Managing Process Manufacturing Using Microsoft Dynamics AX

Introduction
A primary challenge for many process manufacturing firms involves effective implementation and use of an enterprise resource planning (ERP) system for managing the business.  In some firms, the challenge stems from limitations in the current system such as an out-of-date or overly complex software package.  In other firms considering a new ERP package, the challenge stems from their distinctive business practices, and the need to understand how a new package would solve these requirements.   These firms are looking for more out-of-the-box functionality to help minimize custom development, increase predictability of successful implementation and usage, and provide templates for best practices.  The short list of candidate packages typically includes Microsoft Dynamics AX.  

A new book—Managing Process Manufacturing using Microsoft Dynamics AX—explains how Dynamics AX supports the business practices of process manufacturing and distribution firms. These firms handle products representing a wide spectrum of industries. Typical examples include food and beverage, chemicals, life sciences, paper, and primary metals as well as non-durable consumer packaged goods (CPG), and each niche often has specialized requirements. A subset of process firms are also involved in discrete manufacturing (aka a hybrid manufacturer), such as a producer of cleaning solvents and the associated cleaning equipment. These variations are illustrated by 70+ case studies in the book.

The book’s target audience includes those individuals implementing or considering Dynamics AX as their ERP system to manage a process manufacturing business, including those with different levels of AX expertise, in different industry types, and at different implementation stages. The book has been segmented and organized to assist the learning objectives of several groups within the target audience, as summarized below.

1. Different levels of AX expertise, ranging from novices (trying to grasp how the whole system fits together to run their business) to experienced users (trying to learn the new functionality for process manufacturing, or trying to teach novice users).
2. Different types of distribution or manufacturing environments.
3. Different types of process industries such as chemicals, food/beverage or life sciences.
4. Different stages of system implementation, such as evaluating system fit during system selection, or accelerating the learning process during implementation.

The book employs an anchor-and-adjustment learning strategy. For example, the explanation of each business process (such as sales order processing) starts with a basic model reflecting dominant business practices, which then provides a framework for explaining major variations. Another example applies to those with prior AX experience, where the book highlights incremental changes associated with the new software version for process manufacturing. 

One example of incremental change involves the definition of product structure information and the coordination of actual production activities. Product structure information is termed a bill of material (BOM) by discrete manufacturers and a formula by many process manufacturers. These terminology differences have a special significance within AX, since the item type assigned to a manufactured item impacts software functionality. The two item types—termed BOM Item and Formula Item—support different approaches for modeling product structure information. They also employ different order types—termed Production Order and Batch Order—for coordinating actual production. A process manufacturer typically employs just one item type (Formula Items), so that the differences in item types only apply to hybrid manufacturers or to those readers trying to understand the differences.

This book directly addresses the embedded conceptual models within the AX software that support various types of process environments. The information requirements and usage of these conceptual models are described in terms of the end-user experience with standard forms. The navigational details of the end-user experience may differ—whether using customized forms or web-based or hand-held applications—but the information requirements must still conform to the embedded conceptual models. An understanding of the conceptual models can lead to best practices, more effective system usage, and reduced customization. It provides the big picture of “how it all fits together to run the business” and justifies the navigational details of the end-user experience. 

The book contents represent those use cases actually tested and proven by the author, which required thousands of hands-on simulations for business process variations in process manufacturing.  The same approach was employed in my previous AX books.  Given the focus on operational and supply chain management aspects of running a business, the book contents do not attempt to address many other important aspects of system usage. For example, it does not explain the integrated applications for accounting, human resources, and customer relationship management, nor does it explain role-centered pages, alerts, and customization capabilities.  

The book builds on several years of the author’s prior research and field experience with several hundred firms. It also builds on (and summarizes) the information covered in several weeks of classroom training, as well as several thousand pages of user documentation and training materials. It is intended to provide a training tool for professionals with limited time availability and budget.

The following excerpt is from the book’s Summary Chapter, which summarizes system usage in process distribution and process manufacturing environments. 

