609 Assignment 4 & Discussion 4

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Concepts in Enterprise Resource Planning
Fourth Edition

Chapter Four

Production and Supply Chain Management Information Systems

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Production Overview

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

Concepts in Enterprise Resource Planning, Fourth Edition

Production Overview (cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition

Fitter Snacker’s Manufacturing Process

Fitter Snacker uses make-to-stock production

Figure 4-1 Fitter Snacker’s manufacturing process

Concepts in Enterprise Resource Planning, Fourth Edition

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 sequence
Capacity: number of bars that can be produced

Concepts in Enterprise Resource Planning, Fourth Edition

Fitter Snacker’s Production Problems

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

Concepts in Enterprise Resource Planning, Fourth Edition

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
Standard costs: normal costs of manufacturing a product
Production and Accounting must periodically compare standard costs with actual costs and then adjust the accounts for the inevitable differences

Concepts in Enterprise Resource Planning, Fourth Edition

The Production Planning Process

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

Concepts in Enterprise Resource Planning, Fourth Edition

The SAP ERP Approach to Production Planning

Figure 4-2 The production planning process

Concepts in Enterprise Resource Planning, Fourth Edition

Sales Forecasting

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

Concepts in Enterprise Resource Planning, Fourth Edition

Sales Forecasting (cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition

Sales and Operations Planning

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

Concepts in Enterprise Resource Planning, Fourth Edition

Sales and Operations Planning (cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Sales and Operations Planning (cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition

Sales and Operations Planning (cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 4-7 Historical sales figures in SAP

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 4-8 Forecasting model options in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Sales and Operations Planning (cont’d.)

Figure 4-9 Forecasting results presented graphically in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 4.10 Sales and operation plan with rough-cut capacity calculation in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Sales and Operations Planning (cont’d.)

Figure 4-11 Product group structure in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Sales and Operations Planning (cont’d.)

Figure 4-12 Stock/Requirements List for NRG-A bars after disaggregation

Concepts in Enterprise Resource Planning, Fourth Edition

Demand Management

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Materials Requirements Planning (MRP)

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

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 4-15 Fitter’s factory calendar for August

Concepts in Enterprise Resource Planning, Fourth Edition

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

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Materials Requirements Planning in SAP ERP (cont’d.)

Figure 4-18 The MRP list in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Materials Requirements Planning in SAP ERP (cont’d.)

Figure 4-19 The Stock/Requirements List in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 4-20 Conversion of a planned order to a requisition

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Figure 4-21 Source Overview screen for supplier selection

Concepts in Enterprise Resource Planning, Fourth Edition

Detailed Scheduling

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Detailed Scheduling (cont’d.)

Figure 4-22 Repetitive manufacturing planning table in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

Providing Production Data to Accounting

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

Concepts in Enterprise Resource Planning, Fourth Edition

Providing Production Data to Accounting (cont’d.)

Figure 4-23 Goods receipt screen in SAP ERP

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

ERP and Suppliers

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

The Traditional Supply Chain

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

Concepts in Enterprise Resource Planning, Fourth Edition

The Traditional Supply Chain (cont’d.)

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

The Measures of Success

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition

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

Concepts in Enterprise Resource Planning, Fourth Edition