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Creating Storage Bins Automatically Discussion Project
CHAPTER 4 The Procurement Process 265
Creating Storage Bins Automatically
A P P E N D I X 7A
Storage bins can be created individually. However, a large warehouse will have a huge number of bins, often in the tens of thousands. In this case, creating each bin individually is extremely ineffi cient. Therefore, storage bins are generally created automatically by defi ning templates, structures, start- ing values, ending values, and an increment. Figure 7-44 illustrates three exam- ples of how these elements are used in defi ning bins. The template defi nes the format to be used when creating bins automatically. It is 10 digits long and can include one alphabetic character (A), several numeric characters 0 through 9 (N), and several common characters (C), which can be either letters or numbers. In the fi rst example, the template (fi rst row) indicates that the bins
Figure 7-44: Automatic storage bin creation examples
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266 CHAPTER 7 Inventory and Warehouse Management Processes
will begin with an alphabetic character (A) followed by two numbers (NN). The seven remaining characters are common to all bins (C). Thus, a possible bin number is A12XXXXXXX, where “X” represents the common character.
The structure indicates how the noncommon digits will increase or increment. Essentially, digits with the same letter in the structure are incre- mented together, and digits represented by different numbers are incremented independently of one another. Thus, in the fi rst example in Figure 7-44, each of the fi rst three digits is incremented individually because each digit (column) has a different letter in the structure row (A, B, and C). Therefore, an incre- ment in B will not automatically result in an increment in C. In contrast, in the second example the second and third digits are incremented together because they have the same character (B) in the structure row. Thus, if the second digit is incremented by 1, then the third digit also is incremented by 1.
The start value and end value indicate the starting and ending val- ues of the noncommon digits in the bin numbers. In all three examples in Figure 7-44 the start values are A11 and the end values are B22.
Finally, the increment indicates how much each noncommon digit is to be increased by. In the fi rst and second examples each digit is incremented by 1 unit (1 letter or 1 number). Thus, A is incremented to B, 1 is incremented to 2, and so on. In contrast, in the third example the second digit does not increase because the increment for that digit (column) is set to zero.
Let’s turn to the fi rst example. Bin numbers are determined from right to left. The fi rst bin is A11, and each of the three noncommon digits (columns) is incremented separately. The rightmost digit will increment by 1—the incre- ment identifi ed in row 5—so the next bin will be A12. At this point, the rightmost digit has reached its ending value (row 4), so the digit immediately to the left will begin incrementing. Following the same rules, the next bins are A21 and A22. Finally, the fi rst digit increments to “B,” thus creating bins B11, B12, B21, and B22, for a total of 8 bins.
In the second example, the second and third digits are incremented together because they have the same value (B) in the structure. Consequently, bin values for these two digits will be 11 and 22. Combining these values with the value of fi rst digit (A and B) will result in bins A11, A22, B11, and B22.
In the third example, the second and third digits increment together, but the increment value for the second digit is 0. Therefore the second digit will never increment. As a result, these two digits (second and third) will have 12 values ranging from 11 through 22. When these values are combined with the two values for the fi rst digit (A and B), a total of 24 bins are created.
Figure 7-45 illustrates the bin creation data for GBI. GBI uses these two models to create bins in the shelf storage area and the pallet storage area, respectively. All bins begin with the common characters STBN- and end with the common characters 000. Thus, the sixth digit (column) is the only one that increments. For the shelf storage area the starting value is 1, the ending value is 3, and the increment value is 1. Similarly, for the pallet storage area, the start value is 7, the end value is 9, and the increment is 1. Consequently, three bins are created in each area.
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Figure 7-45: Automatic bin creation—GBI
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CHAPTER 4 The Procurement Process 269
269
LEARNING OBJECTIVES
After completing this chapter you will be able to:
Material planning at GBI historically has been very informal. Planning for various types of materials has not been integrated with other pro-cesses. Instead, the company acquires or produces materials when it needs them. As GBI has expanded to include more facilities, materials, and cus- tomers, however, this informal planning has created myriad problems for the company. Inventory levels are rarely what they should be—too much in some cases, not enough in others. On several occasions, customers have expected products to be available sooner than GBI could provide them. The results of this lack of overall planning and coordination have been increased costs due to expedited procurement or production, unplanned expenses resulting from storing excess inventory, and lost sales. GBI’s management fully understands that failing to plan adequately is equivalent to planning for failure. Their strat- egy for alleviating these problems is to implement an effective material plan- ning process at GBI.
C H A P T E R 8C H A P T E R
1The contents of this chapter were prepared with the expert assistance of Dr. Ross Hightower of the Mays Business School at Texas A&M University.
