Concepts in Enterprise Resource Planning 2nd Edition Chapter
Concepts in Enterprise Resource Planning 2nd Edition Chapter 4 Production and Supply Chain Management Information Systems Chapter Objectives Describe the steps in the production planning process of a high-volume manufacturer such as Fitter Snacker. Describe Fitter Snackers production and materials management problems. Describe how a structured process for supply chain management planning enhances efficiency and decision making. Describe how production-planning data in an ERP system can be shared with suppliers to increase supply chain efficiency. Concepts in Enterprise Resource Planning, Second Edition
2 Introduction Enterprise Resource Planning (ERP) has its roots in Materials Requirements Planning (MRP) MRP is still a large part of ERP systems Supply Chain Management looks at the entire supply system from raw materials to finished goods on the retail shelf Concepts in Enterprise Resource Planning, Second Edition 3 Production Overview A production plan answers two questions: 1. How many of each type of snack bar should we
produce, and when? 2. What quantities of raw materials should we order so we can meet that level of production, and when should they be ordered? A successful company must be able to: Develop a good production plan Execute the plan Make adjustments when customer demand differs from the forecast Concepts in Enterprise Resource Planning, Second Edition 4 Production Overview Three general production approaches: Make-to-stock: products are made for inventory in anticipation of sales orders Most consumer products are make-to-stock Make-to-order: products are made to fill specific
customer orders Expensive products or products made to customer specifications Assemble-to-order: combination of make-to-stock and make-to-order Final product assembled for a specific customer order from stock components Concepts in Enterprise Resource Planning, Second Edition 5 Fitter Snackers Manufacturing Process Snack bar line produces: 200 bars/minute 3,000 lb/hr Production line operates for one 8-hour shift per day Raw materials are mixed in one of four mixers Mixers can produce 4,000 lb of dough per hour Excess capacity protects snack bar line from shutting down if a mixer breaks The 4 oz snacks are packed 24 to a display box with 12 display boxes packed to a case
Changing from NRG-A to NRG-B bars takes 30 minutes Concepts in Enterprise Resource Planning, Second Edition 6 Mixer Snack Bar Line Form Bake Mixer Mixer Pack Finished Goods Warehouse
Raw Material Warehouse Mixer Figure 4.1 Fitter Snackers manufacturing process Concepts in Enterprise Resource Planning, Second Edition 7 Fitter Snackers Production Problems Fitter Snackers production problem is deciding how many snack bars to make and when to make them Fitter Snackers main production problems are in the areas of: Communication problems Inventory problems Accounting and purchasing problems All of which are exacerbated by Fitter Snackers unintegrated information system Concepts in Enterprise Resource Planning, Second Edition 8
Communication Problems Communication problems exist in most companies Magnified in a company without an integrated information system At Fitter Snacker, Marketing and Production do not communicate or coordinate planning Production is not always informed of sales promotions or unexpected planned orders Can result in depleted inventory, overtime production, expedited shipments and material shortages Production may not inform Marketing about planned maintenance, which will reduce production Concepts in Enterprise Resource Planning, Second Edition 9 Inventory Problems Production manager schedules production based on experience, rather than formal planning techniques
Primarily compares current warehouse inventory levels with normal values May include informal communications with marketing personnel Inventory information is not available in real-time, and does not recognize inventory that has been sold but not shipped Inventory available to commit to future orders is not known Concepts in Enterprise Resource Planning, Second Edition 10 Inventory Problems Inventory shortages may mean unplanned production changeovers, resulting in: Lost production capacity Potential shortages of other products Actual sales data is not available on a timely basis, because: It is hard to gather
