Planning
the ERP System
Core
Group Basic Training
Define the Core
Group of personnel that will be actively involved in
examining the current
business processes and then helping to define an
improved set of
business processes using APICS prescribed ERP tools and
techniques.
The Core Group needs
to review the standard ERP Flowcharts for each
manufacturing
environment that may be applicable to your operations. It is
essential that the
Core Group have a basic understanding of ERP tools and
techniques in order
to contribute to the creation of a valid ERP Blueprint for
your company.
Define
Current Business Processes
The Core Group needs
to define all the steps currently used to process a sale
from order through
delivery, and all of the steps needed to process the
support functions
from origination to cash payment. This is known as the
order to delivery
cycle and cash to cash cycle respectively.
The order to delivery
cycle defines all the activities involved in getting a
sales order,
manufacturing the product and delivering the product to the
customer.
The cash to cash
cycle defines all the cash outflow activities involved with
planning and
providing the material, manpower and machine resources
needed to manufacture
the products and then paying for the resources
consumed. It also
defines all the cash inflow activities involved with billing
for goods or services
rendered and collecting receivables.
Within a single
organization there may be different business process paths
for different product
lines or different operating divisions. Each business
process path needs to
be defined individually since different tools or
techniques may be
needed for each one.
The ERP Advisor
serves as the facilitator during the creation of this outline.
It is during this
exercise that the Advisor develops a much better
understanding of the
company’s operations.
APICS
Guidelines for ERP 2
Define
Future Business Processes
Once the existing
business processes have been defined, the ERP-educated
Core Group and the
ERP Advisor will retrace the business process cycles
looking for
opportunities to modify or automate the processes.
The key objectives
are to maximize delivery performance, minimize
inventory costs and
maximize productivity. The latter issue affects both
administrative and
manufacturing productivity (maximize labor efficiency,
maximize machine
utilization, optimize machine setups, reduce work in
process, eliminate
non-value added activities, reduce unnecessary
accumulation of hard
copy records, etc.).
Maximizing delivery
performance will delight your customers and will
typically lead to
increased market share and premium margins, which will
increase
net income.
Minimizing inventory
will directly reduce a variety of inventory related
costs (cost of
capital, insurance, storage, handling, obsolescence,
deterioration,
spoilage, pilferage, property tax, etc.) which will increase net
income.
Maximizing
administrative productivity will reduce administrative expenses
or allow for better
utilization of labor resources. Maximizing manufacturing
productivity will
reduce product unit cost and generate better profit margins.
Maximizing
productivity will increase net income.
Documenting
the ERP Blueprint
Using the information
defined above, the ERP Advisor can create Current
and Future ERP
Flowcharts for each of the business segments outlined.
The ERP Advisor will
review these Flowcharts with the Core Group to
confirm that the new
business process model is correct. This will become
the foundation for
defining and implementing specific ERP tools and
techniques to each
business segment.
During the
implementation of the system, the ERP Blueprint is continuously
updated to document
the specific tools, procedures and ownership of each
business process.
APICS
Guidelines for ERP 3
ERP
System Budget and Schedule
Using the confirmed Future
Flowchart, the Advisor can now more
accurately define the
specific hardware, software and implementation costs
that will be needed
to properly install and implement an ERP system for
your company.
The ERP Advisor and
the company can then coordinate a viable
implementation
schedule that meets the desired timetable for activating
process improvements
relative to the availability of financial and personnel
resources that will
be required.
The company may also
want to define metrics for measuring anticipated
improvements in
specific areas. Improvements can be measured using
delivery performance
reports, inventory turns, standard costs, income
statements, or a
variety of other mechanisms.
APICS
Guidelines for ERP 4
Implementing
the ERP System
Hardware
and Software Installation
This involves making
sure that an adequate computer network is in place,
and installing the
ERP software on the server and workstations.
A temporary training
area is also highly recommended to make the learning
process as efficient
as possible. This usually includes at least two
workstations
connected to the network with access to a laser printer.
The ERP Advisor
should be able to connect a laptop computer to your
network in this
training area, and should be able to use a computer projector
in this area. A
whiteboard would also be helpful.
Software
Shakedown by Process
The new system will
need company specific data in order to test the Future
Flowchart business
processes. Data from the company’s legacy system may
be electronically
converted or manually entered into the new system.
Key members of the
Core Group and the ERP Advisor need to simulate all
the business
processes defined by the Future Flowchart using the new ERP
software tools.
The software system
shakedown tests each business process to confirm that
the tools will
function as planned. As the desired result is confirmed for
each business process
the ERP tool, procedure and ownership is documented
in the ERP Blueprint.
Conference
Room Pilot Training
With each business
process having been tested and confirmed, the ERP
Blueprint now defines
the individual owners of each process.
These operators can
now be trained on the functions that are relevant to their
specific area of
responsibility.
APICS
Guidelines for ERP 5
Activate
System and Measure Results
When the system is
functional and the users are trained then it is time to
begin using the new
system.
As mentioned
previously, metrics should be established for measuring
anticipated
improvements in specific areas.
APICS
Guidelines for ERP 6
ERP
Related Terminology
ERP Enterprise
Resource Planning
MRP Material
Requirements Planning
MRPII
Manufacturing Resource Planning
(Closed Loop MRP:
MRPII with Financials)
APICS
American Production and Inventory
Control Society
aka The
Educational Society for Resource
Management
An ERP
System is a set of processes that defines the optimum
methods for operating
a specific business to achieve maximum
productivity and
profitability.
An ERP
Blueprint is the written outline for an ERP system, that
details the
integrated flow of processes, and assigns the individual
ownership for each
process.
An ERP
Software package is the tooling that will be needed to
automate some of the
ERP processes. Computerization is the
technology that
provides the automation that allows the execution
of ERP processes to
be cost efficient and fast enough to be useful.
An ERP
Advisor is the person with the experience and expertise
needed to guide the
efficient implementation of an ERP system.
