Design, Development and Testing of MRP Cockpit, the new custom tool in SAP Fashion Management Solution

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DIPARTIMENTO DI INGEGNERIA DELL’ENERGIA DEI

SISTEMI, DEL TERRITORIO E DELLE COSTRUZIONI

RELAZIONE PER IL CONSEGUIMENTO DELLA LAUREA MAGISTRALE IN INGEGNERIA GESTIONALE

Design, Development and Testing of MRP

Cockpit, a new custom tool in SAP Fashion

Management Solution

Candidato Relatore

Angela Dirienzo Prof. Riccardo Dulmin Tutor Aziendale Dr. Ennio Nironi Sessione di Laurea 02/05/2019 Anno Accademico 2018/2019

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III Dedicato a mio nonno Gerardo, da sempre e per sempre, il sole più bello

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V Ringraziamenti

Il primo ringraziamento speciale va al Prof. Riccardo Dulmin, che con pazienza ed attenzione mi ha guidato nella stesura di questo elaborato, dispensando tanti consigli preziosi.

Un grazie ad Ennio, il mio tutor aziendale, che con grande entusiasmo ed un sorriso sempre stampato sulle labbra mi ha capita al volo ed è stato in grado di valorizzarmi sempre e non abbattermi mai.

Grazie a tutti i ragazzi di Accenture, al clima di famiglia e passione che ci avvolge tutti i giorni. Ognuno di loro, direttamente o indirettamente, ha contribuito a costruire questa tesi e a formare questa “consulente” alle prime armi.

Un grazie speciale ad Alessandra, amica prima che collega, confidente e mentore del mio percorso. Dal primo giorno che ci siamo incontrate mi ha riempito di sorrisi e consigli facendomi sentire subito a casa. Sempre paziente, mai scocciata, disponibile ad ogni ora del giorno, mi aiuta a crescere ed imparare e non potrei sentirmi più fortunata di così.

A mia madre, donna forte e coraggiosa, sempre pronta a farsi in quattro per tutti e in otto per me, e a mio padre, esempio di lealtà e onesta, l’uomo più importante della mia vita senza il quale mi sentirei persa. Quando mi sento orgogliosa di me stessa lo devo solo a loro, alle mille possibilità che mi hanno dato e all’amore che mi dimostrano ogni giorno ed in ogni istante.

A tutta la mia famiglia, lontana e vicina, piccola e unica. Non avrei potuto chiedere di meglio. A i miei nonni e all’amore che solo loro sanno dare, ai miei zii, che mi hanno sempre coccolata e stimolata ad andare avanti e non arrendermi mai. Ad Armando e Francesco, due ragazzi onesti e coraggiosi, che mi rendono fiera di loro, ogni giorno di più. A Laura e Valentina, con le quali ho imparato ad essere sorella pur restando figlia unica. Ai loro mariti e ad Andrea e Niccolò, due bambini meravigliosi, svegli ed intelligenti che rallegrano le nostre vite con giochi, sorrisi e tanto amore. E poi grazie anche a quelli che, e se verranno, perché da noi c’è sempre spazio per tutti.

A Marina e Wilma, due figure fondamentali della mia esistenza, e a Stornarella, il luogo in cui siamo nate, cresciute, e in cui ci siamo scelte. Alle birre in macchina, alle passeggiate di notte per sfogarci un po’, alle risate fino a stare male e ai pianti disperati, ad ogni cosa che è parte di noi e ci legherà per sempre.

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VI

A Giada, e a quel momento in cui, la prima volta che l’ho vista, le ho dato della siciliana e lei a me della campana, fino a scoprire di condividere le stesse radici e lo stesso amore sincero per la nostra terra. Da quel momento ci siamo prese per mano e non ci siamo lasciate più. Compagna di studi, di viaggi, di vita, collega di lavoro e coinquilina, la risceglierei per altre mille volte e in altre mille vite.

A Rosa e Sara, le mie B. e a Deb ed Ali, amiche sincere, sempre presenti. A loro ho dato tutto e da loro ho ricevuto molto di più. Ringrazio Ingegneria per averci fatto incontrare e la nostra amicizia viscerale che ci unisce in quello che siamo state e saremo per sempre.

Alla mia famiglia universitaria, tanti, ma mai troppi, un ringraziamento speciale va a loro con i quali ho condiviso gli anni più bella della mia vita. Vi risceglierei ogni giorno perché con voi non ho mai avuto paura di sentirmi me stessa e di mostrami in tutto quello che sono. Vi ringrazio per ogni momento passato insieme e per tutte le emozioni che mi avete regalato, così tante ed intense che mi basterebbero per le prossime dieci vite e invece siamo solo alla prima, da continuare insieme.

A Dulia e Nicola, a casa Srebot e a tutti quelli che ci sono passati, per un caffè, per un film, per un torneo di scopone, per una birra o per una festa. Luogo di risate e condivisione, lo porterò per sempre con me perché “Casa Srebot è di chi la ama” e quindi per sempre anche mia.

Ai ragazzi della Cina e alla Cina stessa, un vortice di emozioni che saranno per sempre legate a voi.

Grazie a Lorenzo e ai nostri alti e bassi. A lui che è saputo entrare nel mio cuore in un modo che nessuno sa spiegare, guadagnandosi un posto speciale che è destinato a non lasciare mai più, nonostante tutto e nonostante tutti. (T.t.s.a.b)

Ed infine a mio nonno Gerardo, un’assenza assordante che si fa presenza quando nel sonno mi viene a trovare ed ancora riesco a sentire il suono caldo della sua risata. Nonno, oggi saresti tanto fiero di me e questo pensiero mi consola in questo giorno in cui tutti sono qui per me e tu non ci sei. Ma io ti sento perché

“e si chesto nunn'è ammore ma nuje che campamme a ffà”

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Table of Tables

Table 1: Functional Scope at functional stream level in the wave 2 with SAP and others app

coverage ... 162

Table 2: Functional Scope at MDM and Finance Integration in the wave 2 with SAP and others app coverage ... 163

Table 3: SAP FMS Topics and related transactions in the Forecast Management Process ... 183

Table 4: SAP FMS Topics and related transactions in the Buy Calendar and ATP Logic ... 190

Table 5: SAP FMS Topics and related transactions for Supply Demand Match and ARun ... 200

