Advances in Supply Chain Management

2. Advances in Supply Chain Management Chapter 4 : Advanced Planning (Cont….)

3. Lec 8 : Learning Objectives • Describe the hierarchical operations planning process in terms of materials planning (APP, MPS, MRP) and capacity planning (RRP, RCCP, CRP). • Describe MRP, closed-loop MRP, MRP-II, DRP, ERP, and their relationships. • Understand the terms used in MRP computations. • Know how to compute available-to-promise quantities, MRP explosions, and DRP implosions. • Understand the limitations of legacy MRP systems. • Describe an ERP system, and understand its advantages and disadvantages. • Understand why manufacturers and service firms are migrating from legacy MRP systems to integrated ERP systems. • Describe the various modules of an integrated ERP system, and have a general knowledge of the ERP market. • Understand best-of-breed versus single integrator ERP implementations. • Understand why many ERP implementations fail. • Understand how an integrated ERP system works.

4. SUMMARY of Last Lecture • The last lecture has described the role of APS in supply chain management . Hierarchy of planning tasks and supply chain planning matrix were also explained in detail. The supply chain planning matrix has explained in detail the long term, medium tem and short term planning task. Planning modules in HPS are need to be connected through horizontal and vertical information flow. • The present lecture will elaborate the advance planning processes in supply chain management. It will focus on operations planning, aggregate production plan, production scheduling, bill of material, material requirement planning, capacity planning, distribution requirement planning, development and implementation of enterprise resource planning, ERP software applications and providers.

5. LAYOUT • Operations Planning • The Aggregate Production Plan • Master Production Scheduling • The Bill of Materials • Material Requirements Planning • Capacity Planning • Distribution Requirements Planning • The Legacy Material Requirements Planning Systems • The development of the Enterprise Resource Planning Systems (ERP) • Implementing ERP Systems • ERP Software Applications • ERP Software Providers

6. Operations Planning Operations planning is usually hierarchical & can be divided into three broad categories: • Long-range – Aggregate Production Plan (APP)- also called strategic plans are designed with the entire organization in mind and begin with an organization's mission. Top-level managers, such as CEOs or presidents, will design and execute strategic plans to paint a picture of the desired future and long-term goals of the organization. Essentially, strategic plans look ahead to where the organization wants to be in three, five, even ten years. Strategic plans, provided by top-level managers, serve as the framework for lower-level planning. They involves the construction of facilities & major equipment purchase • Intermediate – Shows the quantity & timing of end items (i.e., master production schedule – MPS)- also called Tactical plans support strategic plans by translating them into specific plans relevant to a distinct area of the organization. Tactical plans are concerned

7. Cont’d…. with the responsibility and functionality of lower-level departments to fulfill their parts of the strategic plan. • Short-range - detailed planning process for components & parts to support the master production schedule (i.e., materials requirement planning – MRP); they are the plans that are made by frontline, or low-level, managers. All operational plans are focused on the specific procedures and processes that occur within the lowest levels of the organization. Managers must plan the routine tasks of the department using a high level of detail.

8. Cont…. Computer based “push” resource systems: Closed-loop MRP - A system used for production planning and inventory control, with an information feedback feature that enables plans to be checked and adjusted. Closed Loop MRPs synchronize the purchasing or materials procurement plans with the master production schedule. The system feeds back information about completed manufacture and materials on hand into the MRP system, so that these plans can be adjusted according to capacity and other requirements. The system is called a closed loop MRP because of its feedback feature, which is also referred to as closing the loop. Manufacturing resource planning (MRP II)-incorporates the business & sales plans with the closed-loop MRP system. It is defined as a method for the effective planning of all resources of a manufacturing company. Ideally, it addresses operational planning in units, financial planning, and has a simulation capability to answer "what-if" questions and extension of closed-loop MRP. This is not exclusively a software function, but the

