24 May What has the internet ever done for purchasing?
In the facebook age, when the digital natives – those who don’t remember a time before the internet – are emerging as the new generation of business leaders, thinkers and politicians, it can be easy to forget how today’s business technology evolved. And it’s easy to dismiss it. But knowing a little more than best practice and understanding why we do stuff the way we do is enlightening and helps inform us about the future evolution of business technology.
What the internet did for purchasing and finance – part 1
The origin of the procurement software we use today pre-dates most of us. In the 1960s, before computers were widely adopted in industry, the concepts of MRP, material resource planning or manufacturing resource planning, was developed. Balancing the various requirements and constraints within a manufacturing environment can be highly complex: the development of the bill of materials required to make a product; the components and sub-assemblies required; the assessment of quantities and timings of requirements; the management of stock and the balance between the cost of inventory and the risk of late delivery.
Get your resource planning right and you have an operation that will make a profit – get it wrong and the business goes under. So it was clear that a significant investment in computer technology to support the complexity of MRP was a no brainer and during the 70s and 80s more and more manufacturers invested in MRP until toward the end of the 1980 the market for MRP software in the U.S. was worth $1.2 billion.
In the following decade, MRP morphed into what we now call ERP, enterprise resource planning, embracing not only the management of manufacturing resource but accounting and human resource management as well as procurement and ERP quickly became the back office foundation of large business.
But it was perhaps in the area of supply chain management that enterprise applications had the most dramatic effect during these years. We can see the roots of collaborative supply chain management when we look back at MRP. Effective management requires accuracy in forecasting and the sharing of accurate data with supply chain partners is imperative for it to be effective. There’s a huge win win when manufacturers and suppliers can match their ability to forecast accurately with their ability to deliver on time. Fine tuning allows Just In Time (JIT) delivery which in turn minimizes the need to hold inventory, reduces the requirement to manage stock and lowers cost.
Supply chain software together with the computer network were perhaps the two most important business technology developments in the last 20 years, without which the huge growth in global trade that we see today would not have been possible.