Master Planning based on APICS Principles using SAP ERP ECC6 Kamran Solhi Nikjeh (kamran.solhi@gmail.com) 1. Brief Introduction The purpose of this research is to evaluate and investigate the tools and functions provided by SAP ERP ECC6 to implement and develop Master Planning processes based on APICS principles. The result can be used in manufacturing companies as a significant source of guidance to utilize SAP ERP ECC6 system more efficiently and strategically for implementing and developing Master Planning processes based on APICS concepts. First, this research briefly provides the most important concepts of Master Planning based on APICS principles including demand management, sales and operations planning, and masters production scheduling. Next, the most significant required tools and functions in SAP ERP ECC6 for implementing and developing these processes are presented. Finally, the essential steps for designing and performing APICS Master Planning employed by SAP ERP ECC6 are listed. 2. Master Planning based on APICS Principles: Master planning refers to a group of business processes that includes demand management, sales and operations planning (S&OP), and master production scheduling (MPS). In each level of master planning, demand is forecasted and methods are formulated to meet the demand, given capacity constraints (Figure 2.1). 2.1 Demand Management: Demand management is the function of recognizing and managing all demands for products. It involves prioritizing demand when supply is lacking. Proper demand management facilitates the planning and use of resources for profitable business results. It occurs in the short, medium, and long term. In the long term, demand projections are needed for strategic business planning of such things as facilities. In the medium term, the purpose of demand management is to project aggregate demand for production planning. In the short run, demand management is needed for items (Individual SKUs) and is associated with master production scheduling. Demand management includes four major activities: 1. 2. 3. 4. Forecasting Order processing (occurs when a customer’s order is received) Making delivery promises (Using ATP) Interfacing between manufacturing planning and control and the marketplace. Figure 2.2 shows this relationship graphically. 1 2 2.2 Sales and Operations Planning (S&OP) Prior to any detailed planning taking place in a manufacturing company, an aggregate ‘Game Plan’ needs to be developed by top management to give direction to the company. Looking at what APICS defines as sales and operations planning, it says: 1. The process brings together all the plans for the business (sales, marketing, development, manufacturing, sourcing and financial) into one integrated set of plans. 2. It is performed at least once a month and is reviewed by management at an aggregate (product family) level. S&OP is not developed in detail but the individual products are aggregated into product families that revolve around the company’s production facilities. 3. The process must reconcile all supply, demand and new-product plans at both the detail and aggregate levels and tie to the business plan. 4. It is the definitive statement of the company's plans for the near to intermediate term, covering a horizon sufficient to plan for resources and to support the annual business planning process. 5. Executed properly, the sales and operation planning process, links the strategic plans for the business with its execution and reviews performance measurements for continuous improvement. 6. In order to determine if sufficient critical resources are available to support the plan, or to determine when current resources will no longer be sufficient to support the plan, a resource requirements process is developed. This process will only consider the critical/bottleneck resources, which in most businesses will revolve around equipment, work centers or skilled employees. In some instances these critical resources could include suppliers, materials and / or money. There are three basic strategies that can be used in developing a production plan (Figure 2.3): 1. Chase (demand matching) strategy: It means producing the amounts demanded at any given time. Inventory levels remain stable while production varies to meet demand. 2. Production leveling: It is continually producing an amount equal to the average demand. Companies calculate their total demand over the time span of the plan and, on the average, produce enough to meet it. Sometimes demand is less than the amount produced and an inventory builds up. At other times demand is greater and inventory is used up. 3. Subcontracting: As a pure strategy, subcontracting means always producing at the level of minimum demand and meeting any additional demand through subcontracting. 