Final Year Thesis - Strategic Planning and Purchasing With ERP

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ABSTRACT
Enterprise resource planning (ERP) plays a pivotal role in providing solutions to

organisation in today’s dynamic landscape. An information system which enables
seamless business integration, it creates a competitive advantage to lower total
cost of ownership and meet company objectives. Therefore, ERP is widely
recognised as the software platform that improves and support the evolution of
operation planning and purchasing which came under constant scruntiny of new
manufacturing environment.
The purpose of the report serves to inform reader of the current manufaturing
process and the contribution of ERP in response to the changing demand. In this
report, the author endeavoured to demonstrate ERP capabilities in operation
planning and purchasing using the Microsoft Dynamics NAV (Navision) as the
operating system. Integrating the concept of modern production strategies and
tool, such as lean principle and turnkey project, the author will delineate the use
of ERP in aligning with these strategies using a case study on an original
equipment manufacturer (OEM) for oil and gas drilling system.
The application of ERP on the oil and gas OEM production model provides a
framework for operation planning and purchasing as both represent dominant
activities.
Keywords: Enterprise resource planning; Operation planning; Purchasing;
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LIST OF FIGURES
FIGURE 2.1: TRANSITION FROM CRAFT TO STRATEGIC OPERATIONS 7
FIGURE 2.2. JIT OBJECTIVES AND BUILDING BLOCKS 11
FIGURE 2.3: OVERVIEW SYSTEM OF ERP 16
FIGURE 2.4 : EXTENDED MODEL OF ERP 19
FIGURE 3.1: OPERATION PLANNING GENERAL FRAMEWORK 32
FIGURE 4.1: PURCHASE ORDER PROCESSING 38
FIGURE 4.2 : STRATEGIC PROCUREMENT CYCLE 39
FIGURE 5.1: BIZTALK COMMUNICATION PROCESS 53
FIGURE 5.2 PURCHASING SOLUTION MAP AND BUSINESS FRAMEWORK FOR 54
MICROSOFT DYNAMICS NAV
FIGURE 5.3a : PURCHASE PRICE ENTRY INTO SYSTEM 55
FIGURE 5.3b : DISCOUNT ENTRY INTO SYSTEM 55
FIGURE 5.4: PURCHASE QUOTES 57
FIGURE 5.5: PURCHASE ORDER 57
FIGURE 5.6: WAREHOUSE RECEIPT 58
FIGURE 5.7a : PURCHASE RETURN ORDER 59
FIGURE 5.7b : ITEM TRACKING LINES 59
FIGURE 5.8: PURCHASE CREDIT MEMO FOR RETURN SHIPMENT 60
FIGURE 5.9: PURCHASE CREDIT MEMO FOR PURCHASE ALLOWANCE 60
FIGURE 6.1 OVERVIEW WORK FLOW IN WHS CORP 66
FIGURE 6.2 BILL OF MATERIAL FOR TFL TREE 68
FIGURE 6.3 DELIVERY LEAD TIME MANAGEMENT 72
FIGURE 6.4 : CONTRACTED PURCHASE PRICE 69
FIGURE 6.5 a: PRODUCTION BOM 73
FIGURE 6.5 b: ITEM CARD (GENERAL TAB) 75
FIGURE 6.5 c: ITEM CARD (REPLENISHMENT TAB) 75
II
FIGURE 6.5 d: ITEM CARD (PLANNING TAB) 76
FIGURE 6.6 REQUISITION WORKSHEET 77
FIGURE 6.7 LEAD TIME AFTER TURNKEY PROJECT 78
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LIST OF TABLES
TABLE 2.1. COMPARISON OF MRP AND JIT 13
TABLE 2.2 CHANGES IN BUSINESS MODEL FROM 1970 to 2006 14
TABLE 3.1: PRODUCTION STRATEGIES 23
TABLE 3.2: MAJOR PHASES OF OPERATION PLANNING AND CONTROL 25
TABLE 3.3. I/O CONTROL REPORT 30
TABLE 5.1: MASTER FILE IN ERP DATABASE 46
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TABLE OF CONTENTS
ABSTRACT I
ACKNOWLEDGEMENT II
LIST OF FIGURES III
LIST OF TABLES V
1. INTRODUCTION
1.1 BACKGROUND…...…………………………………………………………….. 1
1.2 OBJECTIVES…………………………………………………………………….. 3
1.3 SCOPE……………………………………………………………………………. 3
1.4 ORGANIZATION OF REPORT………………………………………..………. 4
2. LITERATURE REVIEW
2.1 HISTORY OF PLANNING………………………………………………………. 6