APICS
Guidelines for ERP 7
Enterprise
Resource Planning
Profitability
(income
statement)
Max
Customer Service Min Inventory Costs Max Mfg Productivity
(delivery
service ratio) (inventory turn ratio) (actual product cost)
Manufacturing
Resource Planning
MPS Master
Production Planning
MRP Material
Requirements Planning
CRP Capacity
Requirements Planning
PAC Production
Activity Control
Inventory
Control and Distribution
I/M Inventory
Management / DRP
S/O Sales
Order Processing
P/O Purchase
Order Processing
Financial
Accounting and Control
A/R A/P
G/L
Accounts Receivable Accounts
Payable General Ledger
APICS
Guidelines for ERP 8
The
Purpose of ERP Systems
· To improve productivity and
profitability
Reasons
for lower profitability w/o ERP systems
· poor inventory control
resulting in shortages and oversupplies
of raw materials and
finished goods
· poor material and capacity
planning resulting in long lead times
and late deliveries
· poor workforce planning
resulting in erratic labor requirements
and excessive
overtime costs
1 2 3 4 5
Time
Periods
Revenue vs Net
Income
Revenue
Net
Income
APICS
Guidelines for ERP 9
Justifying
an ERP System
Proven
Path Top Project Middle System Class A
ERP
Planning Guidelines Mgmt Manager Mgmt Operators Advisor
Assess
the Viability of Installing an ERP System
Preliminary
Audit and Assessment X X X
Class -
Understanding ERP Principles X X X
Define
Corporate ERP Objectives X X
Prepare
Cost / Benefit Analysis X X
Define
Project Organization / Preliminary Planning
Executive
Steering Committee X
Appoint
ERP Project Manager X
Class -
Education of ERP Processes X X X
Develop a
Preliminary ERP Outline X X X
Define
Manufacturing Resource Planning Requirements
Sales and
Operations Planning X X X
Demand
Management / Forecasting X X X
Master
Production Scheduling X X X
Material
Requirements Planning X X X
Capacity
Requirements Planning X X X
Production
Activity Control X X X
Define
Inventory Management and Control Requirements
Accurate
Inventory Status X X X
Accurate
Inventory Data X X X
Accurate
Bills of Material X X X
Accurate
Operation Routings X X X
APICS
Guidelines for ERP 10
Installing
an ERP System
Proven
Path Top Project Middle System Class A
ERP
Planning Guidelines Mgmt Manager Mgmt Operators Advisor
Define
Order Processing and Tracking Requirements
Purchasing
and Receiving X X X
Sales
Order Processing X X X
Define
Financial Accounting and Control Requirements
Accounts
Payable X X X
Accounts
Receivable X X X
General
Ledger X X X
Financial
Reporting X X X X
Select
ERP Software to Match Requirements
ERP
Specifications Checklist X X
Evaluate
and Select Software X X X
Check
Software References X
Automate
Enterprise Resource Planning System
Software
and Hardware Installation X X
Software
Shakedown by Process X X
Conference
Room Pilot Training X X X X
Document
Processes & Procedures X X X X
Incremental
Cutover to New System X X X X
ERP
Post-Implementation System Review
Measure
Results vs ERP Objectives X X X X
Followup
Audit and Re-Assessment X X X X
Process
Improvement (JIT and TQM) X X X X X
APICS
Guidelines for ERP 11
The
Reality and Myths of ERP
“ERP
system implementation failure rates are in the range of 60
to 90
percent”
Carol Ptak
APICS President –
Year 2000
Member of IBM
Worldwide ERP Solutions Team
Reasons
for Failure
· Lack of understanding at top
management level
· Lack of education at middle
management level
· Lack of training at the
system operator level
ERP
Implementation Myths
· ERP software is the solution
to your process problems
· There is only one ERP
solution best suited to your needs
· Any ERP software system will
work for your business
· Software companies are
concerned with your objectives
· Most ERP resellers are
competent at implementing ERP
· Firms without MIS
departments can implement remotely
Enterprise
Resource Planning is a system of people and processes that
allows
a manufacturing company to operate more professionally, more
productively,
and more profitably.
Although
ERP software is important in this work, it is merely a package
of
tools that can be used to facilitate and automate the ERP processes.
APICS
Guidelines for ERP 12
ERP
/ Supply Chain Management
Marketing Strategic
Financial
Plan Business Plan
Plan
Sales and Key Resource
Operations Requirements
Plan
Sales Forecast Master
Rough-Cut
Sales Orders Production
Capacity Planning
Planning
Bills of
Material Material Shop
Orders
Requirements Purchase
Orders
Inventory Planning
Control Data
Operation Capacity
Routings Requirements
Production
Planning Scheduling
Work Center
Control Data
Production
Activity Control
Shop
Orders Line Schedules Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab
APICS
Guidelines for ERP 13
ERP
/ Supply Chain Management
Purchasing
Inventory Sales Order
&
Receiving Movements Processing
Accounts
Stock Status Accounts
Payable
WIP Receivable
General
Ledger
Financial
Business
Reporting
Plan
Measuring
Profitability
Revenue less Cost
of Sales less Operating Expenses
APICS
Guidelines for ERP 14
What’s
in the ERP Toolbox?
ERP
Tools of the Trade
· MPS Master
Production Scheduling
· MRP Material
Requirements Planning
· CRP Capacity
Requirements Planning
· PAC Production
Activity Control
Market
Based Factors
· Engineer to Order
· Make to Order
· Assemble to Order
· Sell from Stock
Product
Based Factors
· Unique Projects
· Batch / Job Shop
· Production Line
· Continuous Flow
APICS
Guidelines for ERP 15
Market
Based Operations Planning
Engineer
to Order
· design and build to customer
specifications
· highly engineered / low
volume production
Make
to Order
· only make product after a
sales orders are received
· may forecast some components
to reduce lead time
Assemble
to Order (Package to Order)
· modular components
manufactured to a sales forecast
· final assembly schedule
(FAS) used to fill sales orders
Sell
from Stock
· due to delivery or batch
size or capacity requirements
· product is built to a sales
forecast and sold from stock
· uses master production
schedule / available to promise
APICS
Guidelines for ERP 16
Product
Based Operations Planning
Project
Manufacturing
· engineer project / order
materials / make to plan
· Critical Path / Gantt Chart
for planning and control
· examples: construction,
large machinery, exhibits
Batch
Manufacturing
· jobs are batch routed
through work departments
· MRP and CRP used to plan
material and capacity
· production scheduling and
load leveling required
· shop packets used for
production activity control
· examples: machine shop work,
laminated cutouts
· (may also be referred to as
job shop, intermittent, or
batch
lot manufacturing processes)
(continued
on next page)
APICS
Guidelines for ERP 17
Production
Line Manufacturing
· high volume production on
dedicated equipment
· components may be planned
with MRP or Kanban
· uses production schedules
rather than work orders
· rough cut capacity plan /
forward finite scheduling
· material and labor usually
posted using backflushing
· utilizes operation
overlapping to reduce elapsed time
· examples: automobiles,
electronics, candies
· (may also be referred to as
repetitive, flow line, flow shop,