The Material Planning Process1
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Material planning is concerned with answering three basic questions: (1) What materials are required, (2) how many are required, and (3) when are they required? The inability to answer any of these three questions accurately will result in ineffi ciencies, lost revenues, and customer dissatisfaction. The main objective of material planning is to balance the demand for materials with the supply of materials so that an appropriate quantity of materials is available when they are needed.
The fi rst part of this equation—the demand for materials—is driven largely by other processes. For example, the fulfi llment process uses trad- ing goods and fi nished goods, and the production process uses raw materials and semifi nished goods. If the materials are not available when they are needed, these processes will not function effectively. If raw materials are not available, for example, then the company cannot produce fi nished goods in a timely manner. Consequently, it will be unable to fulfi ll customer orders because it does not have the necessary materials in stock. This situation is known as a stock-out. A stock-out can result in lost sales if customers are not willing to accept late deliveries.
The supply side of the demand-supply equation is usually the domain of the procurement and production processes. That is, materials usually are either purchased or produced. Buying or producing more materials than what are needed will result in excess inventory, which ties up cash until the materials are eventually used. The money tied up in inventory represents an opportunity cost to the company. Additional costs are related to the cost of storage, insur- ance, and the risk of obsolescence. In addition, the value of some materials, such as computer components like memory and hard drives, can decrease rapidly. Thus, the longer the materials remain in storage, the more money the company loses. In some cases, materials may never be used at all and must be discarded, as illustrated in the example of Cisco Systems in Business Processes in Practice 8-1.
In 2001, Cisco Systems was selling huge amounts of their key networking products, driven largely by the dot-com boom. Cisco was having a diffi cult time keep- ing up with the demand for their products due to severe shortages of raw materials, so they had placed double and triple orders for some parts with their suppliers to ‘‘lock up’’ the parts. In addition, they had accumulated a ‘‘safety stock’’ of fi nished goods based on optimis- tic sales forecasts. When the Internet boom started to crash, however, orders began to taper off quickly. Even more damaging for Cisco, the company was unable to communicate the drop in demand through their
organization so that they could reduce their production capacity to sell off their ‘‘safety stock’’ of fi nished goods and also reduce the amount of raw materials they were purchasing to reduce their supply buffer.
This mismatch between lower demand, substan- tial inventories of raw materials, and excessive produc- tion capacity ultimately forced Cisco to write off more than $2.5 billion of excess inventory from their books in 2001—the largest inventory write-off in history.
Source: Compiled from Cisco company reports; and ‘‘Cisco
’Fesses Up to Bad News,’’ Infoworld, April 16, 2001.
Business Processes in Practice 8.1: Cisco Systems
The above discussion focused on fulfi llment and production. Almost all processes, however, either use materials (e.g., plant maintenance, project system, warehouse management) or make them available when they are needed (e.g., project systems, inventory, and warehouse management). Therefore,
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material planning is one of the most complex processes within an organiza- tion. It uses data from many other processes, and it generates procurement proposals, that is, proposed methods of acquiring materials. These proposals are typically in the form of purchase requisitions or planned orders. Purchase requisitions, which we discussed in Chapter 4 (procurement), are requests to purchase materials. Planned orders, discussed in Chapter 6 (production), are requests to produce materials.
A simplifi ed material planning process is depicted in Figure 8-1. The process begins with sales and operations planning (SOP), which uses strategic revenue and sales objectives established by senior management to create spe- cifi c operations plans. The demand management step translates these plans into requirements for individual materials. Requirements specify how many of the materials are needed and when they are needed. These requirements are then used by the materials requirements planning (MRP) step to generate the fi nal procurement proposals for all materials. These proposals trigger the production or procurement processes that make or buy the needed materials. Ultimately the company uses these materials to execute the fulfi llment process.
Figure 8-1: A basic material planning process
The organizational data relevant to the material planning process are cli- ent, company code, plant, and storage locations. Because we have considered all of these concepts in previous chapters, we will not discuss them in this chapter. The next section describes the master data related to the material planning pro- cess. This section is followed by a detailed discussion of process steps. We con- clude the chapter with a discussion of reporting as it relates to material planning.
MASTER DATA The master data relevant to material planning are bill of material, product routing, material master, and product group. We discussed bills of material and product routings in detail in Chapter 6. Recall that materials are used in nearly all processes and that material master data are grouped by process,
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272 CHAPTER 8 The Material Planning Process
material type, and organizational level. We have also discussed various data (views) of the material master in previous chapters. In Chapter 5, we intro- duced MRP and work scheduling views, but we did not examine them in depth. In this section we will discuss these views at length because they are more directly relevant in material planning. In addition, we will discuss product groups as they relate to material planning.
