Production and supply
chain process
MIS2101: Management Information
Systems
Based on material developed by C.J. Marselis
The supply chain
Recall from Part 7…
In the sales process, the organization is the
supplier
 In the purchasing process, the organization
is the buyer
 The movement of goods from supplier to the
end customer is the “supply chain”

Supplier  Organization  Customer
2
MRP and ERP


3
Enterprise Resource
Planning (ERP)
systems evolved
from Materials
Resource Planning
(MRP) systems
MRP systems are a
subset of ERP
systems
 Concerned with
the Supply Chain
 From raw
materials to
finished goods
Facilitating the production
plan

A production plan answers:
Quantity of product to make?
 When to make product?
 How much raw materials to procure and
when?


A successful company must be able to
Develop a good production plan
 Execute the plan
 Make adjustments when customer demand
differs from the forecast

4
Production Approaches
Make to
Stock



Make to
Order


Assemble
to order
5

Products are made for
inventory in anticipation
of orders
Most consumer products
Products are made to
fulfill specific orders
Expensive products or
high-customization
products
Combination of make-tostock and make-to-order
Final product assembled
from stock for a customer
(Dell!)
Fitter Snacker’s
Manufacturing Process
Snack Bar Line
Mixer
Form
Bake
Pack
Mixer
Mixer
6
Changing machines from one
product to the other: 30 minutes
Production
Quantities:
200
bars/minute
3,000 lb/hr
Packed
24/box 12
boxes/case.
Finished Goods Warehouse
Raw Material Warehouse
Mixer
Each mixer
makes: 4,000 lb
dough/hr
Production Problems in “Unintegrated” systems
Hard to know how much and when to
produce
 Problems arise in:

Communication
7
Inventory
Accounting
Communication issues

If production isn’t integrated with marketing:

Production doesn’t know about sales
promotions or unexpected planned orders
• Results: depleted inventory, overtime, expedited
shipments, and material shortages

Marketing doesn’t know about planned
maintenance
• Results: unexpected reduction in production and
unmet demand
8
Production planning process



9
Develop aggregate
production plan for
groups of products
Break down aggregate
plan into product
specific plans for
smaller time periods
Determine raw material
requirements based on
plan
Sales
Forecasting
Starting
Inventory
Sales and Operations Planning
Demand Management
Detailed
Scheduling
MRP
Production
Purchasing
An integrated process
Predicts
future demand
for products
Sales
Forecasting
Starting
Inventory
Sales and Operations Planning
Break production
plan down into
smaller time
increments
Create production
schedule based on
production plan from
demand management
Uses the schedule to
determine
products
10
and staffing
Determines what
company should
produce
Requires starting
inventory levels
and sales forecast
based on capacity
Demand Management
Determines
amount and
timing of raw
material orders
Detailed
Scheduling
MRP
Production
Purchasing
Takes quantity and
timing information
from MRP and
creates orders for
suppliers
Simple Sales Forecast

In an integrated system
Sales automatically recorded
 Accurate sales data available for forecasting


Sales based on adjustment to previous
year’s sales values
Sales Forecasting
Previous Year (cases)
Promotion Sales (cases)
Previous Year base (cases)
Growth:
3.0%
Base Projection (cases)
Promotion (cases)
Sales Forecast (cases)
11
Jan.
5734
Feb.
5823
March
5884
April
6134
5734
172
5906
5823
175
5998
5884
177
6061
6134
184
6318
May
6587
300
6287
189
6476
5906
5998
6061
6318
6476
June
6735
300
6435
193
6628
500
7128
Figure 4.3 Fitter Snacker’s sales forecast for January through June
Sales and operations
planning

How can manufacturing efficiently produce
enough goods to meet projected sales?
Sales and Operations Planning
1) Sales Forecast
2) Production Plan
3) Inventory
4) Working Days
5) Capacity (Shipping Cases)
6) Utilization
7) NRG-A (cases)
70.0%
8) NRG-B (cases)
30.0%
Dec.
100
Jan.
5906
5906
100
22
7333
81%
4134
1772
Feb.
5998
5998
100
20
6667
90%
4199
1799
March
6061
6061
100
22
7333
83%
4243
1818
April
6318
6318
100
21
7000
90%
4423
1895
May
6476
6900
524
23
7667
90%
4830
2070
June
7128
6700
96
21
7000
96%
4690
2010
Figure 4.5 Fitter Snacker’s sales and operations plan for January through June
12
Demand Strategies
 If
demand is greater than capacity
Option
Result
Choose not to meet the
demand
Lost sales
Reduce promotional
expenditures
Potential lost sales
Use overtime to increase
capacity
Increased costs
Build up inventory in
earlier periods
35
30
25
20
Supply
Increased costs and
lost inventory
15
Capacity
10
5
0
13
Time
Forecasting in an Integrated
System