assembly
line, or cellular manufacturing processes)
Continuous
Flow Manufacturing
· high volume production of
liquid or non-solid product
· raw materials may be planned
with MRP or Kanban
· uses production schedules
rather than work orders
· rough cut capacity plan /
forward finite scheduling
· material and labor usually
posted using backflushing
· material flows through fixed
routings (pipes, tanks)
· examples: glass, chemicals,
distillers, food processors
APICS
Guidelines for ERP 18
Market
and Product Linkage
Mfg
Process: Project / Batch / Prod Line / Cont Flow
Market
Drivers Mfg Process MPS MRP CRP PAC
Engineer
to Order
Make to
Order
Assemble
to Order
Make to
Stock
APICS
Guidelines for ERP 19
Mfg
Processes vs ERP Tooling
Categories
of ERP Tools: MPS / MRP / CRP / PAC
Market
Drivers Mfg Process MPS MRP CRP PAC
Engineer
to Order Project
Make to
Order Batch
Prod Line
Assemble
to Order Batch
Prod Line
Make to
Stock Batch
Prod Line
Cont Flow
APICS
Guidelines for ERP 20
Select
the Right Tools for the Job
Market
Drivers Mfg Process MPS MRP CRP PAC
Engineer
to Order Project X Gantt X
Make to
Order Batch X A X
Prod Line
X B C
Assemble
to Order Batch X X A X
Prod Line
X X B C
Make to
Stock Batch X X A X
Prod Line
X X B C
Cont Flow
X X B C
A –
Backward Scheduling / Infinite Capacity
B –
Finite Forward Scheduling or Rough Cut Capacity Planning
C –
Backflushing Production instead of Specific Material and Labor Reporting
APICS
Guidelines for ERP 21
Resource
Planning Objectives
Marketing
Strategic Financial
Plan
Business Plan
Plan
Sales and
Key Resource
Operations
Requirements
Plan
Sales
Forecast Master Rough-Cut
Sales
Orders Production Capacity Plan
Planning
Bills of
Material
Material Shop Orders
Requirements
Purch Orders
Inventory
Planning
Control
Data
Operation
Capacity
Routings
Requirements Production
Planning
Scheduling
Work
Center
Control
Data
Production
Activity
Control
Shop
Orders Line Schedules Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab
· 1 to 5 year business plan
· manpower, equipment,
facilities, finance review
· 1 to 2 years by quarters
· product family groupings
· key resources required test
· 12 month plan by month
· plan end item production
· key resource capacity test
· suggests required jobs
· suggests required PO’s
· time phases requirements
· suggests required actions
· plans operations for jobs
· capacity reqd vs available
· provide load leveling tools
· check material availability
· release work order packets
· generate work schedules
· issue material and labor
· job tracking / job costing
APICS
Guidelines for ERP 22
APICS
Standard ERP Flowchart
Marketing
Business Financial
Plan Plan
Plan
Sales and
Key Resource
Oper Plan
Requirements
Sales
Forecast Master Rough-Cut
Sales
Orders Production Capacity Plan
Planning
Bills of
Material
Material Shop Orders
Requirements
Purch Orders
Inventory
Planning
Control
Data
Operation
Capacity
Routings
Requirements Production
Planning
Scheduling
Work
Center
Control
Data
Production
Activity
Control
Shop
Orders Line Schedule Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab
Purchasing
Inventory Sales Order
&
Receiving Movements Processing
Accounts
Stock Status Accounts
Payable
Work in Progress Receivable
General
Ledger
Financial
Business
Reporting
Plan
APICS
Guidelines for ERP 23
Flowchart
– Engineer to Order
Marketing
Business Financial
Plan Plan
Plan
Sales and
Key Resource
Oper Plan
Requirements
Required
ERP Elements
Sales
Forecast Master Rough-Cut
Sales
Orders Production Capacity Plan
Planning
Estimating and Quoting
Bills of
Material
Material Shop Orders Bills of Material and Routings (opt)
Requirements
Purch Orders
Inventory
Planning Material Requirements Planning
Control
Data
Operation
Capacity
Routings
Requirements Production Capacity Requirements Planning
Planning
Scheduling
Work
Center
Control
Data
Production
Jobs - WIP / Tracking / Costing
Activity
Control
Graphical Jobs Scheduler
(opt)
Shop
Orders Line Schedule Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab Electronic
Data Collection (opt)
Purchasing
Inventory Sales Order Purchase Order & Receivings
&
Receiving Movements Processing Inventory Control
Sales Processing and
Analysis
Accounts
Stock Status Accounts Accounts Payable
Payable
Work in Progress Receivable Accounts Receivable
General General
Ledger
Ledger
Financial
Business
Reporting
Plan
APICS
Guidelines for ERP 24
Flowchart
– Make to Order
Marketing
Business Financial
Plan Plan
Plan
Sales and
Key Resource
Oper Plan
Requirements
Required
ERP Elements
Sales
Forecast Master Rough-Cut
Sales
Orders Production Capacity Plan
Planning
Bills of
Material
Material Shop Orders Bills of Material and Routings
Requirements
Purch Orders
Inventory
Planning Material Requirements Planning
Control
Data
Operation
Capacity
Routings
Requirements Production Capacity Requirements Planning
Planning
Scheduling
Work
Center
Control
Data
Production
Jobs - WIP / Tracking / Costing
Activity
Control
Graphical Jobs Scheduler
(opt)
Shop
Orders Line Schedule Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab Electronic Data Collection (opt)
Purchasing
Inventory Sales Order Purchase Order & Receivings
&
Receiving Movements Processing Inventory Control
Sales Processing and
Analysis
Accounts
Stock Status Accounts Accounts Payable
Payable
Work in Progress Receivable Accounts Receivable
General General
Ledger
Ledger
Financial
Business
Reporting
Plan
APICS
Guidelines for ERP 25
Flowchart
– Assemble to Order
Marketing
Business Financial
Plan Plan
Plan
Sales and
Key Resource
Oper Plan
Requirements
Required
ERP Elements
Sales
Forecast Master Rough-Cut Sales Forecasting
Sales
Orders Production Capacity Plan
Planning Master
Production Schedule
Bills of
Material
Material Shop Orders Bills of Material and Routings
Requirements
Purch Orders
Inventory
Planning Material Requirements Planning
Control
Data
Operation
Capacity
Routings
Requirements Production Capacity Requirements Planning
Planning
Scheduling
Work
Center
Control
Data
Production
Jobs - WIP / Tracking / Costing
Activity
Control
Graphical Jobs Scheduler
(opt)
Shop
Orders Line Schedule Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab Electronic Data Collection (opt)
Purchasing
Inventory Sales Order Purchase Order & Receivings
&
Receiving Movements Processing Inventory Control
Sales Processing and
Analysis
Accounts
Stock Status Accounts Accounts Payable
Payable
Work in Progress Receivable Accounts Receivable
General General
Ledger
Ledger
Financial
Business
Reporting
Plan
APICS
Guidelines for ERP 26
Flowchart
– Make to Stock
Marketing
Business Financial
Plan Plan
Plan
Sales and
Key Resource
Oper Plan
Requirements
Required
ERP Elements
Sales
Forecast Master Rough-Cut Sales Forecasting
Sales
Orders Production Capacity Plan
Planning Master
Production Schedule
Bills of
Material
Material Shop Orders Bills of Material and Routings
Requirements
Purch Orders
Inventory
Planning Material Requirements Planning
Control
Data
Operation
Capacity
Routings
Requirements Production Capacity Requirements Planning
Planning
Scheduling
Work
Center
Control
Data
Production
Jobs - WIP / Tracking / Costing
Activity
Control