9. management of people skills, requiring a dedication to database accuracy, and sufficient computer resources. It is a total company management concept for using human and company resources more productively. • Enterprise requirements planning (ERP) - is an extension of MRP-II. It is a process by which a company (often a manufacturer) manages and integrates the important parts of its business. An ERP management information system integrates areas such as planning, purchasing, inventory, sales, marketing, finance, human resources, etc. ERP is most frequently used in the context of software. As the methodology has become more popular, large software applications have been developed to help companies implement ERP in their organization. Think of ERP as the glue that binds the different computer systems for a large organization. Typically each department would have their own system optimized for that division's particular tasks. With ERP, each department still has their own system, but they can communicate and share information easier with the rest of the company.

10. Distribution requirement planning (DRP) - describes the time-phased net requirements from warehouses & distribution centers customer demand minus any on hand in-transit inventories. It is a method used in business administration for planning orders within a supply chain. DRP enables the user to set certain inventory control parameters (like a safety stock) and calculate the time-phased inventory requirements. DRP uses several variables: • the required quantity of product needed at the beginning of a period • the constrained quantity of product available at the beginning of a period • the recommended order quantity at the beginning of a period • the backordered demand at the end of a period • the on-hand inventory at the end of a period DRP needs the following information: • the demand in a future period • the scheduled receipts at the beginning of a period • the on-hand inventory at the beginning of a period • the safety stock requirement for a period

11. Aggregate Production Plan Hierarchical planning - process that translates annual business & marketing plans & demand forecasts into a production plan for a product family (products that share similar characteristics) in a plant or facility leading to the Aggregate Production Plan (APP) • Planning horizon of APP is at least one year & is usually rolled forward by three months every quarter • Includes costs relevant to the aggregate planning decision include inventory, setup, machine operation, hiring, firing, training, & overtime costs

12. Cont….

13. Cont…. Three basic production strategies : Chase Strategy - Adjusts capacity to match demand. Firm hires & lays off workers to match demand. Finished goods inventory remains constant. Works well for make-to-order firms- Companies that use the chase strategy, or demand matching strategy, produce only enough goods to meet or exactly match the demand for goods. Think of this strategy in terms of a restaurant, which produces meals only when a customer orders, therefore matching the actual production with customer demand. The chase strategy has several advantages; it keeps inventories low, which frees up cash that otherwise can be used to buy raw materials or components, and reduces inventory carrying costs that are associated with holding inventory in stock. Cost of capital, warehousing, depreciation, insurance, taxes, obsolescence and shrinkage are all inventory carrying costs. Level Strategy - Relies on a constant output rate while varying inventory & backlog according to fluctuating demand. Firm relies on fluctuating finished goods & backlogs to meet demand. Works well for make-to-stock firms. In a manufacturing company that uses a level production

14. Cont’d…. strategy, the company continuously produces goods equal to the average demand for the goods. Scheduling consistently arranges the same quantity of goods for production based on the total demand for the goods. So, if for three months a company wants to produce 20,000 units of a certain item and there are a total of 56 working days, it can level production to 358 units per day. Mixed Production Strategy - Maintains stable core workforce while using other short-term means, such as overtime, subcontracting & part time helpers to manage short-term demand. It is more common to use a strategy that mixes the chase and level strategies, and also utilizes overtime and subcontracting to supply small peaks in demand. Most firms find it advantageous to utilize a combination of the level and chase strategy. A combination strategy (sometimes called a hybrid or mixed strategy) can be found to better meet organizational goals and policies and achieve lower costs than either of the pure strategies used independently.