MATERIAL MASTER
Data related to MRP and work scheduling are illustrated in Figure 8-2. MRP data can be quite extensive. Consequently, they are divided into four views or tabs—MRP 1, MRP 2, MRP 3, and MRP 4—to make the data more read- able. These data are relevant to both discrete and repetitive manufacturing (explained in Chapter 6). Our discussion is limited to data relevant to dis- crete manufacturing. Both MRP and work scheduling data are defi ned at the plant level. That is, they are specifi c to each plant. These data determine which strategies and techniques the company will use when planning for the material. Each MRP view provides a specifi c set of data, as indicated in the following list.
Figure 8-2: Material master data for material planning
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The work scheduling view contains data that determine production time such as setup, teardown, and processing time. We discussed these times in Chapter 6 in the context of work centers.
The next section provides a detailed discussion of the key data included in the MRP and work scheduling views of the material master.
Procurement Type
The outcome of the material planning process is one or more procurement proposals, which can trigger either the production or the procurement process. The procurement type indicates whether a material is produced in-house or internally (via the production process), obtained externally (via the procure- ment process), both, or none. Trading goods and raw materials are typically pur- chased from vendors. Consequently, the procurement type for such materials is specifi ed as external. In contrast, fi nished goods and semifi nished goods are typically produced in house. As a result, the procurement type for these types of materials is typically in-house production. Occasionally, however, when a company does not have the material or other resources to produce materials in house, it purchases them externally. In such cases, the procurement type is set to both. Procurement type none is appropriate for discontinued materials.
At GBI, the procurement type is defi ned as both for fi nished goods, as external for trading goods and raw materials, and as in-house for semi- fi nished goods.
MRP Type
MRP type specifi es the production control technique used in planning. Common production control techniques are consumption-based planning, materials requirement planning2 (MRP), and master production scheduling (MPS). MRP type can also be set to “no planning,” in which case the material is not included in the planning process.
Consumption-based planning calculates the requirements for a mate- rial based on historical consumption data. It manipulates these data to project
2The term materials requirement planning refers to both a planning technique and a step in the material planning process.
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or forecast future consumption. The company then procures materials based on this projection. Figure 8-3 illustrates one type of consumption-based plan- ning called reorder point planning. The vertical axis represents the stock or inventory level, and the horizontal axis indicates the relevant time period. Note that the stock level steadily decreases over time. The diagonal line that repre- sents the changes in the stock level is the consumption line.
Figure 8-3: Consumption-based planning
Figure 8-3 also indicates a desired safety stock, which is the mini- mum desired level of inventory. The term stock is often used as a synonym for inventory. A stock-out will occur if a company has insuffi cient inven- tory to fi ll a customer order or to produce a fi nished good. As we discussed earlier in this chapter, a stock-out can lead to insuffi cient production and lost sales. Consequently, a company typically maintains a safety stock to avoid this situation. The material planning process monitors stock levels to prevent them from falling below the safety stock. The safety stock is specifi ed in the material master.
To prevent stock levels from going below the safety stock level, the com- pany must receive a supply of materials by the time the stock level reaches the safety stock level (point A in the fi gure). It takes some time for an order to be processed and for the shipment to be received. The time gap between placing an order—the reorder date in the fi gure—and receiving the materials—the deliv- ery date in the fi gure—is called the replenishment lead time. To ensure that the company receives the materials by the desired delivery date, it must place an order early enough to give the supplier suffi cient time to deliver the materials.
Most companies fi nd it more valuable to determine when to place an order in terms of stock level than in terms of a point in time. Specifi cally, they order materials when the stock level reaches a predetermined level, known as the reorder point. The reorder point is calculated by drawing a verti- cal line from the order date to the consumption line (to point B) and then a horizontal line to the vertical axis (to point C).
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The two other broad categories of consumption-based planning are forecast-based planning and time-phased planning. Forecast-based planning uses historical data to estimate or forecast future consumption. Organizations use the forecast to determine when to order materials. The advantage of this technique over reorder point planning is that it can consider consumption patterns that are more complex than a trend line. Time-phased planning is similar to forecast- based planning. It is used in cases where vendors deliver only on specifi c days of the week.
Regardless of the specifi c technique, consumption-based planning is relatively uncomplicated compared with materials requirements planning. It assumes that future consumption will follow the same patterns as past con- sumption. In addition, it does not take into account dependencies between different materials. For example, the need for wheels depends on the need to produce bicycles. In this case, consumption-based planning is not appropri- ate. This is because the need for wheels is not based on its past consumption; rather, it is based on the need to make bicycles. Companies generally reserve consumption-based planning for materials of low value or signifi cance, such as nuts and bolts.