Graphical Jobs Scheduler
(opt)
Shop
Orders Line Schedule Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab Electronic Data Collection (opt)
Purchasing
Inventory Sales Order Purchase Order & Receivings
&
Receiving Movements Processing Inventory Control
Sales Processing and
Analysis
Accounts
Stock Status Accounts Accounts Payable
Payable
Work in Progress Receivable Accounts Receivable
General General
Ledger
Ledger
Financial
Business
Reporting
Plan
APICS
Guidelines for ERP 27
Master
Production Scheduling
Purpose:
to plan production relative to forecasted demand
· where sales meets
manufacturing via the master planner
· used where sales demand by
period can be forecasted
· define build schedule by
period to plan replenishment
· analyzes forecasts / sales
orders / inventory / safety stock
· calc projected available
balance and available to promise
· MPS (build schedule) becomes
the job demand for MRP
· Rough Cut Capacity Planning
checks for bottlenecks
Stock
Code: 99999 Stock P1 P2 P3 P4 P5 P6
SafetyStock
= 10
ForecastedDemand
100 100 100 100 100 100
Current
SalesOrders 120 90 70 30 0 0
GrossRequirements
120 100 100 100 100 100
BuildSchedule
Units 100 130 200 0 200 0
Projected
Avail Balance 0 -20 10 110 10 110 10
Available
to Promise -20 40 100 100 200 200
Suggested
Adjustments 30 0 0 0 0 0
· PAB = (prior
PAB) + (Build Schedule) – (Gross Reqmts)
· ATP = (Stock
or Build) – (Sales Orders prior to next Build)
· ADJ = (Safety
Stock) – (Projected Available Balance) [>0]
APICS
Guidelines for ERP 28
Production
Planning Exercises
Stock
Code: 99999 Stock P1 P2 P3 P4 P5 P6
Safety
Stock = 10
Forecasted
Demand 100 100 100 100 100 100
Current
Sales Orders 120 90 70 30 0 0
Gross
Requirements 120 100 100 100 100 100
Build
Schedule Units 100 130 200 0 200 0
Projected
Avail Balance 0
Available
to Promise
Suggested
Adjustments
Stock
Code: 99999 Stock P1 P2 P3 P4 P5 P6
Safety
Stock = 0
Forecasted
Demand 100 100 100 100 100 100
Current
Sales Orders 50 45 30 20 5 0
Gross
Requirements
Build
Schedule Units
Projected
Avail Balance 40
Available
to Promise
Suggested
Adjustments
Stock
Code: 99999 Stock P1 P2 P3 P4 P5 P6
Safety
Stock = 50
Forecasted
Demand 100 200 300 300 100 0
Current
Sales Orders 80 120 40 20 0 0
Gross
Requirements
Build
Schedule Units 50 400 200 0 0 0
Projected
Avail Balance 70
Available
to Promise
Suggested
Adjustments
APICS
Guidelines for ERP 29
Production
Planning Answers
Stock
Code: 99999 Stock P1 P2 P3 P4 P5 P6
Safety
Stock = 10
Forecasted
Demand 100 100 100 100 100 100
Current
Sales Orders 120 90 70 30 0 0
Gross
Requirements 120 100 100 100 100 100
Build
Schedule Units 100 130 200 0 200 0
Projected
Avail Balance 0 -20 10 110 10 110 10
Available
to Promise -20 40 100 200
Suggested
Adjustments 30 0 0 0 0 0
Stock
Code: 99999 Stock P1 P2 P3 P4 P5 P6
Safety
Stock = 0
Forecasted
Demand 100 100 100 100 100 100
Current
Sales Orders 50 45 30 20 5 0
Gross
Requirements 100 100 100 100 100 100
Build
Schedule Units 60 100 100 100 100 100
Projected
Avail Balance 40 0 0 0 0 0 0
Available
to Promise 50 55 70 80 95 100
Suggested
Adjustments 0 0 0 0 0 0
Stock
Code: 99999 Stock P1 P2 P3 P4 P5 P6
Safety
Stock = 50
Forecasted
Demand 100 200 300 300 100 0
Current
Sales Orders 80 120 40 20 0 0
Gross
Requirements 100 200 300 300 100 0
Build
Schedule Units 50 400 200 0 0 0
Projected
Avail Balance 70 20 220 120 -180 -280 -280
Available
to Promise 40 280 140
Suggested
Adjustments 30 -170 -70 230 330 330
APICS
Guidelines for ERP 30
MPS
Usage Considerations
Time
Fences
· Demand time fence: near
term period within which
changes to MPS are
kept to a minimum to avoid
disruption to the
production schedule
· Planning time fence: the
longest cumulative lead time
(purchasing lead time
+ manufacturing lead time) for the
stock code
· Planning horizon: the
time period to consider when
processing MRP to
properly incorporate batching rules
Input
to MRP
· the Build Schedule quantity
becomes the sole demand
quantity to MRP for
each MPS stock code item
· existing stock, safety
stock, forecasts and sales orders
are ignored by MRP
for MPS stock code items
· MRP needs only to consider
current existing jobs when
calculating the need
for new jobs for MPS items
· as production is reported
against jobs for MPS items, the
Build Schedule
quantity is reduced and current stock is
increased (keeps PAB
in sync with the Master Schedule)
· as sales orders are invoiced
the forecast, sales orders and
stock quantities are
consumed (keep gross requirements,
PAB and ATP in sync
with the Master Schedule)
APICS
Guidelines for ERP 31
Anatomy
of Product Structures
Product
Structures are the sequence of operations that
components follow
during their manufacture into a product.
Parent
Item: TABLE Qty 1
Work
Center Capacity Unit Batch Rate Cost Queue
(hrs/day)
(hrs/pc) (pcs/time) (pcs/hr) ($/hr) (hrs)
Cutting 8
$25.00 8
Planing 8
$35.00 4
Sanding 8
$20.00 4
Drilling 8
$40.00 4
Finishing
8 3 / 90 min $50.00 8
Assembly 8
5 per hr $20.00 4
Operations
Setup Startup Run Teardown Wait Move
(hrs)
(hrs) (hrs) (hrs) (hrs) (hrs)
Cutting
Planing
Sanding
Drilling
Finishing
0.5 0 0.5 0.5 24 1
Assembly 0
0 0.2 0 0 0.5
Components
Stock Sequence Part Quantity Linked to Scrap
Code
Number Category Required Operation (% or qty)
26" x
40" x 1.5" top TOP 1 Made-in 1 ea Finishing 0%
2" x
2" x 36" legs LEG 2 Made-in 4 ea Finishing 0%
clear
urethane finish CLEAR 3 Purchased 10 oz Finishing 15%
1/2"
x 3" carriage bolt BOLT 4 Purchased 8 ea Assembly 5%
APICS
Guidelines for ERP 32
Anatomy
of Sub-Assembly #1
Sub-Assembly:
TOP Qty 1
Work
Center Capacity Unit Batch Rate Cost Queue
(hrs/day)
(hrs/pc) (pcs/time) (pcs/hr) ($/hr) (hrs)
Cutting 8
0.75 $25.00 8
Planing 8
0.5 $35.00 4
Sanding 8
2 $20.00 4
Drilling 8
0.85 $40.00 4
Finishing
8 $50.00 8
Assembly 8
$20.00 4
Operations
Setup Startup Run Teardown Wait Move
(hrs)
(hrs) (hrs) (hrs) (hrs) (hrs)
Cutting
0.25 0 0.75 0.1 0 0.5
Planing 0.25
0 0.5 0.1 0 0.5
Sanding 0
0 2 0.1 0 0.5
Drilling
0.25 0 0.85 0.1 0 0.5
Finishing
Assembly
Components
Stock Sequence Part Quantity Linked to Scrap
Code
Number Category Required Operation (% or qty)
30" x
48" x 2" oak T-OAK 1 Purchased 1 ea Cutting 10%
APICS
Guidelines for ERP 33
Anatomy
of Sub-Assembly #2
Sub-Assembly:
LEG Qty 4
Work
Center Capacity Unit Batch Rate Cost Queue
(hrs/day)
(hrs/pc) (pcs/time) (pcs/hr) ($/hr) (hrs)
Cutting 8
0.5 $25.00 8
Planing 8
0.3 $35.00 4
Sanding 8
0.8 $20.00 4
Drilling 8
0.25 $40.00 4
Finishing
8 $50.00 8
Assembly 8
$20.00 4
Operations
Setup Startup Run Teardown Wait Move
(hrs)
(hrs) (hrs) (hrs) (hrs) (hrs)
Cutting
0.25 0 2 0.1 0 0.5
Planing
0.25 0 1.2 0.1 0 0.5
Sanding 0
0 3.2 0.1 0 0.5
Drilling
0.25 0 1 0.1 0 0.5
Finishing
Assembly
Components
Stock Sequence Part Quantity Linked to Scrap
Code
Number Category Required Operation (% or qty)
3" x
3" x 40" oak L-OAK 1 Purchased 1 ea Cutting 20%
APICS
Guidelines for ERP 34
Single
Level Product Structure
Parent
Item: TABLE Qty 1
Operations
Setup Startup Run Teardown Wait Move
(Top)
(hrs) (hrs) (hrs) (hrs) (hrs) (hrs)
Cutting
0.25 0 0.75 0.1 0 0.5
Planing
0.25 0 0.5 0.1 0 0.5
Sanding 0
0 2 0.1 0 0.5
Drilling
0.25 0 0.85 0.1 0 0.5