Summary Chapter
This book focused on how Microsoft Dynamics AX 2009 provides an integrated ERP system to support the business practices of process distributors and manufacturers, including hybrid scenarios that involve discrete manufacturing. The targeted reader included those individuals implementing or considering Dynamics AX as their ERP system, as well as those providing consulting assistance. The book presented a complete walk-through of functionality related to operations and supply chain management. In particular, it described the embedded conceptual models within AX that represent the basic business processes and their variations to run a business. An understanding of these conceptual models can lead to best practices, more effective system usage, and reduced customization. An understanding provides the big picture of how it all fits together to run the business, and justifies the navigational details of the end-user experience.

These conceptual models were described in terms of the end-user experience with standard forms. The navigational details may differ when using customized forms, Web-based applications, or hand-held devices, but the information requirements must still conform to the embedded conceptual models.

The book contents can be summarized into two major sections about process distribution and process manufacturing environments. As an aid to those with prior AX experience, the following summary uses italics to highlight new functionality associated with process manufacturing.  Other readers can ignore the significance of italics.

System Usage in Process Distribution
A process distribution environment typically involves the purchase and sale of stocked material items, often with batch tracking considerations. Major factors shaping system usage include the definition of items, batch tracking policies, item costing, coordination of supply chain activities, and variations in sales, purchasing, quality management, and warehousing.

Item Definition: The identifier for a purchased item consists of an item number, although alternative identifiers may be used for supporting sales, purchasing, and intercompany orders. Other item information includes the following:

• Unique identifier based on the item number and variant code(s), such as color and size
• Authorized units of measure for sales and purchasing purposes
• Designation of catch weight items and their units of measure (for weight and pieces), and the policies for pricing and inventory tracking
• Designation of bulk items and the item numbers representing their container variations, which supports inquiries about a bulk item’s inventory balances
• Approved vendors, and the policies for enforcing approved vendors
• Extended text and documents such as Word files and images
• Physical dimensions such as weight and volume that can be used to calculate totals for a sales or purchase order
• Financial dimensions for business analytics purposes

Batch Tracking Considerations (aka Lot Tracking): Batch tracking involves one or more of the following considerations.
• Batch numbering policies, including a mask for automatic assignment of an item’s batch numbers
• Vendor batch information, including shelf life dates and country of origin 
• Shelf life dates for a batch, including the manufacturing date, expiration date, best before date, and shelf advice date
• Batch attributes, including the item’s acceptable range of values (for an attribute) and a customer-specific range of values
• Batch disposition codes, including policies concerning restricted usage
• Batch tracking history

Item Costing: An item’s cost provides the basis for valuing inventory transactions and measuring profitability. It can be based on a standard costing or an actual costing method such as FIFO, LIFO, and weighted average. If applicable, miscellaneous charges such as freight or handling fees can be assigned to purchase orders and sales orders. An item’s standard costs are site-specific, while an actual cost item can have site/warehouse-specific costs, or even batch-specific costs.

Item Replenishment Policies: Item planning data provides the basis for suggested replenishment at sites/warehouses. The basic replenishment methods include min/max, period lot size, and order driven. With the min/max method, the item’s minimum and maximum quantities can be fixed or variable, where a variable quantity can be specified for user-defined time periods such as months. The minimum can also be automatically calculated based on historical usage and the desired customer service level. With the other replenishment methods, the minimum quantity represents the safety stock requirement. Order quantity modifiers (minimum, maximum, and multiple) apply to the suggested order quantity. The suggested vendor for a planned purchase order can reflect a company-wide preference, a site/warehouse-specific preference, or planning logic based on the lowest price or delivery lead time defined in the item’s purchase price trade agreements. An item’s replenishment method can also be based on manual planning.

Coordinating Procurement Activities: Planning calculations synchronize supplies to meet demands, and provide coordination via planned orders and suggested action messages.

• Planned purchase orders. Planned purchase orders reflect site/warehouse-specific planning data for an item. The suggested vendor can reflect the item’s preferred vendor (specified as a company-wide or site/warehouse-specific vendor), or the vendor with the lowest price or delivery lead time. You can create purchase orders from planned orders, or use a firming time fence so that the system automatically creates the purchase orders.
• Planned transfer orders in a multisite operation. Planned transfer orders reflect site/warehouse-specific planning data for an item, which includes the warehouse source for the transfer. The lead time can reflect transportation time between warehouses and the calendars assigned to the warehouses and delivery mode.
• Suggested action messages. Planning calculations generate two types of suggested action messages termed actions and futures. An actions message indicates a suggestion to advance/postpone an order’s delivery date, to increase/decrease an order quantity, or to delete an order. A futures message indicates the projected completion date will cause a delay in meeting a requirement date such as a sales order shipment. For example, if you define a delay in the confirmed receipt date for a purchase order line item, a futures message can identify the impact on delayed delivery of a sales order.
• Planning calculations and consideration of shelf life expiration dates. The shelf life dates assigned to batches—for the expiration date or best before date—can be used by planning calculations to determine inventory availability to meet demand dates.