GBI uses consumption-based planning for materials classifi ed as acces- sories, such as bike helmets (OHMT1000). Figure 8-4 illustrates the plan- ning scenario for procuring helmets. In this example the replenishment lead time is 3 days, and the safety stock is 50 units. The consumption line, calculated from historical sales data, projects that inventory will fall to the safety stock level on day 7 (point A). To ensure that the helmets will arrive by that date, GBI must initiate the purchasing process on day 4 (7 minus the replenishment lead time), the reorder date. The reorder point is calcu- lated by drawing a line from the reorder date to the consumption line (to point B) and then a horizontal line to the vertical axis (to point C). Thus, GBI must place an order for helmets when 125 or fewer helmets are left in stock.
Figure 8-4: Reorder point planning example
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In contrast to consumption-based planning, the MRP technique calcu- lates requirements for a material based on its dependence on other materials. To understand the specifi cs of the MRP technique, we must fi rst consider two related concepts—dependent and independent requirements. The terms dependent and independent refer to the source of the requirements. A material has a dependent requirement if its requirement is dependent on the requirements for another material. For example, a bicycle is made of several components such as wheel assemblies and a seat. The requirement for wheel assemblies and seats is depen- dent on the requirement for bicycles. Therefore, wheel assemblies and seats have a dependent requirement. Typically, semifi nished goods (e.g., wheel assemblies) and raw materials (e.g., seats) have dependent requirements because they are used to make other materials (fi nished goods or other semifi nished goods). In contrast, the requirement for bicycles, a fi nished good, is not dependent on any other material. Instead, it is based on customer demand. Thus, bicycles, and fi n- ished goods in general, have independent requirements.
The MRP technique is used to calculate and plan requirements for mate- rials at all levels of the BOM. This procedure, known as exploding the BOM, is illustrated in Figure 8-5. The input to MRP is the independent requirement for the fi nished goods, which is calculated by the sales and operations planning step of the material planning process. We will examine this technique in greater detail in the process section of this chapter. For now, it is suffi cient to under- stand that the independent requirements are determined based on actual and forecasted sales. These calculated requirements are called planned indepen- dent requirements (PIRs). In contrast, actual sales orders are also known as customer independent requirements (CIRs), or simply customer require- ments. PIRs drive the requirements calculations for each successive level in the BOM. Going further, the requirements for each level are dependent on the requirement for higher-level materials. For example, if the PIR for bicycles is 100 and each bicycle uses 2 wheel assemblies and 1 seat, then the MRP calcula- tion will create dependent requirements of 200 wheel assemblies and 100 seats.
A variation to MRP is master production scheduling (MPS), which utilizes a process similar to MRP but focuses exclusively on the requirements
Figure 8-5: MRP vs. MPS
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for the top-level items in the BOM. Companies use MPS for the most critical fi nished goods to ensure that resources and capacity are available for these materials before they plan for other materials. MPS is an optional step in the planning process and is usually followed by MRP, which completes the plan- ning process for the remaining materials.
Lot Size Key
A lot size is the quantity of material that is specifi ed in the procurement pro- posals generated by the material planning process. The lot size key specifi es the procedure that is used to determine the lot size. A variety of procedures for determining lot size are available. The most basic procedures are static lot-siz- ing procedures, which specify a fi xed quantity based on either a predetermined value (fi xed lot size) or the exact quantity required (lot-for-lot). For example, when using the lot-for-lot procedure, if the calculated requirement for seats is 100, then the proposed order quantity is also 100. Period lot-sizing procedures combine the requirements from multiple time periods, such as days or weeks, into one lot. Optimum lot-sizing procedures take into account the costs of order- ing and storing materials using techniques such as the economic order quantity and economic production quantity calculations. For example, if the calculated requirement for seats is 100, the proposed order quantity may be 500 if it is more economical to purchase the seats in larger quantities. GBI uses the lot-for-lot procedure to determine the lot size for all of its materials.
Scheduling Times
One task that must be performed by the planning process is to estimate the time needed to procure the necessary materials. This calculation is based on estimates of the time required to complete the various tasks that are included in the material master and the product routing. Common time estimates include:
In-house production time and the GR processing time are used to deter- mine procurement time for internally procured materials. For externally pro- cured materials, the planned delivery time and the GR processing time are used.
In-house production time is further divided into three time elements: setup, processing, and interoperation. Recall the discussion of some of these elements from Chapter 6.
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Times can be lot size independent or lot size dependent. Lot size inde- pendent times remain the same regardless of the amount of material being procured. In contrast, lot size dependent times vary according to the lot size or quantity. Examples of lot size independent times are setup time, in-house production time, and the GR processing time. In contrast, processing time is typically lot size dependent.