14
Accurate historical sales
values available for
forecasting
“Fix” historical sales:
 If production was unable
to meet demand sales
does NOT represent
actual demand
 Unusual conditions like
weather
 The effect of sales
promotions
This is essentially data
warehousing and data
mining!
Sales provided from
SD module
Field where planner can
“correct” the sales value
Sales and Operations Planning
(SOP) Case Study


Kellogg’s achieved significant savings from coordinated
sales and operations planning (SOP)
Changed focus based on how they were evaluated





15
Marketing and sales: Evaluated on tons of cereal sold
Manufacturing: Evaluated on tons of cereal produced
No one evaluated on profit!
Kellogg’s new sales order process focused on profit
Kellogg’s has reduced capacity, inventory and capital
needs while increasing sales
Demand Management

Fitter Snacker’s Demand Management process
splits the Monthly SOP plan into weekly and
daily increments
(MPS – Master Production Schedule)
Demand Management
Monthly Demand NRG-A
NRG-B
Working Days in Week
Working Days in Month
MPS
NRG-A
Weekly Demand
NRG-B
16
Week 1
1/2 - 1/5
4134
1772
4
22
752
322
 4 
4134    752
 22 
 4
1772    322
 22 
4/22
represents
how many
work “weeks”
are in each
month
Bill of Material
MRP facilitates
accurate planning of
raw material
purchases
 Bill of Material (BOM)


17
List of materials and
quantities needed to
make a product
Ingredient
Oats (lb)
Wheat germ (lb)
Cinnamon (lb)
Nutmeg (lb)
Cloves (lb)
Honey (gal)
Canola Oil (gal)
Vit./Min. Powder (lb)
Carob Chips (lb)
Raisins (lb)
Protein Powder (lb)
Hazelnuts (lb)
Dates (lb)
Quantity
NRG-A
NRG-B
300
250
50
50
5
5
2
2
1
1
10
10
7
7
5
5
50
50
50
30
70
Lead Times and Lot Sizing


To determine timing and quantity of purchases
Lead time includes:



Time for supplier to receive and process order
Time to take material out of stock, package it, load it
on a truck and deliver it to the manufacturer
Time required at manufacturer to receive the material:
• Unload the truck, inspect the materials, move to storage
location or production line

Lot sizing: determining production or order quantities

18
In many cases, lot sizes for purchased items are
constrained by packaging and transportation
Purchasing and ERP
Provides way to convert Requirements to
Purchase Order automatically
 Help the purchasing specialist select the best
vendor (best price)

19
Convert MRP data to
a purchase order
Options to evaluate vendors
Production and Accounting
in an Integrated System
Information
entered for
material
movement
automatically
updates
accounting
records
 Info can be
entered through
data entry,
barcode, RFID,
etc.
20

Material
received (for
MRP) and the
purchase
order
Implications for Supply
Chain Management
Supply chain participants often use
competitive bidding to reach a “winning”
prices by reacting
 Creates adversarial relationship among
participants

21
Goods
Goods
Supplier
Information
$
$
Goods
Manufacturer
Information
$
$
Goods
Wholesaler
Information
Information
Goods
Retailer
Information
Customer
Raw Materials
$
Supply Chain with ERP
(Integration)



Production plans can be shared along the supply
chain in real time
Managers can evaluate impact of plans on total
cost across the supply chain
Collaboration among participants leads to:




22
Improved product quality
Reduced paperwork
Reduced inventories
Increased customer responsiveness
Inventory Control Case
Study – Hoyt Archery

Pre ERP, complete inventory
count two times each year

Closed plant for 3 days at cost of $5000 /day
Post ERP, accurate, real-time inventory
information and ongoing cycle- counting
process: items are counted each day
 Hoyt also simplified customer interaction with
its configure-to-order (CTO) process

23
SCM with Customer
Collaboration Case Study –
Wal-Mart





24
POS data from bar code scanners is recorded in a
massive data warehouse at Wal-Mart headquarters
Wal-Mart uses data mining techniques to predict what
customers will buy at different times of the year
Data is shared with Wal-Mart suppliers to plan
production
Wal-Mart also allows its 5000 suppliers to directly
access its data warehouse through its Retail Link
program
Wal-Mart is leading the effort to leverage RFID
technology
Summary
An ERP system can improve the efficiency of
production and purchasing processes
 Begins with Marketing sharing sales forecast
 Production plan is created based on forecast
and shared with Purchasing so raw materials
can be ordered properly.
 Production planning can be done without an
integrated system, but integrated system that
allows MRP and Production to be linked to
Purchasing and Accounting

25