Lack of organizational trust With access to sales forecasts and plans and real-time sales order data, production could make better decisions and manage inventory better Concepts in Enterprise Resource Planning, Second Edition 11 Accounting Problems Most companies use standard costs to account for manufacturing costs Standard costs are based on historical costs for materials, labor and factory overhead Manufacturing costs are estimated by multiplying production quantities by standard costs Actual production costs invariably deviate from estimates using standard costs, and adjustments must be made regularly Concepts in Enterprise Resource Planning, Second Edition
12 Production Planning Process Production planning involves: Developing an aggregate production plan for groups of products Breaking down the aggregate plan into more specific plans for individual products using smaller time increments Use the production plan to determine raw material requirements Concepts in Enterprise Resource Planning, Second Edition 13 Sales Forecasting Starting Inventory
Sales and Operations Planning Demand Management Detailed Scheduling MRP Production Purchasing Figure 4.2 The production planning process Concepts in Enterprise Resource Planning, Second Edition 14 Production Planning Steps Sales Forecasting: The process of developing a prediction of future demand for a companys products
Sales and Operations: Process of determining what the company should produce Requires starting inventory levels and sales forecast Capacity must be considered Inventory may be built to meet demand for seasonal products Concepts in Enterprise Resource Planning, Second Edition 15 Production Planning Steps Demand Management: Process of breaking production plan down into smaller time increments Detailed Scheduling: Development of a detailed production schedule based on production plan from demand management Scheduling method depends on production environment Production:
Uses the detailed schedule to determine what products to produce and what staffing is required Concepts in Enterprise Resource Planning, Second Edition 16 Production Planning Steps Material Requirements Planning: Determines amount and timing of raw material orders Purchasing: Takes quantity and timing information from MRP and creates purchase orders, which It transmits to qualified suppliers Concepts in Enterprise Resource Planning, Second Edition 17 Sales Forecasting In SAP R/3, sales (consumption values) are automatically recorded when sales are made in the SD
module Additional detail (sales by region or sales office) can be recorded by the Logistics Information System (LIS) Business Warehouse (BW) can be used for even more detailed sales analysis With an integrated information system, accurate sales data are easily available for forecasting Concepts in Enterprise Resource Planning, Second Edition 18 Simple Sales Forecast Sales based on simple adjustment to previous years sales values Sales Forecasting Previous Year (cases) Promotion Sales (cases) Previous Year base (cases) Growth: 3.0% Base Projection (cases)
Promotion (cases) Sales Forecast (cases) Jan. 5734 Feb. 5823 March 5884 April 6134 5734 172 5906 5823 175 5998
6318 6476 June 6735 300 6435 193 6628 500 7128 Figure 4.3 Fitter Snackers sales forecast for January through June Concepts in Enterprise Resource Planning, Second Edition 19 Sales Volume Previous Year July
6702 Aug. 6327 Sept. 6215 Oct. 6007 Nov. 5954 Dec. 5813 Figure 4.4 Fitter Snackers sales for the previous period, July through December Concepts in Enterprise Resource Planning, Second Edition 20
Sales and Operations Planning Input to SOP is sales forecast and beginning inventory Output is a production plan that balances market demand with production capacity Developing an SOP answers the question: How can manufacturing efficiently produce enough goods to meet projected sales? Fitter Snacker Production Capacity: bars min. hr. 96,000bars/day 200 60 8 min. hr day 1 box 1 case 96,000bars/day 333.3 cases/day
24 bars 12 box Concepts in Enterprise Resource Planning, Second Edition 21 Sales and Operations Planning Sales and Operations Planning 1) Sales Forecast 2) Production Plan 3) Inventory 4) Working Days 5) Capacity (Shipping Cases) 6) Utilization 7) NRG-A (cases) 70.0% 8) NRG-B (cases) 30.0% Dec. 100
6061 6061 100 22 7333 83% 4243 1818 April 6318 6318 100 21 7000 90% 4423 1895 May 6476 6900
524 23 7667 90% 4830 2070 June 7128 6700 96 21 7000 96% 4690 2010 Figure 4.5 Fitter Snackers sales and operations plan for January through June Concepts in Enterprise Resource Planning, Second Edition 22
