Supply chain management (SCM) requires effective use of an integrated enterprise resource planning (ERP) system, and usage of an ERP system is shaped by many design factors that make it easier (or harder) to learn and use. The design factors related to using Microsoft Dynamics AX have been covered in a recent book Managing Your Supply Chain Using Microsoft Dynamics AX. This is the first part of an article covering the design factors related to system usage in distribution and manufacturing.
System Usage in Distribution Environments
The standardized functionality in an ERP system shapes its usage. Efforts to use the system should be guided by (rather than run counter to) its fundamental underlying design. This section reviews the major design factors affecting system usage in a distribution environment; the next section covers factors affecting usage in manufacturing environments. A distribution environment typically involves the purchase and sale of stocked material items. Major factors shaping system usage include item definition, variations in sales and purchasing, coordination of supply chain activities, warehousing and multisite operations.
Item Definition The identifier for a purchased material item consists of an item number, or an item number and variant code for items with size/color variations. The system supports alternative identifiers for sales, purchasing, bar coding, intercompany orders, and electronic documents. Other item information includes the following:
* Multiple units of measure for sales and purchasing purposes
* Extended text and documents such as Word files and images
* Physical dimensions such as weight and volume that can be used to calculate totals for a sales or purchase order
* Financial dimensions for business analytics purposes
* Quality management policies for enforcing batch and/or serial tracking, and for enforcing inspection of received material
Variations in Item Costing An item's cost provides the basis for valuing inventory transactions, and can be based on a standard costing or an actual costing method such as FIFO, LIFO and weighted average. Actual costing methods involve the allocation of miscellaneous charges on purchase orders, such as freight charges. An item's actual cost can be companywide or warehouse-specific, or even batch- and serial-specific.
Variations in Item Replenishment Warehouse-specific planning data provides the basis for item replenishment. The basic replenishment methods include min-max, period lot size, and order driven. With the min-max method, the item's minimum and maximum quantities can be fixed or variable, where a variable quantity can be specified for user-defined time periods such as months. The minimum can also be automatically calculated based on historical usage. With the other replenishment methods, the minimum quantity represents the safety stock requirement. Order quantity modifiers apply to the suggested order quantity. The suggested vendor for a planned purchase order can reflect a companywide preference, or planning logic based on the lowest price or delivery leadtime defined in the purchase price trade agreements. An item's replenishment method can also be based on manual planning.
Variations in Sales Sales order processing in distribution environments involves variations in customers, sales orders, pricing, forecasts, commissions, invoicing, and sales analysis.
Customers. Different types of customers include one-time customers, intercompany customers, and customers requiring foreign currency and language-specific text.
Sales Orders. A standard sales order defines actual demand for an item. Other types of sales orders include blanket sales orders that can be used to create standard sales orders. Additional types handle customer returns, drafts, and subscriptions. Sales orders can reflect intercompany sales and project-specific sales, sales to one-time customers, and customer self-service via the commerce gateway. Several variations apply to sales order line items in distribution environments.
* Items shipped from stock
* Purchased items reflecting a special order or drop shipment, with a purchase order linked to the sales order line item
* Project-specific line items being shipped against a project, where the shipped items can be invoiced separately or included in the project invoice
* A supplemental item automatically added as a line item based on the ordered line items
* An alternate item automatically substituted for an ordered line item
* Credit note line item for indicating a sales order return
* Non-inventoried items such as services
Other line item variations apply to distributors with light manufacturing.
* Kits that are priced and sold as a complete item (with component auto-deduction) or as separate components
* Manufactured items built to order, with a production order linked to the sales order line item. The sales price and promised delivery date can be calculated for the manufactured item.
* Manufactured items configured to order using option selection or a rules-based configurator, with a production order linked to the sales order. The sales price and promised delivery date can be calculated for the manufactured item.
Reservations can be manually or automatically assigned, with optional reservation of scheduled receipts. Delivery promises reflect available inventory and scheduled receipts of the item, and the item's leadtime when additional material must be obtained.
Sales quotations can be defined and converted into sales orders. In defining the pipeline of expected business, they can optionally act as demands based on their win-probability.
Variations in Sales Pricing. An item's standard sales price and UM represent one approach to a predefined sales price. The standard sales price can be manually entered or automatically calculated. Automatic calculation can be based on a markup or contribution percentage applied to the item's inventory cost or purchase price. Other alternatives to sales pricing include the use of source documents such as sales quotations or blanket orders to create a sales order, and the use of sales trade agreements.