Table 6: MRP custom and standard Parameters ... 211

Table 7: Agile Test Cycles within Agile for SAP Method ... 244

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Table of Figures

Figure 1.1: Operations Value Chain (De Toni, Filippini & Forza, 1992) ... 6

Figure 1.2: Environment, Competitive Strategy and Manufacturing Strategy Relationship (Ward and Duray, 2000) ... 11

Figure 1.3: Reconciliation between Operations Resources and Market Requirements (De Toni & Panizzolo, 2018) ... 12

Figure 1.4: MPC System Architecture (De Toni & Panizzolo, 2018) ... 14

Figure 1.5: “Sawtooth” graph of inventory level over time ... 27

Figure 1.6: Graphic representation of EOQ ... 29

Figure 1.7: Classification of Time Series Patterns (Pegel, 1969) ... 34

Figure 1.8: Main Features of Inventory Management Systems (De Toni & Panizzolo, 2018) .... 37

Figure 1.9: The Inventory Profile of Reorder Point System (De Toni & Panizzolo, 2018) ... 39

Figure 1.10: The Inventory Profile of Time Phased Order Point and MRP Systems (De Toni & Panizzolo, 2018) ... 42

Figure 1.11: TPOP and Free Cover variables match (De Toni & Panizzolo, 2018) ... 43

Figure 1.12: Product lifecycle in the fashion industry compared to other markets (Bandinelli , Rinaldi , Rossi, & Tersi, 2011) ... 45

Figure 1.13: Example of a Gantt Chart for the Production and Supply Process in the Fall/Winter Season ... 46

Figure 1.14: A traditional Supply Chain in the Fashion Industry ... 52

Figure 1.15: Comparison between Lean and Agile Supply Chain models (Battista & Schiraldi , 2013) ... 53

Figure 1.16: Quick Response and Fast Fashion compared to the traditional management approach (HermesLab, 2009) ... 54

Figure 2.1: S&OP and Resources Planning integrated system ... 59

Figure 2.2: Inputs and the Outputs of MRP in the conventional planning ... 61

Figure 2.3: Example of Product Structure File (or BOM) ... 63

Figure 2.4: Manufacturing Execution System (MES) linkage with MRP ... 64

Figure 2.5: Product structures for FPA and FPB finished products ... 65

Figure 2.6: Product structure with fixed lead times for FPA and FPB finished products ... 67

Figure 2.7: Net Requirements calculations for FPA unique items ... 68

Figure 2.8: Gross Requirements calculations for FPA unique items ... 68

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Figure 2.10: Core Problem Area of the Equation (Ptak & Smith, 2017) ... 73

Figure 2.11: Planning Horizon depiction (Ptak & Smith, 2017) ... 76

Figure 2.12: Full product structure vs flattened product structure ... 78

Figure 2.13: Connecting the Core Problem to Materials Distortions (Ptak & Smith, 2017) ... 82

Figure 2.14: Decoupling Points and their impacts (Ptak & Smith, 2017) ... 86

Figure 2.15: The five components of Demand Driven MRP (Ptak & Smith, 2017)... 89

Figure 2.16: Decoupling explosion of the BOM (Ptak & Smith, 2017) ... 90

Figure 2.17: Zones of the buffer (Ptak & Smith, 2017) ... 92

Figure 2.18: Illustration of the DDMRP net flow equation elements (Ptak & Smith, 2017) ... 93

Figure 2.19: Representation of the Net Flow Equation (Ptak & Smith, 2017) ... 94

Figure 2.20: DDMRP Buffer Execution status (Ptak & Smith, 2017) ... 95

Figure 2.21: DDAE Model Components (Ptak & Smith, 2017) ... 96

Figure 2.22: DDAE Model implementation stages (Ptak & Smith, 2017) ... 97

Figure 3.1: Information System Elements ... 102

Figure 3.2: Modules of a generic ERP system ... 108

Figure 3.3: Reason for Implementing ERP (Panorama Consulting Solutions, 2018) ... 110

Figure 3.4: Type of Benefits Realized (Panorama Consulting Solutions, 2018) ... 113

Figure 3.5: SAP Integration Landscape (SAP, 2018) ... 118

Figure 3.6: SAP three-layers Architecture (SAP Support Portal, 2018) ... 119

Figure 3.7: SAP R/3 Functional Modules (SAP Support Portal, 2018) ... 120

Figure 3.8: SAP five-phases Implementation Roadmap and ERP Life Cycle ... 124

Figure 3.9: SAP ASAP Methodology (SAP Support Portal2018) ... 126

Figure 3.10: BPR Process steps ... 128

Figure 3.11: Reasons for Using Consultants (Panorama Consulting Solutions, 2018) ... 129

Figure 3.12: Example of Typical SAP Business Blueprint (SAP Support Portal, 2018) ... 130

Figure 3.13: The three environments of SAP landscape (SAP Support Portal 2018) ... 131

Figure 3.14: Example of EPC Model (SAP Support Portal, 2018) ... 131

Figure 3.15: Level of Customization (Panorama Consulting Solutions, 2018) ... 132

Figure 3.16: Cross-cutting activities in SAP Implementation Project ... 134

Figure 3.17: Example of Data Migration process in SAP ... 135

Figure 3.18: Risk Management Methodology ... 135

Figure 3.19: Change Management Methodology ... 137

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Figure 3.21: SAP FMS similarities to Retail Solution (material provided by Accenture) ... 139

Figure 3.22: SAP FMS similarities to Apparel and Footwear Solution (material provided by Accenture) ... 139

Figure 3.23: SAP FMS as an integrated solution (material provided by Accenture) ... 140

Figure 3.24: Illustrative example of SAP FMS Segmentation (SAP Support Portal, 2018) ... 143

Figure 3.25: Illustrative example of SAP FMS Segmentation Strategy (SAP Support Portal, 2018) ... 144

Figure 3.26: Illustrative example of SAP FMS Season Workbench (SAP Support Portal, 2018) 146 Figure 3.27: Valid Period for Segmentation entities (SAP Support Portal, 2018) ... 147

Figure 3.28: Illustrative example of the Order ARun Process Flow (SAP, 2018) ... 148

Figure 4.1: Whole Project Timeline at the time of wave 1 ... 155

Figure 4.2: Whole Project Timeline at the time of wave 2 ... 156

Figure 4.3: Business Processes affected by SAP FMS operations in the wave 2 ... 159

Figure 4.4: Business Blueprint Timeline of the wave 2 ... 164

Figure 4.5: Program Delivery Model in the wave 2 ... 166

Figure 4.6: Implementation Approach in the wave 2 ... 167

Figure 4.7: Business Processes affected by SAP FMS Implementation in the wave 3 ... 169