Demand Strategies When demand is forecasted to exceed capacity, a company might: Choose not to meet all demand or reduce promotional expenditures Use overtime to increase capacity Will increase costs Inventory can be built up in earlier periods Will increase costs and inventory may be lost Try a hybrid approach Concepts in Enterprise Resource Planning, Second Edition 23 Figure 4.6 Sales and Operations Planning Screen in the SAP R/3 system Concepts in Enterprise Resource Planning, Second Edition 24 Forecasting in SAP R/3 Because the SAP R/3 system is integrated, accurate
historical sales values are readily available for forecasting In forecasting, correcting historical sales data is valid if: Production was not able to meet demand, so that the historical sales data does not represent actual demand Unusual conditions like weather affected demand The effect of sales promotions needs to be backed out of the data In the SAP R/3 system, a number of forecasting models are available Concepts in Enterprise Resource Planning, Second Edition 25 Historical Sales Data Sales provided from SD module Field where planner can correct the sales value
Figure 4.7 Historical sales levels for Fitter Snacker Concepts in Enterprise Resource Planning, Second Edition 26 Forecasting Models in SAP R/3 Figure 4.8 Forecasting model options in the SAP R/3 system Concepts in Enterprise Resource Planning, Second Edition 27 Evaluating Forecasts Using graphs to evaluate forecasts is frequently the best method Historical Sales Values Forecasted Sales
Figure 4.9 Forecasting results presented graphically in the SAP R/3 system Concepts in Enterprise Resource Planning, Second Edition 28 Rough-Cut Capacity Planning In SOP, rough-cut capacity planning can be used to evaluate plan feasibility For simple products/processes like Fitter Snacker, the capacity estimations are pretty accurate For complicated assemblies/manufacturing processes, accurate rough cut capacity estimates are hard to achieve Concepts in Enterprise Resource Planning, Second Edition 29 Production Plan Capacity Requirements
Figure 4.10 SOP with rough-cut capacity calculation in the SAP R/3 system Concepts in Enterprise Resource Planning, Second Edition 30 SOP Effectiveness ERP systems provide sophisticated SOP tools, but require commitment from both parties to be successful Without cooperation and agreement on forecasts, sales promotions and production plans, a company will have: Excess quantities of some products Shortages of others Higher costs due to overtime and expedited shipping Successful SOP needs a culture of cooperation, which requires top management support to develop Concepts in Enterprise Resource Planning, Second Edition 31
Another Look: Sales and Operations Planning Kellogg achieved significant savings from coordinated SOP process Key was changing focus of key players Focus was influenced by way players were evaluated Marketing and sales: tons of cereal sold Manufacturing: tons of cereal produced Neither party was evaluated on how much profit Kellogg was making Kelloggs new SOP process, Integrated Business Planning (IBP), is focused on making profit for the company Kellogg has reduced capacity, inventory and capital needs while selling more cereal than ever before Concepts in Enterprise Resource Planning, Second Edition 32 Disaggregating SOP Planning is done on aggregate product groups to make the process easier to manage and evaluate
Aggregate plans must be disaggregated to that more detailed plans can be made for individual products In SAP R/3, the product group hierarchy, which is defined with fixed percentages for each member, is used to determine production quantities for each product With Fitter Snacker, the product group consists of two products NRG-A typically accounts for 70% of sales NRG-B typically accounts for 30% of sales Concepts in Enterprise Resource Planning, Second Edition 33 NRG Group consists of 70% NRG-A Bars and 30% NRG-B Bars Figure 4.11 Product Group Structure in SAP R/3 System Concepts in Enterprise Resource Planning, Second Edition 34
Stock/Requirements List The Stock/Requirements List shows: Current stock Required materials Material receipts planned Material availability Concepts in Enterprise Resource Planning, Second Edition 35 Anticipated demand for NRG-A Bars from Sales and Operations Plan Figure 4.12 Stock/Requirements List for NRG-A bars after disaggregation Concepts in Enterprise Resource Planning, Second Edition 36 Working Days
July 22 Aug. 18 Sept. 20 Oct. 23 Nov. 20 Dec. 17 Figure 4.13 The number of working days at Fitter Snacker, July through December Concepts in Enterprise Resource Planning, Second Edition 37