Customers: Different types of customers include one-time customers, intercompany customers, and customers requiring foreign currency and language-specific text.

Sales Orders: A normal sales order defines actual demand for an item. Other types of sales orders include blanket orders that can be used to create normal sales orders. Sales orders can reflect intercompany sales, or customer self service via the Enterprise Portal. Sales order variations in process distribution environments include the following:

• Sales order reservations can be manually or automatically assigned, with optional reservation of scheduled receipts.
• Reservations of inventory batches can be based on the customer specifications for batch attributes, or a customer’s requirements for same batch.
• Reservations of inventory batches can be based on expiration dates and first-expired-first-out (FEFO) logic, and the customer requirements for sellable days after delivery.
• Capable-to-promise logic can be used to identify expected delivery dates, and account for shelf life dates of available inventory.
• Special orders and direct orders, which generate corresponding purchase orders.
• An alternate item automatically substituted for an ordered line item.
• Restricted order entry for restricted products (based on delivery address) or for obsolete items (based on item-specific policies).
• Customer returns and RMAs, including the repair and/or replacement of the returned item.
• Service orders to install an item, or service agreements for maintaining the item.
• Customer rebates for buying selected products in order to obtain credits or payment.

Sales quotations can be defined and converted into sales orders. In defining the pipeline of expected business, the quotations can optionally act as demands based on their win probability.

Sales Pricing: An item’s standard sales price and UM represent one approach to a company-wide sales price, with optional calculation based on a markup or contribution percentage applied to the item’s inventory cost or purchase price. Other alternatives to sales pricing include the use of source documents such as sales quotations or blanket orders to create a sales order, and the use of sales trade agreements. With a sales price trade agreement, for example, an item’s sales price can reflect site/warehouse-specific pricing or other factors. The other factors include the customer type, the sales UM, quantity breakpoints, and date effectivities, as well as higher prices or a surcharge for shorter delivery lead times. Discounts off an item’s sales price can be defined in sales trade agreements that reflect these same factors. Discounts can also apply to the total order quantity of multiple line items (such as items within a product group) and to the total order value. Other forms of agreements include supplementary items and miscellaneous charges. Sales pricing for a catch weight item can be based on weight or pieces. Some manufacturing scenarios involve commodity pricing to recalculate sales price trade agreements, as described in the next section.

Sales Forecasts: Replenishment of stocked material can be based on sales forecasts. You can define multiple sets of forecast data, and also multilevel forecast models such as regional forecasts that roll-up to a companywide forecast. An item’s sales forecast can be expressed as individual quantities and dates, as a repeating pattern of a fixed or variable quantity per period (such as monthly), or as an item group forecast (aka planning bill) that spreads out a total quantity across several items based on mix percentages. An item’s sales forecast can also be imported from spreadsheets or a statistical forecasting package. The system supports forecast consumption logic to avoid doubled-up requirements.

Sales Invoicing: The system supports a separate invoice for each sales order shipment, and a summarized invoice for multiple sales order shipments. It also handles different payment terms, payment schedules, and payment fees.

Sales Commissions: The system supports commission calculations for one or more sales reps, thereby supporting split commissions. The commission amount reflects a specified commission percentage times the sales order value (such as the gross revenue or net margin). Commissions can vary by type of customer, product, and date effectivity, with calculation after posting a sales order invoice.

Sales Analysis: The system supports standard and ad hoc sales analyses. For example, the standard reports include totals for individual orders, customers, and items as well as sales analysis by customer and item. Other sales analysis approaches include business analytics, pivot tables, and data warehouses.

Vendors: Different types of vendors include one-time vendors, intercompany vendors, and vendors requiring foreign currency or language-specific text.

