Concepts in Enterprise

Resource Planning
4th Edition

Chapter Four
Production and Supply Chain
Management Information Systems
Concepts in Enterprise Resource 1
Planning, 4th Edition
 Objectives
After completing this chapter, you will be able to:
• Describe the steps in the production planning process
of a high-volume manufacturer such as Fitter Snacker
• Describe Fitter Snacker’s production and materials
management problems
• Describe how a structured process for Supply Chain
Management planning enhances efficiency and
decision making
• Describe how production planning data in an ERP
system can be shared with suppliers to increase supply
chain efficiency

Concepts in Enterprise Resource Planning, 4th Edition 2

 Introduction

• Explore some Supply Chain Management functions

(SCM) in an ERP system
• Explore Fitter’s SCM problems and how ERP can
help fix them
• problems scheduling production
• its warehouse is not adequately stocked, and
customer orders cannot be filled in a timely fashion

Concepts in Enterprise Resource Planning, 4th Edition 3

 Production Overview

• To meet customer demand efficiently, Fitter

Snacker must:
– Develop a forecast of customer demand
– Develop a production schedule to meet the
estimated demand
• ERP system is a good tool for developing and
executing production plans
• Goal of production planning is to schedule
production economically

Concepts in Enterprise Resource Planning, 4th Edition 4

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

Concepts in Enterprise Resource Planning, 4th Edition 6

 Fitter Snacker’s Manufacturing
Process
• Fitter Snacker uses make-to-stock production

Figure 4-1 Fitter Snacker’s manufacturing process

Concepts in Enterprise Resource Planning, 4th Edition 7

 Fitter Snacker’s Manufacturing
Process (cont’d.)
• Snack bar line can produce 200 bars a minute, or
3,000 pounds of bars per hour
• Each bar weighs four ounces
• Entire production line operates on one shift a day
• Fitter Snacker’s production sequence
– See Figure 4-1
• Switching the production line from one type of snack
bar to the other takes 30 minutes
– producing two products in one day results in a half-hour loss
of capacity during the changeover
– Capacity: number of bars that can be produced
Concepts in Enterprise Resource Planning, 4th Edition 8
 Fitter Snacker’s Production Problems
• Fitter Snacker has problems deciding how many bars to
make and when to make them
• Communication problems
– FS’s Marketing and Sales personnel do not share information
with Production personnel
• Marketing and Sales frequently excludes Production from
meetings,
• neglects to consult Production when planning sales promotions,
• forgets to notify Production when it takes an exceptionally large
order.
– Production personnel find it hard to deal with sudden increases
in demand
• warehouse inventories are depleted
• Might cause shortages or stockout
Concepts in Enterprise Resource Planning, 4th Edition 9
 Fitter Snacker’s Production Problems
(cont’d.)
• Inventory problems
– Production manager lacks systematic method for:
• Meeting anticipated sales demand
• Adjusting production to reflect actual sales
• Accounting and purchasing problems
– not have a good way to calculate the day-to-day costs of
Fitter’s production
• Uses standard costs: normal costs of manufacturing a product
• For each batch of bars it produces, Fitter can estimate direct costs
(materials and labor) and indirect costs (factory overhead)
• manufacturing costs = The number of batches produced is
multiplied by the standard cost of a batch
– Production and Accounting must periodically compare standard costs
with actual costs and then adjust the accounts.

Concepts in Enterprise Resource Planning, 4th Edition 10

 The Production Planning Process
• Three important principles for production planning:
– Work from sales forecast and current inventory levels to create
an “aggregate” (“combined”) production plan for all products
• plans are made for groups of related products
• the time increment used in aggregate planning is frequently a
month or a quarter
– Break down aggregate plan into more specific production plans
for individual products and smaller time intervals
– Use production plan to determine raw material requirements
• Example: A consumer products company may group by product
type (e.g., shampoo, laundry detergent, and disposable diapers).
– The aggregate production plan for Fitter will combine the only
two products, NRG-A and NRG-B bars using a monthly time
increment.
Concepts in Enterprise Resource Planning, 4th Edition 11
The SAP ERP Approach to Production
Planning

