final year thesis_strategic planning and purchasing with erp

I

ABSTRACT

Enterprise resource planning (ERP) plays a pivotal role in providing solutions to

organisation in today’s dynamic landscape. An information system which enables

seamless business integration, it creates a competitive advantage to lower total

cost of ownership and meet company objectives. Therefore, ERP is widely

recognised as the software platform that improves and support the evolution of

operation planning and purchasing which came under constant scruntiny of new

manufacturing environment.

The purpose of the report serves to inform reader of the current manufaturing

process and the contribution of ERP in response to the changing demand. In this

report, the author endeavoured to demonstrate ERP capabilities in operation

planning and purchasing using the Microsoft Dynamics NAV (Navision) as the

operating system. Integrating the concept of modern production strategies and

tool, such as lean principle and turnkey project, the author will delineate the use

of ERP in aligning with these strategies using a case study on an original

equipment manufacturer (OEM) for oil and gas drilling system.

The application of ERP on the oil and gas OEM production model provides a

framework for operation planning and purchasing as both represent dominant

activities.

Keywords: Enterprise resource planning; Operation planning; Purchasing;

II

LIST OF FIGURES

FIGURE 2.1: TRANSITION FROM CRAFT TO STRATEGIC OPERATIONS 7

FIGURE 2.2. JIT OBJECTIVES AND BUILDING BLOCKS 11

FIGURE 2.3: OVERVIEW SYSTEM OF ERP 16

FIGURE 2.4 : EXTENDED MODEL OF ERP 19

FIGURE 3.1: OPERATION PLANNING GENERAL FRAMEWORK 32

FIGURE 4.1: PURCHASE ORDER PROCESSING 38

FIGURE 4.2 : STRATEGIC PROCUREMENT CYCLE 39

FIGURE 5.1: BIZTALK COMMUNICATION PROCESS 53

FIGURE 5.2 PURCHASING SOLUTION MAP AND BUSINESS FRAMEWORK FOR

MICROSOFT DYNAMICS NAV

54

FIGURE 5.3a : PURCHASE PRICE ENTRY INTO SYSTEM 55

FIGURE 5.3b : DISCOUNT ENTRY INTO SYSTEM 55

FIGURE 5.4: PURCHASE QUOTES 57

FIGURE 5.5: PURCHASE ORDER 57

FIGURE 5.6: WAREHOUSE RECEIPT 58

FIGURE 5.7a : PURCHASE RETURN ORDER 59

FIGURE 5.7b : ITEM TRACKING LINES 59

FIGURE 5.8: PURCHASE CREDIT MEMO FOR RETURN SHIPMENT 60

FIGURE 5.9: PURCHASE CREDIT MEMO FOR PURCHASE ALLOWANCE 60

FIGURE 6.1 OVERVIEW WORK FLOW IN WHS CORP 66

FIGURE 6.2 BILL OF MATERIAL FOR TFL TREE 68

FIGURE 6.3 DELIVERY LEAD TIME MANAGEMENT 72

FIGURE 6.4 : CONTRACTED PURCHASE PRICE 69

FIGURE 6.5 a: PRODUCTION BOM 73

FIGURE 6.5 b: ITEM CARD (GENERAL TAB) 75

FIGURE 6.5 c: ITEM CARD (REPLENISHMENT TAB) 75

III

FIGURE 6.5 d: ITEM CARD (PLANNING TAB) 76

FIGURE 6.6 REQUISITION WORKSHEET 77

FIGURE 6.7 LEAD TIME AFTER TURNKEY PROJECT 78

IV

LIST OF TABLES

TABLE 2.1. COMPARISON OF MRP AND JIT 13

TABLE 2.2 CHANGES IN BUSINESS MODEL FROM 1970 to 2006 14

TABLE 3.1: PRODUCTION STRATEGIES 23

TABLE 3.2: MAJOR PHASES OF OPERATION PLANNING AND CONTROL 25

TABLE 3.3. I/O CONTROL REPORT 30

TABLE 5.1: MASTER FILE IN ERP DATABASE 46

V

TABLE OF CONTENTS ABSTRACT I

ACKNOWLEDGEMENT II

LIST OF FIGURES III

LIST OF TABLES V

1. INTRODUCTION

1.1 BACKGROUND…...…………………………………………………………….. 1

1.2 OBJECTIVES…………………………………………………………………….. 3

1.3 SCOPE……………………………………………………………………………. 3

1.4 ORGANIZATION OF REPORT………………………………………..………. 4

2. LITERATURE REVIEW

2.1 HISTORY OF PLANNING………………………………………………………. 6

2.1.1 MATERIAL RESOURCE PLANNING (MRP)…………………………… 7

2.1.2 CAPACITY PLANNING…………………………………………………… 8

2.1.3 JUST-IN-TIME (JIT)……………………………………………………….. 9

2.1.4 JIT (II)……………………………………………………………………….. 13

2.1.5 MANUFACTURING RESORCE PLANNING (MRP II)………………… 14

2.2 DEFINATION OF ERP………………………………………………………….. 15

2.2.1 COMPONENT OF ERP…………………………………………………… 15

2.3 ERP IMPLMENTATION………………………………………………………… 19

2.4 OVERVIEW OF ERP MARKET………………………………………………... 21

3. OPERATION PLANNING AND CONTROL

3.1 OPERATION MANAGEMENT…………………………………………………. 22

3.2 ROLES OF OPERATION PLANNING AND CONTROL…………………….. 24

3.3 SALES AND OPERATIONS PLANNING……………………………………... 25

3.3.1 SUPPLY PLANNING……………………………………………………… 26

3.4 RESOURCE PLANNING……………………………………………………….. 27

3.5 EXECUTION AND CONTROL…………………………………………………. 28

3.5.1 LOADING…………………………………………………………………… 29

3.5.2 INPUT/OUTPUT CAPACITY CONTROL……………………………….. 29

VI

3.6 DISCUSSION…………………………………………………………………….. 31

4. PURCHASING MANAGEMENT

4.1 NEEDS FOR OUTSOURCING………………………………………………... 33

4.2 PROCUREMENT LIFECYCLE………………………………………………… 34

4.3 PURCHASE ORDER PROCESSING…………………………………………. 35

4.4 STRATEGIC PROCUREMENT………………………………………………... 39

4.4.1 SPEND ANALYSIS………………………………………………………... 40

4.4.2 CONTRACT MANAGEMENT…………………………………………….. 41

4.4.3 SUPPLIER RELATIONSHIP MANAGEMENT………………………….. 42

4.5 DISCUSSION…………………………………………………………………….. 43

5. OPERATION INTEGRATION WITH ERP

5.1 BACKGROUND………………………………………………………………….. 44

5.2 MANUACFTURING DATABASE………………………………………………. 45

5.3 MASTER PRODUCTION SCHEDULING…………………………………….. 47

5.3.1 MATERIAL REQUIREMENT PLANNING………………………………. 48

5.3.2 CAPACITY REQUIREMENT PLANNING………………………………. 49

5.4 MANUFACTURING EXECUTION SYSTEM…………………………………. 49

5.5 ADVANCED PLANNING SCHEDULING……………………………………… 50

5.6 PURCHASING…………………………………………………………………… 51

5.6.1 PURCHASING MANAGEMENT USING MICROSOFT DYNAMICS

NAV………………………………………………………………………… 54

5.7 DISCUSSION……………………………………………………………………. 61

6. CASE STUDY: IMPROVE PROCUREMENT AND OPERATION PLANNING IN OIL AND GAS OEM USING ERP

6.1 COMPANY BACKGROUND……………………………………………………. 65

6.1.1 PRODUCTION STRCUTURE………………………………………........ 67

6.2 STRATEGIC MANAGEMENT…………………………………….……………. 69

6.2.1 TURNKEY PROJECT………………………...…………………………… 69

6.2.2 DECISION LOGIC SUPPORT SYSTEM……………………………….. 72

6.2.3 REQUISITION WORKSHEET…………………………………………… 76

6.3 DISCUSSION………………………………………..………………………….. 78

VII

7. CONCLUSION 79

REFERENCE

APPENDIX A: TFL TREE

APPENDIX B : SUBSEA WELLHEAD

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING CHAPTER 1: INTRODUCTION 1.1 BACKGROUND Information Technology (IT) has been the main driving force for business

revolution in the past decades. Since the emergence of internet, the economical

business landscape has revolutionized, changing our operating functionalities

and strategies. With expanding infrastructures, we are able to maximize the

potential of electronic commerce as mechanism of information dissemination and

global communication in this borderless market. This allows people to access

product information everywhere, resulting in ubiquitous business opportunity

worldwide for enterprise. Real time processing of orders and the concept of e-

business soon materialize under potential of internet which breaks the dawn of

the information age, bringing an end to the industrial age. With such efficient

tools for marketing and reduced barrier of market entry, smaller companies and

entrant can establish a foothold in the global market, driving the business layout

to a new level with concentration in the need to continuously drive down product

cost in order to maintain competitiveness. [1]

Despite the benefits that IT can bring, new source of challenges surface as

companies continuously seek to improve responsiveness and effectiveness in

information management. Globalization brings the world closer than ever. Armed

with advances in technologies and rapid growth in international trade, the world is

now termed a “global village” without geographical border. With a rapid changing

environment, the need for speed and reliable information system that can support

front office as well as back office business functions is of increasing importance.

Many companies face difficulties in redesigning their organization structure to suit

the complexity of supply chain, thus unable to take genuine advantage from

information technology. They fail to acquire a suitable technological infrastructure

that can integrate key business functions within a corporation and adapt to new

changes.

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING

Globalization and IT forces unexpected and disruptive business models. Those

who emerged as forerunner will reap profits while others can only query at

other’s success in the face of failure. Buzzwords, such as outsourcing, supply

chain management (SCM), customer/supplier relationship management

(CRM/SRM) and lean manufacturing surface, becoming areas of research for

professionals. These scenarios set the scene for the emergence of Enterprise

Resource Planning (ERP) which is highly recognized by many as the strategic

tool to gain the competitive edge. A more detailed account on the history of ERP

and the fundamental will be elaborated in Chapter 2

Since 1990s, the growth of ERP is motivated by the concern of Y2K where the

turnover from 31 December 1999 to 1 January 2000 may cause computer

system to malfunction. ERP provided a suitable solution for consolidation of data.

Today, ERP remains one of the rapid growing markets in the software markets.

The market for ERP software will reach approximately $47.7 billion by 2011,

according to AMR Research Inc. It is forecasted that it will continue to grow at a

compound annual growth rate of almost 11%, an increase of $28.8 billion from

2006. [2] Despite the large popularity in ERP software, ERP implementation does

not guarantee success and deliver the expected benefits.

The failure of the implementation lies on several factors, however the real

problems lie in two aspects: process and user. One misconception is that many

recognized ERP as the solution to sophistical problems, harboring unrealistic

expectation as a sliver bullet technology. However good the software technology

may be, it is essential to define the appropriate operational process that match

the ERP system and instill knowledge of the software in the users where human

is always the weakest link in the supply chain.

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 1.2 OBJECTIVES

The objectives of the report serve to

1) Illustrate the evolution of planning system

2) Define Enterprise Resource Planning (ERP) and its functionalities in

operation planning and purchasing

3) Introduce a common framework for operation planning and purchasing

processes

4) Investigate the linkage between operation processes with ERP system.

5) Demonstrate the use of Microsoft Dynamics NAV in operation planning

and purchasing

1.3 SCOPE

The scope of the report is limited to the operation planning and purchasing

aspects of ERP. A strong focus on resource planning and purchasing practices

will be highlighted in this report. The other modules in sales, warehousing,

financial and human resource application will not be discussed in this report.

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1.4 ORGANIZATION OF REPORT Chapter 1 gives an introduction to ERP and set the scene for its emergence. The

main objective and scope of the report will be defined in this chapter.

Chapter 2 consists of the literature review of the ERP. It provides the underlying

concepts of ERP and retraces the historic origin of ERP from the evolution of

MRP/MRP II/JIT/JIT II to allow in depth understanding of the topic. This chapter

will also introduce the four major ERP modules and its sub modules. It provides

brief description of their functionalities and role in the enterprise. Lastly, it ends

with an overview to the current ERP software leader and market.

Chapter 3 introduces the job scope and functions of operation planning. Firstly, it

gives a brief introduction of operation management and production strategies in

the modern manufacturing world. The author categories operation planning into 3

major stages based on their time horizon: Supply planning, Resource planning,

Execution and Control. The characteristics of each stage will be described to

provide the reader with the fundamental knowledge of the operation process.

Chapter 4 introduces the job scope and functions of purchasing. It illustrates the

growing importance of outsourcing in the dynamic landscape. In addition, the

report reviews the evolution of purchasing practices from being traditionally

transaction-focused to strategic contract and supplier management. Lastly, the

author discusses the changes in the requirement of purchasing skills with

reference to the procurement processes.

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Chapter 5 investigates the manufacturing processes integration with ERP. The

challenges faced due to the changing economy will be highlighted and an

analysis on how ERP implementation can facilitate the manufacturing process.

