BTM3533

PRODUCTION PLANNING

ERP
Enterprise Resource Planning
• A comprehensive software approach to support
decisions concurrent with planning and controlling
the business.

• ERP systems are, first and foremost, integrated.

What is ERP?
• A software to support decisions on planning &
control
• A software that integrate application program in
finance, manufacturing, logistics, sales, marketing,
HR, etc.
• A database shared by all functions
• Efficient handling of many transactions
Consistent definition
(standardization)
• ERP requires company to have consistent
definitions across functional areas.
• Without standard terminology, integration is
impossible
• What is demand?
• What is inventory?
• How are exchange rates determined?
• What labor rates are applied?
What are the usefulness of ERP in
planning?
• A management tools helps to balance demand & supply
• Ability to link customers and suppliers into complete
supply chain
• Assist for decision making
• Cross functional integration among sales, marketing,
manufacturing, operations, logistics, purchasing,
finance, NPD, HR
• Provide high level of customer service & productivity,
lower cost, lower inventories, foundation for e-
commerce
What are the benefits of ERP?
• Greater efficiency-efficient handling of transaction
• Better responsiveness through real time
information
• Eliminate redundant processes
• Increase accuracy of information
• https://www.youtube.com/watch?v=BKq7QhBp7gI
• https://www.youtube.com/watch?v=6qUKFRxdVnk
• https://www.youtube.com/watch?v=hfQGHh5NIXI
Features of ERP software – 4
aspects
• Multifunctional
• Integrated
• Modular
• Facilitate classic PPC activities
Multifunctional
• The ability to track financial performance in
monetary terms ($, €)
• Can track purchasing activity in material units
(pounds, kilos, tons)
• Follows sales in terms of products or services
• Reports manufacturing activity in terms of
products, resources, or people
Integrated
Data entered by one functional area
updates all other functional areas

Eliminates Ensures a
reposting of common
data (errors) vision
Modular
• Functional units (finance, sales, manufacturing,
etc.) are narrowly focused
• Functional units can be combined to create a single
system
• Software from other sources can be connected as
well
Facilitate classic PPC activities

Forecasting Production planning

MPC Activity
Support

Inventory
Material planning
management
What are the routine decision
making made by ERP software?
• Transaction processing
• Posting & tracking of the activities that document the business. E.g.
when purchase item from vendor, specific sequence occurs
(solicitation of offer- acceptance of offer-delivery of goods-storage
in inventory-payment for the purchase)
• Decision support
• To assist manager to make intelligent judgment (decision on the
amount to purchase, selection of vendor)
• Give info on reorder points, order quantity, vendor, storage
location, etc.
How ERP connects the functional
units?
• Use a common database updated in real-time
• Each module has the same user interface, like MS
office
• Module focus on 4 major areas – finance,
manufacturing & logistics, sales & marketing, HR
• New features are often added to improve usability /
functionality of the software – minor changes,
major changes – structure of the database, changes
to the network, hardware technology (made every
3-5 years)
Module functionality
• Finance
• Provides common platform for financial data capture,
common set of numbers, processes, reconciliation of general
ledger, auto capture of basic accounting transaction
• Manufacturing & Logistics – most complex component
• SOP – marketing planning, financial planning, operations planning, HR
planning
• Materials management – purchasing, vendor evaluation, invoice
management, invoice and warehouse management
• Plant maintenance – planning & perform repair, PM
• Quality management – procedure for quality control and assurance
• PPC – capacity leveling, MRP, JIT, product costing, BOM processing
• Project management – setup, management and evaluation of large
complex projects
Module functionality
• Sales & Marketing – customer management
• Sales order management, forecasting, order
management, credit checking, distribution, export
control, shipping, transportation management, billing,
invoicing, rebate processing
• Human Resources – manage, schedule, pay, hire,
train people
• Payroll, benefits, applicant data admin., personnel
development planning, workforce planning, schedule &
shift planning, time management, travel expense
accounting
Data integration
• Single database, transaction document each of the activities
• Reducing error and work
• Transaction processed in real time
• Real time – as soon as the transaction is entered into the
system, the effect of items such as inventory status, order
status and account receivable is known to all users
• No delay in the processing of transaction in real-time system
• Data warehouse – separate data on separate computer to
automatically capture & process data outside the basic ERP
system application (e.g. calculation for average lead time)
Example
• AJAX Food service company, makes sandwiches, sold in
vending machine, cafeteria, small stores.
• Materials – bread, butter, peanut butter, grape jelly
• 1 loaf of bread = 10 sandwiches
• 1 package of butter = 50 sandwiches
• 1 container of peanut butter = 20 sandwiches
• 1 container of jelly = 20 sandwiches
• Imagine if the company were making hundreds of different
types of sandwiches and sold at 1000 cities around the
world, what are the info needed by AJAX for PPC?
• Demand forecast
• Worker
• MRP
• Capacity plans
What makes PPC effective?
• 3 major functional areas that make up the internal
supply chain of a manufacturing enterprise –
purchasing, manufacturing, sales & distribution
• Tight cooperation is required between the 3
functions for effective PPC
Functional silo
• Purchasing/procurement - objective: minimize material cost
• Manufacturing – objective: minimum production cost (min. equip.
downtime, high equip. & labor utilization)
• Sales & distribution – objective: minimize distribution and warehousing
cost
Question – what happen if all 3 functions are allowed to work
independently?
• To take advantage of discount, purchasing will buy the largest qty. possible
• Push production to produce more in large batch size
• Late responsiveness to customer demand
• Fully load the truck for distribution
• Too many inventories in distribution center
Functional Silos – Each area is responsible for optimizing
its own operation, with no consideration for how the
overall firm is affected (this is not good)
Distribution
Manufacturing
Purchasing focuses on cost
builds long runs
pursues cost of delivery
rather than
rather than stages instead
responding to
quality of total system
customers
costs
 Supply Chain Performance Metrics
Measure Description Best-in- Average
Class
Delivery Percentage of orders shipped according to 93% 69%
performance schedule
Source: Supply Chain Council