2.1.1 MATERIAL RESOURCE PLANNING (MRP)…………………………… 7
2.1.2 CAPACITY PLANNING…………………………………………………… 8
2.1.3 JUST-IN-TIME (JIT)……………………………………………………….. 9
2.1.4 JIT (II)……………………………………………………………………….. 13
2.1.5 MANUFACTURING RESORCE PLANNING (MRP II)………………… 14
2.2 DEFINATION OF ERP………………………………………………………….. 15
2.2.1 COMPONENT OF ERP…………………………………………………… 15
2.3 ERP IMPLMENTATION………………………………………………………… 19
2.4 OVERVIEW OF ERP MARKET………………………………………………... 21
3. OPERATION PLANNING AND CONTROL
3.1 OPERATION MANAGEMENT…………………………………………………. 22

3.2 ROLES OF OPERATION PLANNING AND CONTROL…………………….. 24
3.3 SALES AND OPERATIONS PLANNING……………………………………... 25
3.3.1 SUPPLY PLANNING……………………………………………………… 26
3.4 RESOURCE PLANNING……………………………………………………….. 27
3.5 EXECUTION AND CONTROL…………………………………………………. 28
3.5.1 LOADING…………………………………………………………………… 29
3.5.2 INPUT/OUTPUT CAPACITY CONTROL……………………………….. 29
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3.6 DISCUSSION…………………………………………………………………….. 31
4. PURCHASING MANAGEMENT
4.1 NEEDS FOR OUTSOURCING………………………………………………... 33

4.2 PROCUREMENT LIFECYCLE………………………………………………… 34
4.3 PURCHASE ORDER PROCESSING…………………………………………. 35
4.4 STRATEGIC PROCUREMENT………………………………………………... 39
4.4.1 SPEND ANALYSIS………………………………………………………... 40
4.4.2 CONTRACT MANAGEMENT…………………………………………….. 41
4.4.3 SUPPLIER RELATIONSHIP MANAGEMENT………………………….. 42
4.5 DISCUSSION…………………………………………………………………….. 43
5. OPERATION INTEGRATION WITH ERP
5.1 BACKGROUND………………………………………………………………….. 44
5.2 MANUACFTURING DATABASE………………………………………………. 45
5.3 MASTER PRODUCTION SCHEDULING…………………………………….. 47
5.3.1 MATERIAL REQUIREMENT PLANNING………………………………. 48
5.3.2 CAPACITY REQUIREMENT PLANNING………………………………. 49
5.4 MANUFACTURING EXECUTION SYSTEM…………………………………. 49
5.5 ADVANCED PLANNING SCHEDULING……………………………………… 50
5.6 PURCHASING…………………………………………………………………… 51
5.6.1 PURCHASING MANAGEMENT USING MICROSOFT DYNAMICS
NAV………………………………………………………………………… 54
5.7 DISCUSSION……………………………………………………………………. 61
6. CASE STUDY: IMPROVE PROCUREMENT AND OPERATION PLANNING IN

OIL AND GAS OEM USING ERP
6.1 COMPANY BACKGROUND……………………………………………………. 65

6.1.1 PRODUCTION STRCUTURE………………………………………........ 67
6.2 STRATEGIC MANAGEMENT…………………………………….……………. 69
6.2.1 TURNKEY PROJECT………………………...…………………………… 69
6.2.2 DECISION LOGIC SUPPORT SYSTEM……………………………….. 72
6.2.3 REQUISITION WORKSHEET…………………………………………… 76
6.3 DISCUSSION………………………………………..………………………….. 78
VI
7. CONCLUSION 79
REFERENCE
APPENDIX A: TFL TREE

