Production and supply chain process

MIS2101: Management Information Systems

Based on material developed by C.J. Marselis

2

The supply chainRecall from Part 7…

In the sales process, the organization is the supplier

In the purchasing process, the organization is the buyer

The movement of goods from supplier to the end customer is the “supply chain”

Supplier Organization Customer

3

MRP and ERP

Enterprise Resource Planning (ERP) systems evolved from Materials Resource Planning (MRP) systems

MRP systems are a subset of ERP systems Concerned with

the Supply Chain From raw

materials to finished goods

4

Facilitating the production plan

A production plan answers: Quantity of product to make?When to make product?How much raw materials to procure and

when? A successful company must be able to

Develop a good production planExecute the planMake adjustments when customer demand

differs from the forecast

5

Production Approaches

Products are made for inventory in anticipation of orders

Most consumer products

Products are made to fulfill specific orders

Expensive products or high-customization products

Combination of make-to-stock and make-to-order

Final product assembled from stock for a customer(Dell!)

Make to

Stock

Make to

Order

Assemble

to order

6

Fitter Snacker’s Manufacturing Process

Ra

w M

ater

ial W

areh

ous

e

Mixer

Mixer

Mixer

Mixer

Form Bake Pack

Fin

ish

ed G

oods

War

eho

use

Snack Bar Line

Ra

w M

ater

ial W

areh

ous

e

Mixer

Mixer

Mixer

Mixer

Form Bake Pack

Fin

ish

ed G

oods

War

eho

use

Snack Bar Line

Production Quantities:200 bars/minute3,000 lb/hr

Each mixer makes: 4,000 lb dough/hr

Packed 24/box 12 boxes/case.

Changing machines from one product to the other: 30 minutes

7

Production Problems in “Un-integrated” systems

Hard to know how much and when to produce

Problems arise in:

Communication Inventory Accounting

8

Communication issues

If production isn’t integrated with marketing:Production doesn’t know about sales

promotions or unexpected planned orders • Results: depleted inventory, overtime, expedited

shipments, and material shortages

Marketing doesn’t know about planned maintenance

• Results: unexpected reduction in production and unmet demand

9

Production planning process

Develop aggregate production plan for groups of products

Break down aggregate plan into product specific plans for smaller time periods

Determine raw material requirements based on plan

Sales and Operations Planning

Demand Management

MRPDetailedScheduling

Sales Forecasting

PurchasingProduction

StartingInventory

Sales and Operations Planning

Demand Management

MRPDetailedScheduling

Sales Forecasting

Sales Forecasting

PurchasingProduction

StartingInventoryStarting

Inventory

10

An integrated process

Sales and Operations Planning

Demand Management

MRPDetailedScheduling

Sales Forecasting

PurchasingProduction

StartingInventory

Sales and Operations Planning

Demand Management

MRPDetailedScheduling

Sales Forecasting

Sales Forecasting

PurchasingProduction

StartingInventoryStarting

Inventory

Predicts future demand for products

Break production plan down into smaller time increments

Create production schedule based on production plan from demand management

Uses the schedule to determine products and staffing

Determines what company should

produceRequires starting

inventory levels and sales forecast based on capacity

Determines amount and

timing of raw material orders

Takes quantity and timing information

from MRP and creates orders for

suppliers

11

Simple Sales Forecast

In an integrated systemSales automatically recordedAccurate sales data available for forecasting

Sales based on adjustment to previous year’s sales values

Jan. Feb. March April May JunePrevious Year (cases) 5734 5823 5884 6134 6587 6735Promotion Sales (cases) 300 300Previous Year base (cases) 5734 5823 5884 6134 6287 6435Growth: 3.0% 172 175 177 184 189 193Base Projection (cases) 5906 5998 6061 6318 6476 6628Promotion (cases) 500Sales Forecast (cases) 5906 5998 6061 6318 6476 7128

Sales Forecasting

Figure 4.3 Fitter Snacker’s sales forecast for January through June

12

Sales and operations planning

How can manufacturing efficiently produce enough goods to meet projected sales?

Sales and Operations Planning Dec. Jan. Feb. March April May June1) Sales Forecast 5906 5998 6061 6318 6476 71282) Production Plan 5906 5998 6061 6318 6900 67003) Inventory 100 100 100 100 100 524 964) Working Days 22 20 22 21 23 215) Capacity (Shipping Cases) 7333 6667 7333 7000 7667 70006) Utilization 81% 90% 83% 90% 90% 96%7) NRG-A (cases) 70.0% 4134 4199 4243 4423 4830 46908) NRG-B (cases) 30.0% 1772 1799 1818 1895 2070 2010

Figure 4.5 Fitter Snacker’s sales and operations plan for January through June

13

Demand Strategies

If demand is greater than capacity

Option ResultChoose not to meet the demand

Lost sales

Reduce promotional expenditures

Potential lost sales

Use overtime to increase capacity

Increased costs

Build up inventory in earlier periods

Increased costs and lost inventory

0

5

10

15

20

25

30

35

Time

Supply

Capacity

14

Forecasting in an Integrated System

Accurate historical sales values available for forecasting

“Fix” historical sales: If production was unable

to meet demand sales does NOT represent actual demand

Unusual conditions like weather

The effect of sales promotions

This is essentially data warehousing and data mining!