The lot size independent in-house production time is an estimate of the total time required for production including the setup, processing, and interop- eration times. Although the processing time normally depends on the number of units being produced, the lot size independent in-house production time is used when (1) the lot size is fi xed, so that processing time is constant, or (2) the processing time is very short compared to the setup and interoperation times. When the processing time is large in comparison to the setup and interopera- tion times or when the quantity of material to be produced varies, a lot size dependent in-house production time is calculated using the three time ele- ments (setup, processing, and interoperation).
Because companies utilize these various time estimates in the planning process to schedule procurement and production, inaccurate values will cause signifi cant problems. Inaccurate schedules require manual intervention, and, if users fi nd they can’t trust the data in the system, they will learn to ignore them and create their own workarounds. Thus, it is imperative that an organization carefully analyze and monitor its processes for determining scheduling times.
Planning Time Fence
The material planning process often has to adjust the quantities and sched- ules it creates for procurement proposals. For example, the consumption of a raw material may be unexpectedly high because of higher-than-expected demand. In such cases the planning process may increase the quantities of existing planned procurements, or it may schedule them so the materials arrive earlier. Changes in procurement proposals far into the future normally are not a major concern, but changes to proposals in the near future can cause prob- lems because other departments or processes in the organization may have incorporated the original proposals into their planning. For this reason, com- panies establish a period of time in which the ERP system is not allowed to automatically change procurement proposals. This time period is known as the planning time fence. If the planning time fence is 30 days, for example, then no purchase requisition that is dated 30 days or less from the current date can be changed automatically by the system. If changes are necessary, they must be made manually.
BOM Selection Method
Recall from Chapter 6 that a bill of materials (BOM) identifi es the materials needed to produce a fi nished good. In some cases a single material can have multiple BOMs. For example, a company might use different BOMs for differ- ent plants or different lot sizes. Companies also generate multiple BOMs when they update their products. For example, if GBI plans to upgrade the touring bike model with a new tire beginning January 1, then it must create a new BOM for the bike in advance with a beginning validity date of January 1. At the same time, it must set the ending validity date of the current BOM to December 31.
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Because several BOMs can exist for the same material, the ERP system must have a method to determine which BOM to use. The BOM selection method in the material master identifi es the criteria the system should use to select the BOM. Examples of criteria are lot size and validity date.
Availability Check Group
The availability check group defi nes the strategy the system uses to deter- mine whether a quantity of material will be available on a specifi c date. The most common method, called available-to-promise (ATP), considers a broad range of elements representing both the supply of and demands for the material. Supply elements include existing inventory, purchase requisitions, purchase orders, and production orders. Demand elements include mate- rial reservations, safety stock, and sales orders. The availability check group informs the system which supply and demand elements to take into account when determining availability. Because material availability is a concern in many parts of an organization, the availability check group is used by multiple processes. For example, the fulfi llment process uses it to ensure that materials can be delivered to a customer on the requested delivery date, and the produc- tion process uses it to ensure that materials are available before production orders are released.
Strategy Group
Strategy group specifi es the high-level planning strategy used in production. Production planning strategies fall into three broad categories: make-to-stock, make-to-order, and assemble-to-order. We introduced the fi rst two strategies in Chapter 6, in the context of the production process. Business Processes in Practice 6-2 in that chapter presents examples of how Dell and Apple use make-to-order and make-to-stock strategies, respectively. In this section, we will extend the discussion of these planning strategies.
In the make-to-stock (MTS) strategy customer orders are fulfi lled from an existing inventory of fi nished goods. The MTS strategy is usually employed by fi rms that produce a high volume of identical products. This strategy reduces the time required to fi ll customer orders because there is no need to wait until the materials are produced. In addition, it enables the company to produce goods at a constant rate and in optimum lot sizes, regardless of customer demand. In SAP ERP the simplest make-to-stock strategy is net requirements planning (strategy 10), in which the system generates procurement proposals based on calculated PIRs without regard to CIRs.
A common variation to the make-to-stock strategy is planning with fi nal assembly (strategy 40). This strategy is also based on PIRs. Unlike the pure MTS strategy, however, this approach takes into account actual sales orders through a procedure called consumption. We discuss consumption modes in the next section.
In contrast to MTS, in a make-to-order (MTO) strategy the produc- tion of the fi nished goods and any needed semi-fi nished goods is triggered by a sales order. The company does not maintain an inventory of these mate- rials. MTO is also referred to as sales-order-based production. In contrast to MTS, MTO is used when each product is unique. For example, if GBI intro- duced a line of high-end racing bikes designed specifi cally for individual riders,
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it would use MTO for these products. The bikes would not be produced until the order was received.
