MIS490 3

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Enterprise Systems Configuration for Business

MIS 490

CHAPTER 4

Production and Supply Chain Management Information Systems

3 3

Objectives After completing this chapter, you will be able to:

• Describe the steps in the production planning process of a high-volume manufacturer such as Fitter Snacker

• Describe Fitter Snacker’s 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

Introduction

• Supply Chain Management (SCM) in an ERP system

• Fitter Snacker is part of a supply chain

• FS’s SCM problems and how ERP can help fix them

Production Overview(Ref. Pg:78)

• To meet customer demand efficiently, Fitter Snacker must: • Develop a forecast of customer demand

• Develop a production schedule to meet the estimated demand

• ERP system is a good tool for developing and executing production plans

• Goal of production planning is to schedule production economically

Production Overview (cont’d.) (Ref. Pg:78)

• Three general approaches to production • Make-to-stock items: made for inventory (the “stock”) in anticipation of sales

orders

• Make-to-order items: produced to fill specific customer orders

• Assemble-to-order items: produced using a combination of make-to-stock and make-to-order processes

Fitter Snacker’s Manufacturing Process (Ref. Pg:79)

• Fitter Snacker uses make-to-stock production

Figure 4-1 Fitter Snacker’s manufacturing process

Fitter Snacker’s Manufacturing Process (cont’d.) • Snack bar line can produce 200 bars a minute, or 12,000 bars per

hour

• Each bar weighs four ounces

• Product 48,000 ounces/hour, or 3,000 lbs/hour

• Entire production line operates on one shift a day

Fitter Snacker’s Production Problems (Ref. Pg:80) • Fitter Snacker has problems deciding how many bars to make and

when to make them

• Communication problems • FS’s Marketing and Sales personnel do not share information with Production

personnel

• Production personnel find it hard to deal with sudden increases in demand • Might cause shortages or stockout

Fitter Snacker’s Production Problems (cont’d.)

• Inventory problems • Production manager lacks systematic method for:

• Meeting anticipated sales demand

• Adjusting production to reflect actual sales

• Accounting and purchasing problems • Production and Accounting must periodically compare standard costs with

actual costs and then adjust the accounts for the inevitable differences

• Standard costs: normal costs of manufacturing a product

The Production Planning Process (Ref. Pg:82)

• Three important principles for production planning: • Work from sales forecast and current inventory levels to create an

“aggregate” (“combined”) production plan for all products

• Break down aggregate plan into more specific production plans for individual products and smaller time intervals

• Use production plan to determine raw material requirements

The SAP ERP Approach to Production Planning

Figure 4-2 The production planning process (Ref. Pg:83)

Sales Forecasting (Ref. Pg:84)

• SAP’s ERP system takes an integrated approach • Whenever a sale is recorded in Sales and Distribution (SD) module, quantity

sold is recorded as a consumption value for that material

• Simple forecasting technique • Use a prior period’s sales and then adjust those figures for current conditions

• To make a forecast for Fitter Snacker: • Use previous year’s sales data in combination with marketing initiatives to

increase sales

Sales Forecasting (cont’d.)

Figure 4-3 Fitter Snacker’s sales forecast for January through June

Sales and Operations Planning (Ref. Pg:85)

• Sales and operations planning (SOP) • Input: sales forecast provided by Marketing

• Output: production plan designed to balance market demand with production capacity

• Production plan is the input to the next step, demand management

Sales and Operations Planning (cont’d.)

Figure 4-5 Fitter Snacker’s sales and operations plan for January through June

Sales and Operations Planning (cont’d.)

• In SAP ERP, sales forecast can be made using: • Historical sales data from the Sales and Distribution (SD) module

• Input from plans developed in Controlling (CO) module

• CO module • Profit goals for company can be set

• Sales levels needed to meet the profit goals can be estimated

Sales and Operations Planning (cont’d.) (Ref. Pg:88) • Rough-cut planning: common term in manufacturing for aggregate

planning • Disaggregated to generate detailed production schedules

• Once SAP ERP system generates a forecast, the planner can view the results graphically

• Rough-cut capacity planning applies simple capacity-estimating techniques to the production plan to see if the techniques are feasible

Sales and Operations Planning (cont’d.)

Figure 4-6 Sales and operations planning screen in SAP ERP

Sales and Operations Planning (cont’d.)

• Historical sales screen allow planner to correct sales values

• Do not account for external factors, such as unusual weather

• Sales figures forecasting represent best estimate of demand

Figure 4-8 Forecasting model options in SAP ERP

Sales and Operations Planning (cont’d.)

Figure 4-9 Forecasting results presented graphically in SAP ERP

Sales and Operations Planning (cont’d.)

• Disaggregating the sales and operations plan • Companies typically develop sales and operations plans for product groups

• SAP ERP system allows any number of products to be assigned to a product group

• Sales and operation plan disaggregated • Production plan quantities specified for the group are transferred to the individual

products that make up the group

Demand Management (Ref. Pg:95)

• Links the sales and operations planning process with detailed scheduling and materials requirements planning processes

• Output: master production schedule (MPS) • Production plan for all finished goods

• For Fitter Snacker, MPS is an input to detailed scheduling, which determines what bars to make and when to make them

Demand Management (cont’d.)

Figure 4-14 Fitter Snacker’s production plan for January: The first five weeks

of production are followed by a day-by-day disaggregation of week 1

Materials Requirements Planning (MRP) (Ref. Pg:97) • Determines required quantity and timing of the production or

purchase of subassemblies and raw materials needed to support MPS

• Bill of material (BOM): list of the materials (including quantities) needed to make a product

Materials Requirements Planning (MRP) (cont’d.)