3 2.3 Master Production Scheduling Once the company has a viable aggregate ‘game plan’ for the business (outcome of the previous step), the master production scheduler can take over and prepare the detailed ‘anticipated build schedule’ for the company’s finished products (individual SKUs). APICS defines the Master Production Schedule as: “MPS is an important tool that is used to satisfy the needs of the market by effective utilization of manufacturing and marketing. The master schedule is the vehicle for implementing the production plan. A more detailed and conceptualized definition of master schedule is: Realistic: The MPS must be realistic. It is a link between marketing and manufacturing. Hence, in order to satisfy the market demand and in order to utilize resource effectively, it should be realistic. It cannot be a “wish list”. Knowing what one really can produce is not easy. 4 Detailed: The master schedule uses the information from various functions to state what to produce, how much to produce and when to produce so that the customer demand is met at the predefined service level. Manufacturing Plan: Master production schedule is not a sales forecast that represents a statement of demand. The master production schedule must take into account the forecast, the production plan (the output of S&OP) and other important considerations such as backlog, availability of material, availability of capacity and management policies and goals. Planning for the MPS is constrained by the earlier planning which resulted in the production plan (S&OP) in terms of product families. On the completion of this task the sum of all the products in each product family in the weekly master production schedule buckets must sum to the quantity in the monthly buckets in the “production plan” (S&OP), to within an agreed tolerance (Figure 2.4). Whilst accomplishing the above the master scheduler must take into account the detailed end item forecast and current customer order such that he can not only support the ‘production plan’ but also the actual demand out in the market place. 5 2.3.1 Dampening Supply and Demand Fluctuations via MPS, and Safety Stocks as a Hedge The challenge the master production scheduler faces is to effectively balance product supply with product demand. One way to envision the situation is to imagine a seesaw like the one shown in Figure 1.4. In the real world, demand rises or falls in unpredictable ways, and imbalances occur. These occasions require a master scheduler to make adjustments to the system in order to get the demand and supply back into balance. An appropriate approach may be to install shock absorbers under the seesaw, to dampen expected fluctuations in supply and demand. Inventory in the form of finished goods as safety stock, for example, is one type of shock absorber. Safety stock inventory can be used as a hedge against unanticipated variations in both demand and supply. If the supplier delivers fewer items than requisitioned, if the production floor builds items that fail to meet quality specifications, or if the demand forecast is for 10 and orders come in for 12, safety stock inventory, used with caution, can be strategically planned to fill out the difference (Figure 2.5). Another type of shock absorber is flexibility in the supply chain, which allows the company to alter the activity rate on the plant floor in order to satisfy demand fluctuations without severe disruption. 6 2.3.2 Lead Time related terms in APICS “Lead Time” related terms can be defined as follows: Lead Time: It is the planning lead time for one level of a MPS item, and shows how long it should take to get the product on the shelf once all the subassemblies, intermediates, and materials required one level down are available. Manufacturing Lead Time: The total time required to manufacture an item, exclusive of lower level purchasing lead time. Also it can be defined as: The cumulative planned lead time when all purchased items are assumed to be in stock. Cumulative lead time: It indicates how long it should take to build a MPS item from scratch (the longest leg or critical path of the item). 2.3.3 MPS Matrix One of the bottom-line goals of master scheduling is to balance supply and demand by time period. That means looking at all demand—from all sources—in discrete time segments and understanding the resources that will be necessary to satisfy that demand—again, in terms of time segments. This business of matching up supply and demand in time segments creates the need for a matrix that immediately reveals when supply and demand are in or out of balance (Figure 2.6). 7 2.3.4 Demand Time Fence and Production Time Fence in MPS A policy or guideline established to note where various restrictions or changes in operating procedures take place. For example, changes to the master production schedule can be accomplished easily beyond the cumulative lead time, while changes inside the cumulative lead time become increasingly more difficult to a point where changes should be resisted. Time fences can be used to define these points. There are two types of time fence including Demand Time Fence, and Planning Time Fence (Figure 2.7). Planning Time Fence: One of the truly valuable features of master scheduling software is the planning time fence (PTF). A planning time fence restricts the computer software system from automatically adding