Demand Management Demand Management links SOP with Detailed Scheduling and MRP via the Master Production Schedule (MPS) Fitter Snackers Demand Management process splits the Monthly SOP plan into weekly and daily increments Demand Management process in SAP R/3 uses the factory calendar to determine the number of working days in a particular week or month Concepts in Enterprise Resource Planning, Second Edition 38 Weekly Disaggregation Demand Management Monthly Demand NRG-A NRG-B Working Days in Week Working Days in Month 4 NRG-A
81 Jan 4 4134 1772 22 188 81 Jan 5 4134 1772 22 188 81 Jan 6 4134 1772 22 188 81
Figure 4.14 Fitter Snackers production plan for January: The first five weeks of production are followed by a day-by-day disaggregation of week 1. Concepts in Enterprise Resource Planning, Second Edition 41 Demand Management Working Days in Week Working Days in Month Week 1 7/2 - 7/6 4 22 Week 2 7/9 - 7/13 5 22 Demand Management
Working Days in Month July 2 22 July 3 22 Week 3 Week 4 Week 5 7/16 - 7/20 7/23 - 7/27 7/30 - 7/31 8/1 - 8/3 5 5 2 3 22 22 22 18 July 4
22 July 5 22 July 6 22 Figure 4.15 Fitter Snackers factory calendar for July Concepts in Enterprise Resource Planning, Second Edition 42 Material Requirements Planning Material Requirements Planning (MRP) is the process of determining the quantity and timing of production and/or purchase quantities needed to support the Master Production Schedule (MPS) MRP would allow Fitter Snacker to accurately plan its raw material purchases Concepts in Enterprise Resource Planning, Second Edition
43 Bill of Material The Bill of Material (BOM) is a list of materials and quantities needed to make a product For Fitter Snacker, the BOM is the recipe for a 500 lb. batch of snack bar dough Concepts in Enterprise Resource Planning, Second Edition 44 Ingredient Oats (lb) Wheat germ (lb) Cinnamon (lb) Nutmeg (lb) Cloves (lb) Honey (gal) Canola Oil (gal) Vit./Min. Powder (lb)
7 5 5 50 50 50 30 70 Figure 4.16 The bill of material (BOM) for Fitter Snackers NRG bars Concepts in Enterprise Resource Planning, Second Edition 45 Lead Times and Lot Sizing The BOM can be used to calculate how much of each material is required to produce a finished product Determining the timing and quantity of purchase orders requires information on lead-times and lot sizing For purchased products, the lead time includes: Time for supplier to receive and process order Time to take material out of stock, package it, load it
on a truck and deliver it to the manufacturer Time required at manufacturer to receive the material: Unload the truck Inspect the materials Move to storage location or production line Concepts in Enterprise Resource Planning, Second Edition 46 Lead Times and Lot Sizing Lot sizing is the process of determining production or order quantities In many cases, lot sizes for purchased items are constrained by packaging and transportation For Fitter Snacker: Oats need to be purchased in multiples of 44,000 lb. hopper truck quantities Wheat Germ needs to be purchased in multiples of 2,000 lb bulk containers Protein powder needs to be purchased in multiples of 1,250 lb. pallet quantities
Concepts in Enterprise Resource Planning, Second Edition 47 MRP Process The MRP Process for oats requires the following steps: 1. Convert MPS quantities from cases to 500 lb. batches 2. Multiply the number of batches by the lb/batch quantities from the BOM to determine gross requirements 3. Subtract existing raw material quantities and released purchase orders from gross requirements to determine net requirements 4. Plan purchase orders in multiples of the 44,000 lb lot size, allowing for the 2-week lead time, to meet the net requirements in Step 3 Concepts in Enterprise Resource Planning, Second Edition
48 MRP Process Scheduled Receipts are purchase orders that have been placed with the supplier and are scheduled to arrive on a particular date The MRP process calculates planned orders, which are orders that should be placed with the supplier to avoid running out of the material Planned orders appear in two places on the MRP Record Planned order release shows when the order should be placed with the supplier Planned order receipt shows when the supplier should deliver the order
Concepts in Enterprise Resource Planning, Second Edition 49 MRP Process 72 752 108.3 500 Oats Lead Time = 2 weeks MPS NRG-A (cases) NRG-B MPS NRG-A (500 lb. batches) NRG-B Gross Requirements (lb) Scheduled Receipts Planned Receipts On Hand