With a sales price trade agreement, for example, an item's sales price can reflect different factors such as customer type, unit of measure, quantity breakpoints and date effectivities, as well as higher prices or a surcharge for shorter delivery leadtimes. Discounts off an item's sales price can also be defined in sales trade agreements that reflect these same factors. Discounts can also apply to multiple line items (such as items within a product group) and to the total order value. Other forms of rules-based sales pricing include supplementary items such as "buy ten and get one free." Sales trade agreements can reflect companywide or warehouse-specific sales prices for an item.
Sales Forecasts. Replenishment of stocked material can be based on sales forecasts. The system supports multiple sets of forecast data, and also multi-level forecast models such as regional forecasts that roll-up to a companywide forecast. An item's sales forecast can be expressed as individual quantities and dates, as a repeating pattern of a fixed or variable quantity per period (such as monthly), or as an item group forecast (aka planning bill) that spreads out a total quantity across several items based on mix percentages. An item's sales forecast can also be imported from spreadsheets or a statistical forecasting package. The system supports forecast consumption logic to avoid doubled-up requirements.
Commissions. The system supports commission calculations for one or more sales reps, where the commission amount reflects a specified commission percentage times the sales order value (such as the gross revenue or net margin). Commissions can vary by type of customer, product and date effectivity, with calculation after posting a sales order invoice.
Invoicing. The system supports a separate invoice for each sales order shipment, and also a summarized invoice for multiple sales order shipments. It also handles different payment terms, payment schedules and payment fees.
Sales Analysis. The system supports standard and ad hoc sales analyses. For example, the standard reports include totals for individual orders, customers, and items as well as sales analysis by customer and item. Other sales analysis approaches include business analytics and pivot tables.
Variations in Purchasing Purchase order processing in distribution environments involves variations in vendors, purchase orders and pricing.
Vendors. Different types of vendors include one-time vendors, intercompany vendors, and vendors requiring foreign currency and language-specific text.
Purchase Orders. A standard purchase order defines a scheduled receipt for an item. Other types of purchase orders include quotations and blanket orders that can be used to create standard purchase orders. Additional types handle vendor returns, drafts, and subscriptions. Purchase orders can reflect intercompany purchases and project-specific purchases, and purchases from one-time vendors. Several variations apply to purchase order line items in distribution environments.
* Purchase of stocked material
* Purchased item reflecting a special order or drop shipment, with the purchase order line item linked to the sales order line item
* Project-specific line items being purchased for a project, where the system automatically issues the received material to the project after posting the purchase invoice
* A supplemental item automatically added as a line item based on the ordered line items
* Credit note line item for indicating a purchase order return
* Purchase of an expense item, fixed asset or non-inventoried item
Other purchase order variations apply to distributors with manufacturing environments.
* Kits that are priced and purchased as a complete item or as separate components
* Purchased item linked to a production order, such as the purchase of an outside operation
* Purchased item configured to order using a rules-based configurator, typically representing a special order with the purchase order line item linked to a sales order or production order
Variations in Purchase Prices. An item's standard purchase price and UM represent one approach to a predefined purchase price. It can be manually entered or automatically calculated based on the last purchase invoice. Other alternatives to an item's purchase price include the use of source documents such as quotations or blanket orders, and the use of purchase trade agreements. With a purchase price trade agreement, for example, an item's purchase price can reflect different factors such as the unit of measure, quantity breakpoints and date effectivities, as well as higher prices or a surcharge for shorter delivery leadtimes. Discounts off an item's purchase price can also be defined that reflect these same factors, as well as multi-line and total discounts. Other forms of rules-based pricing include supplementary items.
Coordinating Procurement Activities Planning calculations synchronize supplies to meet demands, and provide coordination via planned orders and suggested action messages.
Planned Purchase Orders. Planned purchase orders reflect warehouse-specific planning data for an item. The suggested vendor can reflect advanced planning logic that considers purchase price trade agreement information about the lowest price or delivery leadtime. The user can create purchase orders from selected planned orders, or use a firming time fence so that the system automatically creates the purchase orders.
Suggested Action Messages. Planning calculations generate two types of suggested action messages termed actions and futures. An actions message indicates a suggestion to advance/postpone an order's delivery date, to increase/decrease an order quantity, or to delete an order. A futures message indicates the projected completion date will cause a delay in meeting a requirement date such as a sales order shipment.