to the master schedule within a specified zone. If, for example, the master scheduler wants to maintain complete control of all flashlight supply orders within periods 1 through 6, a planning time fence can be placed at the end of period 6, forming a boundary within which only the master scheduler can place supply orders (by definition these orders then be released orders or firm planned orders—no computer planned orders (CPOs), which are created by the computer, being permitted inside the planning time fence). Outside the planning time fence, the computer can continue to place CPOs. The point has already been made that in the absence of any other guidelines, a good place to put the PTF is at the end of the cumulative lead time. Demand Time Fence: The use of a PTF in the master scheduling software is only a mechanical means of controlling where the computer software can place computer planned orders. Some master scheduling software has another time fence capability: that of a demand time fence (DTF). The DTF has basically one purpose, and it is strictly mechanical. Inside the DTF, the total demand will consist only of customer orders (actual demand). In other words, the forecast will be ignored between the current date and the DTF. 2.3.5 Time Zones as Aids to Decision Making in MPS It is beneficial to have a set of guidelines, or rescheduling time zone rules, to aid master schedulers and management in making decisions. These rules are linked to management policies that determine what kinds of changes can be made to the master schedule at certain points in time. Figure 1.6 is an abridgment of the MPS matrix, and shows how the time horizon of periods can be grouped into zones for managing schedule changes. The zones and time fences are as follows (Figure 2.7): 8 Frozen zone (Firm Zone A): Capacity and materials are committed to specific orders. Since changes would result in excessive costs, reduced manufacturing efficiency, and poor customer service, senior management’s approval is usually required to make changes. The extent of the frozen zone is defined by the demand time fence. Within the demand time fence, demand is usually based on customer orders, not forecast. Slushy zone (Trading Zone B): Capacity and material are committed to less extent. This is an area for trade-offs that must be negotiated between marketing and manufacturing. Materials have been ordered and capacity established; these are difficult to change. However, changes in priorities are easier to change. The extent of the slushy zone is defined by the planning time fence. Within this time fence the computer will not reschedule MPS orders. Liquid zone (Planning Zone C): Any change can be made to the MPS as long as it is within the limits set by the production plan. Changes are routine and are often made by the computer program. There are no hard-and-fast rules for establishing where each zone starts and stops. These are totally dependent upon the nature of the product and the market and manufacturing strategy of the company. As a general rule, it is useful to think about the boundary separating zones A and B as a point at which the production process is highly locked in—where changes will be quite costly and disruptive (zone A) and in which a certain amount of careful trading can take place (zone B). The boundary between these two zones often coincides with the final assembly or finishing process. The next step is to determine the boundary between zones B and C. When in doubt, the product’s cumulative lead time is a logical candidate for this boundary. The logic here is that beyond the cumulative lead time, the master scheduler has the time necessary to obtain the required lower-level materials and move capacity around as required. In some cases, however, zone B could extend beyond the cumulative lead time. This happens when management wants more control over the schedule and schedule changes. As time passes, a company’s ability to make changes to the product becomes increasingly more difficult. Actually, the closer the change is to the product’s due date, the more disruptive and costly it will be to 9 make that change. It should be obvious that changes in zone A will be more difficult, disruptive, and costly than changes in zones B and C. Likewise, changes in zone B will be more difficult, disruptive, and costly than changes in zone C. Thus, changes that cause minor disruption and cost increase can be made by individuals lower in the hierarchy of authority, while changes that cause major disruptions as well as significant cost increases should be scrutinized and approved at a higher level (See Figure 2.8). 2.3.6 Forecast Consumption in MPS: As actual demands (customer orders) are booked and are entered into the matrix, those demands consume part of the forecast. Consider Figure 2.7, which contains a one-month forecast of 200 units. This demand came from the sales and operations planning process; the breakdown of this aggregate figure of 200 into weekly periods was accomplished through collaboration between production and marketing. Thus, weeks (periods) 1 through 4 are each forecasted at 50 units, which both parties deemed reasonable in terms of past order patterns and future expectations. The figure 2.9 also contains lines for actual demand, and total demand. 