APPENDIX B : SUBSEA WELLHEAD
VII
B002: IMPROVE OPERATION PLANNING AND PROCUREMENT
USING ENTERPRISE RESOURCE PLANNING
CHAPTER 1: INTRODUCTION
1.1 BACKGROUND
Information Technology (IT) has been the main driving force for business
revolution in the past decades. Since the emergence of internet, the economical
business landscape has revolutionized, changing our operating functionalities
and strategies. With expanding infrastructures, we are able to maximize the
potential of electronic commerce as mechanism of information dissemination and
global communication in this borderless market. This allows people to access
product information everywhere, resulting in ubiquitous business opportunity
worldwide for enterprise. Real time processing of orders and the concept of e-
business soon materialize under potential of internet which breaks the dawn of
the information age, bringing an end to the industrial age. With such efficient
tools for marketing and reduced barrier of market entry, smaller companies and
entrant can establish a foothold in the global market, driving the business layout
to a new level with concentration in the need to continuously drive down product
cost in order to maintain competitiveness. [1]
Despite the benefits that IT can bring, new source of challenges surface as
companies continuously seek to improve responsiveness and effectiveness in
information management. Globalization brings the world closer than ever. Armed
with advances in technologies and rapid growth in international trade, the world is
now termed a “global village” without geographical border. With a rapid changing
environment, the need for speed and reliable information system that can support
front office as well as back office business functions is of increasing importance.
Many companies face difficulties in redesigning their organization structure to suit
the complexity of supply chain, thus unable to take genuine advantage from
information technology. They fail to acquire a suitable technological infrastructure
that can integrate key business functions within a corporation and adapt to new
changes.
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Globalization and IT forces unexpected and disruptive business models. Those

who emerged as forerunner will reap profits while others can only query at
other’s success in the face of failure. Buzzwords, such as outsourcing, supply
chain management (SCM), customer/supplier relationship management
(CRM/SRM) and lean manufacturing surface, becoming areas of research for
professionals. These scenarios set the scene for the emergence of Enterprise
Resource Planning (ERP) which is highly recognized by many as the strategic
tool to gain the competitive edge. A more detailed account on the history of ERP
and the fundamental will be elaborated in Chapter 2
Since 1990s, the growth of ERP is motivated by the concern of Y2K where the
turnover from 31 December 1999 to 1 January 2000 may cause computer
system to malfunction. ERP provided a suitable solution for consolidation of data.
Today, ERP remains one of the rapid growing markets in the software markets.
The market for ERP software will reach approximately $47.7 billion by 2011,
according to AMR Research Inc. It is forecasted that it will continue to grow at a
compound annual growth rate of almost 11%, an increase of $28.8 billion from
2006. [2] Despite the large popularity in ERP software, ERP implementation does
not guarantee success and deliver the expected benefits.
The failure of the implementation lies on several factors, however the real
problems lie in two aspects: process and user. One misconception is that many
recognized ERP as the solution to sophistical problems, harboring unrealistic
expectation as a sliver bullet technology. However good the software technology
may be, it is essential to define the appropriate operational process that match
the ERP system and instill knowledge of the software in the users where human
is always the weakest link in the supply chain.
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1.2 OBJECTIVES
The objectives of the report serve to
1) Illustrate the evolution of planning system
2) Define Enterprise Resource Planning (ERP) and its functionalities in

operation planning and purchasing
3) Introduce a common framework for operation planning and purchasing

processes
4) Investigate the linkage between operation processes with ERP system.
5) Demonstrate the use of Microsoft Dynamics NAV in operation planning