Fill rate by line Percentage of actual line items filled 97% 88%
item
Perfect order Complete orders shipped on time 92.4% 65.7%
fulfillment
Order fulfillment Time from when an order is placed until it is 135 days 225 days
lead time received by the customer
Warranty cost Warranty expenses as a % of revenue 1.2% 2.4%
Inventory Days of supply held in inventory 55 days 84 days
Cash-to-cash Time required to turn cash used to purchase raw 35.6 days 99.4 days
cycle time materials into cash received from customers

Asset turns Measure of how many times per year assets are 4.7 turns 1.7 turns
used to generate revenue
Cash-to-cash cycle time
• CASH IS KING!
• Business is about measuring efficiency using cash-
to-cash cycle time
• Cash-to-cash cycle time is a measure of cash flow
• Cash flow – where cash comes from? Where cash is
spent? What is net change in cash for the year?
• Accountant define – the length of time it takes a
business to convert cash outflows for raw
materials, labor, etc. into cash inflows
 Cash-to-Cash Cycle Time
Cash-to-cash cycle time = Inventory days of supply + Days of sales outstanding
– Average payment period for material

• This calculation is straight forward in ERP

system
• Calculation divided into 3 parts

Procurement Manufacturing Sales and

cycle cycle distribution cycle

•Purchase cost of material •Inventory (Raw materials •Distribution inventory

•Accounts payable inventory, Work-in-process, •Accounts receivable
Finished goods inventory)
 Data used for calculating cash-to-cash
cycle time
• Account payable – are amounts a company
owes because it purchased goods or services
on credit from a supplier/vendor (liabilities)
ERP database

Accounts payable
Purchasing

Inventory

Cash-to-cash
Manufacturing cycle time
Cost of sales

Sales
Sales and
distribution

Accounts receivable
• Account receivable – are amounts a
company has to collect because it sold
goods or services on credit to a
customer (assets)
Calculating Cash-to-Cash cycle
time
S
Average daily sales (Sd) Sd 
d
AR
Accounts receivable days (ARd) ARd 
d

Average daily cost of sales (Cd) Cd  Sd CS

I
Average days of inventory (Id) Id 
Cd

Accounts payable cycle time (APd) AP

APd 
Cd
Cash-to-cash cycle time Cash  to  cash cycle time  ARd  I d  APd
Cash-to-Cash Example
Sales over last 30 days = RM1,020,000
Accounts receivable at the end of the month = RM200,000
Inventory value at the end of the month = RM400,000
Cost of sales = 60% of total sales
Accounts payable at the end of the month = RM160,000

Calculate the cash-to-cash cycle time.

 Cash-to-Cash Example
S 1,020,000
Sales over last 30 days = $1,020,000 Sd    34,000
d 30
Accounts receivable = $200,000 AR 200,000
ARd    5.88 days
d 34000
Inventory value = $400,000
Cd  Sd CS  34,000(0.6)  20,400
Cost of sales = 60% of total sales
I 400,000
Id    19.6 days
Accounts payable = $160,000 Cd 20,400
AP 160,000
APd    7.84 days
Cd 20,400
Cash  to  cash cycle time  ARd  I d  APd  5.88  19.6  7.84  17.64 days