1. Concepts in Enterprise Resource Planning 4th Edition Chapter Four Production and Supply Chain Management Information Systems 1Concepts in Enterprise Resource Planning, 4th Edition

2. 2Concepts in Enterprise Resource Planning,2 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

3. Concepts in Enterprise Resource Planning, 4th Edition3 Introduction Explore some Supply Chain Management functions (SCM) in an ERP system Explore Fitter’s SCM problems and how ERP can help fix them problems scheduling production its warehouse is not adequately stocked, and customer orders cannot be filled in a timely fashion

4. Concepts in Enterprise Resource Planning, 4th Edition4 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

5. Concepts in Enterprise Resource Planning, 4th Edition5 Production Overview (cont’d.) Three general approaches to production –Make-to-stock items: products are manufactured based on demand forecasts –made for inventory (the “stock”) in anticipation of sales orders –accuracy of the forecasts will prevent excess inventory –for example, cameras, canned corn and books –Make-to-order : products are not built until a confirmed order for products is received – Items are produced to fill specific customer orders –usually take this approach when producing items that are too expensive, or items are configured to customer specifications. –for example, airplanes and large industrial equipment

6. Production Overview (cont’d.) Assemble-to-orde r: items produced using a combination of make-to-stock and make-to-order processes –the final product is assembled for a specific order from a selection of make-to-stock components –Example, Personal computers Concepts in Enterprise Resource Planning, 4th Edition6

7. 7 Fitter Snacker’s Manufacturing Process Fitter Snacker uses make-to-stock production Figure 4-1 Fitter Snacker’s manufacturing process

8. Concepts in Enterprise Resource Planning, 4th Edition8 Fitter Snacker’s Manufacturing Process (cont’d.) Snack bar line can produce 200 bars a minute, or 3,000 pounds of bars per hour Each bar weighs four ounces Entire production line operates on one shift a day Fitter Snacker’s production sequence –See Figure 4-1 Switching the production line from one type of snack bar to the other takes 30 minutes –producing two products in one day results in a half-hour loss of capacity during the changeover –Capacity: number of bars that can be produced

9. Concepts in Enterprise Resource Planning, 4th Edition9 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 Marketing and Sales frequently excludes Production from meetings, neglects to consult Production when planning sales promotions, forgets to notify Production when it takes an exceptionally large order. –Production personnel find it hard to deal with sudden increases in demand warehouse inventories are depleted Might cause shortages or stockout

10. Concepts in Enterprise Resource Planning, 4th Edition10 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 –not have a good way to calculate the day-to-day costs of Fitter’s production Uses standard costs: normal costs of manufacturing a product For each batch of bars it produces, Fitter can estimate direct costs (materials and labor) and indirect costs (factory overhead) manufacturing costs = The number of batches produced is multiplied by the standard cost of a batch –Production and Accounting must periodically compare standard costs with actual costs and then adjust the accounts.

11. Concepts in Enterprise Resource Planning, 4th Edition11 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 plans are made for groups of related products the time increment used in aggregate planning is frequently a month or a quarter –Break down aggregate plan into more specific production plans for individual products and smaller time intervals –Use production plan to determine raw material requirements Example: A consumer products company may group by product type (e.g., shampoo, laundry detergent, and disposable diapers). –The aggregate production plan for Fitter will combine the only two products, NRG-A and NRG-B bars using a monthly time increment.

12. Concepts in Enterprise Resource Planning, 4th Edition12 The SAP ERP Approach to Production Planning Figure 4-2 The production planning process

13. The SAP ERP Approach to Production Planning Sales forecasting is the process of predicting future demand for a company’s products. Sales and operations planning (SOP) is the process of determining what the company will produce In the Demand management step, the production plan is broken down into smaller time units, such as weekly or even daily to meet demand for individual products. –The Materials requirements planning (MRP) process determines the amount and timing of raw material orders create raw materials purchase orders in the Purchasing step –the detailed production schedule will determine when the production line will switch between the RG-A and NRG-B bars. manage daily operations in the Production process Concepts in Enterprise Resource Planning, 4th Edition13

14. Concepts in Enterprise Resource Planning, 4th Edition14 Sales Forecasting FS’s has no formal way of developing a sales forecast and sharing it with Production 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 FS’s : –Use previous year’s sales data in combination with marketing initiatives to increase sales

15. Concepts in Enterprise Resource Planning, 4th Edition15 Sales Forecasting (cont’d.) Figure 4-3 Fitter Snacker’s sales forecast for January through June To get accurate base figures for last year’s sales, this promotional increase must be subtracted from the previous year’s sales numbers Fitter’s Marketing and Sales Department anticipates a 3 percent growth in sales over last year, based on current trends and on research reported in trade publications

16. Sales Forecasting (cont’d.) Exercise 4.2 Following the format of the spreadsheet in Figure 4-3, develop a spreadsheet to forecast Fitter’s sales for July through December. Calculate the base projection using the previous year’s values (shown in Figure 4-4), and factor in the 3 percent estimated growth rate. Assume that the special marketing promotion last year resulted in an increase in sales of 200 cases for July, and that a special marketing promotion this year will result in an increase in sales for July of 400 cases. Concepts in Enterprise Resource Planning, 4th Edition16