88,000 33,386 44,000 44,000 22,299 44,000 8,632 108.3 300 46.4 250 44,090 Figure 4.17 The MRP record for NRG bars, weeks 1 through 5 Concepts in Enterprise Resource Planning, Second Edition 50 SAP R/3 MRP and MRP Records MRP list is similar to Stock/Requirements List MPR list shows results of MRP calculations Stock/Requirements shows results of MRP calculations, plus any changes that have occurred since the MRP
calculations were performed: Planned orders converted to production orders Material receipts MRP calculations can require significant computer resources, so are usually performed daily or even less frequently Concepts in Enterprise Resource Planning, Second Edition 51 Figure 4.18 The MRP List in SAP R/3 Concepts in Enterprise Resource Planning, Second Edition 52 Double-clicking on a planned order brings up a window where the planned order can be converted to a purchase requisition Figure 4.19 The Stock/Requirements List in SAP R/3 Concepts in Enterprise Resource Planning, Second Edition
53 Planned Order to Purchase Requisition Planned orders are recommendations from the MRP calculation process on what materials should be ordered/ produced to meet the MPS Planned orders must be converted to purchase requisitions before the purchasing department will begin the process to create a purchase order Planned orders can be converted to purchase orders manually, or the SAP R/3 system can convert a group of planned order to purchase orders e.g. all planned orders that should be placed this week can be converted to purchase requisitions Concepts in Enterprise Resource Planning, Second Edition 54 Planned Order to Purchase Requisition
Planned order release and receipt dates Option to convert planned order to purchase requisition Figure 4.20 Conversion of Planned Order to Purchase Requisition Concepts in Enterprise Resource Planning, Second Edition 55 Purchase Requisition to Purchase Order The purchasing department converts purchase requisitions into purchase orders Purchasing specialists may group items from different purchase requisitions on one purchase order to save costs Purchasing specialists may produce more than one purchase order for the items on a requisition The SAP R/3 system provides tools to help the purchasing specialist select the best supplier (vendor) for a material Once the purchase order is complete, it is transmitted to the supplier (vendor)
A number of methods (mail, fax, EDI, internet) are available for transmitting purchase orders Concepts in Enterprise Resource Planning, Second Edition 56 Options to evaluate vendors Figure 4.21 Source Overview screen for supplier selection Concepts in Enterprise Resource Planning, Second Edition 57 Detailed Scheduling Detailed scheduling is a complex process Scheduling frequently involves a balance between: Long production runs, which reduces lost capacity due to equipment setups, and Short production runs, which result in lower inventory levels Because the mixing capacity at Fitter Snacker is greater than the baking line capacity, scheduling at Fitter
Snacker is focused on the baking line Repetitive manufacturing can be used to schedule production at Fitter Snacker Repetitive manufacturing schedules production run times instead of specific production quantities Concepts in Enterprise Resource Planning, Second Edition 58 Figure 4.22 Repetitive Manufacturing Planning Table in the SAP R/3 system Concepts in Enterprise Resource Planning, Second Edition 59 Linking Production and Accounting Data can be entered into the SAP R/3 system through a PC, bar code scan, wireless PDA or RFID technology Because SAP R/3 is integrated, information entered for a material movement will be used to automatically update accounting records One data entry activity provides data for two functions
(materials management and accounting) simultaneously, providing data consistency For example, the Goods Receipt screen simplifies the connection between the material received from the supplier and the purchase order that created it Accurate data requires company personnel to consistently and accurately enter information into the system Concepts in Enterprise Resource Planning, Second Edition 60 Figure 4.23 Goods receipt screen in SAP R/3 Concepts in Enterprise Resource Planning, Second Edition 61 ERP and Suppliers Fitter Snacker is part of a supply chain that starts with farmers growing oats and wheat germ and ends with a customer buying an NRG bar from a retail store Historically, participants in the supply chain have used