New incorporation of modules, Manufacturing Execution System (MES), Advance

Planning and Scheduling (APS) and Supplier Relationship Management (SRM)

are introduced to enhance ERP functionalities. The author also demonstrates the

use of Microsoft Dynamics NAV on purchase order processing.

Chapter 6 displays the application methodology of ERP. Using realistic scenarios

in an Original Equipment Manufacturer (OEM) company structure, the author

illustrate the application of ERP in improving the processes using Microsoft

Dynamics NAV in a turnkey project. The author will demonstrate the use of ERP

to execute the implementation of turnkey project by means of auto purchase

order generation.

Chapter 7 draws the conclusion to the report.

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING CHAPTER 2: LITERATURE REVIEW

2.1 HISTORY OF PLANNING

Since the beginning of Industrial Revolution, it has always been the objective of

organization to drive down manufacturing cost. In the 18th century craft era, the

market was relatively simple; lower price of commodities will lead to greater

demand, and thus not much emphasis was being placed on material and

inventory control technique. The initial manufacturing of making and selling was

restricted to limited resources and demands among households. With the

concepts of mass production and division of labours brought along the factory

systems. Production began at a larger scale; specialization of task in operations

such as sales, purchasing and engineering soon became necessary. However,

little emphasis was still placed in material and inventory managements. In

contrast, industries seek to produce maximum output to prevent idling of machine

and labour as the Industrial Revolution spurned to height with growth in trade. [3,

4]

Early stock replenishment techniques, such as ABC stratification, economical

order quantity (EOQ), and reorder point (ROP) set early foundation for the

development of ERP. Such technique will not be further elaborated in the report.

With the marriage of IT and business, concept of Material requirement Planning

(MRP) began in 1960s. It then evolved into Material Resource Planning (MRPII)

in 1980s. The road of evolution to MRP/MRPII and ERP started as material and

inventory control management moved from obscurity to a pivotal role in an

organization. Figure 2.1 shows the change in production model from craft era to

mass customization.

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2.1.1 MATERIAL REQUIREMENT PLANNING (MRP)

Joe Orlicky implemented the first Material Requirement Planning (MRP) system

at J.I. Case Company farm machinery successfully in 1961 [5] and he defined

MRP as a computerized approach for the planning of material acquisition and

production.[4] It refers to a system whereby the product is segregated into its

subassemblies. A time schedule is developed for its production in a master

production schedule. The design and breakdown of the product is documented in

the bill of material (BOM) which acts as a summary for the list of subassembly

requirement. This allows ease of accessing the details of subassemblies for

production. With the master production schedule, tracking of the subassemblies

and accurate forecast can be made to support on-time production. With the

intervention of computers in 1960s which handled the increase in product

breakdowns, MRP became an important and popular tool for managing

inventory. If implemented the right way, it can reduce excess inventory, lead time

and improve overall plant efficiency. However, MRP fails to materialize its

ultimate benefit and it is widely believed that the lack of Capacity Planning

contributed to its inefficiency.

TIME

CRAFT - LOW VOLUME - HIGH VARIETY - HIGH QUALITY - HIGH FLEXIBILITY - HIGHLY SKILLED

MASS PRODUCTION - HIGH VOLUME - LOW VARIETY - LOW COST GOODS - LOW FLEXIBILITY - LARGELY DE-SKILEED

PRODUCTION OPERATION VIEWED AS LOW ESTEEMED FUNCTION

MASS CUSTOMIZATION - AGILE, FLEXIBLE,LEAN

PRODUCERS - STRATEGIC PRODUCTION

OPERATION - HIGH VARIETY - HIGH VOLUME - HIGH FLEXIBILITY - HIGH QUALITY

PRODUCTION OPERATION VIEWED AS CORE COMPETENCE

SOURCE: S.Brown, R.Lamming, J.Bessant, P.Jones

FIGURE 2.1: TRANSITION FROM CRAFT TO STRATEGIC OPERATIONS

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 2.1.2 CAPACITY PLANNING

In manufacturing, resource is referred to mostly as machine, equipment, material

and labour. The matching of company resources and capacity to the

manufacturing schedule is a critical activity in production planning. Capacity

planning can be categorized into 2 aspects: Strategic and Tactical.

Strategic decision is associated with the long term planning of capacity and

investment of new facilities, while tactical decision approaches the short term

allocation of machines and work center in operations. [6] A timely allocation of

machine and work center, with detailed material requirement planning (MRP) and

master production schedule (MPS) can reduce the queue time in the operation,

thus shortening the overall operational lead time. On the other hand, excess

capacity result in redundancies which must be avoided. Likewise, overcapacity

prevents organization from taking advantage of the increasing demands.

Therefore capacity management should not be underestimated as it affects the

work competency and allocation of resources in the manufacturing organization.

Both overloading and underloading have negative impact on production, thus the

need for capacity planning to alleviate unbalance loading of machine and labour

has to be devised to achieve the optimal economies of scale.

Capacity Planning can occur at vary level of the planning and production

process. Long range task resource requirement planning take place during

S&OP process. Rough-cut capacity planning (RCCP) occurs during master

scheduling, followed by detailed capacity requirement planning (CRP) in concert

with MRP during master scheduling phase. Infinite/Finite loading and input/output

analysis are employed during operation for shop-floor control and scheduling.

The details of different level of capacity planning will be elaborated in Chapter 3

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 2.1.3 JUST-IN-TIME (JIT)

The Just-in-time (JIT) concept according to American Production and Inventory

Control Society (APICS) is defined as [7]

“a philosophy of manufacturing based on planned elimination of all waste and

continuous improvement of productivity. It encompasses the successful

execution of all manufacturing activities required to produce a final product, from

design engineering to delivery and including all stages of conversion from raw

material onward. The primary elements include having only the required

inventory when needed; to improve quality to zero defects; to reduce lead time by

reducing setup times, queue lengths and lot sizes; to incrementally revise the

operations themselves; and to accomplish these things at minimum cost.”

A technique successfully developed and pioneered in Japan by the Toyota Motor

Company, a recognized leader in automobile industry in the mid-1970s, that

emphasis on streamlining operations, having only the required resources at the

right time and place. The objective to develop such technique arose from the

need to eliminate wastage from operation. The seven major source of wastage in

operation were identified as below. [8]

1. motion (of operator or machine)

2. waiting (of operator or machine)

3. conveyance

4. processing itself

5. inventory

6. correction (rework and scrap)

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This system of eliminating waste came to be known as the Toyota production

System (TPS) which comprised of the major concept of lean manufacturing. With

the indisputable fact of increasing global competition, the JIT technique that

created time efficiencies and drove down production cost became popular among

the manufacturers. American and European manufacturer, such as one of the

forerunner, General Electric, a multinational American technology and Services

Company began to adopt the concept in the 1980s. Soon, lean manufacturing

became a buzzword and topics of academic research. However, the adoption of

technique by American and European has been less successful compared with

the Japanese. One major reason is the absence of trust and respect between

supplier, customer and the unique cultural difference.[4] Figure 2.2 [9] will

present brief detail of JIT’s building blocks and objectives.

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Most operation employs the use of JIT and MRP in their operation process.

Theoretically, both process share common similarities in producing beneficial

impact but in a different way. However in practical, it has been widely debated

that both process cannot co-exist and conflict in implementation. One distinct

difference is that MRP is based on a push system while JIT works on a pull

system

PRODUCT DESIGN: • FEW BILL OF MATERIAL

LEVELS • MANUFACTURABILITY IN

PRODUCTION CELLS • ACHIEVABLE QUALITY • APPROPRIATE QUALITY • STANDARD PARTS • MODULAR DESIGN

PROCESS DESIGN: • SETUP/LOT SIZE

REDUCTION • QUALITY IMPROVEMENT • MANUFACTURING CELLS • LIMITED WORK-IN-

PROCESS • PRODUCTION BAND

WIDTH • NO STOCKROOM • SERVICE

ENHANCEMENTS

ULTIMATE OBJECTIVES • ZERO INVENTORY • ZERO LEAD TIME • ZERO FAILURES • FLOW PROCESS • FLEXIBLE MANUFACTURE • ELIMINATE WASTE

HUMAN/ORGANIZATIONAL ELEMENTS: • WHOLE PERSON • CROSS TRAINING/JOB ROTATION • FLEXIBLE LABOUR • CONTINUAL IMPROVEMENT • LIMITED DIRECT/INDIRECT

DISTINCTION • COST ACCOUNTING/ PERFORAMNCE

MEASUREMENT • INFORMATION SYSTEM CHANGES • LEADERSHIP/PROJECT MANAGEMENT

MANUAFCTURING PLANNING AND CONTROL • PULL SYSTEMS • RAPID FLOW TIMES • SMALL CONTAINER SIZES • PAPERLESS SYSTEMS • VISUAL SYSTEMS • LEVEL LOADING • MRP INTERFACE • CLOSE PURCHASING/VENDOR

RELATIONSHIP • JIT SOFTWARE. REDUCED PRODUCTION

REPORTING/INVENTORY TRANSACTION PROCESSING

SOURCE: MANUFACTURING PLANNING AND CONTROL

FIGURE 2.2. JIT OBJECTIVES AND BUILDING BLOCKS

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According to M.A Vonderembse [10], a push system is based on

“the idea that materials get pushed through the processing operations based on

a schedule. Each order release is based on requirements generated by the

master schedule”

while a pull system is defined as

“a system that moves material based on actual needs at successive work

centers. This pull system concept actually starts with customer demand, which

pull finished products from the company”

Table 2.1[10] shows a comparison between MRP and JIT. A pragmatic approach

is to establish a hybrid system whereby the integration of MRP and JIT brings out

the essence of both systems. From the comparison in Table 2.1, there are both

pros and cons in both systems. While MRP is useful in forecasting and

production planning in the long run, JIT provides a better tool for cost reduction

and minimize inventory, thus provide an organized execution system that

facilitates scheduling. [11] In fact the integration can resolve shortcoming of MRP

and JIT by enhancing the strength and diminishing the weakness of each

system. For instance, the consideration of a long lead time and multiple BOM

level is not largely emphasized in MRP. Implementation of JIT enables reduced

time to market and few bills of material level. With an added dimension of

responsiveness to cost and quality in modern manufacturing, JIT technique is

just the essential tool to meet customer demand. However JIT plays a passive

role in complex planning and forecasting in the long run and the integration of

MRP as a planning tool on top of JIT implementation is the perfect marriage.

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TABLE 2.1. COMPARISON OF MRP AND JIT

MRP JIT

LOADING OF OPERATIONS CHECK BY CAPACITY REQUIREMENT

CONTROLLED BY KANBAN SYSTEM

BATCH SIZES ONE WEEK OR MORE SMALL AS POSSIBLE

IMPORTANCE OF DATA ACCURACY

CRITICAL UNNECESSARY

SPEED SCHEDULE DEVELOPMENT SLOW VERY FAST

FLEXIBILITY LOWEST HIGHEST

COST HIGHEST LOWEST

GOALS MEET DEMAND, HAVE DOABLE PLAN

MEET DEMAND, ELIMINATE WASTE

PLANNING FOCUS MASTER SCHEDULE FINAL ASSEMBLY SCHEDULE

PRODUCTION BASIS PLAN NEED

SOURCE: M.A.Vonderembse, G.P.White

2.1.4 JIT II

JIT II, commonly referred to as vendor-managed inventory (VMI), adopted the

underlying concept of JIT. BOSE Corp, a manufacturer of component quality

speaker introduced this idea in which the supplier managed the inventory

replenishment on behalf of the customer. A technique where the supplier

progressively monitored the inventory level of customers, it involved the buying

strategies and decision by the supplier on the order quantity and scheduling. [12]

However, the VMI partnership will depend largely on the close supplier/customer

relationship.

Today, JIT has evolved into a broader concept of lean system. The basic

underlying fundamental of JIT has been built on and extended from being a

technique to an organization philosophy.

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 2.1.5 MANUFACTURING RESOURCE PLANNING (MRPII)

With complexity in operation and the need for effective planning, the Material

Requirement Planning (MRP) basic manufacturing function is integrated with

more functions, including order processing, manufacturing, and distribution.

Oliver Wight named this integrated system Manufacturing Resource Planning

(MRPII). However radical changes to business model in the 1980s eventually

affected the MRP/MRPII model and evolved to the next stage, birth of Enterprise

Resource Planning (ERP).

Table 2.2 [13] reflects the changes to business model in the past decade and

these changes impinged the effectiveness of MRP/MRPII model. With

manufacturing moving from a product-centric to customer centric business

model, mass customization was fast replacing the traditional concept of mass

production. Thus production size lots decreased due to increase in product

variation and supplier fragmentation, making planning a more tedious process.