10 As actual demand appears and is entered into the matrix, that demand consumes part of the forecast. Thus, in Figure 2.8, the 40 units of actual demand in period 1 consume that same amount of the forecast, leaving 10 units of forecast remaining. The 30 units of actual demand in period 3 consume all but 20 units of that period’s forecast, and 35 units original forecast of 50 in period 4 is consumed by actual demand in that period. Notice, however, that total demand remains the same as the forecast of 50 per week. Here an 11 assumption has been made that the actual demand represents demand already anticipated during the development of the forecast (Figure 2.10). 2.3.7 Outputs of MPS: The MPS is a plan for specific end items or “buildable” components that manufacturing expects to make over some time in the future. It is the point at which manufacturing and marketing must agree what end items are going to be produced. Manufacturing is committed to making the goods; marketing, to selling the goods. The outcomes of MPS are as follows: Input for MRP: The major output of MPS is a set of planning numbers expressed in firm planned orders that drives Material Requirement Planning (MRP). The MPS is the anticipated build schedule, MRP will use these numbers to determine what one would have and calculate what and when one needs to manufacture and purchase raw materials, components, subassemblies and finished products. Available-to-promise (ATP): The second output from the master schedule is the powerful ATP function. Any part of the plan that is not consumed by actual customer orders is available to promise to customers. In this way, the MPS provides a realistic basis for making delivery 12 promises. Using the MPS, sales and distribution can determine the ATP. It is that portion of a firm’s inventory and planned production that is not already committed and is available to the customer. This allows delivery promises to be made and customer orders and deliveries to be scheduled accurately. 3. SAP ECC6 Processes of production planning and production control in SAP ERP comprise the following main areas: Sales and Operation Planning (SOP) Rough-Cut Resource Leveling Demand management Long Term Planning (LTP) Figure 3.1 shows a detailed overview that explicitly illustrates the process modules that we will deal with in detail in subsequent sections, along with their most important input and output values. 13 3.1 Sales and Operation Planning in SAP Sales and Operations Planning (SOP) strives to maintain a balance between SAP Demand Planning and Operations Planning. On the one hand, the goal of sales and operations planning (SOP) is to obtain the operations plan (Production Plan) which is created on the basis of the sales plan. On the other hand, the planned sales data are to be harmonized with the actual production capabilities at a high level. The biggest incentive for implementing SOP in a company comes from the ability of a planner to evaluate various what-if models and to perform scenario planning in simulative modes, before passing on the finalized operations plan to SAP demand management (figure 3.2 and figure 3.3). SOP first carries out the individual steps for creating a sales plan. The sales plan considers solely the requirements side and does not take into account the available production capacity. Then, a resource-leveling step is performed in order to define the operations plan. A rough-cut resource leveling step at aggregate level makes sure that no requirements quantities are transferred to production that significantly exceed the feasible quantities. The sales plan either is created interactively on the basis of the planner's experience or is supported by a forecast based on the historical sales data. Event planning represents another optional step, which considers the influence of promotions and other events (such as the Super Bowl) on the sales volume. The result of sales and operations planning is an operations plan that is transferred as a planned independent requirement (PIR) to demand management. Figure 3.2 illustrates the integration of sales and operations planning into the neighboring processes. 14 3.1.1 Standard SOP and Flexible Planning SAP provides the option to use standard SOP or flexible planning to forecast sales and production plans in meeting customers’ requirements of company’s products (Figure 3.4). Standard SOP: The standardized SOP enables you to carry out planning at predefined levels in individual materials or a group of materials (known as a product group) hierarchy. In this case, SOP is referred to as standard SOP. The product group consists of individual materials or other product groups and enables you to define the proportion factor (percentage) for each material in the overall product group. Flexible Planning: In contrast, planning levels can be configured based on specific requirements in the context of flexible planning. For more complex planning scenarios, flexible planning can help. In flexible planning, you can plan and process planning data from any organizational unit, whether it’s a sales organization, a distribution channel, or a production plant. Also, the screen 15 layout for entering the plan figures can be freely defined. This way, you can define the planning level and the value fields of a planning session. 