Operations
Setup Startup Run Teardown Wait Move
(Legs)
(hrs) (hrs) (hrs) (hrs) (hrs) (hrs)
Cutting
0.25 0 2 0.1 0 0.5
Planing
0.25 0 1.2 0.1 0 0.5
Sanding 0
0 3.2 0.1 0 0.5
Drilling
0.25 0 1 0.1 0 0.5
Operations
Setup Startup Run Teardown Wait Move
(Table)
(hrs) (hrs) (hrs) (hrs) (hrs) (hrs)
Finishing
0.5 0 0.5 0.5 24 1
Assembly 0
0 0.2 0 0 0.5
Components
Stock Sequence Part Quantity Linked to Scrap
Code
Number Category Required Operation (% or qty)
30" x
48" x 2" oak T-OAK 1 Purchased 1 ea Cutting 10%
3" x
3" x 40" oak L-OAK 2 Purchased 4 ea Cutting 20%
clear
urethane finish CLEAR 3 Purchased 10 oz Finishing 15%
1/2"
x 3" carriage bolt BOLT 4 Purchased 8 ea Assembly 5%
APICS
Guidelines for ERP 35
Material
Requirements Planning
Demand
for
Product
Bills of
Material
Material
Shop Orders
Inventory
Requirements Purchase Orders
Control
Data Planning
Operation
Capacity Rough-Cut
Routings
Requirements Capacity Plan
Planning
Work
Center Daily Production
Control
Data Schedule
Purpose
of MRP
· recommend new jobs and
provide a calculated start date
· recommend job actions due to
demand / supply changes
· recommend time-phased
purchase orders to supply jobs
· recommend P/O actions due to
demand / supply changes
APICS
Guidelines for ERP 36
MRP
Input / Calculation / Output
I
Inputs
Independent
Demand
· MPS Build Schedule
· Sales Orders
· Sales Forecasts
· Sales Quotations
· Safety Stock
Dependent
Demand
· Made-in components
· Sub-contract work
· Purchase components
Inventory
Rules
· Made or purchased
· Batch sizing by item
· Lead times by item
· 95% accuracy required
Bills
of Material
· Components required
· Include scrap factors
· 99% accuracy required
Processing
MRP
Calculation
· Regen or Net-Change
· Calc demand for Jobs
· Demand for Sub-Jobs
· Sub-contract demand
· Demand for Purchases
Outputs
Orders
& Reports
รจ Manufacturing
Jobs
รจ Manufacturing
Jobs
รจ Purchase
Orders
รจ Purchase
Orders
· Job Review
· Job Actions report
· P/O Review
· P/O Actions report
· MRP Details report
· Pegging by Item
· Potential Oversupply
APICS
Guidelines for ERP 37
Capacity
Requirements Planning
Demand
for
Product
Bills of
Material
Material
Shop Orders
Inventory
Requirements Purchase Orders
Control
Data Planning
Operation
Capacity Rough-Cut
Routings
Requirements Capacity Plan
Planning
Work
Center Daily Production
Control
Data Schedule
Purpose
of CRP
· calc work center operation
start / finish dates by job
· use rough-cut capacity
loading to plan resource levels
· compare capacity required vs
available by work center
· load leveling (adjust
capacity, reschedule, sub-contract)
APICS
Guidelines for ERP 38
CRP
Input / Calculation / Output
I
Inputs
Sources
of Demand
· Active jobs
· Suggested jobs
· Probable jobs
Work
Centers
· Capacity calendar
· Overtime factors
· Productivity factor
· Labor / burden rates
Routings
· Define operations
· Define work centers
· Define queue, setup,
run, wait, move times
Processing
CRP
Processing
· Calc operation start
and finish dates by
job
· Aggregate capacity
requirements by day
and by work center
· Compare required
capacity vs available
for each work center
· Identify overloaded
work centers
· Resolve work center
overloads using load
leveling tools
Outputs
Balanced
Schedules
รจ Rough-cut
capacity
loading report used
to plan resources or
to revise demand
รจ Dispatch
lists by
work center
รจ Balanced
labor force
daily requirements
รจ Balanced
daily work
center loading
APICS
Guidelines for ERP 39
CRP
– Operation Lead Time
MRP
Customer
Job Start
Oper-1 Oper-2 Oper-3 Oper-4 Job Finish
Oper-1 Queue
Queue Setup Startup Run Run Run Tear
Down Wait Move
Queue
staging buffer time
Setup
machine preparation
Startup
starting production
Run
produce good product
Teardown
shutdown, cleaning
Wait
drying, curing, cooling
Move
to next operation
Oper Queue
Setup Startup Run Tear Down Wait Move InterOp
Hours
CapReq
Hours Lead Time
1 24 1 1 10 0 0 0 24 12 1 + 1.5
2 8 2 0 5 1 4 4 16 8 .7 + 1
3 2 2.5 0.5
15 1.5 0 2 4 19.5 .2 + 2.4
4 16 2 0 6.5
0.5 1 1 18 9 .8 + 1.1
Operation
Time: inter-operation time plus work
center time (days)
Job
Lead Time Offset: days required between job start and finish
dates based on the Operation
Lead Times and the Shop Calendar
APICS
Guidelines for ERP 40
CRP
– Job Lead Time Offset
Job 100 Job
Start Oper-1 Oper-2 Oper-3 Oper-4 Job Finish
Operation
Lead
Times MRP 3
days 2 days 3 days 2 days Customer
Backward
Scheduling
06-Jan 6 + 7 + 10 11 + 12 13 + 14 + 17 18 + 19 20-Jan
Forward
Scheduling
04-Jan 4 + 5 + 6 7 + 10 11 + 12 + 13 14 + 17 18-Jan
Compressing
Job Lead Time Offset
· operation overlap (start
Oper-2 while Oper-1 running)
· reduce queue, setup,
startup, run, teardown, wait, move
· optimize job scheduling to
reduce redundant setups
The
benefits of reducing manufacturing lead times for jobs include less
work
in process, less raw material inventory, less finished goods
inventory,
faster service to the customer, increased sales and increased
market
share.
APICS
Guidelines for ERP 41
Calculating
Capacity Required
Work
Centers - capacity planning entities
· similar machines in a
department (five drill presses)
· work cell in-line machines
for making specific products
· routing specific resource
(CNC Acme Model 99 press)
Job Job
Start W/c-1 W/c-2 W/c-3 W/c-4 Job Finish
100
06-Jan 7 + 10 12 13 + 14 + 17 18 + 19 20-Jan
Cap Req
-> 12 8 19.5 9
200
17-Jan 17 18 19 20-Jan
Cap Req
-> 2 6 3
300
14-Jan 14 17 + 18 19 + 20 21-Jan
Cap Req
-> 6 12 14
400
17-Jan 18 19 20 21 24-Jan
Cap Req
-> 6 4 4 6
W/c-3 Sun Mon
Tue Wed Thu Fri Sat
Capacity
02-Jan 03-Jan 04-Jan 05-Jan 06-Jan 07-Jan 08-Jan
Available
8 8 8 8 8
Required
Capacity
09-Jan 10-Jan 11-Jan 12-Jan 13-Jan 14-Jan 15-Jan
Available
8 8 8 8 8
Required 8
8
Capacity
16-Jan 17-Jan 18-Jan 19-Jan 20-Jan 21-Jan 22-Jan
Available
8 8 8 8 8
Required
3.5 + 8 6 + 4 4
APICS
Guidelines for ERP 42
Work
Center Capacity Calendar
Capacity
is defined as the capability of a work center to
perform a specific
amount of work on a specific day.
Capacity
Calendar Features
· overlay company calendar to
define non-working days
· define work center
capacities for each active work day
(productive
units x daily capacity x utilization
factor x efficiency factor)
· specify work center downtime
or reduced capacity days
APICS
Guidelines for ERP 43
Work
Center Loading Techniques
Backward
Loading / Infinite Capacity
Hrs Job
500
16 Due P5
Job 400
12 500 Due
P4
300 Job
300
8 Due P3
100 400
Job 200
4 200 Due
P2
Job 100
P1 P2 P3 P4
P5 Due P1
Backward
Loading / Finite Capacity
Hrs Job
500
16 Due P5
Job 400
12 Due P4
Job 300
8 200 300
400 500 Due P3
100 Job
200
4 300 500
Due P2
400 Job
100
P1 P2 P3 P4
P5 Due P1
Forward
Loading / Infinite Capacity
Hrs Job
500
16 Due P5
Job 400
12 500 Due
P4
200 300
Job 300
8 Due P3
100 400
Job 200
4 Due P2
Job 100
P1 P2 P3 P4
P5 Due P1
Forward
Loading / Finite Capacity
Hrs Job
500
16 Due P5
Job 400
12 Due P4
Job 300
8 200 300
400 500 Due P3
100 Job
200
4 300 Due
P2
200 400
Job 100
P1 P2 P3 P4
P5 Due P1
APICS
Guidelines for ERP 44
Work
Center Loading Definitions
Loading
is defined as the work that is scheduled to be
performed at a work
center on a specific day.