TABLE 2.2 CHANGES IN BUSINESS MODEL FROM 1970 to 2006

From (1970-1985 period) To (1985 to 2006+ period)

Long lead time production cycles Short, market driven lead times

Mass production Small lot with much variation

Large corporation dominated Agile company dominates

Vertical integration “Virtual Business” with partners

Internal production Extensive outsourcing, contract work

Easy capital sources Difficult capital sources

Larger margins (cost + markup = price) Tremendous margin pressure

Slow technical, market changes Rapid technical, market changes

Production centered Customer-centered

Domestic production Offshore production partners

Large, costly middle management Pressure toward flat organization

Inventory control focus Customer response, cost focus

Low trust of computers High trust of computers

Limited, costly computer power Abundant, low cost computing power

SOURCE: PAUL DEIS, PROACTION 2007

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Besides achieving low production cost, other factors such as quality, reduced

lead time and product differentiation become factor of consideration. As a result,

a different approach to the customer focus industry should be undertaken. ERP

software is there to provide the much critical coordination.

2.2 DEFINATION OF ERP

Enterprise Resource Planning (ERP) is traditionally defined as

“an accounting-orientated information system for identifying and planning the

enterprise-wide resources needed to take, make, ship, and account for customer

orders according to American Production and Inventory Control Society

(APICS).” [14]

It attempts to integrate and support key departmental functions onto a single

computer system. It forms the transactional backbone of an organization. The

system operates on a common database platform that allows storage and access

of information for all modules. The benefits of ERP on operation planning and

purchasing will be discussed in Chapter 5.

2.2.1 COMPONENT OF ERP Enterprise Resource Planning (ERP) can be categorized into 4 main groups

(Figure 2.3):

1) Sales & Marketing

2) Operation & Logistic

3) Financials

4) Human Resource

16


SALES & MARKETING This module includes the front office functions of an organization. The objective

is to manage sale and marketing activities and improve customer services. The

functionalities support by the module include generating and keeping track of

sales order, checking credits limit, supporting customer-related administrative

issues in pricing, quotation, contractual agreement and managing sales report.

With the business model becoming customer-centric, more emphasis has been

placed on the improvement to the functions of this module.

ERP

OPERATIONS AND LOGISTICS

INVENTORY MANAGEMENT MRP MATERIAL MANAGEMENT PRODUCTION PLANNING PROJECT MANAGEMENT QUALITY MANAGEMENT PURCHASING ROUTING MANAGEMENT SHIPPING VENDOR EVALUATION

SALES AND MARKETING ORDER MANAGEMENT SALES MANAGEMENT SALES PLANNING PRICING AFTER SERVICES

FINANICIALS ACCOUNT RECEIVABLE AND PAYABLE ASSET ACCOUNTING CASH MANAGEMENT AND FORCASTING GENERAL LEDGER PRODUCT-COST ACCOUNTING PROFITABILITY ANALYSIS PROFIT CENTER ACCOUNTING FINANCIAL CONSOLIDATION EXECUTIVE INFORMATION

HR PAYROLL PERSONNEL PLANNING TRAVEL EXPENSES HR TIME ACCOUNTING TRAINING

SOURCE: F. ADAM, D. SAMMON FIGURE 2.3: OVERVIEW SYSTEM OF ERP

17


OPERATION & LOGISTIC This module includes the back office manufacturing functions of an organization.

It can be further exploded into below sub-modules:

1) Production Planning

2) Purchasing

3) Engineering

4) Inventory & Warehousing

5) Quality Assurance Management

Fast delivery, high quality, and low cost has been an important criterion to

achieve competitive advantage. Therefore, good management in back office

operations are essential for organization to achieve higher productivity.

FINANCIALS This module involves accounting functions and generates financial reports such

balance sheet, account receivable / payable, general ledger, cash flow, bank

reconciliation and financial statements. Their role is mainly on budget control and

profit-cost accounting for organization.

HUMAN RESOURCE Human Resources (HR) involves management of human resources and capitals

in an organization. Their role involves mainly payroll, training, maintenance of

personnel detail and claims.

18

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING ERP EXTENDED MODEL The basic ERP model can be further evolved with the emergence of Supply

Chain Management (SCM) and Customer Relationship Management (CRM),

referred to as extreme integration (Figure 2.4 ).[4] It extended the network of the

suppliers and customers to enhance communication and improve process to

achieve supply chain profit and cooperation.

Most ERP vendors have SCM functionalities added to their product. SCM refers

to the integration of various entities in the supply chain and enable a seamless

flow of information between all the supply chain partners [15] With SCM module,

the supply chain can be managed efficiently from the point of order to the

delivery of customer.

CRM concentrate on integration with customers. CRM can be categories into two

types: Analytic and Operational. While operation deals with transactional

functions, analytic CRM involves developing strategic sales by analyzing on

customers demands. CRM enhance sales and marketing modules, bringing

better services to customers and widening customer base for organization.

19


2.4 ERP IMPLEMENTATION Implementation of ERP is expensive and the software market catered mostly to

the big organization, most of the Fortune 500 companies in 1990s. A large

company with over 1,000 employee may spend $50 million to S500 million for an

ERP system. Installation cost $30 million in software licensing, $200 million in

consultation fees, and additional amount in purchasing new hardware.

Furthermore, complete implementation may take 4 to 6 years. A midsize

company will require about $20 million and 2 years in implementation. [16] A

Robbins-Gioia (2001), a provider of management consulting services located in

Alexandria – Virginia made a study on the ERP implementation and stated that

51 % of the respondents viewed their ERP implementation as unsuccessful. [17]

According to Standish Group Chaos Report (1994), success rate for IT project

was only 16.2%, while challenged projects accounted for 52.7%, and impaired

(canceled) for 31.1%. [18]

ENTERPRISE EXTENDED EXTENDED

CUSTOMER SUPPLIER

CRM CUSTONER RELATIONSHIP MANAGEMENT

SRM SUPPLIER RELATIONSHIP MANAGEMENT

CENTRAL DATABASE

SALES AND MARKETING

FINANCIAL

OPERATIONS AND LOGISTICS

HR

FIGURE 2.4 : EXTENDED MODEL OF ERP SOURCE: F. ADAM, D. SAMMON

20


According to Gartner Group on time and money spent on ERP implementation,

for 40 percent of enterprises deploying ERP or ERP II systems through 2004, the

actual time and money they spend on these implementations will exceed their

original estimates by at least 50 percent (.07 probability). [19] With such high

failure rate, it is imperative to make studies on its limitation and malfunction to

enhance the success rate of implementation.

CRITICAL SUCCESS FACTOR Critical Success Factor (CSF) is defined as those things that you must do well in

order to be successful. The CSF may be broken down into sub-factors to further

define the actions, measurements, roles, responsibilities and behaviors that each

slice of the organization must demonstrate to assure success and get significant

results. [20] In order to prevent ERP implementation failure, it is important to

define a good CSF. A study by Toni Somers and Klara Nelson on the mean

ranking of CSF shows that top management support, project team competence

and interdepartmental cooperation are the top three CSF in ERP implementation.

[21]

The determination of success in ERP implementation varies from different

companies. The Key Performance Indicators (KPI) is used to assess the level of

success for ERP implementation. Examples of KPI are percentage reduction in

inventory level, inventory accuracy, manufacturing schedule compliance and on-

time shipments. To achieve good KPI, ERP as a standalone system is never

enough. Adoption of business management tools, business intelligence and a

flexible approach is essential to maximize the benefit of ERP implementation.

21


2.5 OVERVIEW OF ERP MARKET Today, ERP vendors not only target big organization but small and medium

(SME) business as well. German software, SAP remains the largest ERP

provider for the past decade despite competition. They are recognized as the

worldwide 2006 market share leader for the enterprise resource planning (ERP),

customer relationship management (CRM) and supply chain management (SCM)

markets, according to Gartner Research. [22] However, with acquisitions of J.D.

Edwards, PeopleSoft ($10 billion), CRM leader Siebel ($5.85 billion), retailer

specialist Retek ($650 million) and others by Oracle, SAP is facing a much

stronger competitor unlike the past. However there are huge potential risks in

major software acquisitions. One example is Dutch software BAAN. Despite a

success story in 1990s with acquisitions of nine companies including Aurum

Software and Coda, poor management and accounting probe eventually caused

the fall of BAAN. [23]

“If Ellison can pull it off, the strategy has the potential to not only reshape his

company but the entire industry,”

-comment by one analyst (2005) on Oracle buying spree of PeopleSoft and

Retek. [24]

“Twenty percent? That’s for pikers. We’ve been growing 26 percent,”

- Catz (Oracle’s president and chief financial officer) said at a meeting of

Wall Street analysts on the sidelines of OpenWorld, the company’s annual

user conference in San Francisco. [25]

This report addresses the approach to a common operation framework and

highlights the integrative role of ERP to operations planning and purchasing.

22

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING CHAPTER 3: OPERATION PLANNING AND CONTROL MANAGEMENT 3.1 OPERTION MANAGEMENT Operation management is concerned with making the most efficient use of

whatever resources an organization has, so as to provide the goods, or services

their customers need, in a timely and cost effective manner according to

H.Barnett. [26] The immediate success in attaining this objective lies largely on

the organizational effort to perform wisely and produce results within a specific

timeframe. However, in the long run, as the production increases at the expense

of the capacity, detailed management of capacity, time and resources in meeting

schedule become ominously crucial. An internal arrangement to coordinate the

movement of material and transformation into finish goods with minimum cost

has to be proposed and executed.

Organizations exist in different models; each with a different approach towards

order fulfillment. Table 3.1 [27] shows the four different production strategies

employed by organization. However it is unlikely to classify an organization

specifically under any one category in modern manufacturing, as the current

trend proposes that organization tend to exist in the form of hybrid and

combination due to the nature of the component. For components that are

standardized and fast moving which are commonly used in assembly, a make to

stock strategy will work best. Buffer or safety stocks are kept in inventory to

prevent a stock out of the component during heavy demand. For a custom

component with infrequent demand, a make to order or procured to order

strategy will work better since excess inventory will likely take up the limited

warehouse capacity.

23


The design of operation functions arises from the business and operation

strategy of the organization. In order to cultivate a competitive advantage in the

dynamic economic, the priority to develop low costing strategy and elimination of

wastage has to be developed. The role of operation planning plays a crucial role

in attaining maximum productivity through the management of resources and

capacity.

Source: F.R. Lin, M.J.Shaw

OPERATION STRATEGY CHARACTERISTICS APPLICATION SITUATION

MADE TO

ORDER (MTO)

ASSEMBLED TO ORDER

(ATO)

ENGINEERED TO ORDER

(ETO)

PRODUCTION IS TRIGGERED BY

SALES ORDER

FINAL ASSEMBLY IS ORDER DRIVEN, BUT THE COMPONENT PARTS ARE FORCAST DRIVEN

AND BUILT TO STOCK


SALES ORDER

HIGH CUSTOMIZATION PRESSURE

BUT LOW RESPONSIVENESS

HIGH CUSTOMIZATION PRESSURE HIGH RESPONSIVENESS, PRODUCT DIFFERENTIATION LATE

IN OFP

HIGH CUSTOMIZATION PRESSURE LOW RESPONSIVENESS, PRODUCT DIFFERENTIATION

MADE TO

STOCK (MTS)


INVENTORY FORECAST LOW CUSTOMIZATION PRESSURE

TABLE 3.1: PRODUCTION STRATEGIES

24

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 3.2 ROLE OF OPERATION PLANNING

According to George W.Ploss [5],

“The essence of manufacturing is the flow of materials from suppliers, through

plants to customers, and of information to all parties about what was planned,

what has happened, and what should happen next.”

Without systematic planning in the long-short run and firm control techniques

over operation, an organization will not be able to attain the essence of

manufacturing. The evolution of planning, together with the dynamic economic

has placed a strong focus in planning and control techniques in organization over

past decades. In a completive and demand-driven economy where the lead time

requirement from customers is shorter than the total accumulative production

lead time, time has displaced cost as the most important element in production.

The main responsibility of operation planning is the successful management and

completion of all activities necessary to produce the product on time with the

objective of minimizing inventory and maximizing the utilization of company

resources. [26, 28] The major activities in production planning can be classified

into 3 major stages (TABLE 3.2).

25


3.3 SALES AND OPERATIONS PLANNING (S&OP) Sales and operation planning (S&OP), also known as Integrated Business

Management is formulated for purpose of collaborating demand management

with supply planning. It defines the game plan and overall direction for the firm to

strategize the OFP to meet demands. [28, 29] A top-management planning

process, whereby a continuous cycle of monthly reviewing, monitoring and

planning of operation to manage customer expectation and synchronize

resources. [30] The regular meeting identifies shortcomings of current operation,

evaluating company mission by setting common goals at all manufacturing

stages in ensuring the synchronization of planning at different department.

Different company has a unique approach towards S&OP, based on their

business planning. Business planning focuses on setting objectives and

company directions for the future. Demand planning and supply planning

represent two major elements of S&OP as they provide the basis for balancing

demand and supply in a supply chain.