Figure 4-16 The bill of material (BOM) for Fitter Snacker’s NRG bars

Materials Requirements Planning (MRP) (cont’d.) • Lead times and lot sizing

• Lead time: cumulative time required for the supplier to receive and process the order, take the material out of stock, package it, load it on a truck, and deliver it to the manufacturer

• Lot sizing: determining production quantities and order quantities

• MRP record: standard way of viewing the MRP process on paper

Materials Requirements Planning (MRP) (cont’d.)

Figure 4-17 The MRP record for oats in NRG bars, weeks 1 through 5

Materials Requirements Planning in SAP ERP

• MRP list shows results of MRP calculations

• MRP process creates planned orders to meet dependent requirements

• Stock/Requirements List shows: • Planned orders

• Purchase requisitions (PurRqs)

• Purchase orders (POitem)

• Planner can convert a planned order to a purchase order from Stock/Requirements List by double-clicking the planned order line

Materials Requirements Planning in SAP ERP (cont’d.) • Integrated information system allows Purchasing to make the best

decision on a vendor based on relevant, up-to-date information

• Once Purchasing employee decides which vendor to use, the purchase order is transmitted to vendor

• System can be configured to fax order to vendor, transmit it electronically through EDI (electronic data interchange), or send it over the Internet

Detailed Scheduling (Ref. Pg:105)

• Detailed plan of what is to be produced, considering machine capacity and available labor

• One key decision in detailed production scheduling • How long to make the production runs for each product

• Production run length requires a balance between setup costs and holding costs to minimize total costs to the company

Detailed Scheduling (cont’d.)

• Fitter Snacker uses repetitive manufacturing

• Repetitive manufacturing environments usually involve production lines that are switched from one product to another similar product

• Production lines are scheduled for a period of time, rather than for a specific number of items

Detailed Scheduling (cont’d.)

• Production runs should be decided by evaluating the cost of equipment setup and holding inventory

• Integrated information system simplifies this analysis • Automatically collects accounting information that allows managers to better

evaluate schedule trade-offs in terms of costs to company

Providing Production Data to Accounting (Ref. Pg:107) • In the manufacturing plant, ERP packages do not directly connect

with production machines

• Data can be entered into SAP ERP through a PC on the shop floor, scanned by a barcode reader or radio frequency identification (RFID) technology, or a mobile device

• In an integrated ERP system, the accounting impact of a material transaction can be recorded automatically

Providing Production Data to Accounting (cont’d.) • Once FS accepts shipment, Receiving must notify SAP ERP system of

the arrival and acceptance of the material • Goods receipt transaction

• Receiving department must match goods receipt with purchase order that initiated it

• When receipt is successfully recorded, SAP ERP system immediately records the increase in inventory levels for the material

ERP and Suppliers (Ref. Pg:108)

• Fitter Snacker is part of a supply chain • Starts with farmers growing oats and wheat

• Ends with a customer buying an NRG bar from a retail store

• ERP systems can play a key role in collaborative planning

ERP and Suppliers (cont’d.)

• Working with suppliers in a collaborative fashion requires trust among all parties

• Company opens its records to its suppliers

• Suppliers can read company’s data because of common data formats

• Advantages • Reductions in paperwork

• Savings in time

• Other efficiency improvements

The Traditional Supply Chain (Ref. Pg:109)

• Supply chain: all activities that occur between the growing or mining of raw materials and the appearance of finished products on the store shelf

• Traditional supply chain • Information is passed through the supply chain reactively as participants

increase their product orders

• Inherent time lags cause problems

The Traditional Supply Chain (cont’d.)

Figure 4-24 Supply chain management (SCM) from raw materials to

consumer

The Traditional Supply Chain (cont’d.)

• EDI and ERP • Before ERP systems were available, companies could be linked with customers

and suppliers through electronic data interchange (EDI) systems

• Well-developed ERP system can facilitate SCM • Needed production planning and purchasing systems already in place

• With ERP system, sharing production plans along the supply chain can occur in real time

The Measures of Success (Ref. Pg:112)

• Performance measurements (Metrics) • Show the effects of better supply chain management

• Cash-to-cash cycle time • Time between paying for raw materials and collecting cash from customer

• SCM costs • Include cost of buying and handling inventory, processing orders, and

information systems support

The Measures of Success (cont’d.)

• Initial fill rate • Percentage of the order that the supplier provided in the first shipment

• Initial order lead time • Time needed for the supplier to fill the order

• On-time performance • If supplier agreed to requested delivery dates, tracks how often supplier

actually met those dates

Summary

• ERP system can improve the efficiency of production and purchasing processes

• Efficiency begins with Marketing sharing a sales forecast

• Production plan is created based on sales forecast and shared with Purchasing so raw materials can be ordered properly

Summary (cont’d.)

• Companies can do production planning without an ERP system, but an ERP system increases company’s efficiency

• ERP system that contains materials requirements planning allows Production to be linked to Purchasing and Accounting

• This data sharing increases a company’s overall efficiency

Summary (cont’d.)

• Companies are building on their ERP systems and integrated systems philosophy to practice supply chain management (SCM)

• SCM: company looks at itself as part of a larger process that includes customers and suppliers

• Using information more efficiently along the entire chain can result in significant cost savings

• Complexity of the global supply chain • Developing a planning system that effectively coordinates information technology and

people is a considerable challenge