17. Concepts in Enterprise Resource Planning, 4th Edition17 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

18. Concepts in Enterprise Resource Planning, 4th Edition18 Sales and Operations Planning (cont’d.) Figure 4-5 Fitter Snacker’s sales and operations plan for January through June capacity calculation ( next slide) To determine the capacity utilization for each month by dividing the production plan amount (line 2) by the available capacity (line 5). 7 and 8 in Figure 4-5 disaggregate the planned production shown in line 2, based on the breakdown of 70 percent NRG-A and 30 percent NRG-B snack bars

19. capacity each month is calculated in terms of the number of shipping cases. 200 bars per minute × 60minutes per hour × 8 hours per day = 96,000 bars per day, which (96,000 bars per day ÷ 24 bars per box ÷ 12 boxes per case) equals 333.3 cases per day. If you multiply the number of working days in a month by the production capacity of 333.3 shipping cases per day, you get the monthly capacity in shipping cases, which is shown in line 5. Concepts in Enterprise Resource Planning, 4th Edition19

20. Concepts in Enterprise Resource Planning, 4th Edition20 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, or –Input from plans developed in Controlling (CO) module In the CO module –Profit goals for company can be set used to estimate the sales levels needed to meet the profit goals

21. Concepts in Enterprise Resource Planning, 4th Edition21 Sales and Operations Planning (cont’d.) Figure 4-6 Sales and operations planning screen in SAP ERP

22. Concepts in Enterprise Resource Planning, 4th Edition22 Sales and Operations Planning (cont’d.) Rough-cut planning: common term in manufacturing means: Disaggregated to generate detailed production schedules Once SAP ERP system generates a forecast, the planner can view the results graphically Another feature of the SAP ERP sales and operations planning process is the integration of – Rough-cut capacity planning applies simple capacity-estimating techniques to the production plan to see if the techniques are feasible

23. Concepts in Enterprise Resource Planning, 4th Edition23 Sales and Operations Planning (cont’d.) Figure 4-9 Forecasting results presented graphically in SAP ERP

24. Concepts in Enterprise Resource Planning, 4th Edition24 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

25. Concepts in Enterprise Resource Planning, 4th Edition25 Sales and Operations Planning (cont’d.) Figure 4-11 Product group structure in SAP ERP

26. Concepts in Enterprise Resource Planning, 4th Edition26 Sales and Operations Planning (cont’d.) Figure 4-12 Stock/Requirements List for NRG-A bars after disaggregation

27. Concepts in Enterprise Resource Planning, 4th Edition27 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 –Also an input to the materials requirements planning process, which determines what raw materials to order to support the production schedule The demand management process splits Fitter’s monthly production planning values into finer time periods

28. Concepts in Enterprise Resource Planning, 4th Edition28 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

29. For the weekly plan, the master production schedule MPS plan for NRG-A bars in week 1 was calculated as : (4,134 cases in January [the monthly demand from Figure 4-5] ÷ 21 working days in month of January) × 5 working days in Week 1 = 984.3 cases per week. Concepts in Enterprise Resource Planning, 4th Edition29

30. In February, the MPS for NRG-A bars in Week 5 was calculated as ( Because Week 5 consists of the last day in January and the first four days ) : (4,134 cases in January [monthly demand] ÷ 21 working days in month of January) × 1 working day in Week 5 = 196.9 cases (4,198 cases in February [monthly demand] ÷ 20 working days in month of February) × 4 working days in Week 5 = 839.6 cases Week 5 Total = 196.9 + 839.6 = 1,036.5 cases Concepts in Enterprise Resource Planning, 4th Edition30

31. Concepts in Enterprise Resource Planning, 4th Edition31 Materials Requirements Planning (MRP) Determines required quantity and timing of the production or purchase of subassemblies and raw materials needed to support master production schedule MPS –Bill of material (BOM): list of the materials (including quantities) needed to make a product

32. Concepts in Enterprise Resource Planning, 4th Edition32 Materials Requirements Planning (MRP) (cont’d.) Figure 4-16 The bill of material (BOM) for Fitter Snacker’s NRG bars

33. Concepts in Enterprise Resource Planning, 4th Edition33 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 ( for raw materials produced in-house) and order quantities (for purchased items).