15. Master Production Scheduling A master production schedule (MPS) is a plan for individual commodities to produce in each time period such as production, staffing, inventory, etc.[1] It is usually linked to manufacturing where the plan indicates when and how much of each product will be demanded. This plan quantifies significant processes, parts, and other resources in order to optimize production, to identify bottlenecks, and to anticipate needs and completed goods. Since an MPS drives much factory activity, its accuracy and viability dramatically affect profitability. Typical MPS's are created by software with user tweaking. Due to software limitations, but especially the intense work required by the "master production schedulers", schedules do not include every aspect of production, but only key elements that have proven their control affectivity, such as forecast demand, production costs, inventory costs, lead time, working hours, capacity, inventory levels, available storage,

16. and parts supply. The choice of what to model varies among companies and factories. The MPS is a statement of what the company expects to produce and purchase (i.e. quantity to be produced, staffing levels, dates, available to promise, projected balance). The MPS translates the business plan, including forecast demand, into a production plan using planned orders in a true multi-level optional component scheduling environment. Using MPS helps avoid shortages, costly expediting, last minute scheduling, and inefficient allocation of resources. Working with MPS allows businesses to consolidate planned parts, produce master schedules and forecasts for any level of the Bill of Material (BOM) for any type of part. Thus, it is a detailed disaggregation of the aggregate production plan, listing the exact end items to be produced by a specific period. • More detailed than APP & easier to plan under stable demand.

17. Cont’d…. • Planning horizon is shorter than APP, but longer than the lead time to produce the item. Note: For the service industry, the master production schedule may just be the appointment log or book, where capacity (e.g., skilled labor or professional service) is balanced with demand.

18. Cont….. The MPS - the production quantity to meet demand from all sources & is used for computing the requirements of all time-phased end items System nervousness - small changes in the upper-level-production plan cause major changes in the lower-level production plan Firms use a time fence to deal with nervousness by separating the planning horizon into – • Firmed Segment (AKA demand time fence), from current period to several weeks into future. Can only be altered by senior management • Tentative segment (AKA planning time fence), from end of firmed segment to several weeks into the future

19. Bill of Materials • Bill of Materials (BOM) - document that shows an inclusive listing of all component parts & assemblies making up the final product. A bill of materials or product structure (sometimes bill of material, BOM or associated list) is a list of the raw materials, sub-assemblies, intermediate assemblies, sub-components, parts and the quantities of each needed to manufacture an end product. A BOM may be used for communication between manufacturing partners, or confined to a single manufacturing plant. A BOM can define products as they are designed ( engineering bill of materials), as they are ordered (sales bill of materials), as they are built ( manufacturing bill of materials), or as they are maintained (service bill of materials or pseudo bill of material). The different types of BOMs depend on the business need and use for which they are intended. In process industries, the BOM is also known as the formula, recipe, or ingredients list. In electronics, the BOM represents the list of components used on the printed wiring board or printed circuit board. Once the design of the

20. Cont’d…. circuit is completed, the BOM list is passed on to the PCB layout engineer as well as component engineer who will procure the components required for the design. • Dependent Demand - the internal demand for parts based on the demand of the final product in which the parts are used (e.g., subassemblies) • Independent Demand - demand for final products affected by trends, seasonal patterns, & general market conditions • Multilevel Bill of Materials - shows the parent-component relationships & the specific units of components known as the planning factor. Often presented as an indented bill of materials • Super Bill of Materials (AKA planning BOM, pseudo BOM, phantom BOM, or family BOM) enables the firm to forecast the total demand end products

21. Cont….

22. Material Requirements Planning • Material requirements planning (MRP) is a production planning, scheduling and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, while it is possible to conduct MRP by hand as well. • An MRP system is intended to simultaneously meet three objectives: • Ensure materials are available for production and products are available for delivery to customers. • Maintain the lowest possible material and product levels in store • Plan manufacturing activities, delivery schedules and purchasing activities. MRP - calculates the exact quantities, need dates, & planned order releases for subassemblies & materials required to manufacture a final product.

23. Cont’d…. MRP requires – • The independent demand information • Parent-component relationships from the BOM • Inventory status of final product & components. • Planned order releases (the output of the MRP system) Advantage of MRP - provides planning information Disadvantage of MRP - loss of visibility, especially acute for products with a deep BOM, & ignores capacity & shop floor conditions.