Sales provided fromSD module

Field where planner can “correct” the sales value

15

Sales and Operations Planning (SOP) Case Study

Kellogg’s achieved significant savings from coordinated sales and operations planning (SOP)

Changed focus based on how they were evaluated Marketing and sales: Evaluated on tons of cereal sold Manufacturing: Evaluated on tons of cereal produced No one evaluated on profit!

Kellogg’s new sales order process focused on profit Kellogg’s has reduced capacity, inventory and capital

needs while increasing sales

16

Demand Management

Fitter Snacker’s Demand Management process splits the Monthly SOP plan into weekly and daily increments(MPS – Master Production Schedule)

Week 1 Demand Management 1/2 - 1/5 Monthly Demand NRG-A 4134

NRG-B 1772 Working Days in Week 4 Working Days in Month 22 MPS NRG-A 752 Weekly Demand NRG-B 322

752224

4134

322224

1772

4/22 represents how many

work “weeks” are in each

month

17

Bill of Material

MRP facilitates accurate planning of raw material purchases

Bill of Material (BOM) List of materials and

quantities needed to make a product

Ingredient NRG-A NRG-BOats (lb) 300 250Wheat germ (lb) 50 50Cinnamon (lb) 5 5Nutmeg (lb) 2 2Cloves (lb) 1 1Honey (gal) 10 10Canola Oil (gal) 7 7Vit./Min. Powder (lb) 5 5Carob Chips (lb) 50Raisins (lb) 50Protein Powder (lb) 50Hazelnuts (lb) 30Dates (lb) 70

Quantity

18

Lead Times and Lot Sizing

To determine timing and quantity of purchases Lead time includes:

Time for supplier to receive and process order Time to take material out of stock, package it, load it

on a truck and deliver it to the manufacturer Time required at manufacturer to receive the material:

• Unload the truck, inspect the materials, move to storage location or production line

Lot sizing: determining production or order quantities In many cases, lot sizes for purchased items are

constrained by packaging and transportation

19

Purchasing and ERP

Provides way to convert Requirements to Purchase Order automatically

Help the purchasing specialist select the best vendor (best price)

Options to evaluate vendorsConvert MRP data to a purchase order

20

Production and Accounting in an Integrated System

Information entered for material movement automatically updates accounting records Info can be

entered through data entry, barcode, RFID, etc.

Material received (for MRP) and the

purchase order

21

Implications for Supply Chain Management

Supply chain participants often use competitive bidding to reach a “winning” prices by reacting

Creates adversarial relationship among participants

Supplier

Raw

Mat

eria

ls

Manufacturer Wholesaler Retailer

Cus

tom

er

Goods Goods Goods Goods Goods

$$ $ $ $

Information Information Information Information Information

Supplier

Raw

Mat

eria

ls

Manufacturer Wholesaler Retailer

Cus

tom

er

Goods Goods Goods Goods Goods

$$ $ $ $

Information Information Information Information Information

22

Supply Chain with ERP (Integration)

Production plans can be shared along the supply chain in real time

Managers can evaluate impact of plans on total cost across the supply chain

Collaboration among participants leads to: Improved product quality Reduced paperwork Reduced inventories Increased customer responsiveness

23

Inventory Control Case Study – Hoyt Archery

Pre ERP, complete inventory count two times each yearClosed plant for 3 days at cost of $5000 /day

Post ERP, accurate, real-time inventory information and ongoing cycle- counting process: items are counted each day

Hoyt also simplified customer interaction with its configure-to-order (CTO) process

24

SCM with Customer Collaboration Case Study – Wal-Mart

POS data from bar code scanners is recorded in a massive data warehouse at Wal-Mart headquarters

Wal-Mart uses data mining techniques to predict what customers will buy at different times of the year

Data is shared with Wal-Mart suppliers to plan production

Wal-Mart also allows its 5000 suppliers to directly access its data warehouse through its Retail Link program

Wal-Mart is leading the effort to leverage RFID technology

25

Summary

An ERP system can improve the efficiency of production and purchasing processes

Begins with Marketing sharing sales forecast Production plan is created based on forecast

and shared with Purchasing so raw materials can be ordered properly.

Production planning can be done without an integrated system, but integrated system that allows MRP and Production to be linked to Purchasing and Accounting