Backward
Loading / Infinite Capacity
· typical scheduling technique
for batch processing where
multiple work centers
may be required for any job and
where capacity
constraints may exist at one or more of
the work centers on
any specific work day
· use load leveling techniques
to adjust capacity and / or
operation start/stop
schedule dates to balance workloads
Forward
Loading / Finite Capacity
· typical scheduling technique
for in-line processes where
production routing is
contained within a single work cell
· computes job schedule dates
based on order backlog and
the rated line
capacity to generate a production schedule
· provides good what-if
capacity testing for batch process
orders where a sales
order opportunity exists conditional
upon order delivery
in less than the normal lead time
Backward
Loading / Finite Capacity (not commonly used)
Forward
Loading / Infinite Capacity (not commonly used)
APICS
Guidelines for ERP 45
Visual
Factory Utilization
APICS
Guidelines for ERP 46
Visual
Production Scheduling
APICS
Guidelines for ERP 47
Production
Activity Control
Master
Rough-Cut
Production
Capacity Plan
Schedule
Bills of
Material
Material
Shop Orders
Inventory
Requirements Purchase Orders
Control
Data Planning
Operation
Capacity Production
Routings
Requirements Scheduling
Planning
Work
Center
Control
Data
Production
Activity Control
Shop
Orders Line Schedules Gantt Charts
Issue Mat
/ Lab Backflushing Issue Mat / Lab
Purpose
of PAC
· release manufacturing orders
or production schedules
· issue materials consumed in
the production process
· post labor time consumed in
the production process
· track work in progress and
report finished production
· measurements to evaluate
profitability and productivity
APICS
Guidelines for ERP 48
Production
Control & Analysis
Measuring
Productivity Efficiency x Utilization
Efficiency:
Standard Hours / Actual Hours
Utilization:
Hours Worked / Hours Available
Batch
Lots
Shop
Orders
· resource availability
· print shop order packet
Processing
· issue materials by oper
· scan / post labor by oper
· report production by job
Profitability
· sales margin analysis
· plan vs actual job cost
· analyze scrap by job
Productivity
· employee productivity
· machine productivity
· workcenter productivity
Flow
Lines
Line
Schedules
· resource availability
· print work cell schedule
Processing
· backflush plan materials
· track or backflush labor
· report prod by stockcode
Profitability
· standard sales margins
· process costing analysis
· cycle count for waste
Productivity
· employee productivity
· work cell productivity
Projects
Work
Orders
· resource availability
· provide detailed plans
Processing
· issue materials used
· post labor expended
· report percent finished
Profitability
· progress billings
· plan vs actual cost
Productivity
· employee productivity
APICS
Guidelines for ERP 49
Principles
of Inventory Management
Inventory
is defined as the buffer between supply and demand.
Inventory can be the
finished goods stock needed to supply the demand to
fill customer orders,
or it can be the raw materials stock needed to supply the
demand from
manufacturing orders.
This buffer costs
money and detracts from net income. APICS estimates the
annual cost of
inventory to be 35% of a company’s average inventory value.
Cost of capital,
insurance, storage, handling, obsolescence, deterioration,
spoilage, pilferage
and property taxes all contribute to the cost of inventory.
On the other hand,
lost sales opportunities, back orders, freight premiums
and expediting are
some of the costs associated with not carrying inventory.
Inventory
Management is defined as a system of material management
processes that are
necessary to achieve the following goals:
· optimal customer
service (measured by delivery Service Ratio)
· optimal inventory
mix (the right quantities of the right items at the
right time, prevent
material shortages and material oversupplies)
· optimal operating
efficiency (foster manufacturing and purchasing
efficiencies,
including maintaining level work force requirements)
· optimal return
on investment (is inventory the best use of capital,
maximize the above
stated goals while minimizing the investment)
Customer Service
Customer service is
defined as the ability to address the needs, inquiries and
requests from
customers.
Addressing the
customer’s needs means providing a product or service that
meets or exceeds the
customer’s requirements, including on-time delivery.
APICS
Guidelines for ERP 50
The ability to
deliver product on-time can be measured as follows:
Service
Ratio = (items shipped on-time) / (total
items requested)
A higher Service
Ratio means more satisfied customers, but at the cost of a
greater inventory
investment. However, it is important to note that better
service to customers
can out-market lower prices in many situations.
Inventory Mix
Inventory is
typically classified as follows:
Raw
Material – purchased material that is converted during the
manufacturing process
Work
in Process – partially processed items containing value-added
material, labor and
overhead costs
Finished
Goods – the finished product that can be sold to a customer,
or used as a
component in a subsequent manufacturing process
Inventory items are
identified and tracked using stock codes, and sometimes
by a Stock Keeping
Unit (SKU). Although the same stock code can be used
to reference an item
regardless of warehouse location, SKU codes identify
an item at a specific
geographic location. Therefore, a single stock code item
stored at the main
warehouse and at six distribution centers represents seven
SKU codes.
Inventory tracking
can be perpetual or periodic. Perpetual inventory means
that all transactions
that affect inventory are processed as they occur, so that
the amount of
inventory available is known at all times. Periodic inventory
means that inventory
is periodically counted and the records adjusted.
Material requirements
planning (MRP) is the primary ERP tool used to
manage the optimal
mix of inventory items. A perpetual inventory is
mandatory when
utilizing MRP. In addition, the perpetual inventory stock
status must be at
least 95% accurate and the bills of material must be at least
99% accurate for MRP
calculations to be effective.
The optimal mix of
inventory items will also be impacted by the accuracy of
sales forecasting,
inventory batching rules and manufacturing lead times.
APICS
Guidelines for ERP 51
Distribution
requirements planning (DRP) uses logic very similar to MRP
logic and may be used
to manage the optimal mix of inventory items by
SKU in multiple
distribution centers.
Operating Efficiency
When manufacturing or
purchasing materials, it is important to consider the
shop order or
purchase order quantities (lot sizes).
Lot sizes that are
too small may be inefficient with respect to manufacturing
setup costs, or may
cause the purchase price to be relatively high. On the
other hand, lot sizes
that are too large may cause inventory oversupplies.
Typical lot sizing
techniques are as follows:
· lot for lot –
order exact amount needed to supply demand
· fixed order quantity –
fixed batch size quantities (possibly due to
batch production, or
raw materials packaged in fixed quantities)
· fixed period quantity –
order in quantities needed to supply the
demand for a
specified time period
· economic order quantity (EOQ)
– calculated order quantity where
the inventory holding
cost is equal to the setup cost to manufacture
the items, or equal
to the order process cost to purchase the items
The premise of EOQ is
that inventory holding cost is only warranted when it
would be more costly
to manufacture or purchase items in smaller lot sizes
due to the
manufacturing setup or purchase order processing costs involved.
The mathematical equation
to calculate EOQ is as follows:
EOQ = square
root of (2 x annual usage x order
or setup cost)
divided
by (% cost to hold inventory x item
unit cost)
Return on Investment
For most companies,
proper inventory management has the greatest potential
for improving net
income. Material shortages and material oversupplies can
have an enormous
drain on corporate resources, and can severely affect net
APICS
Guidelines for ERP 52
income. Although
inventory is a balance sheet asset, the cost of holding that
asset can be very
detrimental to net income on the Profit and Loss statement.
EOQ
Reductions
Previously EOQ was
defined as a lot sizing technique used to optimize
manufacturing and
purchase ordering efficiencies. The premise of EOQ also
indicates that reducing
setup costs or purchase ordering costs will cause a
reduction in the
calculated EOQ lot size, which will promote a reduction in
inventory carrying
costs.
For manufactured
items, a reduction in EOQ lot size reduces manufacturing
lead times, reduces
WIP, reduces finished goods inventory, and facilitates
production
scheduling.
For purchased items,
a reduction in EOQ lot size will tend to reduce raw
material inventory
levels.
Inventory
Turns
The common method for
benchmarking inventory investment is as follows:
Inventory
turns = (annualized cost of sales) / (current
average inventory)
A high inventory turn
rate indicates that a minimal inventory investment is
being used to achieve
the level of sales, whereas a low inventory turn rate
indicates the
opposite.