and purchasing
1.3 SCOPE
The scope of the report is limited to the operation planning and purchasing
aspects of ERP. A strong focus on resource planning and purchasing practices
will be highlighted in this report. The other modules in sales, warehousing,
financial and human resource application will not be discussed in this report.
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1.4 ORGANIZATION OF REPORT
Chapter 1 gives an introduction to ERP and set the scene for its emergence. The
main objective and scope of the report will be defined in this chapter.
Chapter 2 consists of the literature review of the ERP. It provides the underlying
concepts of ERP and retraces the historic origin of ERP from the evolution of
MRP/MRP II/JIT/JIT II to allow in depth understanding of the topic. This chapter
will also introduce the four major ERP modules and its sub modules. It provides
brief description of their functionalities and role in the enterprise. Lastly, it ends
with an overview to the current ERP software leader and market.
Chapter 3 introduces the job scope and functions of operation planning. Firstly, it
gives a brief introduction of operation management and production strategies in
the modern manufacturing world. The author categories operation planning into 3
major stages based on their time horizon: Supply planning, Resource planning,
Execution and Control. The characteristics of each stage will be described to
provide the reader with the fundamental knowledge of the operation process.
Chapter 4 introduces the job scope and functions of purchasing. It illustrates the
growing importance of outsourcing in the dynamic landscape. In addition, the
report reviews the evolution of purchasing practices from being traditionally
transaction-focused to strategic contract and supplier management. Lastly, the
author discusses the changes in the requirement of purchasing skills with
reference to the procurement processes.
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Chapter 5 investigates the manufacturing processes integration with ERP. The

challenges faced due to the changing economy will be highlighted and an
analysis on how ERP implementation can facilitate the manufacturing process.
New incorporation of modules, Manufacturing Execution System (MES), Advance
Planning and Scheduling (APS) and Supplier Relationship Management (SRM)
are introduced to enhance ERP functionalities. The author also demonstrates the
use of Microsoft Dynamics NAV on purchase order processing.
Chapter 6 displays the application methodology of ERP. Using realistic scenarios

in an Original Equipment Manufacturer (OEM) company structure, the author
illustrate the application of ERP in improving the processes using Microsoft
Dynamics NAV in a turnkey project. The author will demonstrate the use of ERP
to execute the implementation of turnkey project by means of auto purchase
order generation.
Chapter 7 draws the conclusion to the report.
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CHAPTER 2: LITERATURE REVIEW
2.1 HISTORY OF PLANNING
Since the beginning of Industrial Revolution, it has always been the objective of
organization to drive down manufacturing cost. In the 18th century craft era, the
market was relatively simple; lower price of commodities will lead to greater
demand, and thus not much emphasis was being placed on material and
inventory control technique. The initial manufacturing of making and selling was
restricted to limited resources and demands among households. With the
concepts of mass production and division of labours brought along the factory
systems. Production began at a larger scale; specialization of task in operations
such as sales, purchasing and engineering soon became necessary. However,
little emphasis was still placed in material and inventory managements. In
contrast, industries seek to produce maximum output to prevent idling of machine
and labour as the Industrial Revolution spurned to height with growth in trade. [3,
4]
Early stock replenishment techniques, such as ABC stratification, economical

order quantity (EOQ), and reorder point (ROP) set early foundation for the
development of ERP. Such technique will not be further elaborated in the report.
With the marriage of IT and business, concept of Material requirement Planning
(MRP) began in 1960s. It then evolved into Material Resource Planning (MRPII)
in 1980s. The road of evolution to MRP/MRPII and ERP started as material and
inventory control management moved from obscurity to a pivotal role in an
organization. Figure 2.1 shows the change in production model from craft era to
mass customization.
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MASS CUSTOMIZATION
- AGILE, FLEXIBLE,LEAN
PRODUCERS
- STRATEGIC PRODUCTION
OPERATION
- HIGH VARIETY
MASS PRODUCTION - HIGH VOLUME
- HIGH VOLUME - HIGH FLEXIBILITY
- LOW VARIETY - HIGH QUALITY
- LOW COST GOODS PRODUCTION OPERATION
- LOW FLEXIBILITY VIEWED AS CORE
- LARGELY DE-SKILEED COMPETENCE
CRAFT PRODUCTION OPERATION
- LOW VOLUME VIEWED AS LOW
- HIGH VARIETY ESTEEMED FUNCTION
- HIGH QUALITY
- HIGH FLEXIBILITY
- HIGHLY SKILLED
TIME
FIGURE 2.1: TRANSITION FROM CRAFT TO STRATEGIC OPERATIONS
SOURCE: S.Brown, R.Lamming, J.Bessant, P.Jones
2.1.1 MATERIAL REQUIREMENT PLANNING (MRP)
Joe Orlicky implemented the first Material Requirement Planning (MRP) system
at J.I. Case Company farm machinery successfully in 1961 [5] and he defined
MRP as a computerized approach for the planning of material acquisition and
production.[4] It refers to a system whereby the product is segregated into its
subassemblies. A time schedule is developed for its production in a master
production schedule. The design and breakdown of the product is documented in
the bill of material (BOM) which acts as a summary for the list of subassembly
requirement. This allows ease of accessing the details of subassemblies for
production. With the master production schedule, tracking of the subassemblies
and accurate forecast can be made to support on-time production. With the
intervention of computers in 1960s which handled the increase in product
breakdowns, MRP became an important and popular tool for managing
inventory. If implemented the right way, it can reduce excess inventory, lead time
and improve overall plant efficiency. However, MRP fails to materialize its
ultimate benefit and it is widely believed that the lack of Capacity Planning
contributed to its inefficiency.
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2.1.2 CAPACITY PLANNING
In manufacturing, resource is referred to mostly as machine, equipment, material