RANGE/DURATION SUMMARY

RESOURCE

PLANNING

SUPPLY

PLANNING

LONG –

1-2 YEAR OR MORE

PHASE

EXECUTION AND CONTROL

USUALLY TAKE PLACE DURING SALES AND OPERATION PLANNING. IT INVOLVES LONG TERM PLANNING AND STRATEGIES TO MEET FUTURE OPERATION EVENTS

DETAILED MATERIAL REQUIREMENT PLANNING (MRP) AND CAPACITY REQUIREMENT PLANNING (CRP), TOGETHER WITH MASTER PRODUCTION SCHEDULE

(MPS) TO EXECUTE THE PLANNING BASED ON S&OP

ENSURING THE EFFECTIVENESS IN EXECUTION OF PLANNING AND SHOP FLOOR CONTROL, MEASURE VARIATION FROM PLANNING AND PROVOKE

CORRECTIVE ACTION

MEDIUM – QUARTERLY, ABOUT 3-4

SHORT – DAILY, WEEKLY, MONTHLY

TABLE 3.2: MAJOR PHASES OF OPERTATION PLANNING AND CONTROL

26


Demand planning has an important role in modern manufacturing in this demand

driven environment. It identify future requirement and provides forecast for

coordination with supply planning. Other elements may include new product

(development) planning and financial planning.

3.3.1 SUPPLY PLANNING

One key aspect of supply planning is to analyze on the company resources and

strategies for future consumption. It involves resource management and

elimination of undesired constraint in the short medium and long run. The

aggregate supply plan defines the aggregate production rate, size of overall

workforce and capacity. It influences the critical aspect of operation in

determination of the inventory level, make or buy strategy, expansion of

workforce, capacity, and segregation of product family to sustain the business

plan criteria. [6, 31]

An aggregate supply plan provides the information and plan on requirement of

products at each given period after which a master production schedule (MPS)

which indicates the amount of products planned for a given period is developed

based on the supply plan.[6] The responsibility of a master scheduler in

determining, managing and constant reviewing of the anticipated schedule based

on the constraint on resource and capacity ensures the satisfaction of customer

demand. Rough cut capacity and material planning provides a calculation of the

rough estimate of workload to find the right combination of resource and capacity

based on MPS. It identifies potential bottleneck in operation at early stage. In

addition, it addresses the issues whether the equipment, workforce and materials

are adequate to support future demand. Besides, it also provides some form of

visibility into future and gauges the validity of the aggregate supply plan in

response to the changing requirement.

27


The rough-cut planning will be converted into plans from S&OP into detailed

material requirement planning and capacity requirement planning in the next few

months [32] The output of sales and operations planning is then fed on to the

next stage of resource planning.

3.4 RESOURCE PLANNING

If S&OP, the mastermind of the operation is being compared to as the composer

of a symphony, master production scheduling represents the conductor that

direct the band in an orchestra. Master production scheduling is based on the

decision from S&OP, converting them into reality by means of detailed material

requirement planning and capacity requirement planning. The construction of an

effective master production schedule (MPS) to meet customer lead time

requirement provides the basis for supporting available to promise (ATP),

synchronizing customer order against capacity competency. It provides

coordination of each functional group in an organization. [5, 9] MPS also covers

the aspect of timely internal production and purchasing in maintaining optimal

inventory. Material and capacity constraints pose a significant problem to smooth

operation. MPS tackles these constraints, together with input from the feedback

system of material requirement planning (MRP) and capacity requirement

planning (CRP), in ensuring the continuous flow manufacturing process.

Resource planning represents the intermediate stage of production planning.

The resource planning system consists of a feedback loop system of MPS, MRP

and CRP processes. Instructions from top management are translated from

S&OP to MPS. MPS, linked to detailed bills of material for production end items,

is responsible for driving MRP which produce, monitor and revise schedules.

CRP is integrated to ensure the availability of facilities, machine and work center.

CRP also calculates the capacity required for timely allocation of work station for

the production.

28


An evaluation to MRP and CRP will be assessed to predetermine if the

formulation is realistic for execution. The loop is closed when the formulation is

deemed do-able; otherwise the process repeats in attempt to create a valid MPS.

3.5 EXECUTION AND CONTROL Good planning doesn’t guarantee results without proper execution. A holistic

approach towards planning and fundamental controls in execution is the

ingredient to success in operation management. No planning is perfect as future

event can never be predicted accurately but good planning is still essential to

minimize alteration during execution. Attentions have shifted from planning to

execution techniques in the demand-driven environment due to the smaller

production lot size and higher product variety. Final production and assembly

schedule no longer follow the norms as disruptions force deviations in scheduling

to provoke corrective actions that rely on appropriate and timely execution

techniques. The role of MRP has been reduced to supporting role in modern

manufacturing but still powerful tool in long range scheduling and planning.

Short range planning undertaken by various operating department covers routine

schedules of production output, schedule, material purchases, product quality

and production yield improvement. [33] It addresses immediate issues pertaining

to the production, and serves as a feedback to the production planning system

for corrective actions to achieve better shop floor control. Finite/Infinite loading

and Input/Output Capacity Control represent two types of short range capacity

management which serves as bottleneck management in daily operation.

29

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 3.5.1 LOADING Loading refers to the assignment of jobs to machine and work centers. In modern

manufacturing where a job is assigned to multiple machine and work centers, the

complexity in scheduling jobs results in increase of set-up and queue time

lengthening production lead time. An infinite approach to loading refers to

scheduling of work centers without regard to capacity to the work centre whereas

a finite approach only load up to the predetermined amount of capacity and

schedule to the actual start and stop time of the centre based on prioritization of

jobs.[6]Infinite loading enable the identification of bottleneck operation over

specific period which feedback to supply planning and master scheduling for

corrective actions. However highly prioritized jobs may have to wait longer since

the capacity is always fully loaded. Finite loading enable optimal capacity

utilization by loading prioritized job to available capacity without congestion.

However in practical, the waiting time for the next prioritized job may increase the

machine idle time and eventually cause underutilization of capacity. Furthermore,

the routing sequence may not be accurate and exceed the planned schedule.

3.5.2 INPUT/OUTPUT CAPACITY CONTROL Input/Output (I/O) Capacity Control is used to achieve shorter manufacturing lead

time and tight shop floor control and by keeping constant amount of work on

shop floor [31] and monitoring work flow at individual work centres.[6]

I/O capacity control measures the actual I/O against the planned I/O to identify

potential underloading or overloading problem if the actual amount of work

deviate from the planned amount of work over period of time.

30


Table 3.3 shows an I/O report for a particular work centre. The cumulative

deviation measured the difference between the planned I/O and actual I/O over

time. The fairly reasonable cumulative deviation of 3 hours for input indicates that

optimal work is entering the work centre while a high negative cumulative

deviation of 92 hours for output indicates the work centre is not producing

enough work. This report provides planner with essential information to identify

problem work centre and take actions to rectify the situation.

WEEK 1/2 1/9 1/16 1/23 1/30 2/7

PLANNED INPUT

120 120 120 120 120 120

ACTUAL INPUT

125 115 120 125 118

PLANNED OUTPUT

150 120 120

ACTUAL OUTPUT

160 130 140 145 120

CUMULATIVE CHANGE IN BACKLOG

-35 -50 -70 -90 -92

CUMULATIVE DEVIATION

+5 0 0 +5 +3

CUMULATIVE DEVIATION

+10 -10 -20 -25 -25

150 150 150

UNIT OF I/O IN HRS

TABLE 3.3. I/O CONTROL REPORT

31

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 3.6 DISCUSSION Operation planning plays a vital role in operation management, be it top

management planning at the top of hierarchy to day-to-day execution and control

in the routine operation. With evolution in planning to suit the dynamic economic

added on the complexity factor of supply chain, the need for an efficient tool to

integrate the process and provide visibility to the operation is imperative. ERP is

a popular tool to support the planning process. The production modules of ERP

assist the planner in master scheduling by facilitating MRP and CRP. It allows

transaction and work entry into system to monitor progress for proper shop floor

control. This chapter serves as an introduction to the basics of production

planning. Figure 3.1 shows the conceptual model of operation planning in an

organization.

Today, with higher expectation from customers, organization has developed a

strategic focus towards operation planning. Introduction of lean concept to

reduce cost and improve operation is widely adopted by much organization in

recent years. ERP provides an informative platform to integrate these

methodologies and strategies into the process.

32


SALES ORDERS

RESPONSIBILITY

SALES

PROCUREMENT

OPERATION PLANNING

ISSUE PR TO

PROCUREMENT

SET UP MASTER

BOM

SET UP MASTER

ROUTING

DEFINE PRODUCT

STRUCTURE

ANALYSE WORK CENTER

SALES & OPERATION PLANNING

MASTER PRODUCTION SCHEDULING

MATERIAL REQUIREMENT

PLANNING

SALES FORECAST

COMMODITY GROUPING

SET UP ITEM

MASTER

ITEMS

PHAMTON BOM

INTERNAL

EXTERNAL

DEMAND PLANNING SUPPLY PLANNING

MAKE OR

BUY

BUY PURCHASE ORDER

PROCESSING

BUSINESS PLANNING

CAPACITY REQUIREMENT

PLANNING

SET UP JOB CALENDER

OK?

FIGURE 3.1: OPERATION PLANNING GENERAL FRAMEWORK

DEVELOPMENT PLANNING

FINANCIAL PLANNING

FACILITIES

MANPOWER

NO NO

YES

MAKE

PRODUCTION ORDER

PROCESSING

SALES & OPERATION PLANNING

RESOURCE PLANNING

EXECUTION AND CONTROL

SHOP FLOOR CONTROL

PRODUCTION COMPLETION

PRODUCTION REPORTING

INPUT/OUTPUT CONTROL

FINITE/INFINITE LOADING

GNATT CHART

33

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING CHAPTER 4: PURCHASING MANAGEMENT

4.1 NEEDS FOR OUTSOURCING Since the transformation of business landscape, forecasting and planning has

become a complicated job. The increase in demand variability has led to a

blurred demand and vastly reduces visibility throughout the operation network.

This demand variability, together with the constraints of resources and capacity

limitation results in ineffective production process. In period of high demand,

expansion and newly requisition of resources can meet the short run capacity.

However, in period of relatively lower demand, wastage in term of machine and

manpower idling could prove to be substantial. [34]

Outsourcing enables an organization maximum utilization of their limited capacity

and at the same time, utilizing resources from external source to meet order

fulfillment through purchasing of material items. Organization can have better

control over their resources to take advantage of the competitive edge that

external source can provide in term of quality, lead time, technology and

technical know-how. Therefore, procurement plays a supportive role in the

operation planning through supplier selection, management and strategic

sourcing, especially in an outsourcing environment, for instance the Original

Equipment Manufacturers (OEMs).

Effective purchasing management is essential as they perform a vital role in the

reduction of the overall supply chain cost and external coordination. According to

Mark S. Miller and Thomas M. Gaddy, they identify six actions which purchasing

management can help reduce total supply chain cost : 1) Improve SCM flow 2)

Make supplier arrangements to reduce assets 3)Reduce cycle time, 4) Outsource

non-core functions, 5) Improve customer service, and 6) Select a supplier based

on supply chain capability. [35]

34


4.2 PROCUREMENT CYCLE Traditional purchasing has rapidly evolved under the force of globalization. From

purchasing supplies to negotiation with supplier to achieving favorable deal and

tracking deliveries, the duties of purchaser have extended beyond these basics.

The modern procurement activities can be broadly divided into two role, buyer

and vendor scheduler. [29] The buyer role focuses on the strategic and tactical

management of purchasing while a vendor scheduler focuses on the execution of

purchasing activity.

1. Execution phase

• Purchase order processing

2. Strategic and tactical phase

• Spend Analysis

• Supply Strategy

• Sourcing

• Contract Management

• Vendor Management

The execution phase deals with the primary transactional functions of

purchasing, from the point of receiving Purchase Requisition (PR) to arrival of

purchased items The strategic phase involves supporting operation planning and

the effective matching of resources to the customers through vendor selection

and management in order to achieve low price, good quality and on time delivery.

Other strategic priority of procurement includes identification and implementation

of cost reduction measures to obtain substantial saving, and continuous

improvement of supplier’s processes to establish a mutual beneficial relationship.

35

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 4.3 PURCHASE ORDER PROCESSING Purchasing Order Processing is the basic duty of a purchaser in his/her role as a

vendor scheduler. The process can be classified into 3 different stages below:

STAGE 1: PURCHASE REQUSITION Material to be acquired can be classified into several category: Raw material,

Supplementary materials, Semi-manufactured products, Components, Finished/

Trade Product, Investment Goods/Capital Equipment, Maintenance, Repair,

Operating (MRO items) Materials and Services, according to Arjan J.Van Weele.

[36] The purchase requisition (PR), also known as the statement of work,

signifies the recognition of need for items in an organization. It specifies the detail

of the purchase and usually states the product description, quantity, planned

delivery date, ship-to information and delegated purchaser.

Depending on the nature of industry, the purchaser takes different actions upon

receiving the purchase requisitions. For instance in electronics industry, a single

order for chips can measured up to million in quantity. A review team will be set

up. Otherwise, for an original equipment manufacturer (OEM), the order varies

and measure to as little as one to as many as hundreds. Usually the purchaser

makes independent decision on the source and the issue of purchase order.