Symmetry of Sales and Purchasing Functionality Symmetry makes the system easier to understand and use. Sales and purchasing both handle the variations in order types, such as standard orders, blanket orders, and returns. Both provide parallel approaches for handling prices and discounts, miscellaneous charges, external item numbers, order quantity modifiers, order-related text, order status, and other issues. Symmetry is also apparent in the definition of customer and vendor information, handling of special orders and drop shipments, and segmentation of information on windows and tabs.
Warehouse Variations Stocking locations are uniquely identified by a warehouse and bin location. The system supports batch- and serial-tracking of an item's inventory. The system also supports inventory tracking by a serialized container or pallet containing a quantity of the same item.
The reporting of shipping activities can reflect an order-based or document-based approach. The document-based approach, for example, employs a shipping document (identifying line items from one or more orders) and its associated picking route document(s). Receiving activities can also reflect an order-based or a document-based approach. The system supports coordination of forklift drivers for moving palletized items. Movement within a warehouse can reflect bin replenishment policies, such as replenishing bins from a bulk storage area.
Variations in Multisite Operations The system supports different types of multisite operations, including autonomous sites within a company, a distribution network with transfers between warehouses, and intercompany trading. An item's costs, prices and replenishment methods can be warehouse-specific, where the replenishment method can identify the preferred ship-from warehouse to model a distribution network. Transfer orders coordinate movement between warehouses, and track in-transit inventory. Sales order line items indicate the ship-from warehouse, while purchase order line items indicate the ship-to warehouse. With intercompany trading, the purchase order in one company automatically generates the corresponding sales order in the supplying company. The sales order shipment can also trigger a purchase order receipt. The planning calculations coordinate intercompany orders across a multi-tier supply chain.
This is Part One of a two-part article reprinted from Managing Your Supply Chain Using Microsoft Dynamics AX. Part Two will cover design factors related to manufacturing environments.
The book can be ordered on amazon.com.
About the Author
Dr. Scott Hamilton has consulted worldwide with more than a thousand companies and conducted several hundred executive seminars on supply chain management and ERP issues. He also helped design three influential ERP software packages. His books include Maximizing Your ERP System and the APICS CIRM textbook on information systems for manufacturing, and previous books on Microsoft Dynamics AX and Dynamics NAV. Scott can be reached at ScottHamiltonPhD@aol.com or 612-963-1163.
System Usage in Distribution Environments
The standardized functionality in an ERP system shapes its usage. Efforts to use the system should be guided by (rather than run counter to) its fundamental underlying design. This section reviews the major design factors affecting system usage in a distribution environment; the next section covers factors affecting usage in manufacturing environments. A distribution environment typically involves the purchase and sale of stocked material items. Major factors shaping system usage include item definition, variations in sales and purchasing, coordination of supply chain activities, warehousing and multisite operations.
Item Definition The identifier for a purchased material item consists of an item number, or an item number and variant code for items with size/color variations. The system supports alternative identifiers for sales, purchasing, bar coding, intercompany orders, and electronic documents. Other item information includes the following:
* Multiple units of measure for sales and purchasing purposes
* Extended text and documents such as Word files and images
* Physical dimensions such as weight and volume that can be used to calculate totals for a sales or purchase order
* Financial dimensions for business analytics purposes
* Quality management policies for enforcing batch and/or serial tracking, and for enforcing inspection of received material
Variations in Item Costing An item's cost provides the basis for valuing inventory transactions, and can be based on a standard costing or an actual costing method such as FIFO, LIFO and weighted average. Actual costing methods involve the allocation of miscellaneous charges on purchase orders, such as freight charges. An item's actual cost can be companywide or warehouse-specific, or even batch- and serial-specific.
Variations in Item Replenishment Warehouse-specific planning data provides the basis for item replenishment. The basic replenishment methods include min-max, period lot size, and order driven. With the min-max method, the item's minimum and maximum quantities can be fixed or variable, where a variable quantity can be specified for user-defined time periods such as months. The minimum can also be automatically calculated based on historical usage. With the other replenishment methods, the minimum quantity represents the safety stock requirement. Order quantity modifiers apply to the suggested order quantity. The suggested vendor for a planned purchase order can reflect a companywide preference, or planning logic based on the lowest price or delivery leadtime defined in the purchase price trade agreements. An item's replenishment method can also be based on manual planning.
