Managing Your Supply Chain Using Microsoft Axapta: A Book Excerpt Part Three: Common Scenarios

Managing Your Supply Chain Using Microsoft Axapta: A Book Excerpt
Part Three: Common Scenarios
Featured Author - Dr. Scott Hamilton - March 25, 2004

Common Scenarios for Sales and Operations Planning

The nature of a sales and operations planning (S&OP) game plan depends on several factors, such as the need to anticipate demand, the item's primary source of supply, and the production strategy for manufactured items. Consideration of these factors can be illustrated with several common scenarios. The first two scenarios reflect stocked end-items, while the next three scenarios reflect variations in a make-to-order production strategy. The first scenario illustrates a distribution environment with replenishment based on min/max logic, while the next four illustrate manufacturing environments employing forecasted demand. The scenarios also include a project-oriented environment and a multisite environment.

Scenario #1: Stocked End-Items based on Min/Max

Most distribution environments carry inventory of purchased items in anticipation of actual demand, oftentimes based on min/max reordering policies. An item's minimum and maximum quantities can be fixed, or variable by time period to reflect seasonality and trends. The minimum quantity can be automatically calculated based on historical usage. Alternatively, a period reordering policy can be used with forecasted demands, possibly derived from statistical forecasting techniques. Planning calculations suggest planned orders and action messages to coordinate supply chain activities. They also identify unrealistic situations via futures messages about the inability to meet a requirement date. Purchase orders can optionally be linked to a sales order, or drop-shipped from the supplier to the customer.

Scenario #2: Make-to-Stock Standard Product

The S&OP approach for a make-to-stock standard product is almost exactly the same as a distribution item, since it requires inventory to anticipate actual demand. Replenishment can be based on min/max logic, but this scenario focuses on using forecasted demand with forecast consumption by sales orders. As shown in figure 5-3, demands consist of sales orders and sales forecasts. Sales orders consume sales forecast and drive shipping activities, and the combination of forecasts and sales orders drive the item's master schedule comprised of make-to-stock production orders.

Figure 5.3 S&OP for a Make-to-Stock Manufactured Product

Production and procurement activities are driven by existing and planned production orders. Planning calculations help formulate a realistic game plan by identifying potential material and capacity constraints. For example, action messages identify potential material constraints related to the end-item and its components. With scheduling based on an infinite capacity viewpoint, work center load analysis identifies potential capacity constraints in terms of overloaded periods. In overloaded periods, adjustments to available capacity (such as overtime and personnel transfers) or adjustments to loads (such as alternate routings) can help overcome the capacity constraint. With scheduling based on finite capacity and material, the action messages identify when delivery dates cannot be met.

Unrealistic situations in the supply chain often require changes to the master schedule or to sales orders. An analysis of an item's supplies and demands via pegging may be required to understand a situation and make the appropriate decision.

This is Part Three of a four-part excerpt from the book Managing Your Supply Chain Using Microsoft Axapta by Dr. Scott Hamilton.

The book can be ordered on amazon.com.

Part One began the discussion of "Sales and Operations Planning."

Part Two detailed "Understanding Planning Calculations."

Part Four will propose "Guidelines and Case Studies."

Reprinted with permission from McGraw-Hill

S&OP Approaches for a Make-to-Order Product

The game plan for a make-to-order manufactured item depends on the approach for anticipating demand of stocked components, the need for direct linkage between production orders and sales orders, and the approach to defining product structure.

Anticipating Demand for Stocked Components. Several different approaches can be used for stocking components. One approach involves an order-point replenishment method for the components, while a second approach involves purchase forecasts. These approaches do not provide visibility of capacity requirements related to make-to-order items, nor do they take advantage of predefined bill/routing information for standard products. A third approach involves a sales forecast for end-items that drives replenishment of stocked components while sales orders drive final assembly of make-to-order items. This third approach involves consideration of forecast consumption logic to avoid doubled up requirements.

Need for Direct Linkage. Production orders for a make-to-order product can be directly or indirectly linked to sales orders. For the end-item, the user establishes direct linkage by generating a production order from a sales order line item. The system automatically generates linked production orders for make-to-order manufactured components (the component type is production) and linked purchase orders for buy-to-order purchased components (the component type is vendor).