3.2 Rough-Cut Resource Leveling For you to carry out capacity analysis in standard SOP or in flexible planning, you need master data for the capacity requirements for production of a base quantity of the material or product group. This master data is known as a task list, and it can be a routing, a rate routing, a master recipe, or a rough-cut planning profile. Normally, a rough-cut planning profile is created for the material–plant combination because it provides a rough estimation of the capacity requirements. Based on the details given in the rough-cut planning profile, the resource leveling calculates the resource load for the operations plan and thus enables you to quickly estimate feasibility in terms of capacity. If a capacity is overloaded, a corresponding message is displayed in the footer. In our example, this will be the case for December 2006 (see Figure 6.55). 16 The capacity utilization is immediately calculated when the plan changes, and this facilitates the interactive adjustment of the operations plan to the capacities. 17 3.3 Demand Management Demand management combines sales planning with customer requirements according to the planning strategy and thus determines the independent requirements, namely revised PIRs, for production.In demand management, unlike operations planning, the PIR is given a precise date, using Time-Based Disaggregation and can be consumed with specific customer requirements. Figure 3.6 shows the process flow for demand management. 18 3.3.1 Time-Based Disaggregation When the defined production plan as PIRs is transferred from the SOP, a time-based disaggregation is required. The reason is that planning is carried out in periods of weeks or months in SOP, and the requirement of the period is scheduled for the first working day of the period if no time-based disaggregation function is configured (Figure 3.7). However, if you need an in-depth and complex distribution of quantities, then we need to define distribution strategies and period splits (Figure 3.8). 19 3.3.2 Consumption and Planning Strategies The principle of consumption is that sales orders reduce the PIR originated from SOP process. Whether consumption will take place depends on the planning strategy. As a matter of principle, the planning strategies (i.e., Planning with final assembly, Planning without final assembly, and Planning with planning material) require a consumption (Figure 3.6). SAP offers many different preconfigured planning strategies in the standard system. The most common strategies are described briefly below (Table 3.1). Make-to-Stock Strategy (Strategy 10): With make-to-stock production, the entire planning is performed based solely on the planned independent requirement. The underlying assumption is that the products must be in stock for customers to buy them. This also means that sales orders do not affect requirements. Make-to-stock production is often used in the consumer goods industry. Make-to-Order (Strategy 20): Make-to-order production is the exact opposite of make-to-stock production: Production is initiated only by the specific sales order, and the sales order is catered for only well after the order receipt. Planning is performed individually for each sales order (or more precisely: for each sales order item).This implies that there is no SOP and no planned independent requirements are created. Neither Demand Management is involved in this process, nor is there an allocation mechanism. Planning with final assembly (Strategy 40): This strategy is probably the most widely used make-to-stock strategy. It makes sense to use this planning strategy if you can forecast production quantities for the final product. PIRs are consumed by incoming sales orders so that the master plan is always adjusted to suit the current requirements situation. This means that the important feature of this planning strategy is that you can react quickly to customers’ requirements (sales orders). 