A variation of the MTO strategy is assemble-to-order (ATO), in which an inventory of components (semifi nished goods) needed to make the fi n- ished good is procured or produced to stock. The production of the fi nished goods is triggered by a sales order and therefore uses an MTO strategy. ATO is commonly employed in an environment in which there are a large number of possible confi gurations of end items. For example, different computer confi gu- rations are possible using a number of different options for monitors, storage devices, and memory. A sales order for the fi nished product can usually be fi lled quickly because only the fi nal assembly has to be executed. (The compo- nents are already in stock.) In SAP ERP, the ATO strategy is also referred to as planning without fi nal assembly (strategy 50) or subassembly planning. Variations of both the pure MTO and MTS strategies offer more fl exibility in meeting customer requirements.
Consumption Mode
A key point that emerges from the discussion of strategy groups is that the manner in which PIRs (planned independent requirements) and CIRs (actual customer orders) interact is determined by the planning strategy. On the one hand, in a MTS strategy such as net requirements planning, CIRs and PIRs are independent of each other, and procurement proposals generated by the material planning process are based only on PIRs. CIRs are fulfi lled entirely from existing stock. On the other hand, under the planning with fi nal assem- bly approach, procurement proposals take into account both PIRs and CIRs. However, procurement proposals are not created by simply adding the PIR and CIR quantities. This is because the PIRs are created in anticipation of customer orders, and CIRs are expected to consume the PIRs. In other words, sales orders are expected to be fi lled from the planned requirements. When a CIR consumes PIRs, it reduces the quantity of PIRs by the quantity of the CIR. This process is called consumption.
Table 8-1 illustrates consumption under the planning with fi nal assembly strategy. In Example 1 a PIR of 50 exists when a CIR of 60 is created. Because the CIR is greater than the PIR, the entire PIR is consumed. Therefore, after consumption the PIR quantity is zero. The planning process will create a pro- curement proposal for the CIR quantity of 60 units. In Example 2 a PIR of 50 exists when a CIR of 40 is created. After consumption, 10 of the original 50 in the PIR remain. The planning process will create two procurement proposals: one for the PIR quantity of 10 units and one for the CIR quantity of 40 units.
Before Consumption After Consumption
PIR CIR PIR CIR
Example 1 50 60 0 60
Example 2 50 40 10 40
Table 8-1: Consumption example
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Thus, when PIRs are not consumed by CIRs (because there are not enough customer orders), the procurement proposals will result in an increase in the inventory of the material. In the opposite situation, when CIRs exceed available PIRs within the consumption period—that is, customer orders exceed the planned requirements—then the planning process generates additional procurement proposals to cover the difference.
The manner in which CIRs consume PIRs is determined by the consump- tion mode. Two commonly used consumption modes are forward consumption and backward consumption. A combination of forward and backward con- sumption is also possible. These alternatives are diagrammed in Figure 8-6. The top part of the fi gure illustrates backward consumption (mode 1); the mid- dle part, forward consumption (mode 3); and the bottom part, backward and forward consumption (modes 2 and 4). In these illustrations the horizontal axis is the time line, the area above the time line represents the planned inde- pendent requirements, and the area below the time line indicates the customer requirements. The plan (PIR) is to produce or procure 40 bikes in each time period. In each case the company must fi ll a customer requirement of 60 bikes.
Figure 8-6: Consumption modes
In backward consumption, customer requirements consume PIRs that are dated prior to the time of the customer requirements. Thus, to meet the CIR of 60 bikes, the immediately preceding PIR is consumed. Because this quantity (40) is not suffi cient to satisfy the CIR (60), 20 bikes from the next preceding PIR are consumed. In forward consumption, customer requirements consume PIRs that occur after the date of the CIR. Thus, to meet the require- ment of 60 bikes, the PIRs immediately following the CIR are consumed as
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needed—40 bikes from the fi rst PIR and 20 from the next. Modes 2 and 4 use both forward and backward consumption. Mode 2 uses backward consump- tion fi rst followed by forward consumption; mode 4 uses the reverse.
The consumption period indicates the number of days, before or after, from the CIR that PIRs can be consumed. PIRs outside the consumption period cannot be consumed by the CIR. The assumption is that, because of scheduling and capacity considerations, only PIRs in the same general time- frame as the sales order should be consumed by the CIR.
Demo 8.1: Review MRP and scheduling views for a material
PRODUCT GROUPS
When a company manufactures or sells many similar products, such as a fur- niture company with tens of thousands of different types of chairs and desks, planning separately for each material is neither necessary nor effi cient. For this reason, companies generally place products with similar planning characteris- tics, such as similar types or similar manufacturing processes, into a product group or a product family. The grouping of products, from the lowest mate- rial (fi nished good or trading good) level to the highest product group level, is called aggregation. That is, products are aggregated into groups. Moreover, a higher-level product group can be nested, meaning that it is comprised of lower-level product groups. The lowest product group in any hierarchy con- sists of materials, either fi nished goods or trading goods.