Figure 4.8: Project Timeline of the wave 3 ... 174

Figure 4.9: The five Master Data in SAP PP Module (SAP Support Portal, 2018) ... 176

Figure 4.10: The SAP PP Module Production Planning and Control Process (SAP Support Portal, 2018) ... 178

Figure 4.11: Season Management in the Production Planning System ... 180

Figure 4.12: The Forecast Management Process in SAP FMS ... 181

Figure 4.13: TXT and SAP FMS Interface Process ... 182

Figure 4.14: TXT and SAP FMS Interface Program Logic ... 183

Figure 4.15: Segmentation Strategy and Segmentation Structure in SAP FMS MM43 Transaction ... 184

Figure 4.16: PIRs in SAP and Interface with TXT and Excel ... 185

Figure 4.17: PIRs as SAP objects to represent forecast ... 186

Figure 4.18: Illustrative example of MD63 Transaction in SAP FMS ... 186

Figure 4.19: Illustrative example of PIR Consumption and Withdrawal ... 187

Figure 4.20: Standard SAPFMS MM43 transaction for PIR Consumption... 188

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Figure 4.22: Standard SAPFMS MD04 transaction for PIR Consumption ... 189

Figure 4.23: Standard SAP FMS MD73 transaction for PIR Withdrawal ... 189

Figure 4.24: Standard SAPFMS MD04 transaction for PIR Withdrawal ... 189

Figure 4.25: Buy Calendar Terminology: Reference Dates and Lead Times ... 191

Figure 4.26: Custom Program in SAP FMS for Buy Calendar Upload ... 192

Figure 4.28: SAP FMS FSH_COD transaction Input Selection screen ... 192

Figure 4.27: SAP FMS FSH_COD transaction visualization ... 192

Figure 4.29: SAP FMS MM43 transaction... 193

Figure 4.30: ATP Logic and Buy Calendar ... 193

Figure 4.31: Illustrative example of ATP Logic and Buy Calendar ... 194

Figure 4.32: Launch screen of SAP FMS FSH_MD04 Transaction ... 195

Figure 4.33: Screen Analysis of SAP FMS FSH_MD04 Transaction ... 195

Figure 4.34: SAP FMS MD04 Transaction for the overall balance ... 196

Figure 4.35: SAP FMS MMBE Transaction for Stock management ... 197

Figure 4.36: SAP FMS MM23N Transaction for POs display ... 197

Figure 4.37: SAP FMS VL33N Transaction for Inbound Deliveries display ... 198

Figure 4.38: SAP FMS MD63 Transaction for PIRs display ... 198

Figure 4.39: SAP FMS ME23N Transaction for POs display ... 199

Figure 4.40: SAP FMS VA03 Transaction for SOs display ... 199

Figure 4.41: SAP FMS VA43 Transaction for Contracts display ... 200

Figure 4.42: Key Pillars of ARun Logic ... 201

Figure 4.43: ARun and Supply Demand Match linkage ... 201

Figure 4.44: Illustrative example of ARun and ARun Preview Visualization Logic ... 202

Figure 4.45: SAP FMS ARUN Transaction ... 202

Figure 4.46: SAP FMS ARUN Preview transaction ... 203

Figure 4.47: SAP FMS ARUN Transaction Selection Screen ... 203

Figure 4.48: SAP FMS ARUN Transaction Analysis Screen ... 203

Figure 4.49: SAP FMS MM53N Transaction for PRs display ... 205

Figure 4.50: "Special Flows" of Direct Shipment PRs within SAP and MobiMedia ... 206

Figure 4.51: “Special Flows" of Design Your Own PRs within SAP FMS ... 207

Figure 4.52: “Special Flows" of Cross Docking PRs within SAP and MobiMedia ... 207

Figure 4.53: MRP Scope Directions ... 208

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Figure 4.55: Illustrative example of MRP and Buy Calendar Logic ... 212

Figure 4.56: Buy Date Selection Logic ... 212

Figure 4.57: Delivery Date Calculation Logic ... 213

Figure 4.58: MRP Launch Frequency ... 213

Figure 4.59: Forecasting and PIRs Interface ... 214

Figure 4.60: SAP FMS MRP Live MD01N Transaction... 215

Figure 4.61: Process Flow of TXT, MRP and MRP Cockpit ... 215

Figure 4.62: MRP Master Data Upload ... 216

Figure 4.63: Selection Screen of SAP FMS custom program for MRP Type and MRP Controller management ... 216

Figure 4.64: Selection Screen of SAP FMS custom program for MRP Self-Scheduling ... 217

Figure 4.65: Illustrative example of MRP Self-Scheduling custom program Logic ... 217

Figure 4.66: Illustrative example of MRP and PRs Generation Logic ... 218

Figure 4.67: Illustrative example of MRP and ATP Logics ... 219

Figure 4.68: Focus of "PRs Post-processing" blocks flow ... 220

Figure 4.69: MRP Source Assignment Logic ... 221

Figure 4.70: E2E Forecast to Pay Logical Flow ... 222

Figure 4.71: MRP and MRP Cockpit Solution Block ... 222

Figure 4.72: Innovation model (Cross, 2011) ... 226

Figure 4.73: The Design Thinking Process ... 227

Figure 4.74: The details illustration of intertwining Design Thinking and Agile development methods ... 230

Figure 4.75: Integrating design thinking into an agile workflow. Teams balance efforts across discovery and delivery to maximize user outcomes (Hill, 2018) ... 233

Figure 4.76: Value Proposition of Agile for SAP Method (material provided by Accenture) .... 236

Figure 4.77: Minimum Viable Product: Agile for SAP vs Waterfall ... 237

Figure 4.78: Plan-driven vs Value-driven approach ... 238

Figure 4.79: Design-Build-Test-Deploy approach: Agile for SAP vs Waterfalls Methods ... 238

Figure 4.80: Key Figures and Roles in Agile for SAP Method ... 239

Figure 4.81: Accenture Implementation Project within Agile for SAP Method ... 240

Figure 4.82: Overview of ASAP Methodology and Agile for SAP linkage (SAP Support Portal, 2018) ... 245

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Figure 4.84: MRP Cockpit expectations ... 251

Figure 4.85: MRP Cockpit prototype for the PRs aggregates level (Business Blueprint Document) ... 254

Figure 4.86: MRP Cockpit prototype for the single style/color level (Business Blueprint Document) ... 255