and labour. The matching of company resources and capacity to the
manufacturing schedule is a critical activity in production planning. Capacity
planning can be categorized into 2 aspects: Strategic and Tactical.
Strategic decision is associated with the long term planning of capacity and
investment of new facilities, while tactical decision approaches the short term
allocation of machines and work center in operations. [6] A timely allocation of
machine and work center, with detailed material requirement planning (MRP) and
master production schedule (MPS) can reduce the queue time in the operation,
thus shortening the overall operational lead time. On the other hand, excess
capacity result in redundancies which must be avoided. Likewise, overcapacity
prevents organization from taking advantage of the increasing demands.
Therefore capacity management should not be underestimated as it affects the
work competency and allocation of resources in the manufacturing organization.
Both overloading and underloading have negative impact on production, thus the
need for capacity planning to alleviate unbalance loading of machine and labour
has to be devised to achieve the optimal economies of scale.
Capacity Planning can occur at vary level of the planning and production
process. Long range task resource requirement planning take place during
S&OP process. Rough-cut capacity planning (RCCP) occurs during master
scheduling, followed by detailed capacity requirement planning (CRP) in concert
with MRP during master scheduling phase. Infinite/Finite loading and input/output
analysis are employed during operation for shop-floor control and scheduling.
The details of different level of capacity planning will be elaborated in Chapter 3
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2.1.3 JUST-IN-TIME (JIT)
The Just-in-time (JIT) concept according to American Production and Inventory

Control Society (APICS) is defined as [7]
“a philosophy of manufacturing based on planned elimination of all waste and

continuous improvement of productivity. It encompasses the successful
execution of all manufacturing activities required to produce a final product, from
design engineering to delivery and including all stages of conversion from raw
material onward. The primary elements include having only the required
inventory when needed; to improve quality to zero defects; to reduce lead time by
reducing setup times, queue lengths and lot sizes; to incrementally revise the
operations themselves; and to accomplish these things at minimum cost.”
A technique successfully developed and pioneered in Japan by the Toyota Motor

Company, a recognized leader in automobile industry in the mid-1970s, that
emphasis on streamlining operations, having only the required resources at the
right time and place. The objective to develop such technique arose from the
need to eliminate wastage from operation. The seven major source of wastage in
operation were identified as below. [8]
1. motion (of operator or machine)

2. waiting (of operator or machine)
3. conveyance
4. processing itself
5. inventory
6. correction (rework and scrap)
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This system of eliminating waste came to be known as the Toyota production

System (TPS) which comprised of the major concept of lean manufacturing. With
the indisputable fact of increasing global competition, the JIT technique that
created time efficiencies and drove down production cost became popular among
the manufacturers. American and European manufacturer, such as one of the
forerunner, General Electric, a multinational American technology and Services
Company began to adopt the concept in the 1980s. Soon, lean manufacturing
became a buzzword and topics of academic research. However, the adoption of
technique by American and European has been less successful compared with
the Japanese. One major reason is the absence of trust and respect between
supplier, customer and the unique cultural difference.[4] Figure 2.2 [9] will
present brief detail of JIT’s building blocks and objectives.
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MANUAFCTURING PLANNING AND HUMAN/ORGANIZATIONAL ELEMENTS:

