From my experience in various MTO environments such as the Aerospace and Communications industries the Sales and Marketing departments have a reluctance to forecast business activity.  There are three main reasons for this:

• They feel that it is difficult or impossible to estimate what a customer is likely to do, and if they did, the result would not be that accurate.
• If they came up with an estimate, that would then become the target by which their sales performance would be measured.
• Forecasting takes time and resources and sales people would prefer to be using that time in getting in front of prospective customers and creating sales.

While being sympathetic with their position this reluctance to forecast creates problems throughout the organization that they may not be aware of, particularly in the supply side of the organization concerned with Planning and Purchasing.

Now let us take a look at the result of this decision.  Demand management is a major input to the Sales and Operations process which balances demand and supply, so resulting from this there is only information coming from the sales orders being received and there is no visibility into the future.

The Sales and Operations process is an input to the Master Production Scheduling (MPS) process and then onto the Material Requirements Planning (MRP) Process.  The objective of an MRP process is to plan for lower level components and to have them in place when needed.

Customers, as we know, are demanding ever shorter lead times, and If a sales forecast is not in place, then the only way the Planners and Purchasers can have material in place when it is needed is to actually do the necessary forecasting for the lower level components.

So two things have occurred here and neither is good.

• The sales organization has shifted the responsibility for producing forecasts to the Planners and Buyers. The organization that is in constant contact with customers and has a feel for the market place has abdicated the forecasting responsibility to the Planner and Buyers who have little or no contact with the customers and no real feel for the market place in which the organization is operating.
• Following on from that the only way the Planners and Buyers can forecast is simply to look in the rear-view mirror and assume that history will be a predictor of the future, and we know how inaccurate that can be. In most cases a historical review will be done and a method, such as a moving average will be employed, resulting in the wrong set of people producing the forecast and using a less-than-optimal method to do it.

It then gets even worse.  Because the Planning and Purchasing departments are part of operations their overriding concern is to make certain that there is sufficient inventory for Production to make what it needs.  Thus there is a tendency for the Buyer to order more than is necessary, a safety stock usually well in excess of what demand and supply fluctuations would dictate.  This is often exacerbated by the fact that the Buyer also needs to compensate for the manufacturing yield losses that may not be set up in the manufacturing Bill of Materials (BOM).  Add to that vendor lot-sizing and minimum order quantities and you have what most MTO companies have; an excessive inventory of component parts and no real idea of exactly how it happened.  Then comes the emails from the Finance department and Senior Management, and I think everyone knows how this plays out.

So, what is the solution?  In spite of their protestations, Sales must understand that a forecast has to be completed on a regular basis (at least once a month) and that they are the best positioned people in the organization to do it.  It is understood that a forecast will not be perfect but it will be the best that the organization can come up with, and also, as the body of knowledge tells us, some kind of forecast is better than no forecast at all.  A far-sighted organization will ensure that the no sales person is disadvantaged by providing a forecast, even when that forecast is compared against actual events (as it should be).

One this small, but absolutely essential, piece of the jigsaw puzzle is in place, everything else will fall into place.   The Sales and Operations process will become more effective as the Demand Management improves, this will ensure a more robust Master Production Scheduling, and the resultant MRP process will be more accurate and better controlled.

This will improve the planning of these lower level components which will in turn reduce the level of inventory of these components.

One of the reoccurring issues in planning when using a Material Requirements Planning (MRP) system concerns expiration dates of material in inventory.

For example, if today is January 1^st, there is a requirement for 50 of part A on February 15^th, and there are 60 units of Part A in inventory, is the requirement covered? The obvious answer is yes.

However, if 40 of those units have an expiration date of February 28^th, and 20 have an expiration date of January 31^st, is the requirement now covered? Again, the obvious answer is that only 40 units are covered.

However, MRP will not take into account expiration dates and MRP will plan as if the requirement is covered and thus will not plan any orders for Part A. MRP acts as if the requirements are completely covered.

So the question becomes, why does MRP not take the expiration dates into consideration when it plans? It has the ability to figure out when the material becomes obsolete and can act accordingly.

The answer is that expiration dates can mean different things to different customers. For some customers an expiration date is a hard stop. The material has to be removed the day after the expiration date. For other customers it is a guide line, and for yet others, including a DNA testing company that I ran the Supply Chain for, the expiration date can be changed and moved out by a re-validation procedure.

Bearing this in mind, it would then be difficult for some users that had a reasonable expectancy of still be able to use the material, if MRP had already created planned orders based on the fact that some material was going to expire before the requirement existed.

This is in line with other date issues such as a phase out – phase in, when a revision is made to a particular product or material. Again MRP will not take into account the fact that there is material with a previous revision in inventory, and for the same reason that the dates can, and often are changed by the users.

So, how should expiration dates be dealt with in MRP?

It is vital to have, in your ERP system, a type of report that shows you what is in inventory with the expiration dates for each lot. If you can also have in your report a “requirements per day” (or week, or month) amount based on the average requirements for the material for (say) the previous 3-6 months, then you will be even better placed.

You can now review this report on a regular basis and highlight those items that are in danger of passing their expiration date. You can then:

1. Revalidate the material and change the expiration date if possible.
2. Remove the material to a non-nettable (one that MRP ignores) location.
3. Adjust MRP by creating a Firm-Planned work order.

These actions are part of the Planners responsibility and the review of all material expiration dates should be a priority for the Planning department, whichever environment and whichever approach you are going to use.