Purchase Orders: A normal purchase order defines a scheduled receipt for an item. Other types of purchase orders include blanket orders that can be used to create normal purchase orders, and returned orders for handling returns to vendor. Purchase orders can reflect intercompany purchases and purchases from one-time vendors. Several variations apply to purchase orders in distribution environments, as summarized below.
• Purchase of stocked material
• Purchased item reflecting a special order or drop shipment of a direct order
• Purchase requisitions and approval process
• Request for quotes (RFQs)
• Purchase of an expense item, fixed asset, or non-inventoried item

Purchase Prices: An item’s standard purchase price and UM represent one approach to a company-wide purchase price. It can be manually entered or automatically calculated based on the last purchase invoice. Other alternatives to an item’s purchase price include the use of source documents such a purchase requisition or blanket purchase order, and the use of purchase trade agreements. With a purchase price trade agreement, for example, an item’s purchase price can reflect site/warehouse-specific pricing and other factors. The other factors include the purchasing UM, quantity breakpoints, and date effectivities, as well as higher prices or a surcharge for shorter delivery lead times. Discounts off an item’s purchase price can also be defined that reflect these same factors, as well as multiline and total discounts. Other forms of agreements can define supplementary items and miscellaneous charges. Purchase prices for a catch weight item can be based on weight or pieces.

Quality Management: A broad viewpoint of quality management typically extends across every aspect of supply chain management, ranging from approved vendors and batch tracking of received material to the handling of returns. Some specific concerns include the following:

• Receiving inspection and the use of quarantine orders (to limit usage) and quality orders (to report test results). The test results can optionally update the batch attribute values for an item’s batch.
• Perform testing and record test results within different business processes (via quality orders), such as the arrival/receipt for a purchase order or the picking/shipping steps for a sales order.
• Assign a batch disposition code (for a batch controlled item) to indicate restricted usage policies.
• Generate certificates of analysis with the relevant batch attributes and their actual values (via quality orders).
• Identify and track quality problems via nonconformance reports.
• Identify hazardous materials and their MSDS documents, and ensure compliance for sending MSDS documents to customers, or receiving MSDS documents from vendors.
• Enforce restrictions on sales order processing, such as preventing order entry for restricted products or for stopped items.
• Provide regulatory reports for sales to different countries.

Warehouse Management: Stocking locations are uniquely identified by a site, warehouse, and bin location. You can track batch and serial numbers of an item’s inventory, and support the different inventory tracking approaches for catch weight items. Basic warehouse management transactions include adjustments, transfers, and physical counts as well as arrivals and shipments.

An arrival overview provides visibility of all anticipated arrivals, such as purchase orders, transfer orders, and customer returns. You can record the arrivals associated with multiple orders, and then use this information to update receipts against specific orders. In a similar fashion, you can view anticipated picking activities for sales orders and transfer orders, and create order-based or consolidated picking lists to record the actual material picked and shipped.

Transfers in Multisite Operations: Dynamics AX supports different types of multisite operations, including autonomous sites within a company, a distribution network with transfers between sites, and intercompany trading. Transfer orders coordinate movement between sites and warehouses, and track in-transit inventory. Specific batches can be reserved for transfers based on batch attributes or shelf life dates.  With intercompany trading, the purchase order in one company automatically generates the corresponding sales order in the supplying company, and vice versa. Intercompany orders may be for stocked items, or reflect special orders and direct orders. Planning calculations can be sequentially performed across a multi-company supply chain. Intercompany trading can also be supported when the trading partner is using another instance of AX or another ERP system.

System Usage in Process Manufacturing
Manufacturing environments transform purchased materials into salable end items, often with batch tracking throughout the product structure. This section focuses on manufactured items designated as a formula item (rather than a BOM item) with production activities coordinated via batch orders.  The system usage considerations cited in the previous section about process distribution also apply to these manufactured items, such as batch tracking considerations, replenishment policies, sales orders and pricing, sales forecasts, quality management, warehouse management, and transfers. Additional considerations include the definition of recipe information, sales and operations planning (S&OP) game plans, master scheduling logic, and variations in batch order processing.

Item Information for Manufactured Items: Item numbers are used to identify manufactured items. They also identify co-products and by-products, as well as planning items for disassembly purposes.