CONTROL • WHOLE PERSON
• PULL SYSTEMS • CROSS TRAINING/JOB ROTATION
• RAPID FLOW TIMES • FLEXIBLE LABOUR
• SMALL CONTAINER SIZES • CONTINUAL IMPROVEMENT
• PAPERLESS SYSTEMS • LIMITED DIRECT/INDIRECT
• VISUAL SYSTEMS DISTINCTION
• LEVEL LOADING • COST ACCOUNTING/ PERFORAMNCE
• MRP INTERFACE MEASUREMENT
• CLOSE PURCHASING/VENDOR • INFORMATION SYSTEM CHANGES
RELATIONSHIP • LEADERSHIP/PROJECT MANAGEMENT
• JIT SOFTWARE. REDUCED PRODUCTION
REPORTING/INVENTORY TRANSACTION
PROCESSING
ULTIMATE OBJECTIVES
• ZERO INVENTORY
• ZERO LEAD TIME
• ZERO FAILURES
• FLOW PROCESS
• FLEXIBLE MANUFACTURE
• ELIMINATE WASTE
PROCESS DESIGN: PRODUCT DESIGN:

• SETUP/LOT SIZE • FEW BILL OF MATERIAL
REDUCTION LEVELS
• QUALITY IMPROVEMENT • MANUFACTURABILITY IN
• MANUFACTURING CELLS PRODUCTION CELLS
• LIMITED WORK-IN- • ACHIEVABLE QUALITY
PROCESS • APPROPRIATE QUALITY
• PRODUCTION BAND • STANDARD PARTS
WIDTH • MODULAR DESIGN
• NO STOCKROOM
• SERVICE
ENHANCEMENTS
FIGURE 2.2. JIT OBJECTIVES AND BUILDING BLOCKS
SOURCE: MANUFACTURING PLANNING AND CONTROL
Most operation employs the use of JIT and MRP in their operation process.
Theoretically, both process share common similarities in producing beneficial
impact but in a different way. However in practical, it has been widely debated
that both process cannot co-exist and conflict in implementation. One distinct
difference is that MRP is based on a push system while JIT works on a pull
system
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According to M.A Vonderembse [10], a push system is based on
“the idea that materials get pushed through the processing operations based on
a schedule. Each order release is based on requirements generated by the
master schedule”
while a pull system is defined as
“a system that moves material based on actual needs at successive work

centers. This pull system concept actually starts with customer demand, which
pull finished products from the company”
Table 2.1[10] shows a comparison between MRP and JIT. A pragmatic approach
is to establish a hybrid system whereby the integration of MRP and JIT brings out
the essence of both systems. From the comparison in Table 2.1, there are both
pros and cons in both systems. While MRP is useful in forecasting and
production planning in the long run, JIT provides a better tool for cost reduction
and minimize inventory, thus provide an organized execution system that
facilitates scheduling. [11] In fact the integration can resolve shortcoming of MRP
and JIT by enhancing the strength and diminishing the weakness of each
system. For instance, the consideration of a long lead time and multiple BOM
level is not largely emphasized in MRP. Implementation of JIT enables reduced
time to market and few bills of material level. With an added dimension of
responsiveness to cost and quality in modern manufacturing, JIT technique is
just the essential tool to meet customer demand. However JIT plays a passive
role in complex planning and forecasting in the long run and the integration of
MRP as a planning tool on top of JIT implementation is the perfect marriage.
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TABLE 2.1. COMPARISON OF MRP AND JIT
MRP JIT
LOADING OF OPERATIONS CHECK BY CAPACITY CONTROLLED BY KANBAN
REQUIREMENT SYSTEM
BATCH SIZES ONE WEEK OR MORE SMALL AS POSSIBLE
IMPORTANCE OF DATA CRITICAL UNNECESSARY
ACCURACY
SPEED SCHEDULE DEVELOPMENT SLOW VERY FAST
FLEXIBILITY LOWEST HIGHEST
COST HIGHEST LOWEST
GOALS MEET DEMAND, HAVE DOABLE MEET DEMAND, ELIMINATE
PLAN WASTE
PLANNING FOCUS MASTER SCHEDULE FINAL ASSEMBLY SCHEDULE
PRODUCTION BASIS PLAN NEED
SOURCE: M.A.Vonderembse, G.P.White
2.1.4 JIT II
JIT II, commonly referred to as vendor-managed inventory (VMI), adopted the