Figure 4-2 The production planning process

Concepts in Enterprise Resource Planning, 4th Edition 12

The SAP ERP Approach to Production
Planning
• Sales forecasting is the process of predicting future demand
for a company’s products.
• Sales and operations planning (SOP) is the process of
determining what the company will produce
• In the Demand management step, the production plan is
broken down into smaller time units, such as weekly or even
daily to meet demand for individual products.
– The Materials requirements planning (MRP) process
determines the amount and timing of raw material orders
• create raw materials purchase orders in the Purchasing step
– the detailed production schedule will determine when the
production line will switch between the RG-A and NRG-B bars.
• manage daily operations in the Production process
Concepts in Enterprise Resource Planning, 4th Edition 13
 Sales Forecasting
• FS’s has no formal way of developing a sales forecast and
sharing it with Production
• SAP’s ERP system takes an integrated approach
– Whenever a sale is recorded in Sales and Distribution
(SD) module, quantity sold is recorded as a consumption
value for that material
• Simple forecasting technique
– Use a prior period’s sales and then adjust those figures for
current conditions
• To make a forecast for FS’s :
– Use previous year’s sales data in combination with marketing
initiatives to increase sales

Concepts in Enterprise Resource Planning, 4th Edition 14

 Sales Forecasting (cont’d.)

•To get accurate base figures for last year’s sales, this promotional increase must be
subtracted from the previous year’s sales numbers
•Fitter’s Marketing and Sales Department anticipates a 3 percent growth in sales over
last year, based on current trends and on research reported in trade publications

Figure 4-3 Fitter Snacker’s sales forecast for January through June

Concepts in Enterprise Resource Planning, 4th Edition 15

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

Concepts in Enterprise Resource Planning, 4th Edition 16

 Sales and Operations Planning

• Sales and operations planning (SOP)

– Input: sales forecast provided by Marketing
– Output: production plan designed to balance market
demand with production capacity
• Production plan is the input to the next step, demand
management

Concepts in Enterprise Resource Planning, 4th Edition 17

 Sales and Operations Planning
(cont’d.)

• capacity calculation ( next slide)

•To determine the capacity utilization for each month by dividing the production plan amount (line 2) by the
available capacity (line 5).
• 7 and 8 in Figure 4-5 disaggregate the planned production shown in line 2, based on the breakdown of 70
percent NRG-A and 30 percent NRG-B snack bars

Figure 4-5 Fitter Snacker’s sales and operations plan for January through June

Concepts in Enterprise Resource Planning, 4th Edition 18

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

Concepts in Enterprise Resource Planning, 4th Edition 19

 Sales and Operations Planning
(cont’d.)
• In SAP ERP, sales forecast can be made using:
– Historical sales data from the Sales and Distribution
(SD) module, or
– Input from plans developed in Controlling (CO)
module
• In the CO module
– Profit goals for company can be set
• used to estimate the sales levels needed to meet the
profit goals

Concepts in Enterprise Resource Planning, 4th Edition 20

 Sales and Operations Planning
(cont’d.)

Figure 4-6 Sales and operations planning screen in SAP ERP

Concepts in Enterprise Resource Planning, 4th Edition 21
 Sales and Operations Planning
(cont’d.)
• Rough-cut planning: common term in
manufacturing means: Disaggregated to generate
detailed production schedules
• Once SAP ERP system generates a forecast, the planner
can view the results graphically
• Another feature of the SAP ERP sales and operations
planning process is the integration of
– Rough-cut capacity planning applies simple
capacity-estimating techniques to the production
plan to see if the techniques are feasible

Concepts in Enterprise Resource Planning, 4th Edition 22

 Sales and Operations Planning
(cont’d.)

Figure 4-9 Forecasting results presented graphically in SAP ERP

Concepts in Enterprise Resource Planning, 4th Edition 23

 Sales and Operations Planning
(cont’d.)
• Disaggregating the sales and operations plan
– Companies typically develop sales and operations
plans for product groups
– SAP ERP system allows any number of products to
be assigned to a product group
– Sales and operation plan disaggregated
• Production plan quantities specified for the group are
transferred to the individual products that make up the
group

Concepts in Enterprise Resource Planning, 4th Edition 24

 Sales and Operations Planning
(cont’d.)