Variations in Sales Sales order processing in distribution environments involves variations in customers, sales orders, pricing, forecasts, commissions, invoicing, and sales analysis.
Customers. Different types of customers include one-time customers, intercompany customers, and customers requiring foreign currency and language-specific text.
Sales Orders. A standard sales order defines actual demand for an item. Other types of sales orders include blanket sales orders that can be used to create standard sales orders. Additional types handle customer returns, drafts, and subscriptions. Sales orders can reflect intercompany sales and project-specific sales, sales to one-time customers, and customer self-service via the commerce gateway. Several variations apply to sales order line items in distribution environments.
* Items shipped from stock
* Purchased items reflecting a special order or drop shipment, with a purchase order linked to the sales order line item
* Project-specific line items being shipped against a project, where the shipped items can be invoiced separately or included in the project invoice
* A supplemental item automatically added as a line item based on the ordered line items
* An alternate item automatically substituted for an ordered line item
* Credit note line item for indicating a sales order return
* Non-inventoried items such as services
Other line item variations apply to distributors with light manufacturing.
* Kits that are priced and sold as a complete item (with component auto-deduction) or as separate components
* Manufactured items built to order, with a production order linked to the sales order line item. The sales price and promised delivery date can be calculated for the manufactured item.
* Manufactured items configured to order using option selection or a rules-based configurator, with a production order linked to the sales order. The sales price and promised delivery date can be calculated for the manufactured item.
Reservations can be manually or automatically assigned, with optional reservation of scheduled receipts. Delivery promises reflect available inventory and scheduled receipts of the item, and the item's leadtime when additional material must be obtained.
Sales quotations can be defined and converted into sales orders. In defining the pipeline of expected business, they can optionally act as demands based on their win-probability.
Variations in Sales Pricing. An item's standard sales price and UM represent one approach to a predefined sales price. The standard sales price can be manually entered or automatically calculated. Automatic calculation can be based on a markup or contribution percentage applied to the item's inventory cost or purchase price. Other alternatives to sales pricing include the use of source documents such as sales quotations or blanket orders to create a sales order, and the use of sales trade agreements.
With a sales price trade agreement, for example, an item's sales price can reflect different factors such as customer type, unit of measure, quantity breakpoints and date effectivities, as well as higher prices or a surcharge for shorter delivery leadtimes. Discounts off an item's sales price can also be defined in sales trade agreements that reflect these same factors. Discounts can also apply to multiple line items (such as items within a product group) and to the total order value. Other forms of rules-based sales pricing include supplementary items such as "buy ten and get one free." Sales trade agreements can reflect companywide or warehouse-specific sales prices for an item.
Sales Forecasts. Replenishment of stocked material can be based on sales forecasts. The system supports multiple sets of forecast data, and also multi-level forecast models such as regional forecasts that roll-up to a companywide forecast. An item's sales forecast can be expressed as individual quantities and dates, as a repeating pattern of a fixed or variable quantity per period (such as monthly), or as an item group forecast (aka planning bill) that spreads out a total quantity across several items based on mix percentages. An item's sales forecast can also be imported from spreadsheets or a statistical forecasting package. The system supports forecast consumption logic to avoid doubled-up requirements.
Commissions. The system supports commission calculations for one or more sales reps, where the commission amount reflects a specified commission percentage times the sales order value (such as the gross revenue or net margin). Commissions can vary by type of customer, product and date effectivity, with calculation after posting a sales order invoice.
Invoicing. The system supports a separate invoice for each sales order shipment, and also a summarized invoice for multiple sales order shipments. It also handles different payment terms, payment schedules and payment fees.
Sales Analysis. The system supports standard and ad hoc sales analyses. For example, the standard reports include totals for individual orders, customers, and items as well as sales analysis by customer and item. Other sales analysis approaches include business analytics and pivot tables.
Variations in Purchasing Purchase order processing in distribution environments involves variations in vendors, purchase orders and pricing.
Vendors. Different types of vendors include one-time vendors, intercompany vendors, and vendors requiring foreign currency and language-specific text.
Purchase Orders. A standard purchase order defines a scheduled receipt for an item. Other types of purchase orders include quotations and blanket orders that can be used to create standard purchase orders. Additional types handle vendor returns, drafts, and subscriptions. Purchase orders can reflect intercompany purchases and project-specific purchases, and purchases from one-time vendors. Several variations apply to purchase order line items in distribution environments.