As an example, an
inventory turn rate of six would indicate that inventory
equivalent to only
two months of cost of sales value is needed to sustain the
current sales pace.
An inventory turn rate of one would indicate that the
equivalent of an
entire year’s worth of cost of sales value is being held as
inventory.
Reasonable inventory
turn rates are industry specific. Many companies will
use the standard for
their industry as a benchmark when evaluating their
inventory investment
using this method.
Sales
Forecasting
In make-to-stock and
assemble-to-order manufacturing environments, an
accurate sales
forecast is critical input to developing an accurate Master
Production Schedule
(MPS). If MPS is not accurate, then the wrong types
APICS
Guidelines for ERP 53
and quantities of
product will be manufactured, resulting in unnecessary raw
material,
work-in-process, and finished goods inventory holding costs.
Independent demand
(finished goods) should be forecasted, and dependent
demand
(sub-assemblies or purchased components) should be calculated
using MRP.
Forecasting is not an
exact process. It is usually based on sales history,
seasonality
considerations, market intelligence, leading indicators, trend
projections, product
life cycle, panel consensus, management estimates,
statistical analysis,
and sales commitments. Any information that can
provide forecasting
accuracy should be utilized.
Tracking signals are
used to measure the accuracy of the sales forecast for
each stock code being
forecasted by measuring the deviation between the
forecast and actual
sales. Deviations from the forecast can be either time or
quantity related.
The forecast tracking
signal is mathematically computed as follows:
Tracking
Signal = (algebraic sum of the deviations) divided
by
(sum
of the absolute deviations / number of time periods)
A tracking signal
that exceeds plus or minus 4 indicates a poor forecast for
that stock code item.
Safety
Stock
Safety stock and
safety lead time provides protection against unforeseen
fluctuations in
supply or demand. Safety stock is used for independent
demand, and safety
lead time is used for dependent demand. Both safety
stock and safety lead
time will increase inventory holding costs.
Again, it is not
advisable to hold inventory for dependent demand material
until MRP calculates
the need for this material. However, it may be
advisable to include
safety lead time for these items to compensate for poor
lead time
reliability.
Fluctuation in demand
is known as demand variability, and is caused by
variations between
anticipated demand and actual demand. Unreliable sales
forecasts or erratic
customer buying patterns contribute to increased demand
variability.
Increased variability requires increased safety stock to achieve
the desired level of
delivery service.
APICS
Guidelines for ERP 54
Replenishment time
will also affect the amount of safety stock to carry. The
longer the
replenishment lead time, the more safety stock is required since
the window of
opportunity to run out of stock is larger.
The amount of safety
stock to carry for each stock code item can be
calculated
mathematically. The formula is a function of the variability of
demand, the
replenishment lead time, and the desired delivery service level.
Safety
Stock = (Standard Deviation) x (Safety
Factor) x square
root of
(lead
time divided by forecast period)
The Standard
Deviation is a statistical analysis term relating to the amount
of demand
variability. It can also be defined in terms of Mean Absolute
Deviation (MAD),
where MAD is simpler to calculate.
Standard
Deviation = MAD x 1.25
The Safety
Factor is obtained from a Safety Factor Chart that
defines the
numerical factor to
be used to attain a desired Service Ratio delivery
performance level.
Safety
Factor Chart sampling: Service Ratio Safety Factor
80% 0.84
90% 1.28
95% 1.65
98% 2.05
99% 2.33
99.99% 4.00
The Safety Factor
Chart reveals that disproportionately greater amounts of
additional safety
stock will be required to realize incremental increases in
delivery service
performance.
ABC
Inventory Analysis
The Pareto 80/20 rule
generally applies to inventory management. The
premise is that
approximately 20% of the stock code items are responsible
for 80% of the
inventory movements.
Based on that
premise, it is then prudent to focus inventory management
efforts more
intensely on those items that make up the 20%, since better
inventory control on
those items will have the greatest positive impact.
APICS
Guidelines for ERP 55
Most ERP systems
include an automated process to categorize inventory
items with an ABC
code based on a combination of usage and value. The
user would typically
define the ABC code breakpoint, perhaps as follows:
A items – 80% of
usage-value (20% of items)
B items – 10% of
usage-value (30% of items)
C items – 10% of
usage-value (50% of items)
Then the user would
be able to selectively include A or B or C coded items
when analyzing
inventory. Typically A coded items would be managed more
closely than C coded
items.
Because of the
different nature of purchased and manufactured items, it is
critical that the ABC
coding of these two groups of items be segregated.
Otherwise, a
purchased item with significant inventory movement activity
could get coded as a
C item due to the greater valuation inherent with
manufactured items.
ABC inventory
analysis is just another tool to provide a better return on the
inventory investment.
APICS
Guidelines for ERP 56
Distribution
Requirements Planning
An inventory
management strategy may include Distribution Centers to
store product, or to
assemble product, at strategic warehouse locations that
are geographically
closer to the customers.
The benefits of this
strategy include transportation savings, better customer
service and increased
selling opportunities. However, this strategy also adds
additional overhead
and inventory costs.
Centralized
Replenishment Control: This is a push
system that uses
a distribution
requirements planning (DRP) system to calculate and plan the
replenishment
requirements for all distribution facilities. Replenishment
decisions are made by
a DRP planner, and product is then pushed down to
the distribution
centers.
A DRP system can
typically allocate inventory resources in the most cost
efficient manner.
However, this method may ignore the benefit of localized
input, such as
anticipated spikes in local demand. DRP systems use much of
the same logic as MRP
systems to review demand and then suggest
replenishment orders,
such as considering lot sizing rules by stock code.
Decentralized
Replenishment Control: This is a pull
system where
product replenishment
is planned at each distribution center. This method
can more effectively
consider any localized replenishment planning factors.
However, since each
distribution center is responsible for ordering their own
replenishment, it
generally requires that each distribution center have their
own planning system.
The various systems may not be able to view or
utilize inventory
available at other distribution centers, which in turn may
require greater
safety stock levels at each location.
APICS
Guidelines for ERP 57
Storage
Management processes are used to store and locate products in
a warehouse, and
generally fall into one of the following categories:
· Random Location: Product
is stored wherever there is space, and
the bin location may
be recorded to facilitate locating that product
as it is needed.
· Fixed Bin Location: Specific
product is stored in specific bin
locations. This is
not the most efficient use of warehouse space,
since bins reserved
for a specific product may sit empty.
· Zone Storage: This
is random location storage within a fixed zone
location. Again, the
bin location may be recorded to facilitate
locating the product.
· Point-of-use Storage: This
method provides storage of product at
the point of usage to
minimize the overhead of tracking and
moving product. It
can be used with finished goods held at the
customer site under
consignment, or with raw materials held at the
work cell.
Transportation
alternatives need to be considered for product being
delivered to
customers or product being shipped to distribution centers. The
mode of
transportation to use depends on volume, weight, value, distance
and accessibility
considerations.
The more common modes
of transportation include parcel delivery (UPS),
bus (Greyhound), air
(Fed-Ex, UPS Red), truck line (TL, LTL, Reefer),
water (ship, barge),
railroad or pipeline.
Route
Scheduling may also be relevant for certain manufacturers that are
also in the business
of delivering product to their customers. In this case, a
route scheduling
system may be used to plan the most efficient use of the
company’s delivery
resources.
Such a system might
plan the daily delivery routes for drivers relative to the
orders that will be
ready to ship. It may also plan the sequencing of orders
to be loaded onto
trucks relative to the planned unloading sequence of
product as the driver
makes the scheduled delivery stops.
When product is
shipped using a third party transportation company, then
the responsibility
for route scheduling typically shifts to that third party as
soon as the product
leaves the shipping dock.
APICS
Guidelines for ERP 58
Principles
of Just-In-Time (JIT)
“There
is nothing so useless as doing efficiently that which should not be
done
at all.”