Definition of Recipe Information Using Formulas and Routings: The recipe for a manufactured item is defined by the assignment of a master formula and an optional master routing. The assignments are termed a formula version and routing version, and a manufactured item can have multiple versions of a formula and/or routing. Different versions may reflect different sites, different quantities being manufactured, planned changes based on effectivity dates, or an alternate formula or routing. An alternate formula, for example, may indicate a different yield percentage, a different formula size/multiple, or different co/by-products. An alternate routing may indicate a faster production process or the use of different equipment. Each formula version and routing version requires an approval to support subsequent use in planning, costing, and batch orders. A batch order has a separate order-dependent formula and routing that initially reflect the assigned formula version and routing version, and you can manually maintain this information.

Formula Information: An item’s formula version can be company-wide or site-specific, and it defines the ingredients and (if applicable) the co/by-products of the production process. Each ingredient defines an item and a required quantity, and other information such as the component type, source warehouse, and the corresponding operation number. Required quantities can also be expressed as a percentage of the formula size. The component type indicates whether a manufactured component is make-to-stock, make-to order, or a phantom, and whether a purchased component is buy-to-stock or buy-to-order. You can optionally define substitute ingredients for a component so that the substitutes will be considered in planning calculations when there is insufficient availability of the component. The BOM Designer provides a graphical tool for maintaining formula information.

The formula information about a co-product includes the expected output quantity and an optional cost allocation percentage for calculating the co-product’s cost. A co-product reflects a desired output that can be sold or used, whereas a by-product reflects waste that typically adds cost to a parent item. Information about a by-product also includes the expected output quantity, and an optional cost allocation amount which will be included in the costing of the parent item. With a manufactured item that represents a planning item (for disassembly purposes), 100 percent of the expected output consists of the specified co/by-products.

Routing Information: An item’s routing version must be site-specific, and it defines one or more routing operations in the production process. Each routing operation defines the operation number, the work center (or work center group), the time requirements and other information such as an operation description and operation yield percentage. Each operation also specifies a master operation identifier that can optionally provide default values. Separate work center costs can be defined for an operation’s setup time and run time, and for a piece rate. Each work center belongs to a work center group, and has a calendar of working times. It can be designated as having finite or infinite capacity for scheduling purposes. For block scheduling purposes, a work center’s calendar can indicate blocks of working time with a related property, so that similar operations are scheduled together to minimize setup times.

Cost Calculations for a Manufactured Item: A BOM calculation function uses formula and routing information, and cost data about material, labor, and overhead formulas, to calculate the costs for a manufactured item. As noted earlier, the BOM calculation can also determine a co-product item’s cost (based on a cost allocation percentage) and include the costs of a by-product item (based on the cost allocation amount or the item’s cost). Overhead formulas can reflect material-related overheads and/or routing-related overheads. The cost data for material, labor, and overhead formulas can be entered for future dates, so that projected costs can be calculated. The BOM calculation of a planned cost supports several types of simulations. For example, the simulation could reflect the last purchase price or the purchase price trade agreements for material items, and the projected labor costs and overhead formulas. The calculation of a manufactured item’s standard cost provides the basis for identifying variances on batch orders.

The BOM calculation can also calculate a suggested sales price for a manufactured item. The suggested sales price is calculated using a cost-plus markup approach with profit percentages assigned to material, labor, and overhead. In a similar fashion, an order-specific BOM calculation can calculate a manufactured item’s suggested sales price in the context of a sales quotation, sales order, or service order.

S&OP Game Plans and Master Scheduling Logic: A product’s sales and operations planning (S&OP) game plan can reflect make-to-stock or make-to-order production strategies, where the make-to-order strategy can support direct or indirect linkage to sales order demands. Direct linkage can also apply to the make-to-order manufactured components and the buy-to-order purchased components. The S&OP game plan may include use of a sales forecast and safety stock, and the previous section described the various approaches to both.

The planning calculations consist of two tasks—termed the forecast scheduling task and master scheduling task—to calculate gross and net requirements respectively. The master scheduling task generates planned orders and action messages to coordinate supply chain activities for manufactured items as well as purchased items and transfer items. The master scheduling logic includes the following considerations.