Figure 4.87: MRP Cockpit prototype for the SKU level (Business Blueprint Document) ... 256

Figure 4.88: MRP Cockpit process and its interactions with other systems ... 257

Figure 4.89: "Reference Dates and Buy Periods" Combination Matrix... 260

Figure 4.90: "Group By": the tree-structure ... 261

Figure 4.91: Example of Excel file used for Upload and Download execution modes ... 271

Figure 4.92: MOQ Alignment and Rounding procedure logic ... 272

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Abstract

This master thesis is based on a three-month internship at Accenture Spa, a leading global professional services company, that has been involved into the implementation project of SAP Fashion Management Solution in a company global leader in branded lifestyle apparel, footwear and accessories. In the context of the Production Planning module, the new fully custom tool MRP Cockpit has been conceived, designed and developed using a methodology made up of the combination of two innovative methods, the Agile for SAP method and the Design Thinking. These methods share some of their principles and goals and emphasize to put focus on the feedback and revise incrementally. Design Thinking takes an empathetic approach that puts the needs of users at the center of projects. It looks at the “why” of a problem with the aim of defining a solution that satisfies users’ real needs. Agile methods, instead, is focused on the “how” of project delivery, breaking up the planning and scope of work into smaller units. As projects develop, teams can make modifications based on real-time feedback from testing, iterating and continuously improving throughout the development process. Basically, when the Agile Method meets the Design Thinking, the why and how are incorporated. Finding the solution marks the border between problem (why) and solution (how) areas. In this project, the custom tool MRP Cockpit stands for the solution.

In this thesis, a literary review and context analysis about Production Planning and MRP procedure with a focus on Fashion Industry is available. Thus, after scanning what leads the so-called “conventional planning” turning into more today’s manufacturing landscape suitable models, the SAP Fashion Management Solution is analyzed, being compliant to the Demand Driven MRP, a dynamic and effective solution to answer the challenges of today’s manufacturing landscape. SAP FMS, conceived with the purpose of harmonizing the most critical processes for companies in the Fashion market, is described with a focus on the Production Planning module and MRP Cockpit. The tool is considered and defined as the custom tool that allows analysis and update of the MRP elements and results, offering both an aggregated and detailed view. The MRP Cockpit has been conceived as an MRP-related tool, by which MRP results are analyzed and handled according to planners’ needs.

Although designed as a custom tool, with the right adjustments to the new client business process in the planning module, the MRP Cockpit is supposed to become a standard SAP tool in the context of the Production Planning module in SAP Fashion Management Solution.

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1

Introduction

This master thesis is based on a three-month internship at Accenture Spa, a leading global professional services company, providing a broad range of services and solutions in strategy, consulting, digital, technology and operations, that carried out the implementation project of SAP Fashion Management Solution in a company global leader in branded lifestyle apparel, footwear and accessories.

The project concerns the SAP FMS implementation in a company, global leader in branded lifestyle apparel, footwear and accessories, global iconic brands with nearly 70.000 associates and 12.4 US billion dollars in revenue in the last year. The project is for Accenture one if the most iconic SAP implementation project in terms of time, number of persons involved and results in the specific context of the Fashion Industry. The company is a brand manufacturer, highly diversified across brands, products, distribution channels and geographies with 24 brands in four regions, Americas, Europe-Middle East-Africa (EMEA), Asia Pacific and United State. The implementation project encompasses only the Europe region with 23 countries which have been mapped in SAP as Sales Organization/Purchase Organization leveraging two main Distribution Centers (DCs) in Europe, and several stores.

The SAP FMS Implementation Project is composed of four phases (or waves) that are deeply described in the fourth chapter. Each wave involved different brands, different SAP FMS modules and has its own features and peculiarities. The wave of which I have taken part is the wave 3, on which is focused the most part of the chapter. This phase is characterized by three new processes:

 Roll-out project for the Cluster 2 Brands;

 MRP and Warranty design, build and deployment;  MRP Cockpit custom tool design, build and deployment.

In this wave, MRP tool became an “in-scope” part of the project and the MRP Cockpit, the custom tool heart of my thesis project, has been conceived, designed, developed, realized, implemented and tested and for which the Go-Live date is foreseen in June 2019.

Before starting describing and discussing the SAP FMS implementation project a literature review and analysis of context have been provided in the first two chapters with a focus of Production Planning and MRP procedure.

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2

In the first chapter Production Planning is analyzed in all its forms. Starting from the definition of the Production function, the Value Chain Model is used to deeply understand the real essence of this function in the companies. When treating with Production, it is not possible to disregard the Planning procedure since it is the function that enables the production process progress. In this context, the Manufacturing Planning and Control System is investigated through its three level of planning and, finally, there is an attempt to summarize the Planning function by the following formula.

𝐼𝑁𝑉(𝑇1) = 𝐼𝑁𝑉(𝑇0) − 𝐷𝐸𝑀(𝑇1) + 𝑆𝑈𝑃(𝑇1)

Starting from it, all its key components are deeply described in the chapter: Inventory Management, Demand and Supply Planning.

Moreover, the Fashion Industry world in deeply investigated, especially with regards to its planning features in the context of Supply Chain Management. Today’s Fashion Market is higly competitive and demand driven.

Effective management to achieve competitive advantages includes the ability to manage a complex network. In the context of the fashion industry, the operational strategy consists of ordering, well in advance, many different references, each having a relatively short life cycle of only a few weeks. However, on the contrary, a fashion supply chain must respond quickly to market changes to meet customer requests and increase profitability. These opposite requirements force the management to face several decision-making problems to find the best definition and mix of all the variables with the aim of maximizing profits and customer satisfaction.

In the second chapter, the MRP System is described since its origins until the most today’s revolutionary models. All the failures of the system are analyzed to deeply understand what exactly leads the MRP, always conceived as the way of life in manufacturing, the mean able to promote and protect the flow of material and information, to be considered an unsuitable tool to fulfill the today’s requirement of Production Planning. For sure, the codification and subsequent commercialization of MRP fundamentally changed the industrial world, and it did so relatively quickly. However, the environment in which companies work is ever-changing and systems, models and tools working with and for companies need to change with and for them. That is the reason way new solutions have been development with this aim. Among them, Demand Driven MRP turns out to be a proven, dynamic and effective solution to answer the

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3 challenges of today’s manufacturing landscape. Therefore, a Demand Driven Adaptive Enterprise Model has been designed, focuses on the protection and promotion of relevant information and materials, the primary objective of Production Planning, across the operational, tactical and strategical ranges of an organization allowing it to continually and successfully adapt to the complex, changing and volatile Supply Chain in existence today.