underlying concept of JIT. BOSE Corp, a manufacturer of component quality
speaker introduced this idea in which the supplier managed the inventory
replenishment on behalf of the customer. A technique where the supplier
progressively monitored the inventory level of customers, it involved the buying
strategies and decision by the supplier on the order quantity and scheduling. [12]
However, the VMI partnership will depend largely on the close supplier/customer
relationship.
Today, JIT has evolved into a broader concept of lean system. The basic
underlying fundamental of JIT has been built on and extended from being a
technique to an organization philosophy.
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2.1.5 MANUFACTURING RESOURCE PLANNING (MRPII)
With complexity in operation and the need for effective planning, the Material
Requirement Planning (MRP) basic manufacturing function is integrated with
more functions, including order processing, manufacturing, and distribution.
Oliver Wight named this integrated system Manufacturing Resource Planning
(MRPII). However radical changes to business model in the 1980s eventually
affected the MRP/MRPII model and evolved to the next stage, birth of Enterprise
Resource Planning (ERP).
Table 2.2 [13] reflects the changes to business model in the past decade and
these changes impinged the effectiveness of MRP/MRPII model. With
manufacturing moving from a product-centric to customer centric business
model, mass customization was fast replacing the traditional concept of mass
production. Thus production size lots decreased due to increase in product
variation and supplier fragmentation, making planning a more tedious process.
TABLE 2.2 CHANGES IN BUSINESS MODEL FROM 1970 to 2006
From (1970-1985 period) To (1985 to 2006+ period)
Long lead time production cycles Short, market driven lead times
Mass production Small lot with much variation
Large corporation dominated Agile company dominates
Vertical integration “Virtual Business” with partners
Internal production Extensive outsourcing, contract work
Easy capital sources Difficult capital sources
Larger margins (cost + markup = price) Tremendous margin pressure
Slow technical, market changes Rapid technical, market changes
Production centered Customer-centered
Domestic production Offshore production partners
Large, costly middle management Pressure toward flat organization
Inventory control focus Customer response, cost focus
Low trust of computers High trust of computers
Limited, costly computer power Abundant, low cost computing power
SOURCE: PAUL DEIS, PROACTION 2007
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Besides achieving low production cost, other factors such as quality, reduced
lead time and product differentiation become factor of consideration. As a result,
a different approach to the customer focus industry should be undertaken. ERP
software is there to provide the much critical coordination.
2.2 DEFINATION OF ERP
Enterprise Resource Planning (ERP) is traditionally defined as

“an accounting-orientated information system for identifying and planning the
enterprise-wide resources needed to take, make, ship, and account for customer
orders according to American Production and Inventory Control Society
(APICS).” [14]
It attempts to integrate and support key departmental functions onto a single

computer system. It forms the transactional backbone of an organization. The
system operates on a common database platform that allows storage and access
of information for all modules. The benefits of ERP on operation planning and
purchasing will be discussed in Chapter 5.
2.2.1 COMPONENT OF ERP
Enterprise Resource Planning (ERP) can be categorized into 4 main groups

(Figure 2.3):
1) Sales & Marketing

2) Operation & Logistic
3) Financials
4) Human Resource
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FINANICIALS
ACCOUNT RECEIVABLE AND