Many make-to-order production strategies do not require direct linkage between production orders and sales orders, either for the end-item or for its components built to actual demand. Planning calculations account for indirect linkage in terms of the demand date and the scheduled receipt dates of supply orders.

Approach to Defining Product Structure. The predefined bill/routing information for a standard product represents one approach to defining product structure, with planned engineering changes based on the date effectivities related to bill/routing versions or the date effectivities related to components. A component's required quantity can optionally reflect a formula and measurement data (such as height, width, depth and density) about the parent item and component. Other approaches include a specified bill/routing version and configurations defined via option selection.

- Specified Versions of a Bill and Routing. The specified version of a bill and routing (termed sub-BOM and sub-route) can be identified for a manufactured component. They can also be specified when creating a production order or when entering a sales order for a manufactured item.

When defining a custom product using a product model for a modeling enabled item, the system automatically creates bill/routing versions and assigns them to the relevant sales order or production order. It also assigns them to either the modeling-enabled item or the newly created item.

- Configurations Defined via Option Selection. An item's configurations created via option selection represent a different approach to bill/routing information compared to the specified versions described above. The bill of options and option selection process apply to configurable items. The user can maintain the selected options for an item's configuration using a separate item configuration window.

Scenario #3: Make-to-Order Standard Product with Direct Linkage

This scenario illustrates a make-to-order standard product built from stocked components. In particular, it involves sales forecasts to drive replenishment of stocked components, and direct linkage between the sales order and the production order. The make-to-order piece of equipment shown in figure 5.4 provides an illustrative example. In this case, the equipment's bill contains a make-to-order component (the base unit), a buy-to-order component (the outside operation for painting), a make-to-stock component (the extra control), and a phantom component (common parts). The routing contains two operations to assemble and paint the equipment. The bill for the base unit consists of a power unit and other components.

Figure 5.4 Example of a Make-to-Order Standard Product

The forecast consumption logic—via a manual, open order or reduction percentage approach—ensures that only sales orders drive final assembly production orders. Direct linkage involves generating the production order from the sales order for the equipment. After generating the end-item's production order, the system automatically generates a linked production order for a make-to-order component and a linked purchase order for a buy-to-order component.

The sales order for a make-to-order standard product often requires a promised delivery date that reflects the bill and routing information. When calculating the promised delivery date, the user can also view the planned orders needed to meet the delivery date and immediately generate these orders. In this scenario, the S&OP game plan is expressed in terms of master schedules for stocked items and final assembly schedules (directly linked production orders) for the end-item and make-to-order components.

Scenario #4: Make-to-Order Standard Product with Indirect Linkage

This scenario differs slightly from Scenario #3, since the production order for the end-item is not generated from the sales order so that it is indirectly linked to demands. The item's components also have a normal component type, so that the system does not generate linked production orders for the components. The critical issue involves forecast consumption logic, so that near-term sales orders drive the item's production orders and the sales forecast drives replenishment of long lead-time components. With forecast consumption by sales orders or a reduction percentage, for example, the fully-booked backlog of sales orders can drive near-term supply chain activities.

Scenario #5: Make-to-Order Custom Product with Component Forecasts

This scenario involves a custom product built from stocked components, where replenishment is based on purchase forecasts. The custom product can be either a configurable item or a modeling-enabled item, where option selection automatically creates the configuration's product structure or the use of the product model automatically creates the master bill/routing to build the custom product. The make-to-order custom equipment shown in Figure 5.5 provides an illustrative example.

Figure 5.5 Example of a Make-to-Order Custom Product

In this example, the equipment's bill of options or product model enables the user to indicate their choice of required options concerning the base unit (basic versus deluxe) and paint color (red versus blue), and the optional option concerning the extra control. Figure 5.5 indicates the name of each option group such as the base group. The base unit also represents a custom product comprised of a power unit (high or low) and other parts. This example represents a multi-level custom product.

Independent demands for a custom product consist of end-item sales orders and purchase forecasts for stocked components. As shown in figure 5.6, component forecasts drive the master schedules for stocked material, whereas sales orders drive the final assembly schedules for the end-item and any make-to-order components. Generating the production order from the sales order provides direct linkage between orders, and the system automatically generates linked production orders for make-to-order components.

