Procurement of the material is a critical task. If not planned properly, it always results into over-stocking of material or shortages. In today’s competitive scenarios businessmen can’t afford to block their funds for excess stocks or run out of schedules because of shortage of material.
In trading activity, the material handling part is comparatively simpler as that can be directly liked to buffer quantity / re-order level. By setting this, the ERP system can send alerts & trigger the procurement process. However, in manufacturing scenarios the process of deriving the exact requirement of raw material itself is a challenging task. This is because the manufacturing processes are comparatively complicated, may contain multiple level Bill of Material and can have multiple Sales Orders to be executes as per the dispatch schedules. This makes it essential for the Manufacturer to have a very efficient ERP system which can derive the exact shortage quantities for the required raw materials to meet the dispatch schedules as per Sales Orders. No doubt, it’s a challenging task and many of the ERP systems have failed to deliver the accurate shortage figures for Raw Material because they do not consider many of the practical aspects in Material Planning.
In order to make the production plan, you need to divide your sales orders into Work Orders (Production Work Order). In some cases, the Sales Order is same as Work Order. An ideal system for Material Resource Planning considers the finished goods or sub-assemblies mentioned in the Work Order. This selection can be for one Work Order or Multiple Work Orders. This means that Finished Goods or Sub-assemblies mentioned in the Work Orders are to be considered with their respective Bill of Materials and the Raw Material requirement is derived. This requirement of course is multiplied with the quantities of the respective Finished Goods or Sub-Assemblies. The systems thus tells the total required quantities of the required list of Raw Materials. It is obvious to consider the closing stock of those respective raw material available in stores which is to be deducted from the total requirement. In case of any of the Purchase Orders already raised for some of the Raw Materials, the respective quantities are further deducted to derive the net shortage. There is one more parameter you need to consider before placing the orders for shortage quantities of the Raw Material Items. That is the buffer stock needed for some of the stock items. In that case the buffer stock quantities are added to the net shortage quantities of those items.
This gives the correct picture of net shortage which is derived for planning the production activity for given Work Orders. Some of the ERP systems provide automatic generation of Purchas Orders foe Raw Material Items for the required shortage quantities.