STAGE 2: BID EVALUATION AND AWARDING The purchaser’s evaluation on the supplier capabilities in aligning with supply

chain objectives (low price, good quality service, and on time delivery) is vital in

governing the decision on selection of supplier. Other exogenous criteria include

the technical know-how, facilities, past relationship, working experience, and

geographical location of supplier. [37]

36


With the antiqued concept of vertical integration fast disintegrating in modern

supply chain management, organization practices supply base rationalization

whereby a group of specialized vendors is elected for aggregate product family.

In some case, a preferred vendor may be decided for the product in advance.

This depends on the supply and sourcing strategy that will be elaborated in later

sections under strategic procurement.

A request for quotation (RFQ) is prepared and sent to potential supplier for price

inquiry. It translates the essential information from PR to the supplier who can

prepare for the production upon issue of purchase order (PO). The purchaser will

analysis the bid and negotiates for favorable price before selecting the supplier

and issuing the PO.

The PO is a form of commercial obligation and acknowledgement between the

buyer and seller which indicates the agreed price, quantity, promised delivery

promises, payment term and penalty indicated in the document. There are

several types of PO which include:

• Blanket Purchase Order. A blanket purchase order (BPO) is an order

method in which the supplier delivers to the buyer over a period of time.

BPO is beneficial to supplier in providing better visibility into future

demands for effective planning and to buyer in achieving cost saving from

the economies of scale. It is suitable for recurring purchased product

whereby it is difficult to plan replenishment. [38]

• Subcontracting. Subcontracting refers to the purchasing of services from

the supplier. A good ordering technique for goods that are explicitly

complex to define especially for large structural component in the

Aerospace and Construction industry which is time consuming and

costly.[37]

37


With the extension of internet capabilities to purchasing, e-procurement software

provider has introduced the concept of reverse auction. Reverse Auction

represent an online auction between the buying organization and a group of pre-

qualified suppliers who attempt to outbid each other with competitive price to win

the order for the goods or service that have clearly defined specifications for

design, quantity, quality, delivery, and related terms and conditions over a

specific time frame. The benefits associated with reverse auction are:

1. Price reduction through aggressive price competition among

vendors.

2. Reduce or eliminate the negotiation phase of the purchasing

process

3. Automate and ease the purchasing process, reducing vendor

response lead time. With competition, the vendor must response

within the given time frame.

Despite the success of reverse auction in procurement acquisitions, the process

can be contradictory as it may neglect long term collaboration of buyer-supplier

alliance. [39]

STAGE 3: SYNCHRONZED DELIVERIES AND EXPEDIATING The first two stages describe the processing of direct material replenishment.

Stage 3 focuses on the PO execution in synchronizing deliveries and monitoring.

Purchaser follows up and expediate to ensure that the supplier meets the

delivery promises. Upon delivery receipt, the purchaser is to acknowledge the

invoice and receipt for payment; otherwise perform return management in case

of rejected goods or non-conformities. Figure 4.1 shows the overview of

purchase order processing.

38


RESPONSIBILITY

PROCUREMENT

OPERATION PLANNING FIGURE 4.1: PURCHASE ORDER PROCESSING

STAGE 1: PURCHASE

REQUISITION

STAGE 2: BID

EVALUATION & AWARDING

STAGE 3: SYNCHRONIZING

DELIVERY & EXPEDIATING

ISSUE PURCHASE REQUISITION

REVIEW PURCHASE

REQUISITION

BUYER D SERVICE

BUYER C COMPONENT/

FINISHED PRODUCT

BUYER B SUPPLYMENTARY

MATERIAL

BUYER A RAW

MATERIAL

BUYER D MRO

SEND REQUEST FOR QUOTATION TO

VENDORS

RECEIVE QUOTATION FROM

VENDORS

REVIEW & NEGOTIATION WITH

VENDORS

ISSUE PURCHASE ORDER

LEAD TIME CONSIDERATION

PAST VENDOR PERFORMANCE

COMPETITIVE PRICE

TECHNICAL KNOW-HOW

BLANKET PURCHASE ORDER

SUBCONTRACTING NORMAL PURCHASE ORDER

FOLLOW UP & EXPEDIATE

QUALITY CHECK

PURCHASE RETURN & REWORK

CLOSE PURCHASE ORDER

CHECK STATUS FOR BLANKET

PURCHASE ORDER

FAIL

PASS

STATUS: INCOMPLETE

STATUS: COMPLETE

39

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 4.4 STRATEGIC PROCUREMENT The current trend of purchasing no longer focus entirely on the efficiencies in

execution of purchase order. To achieve substantial cost savings and long term

collaboration with supplier, the need to develop strategies in procurement to

bring values to supply chain arises. From the cumbersome component

outsourcing to the more strategic system outsourcing, purchasing activities have

streamlined with the advancement in computing technology. The need to build

trust and alliance with supplier in order to build a strategic relationship which

require total commitment from both parties become imperative.

Figure 4.2 illustrates the strategic procurement flow from spend analysis to

vendor management.

SPEND ANALYSIS

SOURCING

SUPPLY STRATEGY

CONTRACT MANAGEMENT

SUPPLIER RELATIONSHIP MANAGEMENT

The process of identifying current expenditure to determine what is being spent on, with whom, and for what

Development of vendor base through continuous searching and evaluating of new vendors, locally or globally

Management of contract pricing, renewal, discount, policy, monitoring, and negotiation

Vendor appraisal based on quality and delivery and establish good working relationship though SRM

FIGURE 4.2 STRATEGIC PROCUREMENT CYCLE

Address supply issue, such as supply base rationalization from data of spend analysis

40

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 4.4.1 SPEND ANALYSIS In Andrew Bartolini and William Browning II research on Spend Analysis, they

identify three actions to cost savings in purchasing [40]:

1. Identify opportunities to aggregate spend and negotiate superior contracts

2. Identify and reduce non-compliant or “maverick” spend

3. Improve procurement operations and supplier performance

Spend analysis allows in-depth examination on the expenditure and provides a

basis for devising strategic policy and decision. It is the starting point and

provides visibility for the identification and implementation of any strategic

sourcing and supply strategy.

Spend analysis addresses three key purchasing questions [41]

1. How much we are spending?

2. Whom are we buying from?

3. How much we are spending with each supplier and what parts, materials

and other tools we are getting from each supplier?

The increasing recognition and relevance of spend analysis over the years lead

the evolution of purchasing practices, shifting towards strategic procurement.

Data analysis has became an important skills as more buyers are reliant on data

analysis skills now as compared to five years ago. [42]

Strategic sourcing is performed to constantly identify new and competitive

vendors locally or globally. Supply strategy addresses supply issues such as

supplier base rationalization. Through spend analysis, purchasers are able to

identify competitive suppliers and recognize their comparative advantage. Many

companies today are facing the problem of keeping an optimal supplier base.

41


Having too many suppliers prevent stockout, however it is difficult to achieve

significant cost saving without long term collaboration with supplier to achieve the

lowest cost. Therefore, there is a need to establish a firm suppliers base who

comprise of the best performing vendors to reduce “maverick” spend and non-

compliance.

4.4.2 CONTRACTUAL MANAGEMENT A supply contract is a fixed mutual obligations and agreements that protect

involving parties against breaching of term, thereby preventing any unexpected

changes to planning and production in supply chain within the validity of contract.

It covers services or purchases that require condition that extend beyond the

scope of purchase order or within a considerably long period of time. Common

types of agreement, such as fixed-price, cost-reimbursable and incentive exist,

however usually in combination.

The availability of contract agreement serves to streamline the order processing

and direct material replenishment. It is an extremely useful tool for lead time

management and cost savings. A stocking agreement can reduce the lead time.

This reduction in lead time is due to absence of vendor response lead time and

the shorter deliver lead time. For instance, in the OEMs hierarchy structure, the

vendor response lead time is typically longer than most industry as the chain of

response extends from the material supplier to the main supplier. The response

lead time may be even longer given the complexity of product design and stock

out of base material. Moreover, the company can indirectly increase their

inventory level by having stocking agreement with the supplier. The contracted

subassemblies can be stock in the form of raw, semi-finished or work in progress

(WIP). These will greatly reduce the delivery lead time upon purchase order. A

pricing agreement specifies fixed price from supplier within validity date.

42


Other cost saving measures such as line discount and invoice discount upon

minimum order quantity and minimum invoice amount are included as part of a

pricing agreement. Effective contract management is a key procurement function.

Negotiation skill is an essential skill of a buyer to achieve the lowest possible

price. In addition, buyer is responsible in monitoring supplier performance metrics

and ensures contract compliance and renewal when expiring. Therefore, buyer

plays a pivotal role in contract authoring, negotiation, execution and monitoring

for the organization.

4.4.3 SUPPLIER RELATIONSHIP MANAGEMENT For companies to be successful, they need to build a strong supplier relationship

for joint venture. Modern supply chain now includes supplier relationship

management in the extended ERP model. The buyer/vendor relationship has

transformed from simple purchasing transactions to joint collaboration which

require commitment to supplier from the buying organization. Supplier

performance has a direct influence on the efficiency of the business operation

unlike the past, where they are merely commodity provider. It has become

imperative that suppliers take participation in organization planning and merge

themselves into company future vision. It has become the responsibilities of the

buyer to take up the job of a liaison person between the company and supplier.

To create an environment to foster the strategic partnership, regular meeting to

understand the supplier problems and discuss future policies are essential for

better understanding of each other business process.

43

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 4.5 DISCUSSION Purchasing is evolving with the unprecedented changes in business

environment. Internet capability has transformed the traditional paper-based

purchasing activities to highly automated and strategic purchasing management.

The emphasis for automation in purchasing activities to free up time for strategic

sourcing and contract management is the key to an effective procurement

function. The shift from price focus to total cost focus redefines the priority,

knowledge and skills of a purchaser. Knowledge in area of supplier relationship

management, total cost analysis, purchasing strategies planning and supplier

analysis has became the most important criterion to define a good buyer. [43]

Despite the importance of possessing such knowledge, a buyer requires tool that

enable them to put their knowledge into practice. ERP not only provides varying

degree of automation to the transactional activities but also allows analyzing and

reporting, which supports spend analysis and vendor evaluation. Therefore, ERP

is a necessity to support the purchaser daily activities and a tool for supporting

decision making.

44

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING CHAPTER 5: OPERATION INTEGRATION WITH ERP

5.1 BACKGROUND Manufacturer faces a mounting problem in meeting the constant changes from

customers and suppliers. Ability to attract and retain customers depends on

largely on the organization effort in coordinating the supply chain to provide

excellent customer support in order promising and responding to last minute

changes. Moreover, the need to adhere agile, lean strategy or Six Sigma

methodology to increase total supply chain profit, reduce cost and maintain

competitiveness requires a platform to handle the complexity of backoffice

application in manufacturing. Therefore, in order to achieve supply chain

coordination, an integrated system whereby the customers, manufacturer,

suppliers are aligned to common objectives is required to improve

communication, responsiveness and flexibility.

The benefit of an ERP system to support electronic data interchange (EDI) in

maintaining data integrity, inventories accuracy, transaction consistency, data

storage and retrieval serves as a tool for backend manufacturing integration in

the supply chain. Elimination of paperwork enhances the manufacturing process,

creating a conducive working environment. Manufacturing integration involves a

range of functions from production planning to execution of operations and

purchasing from external supplier. ERP provides the solution to manage

manufacturing process including production order processing, maintaining

planning bills and support material/capacity requirement planning. This chapter

illustrates the benefits and integrative nature of ERP system in manufacturing

modules.

45


Most of the companies do not get quantifiable financial benefit through the

implementation. [44] With the possible benefits from S&OP process, many ERP

software vendors, such as SAP have introduced S&OP modules to cater to the

increasing need even though many companies only require a well organized

spreadsheet to excel for this process. However, ERP still plays a critical role in

enhancing the execution and planning of the strategic process. It provides

accurate point-of-sales (POS) data in enabling creation of demand plan for better

forecasting. In addition, supply chain activities and resources need to be closely

monitored through MRP and CRP.

Supply planning defines the overall plan for the production process to satisfy the

customer demands, aligning with internal management to achieve operational

efficiencies in allocation of resources and capacity. It involves planning for the

entire supply chain activities, including defining product structure in BOM level,

replenishment methods, reordering policy, resources management, scheduling

and evaluation of performance. ERP enable the set up of manufacturing

database in the system and materialize top management decision into concrete

instructions and plan for production.

5.2 MANUFACTURING DATABASE The common manufacturing database represents the fundamental of ERP and

provides user with real-time access of information in the database. With a

common relational database, it enables users to access same data for purpose

of checking, planning and analysis. ERP serves as a storage and retrieval

system which enable user to input, store, alter and display data from within the

system with the click of the mouse. Information pertaining to the product

structure, vendor information and user responsibility are set up prior to

production. This information provides the platform for the configuration of

decision logic, entrusting responsibilities to the respective buyer or planner in

charge of the commodity for setting up any planning and purchasing activities.

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Table 5.1 illustrates a list of master file in the database. Each of the following

document and information is recognized by a unique identifier.