• Planned batch orders reflect the quantity-sensitive versions of formulas and routings, the yield percentage and formula size/multiple of a formula version, and the substitute ingredients for a component. A co-product of a planned batch order will be treated as a scheduled receipt.
• Unsatisfied demands for a co-product item will result in planned batch orders for a specified parent item in order to cover the demands.
• Shelf life expiration dates on batches will be used in determining available inventory to meet demands.
• Master scheduling logic calculates total requirements for a bulk item, and generates planned batch orders to optimize production factors such as quantity breakpoints for formula and routing versions, and the formula size/multiple and yield percentage of a formula version. The logic also synchronizes the planned orders for each packaging variation of the bulk material, so that the bulk can be packaged immediately to meet demand.

Coordinate Production Activities: The primary coordination tools include planned batch orders and action messages. Production schedules, Gantt charts, and load analysis by work center also act as coordination tools when routing data has been defined. Routing information can support several advanced scheduling techniques. Coordination of outside operations involves purchase orders for an associated buy-to-order component. As noted earlier, the master scheduling logic synchronizes the planned batch orders for producing a bulk item and the item numbers representing its packaging variations. You can consolidate and firm these batch orders, which will create a corresponding consolidated order that acts as a single point for coordination and reporting of production activities.

Reporting Actual Production Activities: Several types of production activities can be reported against batch orders. These activities include started quantities, component usage, and the receipt of finished quantities (for parent items and for co/by-products). The activities also include reporting of operation time and completions when routing data exists.  Auto-deduction can apply to material components and routing operations. Component usage may reflect reservations of a batch-controlled item based on the desired batch attribute values, or the shelf life expiration dates of batches.

The reporting of actual production activities provides the basis for comparing estimated and actual costs on a batch order. The completion of a batch order (with a status of ended) provides the basis for calculating an item’s actual cost, or for calculating the order variances for a standard cost item. Variances related to co/by-products are also calculated.

Additional Purchasing Considerations in Process Manufacturing: The additional considerations include purchase orders for a buy-to-order component or an outside operation linked to a batch order.

Additional Sales Considerations in Process Manufacturing: Some manufacturing scenarios involve commodity pricing, so that the sales prices within trade agreements can be automatically calculated and updated based on periodic changes to the costs of the purchased commodity.

Project-Oriented Operations: Project-oriented operations involve forecasting requirements and tracking actual costs related to material, time, and expenses. The forecasted requirements provide the basis for a project budget, and multiple budgets can be defined. External projects may also involve project-specific sales quotations and sales orders. The planning calculations can include the forecasted requirements for material and time, as well as demands stemming from the project-specific sales orders and quotations. Procurement may employ project-specific purchase orders, requisitions, and RFQs.

Service-Oriented Operations: Service orders provide coordination of field service and internal service personnel, and close integration with projects. Each service order defines the resource requirements—for material, labor, and expenses—that serve as the basis for estimated costs. Materials can also be identified for shipment to the customer. Repair history can be recorded against the bill of material for items being serviced. Detailed information can also be recorded about the symptoms–diagnosis–resolution of repair problems. Actual resource consumption drives project accounting for invoicing purposes. Service agreements define resource requirements for periodic services, and provide the basis for automatically creating the service orders to perform the services.

Concluding Remarks
When learning or implementing any ERP software package, it is important to understand its underlying conceptual models and how it supports variations in business processes. It is easy to get bogged down in the navigational details. This chapter summarized the book contents to highlight how Microsoft Dynamics AX can support the requirements of process manufacturers and distributors.

Author’s Biography

Scott Hamilton consults and teaches globally on supply chain management (SCM) and enterprise resource planning (ERP) issues. He has consulted with more than a thousand companies and conducted several hundred executive seminars, and also taught SCM/ERP as an MBA professor at leading universities in the US, Europe and the Pacific Rim. His doctorate is in information systems, specializing in manufacturing and distribution. He authored Maximizing Your ERP System and also several books about Microsoft Dynamics. Scott has won the rarely-given Microsoft MVP Award for Dynamics AX, and Microsoft’s Excellence in Innovation Award. Scott recently joined Solugenix, a Microsoft Dynamics AX partner with offices around North America and a well-known reputation as a trusted advisor for AX implementations and support. Scott can be reached at Scott.Hamilton@Solugenix.com.

1 Dynamics AX is a registered trademark of Microsoft.  The book and article employ the term “AX” for short. 

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