Thus, after scanning what leads the so-called “conventional planning” turning into more today’s manufacturing landscape suitable models, the third chapter is completely dedicated to one of those: SAP ERP system and SAP Fashion Management Solution. SAP S/4HANA for extended planning (On-Premise) and SAP S/4HANA Cloud for advanced supply chain (Cloud) are among the software and ERP system compliant to Demand Driven MRP approach and SAP FMS, MRP included, uses Functional Modules of SAP S/4HANA, resulting compliant in turn. Fashion companies, implementing SAP FMS, will have a solution enables them to manage their business processes across one large data system landscape. It also enables the companies in the fashion industry to use the power of in-memory computing to analyze large data volumes for a fast and accurate overview of products. This results in greater efficiency, quicker time to market, and better inventory control.

The SAP FMS solution adapts to the characteristics of the fashion industry. Indeed, the purpose of SAP FMS is to harmonize the most critical processes for companies in the Fashion, such as the coding of articles according to simple rules and understandable, planning and procurement following the timing of the market, effective and efficient warehouse management ensuring availability immediate delivery of the material, and the reprogramming and allocation of the goods on delivery which are optimized and made more flexible by the new features of the system. The goal of SAP is to continue to respond to the evolution of the fashion market, updating the system with new features and applications that allow to companies to compete in this dynamic market.

In the fourth chapter, MRP Cockpit tool is deeply described. It is considered and defined as the custom tool that “will allow analysis and update of the MRP elements and results, offering both an aggregated and detailed view” (Business Blueprint document). The MRP Cockpit has been conceived as an MRP-related tool, by which MRP results are analyzed and handled according to planners’ needs.

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4

MRP Cockpit functionalities and features are described after a deep analysis of the methodology implemented by Accenture teams to design and develop the tool. This methodology made up of the combination of two innovative methods widely used in the context of software (but not only) development. These are, the Agile Method and the Design Thinking, that share some of their principles and goals and emphasize to put focus on the feedback and revise incrementally. Moreover, an Agile for SAP methodology has been used. By leveraging on the model proposed by SAP (linked to the ASAP methodology), Accenture developed an Agile method for SAP. Agile method and Design Thinking, despite they share some principles, design thinking methods allow the teams to explore entirely new solutions to tackle the true problem, which agile methods is about to put focus on incremental improvements on the solutions (Wölbling, 2012). Therefore, to apply both methods into the product development cycles can unleash the true value of the products and services for today digital market. When the Agile Method meets the Design Thinking, the why and how are incorporated.

In the context of the MRP Cockpit, Design Thinking took an empathetic approach that put the needs of users at the center of projects by asking questions about the specific challenges that need to be solved. It looked at the “why” of the problem, and the goal was to define a solution that satisfies users’ real needs. The “why”, was the “void” in standard MRP and the possibility of only create PRs at variant level (SKU).

Agile method focused on the “how” of project delivery, breaking up the planning and scope of work into smaller units. As projects develop, team could make modifications based on real-time feedback from testing, iterating and continuously improving throughout the development process. The “how”, have been the features and functionalities of the tool, continuously developed, tested and proposed to the client in order to fulfill the users’ needs.

Finding the solution marked the border between problem and solution areas. In the context of this project, the custom tool MRP Cockpit was the solution.

In conclusion, if the MRP Cockpit will properly address the last phase of “Go-Live & Stabilization”, it will be proposed to the future company that will turn to Accenture for SAP FMS implementation project, with the right adjustments to the new client business process as regard the planning module. The MRP Cockpit is supposed to become a standard SAP functionality in the context of the Production Planning module in SAP Fashion Management Solution.

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5

Chapter 1 Production Planning and Focus on Fashion Industry

1.1 Introduction

In this chapter, Production Planning is analyzed in all its forms. Starting from the definition of the Production function, the Value Chain Model is used to deeply understand the real essence of this function in the companies. In literature, Production function has always been investigated until it was considered as reconciliation and coherence of Operation Resources and Market Requirement. When treating with Production, it is not possible to disregard the Planning procedure since it is the function that enables the production process progress. In this context, the Manufacturing Planning and Control System is investigated through its three level of planning and, finally, there is an attempt to summarize the Planning function by a formula. Starting from it, all its key components are deeply described in the chapter: Inventory Management, Demand and Supply Planning.

Moreover, the Fashion Industry world in deeply investigated, especially with regards to its planning features in the context of Supply Chain Management. Today’s Fashion Market is higly cometitive and demand driven. This have forced companie to refresh their products continously, to cater the trend of varying needs of consumers. Products and market features are described, as well as the actual challenges in the fields of Planning and Supply Chain in general.

1.2 Value Chain Model

In general, “Production function” means a business sub-system that, using some input resources (materials, energy, information, capital, technologies, persons, know-how, etc.), allows to obtain as outputs products and services and, of course, an increase in know-how (De Toni & Panizzolo, Sistemi di Gestione della Produzione, 2018). In industry, by the term “Production” it is identified, in a strict sense, a set of activities that promote goods physical transformation. In a broader view, production means the set of activities related to in-bound and out-bound logistic. Given the strong interrelationship between process and product, also design and industrialization activities are considered integral parts of production function.

In order to consider the themes of production function and production strategy, the conceptual value chain model is used (De Toni, Filippini , & Forza, Manufacturing Strategy in Global Markets: An Operations Management Model, 1992). The model ca be used to understand and individuate

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problems and opportunities in order to achieve competitive advantages starting from production.

The model considers competitive advantages or external performances, competitive priorities or internal performances and operations based on four operational phases: design, procurement, production and distribution.

These four phases represent what can be defined as the "operation value chain". For each phase of the operation value chain, the model makes possible to observe the influence of decision categories on the performance of the operating system and on the competitive advantages which the company can obtain as a result.

The phases which are considered by the model are those which make up the operation value chain: design and development of products, purchasing or raw materials and components, manufacturing of components and assembly of final products, and distribution. It should be noted that in Figure 1.1, the design phase has been kept separate from the other phases. The reason for this is that only in the case of "engineer-to-order" (ETO) firms is the design phase routinely performed as the first operation, followed by purchasing, manufacturing and distribution. In other firms of the "make-to-order" (MTO), "assemble-to-order" (ATO) and "make-to-stock" (MTS) types, design is an activity which is not synchronous with the other

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7 operations, which are instead carried out in a cyclical fashion. The different strategies will be deeper described later in the chapter.