24. The Scope of MRP in Manufacturing Independent vs. Dependent Demand Independent demand is demand originating outside the plant or production system, while dependent demand is demand for components. The Bill of Materials (BOM) specifies the relationship between the end product (independent demand) and the components (dependent demand). MRP take as input the information contained in the BOM. Functions The basic functions of an MRP system include: inventory control, bill of material processing, and elementary scheduling. MRP helps organizations to maintain low inventory levels. It is used to plan manufacturing, purchasing and delivering activities. "Manufacturing organizations, whatever their products, face the same daily practical problem - that customers want products to be available in a shorter time than it takes to

25. Cont’d.… make them. This means that some level of planning is required." Companies need to control the types and quantities of materials they purchase, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few examples are given below: • If a company purchases insufficient quantities of an item used in manufacturing (or the wrong item) it may be unable to meet contract obligations to supply products on time. • If a company purchases excessive quantities of an item, money is wasted - the excess quantity ties up cash while it remains as stock and may never even be used at all. • Beginning production of an order at the wrong time can cause customer deadlines to be missed.

26. Cont’d…. MRP is a tool to deal with these problems. It provides answers for several questions: • What items are required? • How many are required? • When are they required?... MRP can be applied both to items that are purchased from outside suppliers and to sub-assemblies, produced internally, that are components of more complex items. Data The data that must be considered include: • The end item (or items) being created. This is sometimes called Independent Demand, or Level "0" on BOM. • How much is required at a time.

27. Cont’d…. • When the quantities are required to meet demand. • Shelf life of stored materials. • Inventory status records. Records of net materials available for use already in stock (on hand) and materials on order from suppliers. • Bills of materials. Details of the materials, components and sub-assemblies required to make each product. • Planning Data. This includes all the restraints and directions to produce the end items. This includes such items as: Routing, Labor and Machine Standards, Quality and Testing Standards, Pull/Work Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size, Lot-For-Lot, Economic Order Quantity), Scrap Percentages, and other inputs.

28. Cont’d…. Outputs There are two outputs and a variety of messages/reports: • Output 1 is the "Recommended Production Schedule" which lays out a detailed schedule of the required minimum start and completion dates, with quantities, for each step of the Routing and Bill Of Material required to satisfy the demand from the Master Production Schedule (MPS). • Output 2 is the "Recommended Purchasing Schedule". This lays out both the dates that the purchased items should be received into the facility AND the dates that the Purchase orders, or Blanket Order Release should occur to match the production schedules.

29. Cont…. Terms used in MRP: • Parent - Item generating demand for lower-level components. • Components - parts demanded by a parent. • Gross requirement - A time-phased requirement prior to netting out on-hand inventory & lead-time • Net requirement - The unsatisfied item requirement for a specific time period. Gross requirement for period minus current on-hand inventory. • Scheduled receipt - A committed order awaiting delivery for a specific period. • Projected on-hand inventory - Projected closing inventory at end of period. Beginning inventory minus gross requirement, plus scheduled receipt & planned receipt & planned receipt from planned order releases. • Planned order release - Specific order to be released to the shop or to the supplier.

30. Cont…. • Time bucket - Time period used on the MRP. Days or weeks • Explosion - Process of converting a parent item’s planned order releases into component gross requirements • Planning factor - Number of components needed to produce a unit of the parent item • Firmed planned order - Planned order that the MRP computer logic system does not automatically change when conditions change to prevent system nervousness • Pegging - Relates gross requirements for a part to the planned order releases • Low-level coding - assigns the lowest level on BOM to all common components to avoid duplicate MRP computations • Lot size - order size for MRP logic • Safety Stock - Protects against uncertainties in demand supply, quality, & lead time