PROBABLY THE MOST CRITICAL MASTER FILE IN THE ERP

DATABASE. IT CONTAINS PRODUCT INFORMATION RANGING FROM

PRODUCT COSTING, PLANNING, REPLENISHMENT, BILL OF MATERIAL

AND ROUTING WHICH ALLOW THE PROGRAMMING OF DECISION

LOGIC FOR PLANNING, PRODUCTION AND PURCHASING

DESCRIPTION

ITEM

VENDOR

MASTER FILE

BILL OF MATERIAL

INVENTORY LOCATION

ROUTING

USER RESPONSIBILITY

DESCRIBE THE ENGINEERING FEATURES AND LIST THE

SUBCOMPONENTS, SUBASSEMBILIES AND PHAMTON BOM THAT BUILT

THE PRODUCT. MAINTAINANCE OF BOM MASTER FILE IS CRITICAL

FOR MATERIAL REQUIREMENT PLANNING AND MASTER

PRODUCTION SCHEDULING

DEFINE THE SEQUENCE OF THE OPERATION PROCESS. ROUTING

DATA SET THE TIME REQUIREMENT NEEDED FOR EACH STAGE OF

THE PRODUCTION PROCESS WHICH IS USED IN CAPACITY PLANNING

AND CONTROL OF WORK CENTRE

CONSIST OF SALES, PLANNER AND PURCHASER OF THE

ORGANIZATION. EACH USER IS BEING ASSIGNED TO THEIR

RESPONSIBILITIES THROUGH THE ALLOCATION OF THE USER

UNIQUE INDENTIFIER.

CONTAIN ALL THE INFORMATION OF A VENDOR WHICH INCLUDE

COMMUNICATION, INVOICING, PAYMENT, TRADING DETAILS AND

PRODUCT CATALOUGE.

LIST ALL THE INVENTORY LOCATION OF A MULTI-SITE OPERATING

ORAGNIZATION FOR DELIVERY AND STOCKEEPING PURPOSE.

TABLE 5.1: MASTER FILE IN ERP DATABASE

47

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 5.3 MASTER SCHEDULING The challenge for master scheduling lies in maintaining a balance between the

frequent changing demand and supply. It aims to satisfy customers within the

constraints of factory and the supplier base. The ability to manage, alter, report,

track the scheduling and operations within the plant provides a mean to identify

errors in master scheduling and respond quickly. John Proud identifies some

symptoms of master scheduling problems: Uncontrollable costs, Disruptions on

the shop floor, Late deliveries to customers, Late deliveries from suppliers,

Unplanned overtime/off-losing, High work-in process, Mismatched inventories,

Over-/Under/Utilized resources, Long queues and Finger pointing/low morale.[28]

The balance of demand and supply depends on the master scheduler and a

software computer system which maintains scheduling by detecting any problem

through structured decision logic. The programmed decision logic forges a data

and process linkage in automating the system to prompt action message to the

responsible parties upon the imbalance of supply and demand. This feedback

allows master scheduler to order production or purchase when the stock fall

below its safety level or reorder point. In chapter 6, the author will demonstrate

the configuration of decision logic from the item card to assist in master

scheduling using Microsoft Dynamics NAV.

Monitoring production progress through ERP enhances visibility in the supply

chain through functions in reporting usage, item tracking, production status

control, supporting available-to-promise, and capable-to- promise. Master

scheduler can identify problems relating to backlogs and over-/under-utilization of

resources, etc and reschedule or feedback to top management in proposing

solutions to rectify the situation.

48


Master scheduling performs strategically and tactically at different level of

planning. ERP serves as an analytic tool in production planning and controlling,

but also to convey instructions to work centre for operation. In the next few

sections, the author will examine how ERP integrate key operation functions in

manufacturing.

5.3.1 MATERIAL REQUIREMENT PLANNING MRP is a major component of master scheduling. It plays a critical role in

planning of projected demand to avoid shortage, and ensuring that items arrive in

a timely fashion. MRP utilize expanded bill of material to compute the demand

based on the requirement of the parent item. ERP system maintains the bill of

material and routing, and provides handling of version management which allows

flexibility and alteration into the anatomy of planning bill.

To practice effective MRP in manufacturing, it is necessary that a computerized

integrated system provides the essential data for gross requirement, scheduled

receipts, projected available, planned order/purchase receipts and release, which

are used to compute the forecast demand. Using these information and preset

decision logics, MRP monitors the inventory level, create planned orders upon

consumption from sales order or reschedule delivery dates to changing demand.

[45] The inputs from production and purchase orders, and consumptions from

sales order from the system provide sanity check to item availability. It

regenerate the planned order according to prevent shortage and excess

inventory. MRP is at the heart of manufacturing process; however the

assumption of infinite capacity means the in adept of capacity constraint into

consideration which leads to unrealistic scheduling.

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5.3.2 CAPACITY REQUIREMENT PLANNING To optimize capacity and resources utilization, Capacity Requirement Planning

(CRP) is needed to eliminate the shortcoming of MRP. The identification of

capacity problems leads to corrective measures by planners in rescheduling to

alternative work centers, outsourcing or extension of working hours. ERP assess

usage variance and utilization by means of man-hours through calculation of

working hours for items through the routing bills and setting of work center,

working calendars and shift to determine the available capacity. It reports the

output from individual work centers and provides planner with the needed

information to identify problem work centers from the system. Automatic flushing

at each operational process provides a reliable and accurate data for the

machine usage. Computerized tracking of usage also enables finite loading and

scheduling of each work center preventing overloading or underloading,

optimizing its utilization. 5.4 MANUFACTURING EXECUTION SYSTEM With increasing computing technology, traditional ERP has evolved to enhance

shop floor integration to close the gap between planning and execution.

Communication and shop floor data exchange between planners and shop floor

is the key to effective execution and production control in manufacturing.

Manufacture Execution System (MES) provides visibility of actual production

activity compared to planned activity and is essential in maintaining control of the

production operation. It allows immediate response, monitor, feedback on

performance and coordination on the shop floor process based on real time

activities to readjust the planning and scheduling. Thus, it provides better

manufacturing control and track capabilities which reduces variability, scraps and

reworks, aligning with lean strategy.

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A form of factory floor information and communication system as defined by

APICS to achieve shop floor integration, the data are connected and linked to

ERP system by means of bar coding, discrete counters, middleware etc to

enable bidirectional seamless flow of manufacturing information. [31] For

instance QAD, an innovative enterprise software maker, has introduced Just-in-

time Sequencing (JIT/S) modules which managed sequence production and

Manufacturing Executing Workbench (MEW) which enable event-driven control

system with minutes to minutes planning of the shop floor. [46] These modules

can be integrated with ERP to improve shop floor control. More manufacturers

have already implemented MES within the past two years. [47] This indicates

resurgence in the interest of MES. SAP introduced SAP Xapp Manufacturing

Integration and Intelligent (SAP Xmii) which provide a direct connection between

shop floor system and business process for better visibility, responsiveness and

shop floor control after their acquisitions of Lighthammar in late 2005. Oracle

latest E-Business Suite Release 12 includes manufacturing functionality for shop

floor management, including complex lot transactions, dynamic routing, end-to-

end genealogy of products, and modeling and tracking of operation yield costs.

[48]

5.5 ADVANCED PLANNING SCHEDULING Planning and scheduling is two major components in supply chain management.

While planning explores the possibility of the future, scheduling examines the

realism of implementation to meet demand and overcome constraint in a short

range of period. Traditional time-consuming concept of master scheduling,

material requirement planning and capacity requirement planning is fast

becoming obsolete and replaced by a newer breed of computerized Advanced

Planning Scheduling (APS) System in the new economy.

51


APS, a leading edge in manufacturing technology capitalized on the computing

technology to optimize resources and constraints to make decision on planning

and scheduling. It uses linear programming to optimize feasible schedules and

comprises a range of functionalities in forecasting, order promising, purchasing,

cost shipping, shop floor control, finite capacity scheduling and constraint based

planning. [45, 49] A great enabler for lean scheduling, it employs Just-In-Time

(JIT) concept and prevents overloading of bottleneck resources, reducing work in

progress (WIP). Unlike MRP which require multiple iteration and re-feasibility,

APS recognizes the resource/capacity constraint and makes use of complex

algorithms to generate an optimal schedule in a single run.

5.6 PURCHASING The primary functions of purchasing include procuring in optimal quantities and

scheduling a timely receipt into inventory. The fluent flow of procuring activities is

essential for an effective order fulfilment process and inventory control.

Purchasing order management from request of quotation, handling purchasing

transaction to receiving deliveries can be electronically managed with an ERP

system. The system facilities the executions of purchases order processing and

return management which ensures transaction transparency in purchasing.

Moreover, with automatic creation of contractual agreement and reverse auction

in place, varying degree of system automation is achieved in the execution

process. Relevant agreement details are negotiated and agreed during the pre-

purchase stage which is inputted into the ERP system for future transaction

reference. When the requisition is reviewed and approved, the system

automatically creates an Auto PO to the preferred vendor with the contractual

price, delivery terms and promises based on the agreement.

52


Computing technology has evolved the traditional paper based procedure to

using the system to capture purchasing detail. Such data is useful for spend

analysis and supplier evaluation. Computerization and a common relational

database is the essential criteria to a success spend analysis. Most organization

still adopt the traditional manual consolidation and analysis of spend data, and

thus has not reap the ultimate benefit of spend analysis given the limited spend

visibility. The four major barriers to effective spend analysis are poor data quality,

multiple source data, lack of standardization process and insufficient automation.

[41] ERP provides integration of purchasing process in supply chain and provides

a common relational database which negates the possibility of analyzing from

multiple data source. Highly trained professionals in the ERP software are

required to ensure that the purchasing order processing is effectively executed in

a standardized fashion. Purchasing data will be captured in the system and these

ensure data integrity. Some ERP software allows generation of crystal reports

such as Purchase Order History, Supplier History, and Items History which are

very useful for analysis. Skilled purchasers are able to import the data to

Microsoft Excel and manipulate the crystal report by means of pivot table into a

wide variety of comprehensive data for analysis. Through the ERP system,

information on aggregate expenditure can be timely retrieved and manipulated.

The need to identify potential vendors and establish long term working

relationship is the key to achieve competitive edge in an outsourcing

environment. Supplier history such as price, non conformance, returns to

vendors, purchase order history and delivery performance can be captured by

the system in the routine purchase order processing. These data are indicators of

appraisal in vendor evaluation. Periodic reviews on vendor performance enable

the filtration of potential vendors capable of meeting the company requirement

and policy. With ERP, a performance –based evaluation of vendor can be

analyzed through transactional data. A vendor ranking system can be

established with a formal process of rating their performance.

53


Today, empowered by the implementation of computing software, SRM software

and module have surfaced to enhance the connectivity between supplier and

company. SRM software compatibility with ERP reaps the benefit of technology,

resulting in streamline processes and engaging real-time communication through

communication portal to achieve inter-operability among suppliers. It automates

the sourcing process which enables better negotiation with supplier

electronically.

For Microsoft Dynamics NAV, BizTalk Server provides enterprise with effective

trading partner connectivity and business to business integration. It facilitates

data exchange with customers and vendors. Data exchanges include outbound

documents (request for quotation, purchase order, purchase return) and inbound

documents (purchase quote, purchase order confirmation and purchase

receipts), thus BizTalk further enhances real time communication in purchasing

order processing (Figure 5.1). BizTalk provides Navision with varying degree of

SRM/CRM capabilities in communication electronically.

BUYER VENDOR

SENDING PURCHASE

QUOTE

RECEIVING PURCHASE

QUOTE*

RECEIVING PURCHASE

QUOTE

RECEIVING PURCHASE

ORDER

RECEIVING PURCHASE

ORDER CONFIMATION

RECEIVING PURCHASE

RECEIPT

SENDING PURCHASE

RETURN

SENDING PURCHASE

RECEIPT

SENDING PURCHASE

QUOTE*

ISSUING PURCHASE

ORDER

SENDING PURCHASE

ORDER CONFIMATION

RECEIVING PURCHASE

RETURN

BIZTALK SERVER

INBOUND DOCUMENT

OUTBOUND DOCUMENT

* VENDOR RECEIVE AND INTERPRET THE PURCHASE QUOTE AS A REQUEST FOR QUOTATION, THEN SEND THE FINAL QUOTE TO THE BUYER

FIGURE 5.1: BIZTALK COMMUNICATION PROCESS

54


5.6.1 PURCHASING MANAGEMENT USING MICROSOFT DYNAMICS NAV The author will demonstrate the purchasing functionalities in Microsoft Dynamics

NAV in this section. Refer to Figure 4.1 for the purchasing order processing

framework. Figure 5.2 shows how Microsoft Dynamics NAV is used in the

purchasing process.