Figure 5.6 Make-to-Order Custom Product

Handling Partially Defined Make-to-Order Products

The definition of a product's bills and routing may be incomplete at the time of sales order placement. An incomplete design may reflect several conditions, such as rough quotes, evolving customer specifications, or requirements for further engineering design to specify part numbers and drawings. In many cases, procurement and production activities must be initiated for critical-path components before the design has been completed.

A basic decision must be made about the approach for maintaining the evolving product design. For example, the evolving design can be defined in terms of the master bills or the order-dependent bills. Planning calculations can use partially defined bills and routings to help coordinate supply chain activities. A key step involves defining items for critical-path components, such as key subassemblies and long lead-time purchased material, so that orders can be initiated. A critical-path manufactured item requires additional information about its bill of material. In this way, planning calculations can generate suggested action messages based on the evolving definition of product structure.

Scenario #6: Project-Oriented Environments

There are many variations of project-oriented environments for both internal projects and external projects, where external projects may be billed on a fixed price or a time-and-materials basis. However, a basic approach to S&OP game plans applies to all projects that involve forecasted or actual demands that require coordination of supply chain activities.

The example involves a firm that sells and installs plumbing and electrical parts for commercial building construction sites. The external project consists of multiple subprojects reflecting the installation phases that must be scheduled to fit the dynamically changing progress of the building construction. Each subproject has forecasted requirements for material and capacity. Figure 5.7 illustrates the forecasted requirements for two subprojects involving electrical and plumbing installation.

Figure 5.7 Example of a Project

This example involves two pools of skilled labor (electricians and plumbers) that are defined as work center groups, with the employees defined as work centers within each group. The parent project has forecasted capacity requirements for designing the installation, and forecasted costs for travel and photocopying. Each subproject has forecasted material and capacity requirements to perform the installation. For example, the electrical subproject has forecasted requirements for electrical parts and for the work center group of electricians.

The forecasted requirements provide visibility to coordinate supply chain activities related to capacity, material and cash planning. Capacity planning, for example, can anticipate overloaded periods so that overtime or subcontracted labor can be arranged. Changes to the construction schedule are reflected in updates to forecasted requirements. Project-specific sales orders for material consume the project-specific forecasts, and also provide a mechanism to ship materials to the site. In this case, the shipment transactions do not generate an invoice, since billing will be handled through project invoicing capabilities (such as a time and materials basis).

Scenario #7: Multisite Environment and a Distribution Network

There are two basic variations for coordinating material movements between warehouses in a multisite operation. One variation employs transfer orders to coordinate movements between sites in the same company, and the other variation employs inter-company trading to coordinate movements between sites in different companies.

The example involves a multinational firm that builds equipment in different manufacturing sites and stocks inventory at various distribution sites. As shown in figure 5.8, the manufacturing site #1 produces a base unit subassembly that must be transferred to manufacturing site #2 to produce the piece of equipment. Both sites are within the same company A so that planned transfer orders communicate the need for material movement. The equipment is sold to distribution site #3 within company B. After creating an inter-company purchase order in company B, the system automatically creates a corresponding sales order in company A.

Figure 5.8 Example of a Multi-Site Environment

Company A sells the equipment to domestic customers while Company B sells it the foreign customers. Sales forecasts for the equipment are defined for each company and site.

This concludes Part Three of a four-part excerpt from the book Managing Your Supply Chain Using Microsoft Axapta by Dr. Scott Hamilton.

The book can be ordered on amazon.com.

Part One began the discussion of "Sales and Operations Planning".

Part Two detailed "Understanding Planning Calculations."

Part Four will propose "Guidelines and Case Studies."

Reprinted with permission from McGraw-Hill

About the Author

Dr. Scott Hamilton has specialized in information systems for manufacturing and distribution for three decades as a consultant, developer, user, and researcher. Hamilton has consulted worldwide with over a thousand firms, conducted several hundred executive seminars, and helped design several influential ERP packages. He previously co-authored the APICS CIRM textbook on How Information Systems Impact Organizational Strategy and recently authored Managing Your Supply Chain Using Microsoft Navision. Hamilton is currently working closely with Microsoft partners involved with manufacturing and distribution, and can be reached at ScottHamiltonPhD@aol.com or 612-963-1163.