Peter Drucker
Business Management
Guru
History
of JIT
The original notion
of Just-In-Time (JIT) was to provide the following:
· the right amount
· of the right material
· to the right place
· at the right time
This concept involved
suppliers providing raw materials to manufacturers,
or manufacturers
providing finished goods to their customers.
JIT has evolved to
represent a broader philosophy, and is defined by APICS
as
the process for continuous improvement of quality, productivity, inventory
reduction,
and the elimination of all non-value-add activities through a team
approach
that encourages employee development and empowerment.
The objective is to
make JIT part of the corporate culture and work ethic,
and typically
includes the following goals:
· improve responsiveness to
customers (better delivery service)
· improve quality of work life
(better morale, less turnover)
· achieve minimum quality
standards (TQM Zero Defect standards)
· improve manufacturing
flexibility (flexible volume, mix, labor)
· improve asset productivity
(inventory, people, machine, facilities)
· improve time management
(time is money, enhance productivity)
· reduce costs without
sacrificing quality (elimination of waste)
APICS
Guidelines for ERP 59
The soul of the JIT
philosophy is the elimination of waste. Waste consists of
all non-value-added cost
elements. It may include excessive inventory,
excessive
manufacturing queue/setup/run/teardown/wait/move times, overengineered
product designs,
defective product (scrap) or reworking, any
motion or activity
that doesn’t add value to the product, poor selection of
transportation, etc.
Enormous improvements
in productivity and profitability are possible when
applying JIT
principles to the corporate culture. However, keep in mind that
the successful
implementation of JIT depends on people, not hardware or
software. JIT is not
a short-term fix, but a continuous improvement program
that has to be
actively promoted and supported by management.
JIT
Techniques
Kanban:
A simple pull system for the replenishment of components in
a
repetitive production
line environment. It is a visual and orderless system
used to authorize
replenishment of more component material to production.
This technique is
most applicable in repetitive production line environments
where there is a
level demand for the same components , where component
replenishment has a
short lead time, and where component replenishment
can be made in small
batch sizes.
The goal of Kanban is
to minimize replenishment lead time, minimize raw
material inventory,
minimize manufacturing lead time, minimize WIP, and
minimize queue space.
Kanban needs to be
simple and visual. Examples of Kanban are as follows:
· Kanban square: A makes
components for B and puts the parts in a
designated area. As
soon as B pulls that batch of parts from the
designated area, then
A is authorized to produce another batch.
· On an automotive assembly
line, when an engine is installed onto
the frame, a colored
golf ball that designates the type of engine
just used is removed
from a packet attached to the engine and
dropped down a pipe
that goes to the engine supply room. The
engine supply room
then immediately replenishes the assembly
line with another
engine of the type just used.
APICS
Guidelines for ERP 60
· An outside supplier provides
point-of-use delivery of components
to a customer’s
production line. When delivering containers of
additional
components, the driver picks up the empty containers
from previous
deliveries. The empty containers automatically
authorize the
supplier to replenish that amount of component
product.
Focused
factories: The concept is to isolate engineering and manufacturing
resources for a
specific product family in order to allow the smaller group to
focus its attention
exclusively on that particular product line.
The concentration of
resources on smaller family groups can usually provide
superior products
that are better aligned with customer requirements, and
typically can be
manufactured using more efficient workflow layouts.
Focused factories can
be independent facilities separated geographically, or
they can be profit
centers within a larger organization at a single location.
Cellular
Manufacturing: This concept is related to focused factories, and
promotes developing
families of similar parts to reduce changeovers and
simplify scheduling.
Production machinery can then be arranged by product
family to reduce
manufacturing queue time and move time.
Cellular
manufacturing implies production line manufacturing. Production
line manufacturing
implies operation overlapping. Operation overlapping
dramatically reduces
manufacturing lead times by eliminating virtually all
queue time and wait
time. Removing queue time and wait time dramatically
reduces WIP and
reduces the space required to hold WIP.
Order splitting,
which means running a single job operation on multiple
machines
simultaneously, may also be utilized to reduce manufacturing lead
time, but at the
expense of additional setup time.
Single
Minute Exchange of Die (SMED): This is another JIT concept
that
stresses reducing setup
time.
As discussed
previously, reducing setup time allows for smaller economic
batch quantities,
which reduces inventory holding costs and allows for better
flexibility
responding to customer requirements.
Certified
Suppliers: Certified suppliers implies fewer suppliers, and perhaps
the ability to
eliminate the need for inspection of incoming materials.
APICS
Guidelines for ERP 61
The original JIT
concept of having the right amount of the right material at
the right place at
the right time is still of vital importance to a manufacturing
operation. Please
note that lowest price was not part of the JIT statement. It
is very possible for
lower priced components to add significantly more cost
to manufacturing by
generating more scrap / rejects / rework, forcing
changes to the
production schedule, etc.
The primary objective
of a certified supplier program is to find a single
source for each
component, where that source can continuously meet the
manufacturer’s volume
and quality requirements. This typically can evolve
into a very close
relationship where the supplier may be included in product
development
discussions to provide additional expertise.
Supplier
certification can also apply to outside contractors who may be used
to provide
specialized manufacturing processes, or to provide additional
capacity
periodically.
As always, the JIT
goal is to implement processes that allow manufacturers
to operate more
productively and more profitably.
Poka-yoke:
This is a Japanese term meaning to mistake-proof processes, and
typically includes
some sort of pass/no-pass quality control check.
It implies being able
to screen products from advancing in the production
process if they don’t
pass a specific quality control test. The test needs to be
simple and visual (or
auditory).
Examples might be
checking that the piece fits in a quality control jig, that a
dowel turns easily in
a hole, that the weight or temperature of the product is
within a specified
tolerance, that the part mates with the next part in the
assembly, etc.
Theory
of Constraints: This relatively modern theorem states that the
throughput
(productivity and profitability) of a manufacturing enterprise is
restricted by the
most constraining bottleneck in the manufacturing process.
The theory further
stipulates that conventional cost analysis does not
effectively consider
the implications of these constraints. For example, if
throughput is
constrained at a work center that can process 100 pieces per
hour, it may seem
cost prohibitive to do operation splitting using an alternate
work center that can
only process 20 pieces per hour.
APICS
Guidelines for ERP 62
However, the
improvement in total factory throughput by utilizing the
alternate resource
can be tremendous in such a scenario. It may allow other
work centers to
operate at a higher utilization, substantially increasing
production for
current sales orders, and significantly increasing profitability.
A technique called
Drum-Buffer-Rope (DBR) has been prescribed by the
Theory of Constraint
(TOC) experts to maximize production throughput by
paying special
attention to bottleneck work centers.
DBR specifies that
the constraining work center should always be operated
at full utilization
and that production at upstream and downstream operations
should be
synchronized with the production capabilities of the bottleneck
work center.
To maximize the
productive capacity of a constraining work center, efforts
should be made to
reduce setup time and tear down time, and to maximize
run time cycle rates.
Downtime must be minimized, and there should
always be a queue of
available work for this work center.
Benefits
of JIT
Since JIT is a
commitment to continuous improvement, the benefits from
implementing JIT
concepts are generally ongoing and incremental. The
objective is to
institute processes that promote lasting productivity and
profitability
enhancements. These enhancements are typically the result of
numerous improvement
activities, and it may be difficult to analyze the ROI
from any individual
activity.
Some of the benefits
of operating more efficiently include the following:
· reductions in purchasing and
manufacturing lead times
· reductions in raw material,
WIP and finished inventory
· reductions in scrap, rejects
and reworking
· reduced space needed for WIP
and inventory
· setup time reductions and
improved cycle rates
· improved machine and
employee productivity
Utilizing JIT
principles is a low risk / high reward proposition. The cost of
JIT is in the
education and training needed to develop personnel to be more
effective in defining and implementing
improvements to your operations.
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