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.

Not getting the return on investment for your ERP/MRP application?

Most organizations have a certain degree of optimism when starting an implementation of an Enterprise Resource Planning application. They have been assured by the vendor that after an implementation period of 3 to 4 months they will begin to see the improvements in visibility and the savings in resources that would bring the Return on Investment (ROI).

They then may have success in implementing the General Ledger part of the system and also the basics such as Accounts Payable, Accounts Receivable, and Inventory, but then are usually disappointed when implementing the guts of the Supply Chain system to find out that greater visibility is not forthcoming any more than the savings of resources.

Why is it then the Material Requirements Planning (MRP) system does not give the expected return?

An MRP is very simple in concept. There are 5 inputs to an MRP system and 2 outputs. The 5 inputs are Sales/Forecasting, Inventory, Bills of Material, Open Orders (PO’s and work orders), and Planning data. If these are as accurate as possible, then the 2 outputs, Planned PO’s and Work Orders, and the MRP Action Messages will be accurate and give you the visibility and information that will lead to saving your organization’s resources.

What then, goes wrong?

The issue is not in the concept but in the details of how these inputs affect MRP. Let us look at the inputs in detail:

Sales/Forecasting

Most organizations have a method of processing customer purchase orders and converting them to the sales orders and the work orders/PO’s necessary to get the work done. However it is on the forecasting side that the data accuracy is badly affected.

However accurate or otherwise the forecasts are, is usually dependent on the industry, these are the functions that are usually not done well:

• Forecasts are not backed up with information
  • Unusual activity in one period
  • Information relating to future customer promotions or other activities
• Forecasts are not done by the Sales department
  • Leave it to Planners who can only extrapolate historical data
• Forecasts are not monitored and measured for accuracy
  • No input for future forecasts
  • No increase in accuracy as there is no feedback for problem-solving
• Forecasting is done outside of the ERP/MRP system
  • Spreadsheets are passed around without an audit trail or any version control
• Forecasting data is not set up correctly in the implementation
  • Forecasting time fence
  • Are differences between sales and forecasts to be carried on to future months or should they be taken that if it didn’t happen it won’t happen

Inventory

Most organizations have a handle on shelf accuracy (and if they have not they will not get get any visibility from their MRP system), but the issues again are in the details.

• There must be an understanding of inventory status
  • Available and non-available
  • Nettable (MRP plans for it) and non-nettable (MRP does not plan for it
• How inventory statuses are set up
  • MRB (Material Review Board) is usually set as non-available and non-nettable
  • Incoming inspection is usually set as non-available and nettable

Bills of Material (BOM’s)

If you were to ask most organizations about their BOM’s they would say that they would have a high degree of accuracy, and by that they mean that the “quantity pers”, which is the number of units of a component that are needed to make the parent. However, there are two issues relating to BOM’s that are usually not done well.

• Yield losses or scrap factors. If it takes 20 units of B to make 1 A, but there is a yield loss of 10%, then the BOM should be set up as 22 units (actually 20/(1-0.1) which is 22.22, but 22 is sufficient). If this is not done planning will be affected.
  • Sufficient component material will not be available
  • Purchasing then orders more than necessary and there is a build-up of inventory
• The Engineering Change Control (or Engineering Change Notification, ECN) process lacks discipline.
  • This usually occurs because there are many changes needed because of market-driven forces or because of lack of quality in the original product.
  • There is not sufficient discipline in the process that keeps the Engineering BOMS separate from the Production BOM’s and this causes problems in Planning and Purchasing, and causes reworks.

Planned PO’s and Work Orders

This is probably the weakest area of control in the inputs to MRP. There is little understanding of how open orders affect MRP.

• The accuracy of WIP inventory can be as low as 50%. Finance normally does not do a WIP count but relies on the open work orders.
• Work orders are often left open for a variety of reasons:
  • There is a problem with the material and it is waiting action from Quality Control. MRP still sees these as material due to arrive soon, and if this is not the case the material needs to be moved into a location defined as non-nettable.
  • Because of a shortage or an overage the work order has not been closed because the people responsible are not certain how to close these.
• It should be understood that any open work orders are expected to be available on the order due date, and any open work orders with due dates in the past will be expected by MRP to be arriving immediately.

Planning Data

This is another area that is not well understood. The main Planning data elements that MRP uses are lead times (and the elements making up lead time such as manufacturing lead time, shipping lead time, and safety time), safety stock, order minimums, and order multiples.

• Depending on the type of ERP system MRP uses Planning data to plan the due dates for the planned orders, but uses the Routing information to calculate the due date of a work order when it is firm-planned or released.
  • Routing information for a particular part number when the manufacturing elements of lead time (Queue, Set-up, Run, Wait, and Move)are cumulated should agree with the lead time set up in the Planning Data file.
• MRP will expect the material on the due date of the order. This applies to both PO’s and work orders. It is this aspect that is least understood by those people involves in planning.
  • If a vendor or a manufacturing process has indicated that the material will be available later that the due date, then the due date needs to be changed. If it is not MRP will assume that the material will be available on that published due date and plan accordingly.
  • If a due date is in the past then MRP will assume that the material will be available immediately and also plan accordingly.
• MRP will always plan to cover net requirements (gross requirements less that which is already in inventory). Therefore it will plan to have zero inventory once the requirements have been satisfied.
  • Zero inventory is a satisfactory situation for MRP if all requirements have been met.
  • If safety stock is in place, MRP will plan to have that amount in inventory.
  • Safety stock is considered by MRP to be immediate demand, so action messages will be generated immediately if a new safety stock level is set.
  • Fixed order quantities, such as minimums and multiples, will be used by MRP and result in larger quantities planned that may be necessary. These minimums and multiples should be kept as low as possible to avoid excessive inventory.

If these 5 inputs to MRP are understood by everyone involved, and the details and the MRP mechanisms used also understood, then a working MRP system will be in place and the organization can expect the returns on investment that it had hoped for when the MRP/ERP investment was made in the first place.

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.