FAIL

PASS

SEND RFQ TO VENDORS *

CONVERT PURCHASE QUOTE/BID TO PURCHASE

ORDER FOR SELECTED VENDOR

POST RECEIPT IN SYSTEM UPON DELIVERY

QC

CHECK

CREATE PURCHASE RETURN ORDER

CREATE PURCHASE QUOTE FOR SELECTION OF

VENDOR

RECEIVE QUOTATION, ENTRY INTO PRICE LINE

INVOICE AND PAYMENT REMIT

RESPONSIBILITY

FINANCE

PROCUREMENT

WAREHOUSE

CREATE WAREHOUSE RECEIPT

CREATE PURCHASE CREDIT MEMO FOR

PURCHASE ALLOWANCE

CREATE PURCHASE CREDIT MEMO AND

REPLACEMENT OF ITEMS

FIGURE 5.2 PURCHASING SOLUTION MAP AND BUSINESS FRAMEWORK FOR MICROSOFT DYNAMICS NAV *Require BizTalk

REVERSE AUCTION*

1

2

3

4

5

6 7

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Company faces problem in maintaining alternative purchase price and discounts

without ERP. Often, buyer negotiates for better price with vendors in long term

collaboration to continuously lower the cost. ERP assists in purchase pricing and

discount management which specifies line discount upon minimum quantity. The

set up of alternative prices and discounts in the system allows purchaser to

select the most appropriate vendor who offers the most competitive price.

1. Upon receiving the quotation, the buyer will enter the price line (Figure 5.3a)

and discount (Figure 5.3b) into the system.

FIGURE 5.3: a) PURCHASE PRICE ENTRY b) DISCOUNT ENTRY INTO SYSTEM

56

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 2. The next step is creating a purchase quote for comparison of prices. A

purchaser will source, enquire and negotiate the price from vendors for the most

competitive price before turning it into order Figure 5.4 shows the quotation from

the 3 vendors: Koekamp Leerindustrie (31568974), Houtindustrie Bruynsma

(31147896) and Beekhuysen BV (31580305). Houtindustrie Bruynsma

quotation is the most favorable, after a line discount of 5% to Blanking Plug and

Union Cap stated in the agreement upon minimum order quantity.

57


FIGURE 5.4: PURCHASE QUOTES

3. A purchase order (106373) is created from the purchase quote(1024) which is

sent via email to the vendor in Figure 5.5. Navision calculates the expected

receipt and latest order date for the delivery from the formula below:

Planned Receipt Date + Safety Lead Time + Inbound

Warehouse Handling Time

= Expected Receipt

Date

Requested Receipt Date – Lead Time Calculation = Order Date

FIGURE 5.5: PURCHASE ORDER

58

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 4. A warehouse receipt RE000032 is then created to inform the warehousing

department of the pending delivery in Figure 5.6

FIGURE 5.6: WAREHOUSE RECEIPT

5. In event of non-conformances, the items will be returned to the vendors for

rework, replacement or compensation. Return management using Navision

provide an efficient handling of items in a timely fashion which is important in

establishing good relationships.

The purchaser is responsible for informing the vendors regarding the non-

conformance and compensation if applicable. Navision handles return activity by:

I. Create purchase return

II. Issue credit memo and request for replacement items

III. Request purchase allowance (price deduction from original price)

59

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING I. A purchase return order (1005) is created which indicates that 2 units of Union

Cap are defective and thus will be shipped back to vendors. Under the item

tracking line, the 2 defective items are allocated with serial no S/N1000 and

S/N2000.

FIGURE 5.7: a) PURCHASE RETURN ORDER b) ITEM TRACKING LINES

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING II. After creation of credit memo, 2 items are returned to the vendors. The

inventory of union cap will drop by 2.

FIGURE 5.8: PURCHASE CREDIT MEMO FOR RETURN SHIPMENT

III. Figure 5.9 shows the creation of credit memo for purchase allowance. Instead

of returning to vendor, a 50% purchase allowance or claim is requested from the

company

FIGURE 5.9: PURCHASE CREDIT MEMO FOR PURCHASE ALLOWANCE

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 5.7 DISCUSSION ERP is the starting point and platform for integration of manufacturing activities

from planning to execution. With evolving dynamic business landscape, ERP

vendors are improving their services and modules to provide state-of-art

technology solution to cater to the upcoming challenges. The need to develop

add-ons to existing ERP platform is essential for continual survival.

With an effective information system that promotes transparency and

communication, manufacturing integration can be achieved with ERP. It is also

widely recognized as a supporting tool to sustain lean performance. In fact, lean

can be achieved without IT interference as what Toyota has achieved back then.

However, the labour-intensive process can be simplified with the aid of

technology and this is needed when it comes to extension from a single plant to

multi-site operation. The inclusion of Manufacturing Execution System, Advanced

Planning & Scheduling, lean and Kanban capability modules to ERP enable lean

manufacturing with better flexibility and control over the operation. However

software alone is incapable to cultivate a lean environment or transformation.

Other factors such as top management support, user training, and effective shop

floor design are needed to complement with lean strategy.

ERP is still widely recognized as the information system to maintain sustainable

development and meet future requirements in today’s knowledge economy. In

spite of the bullish growth and demand for ERP, the failure of implementation of

ERP remains ominous. For example, FoxMeyer, pharmaceutical MNCs launched

a law suit against SAP, blaming the software as the cause of their downfall in

1994. However, the court rules the decision in favor of SAP. Hershey, a leading

manufacturer of chocolate, confectionaries and beverages in United States of

America chose implementation of SAP ERP but that prove to be a major setback

as they incurred heavy losses in sales and profit.

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Therefore, to achieve full benefits of ERP and avoid pitfalls, companies need to

understand and identify the implementation problems. This report provides a

general framework of ERP system and its implication in manufacturing processes

and functionalities.

The main cause of ERP implementation failure is that companies are unable to

alter their existing business practices to match their ERP system. Operative

limitation exists as firms lack comprehensive knowledge of business implications

and rigidity of the ERP system to achieve a substantial return on investment

(ROI). Strict adherence of good practice and reengineering of work process to

the changes brought by ERP is the key to long run success of its implementation.

The operative barrier of ERP in manufacturing is summarized as below:

1. Lack of Data Integrity and Maintenance

Data integrity refers to being correct or consistent with the intended state

of information. Any unauthorized modification of data, whether deliberate

or accidental, is a breach to data integrity according to Donn P. Parker.

[50] Poor quality data has an undesirable impact on the business

operation as their propagation across the information infrastructure result

in erroneous information in stored data. As a result, analysis results in

inaccurate sales and production forecast which affect operation planning

and result in redundancies and inefficiencies. Maintaining data integrity in

the system depends largely on the users to input the appropriate and right

data and perform internal audit processes and data checks. Oracle

introduce Oracle data Integrator to understand the stored information of

various application by defining business rule and perform data cleansing

operation to ensure data is adequately verified and validated. [51]

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2. Lack of Top Management Support and User Acceptance Dedication from top management and user is crucial to ensure the system

reap its benefit in the long run. Users may not be convinced with the new

work process and lack acceptance and confidence towards the system as

they fail to adjust to the initial changes. The complex user interface poses

as a barrier to user acceptance. Training and user-involvement to instill

the right attitude and methods towards the technology will improve their

skills and knowledge to the new business process.

3. Failure of Accommodating Evolution of Business Process

Business Process Reengineering is essential to realign business principle

and strategy with the ERP system. The rigidity and inflexibility of the

system is a barrier to accommodation to evolution of business process.

For instance, Hershey’s reengineering of operation structure caused

confusion and disruption of normal functions and created uncertainties

during the implementation process. That was primarily due to their over

attention to ERP implementation and failure to rectify the uncertainties

arise from the implementation. As a result, they are unable to focus and

channel their energy on their core ability, thus losing their comparative

advantage in the market. [53] There are other instances whereby the

change in business process affect and disturb vendor’s plan and thus

resulted in poor coordination between suppliers and organization. In

addition, the implementation of ERP takes a long time before sustaining

any benefits.

4. Myth

The mythical belief of ERP as a sliver bullet technology to business

process also contributes to operative barrier. ERP is simply an integrative

technology but it is not a model in itself. The computer provides a powerful

tool in storing, display, and assisting in decision making process.

64


However, the computer lacks the innovative, evaluative, analytics ability

and product knowledge in decision making to replace human judgment

and management decision especially in scenarios of uncertainty. It only

serves to remind and inform through action messaging by defining preset

rules but the responsibility and accountability of implementing lies with

human being. For instance, ERP doesn’t replace the job of master

scheduler despite configuration of decision logic. It calculates the

requirements arithmetically and prompts the master scheduler who in turn

creates and maintains a valid master production schedule to authorize

production. The decision making involves experience in understanding the

work process and assumptions behind the operation more than simple

arithmetical calculation by the system. [28]

In the next chapter, the author will present a case study to illustrate how the

operating planning and purchasing process can be streamlined with the

implementation of turnkey project in an oil and gas OEM.

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CHAPTER 6: CASE STUDY: IMPROVE PROCUREMENT AND OPERATION PLANNING IN OIL AND GAS OEM USING ERP

6.1 COMPANY BACKGROUND The case study describes the operation planning and purchasing using ERP for

an OEM of oil and gas drilling system structural type. For clarity purpose, the

presentation of the case study will employ the use of pseudonyms widely in this

report. The presentation format will be divided into 3 major portions, 1) Company

background 2) Operation planning 3) Purchasing with ERP. In the last section,

the author will discuss the alignment of ERP with lean strategy and implication of

the case study. In addition, the limitation of ERP will be used to explain the

glitches in this idealistic situation.

WHS Corp is an oil and gas provider of flow equipment products and systems,

such as subsea tree, manifold, wellhead and mudline drilling system. It caters to

an extensive and specialize group of customer in the upstream petroleum

industry which include drilling contractors, oil & gas producers, pipeline operators

and refiners.

Within the organization, there exist complex chains of work flow in Figure 6.1.

Figure 6.1 shows the overview of work flow and role of respective department in

WHS Corp. The 2 major activities are tendering and order processing.

66


OPERATION PLANNING

PURCHASING

WAREHOUSING

ENGINEERING

QUALITY ASSURANCE/CONTROL

AFTER SALES

SALES

EXTERNAL SUPPLIER / JOBBERS

CUSTOMER LOGISTICS & TRANSPORTATION

STOCKIST

MATERIAL SUPPLIER /

MILLER

INCOMING/OUTGOING SALES

ORDER/CONFIRMATION, CUSTOMER SERVICES SUCH AS ANSWERING

ENQUIRIES AND REQUEST FOR

QUOTATION REQUEST FOR TENDER

SUBMIT TENDER

REPAIR AND MAINTAINENCE OF

PRODUCT. PROVIDE AFTER SALES

SERVICES

SUBMIT PURCHASE

REQUISITION REQUEST/SUBMIT

FOR TENDER QUOTATION

OUTSOURCING/ SUBCONTRACTING

PURCHASE FORGING

MAINTAINENCE OF STOCKIST

BUY FROM MILLER

BUY FROM STOCKIST

SUBMIT DESIGN SPECIFICATION FOR TENDER

QUALITY INSPECTION.

IF FAIL, REWORK,

OTHERWISE KEEP IN

WAREHOUSE

FIGURE 6.1 OVERVIEW WORK FLOW IN WHS CORP

ASSEMBLY OF COMPONENTS

BASED ON PRODUCTION

ORDER

PLAN PRODUCTION

SCHEDULE FOR ASSEMBLY

INTERNAL SUPPLY CHAIN

EXTERNAL SUPPLY CHAIN

(BACKEND) EXTERNAL

SUPPLY CHAIN (FRONTEND)

ORDER PROCESSING TENDERING

AFTER SALES

FURTHER OUTSOURCE

TO EXTERNAL SUPPLIER

EXTERNAL SUPPLIER / JOBBERS

67

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 6.1.1 PRODUCTION STRUCTURE One major characteristic for WHS Corp is that they practice product

differentiations and customizations which are more aligned with the new

business landscape unlike the traditional mass production model. With a varying

degree of familiarity to an engineer-to-order (ETO) where there are active

customer involvement in product design and manufacturing planning directly

linked to customer orders, WHS Corp also exhibit some degree of resemblance

to an assemble to order (ATO) production model.

Unlike the conventional ATO model in automotive and electronic industry, WHS

Corp practices a hybridized production model. The key difference between these

OEM lies in the production and purchase quantity in a single lot or order and the

frequency of the order. A single order for WHS Corp can vary from as little as 1

unit to as many as 50 units. Furthermore, the order may not be repetitive or may

exist as a one-off large scale requirement from tender. The requirement for

similar products is not as frequent as automotive vehicles and electronic devices.

Therefore it is costly and risky to stock finished product or even manufacture sub-

components and forging due to the absence of economic of scale. Instead, most

parts are procured to order and assembly before shipping to the customer.

However, problems exist in this production structure. Due to the complexity of the

product, it can be broken down into several sub assemblies. Furthermore, the

company practices global outsourcing of parts. Figure 6.2 shows the breakdown

of the sub components from its parent items, TFL tree. This results in the

existence of bottleneck as the delivery lead time differs. For instance, the lead

time for master block valve and tree connector may take 2 weeks; however the

lead time for subsea wellhead may take as long as 15 weeks due to the

complexity and difficulties in obtaining the material for internal assembly. The

subsea wellhead is recognized as the bottleneck in the production.