Figure 4-11 Product group structure in SAP ERP

Concepts in Enterprise Resource Planning, 4th Edition 25

 Sales and Operations Planning
(cont’d.)

Figure 4-12 Stock/Requirements List for NRG-A bars after disaggregation

Concepts in Enterprise Resource Planning, 4th Edition 26

 Demand Management
• Links the sales and operations planning process with
detailed scheduling and materials requirements planning
processes
• Output: master production schedule (MPS)
– Production plan for all finished goods
• For Fitter Snacker, MPS is
– an input to detailed scheduling, which determines what bars to make and when
to make them
– Also an input to the materials requirements planning process, which determines
what raw materials to order to support the production schedule
•The demand management process splits Fitter’s
monthly production planning values into finer time
periods

Concepts in Enterprise Resource Planning, 4th Edition 27

 Demand Management (cont’d.)

Figure 4-14 Fitter Snacker’s production plan for January: The first five weeks
of production are followed by a day-by-day disaggregation of week 1
Concepts in Enterprise Resource Planning, 4th Edition 28
• For the weekly plan, the master production schedule
MPS plan for NRG-A bars in week 1 was calculated as:

• (4,134 cases in January [the monthly demand from

Figure 4-5] ÷ 21 working days in month of January)
× 5 working days in Week 1 = 984.3 cases per
week.

Concepts in Enterprise Resource Planning, 4th Edition 29

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

Concepts in Enterprise Resource Planning, 4th Edition 30

 Materials Requirements Planning
(MRP)
• Determines required quantity and timing of the
production or purchase of subassemblies and raw
materials needed to support master production
schedule MPS
– Bill of material (BOM): list of the materials
(including quantities) needed to make a product

Concepts in Enterprise Resource Planning, 4th Edition 31

 Materials Requirements Planning
(MRP) (cont’d.)

Figure 4-16 The bill of material (BOM) for Fitter Snacker’s NRG bars

Concepts in Enterprise Resource Planning, 4th Edition 32

 Materials Requirements Planning
(MRP) (cont’d.)
• Lead times and lot sizing
– Lead time: cumulative time required for the supplier
to receive and process the order, take the material
out of stock, package it, load it on a truck, and
deliver it to the manufacturer
– Lot sizing: determining production quantities ( for
raw materials produced in-house) and order
quantities (for purchased items).

Concepts in Enterprise Resource Planning, 4th Edition 33

 Materials Requirements Planning
(MRP) (cont’d.)

Figure 4-17 The MRP record for oats in NRG bars, weeks 1 through 5
•Each mixer mixes dough in 500-pound batches ( see Figure 4-1 )
Each shipping case weighs 72 pounds (not including packaging), so to convert shipping
cases to 500-pound batches, multiply the number of shipping cases by
72 pounds per case, and then divide by 500 pounds per batch (see line3)
•Fitter uses 300 pounds of oats per batch of NRG-A bar and 250 pounds of oats per batch
of NRG-B bar
•NRG-A: 142 batches × 300 lb. per batch = 42,600 lb. oats
• NRG-B: 61 batches × 250 lb. per batch = 15,250 lb. oats
• Total = 57,850 lb. oats
34
Concepts in Enterprise Resource Planning, 4th Edition
• Scheduled receipts, shows the expected timing of orders of materials that have already been
placed. (Plan orders in multiples of the 44,000-pound lot size)
– There is a two-week lead time for oats
• Planned receipts, shows when planned orders will arrive
• Planned orders ,shows the quantity that the MRP calculation recommends ordering, and it
is the output from the MRP process that purchasing uses to determine what to order to
produce the product, and when to order it.

Concepts in Enterprise Resource Planning, 4th Edition 35

 Exercise 4.5

• Develop an MRP record, similar to the one in

Figure 4-17, for wheat germ for the five weeks of
January. Wheat germ must be ordered in bulk-
container quantities, so the planned orders must be
in multiples of 2,000 pounds. Use a lead time of
one week and an initial on-hand inventory of 3,184
pounds; assume that an order of 8,000 pounds is
scheduled for receipt during Week 1.