34. Concepts in Enterprise Resource Planning, 4th Edition 34 Materials Requirements Planning (MRP) (cont’d.) Figure 4-17 The MRP record for oats in NRG bars, weeks 1 through 5 Each mixer mixes dough in 500-pound batches ( see Figure 4-1 ) Each shipping case weighs 72 pounds (not including packaging), so to convert shipping cases to 500-pound batches, multiply the number of shipping cases by 72 pounds per case, and then divide by 500 pounds per batch (see line3) Fitter uses 300 pounds of oats per batch of NRG-A bar and 250 pounds of oats per batch of NRG-B bar NRG-A: 142 batches × 300 lb. per batch = 42,600 lb. oats NRG-B: 61 batches × 250 lb. per batch = 15,250 lb. oats Total = 57,850 lb. oats

35. Scheduled receipts, shows the expected timing of orders of materials that have already been placed. ( Plan orders in multiples of the 44,000-pound lot size ) –There is a two-week lead time for oats Planned receipts, shows when planned orders will arrive Planned orders,shows the quantity that the MRP calculation recommends ordering, and it is the output from the MRP process that purchasing uses to determine what to order to produce the product, and when to order it. Concepts in Enterprise Resource Planning, 4th Edition35

36. Exercise 4.5 Develop an MRP record, similar to the one in Figure 4-17, for wheat germ for the five weeks of January. Wheat germ must be ordered in bulk- container quantities, so the planned orders must be in multiples of 2,000 pounds. Use a lead time of one week and an initial on-hand inventory of 3,184 pounds; assume that an order of 8,000 pounds is scheduled for receipt during Week 1. Concepts in Enterprise Resource Planning, 4th Edition36

37. Concepts in Enterprise Resource Planning, 4th Edition37 Materials Requirements Planning in SAP ERP MRP list shows results of MRP calculations MRP process creates planned orders to meet dependent requirements ( Dependent requirements represent the demand for oats created by the planned orders for snack bars—the demand for oats depends on the production plans for snack bars.) 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

38. Concepts in Enterprise Resource Planning, 4th Edition38 Materials Requirements Planning in SAP ERP (cont’d.) Figure 4-18 The MRP list in SAP ERP

39. Concepts in Enterprise Resource Planning, 4th Edition39 Materials Requirements Planning in SAP ERP (cont’d.) Figure 4-19 The Stock/Requirements List in SAP ERP

40. Concepts in Enterprise Resource Planning, 4th Edition40 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

41. Concepts in Enterprise Resource Planning, 4th Edition41 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(A group of similar or related goods that is produced by using a particular group of manufacturing procedures, processes or conditions ) for each product –Production run length requires a balance between setup costs (cost involved in placing an order or setting up the equipment to make the product, etc) and holding costs (storage, insurance, investment) to minimize total costs to the company

42. Concepts in Enterprise Resource Planning, 4th Edition42 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 (The continuous production of identical products during a manufacturing cycle) –Production lines are scheduled for a period of time, rather than for a specific number of items

43. Concepts in Enterprise Resource Planning, 4th Edition43 Detailed Scheduling (cont’d.) Figure 4-22 Repetitive manufacturing planning table in SAP ERP

44. Concepts in Enterprise Resource Planning, 4th Edition44 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

45. Concepts in Enterprise Resource Planning, 4th Edition45 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 using barcode or RFID technology (Radio frequency identification ), or entered using a mobile device In an integrated ERP system, the accounting impact of a material transaction can be recorded automatically

46. Concepts in Enterprise Resource Planning, 4th Edition46 Providing Production Data to Accounting (cont’d.) Once F’S 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

47. Concepts in Enterprise Resource Planning, 4th Edition47 Providing Production Data to Accounting (cont’d.) Figure 4-23 Goods receipt screen in SAP ERP

48. Concepts in Enterprise Resource Planning, 4th Edition48 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

49. Concepts in Enterprise Resource Planning, 4th Edition49 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 translate into cost savings for the company and the suppliers Allows all parties to eliminate from the supply chain costs that do not add value to the product (such as inventory, overtime, changeovers, and spoilage), while simultaneously improving customer service.

50. Concepts in Enterprise Resource Planning, 4th Edition50 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 –for Fitter’s NRG bars starts with farmers growing oats and wheat, and it ends with a customer buying a bar from a retail store. Traditional supply chain –Information is passed through the supply chain reactively, as participants increase their product orders –Example –Inherent time lags cause problems

51. Concepts in Enterprise Resource Planning, 4th Edition51 The Traditional Supply Chain (cont’d.) Figure 4-24 Supply chain management (SCM) from raw materials to consumer

52. Concepts in Enterprise Resource Planning, 4th Edition52 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

53. Concepts in Enterprise Resource Planning, 4th Edition53 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 –In one study, the cash-to-cash cycle time for companies with efficient supply chain management processes was a month, whereas the cycle averaged 100 days for those companies without effective supply chain management. –Total supply chain management costs Include cost of buying and handling inventory, processing orders, and information systems support –In one study, companies with efficient SCM processes incurred costs equal to 5 percent of sales. By contrast, companies without SCM incurred costs of up to 12 percent of sales

54. Concepts in Enterprise Resource Planning, 4th Edition54 The Measures of Success (cont’d.) Other metrics have been developed to measure what is happening between a company and its suppliers 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

55. Concepts in Enterprise Resource Planning, 4th Edition55 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

56. Concepts in Enterprise Resource Planning, 4th Edition56 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

57. Concepts in Enterprise Resource Planning, 4th Edition57 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