With reference to the primary activities of Porter's value chain: inbound logistics, operations, outbound logistics, marketing/sales and service and to support activities: procurement, technology development, human resource management, and firm infrastructure, the following should be emphasized:

 two primary activities of the value chain, that is to say marketing/sales and services, have not been taken into consideration because this model is concerned with "operations". Furthermore, when the downstream primary activities of the value chain are of vital importance for competitive advantage, the international competition strategy tends to be multidomestic; while in those industries where upstream primary activities and support activities, like technology development, are critical, global competition is more frequent;

 the outbound logistics are the same as in our distribution phase; the production phase also includes the inbound logistics;

 the support activity classified as procurement in Porter's model (purchasing of raw materials, machinery, buildings, etc.) has been restricted to one of the activities which are described by this term: purchasing of only raw materials and components, that is, those parts which are cyclically purchased by the firms; in this case it is correct to consider purchasing as a primary activity, because it plays an effective role in the physical creation of the product;

 the design phase is also considered a primary activity because it too is involved in the physical creation of the product.

1.2.1 Operations System Performances and Competitive Advantages

As regarding operations system performances and competitive advantages, there is no full convergence in literature. In 1988, Hayes, Wheelwright and Clark introduced the concept of competitive priority and proposed five classes: costs, quality, reliability, flexibility and innovation. Ferdows, Miller, Nakane and Vollmann (1986), proposed four competitive dimensions: quality, reliability, costs-effectiveness and flexibility. Ward, Leong and Snyder (1990) indicate five competitive classes to which the most part of literature contributes can be

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related: costs, timeliness of delivery, quality, flexibility (product mix and capacity) and innovation.

With reference to the general concept of competitive advantages, three types of advantage are considered:

 price;

 product differentiation;  service differentiation.

This definition of competitive advantages derives from the fact that, in general, consumers choose among several product alternatives, which include the connected services, on the basis of the price-quality relationship. It is important to underline how, for manufacturing companies, market success is becoming more and more dependent on the ability to offer a balanced mix of products and services. The link between product and service is becoming so tight that it is difficult to distinguish between product and service; in fact, some authors are proposing the concept of "service-enhanced product".

1.2.2 Strategic Decision Categories

The strategic decision categories in the manufacturing field are extensively discussed in literature. Hayes, Wheelwright and Clark (1988) identify ten categories divided into structural (capacity, facilities, technology, vertical integration) and infrastructural (production planning and control, quality, organization, workforce, new product development, performance measurement systems). Skinner proposes five strategic decisional categories: structural (plant and equipment) and infrastructural (production planning and control, organization and management, labor and staffing, product design/engineering). Fine and Hax propose six strategic decision-making areas, of which three are structural (capacity, facilities, process and technologies) and three infrastructural (product quality, human resources, scope of new products).

De Toni and Panizzolo (2018) proposed three groups of strategic decisional variables, as shown in figure, are identified:

1. organization and management; 2. management systems;

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9 3. technologies.

The categories which are proposed are in many cases the same as those which have already been indicated, but others are introduced with the objective of underlining all the elements and decisions which are significant in obtaining strategies of a global type. Each group of categories can be referred to the operation value chain and represents a framework within which management makes strategic choices which have operative implications and effects on performance.

1. The first group of strategic decision categories, “organization and management”, includes elements which can be traced back to the external and internal organizational structure of the company and to the role of management; these are:

 configuration and co-ordination of the activities;

 the level of concentration/decentralization of activities in the value chain and the way in which they are coordinated;

 agreements and coalitions;

 internal organization structures and integration mechanisms;

 managerial roles: the role of the manager in integrating activities to obtain a continuous improvement of the operating system.

2. The second group of strategic decision categories is represented by management systems, considered both as approaches to process management and as formal techniques and procedures. Of those which are applicable to one or more phases of the operation value chain we list the most important ones:

 simultaneous product-process design;  co-makership;

 total quality control;  just-in-time;

 distribution resources planning.

3. The third and final group of strategic decision categories is represented by technologies. These can be divided into the following:

 process technologies of all the phases: design, transport, handling, storage, production and distribution;

 information technologies for collection, elaboration and communication of data and information (information and communication systems);

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 technologies incorporated in the product aimed at improving quality and reducing costs.

In general, whatever is the choice of the top management of a company, the crossing of the strategic decision categories with the four phases of the operation value chain makes it possible to identify different areas which represent the implications in terms of opportunities and decisions for the realization of a global strategy.

1.3 Production Strategy: definitions and dimensions

Manufacturing strategy can be defined as deployment of corporate strategy extended to production function, namely the way in which an organization exploits the production resources to achieve its objectives (De Toni & Panizzolo, 2018).

The first author who deeply developed researches about manufacturing strategy was C. Wickham Skinner. After 10 years as a manufacturing manager at the Honeywell Corporation, he became professor at the Harvard Business School in 1958. His most famous article was published, in 1969, in the journal Harvard Business Review titled “Manufacturing- Missing Link in Corporate Strategy”. In this article, the author underlines the lack of connection between corporate strategy and manufacturing activities. Manufacturing strategy is the missing link between corporate strategy and choices in production terms.

As for corporate strategy, also for manufacturing strategy, there are different definitions in literature. Skinner proposed as manufacturing strategy “a link between manufacturing decisions and corporate strategy. When corporate strategy is not keeping pace with corporate strategy, production decisions are frequently incoherent and short-term. The result is that production is separated from business” (Skinner, 1958).

Beyond the subsequent developments, Skinner researches still remain a key passage in the operations study’s evolution. This is because, they opened a new strategic perspective: the manufacturing strategy area of studies is associated to his name.

As for corporate strategy, also manufacturing strategy can be treated in terms of content, process and context (Swamidass & Newell, 1987; Swink & Way, 1995).

The content concerns the competitive priorities (internal performances) and strategic decision categories to obtain the above priorities. These variables have been already treated in the previous chapter.

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11 The topic of process of formulation and implementation of manufacturing strategy has been less treated in literature. Mainly discussed are the sequencing of the definition of competitive priorities and the selection of the action leverages (Platts & Gregory, 1990). Debated topics are: organizational culture, process orientation and inter-functional integration, employees’ motivation and sense of belonging, management as a project of the process itself (Mills, Elmasri, Khan, Miriyala, & Subramanian , 1995).

