time frame.
The secondary reports generated by MRP include: performance control reports, which are
used to track problems like missed delivery dates and stock outs in order to evaluate system
performance; planning reports, which can be used in forecasting future inventory
requirements; and exception reports, which call managers' attention to major problems like
late orders or excessive scrap rates.

ADVANTAGES AND DISADVANTAGES OF MRP

As with every system based process, material resource planning also has its advantages and
disadvantages, and they are as follows:
Advantages of Material Resource Planning

It helps in maintain minimum inventory levels.

With minimum inventory levels, material planning also reduces associated costs.

Material tracking becomes easy and ensures that economic order quantity is achieved for
all lot orders.

Material planning smoothens capacity utilization and allocates correct time to products as
per demand forecast.

Material planning not only benefits operation department but is also beneficial to the other
department of organization. They are as follows:

Material planning is useful in determining cash flow requirement based on material

requirements and final dispatch schedules.

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

It helps procurement team in scheduling purchase of necessary material.

It helps the sales team in determining delivery dates for final products.

Disadvantages of Material Resource Planning

Material planning is highly dependent on inputs it receives from other systems or

department. If input information is not correct than output for material planning will also
be incorrect.

Material planning requires maintenance of robust database with all information pertaining
inventory records, production schedule, etc. without which output again would be
incorrect.

Material planning system requires proper training for end users, as to get maximum out
of the system.

Material resource planning system requires substantial investment of time and capital.

MANUFACTURING RESOURCE PLANNING (MRP II)

CONCEPT
MRP II is manufacturing resource planning. MRP II includes software for many areas of
manufacturing companies including purchasing, inventory, material requirements planning, shop
floor scheduling, capacity plannning, customer order entry and accounting. Advantages are
standardization and automation of business processes leading to improvements in cost control
and revenue.
ADVANTAGES OF MRP II
The MRP II is a useful tool, the main function of which is to standardize all the business
processes

through

providing

automated

methods

for

various

business

segments.

Standardization leads to the processes that are easily repeated as well as a platform that gives
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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

an opportunity to improve all those processes. The point is that the organization that
successfully implements MRP II for the first time faces with a range of troubles regarding
controlling the process of controlling the increase in transactions in purchasing, manufacturing
and selling associated with growth. Besides, the MRP II systems provide the employees with an
opportunity to do more and, as a result, to have a clearer visibility of information for their
businesses. All the advancements in the way all the work is performed enable the company to
become more competitive.

DISADVANTAGES OF MRP II
When it comes to the disadvantages of the MRP II, one should mention the fact that the
implementation of the MRP II systems requires information to be accurate. In case poor quantity
info is applied either in the bill of material module or the inventory segment, this will result in
automated planning processes errors. The planning modules use averages for length of
particular time to manufacture (lead times) or purchase and for quantities that are usually
purchased regarding the purchase order or manufactured on a work order (usually known as lot
sizes.) In case there is variability regarding the actual lot sizes produced or bought and the lead
times then the planning software wont generate plans that go with what is actually happening.
The whole point is that the lack of understanding and poor information on the lot sizes and lead
times average impact can cause costly reimplementation and implementation failure.

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

Conclusion
The key to making MRP implementation work is to provide training and education for all affected
employees. It is important early on to identify the key personnel whose power base will be
affected by a new MRP system. These people must be among the first to be convinced of the
merits of the new system so that they may buy into the plan. Key personnel must be convinced
that they personally will be better served by the new system than by any alternate system. One
way to improve employee acceptance of MRP systems is to adjust reward systems to reflect
production and inventory management goals

Today many big/ small and Mid-sized organisations are implementing ERP solutions to manage
the business plans and policies not only in efficient but also in effective manner. An ERP solution
allows your organization available resources are utilized in optimum manner.

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STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

In this busy world no one would like to waste their resources time on managing information in
different software which can be complicated sometime both in managing and investing. So to
have a single system rather than different system provides un-complications in entries for both
the organization and to the employees.

In summary, ERP application can help organizations in various ways of business aspect. The
common importance of ERP that can be conclude are it helps in reduction of organizations
operating cost can be reduced, integrates all parts of an organization, increases the efficiency of
operations as a result of the integration, integration on information systems which enables free
flow connection of information across the organization and enables consolidation of different
software within the organizations

When

considering an

ERP system for a manufacturing

organisation

the core

competences and historical pedigree of the system must match your business
manufacturing. Getting your hands on the software in a meaningful way prior to
purchase is the best (and only) way to ensure the products suitability to your needs. If
that is not an option, then speak to as many customers of the existing system as you
can. Learn its strengths and its weaknesses. Maybe the weaknesses will not affect your
business, but at least you will be aware of them.

The best practice should be to select the best in class product for the task at hand.
If, for example an ERPs accounts facility is lacking or less suited to your business
then maybe a better solution is a separate MRP and account system that can
interface to each other. Cost also plays an important factor E may have the lesser
value than M in a game of Scrabble, but the exchange of the letters at the front of
your chosen information system can have a major impact on your balance sheet
without relational improvements to your business

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MANAGEMENT ACCOUNTING & PERFORMANCE EVALUATION

STRATEGIC MANAGEMENT ACCOUNTING
ERP, MRP & MRP II

REFERENCES
http://www.ehow.com/info_8401517_advantages-disadvantages-mrp-ii.html

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