Figure 8-7 illustrates the product groups for GBI bikes. The bicycle prod- uct group (PG-BIKE000) consists of a number of nested product groups. Each one of these groups represents a different product line such as the touring bikes (PG-TOUR000) and off-road bikes (PG-ORBK0000). The eight boxes at the bottom level of the hierarchy are all materials that represent the differ- ent bicycle models.
Materials and product groups can be members of more than one group for different planning scenarios. For example, a company might plan sepa- rately for domestic and export markets because they involve different sales patterns. Further, each member of a product group is assigned a proportion factor. A proportion factor is a measure of how much the item infl uences the product group. For example, in Figure 8-7, the product group for off-road bikes includes the Men’s bikes and Women’s bikes, with proportion factors of 65% and 35%, respectively. Thus, Men’s bikes are more infl uential than Women’s bikes in planning for the off-road bike group. Proportion factors are used in the material planning process to derive detailed plans from high-level fore- casts. Forecasts and plans for the higher level product groups are disaggregated into plans for lower levels using the proportion factors. For example, if the plan calls for 1,000 off-road bikes, then the system automatically translates this information into a plan for 650 Men’s and 350 Women’s bikes. We address aggregation and disaggregation in greater detail in the process section of this chapter. Business Processes in Practice 8-2 describes product groups at Apple Inc.
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Figure 8-7: GBI product groups
Apple provides an excellent example of how compa- nies use product groups for material planning purposes. (Figure 8–8). Apple’s product portfolio consists of sev- eral hardware, software, and service products, such as Macs, iPods, iPhones, iPads, and peripherals. If we look only at Apple’s standard make-to-stock hardware prod- ucts, we can begin to appreciate the complexity of the company’s material planning process. Apple assigns each product to a product group, for example, Macs, iPads, and Peripherals and Accessories. Nested within the Macs product group are several product subgroups, for exam- ple, Desktops, Portables, and Servers. In turn, the product subgroups are subdivided into individual fi nished goods. Thus, for example, the product subgroup Portables is comprised of the MacBook, MacBook Pro, and MacBook
Air. Significantly, many products within the same prod- uct group are manufactured from similar raw materials. For example, most of the products in the product groups for iPad, iPhone, and iPod contain the same processors and fl ash memory chips. However, only the iPod Touch and the iPhone share the same size touch screens. Thus, aggregation and disaggregation across product groups become increasingly complex when companies need to plan for shared raw material dependencies. For this rea- son, companies must employ accurate demand forecast- ing to ensure that material planning is executed properly.
Note: Apple changes its product offerings with great frequency.
Figure 8-8 depicts the Apple mid-2010 product offering.
Source: Apple company reports.
Business Processes in Practice 8.2: Product Groups at Apple, Inc.
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Figure 8-8: Product groups at Apple Inc
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Demo 8.2: Review GBI product groups
PROCESS In this section we will discuss the material planning process, which is presented in Figure 8-9. The fi rst step in the process is often sales and operations planning (SOP). SOP is a forecasting and planning tool that businesses use to enter or generate a sales forecast, specify inventory requirements, and then generate an operations plan. SOP typically involves fi nished goods. Therefore, the operations plan is, in effect, a production plan for these materials. The plan generated by SOP is called a rough-cut plan because the planning is usually at a highly aggregated level and is not very precise.
Figure 8-9: The material planning process
Whether SOP is required depends on the production planning strategy used for the material. MTO production does not require a production plan because production is triggered by sales orders. Therefore, SOP is not nec- essary. In contrast, MTS production requires a production plan based on a sales forecast because sales orders are fi lled from materials already in inven- tory. Consequently SOP is relevant for materials with the MTS strategy. For variations of MTO such as ATO, in which semifi nished materials are produced ahead of time and placed in inventory, production plans must be created for the semifi nished materials.
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286 CHAPTER 8 The Material Planning Process
SOP creates a production plan at the product group level. In turn, these requirements must be translated into PIRs for the individual mate- rials in the product group. This task is accomplished in the disaggregation step. The PIRs for the individual materials are then transferred to demand management, where they are revised and refi ned based on the specifi c plan- ning strategies we discussed earlier. The fi nal step, MRP, creates specifi c procurement proposals to ensure that suffi cient materials will be available to cover each requirement.
The sales and operation step requires input from many parts of an orga- nization and is often performed by the planning or forecasting group. After the production plan is transferred to demand management, it becomes the respon- sibility of the MRP controller. The MRP controller is the person or persons in an organization responsible for creating procurement proposals and monitor- ing material availability. All materials that are used in the planning process must be assigned to an MRP controller in the material master.