As concerns relations between manufacturing strategy and context, in literature, the reference model is the one represented in the figure 1.2. It suggests that the external environment affects both competitive and manufacturing strategy, Competitive strategy is cast in a mediating relationship because it intervenes between environmental dynamism and manufacturing strategy. The model also implies that competitive strategy directly influences manufacturing strategy. Further, the relationship of environment, competitive strategy, and manufacturing strategy is linked to performance and a direct links exist between strategies and performance (Ward & Duray, 2000).

Figure 1.2: Environment, Competitive Strategy and Manufacturing Strategy Relationship (Ward

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1.3.1 Production Strategy as reconciliation and coherence

Market requirements are always heterogeneous, dynamic and ambiguous. The response capabilities of production to these requirements has always some limitations. This is because productive resources are technically constrained, difficult to change and complex. The dynamic nature and complexity that characterizes productive resources, make really challenging the market requirements and production response capability reconciliation process. The task of sorting out the physiological conflict between market requirements and productive resources is given to strategy, in general, and to manufacturing strategy, in particular. It’s possible to read the conflict resolution as a matter of the coexistence, within the same strategic environment, two different strategic approaches, known in literature as “Market-driven” and “Resource-driven” approach (De Toni & Panizzolo, Sistemi di Gestione della Produzione, 2018)

“Market-driven” approach starts from industry analysis in order to define market requirements and manufacturing choices based on theme. It can be defined as an external market analysis that identifies threats and opportunities of the competitive environment and critical success factors as a result. “Resources-driven” approach, on the other hand, starts from the potential use of resources to develop production competences capable to generate and maintain competitive advantages. It can be defined as an internal analysis of the organization resources and competences, that identifies strengths and weaknesses and core competencies as a result.

Figure 1.3: Reconciliation between Operations Resources and Market Requirements (De Toni & Panizzolo, 2018)

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13 At this point, the concept of manufacturing strategy as a reconciliation strategy, raises a question: should the reconciliation strategy be shaped on market positioning needs or leverage on organization core competencies to obtain a significant market strategic positioning? The answer is that both the strategic perspectives are valid. In other words, it’s needed to move from an OR logic to an AND one. It means that, the heart of the reconciliation is the achieving of a competitive positioning coherent with market requirement and supported by production core competencies.

1.4 Manufacturing Planning and Control System

Production planning is strategic planning performed by the top management of the manufacturing company. Production planning is aggregate level planning. The aim of the production planning is to make decisions that would produce the best overall performance for the company. The key functional areas of the manufacturing company should therefore take part in the production planning process (Vollmann, Berry, & Whybark, 1997). The marketing management and the financial department give the basic input into the top management strategic planning process. In the manufacturing company, the third basic input comes from the production management. The best overall result cannot be achieved without considering the characteristics of the manufacturing process itself. The three key functional areas make up the basic trade-offs for the top management of the manufacturing company (Russell & Taylor III, 2003). The production planning does not only produce plans for the manufacturing function but rather for the many functional areas of the manufacturing company. Production plan is the manufacturing part of the production planning. Other functional areas will produce their own plans based on the production planning process. In this way the different functions are kept in concert (Vollmann, Berry, & Whybark, 1997).

Manufacturing Planning and Control System (MPCS) is structured according to an architecture including a set of activities which extend over three different time horizons (long, medium and short term) and result articulated on three different levels:

1. General Planning or Front-end level: general directives about production are laid down; 2. Detailed Planning (programming) or Engine: material and capacity plans are defined; 3. Execution and Control or Back-end: orders are released and working progresses are

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MPC System architecture is represented in Figure 1.4.

1.4.1 Front-end level

The first level includes the development of three different plans: 1. Production Plan (PP): long-term plan;

2. Master Production Plan (MPS): medium-term plan; 3. Final Assembly Schedule (FAS): short-term plan.

These production plans are defined on the base of commercial information, such as medium-long term sales forecasting or accepted (closed) medium-short term customer orders (demand management). In general, a mix of forecasting and customer orders are used to operate in long, medium and short term.

Planning activities start from the definition of these production plans mutually consistent, broken down on three different time horizons and characterized by different planning objects. “Mutually consistent” attribute means that quantities defined in the long term are a constrain to be respected in the medium term and, in turn, medium-term quantities are a constrain for the short-term ones.

These plans are the pure replica of commercial needs, but they are developed considering resources availability, production constraints presence, stock policies, etc. The productive

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15 resources planning, named Resources Requirements Planning (RRP) over long-term and Rough-Cut Capacity Planning (RCCP) over medium-term is performed in terms of “rough” needs planning and only concerns “critical” resources which cannot be ruled by decisions taken with short advance.

1.4.2 Engine level

The second level of planning starts from first level output. In the medium-term material requirement are defined by means of a procedure named Material Requirements Planning (MRP) and production capacity requirements defined by a procedure named Capacity Requirements Planning (CRP).

MRP procedure starts from MPS having as its objects, final products and subassemblies quantities. The MRP system calculates requirements of each part/material presents in the Bill of Material (BOM). This concept will be discussed in detailed in the chapter 2. For the moment the definition from APICS is proposed, in order to understand what is meant by BOM: “A listing of all subassemblies, intermediates, parts and raw materials that go into parent assembly showing the quantity of each required to make an assembly”.

Regarding to a certain material, starting from a parent-part code in the plan, the so-called “gross requirement” is calculate. It will be subsequently “adjusted” to reflect its actual (stock amount) or future (an order for that material issued in the past, but outstanding) availability.

If such availability is lower than gross requirements, a net requirement comes out by difference and MRP provides to planning an order emission.

CRP procedure requires to know the so-called “Manufacturing cycle check list” (all the necessary operations to fabricate a single element through a succession of technological processes) and of concerning unit time of a single work center (a set of homogeneous resources from a loading and productive capacity point of view).

Thanks to these data and starting from orders planned by MRP, detailed planning of productive capacity requirements has been reached. The adjective “detailed” is used to distinguish this planning to the “rough” planning of the first level. This “detailed” planning can have infinite capacity or not.

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These two procedures are replicate in the short-term too, starting from the FAS, with the difference that, in this case, they are related to final work center productive capacities and to missing material checking.

It is to be noted that CRP and MRP procedures do not work in long-term horizon, since resources and material macro-checking have been conducted in terms of RRP and framework contract.

1.4.3 Back-end level

Third-level planning aims to execute second-level decisions. Working scheduling and progress start from managers decisions about effective implementation of what planned in the second level.

