Production Logistics and ERP Chapter 6

Production Logistics Increased competitive pressures on production processes due to: Shorter product development times Focus on product quality Shorter product life cycles Production Logistics is SAP approach to production planning and control Integrated with other Value chains in R/3 such as procurement and warehousing and SD.

Production Logistics (cont.) Builds upon the integration of MRP II Provides specific support for TQM and Kanban material management processes More customer centric than MRP II with integration of sales information

Production Logistics (cont) R/3 Org. Elements Plant Storage Location Work center MRP area R/3 Business Objects Material master Production order BOM Sales & Operations plan Master recipe

Production Logistics Scenarios Sales-order related production Production by lot size Sales-order related repetitive manufacturing Project-oriented make-to-order production Production replenishment

Production Logistics VC Order Prelim Costing Production Order Execution Quality Inspection After production Capacity Planning Production Order Creation Inspection Check by lot Defects Recording Inspection Point Related to process Material Staging Sales Support Capacity Planning Information System QM cost input

Production by Lot Size Scenario Processing of Sales Plan Determining quantities and dates Purchase requisitions created Single Item MPS Creation, release and execution of production order 5. Goods issue 6. Completions of PO confirmation 7. Goods receipt 8. Settlement of PO

Production By Lot Size: Plan Processing Profitability Analysis w/static Standard cost Sales quantity Copied from CO-PA Processing of Sales and operation planning Demand Program is to Be created Production Plan is created Sales plan Is created V V Demand Management Demand Program edited

Production By Lot Size: Demand Management Single Item MPS V Purchase Requisition created Planned Orders created ^ Planned Order conversion Processing Stock Material Requests for quotation sent to vendors Management Of consignment stocks Internal procurement With stock support Order arrived

Production By Lot Size: Creating Production Order Con. Of plan Order to prod. Order is started Creation of Production order Production Order is created Release of Production order V Quality Management In production Trans. Req. generated Prod. Order Is released Inspection lot Created for Prod order

Production By Lot Size: Execute Production Order Execution of Production order ^ Material is produced Material issue for Production order Is to be posted Production order to Be confirmed Goods receipt To be posted Goods issue For production orders Completion Confirmation of Prod. order Goods receipt processing V Prod. Order Is completely confirmed Prod. Order Status is Fully delivered Actual costs Updated in Prod. order Goods issue is Posted for Prod. order Time management processing Settlement of Production order

Other Production Scenarios Repetitive manufacturing Make-to-order production Process manufacturing Project-related “Engineer to order” Quality management for goods receipt from production

Autodesk Inc. Case $400M Company, growing at 20%/year Ten sales offices in US and 5 development centers in US and Switzerland with 1900 people Sells famous CAD and MM software Goal was to maintain growth rate and ship products within 1 hour of receiving customer order existing system was stretched by global growth and couldn’t handle multiple order codes; operating info was not available to executives for decision making Used R/3 to redesign business model and 25 major business processes, including 240 subprocesses Re-engineered order process for automatic pricing; reduced number of order codes Can track sales in real time along with new product evaluation copies and manufacturing costs around the world Future plans were to extend the software to Europe and Asia regions, remote access, allow for product downloading

A Normal Company’s Systems Fitter Snacker, Inc. Founded in the ’50s A small manufacturer of healthy snack bars NRG-A and NRB-B bars Two divisions; Wholesale and Direct Sales

Problems with Fitter Snacker’s Systems: Sources: Three unintegrated systems Sales Order System Warehouse System Accounting System Manual handling of transactions Information not available in “real time”

Fitter Snacker’s Systems Quote Sales Order Pick, Pack and Ship Invoice Payment Returns Warehouse Accounting Receiving Fitter Snacker’s Sales Process

Production and Materials Management at Fitter Snacker Must answer the following questions: How much of each bar should be produced? What quantities of raw materials should be ordered? When should raw materials be ordered

General Approaches to Production Make-to-stock: Items produced in anticipation of orders Make-to-order: Items produced to meet specific customer orders Assemble to order: Final product assembled from make-to-stock items

Fitter Snacker Manufacturing Process Raw Material Warehouse Mixer Form Bake Pack Finished Goods Warehouse Snack Bar Line

Fitter Snacker Production Problems Communications Marketing does not share data with production (sales promotions and large, unexpected orders) Inventory True inventory status not known No real-time data on actual sales Accounting and Purchasing Difficulty forecasting raw material and labor costs Adjusting accounts for actual vs. standard costs time consuming and done infrequently MRP allows plant manager to plan production and raw materials for many periods. It works backwards from a sales forecast to create a production schedule. From there, given supplier lead times and finished product recipes, MRP works backwards to schedule raw material purchases. This is impossible to figure w/o a computer.

Production Planning Process Work from sales forecast to create aggregate production plan Break down aggregate plan into more specific plans Use production plan to determine raw material requirements

SAP R/3 Approach to Production Planning Sales and Operations Planning Demand Management MRP Detailed Scheduling Sales Forecasting Purchasing Production

Sales Forecasting

Sales and Operations Planning

Sales and Operations Planning

Sales and Operations Planning

Sales and Operations Planning

Sales and Operations Planning

Demand Management

Demand Management Calculation for Week 5 4,134 cases in Jan. x 3 days in week 5 ÷ 22 working days in Jan. = 563.7 cases 4,1984 cases in Feb. x 3 days in week 5 ÷ 20 working days in Feb. = 419.8 cases Total = 983.5 cases

MRP Bill of Material

MRP MRP Record

MRP List in SAP R/3

Stock Requirements List in SAP R/3

Detailed Production Scheduling Snack bar production line is bottleneck Scheduling of production line is key to determining detailed production schedule

Detailed Production Scheduling Length of production runs Longer runs reduces cost of setups Longer runs increase capacity utilization Shorter runs reduces cost of inventory

Providing Production Data to Accounting Production data does not get entered into an ERP system directly Many methods of gathering shop floor data are available ERP allows shop floor data to be collected once for production and accounting purposes, and data is consistent in both areas

ERP in Supply Chain Management $ $ $ $ $ Goods Goods Goods Goods Goods Raw Materials Customer Supplier Manufacturer Wholesaler Retailer Information Information Information Information Information

Supply Chain Management and ERP ERP not required for Supply Chain Management (SCM) ERP can facilitate sharing information in real time Use of internet can reduce communication costs

Supply Chain Metrics Total Supply Chain Cash-to-cash cycle time: Time from paying for raw materials to the time when cash is collected from the customer Total supply chain costs

Supply Chain Metrics Buyer-Supplier Initial fill rate Initial-order lead-time On-time performance

Summary An ERP system can improve the efficiency of the production and purchasing processes. Efficiency begins with Marketing sharing sales forecasts with Production, which shares its production plans with Purchasing

Summary continued Production planning can be done without an ERP system, but and ERP system allows production to be linked to Purchasing and Accounting. This data sharing increases a company’s overall efficiency

Summary continued Companies are building on their ERP systems to practice supply chain management. In doing this, the company looks at itself as part of a large process that includes customers and suppliers. Using information more efficiently along the supply chain can significantly reduce costs.