Our discussion of the material planning process will use GBI’s bicycles product group (Figure 8-7) as an ongoing example. GBI initiates its material planning process when it develops its overall strategic plan. This plan includes expected sales for the bicycles product group (PG-BIKE000).
SALES AND OPERATIONS PLANNING
Figure 8-10 diagrams the elements of the sales and operations planning step. SOP is triggered when the organization wishes to revise its production plan. Most organizations perform this task at scheduled intervals depending on their planning process. For example, an organization may require quarterly reviews of sales forecasts and production plans. SOP may also be triggered by unex- pected events such as changes in the overall economic outlook. For example, the fi nancial crisis of 2008 caused many companies to revise their sales fore- casts downward and reduce their production levels accordingly. SOP uses data from a variety of sources to produce a production plan.
Figure 8-10: Elements of the SOP step
SOP can generate several versions of a production plan based on dif- ferent assumptions concerning the growth of the overall economy. Each plan incorporates different sales forecasts and desired inventory levels. The company then evaluates these plans to determine their feasibility in terms of production capacity. Generating multiple versions allows the organization to consider different planning scenarios. After evaluating the various plans, the company selects one scenario as the basis for further planning.
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Process 287
SOP can be either standard or fl exible. With standard planning a company uses predefi ned planning models. These models are relatively simple, and they take into account total values for sales, production, and inventory levels for the entire organization. Therefore, standard planning can be employed only for highly aggregated planning. It is easy to use, however, and requires no preparation.
In contrast, with fl exible planning a company uses tools to develop more complex planning models that contain far greater levels of detail. For example, an organization can create a model that breaks down sales to the distribu- tion channel level and calculates production quantities for individual plants. However, fl exible planning requires more-detailed data than does standard planning, and the desired planning models must fi rst be created. Our discus- sion is limited to standard planning.
Data
Figure 8-11 illustrates the data utilized in the sales and operations step. The most critical data are a sales plan, existing inventory levels, and inventory requirements. Existing inventory levels can be transferred from inventory and warehouse management. Inventory requirements most frequently are deter- mined based on economic and fi nancial criteria such as storage costs, varia- tions in expected customer demand, and production capacities. They can be calculated as a part of the overall strategic planning process.
Figure 8-11: Data in the SOP step
Organizations execute planning for specifi c organizational levels and master data—for example, for specifi c product groups and specifi c plants.
Tasks
The tasks in the sales and operations planning step include creating the sales plan, specifying inventory requirements, and creating a production plan. The interface to complete the tasks in SOP is a simple-to-use spreadsheet-like tool
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called the planning table. Figure 8-12 illustrates a standard SOP planning table. The header area of the table indicates the product group and plant for which the plan is generated as well as the version number of the plan. (Recall that multiple versions of the same plan can be created for different planning scenarios.) The columns represent months by default, but users can specify other time periods. The table includes the following rows:
Figure 8-12: Standard SOP planning table
The sales plan is entered fi rst. Data for the sales plan can be obtained from a variety of sources:
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Regardless of which procedure the company uses, after it enters the sales plan the system generates a production plan based on one of the following options:
Figure 8-13 illustrates a planning table for the bicycles product group for GBI’s Dallas plant. The planning timeframe is 4 months. The planning scenario is one in which the system will calculate the needed production plan to meet the specifi ed sales plan and the desired target stock levels. The top fi gure illus- trates the planning table after the sales plan and target stock levels have been entered. The bottom table displays the results after the system has calculated the needed production plan. The production data are calculated by computing the total requirements (sales � target stock) and subtracting available stock (stock level from the previous month).
Figure 8-13 shows that the production plan for the bicycles product group for the 4 months is 1,100, 1,300, 900, and 850, respectively. Table 8-2 shows the calculation for the third month.
To calculate the day’s supply, the system fi rst determines the daily require- ments by dividing the sales by the number of working days in the month. It then divides the target stock level by the daily requirements. The calculation for month 2 is shown in Table 8-3 (assuming 30 working days in month 2).
The target day’s supply row in Figure 8-13 is empty because the values in this row would be entered by the user only if the method for calculating the production plan was based on the target day’s supply.
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Figure 8-13: GBI SOP example
Sales 1,000 units
Target stock � 100 units
Previous inventory � 200 units
Production 900 units
Table 8-2: Production plan calculation example
Target stock �
200 units � 5 Day’s supply
Daily requirements (1,200 units / 30 working days)
Table 8-3: Day’s supply calculation example
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Outcomes
The outcome of SOP is one or more versions of the production plan. There are no fi nancial implications and no material movements. Consequently, no FI, CO, or material documents are created.
Demo 8.3: Create an SOP for the bicycles product group
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