31. Development of ERP System Enterprise Resource Planning Systems (ERP) - information system connecting all functional areas & operations of an organization &, in some cases, suppliers and customers via common software infrastructure and database • ERP provides means for supply chain members to share information so that scarce resources can be fully utilized to meet demand, while minimizing supply chain inventories (ERP) is business management software—typically a suite of integrated applications—that a company can use to collect, store, manage and interpret data from many business activities, including: • Production planning, cost • Manufacturing or service delivery • Marketing and sales • Inventory Management • Shipping and payment

32. ERP provides an integrated view of core business processes, often in real-time, using common database maintained by a database management sysytem. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments: orders, purchase orders, and payroll. The applications that make up the system share data across the various departments (manufacturing, purchasing, sales, accounting, etc.) that provide the data. ERP facilitates information flow between all business functions, and manages connections to outside stakeholders. The ERP system is considered a vital organizational tool because it integrates varied organizational systems and facilitates error-free transactions and production. However, ERP system development is different from traditional systems development. ERP systems run on a variety of computer hardware and network configurations, typically using a database as an information repository.

34. Implementing ERP System Two types of ERP implementation • Best-of-breed - pick the best application for each individual function. Disadvantage- software may not integrate well but this may not be a major issue in future • Single integrator solution - pick all the desired applications from a single vendor Implementation Problems: • Lack of top management commitment • Lack of adequate resources • Lack of proper training • Lack of communication • Incompatible system environment

35. Advantages and Disadvantages of ERP System Advantages • The fundamental advantage of ERP is that integrated myriad businesses processes saves time and expense. Management can make decisions faster and with fewer errors. Data becomes visible across the organization. Tasks that benefit from this integration include: • Sales forecasting, which allows inventory optimization. • Chronological history of every transaction through relevant data compilation in every area of operation. • Order tracking, from acceptance through fulfillment • Revenue tracking, from invoice through cash receipt • Matching purchase orders (what was ordered), inventory receipts (what arrived), and costing (what the vendor invoiced) • ERP systems centralize business data, which:

36. Eliminates the need to synchronize changes between multiple systems—consolidation of finance, marketing, sales, human resource, and manufacturing applications • Brings legitimacy and transparency to each bit of statistical data • Facilitates standard product naming/coding • Provides a comprehensive enterprise view (no "islands of information"), making real–time information available to management anywhere, any time to make proper decisions • Protects sensitive data by consolidating multiple security systems into a single structure Disadvantages • Customization can be problematic. Compared to the best-of-breed approach, ERP can be seen as meeting an organization’s lowest common denominator needs, forcing the organization to find workarounds to meet unique demands.

37. Re-engineering business processes to fit the ERP system may damage competitiveness or divert focus from other critical activities. • ERP can cost more than less integrated or less comprehensive solutions. • High ERP switching costs can increase the ERP vendor's negotiating power, which can increase support, maintenance, and upgrade expenses. • Overcoming resistance to sharing sensitive information between departments can divert management attention. • Integration of truly independent businesses can create unnecessary dependencies. • Extensive training requirements take resources from daily operations. • Due to ERP's architecture (OLTP) ERP systems are not well suited for production planning and SCM. • Harmonization of ERP systems can be a mammoth task (especially for big companies) and requires a lot of time, planning, and money.

38. ERP Software Applications Major ERP applications include – • Accounting and finance • Customer relationship management • Human resource management • Manufacturing • Supplier relationship management • Supply chain management

39. ERP Software Providers The 3 major ERP providers are now – • Oracle • SAP • Microsoft Other small software firms provide applications (e.g., Sage’s MAS 90) as well as full ERP solutions but lack applistructure - the merger of enterprise application and infrastructure technology

40. SUMMARY The present lecture has elaborated the advance planning processes in supply chain management. It has focused on operations planning, aggregate production plan, production scheduling, bill of material, material requirement planning, capacity planning, distribution requirement planning, development and implementation of enterprise resource planning, ERP software applications and providers.