* Purchase of stocked material
* Purchased item reflecting a special order or drop shipment, with the purchase order line item linked to the sales order line item
* Project-specific line items being purchased for a project, where the system automatically issues the received material to the project after posting the purchase invoice
* A supplemental item automatically added as a line item based on the ordered line items
* Credit note line item for indicating a purchase order return
* Purchase of an expense item, fixed asset or non-inventoried item
Other purchase order variations apply to distributors with manufacturing environments.
* Kits that are priced and purchased as a complete item or as separate components
* Purchased item linked to a production order, such as the purchase of an outside operation
* Purchased item configured to order using a rules-based configurator, typically representing a special order with the purchase order line item linked to a sales order or production order
Variations in Purchase Prices. An item's standard purchase price and UM represent one approach to a predefined purchase price. It can be manually entered or automatically calculated based on the last purchase invoice. Other alternatives to an item's purchase price include the use of source documents such as quotations or blanket orders, and the use of purchase trade agreements. With a purchase price trade agreement, for example, an item's purchase price can reflect different factors such as the unit of measure, quantity breakpoints and date effectivities, as well as higher prices or a surcharge for shorter delivery leadtimes. Discounts off an item's purchase price can also be defined that reflect these same factors, as well as multi-line and total discounts. Other forms of rules-based pricing include supplementary items.
Coordinating Procurement Activities Planning calculations synchronize supplies to meet demands, and provide coordination via planned orders and suggested action messages.
Planned Purchase Orders. Planned purchase orders reflect warehouse-specific planning data for an item. The suggested vendor can reflect advanced planning logic that considers purchase price trade agreement information about the lowest price or delivery leadtime. The user can create purchase orders from selected planned orders, or use a firming time fence so that the system automatically creates the purchase orders.
Suggested Action Messages. Planning calculations generate two types of suggested action messages termed actions and futures. An actions message indicates a suggestion to advance/postpone an order's delivery date, to increase/decrease an order quantity, or to delete an order. A futures message indicates the projected completion date will cause a delay in meeting a requirement date such as a sales order shipment.
Symmetry of Sales and Purchasing Functionality Symmetry makes the system easier to understand and use. Sales and purchasing both handle the variations in order types, such as standard orders, blanket orders, and returns. Both provide parallel approaches for handling prices and discounts, miscellaneous charges, external item numbers, order quantity modifiers, order-related text, order status, and other issues. Symmetry is also apparent in the definition of customer and vendor information, handling of special orders and drop shipments, and segmentation of information on windows and tabs.
Warehouse Variations Stocking locations are uniquely identified by a warehouse and bin location. The system supports batch- and serial-tracking of an item's inventory. The system also supports inventory tracking by a serialized container or pallet containing a quantity of the same item.
The reporting of shipping activities can reflect an order-based or document-based approach. The document-based approach, for example, employs a shipping document (identifying line items from one or more orders) and its associated picking route document(s). Receiving activities can also reflect an order-based or a document-based approach. The system supports coordination of forklift drivers for moving palletized items. Movement within a warehouse can reflect bin replenishment policies, such as replenishing bins from a bulk storage area.
Variations in Multisite Operations The system supports different types of multisite operations, including autonomous sites within a company, a distribution network with transfers between warehouses, and intercompany trading. An item's costs, prices and replenishment methods can be warehouse-specific, where the replenishment method can identify the preferred ship-from warehouse to model a distribution network. Transfer orders coordinate movement between warehouses, and track in-transit inventory. Sales order line items indicate the ship-from warehouse, while purchase order line items indicate the ship-to warehouse. With intercompany trading, the purchase order in one company automatically generates the corresponding sales order in the supplying company. The sales order shipment can also trigger a purchase order receipt. The planning calculations coordinate intercompany orders across a multi-tier supply chain.
This is Part One of a two-part article reprinted from Managing Your Supply Chain Using Microsoft Dynamics AX. Part Two will cover design factors related to manufacturing environments.
The book can be ordered on amazon.com.
About the Author
Dr. Scott Hamilton has consulted worldwide with more than a thousand companies and conducted several hundred executive seminars on supply chain management and ERP issues. He also helped design three influential ERP software packages. His books include Maximizing Your ERP System and the APICS CIRM textbook on information systems for manufacturing, and previous books on Microsoft Dynamics AX and Dynamics NAV. Scott can be reached at ScottHamiltonPhD@aol.com or 612-963-1163.
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