Concepts in Enterprise Resource Planning, 4th Edition 36

 Materials Requirements Planning in
SAP ERP
• MRP list shows results of MRP calculations
• MRP process creates planned orders to meet dependent
requirements (Dependent requirements represent the demand for oats
created by the planned orders for snack bars—the demand for oats
depends on the production plans for snack bars.)
• Stock/Requirements List shows:
– Planned orders
– Purchase requisitions (PurRqs)
– Purchase orders (POitem)
• Planner can convert a planned order to a purchase order from
Stock/Requirements List by double-clicking the planned order line

Concepts in Enterprise Resource Planning, 4th Edition 37

 Materials Requirements Planning in
SAP ERP (cont’d.)

Figure 4-18 The MRP list in SAP ERP

Concepts in Enterprise Resource Planning, 4th Edition 38
 Materials Requirements Planning in
SAP ERP (cont’d.)

Figure 4-19 The Stock/Requirements List in SAP ERP

Concepts in Enterprise Resource Planning, 4th Edition 39
 Materials Requirements Planning in
SAP ERP (cont’d.)
• Integrated information system allows Purchasing to
make the best decision on a vendor based on
relevant, up-to-date information
• Once Purchasing employee decides which vendor
to use, the purchase order is transmitted to vendor
– System can be configured to fax order to vendor,
transmit it electronically through EDI (electronic data
interchange), or send it over the Internet

Concepts in Enterprise Resource Planning, 4th Edition 40

 Detailed Scheduling
• Detailed plan of what is to be produced, considering
machine capacity and available labor
• One key decision in detailed production scheduling
– How long to make the production runs(A group of similar or
related goods that is produced by using a particular group of
manufacturing procedures, processes or conditions ) for each
product
– Production run length requires a balance between setup costs
(cost involved in placing an order or setting up the equipment to
make the product , etc) and holding costs (storage, insurance,
investment) to minimize total costs to the company

Concepts in Enterprise Resource Planning, 4th Edition 41

 Detailed Scheduling (cont’d.)

• Fitter Snacker uses repetitive manufacturing

• Repetitive manufacturing environments
• usually involve production lines that are switched
from one product to another similar product (The
continuous production of identical products during a
manufacturing cycle)
– Production lines are scheduled for a period of time,
rather than for a specific number of items

Concepts in Enterprise Resource Planning, 4th Edition 42

 Detailed Scheduling (cont’d.)

Figure 4-22 Repetitive manufacturing planning table in SAP ERP

Concepts in Enterprise Resource Planning, 4th Edition 43
 Detailed Scheduling (cont’d.)

• Production runs should be decided by evaluating

the cost of equipment setup and holding inventory
• Integrated information system simplifies this
analysis
– Automatically collects accounting information that
allows managers to better evaluate schedule trade-
offs in terms of costs to company

Concepts in Enterprise Resource Planning, 4th Edition 44

 Providing Production Data to
Accounting
• In the manufacturing plant, ERP packages do not
directly connect with production machines
– Data can be entered into SAP ERP through a PC on the shop
floor, scanned using barcode or RFID technology (Radio
frequency identification ), or entered using a mobile device
• In an integrated ERP system, the accounting
impact of a material transaction can be recorded
automatically

Concepts in Enterprise Resource Planning, 4th Edition 45

 Providing Production Data to
Accounting (cont’d.)
• Once F’S accepts shipment, Receiving must notify
SAP ERP system of the arrival and acceptance of
the material
– Goods receipt transaction
• Receiving department must match goods receipt with
purchase order that initiated it
• When receipt is successfully recorded, SAP ERP
system immediately records the increase in inventory
levels for the material

Concepts in Enterprise Resource Planning, 4th Edition 46

 Providing Production Data to
Accounting (cont’d.)