In particular, third-level activities concern the outside processing and purchase orders release, in-bound materials check, manufacturing orders release and their sequencing, materials collection and production movements and progresses monitoring.

Compared to the second level, activities are real-time executed in function of actual production conditions. More generally, scheduling considers set-up time and costs, working priorities, materials availability, amount of stock of WIP materials and other variables.

In the medium-term production scheduling concerns work centers in which both initial and intermediate processing and materials collection sequences are carried out.

In the short-term scheduling the sequences detailed of final operations is specified starting from their preparatory activities.

It’s to be noted that monitoring and execution activities are not performed in the long-term because they are executed on the basis of the actual situation in terms of production resources orders, requirements and availability.

1.4.4 Long-term Manufacturing Planning and Control System Structure

In the long term, the fundamental objective of the production planning and control system, is the development of the Production Plan (PP). The PP is therefore a document that defines the program of production activities over the long term. This plan is normally defined starting from sales forecasts, even if in a limited number of companies, generally belonging to those operating on orders, the commercial input is also made up of the customer order portfolio. The planning objects, related to the output or to the input of the productive system, are provided with a high

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17 level of aggregation, for example the revenue. In other cases, they are objects that allow a global measure representative of the quantities that will come out of the production system or that come in in a given future period.

The PP has to necessarily satisfy the expected demand, complying with the constraints of resources, and to be coherent with organization policy in terms of service, quality, price and time. To respect the constraints of resources, the long-term PP triggers a resource planning called Resource Requirements Planning (RRP), which carries out a “macro” verification of the requirements of resources considered “critical” those that cannot be governed by decisions made with short advances. The calculated requirements are compared to the availability of these resources to activate possible interventions and compatibility of requirements and availability. With the critical suppliers the so-called framework contract is defined. It is an order which represents, for the supplier, a commitment resulting from a contractual agreement, to supply certain materials, under negotiated conditions, whenever his client, with the agreed period, will send an order for an effective supply. The company functions involved in the definition of the long-term production plan are, in addition to production, sales, finance, procurement and in general other areas connected to the procurement of external resources. It should be noted that, all these activities described are part of the one level (Front End) that characterizes the long-term production planning and control system.

1.4.5 Medium-term Manufacturing Planning and Control System Structure

In the medium-term horizon MPS drawing up leads all the production management activities. Starting from a combination of forecasting and demand management, MPS is a production plan with a further degree of granularity compared to the PP in terms of physical quantities. The PP is a constraint in terms of resources within MPS has to be defined. MPS enables RCCP procedure related to the only “critical resources” (productive capacity and workforce) for the plan execution.

Forecasting and demand management activities, MPS and RCCP are all included in the Front-end level. Once requirements-availability match is checked, MPS is authorized to proceed to the following detailed checks about materials and productive capacity falling within the Engine level of MPC system.

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Material requirements planning is implemented by MRP procedure, thanks to BOM explosion and net requirements amount obtained from the gross one, whereas capacity requirements planning is performed by CRP procedure thanks to work centers loading using manufacturing cycle check list and information related to available capacity.

Once all the verifications concerning time and capacity are closed, it’s therefore possible to release production and purchase orders which will be respectively managed by Shop Floor Control (SFC) and procurement system. These are activities performed within the Back-End level.

1.4.6 Short-term Manufacturing Planning and Control System Structure

FAS plan defines product quantities in terms of their final configuration and on the base of customer orders, even if in some cases, short-term demand forecasting can be used. This is the reason for the dotted line. All these activities represent the Front-End level.

Here again, Engine level includes MRP and CRP procedures, but they are respectively used for the missing material verification and for the available capacity check in the downstream work centers where final activities are performed.

The Back-End level includes release, sequencing, advancing of manufacturing orders.

1.5 The Essence of Production Planning: Planning Formula and Key Components

Production planning is the function that maintains the production process. It delivers production plans for the manufacturing process and reviews and possibly revises the plans on the monthly basis. The production plan is the top management's linkage to the manufacturing process. The production plans are delivered down to the master production scheduling where the plans are disaggregated. Production planning is seen on the operational level, but it is based on the strategic decisions (Vollmann, Berry, & Whybark, 1997). The basic trade-offs which the top management of the manufacturing company will face are:

 high service level;  high capacity utilization;  minimization of inventories.

Regarding the high service level, it is in refers to the production process ability to respond to the demand of the market. Parameters that commonly define the service level are: ability to respond to the variation in the demand, lead time and the reliability of the deliveries. Often the

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19 supply chain cannot respond to the requirements of the market demand. Therefore, the inventories are built up to fill the gap between the supply and the demand (Vollmann, Berry, & Whybark, 1997). High inventories are an easy way to absorb the problem of variation in the demand to which the production capacity cannot respond. Lead time is the time from placing the order to receiving the delivery (Russell & Taylor III, 2003). Lead times are shortened dramatically due to inventories because they can eliminate the time needed for the whole production process. Reliability of deliveries means on-time deliveries as well as quality of the products delivered.

Capacity utilization rate tells how well the company is using its capacity. The machines make sense only while they are operating so capacity utilization should be as high as possible. Very high capacity usage rates can be achieved in the mass production and in the continuous production since machines are dedicated mostly to single products. On the other hand, in batch production the machines or the production lines are normally used to produce several different products (Russell & Taylor III, 2003). Always when the machine is being set up for a different product the capacity utilization is suffering. To maximize capacity utilization in the batch production, it is needed to minimize the setup times. The minimization of the setup times is achieved by producing fewer but bigger batches. On the other hand, big batches result the growth of inventories and the quality of the production may suffer.

Minimization of the inventories means simply less materials, semi-finished goods and finished goods in stock. The less inventory the company has the easier it makes the warehouse management. Especially quality problems and the scrap value tend to decrease while inventories are decreased. In the financial terms, the inventories equal to the working capital of the company. If the working capital investments are high, it means that the company's monetary resources are tied up, which obviously is not a good the inventories cause also other costs. The other inventory related costs are warehousing costs and warehouse handling costs (Vollmann, Berry, & Whybark, 1997). Although the cost of the working capital investment is hypothetical. The basic trade-offs make conflicts with each other constantly. By optimizing the one the two others are suffering. Making decisions which would optimize the overall operations is very difficult. The decision making easily covers so wide a range of variables that the optimization of whole entity does not make sense. The balance between the three will rarely produce the optimal overall result. It largely depends on the company and its processes which of the trade-offs should be emphasized most. One object can be defined which will improve the overall