68


TREE CAP ASSEMBLY

TFL TREE

ANNULUS LOOP

TFL FLOW LOOP

WYE SPOOL AND

DIVERTER

MASTER VALVE BLOCK

FLOW LINE CONNECTOR

TREE GUIDE FRAME

TREE CONNECTOR

SWAB VALVE

SUBDSEA WELLHEAD

WELLHEAD GUIDEBASE

UNION CAP

BLANKING PLUG

RETAINER RING

ANNULUS WING

VALVE

FLOW LOOP B

WING VALVE

FLOW LOOP A

TEMPORARY GUIDEBASE

RUNNING TOOL

HOUSING RUNNING TOOL,

762 MM

HIGHT PRESSURE HOUSING

RUNNING TOOL

CASING HANGER

RUNNING TOOL

TEST TOOL

WEAR BUSHING, 178MM

WEAR BUSHING, 245MM

WEAR BUSHING, 340MM

ANNULUS SEAL ASSEMBLY A

ANNULUS SEAL ASSEMBLY B

ANNULUS SEAL ASSEMBLY C

CASING HANGER,

CASING HANGER,

CASING HANGER,

HOUSING BORE PROTECTOR

HIGH PRESSURE WELLHEAD

HOUSING

SURFACE

LOW PRESSURE CONDUCTOR

HOUSING

PGB

TGB

CONDUCTOR CASING, 762MM

GUIDELINE

INTERNAL ASSEMBLY

LEVEL 0

LEVEL 1

LEVEL 2

LEVEL 3

FIGURE 6.2 BILL OF MATERIAL FOR TFL TREE

REFER TO APPENDIX A & B FOR FULL DETAIL OF ASSEMBLY

69

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 6.2 STRATEGIC MANAGEMENT WHS production structure is ruled by business uncertainties. The uncertainties

lead to difficulties in forecasting and force an unexpected business model. The

company is more reliant on resource management in strategic planning,

organizing and controlling of resource instead of the traditional resource

planning. Effective strategic plan need to be defined to deal with high customer

expectation in service, quality, delivery and cost.

One major obstacle to WHS in delivery promises is the existence of bottleneck

which prevents earlier delivery date. In the next two sections, the author will

demonstrate the use of ERP to solve the bottleneck issues in operation planning

and purchasing by means of turnkey project.

6.2.1 TURNKEY PROJECT

Purchasing strategies play a critical role in supplier integration with company

objectives. In order to achieve conflicting criterion of low cost, good quality and

speedy delivery, the need for supplier to take part in operation planning is of

paramount importance. Global outsourcing and complexity of product further

pose barriers to a timely delivery.

In WHS Corp, almost 80% of the parts are either outsourced or subcontracted

while the company focuses on their core competencies in gaining comparative

advantage within the industry. The supplier performances create substantial

value as they are responsible for a large portion of the company production.

WHS Corp faced a major challenge in fast and timely delivery to meet its

customer expectation. The breakdown into sub-assemblies and existence of

bottleneck makes operation planning tedious. Furthermore, it is risky to keep

inventory of bottleneck part. Thus, the key for earlier promised date lies in

shortening the overall delivery lead time.

70


Figure 6.3 shows the delivery lead time to customer. The total delivery vendor

lead time plays a crucial role determining the promised delivery date. With close

collaboration and efficient planning with vendors, the total vendor lead time can

be vastly reduced by means of turnkey project and contract management.

A well-undertaken turnkey project involves the following steps

1) Set up project team

2) Identify turnkey entities and commodity families for the project

3) Practice supplier base rationalization through selection of external

suppliers based on core competencies

4) Outline project objective and open discussion with suppliers

5) Compare quotation for selection of turnkey suppliers

6) Contract authoring, negotiation and finalization

7) Execute agreement condition

8) Review and evaluate success of project

FIGURE 6.3 DELIVERY LEAD TIME MANAGEMENT

ITEM SAFETY

LEAD TIME

VENDOR RESPONSE LEAD TIME

VENDOR DELIVERY LEAD TIME

ASSEMBLY LEAD TIME

TRANSPORTATION & FREIGHT LEAD

TIME

SENDING RFQ UPON

PR

ISSUE OF PO

WAREHOUSE HANDLING &

QUALITY CHECK

DELIVERY TO CUSTOMER

EXISTENCE OF MANY SUB-ASSEMBLIES AND BOTTLENECK MAY LEAD TO A LONGER PHASE LEAD

TIME IN VENDOR DELIVERY OF PARTS. VARIED FROM 4 -12 WEEKKS

ITEM SAFETY LEAD TIME = 2 WEEKS

VENDOR MAY NEED TO SOURCE FOR MATERIAL, OR FURTHER OUTSOURCE TO OTHER SUPPLIERS IF THEY

DO NOT POSSESS THE TECHNOLOGICAL KNOW-HOW

VARIED 1-2 WEEKS

DEPENDING ON THE DELIVERY LOCATION USUALLY BY SEA FREIGHT DUE TO THE HIGH

COST USING AIR FREIGHT UNLESS OF CERTAIN URGENCY

SEA FREIGHT MAY TAKE AS LONG AS 12 WEEKS IF DESTINATION IS IN

TOTAL VENDOR LEAD TIME

71


The main objective of WHS Corp is to collaborate with turnkey vendor to reduce

the total vendor lead time and create a value chain. The first task involves the

identification of bottleneck parts. Most vendors experience difficulties in sourcing

for material, Inconel 718 which requires them to import from oversea. The

duration may take as long as 12 to 16 weeks. Moreover, it is costly if the

requirement for those parts is insignificant in amount. Thus parts made of Inconel

718 are outsourced to oversea vendors in Europe and USA; however that does

not solve the problem of long lead time.

WHS Corp identifies 3 local vendors for the turnkey project based on their

technological know how, core competencies, experience from past project and

performance. ERP system provides JIT information on purchase order history

and supplier history for analysis of vendors. Among them, LCH Pte Ltd

(TK00020) emerges as the most competitive vendors with an expected lead time

of 4 weeks after post-bidding

Microsoft Dynamics NAV provides a convenience tool for supporting turnkey

project execution with its pricing and discount management, decision logic

support system and requisition worksheet to streamline the order processing.

After finalizing on the agreement, the purchaser enters the agreed price or

discount into the system. Figure 6.4 shows the contracted price for the items,

with a validity of a year. This information will be available to the planners upon

the generation of requisition worksheet in later section.

72


FIGURE 6.4 CONTRACTED PURCHASE PRICE 6.2.2 DECISION LOGIC SUPPORT SYSTEM The generation of auto purchase order depends on the decision logic support

system. Decision logic support system is a pre-configured set of planning rules

which is used to generate the requisition worksheet by arithmetical calculation of

requirement. It represents the core function of the manufacturing modules in

enterprising the concept of master production scheduling (MPS) and material

requirement planning (MRP).The creation of item card represents the first step to

definition of the products and its sub-components, followed by the definition of

their hierarchy by linkage to their parent item through production BOM.

Production BOM is used by the requisition worksheet to show what needs to be

made or purchased. Figure 6.5a shows the production BOM No.2304A for TFL

Tree on Microsoft Dynamics NAV. It shows the items and phantom BOM that

make TFL Tree.

73


FIGURE 6.5 a: PRODUCTION BOM

The next three figures highlight the key component in an item card which

comprise of general (Figure 6.5b), replenishment (Figure 6.5c) and planning

(Figure 6.5d) functions. In this example, the author will be illustrating the set up of

a Wellhead Guidebase from a TFL Tree System. The availability of ERP has

replaced the manual planning and scheduling with automation and computerized

scheduling by the software. Accurate data storage and calculation of inventory

level assist in making planning decision. Predetermination of lot size and lead

time enable planning arithmetically for production and purchasing to meet the

demand. The replenishment tab provides information for the set up of the

manufacturing strategy and replenishment method for the items in the database

while the planning tab affects the method of planning.

74


In Figure 6.5b, Wellhead Guidebase is uniquely identified as No.6655. The

general tab shows important information regarding the item availability. It

indicates the quantity on inventory, purchase, production, sales, and service

order. This example shows that there is no purchase, production, sales and

service order for this item. The program automatically calculates and updates the

contents of the field whenever there is a creation of order for the item. Upon the

creation of purchase order for 10 units of Wellhead Guidebase, the field for

quantity on purchase order will be updated to 10 units and the quantity on

component lines will decrease to (40-10=30) units. Therefore, the general tab

exhibits the summary of the item quantity and amount requirement on a

generalized view.

The replenishment tab in Figure 6.5c defines the type of replenishment system,

purchase or production. Under the purchase section, the information on the

preferred vendor, vendor item no. and estimated lead time can be entered

according. This information will be highlighted in the requisition worksheet and

the lead time calculation field is used to compute the planned receipt date and

ending date.

The planning tab in Figure 6.5d defines the reordering policy for the item. Upon

the need for replenishment, reordering policy will calculate the lot size per

planning period based on the parameters entered. For Wellhead Guidebase, the

company does not practice any reordering policy as the requirement is linked

directly to customer order, thus the planning parameter is disabled.

75


FIGURE 6.5 b: ITEM CARD (GENERAL TAB)

FIGURE 6.5 c: ITEM CARD (REPLENISHMENT TAB)

76


FIGURE 6.5 d: ITEM CARD (PLANNING TAB) 6.2.3 REQUISITION WORKSHEET

The requisition worksheet provides a convenient tool for calculation of items

requisition plan. It analyses the projected item availability, taking into

consideration of the forecasted demand and supply by arithmetically calculation

of following formula to compute the item balance. A negative value will prompt

replenishment as predefined in the item card. It proposes a requisition plan

through action message, providing the necessary purchase details.

Projected Available Balance = Inventory + Scheduled Receipts + Planned Receipts – Gross Requirement.

Figure 6.6 shows the requisition worksheet generated for tree cap assembly

(3242). Since there is no inventory for these items, the system will generate a

requisition worksheet from the planned receipt. Purchase order can be created

directly to turnkey vendor LCH Pte Ltd (TK00020) from the requisition worksheet

by carrying out the action messages command, thus generating an auto

purchase order.

77


FIGURE 6.6 REQUISITION WORKSHEET

78

B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING 6.3 DISCUSSION The turnkey project creates values for the company through collaboration with

the vendors. The implementation of turnkey project shortens the delivery lead

time and streamlines the purchasing and operation planning process as

compared to the traditional purchase order processing in Figure 4.1. Post

implementation in figure 6.7 can lead to a more than 50% reduction in lead time

and an improvement to on-time delivery to customers

This project is aligned with lean strategy which eliminates waste through JIT

purchasing, creation of better flow process and management of materials through

auto PO generation. It offers operational improvement and cost saving to achieve

conflicting company objectives. There is no need to increase inventory to meet

customers demand. In the long run, quality improves as turnkey suppliers are

more accustomed to machining similar commodity, further eliminating waste from

rework.

ERP is needed for the turnkey project and act as a tool to sustain the lean

application. JIT information in term of quality information can be accessed real

time from the system in the right place and right time through the manufacturing

database. Without ERP, it is difficult to sustain a lean environment.

FIGURE 6.7 LEAD TIME AFTER TURNKEY PROJECT

ITEM SAFETY

LEAD TIME

REDUCTION IN LEAD TIME

VENDOR DELIVERY LEAD TIME

ASSEMBLY LEAD TIME

TRANSPORTATION & FREIGHT LEAD

TIME

AUTO PO FROM REQUSITION WORKSHEET

WAREHOUSE HANDLING &

QUALITY CHECK

DELIVERY TO CUSTOMER

DEPENDING ON THE DELIVERY LOCATION USUALLY BY SEA FREIGHT DUE TO THE HIGH

COST USING AIR FREIGHT UNLESS OF CERTAIN URGENCY

SEA FREIGHT MAY TAKE AS LONG AS 12 WEEKS IF DESTINATION IS IN

TOTAL VENDOR LEAD TIME

79


CHAPTER 7: CONCLUSION

In this report, the author has introduced the concept of ERP in operation planning

and purchasing. Firstly, the author highlights the underlying job scope and

functions in operation planning and purchasing to give reader a better

understanding of the theoretical concept behind the manufacturing and

purchasing modules. In Chapter 5, the author explains the benefits of ERP

integrative nature and limitation in an organization. The case studies

demonstrate ERP functionalities in auto purchase order generation using

Microsoft Dynamics NAV. It investigates the application of ERP in supporting

turnkey project and lean application in WHS Corp.

Relying solely on ERP doesn’t yield maximum benefits. The need to model a

lean process with innovation ways for continuous improvement is the key to meet

future challenges. ERP holds the key to coordination and support that

improvement. It facilitates transactions and improves internal efficiencies with

consistent routine execution. Today, ERP vendors are constantly improving the

system by introduction of new add on to the system and module to meet future

challenges. With the birth of novel business strategies, the quest for continual

integration with ERP will bring the development of the system to new height.

Future work might examine the development of ERP with lean application given

the increasing trend of lean adoption on supply chain. The current status of ERP

modules is not well-developed to satisfy the market desire in lean application.

80

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B002: IMPROVE OPERATION PLANNING AND PROCUREMENT USING ENTERPRISE RESOURCE PLANNING APPENDIX A: TFL TREE

87


APPENDIX B: SUBSEA WELLHEAD

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final year thesis_strategic planning and purchasing with erp

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