Figure 4-23 Goods receipt screen in SAP ERP

Concepts in Enterprise Resource Planning, 4th Edition 47
 ERP and Suppliers

• Fitter Snacker is part of a supply chain

– Starts with farmers growing oats and wheat
– Ends with a customer buying an NRG bar from a
retail store
• ERP systems can play a key role in collaborative
planning

Concepts in Enterprise Resource Planning, 4th Edition 48

 ERP and Suppliers (cont’d.)
• Working with suppliers in a collaborative fashion requires
trust among all parties
– Company opens its records to its suppliers
– Suppliers can read company’s data because of common data
formats
• Advantages
– Reductions in paperwork
– Savings in time
– Other efficiency improvements translate into cost savings for the
company and the suppliers
• Allows all parties to eliminate from the supply chain costs that do not add
value to the product (such as inventory, overtime, changeovers, and
spoilage), while simultaneously improving customer service.

Concepts in Enterprise Resource Planning, 4th Edition 49

 The Traditional Supply Chain
• Supply chain: all activities that occur between the
growing or mining of raw materials and the appearance of
finished products on the store shelf
– for Fitter’s NRG bars starts with farmers growing oats and wheat, and
it ends with a customer buying a bar from a retail store.
• Traditional supply chain
– Information is passed through the supply chain
reactively, as participants increase their product
orders
– Example
– Inherent time lags cause problems

Concepts in Enterprise Resource Planning, 4th Edition 50

 The Traditional Supply Chain (cont’d.)

Figure 4-24 Supply chain management (SCM) from raw materials to

consumer

Concepts in Enterprise Resource Planning, 4th Edition 51

 The Traditional Supply Chain (cont’d.)

• EDI and ERP

– Before ERP systems were available, companies
could be linked with customers and suppliers
through electronic data interchange (EDI) systems
– Well-developed ERP system can facilitate SCM
• Needed production planning and purchasing systems
already in place
– With ERP system, sharing production plans along
the supply chain can occur in real time

Concepts in Enterprise Resource Planning, 4th Edition 52

 The Measures of Success
• Performance measurements (Metrics)
– Show the effects of better supply chain management
– Cash-to-cash cycle time
• Time between paying for raw materials and collecting cash
from customer
– In one study, the cash-to-cash cycle time for companies with
efficient supply chain management processes was a month,
whereas the cycle averaged 100 days for those companies
without effective supply chain management.
– Total supply chain management costs
• Include cost of buying and handling inventory, processing
orders, and information systems support
– In one study, companies with efficient SCM processes incurred costs
equal to 5 percent of sales. By contrast, companies without SCM
incurred costs of up to 12 percent of sales

Concepts in Enterprise Resource Planning, 4th Edition 53

 The Measures of Success (cont’d.)
• Other metrics have been developed to measure what is
happening between a company and its suppliers
• Initial fill rate
– Percentage of the order that the supplier provided in
the first shipment
• Initial order lead time
– Time needed for the supplier to fill the order
• On-time performance
– If supplier agreed to requested delivery dates, tracks
how often supplier actually met those dates

Concepts in Enterprise Resource Planning, 4th Edition 54

 Summary

• ERP system can improve the efficiency of

production and purchasing processes
– Efficiency begins with Marketing sharing a sales
forecast
– Production plan is created based on sales forecast
and shared with Purchasing so raw materials can be
ordered properly

Concepts in Enterprise Resource Planning, 4th Edition 55

 Summary (cont’d.)

• Companies can do production planning without an

ERP system, but an ERP system increases
company’s efficiency
– ERP system that contains materials requirements
planning allows Production to be linked to
Purchasing and Accounting
– This data sharing increases a company’s overall
efficiency

Concepts in Enterprise Resource Planning, 4th Edition 56

 Summary (cont’d.)

• Companies are building on their ERP systems and

integrated systems philosophy to practice supply
chain management (SCM)
– SCM: company looks at itself as part of a larger
process that includes customers and suppliers
– Using information more efficiently along the entire
chain can result in significant cost savings
– Complexity of the global supply chain
• Developing a planning system that effectively
coordinates information technology and people is a
considerable challenge

Concepts in Enterprise Resource Planning, 4th Edition 57