competitive bidding to achieve low prices This frequently leads to adversarial relationships The supply chain is frequently more efficient if participants work collaboratively to: Improve products Reduce paperwork Reduce inventories and costs Increase responsiveness to the customer Concepts in Enterprise Resource Planning, Second Edition 62 Traditional Supply Chains In the traditional supply chain, information is passed through the supply chain reactively Information on changes to customer demand may not reach suppliers for days or week Information is filtered by purchase order process Goods Information
$ $ $ Goods Goods Goods Supplier Manufacturer Information Wholesaler Information
Information $ Retailer Goods Customer Raw Materials $ Information Figure 4.24 Supply-chain management (SCM) from raw materials to consumer Concepts in Enterprise Resource Planning, Second Edition 63 ERP and Supply Chains
ERP systems can facilitate supply chain efficiency Production plans can be shared along the supply chain in real time Integration of accounting allows managers to evaluate impact of plans on total supply chain costs Measures of supply chain performance include: Cash-to-cash cycle time Total SCM costs Initial fill rate Initial order lead time On-time performance Concepts in Enterprise Resource Planning, Second Edition 64 Another LookInventory Control Before ERP, Hoyt Archery performed a complete inventory count twice a year Manufacturing plant closed for 3 days at a cost of $5,000 per day With ERP, Hoyt had accurate, real-time inventory
information and could implement an ongoing cyclecounting process Rather than count all items twice a year, with cycle counting a few inventory items are counted each day Hoyt also simplified customer interaction with its configure-to-order (CTO) process Concepts in Enterprise Resource Planning, Second Edition 65 Another LookSupply Chain Management with Customer Collaboration Most growth in e-commerce has been in business-tobusiness (B-to-B) commerce, not business-to-consumer (B-to-C) commerce Vanity Fair had no problem complying with the Webbased order tracking requirement of government agencies because it had an ERP system If you are going to begin to collaborate with your suppliers, you will have to have real-time information available to them Tim Lamberth, VP of Global Processes, Vanity Fair
Concepts in Enterprise Resource Planning, Second Edition 66 Another LookSupply Chain Management with Customer Collaboration Wal-Mart uses data to gain competitive advantage with its supply chain Purchase data from bar code scanners is recorded in a massive data warehouse at Wal-Mart headquarters Wal-Mart uses data mining techniques to predict what customers will buy at different times of the year This data is shared with Wal-Mart suppliers to plan production Wal-Mart also allows its 5,000 suppliers to directly access its data warehouse through its Retail Link program Wal-Mart is leading the effort to include RFID technology SAPs R/3 software has RFID capabilities Concepts in Enterprise Resource Planning, Second Edition
67 Another LookA Suppliers Point of View VDO had problems in the highly-competitive automotive industry due to: Four manufacturing plants, each with its own business processes No real-time information system VDOs survival was threatened as its competitors provided lower cost products with better delivery accuracy To solve this problem, VDO implemented SAP using the ASAP (now Solution Manager) methodology First plant in 8 months Remaining 3 plants in four months Concepts in Enterprise Resource Planning, Second Edition 68 Summary
An ERP system can improve the efficiency of production and purchasing processes Begins with Marketing sharing sales forecast Production plan is created based on forecast and shared with Purchasing so raw materials can be ordered properly. Production planning can be done without an ERP system, but an ERP system that contains MRP allows Production to be linked to Purchasing and Accounting This data sharing increases a companys overall efficiency. Concepts in Enterprise Resource Planning, Second Edition 69 Summary
Companies are building on their ERP systems and integrated systems philosophy to practice SCM. In doing this, the company looks at itself as part of a larger process that includes customers and suppliers. By using information more efficiently along the entire chain, significant cost savings can result. Concepts in Enterprise Resource Planning, Second Edition 70
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