20 3.4 Long-Term Planning The purpose of long-term planning is to simulate planning. Such a simulation is not limited to a longterm or medium-term period, but also can be done for the short term. 21 The objectives of the time-based areas differ as follows: Long-term simulation: The goal of long-term simulation is to obtain information on long-term to medium-term requirements and capacities. In this context, average stocks and exact lot sizes are usually sufficient. Short-term simulation: The goal of short-term simulation is to check the effects of short-term planning changes before they effect material requirements planning. Here, the actual planning situation must be mapped as accurately as possible. Simulation is typically based on an inactive version originated from demand management and uses tools similar to those used in material requirements planning. All simulation-relevant transaction data, such as PIRs (originate from demand management), planned orders (originated from MRP), sales orders (Originated from sales and distribution), and firm receipts (originated from production execution), are maintained in a planning scenario. The following functions are available to evaluate the simulation carried out in long-term planning: Comparison with operative planning Analysis of capacity utilization Analysis of external procurement data Requirements and inventory analysis Cost-center planning 22 There are three very important tools for evaluating LTP including: 1. Capacity availability check (CRP): The capacity availability function plays a central role in the entire production process. Capacity requirements planning (CRP) helps a company ensure that the relevant resources become available at the required time for optimum and uninterrupted production (Figure 3.10). 2. LTP evaluation – SOP Mode: It checks whether the quantity of simulative planned orders originated from LTP are in accordance with the related PIRs defined in the SOP. Planning for the LTP (MPS) is constrained by the earlier PIRs which resulted in the SOP in terms of product Groups. On the completion of this task the sum of all the individual products in each product family in the selected time bucket of LTP (MPS) must sum to the quantity in the monthly or weekly buckets in the related “Operation plan” line in the SOP, to within an agreed tolerance (Figure 3.11). 3. LTP evaluation – MPS Mode: It plays the role of MPS Matrix based on APICS principles (Figure 3.12). 23 3.5 Planning Time Fence and Firming Type For reasons of production planning and control stability, the system generally should avoid automatically creating planned orders until the very last day in order not to confuse the production plan. The planning time fence allows for the definition of a range within which MRP does not create or delete any procurement proposals (such as planned orders, purchase requisitions, and delivery schedules as a result of MRP runs). However, MRP planners still have the flexibility to make any lastminute manual changes, if needed. If and how the planning time fence is taken into account depends on the firming type. Four firming types are available, and these differ with regard to the automatic firming of elements within the planning time fence and with regard to the creation of new elements. Table 3.2 lists the properties of the respective firming types. If the procurement proposals are not firmed in the planning time fence, they are deleted in the case of a surplus. Figure 3.13 illustrates the different behaviors of the firming types on the basis of a sample shortage. In this example, a requirement of 10 units within the planning time fence confronts a planned order of five units. Figure 3.13 shows the situation after the planning run. 24 3.6 Fixed Period in SAP Forecast Values as a Demand Fence in APICS Demand Management The fixed period is the number of periods for which the system will NOT recalculate (change) the forecast values (Automatically) in the next forecast. Fixed periods are NOT changed if you instruct the system to automatically calculate Forecasting Values for the new periods. The fixed periods start with the initial forecast period (First Period). The benefits of fixed period include: 25 1. In order to avoid excessive fluctuations in the forecast calculation or 2. Because production (Production Line in SOP) can no longer react to changed planning figures in the specified horizon. 4. Essential Steps for Designing and Implementing APICS Master Planning Using SAP ERP ECC6 The purpose of this section is to propose the process of performing APICS Master planning utilizing available tools and functions in SAP ERP ECC6. The table 4.1 lists the most significant steps for handling APIC Master Planning process and related tools and functions provided in SAP ERP ECC6. APIC Master Planning SAP ERP ECC6 Demand Management (Aggregate Demand Plan) Forecasting Demand Management (Detailed Demand Plan) Forecasting Demand Management (Event Planning) Event Modeling Demand Management (Customer Orders) Sales and Distribution (Sales Order) Sales and Operation Planning (S&OP) Standard SOP (Product Group & SKU hierarchy) Sales and Operation Planning (S&OP) Flexible Planning (Flexible and complex Hierarchy) Rough-Cut Capacity Planning (RCCP) Alternative 1: Rough-Cut Resource Leveling Master Production Scheduling Matrix (MPS Matrix) Alternative 2: LTP Evaluation - Capacity Availability Check First Tool: LTP Evaluation - SOP Mode Safety Stock Second Tool: LTP Evaluation - MPS Mode Safety Stock in Material Master Forecast Consumption Demand Management Consumption in Strategy 40 Demand Time Fence Fixed Period in SAP Forecast Values Planning Time Fence Planning Time Fence and Firming Type Table 4.1 APIC Master Planning process steps and related tools and functions in SAP ERP ECC6 26