PAYABLE
ASSET ACCOUNTING
CASH MANAGEMENT AND
FORCASTING
GENERAL LEDGER
PRODUCT-COST
ACCOUNTING
PROFITABILITY ANALYSIS
PROFIT CENTER
ACCOUNTING
SALES AND MARKETING FINANCIAL CONSOLIDATION OPERATIONS AND
EXECUTIVE INFORMATION LOGISTICS
ORDER MANAGEMENT
SALES MANAGEMENT
SALES PLANNING INVENTORY MANAGEMENT
PRICING MRP
AFTER SERVICES MATERIAL MANAGEMENT
ERP PRODUCTION PLANNING
PROJECT MANAGEMENT
QUALITY MANAGEMENT
PURCHASING
ROUTING MANAGEMENT
SHIPPING
VENDOR EVALUATION
HR
PAYROLL
PERSONNEL PLANNING
TRAVEL EXPENSES
HR TIME ACCOUNTING
TRAINING
FIGURE 2.3: OVERVIEW SYSTEM OF ERP

SOURCE: F. ADAM, D. SAMMON
SALES & MARKETING
This module includes the front office functions of an organization. The objective
is to manage sale and marketing activities and improve customer services. The
functionalities support by the module include generating and keeping track of
sales order, checking credits limit, supporting customer-related administrative
issues in pricing, quotation, contractual agreement and managing sales report.
With the business model becoming customer-centric, more emphasis has been
placed on the improvement to the functions of this module.
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OPERATION & LOGISTIC
This module includes the back office manufacturing functions of an organization.

It can be further exploded into below sub-modules:
1) Production Planning
2) Purchasing
3) Engineering
4) Inventory & Warehousing
5) Quality Assurance Management
Fast delivery, high quality, and low cost has been an important criterion to
achieve competitive advantage. Therefore, good management in back office
operations are essential for organization to achieve higher productivity.
FINANCIALS
This module involves accounting functions and generates financial reports such
balance sheet, account receivable / payable, general ledger, cash flow, bank
reconciliation and financial statements. Their role is mainly on budget control and
profit-cost accounting for organization.
HUMAN RESOURCE
Human Resources (HR) involves management of human resources and capitals

in an organization. Their role involves mainly payroll, training, maintenance of
personnel detail and claims.
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ERP EXTENDED MODEL
The basic ERP model can be further evolved with the emergence of Supply
Chain Management (SCM) and Customer Relationship Management (CRM),
referred to as extreme integration (Figure 2.4 ).[4] It extended the network of the
suppliers and customers to enhance communication and improve process to
achieve supply chain profit and cooperation.
Most ERP vendors have SCM functionalities added to their product. SCM refers
to the integration of various entities in the supply chain and enable a seamless
flow of information between all the supply chain partners [15] With SCM module,
the supply chain can be managed efficiently from the point of order to the
delivery of customer.
CRM concentrate on integration with customers. CRM can be categories into two
types: Analytic and Operational. While operation deals with transactional
functions, analytic CRM involves developing strategic sales by analyzing on
customers demands. CRM enhance sales and marketing modules, bringing
better services to customers and widening customer base for organization.
18
EXTENDED EXTENDED
ENTERPRISE
FINANCIAL
CUSTOMER SUPPLIER
SALES AND CENTRAL OPERATIONS

MARKETING DATABASE AND
LOGISTICS
HR
CRM SRM
CUSTONER SUPPLIER
RELATIONSHIP RELATIONSHIP
MANAGEMENT MANAGEMENT
FIGURE 2.4 : EXTENDED MODEL OF ERP

SOURCE: F. ADAM, D. SAMMON
2.4 ERP IMPLEMENTATION
Implementation of ERP is expensive and the software market catered mostly to

the big organization, most of the Fortune 500 companies in 1990s. A large
company with over 1,000 employee may spend $50 million to S500 million for an
ERP system. Installation cost $30 million in software licensing, $200 million in
consultation fees, and additional amount in purchasing new hardware.
Furthermore, complete implementation may take 4 to 6 years. A midsize
company will require about $20 million and 2 years in implementation. [16] A
Robbins-Gioia (2001), a provider of management consulting services located in
Alexandria – Virginia made a study on the ERP implementation and stated that
51 % of the respondents viewed their ERP implementation as unsuccessful. [17]
According to Standish Group Chaos Report (1994), success rate for IT project
was only 16.2%, while challenged projects accounted for 52.7%, and impaired
(canceled) for 31.1%. [18]
19
According to Gartner Group on time and money spent on ERP implementation,

for 40 percent of enterprises deploying ERP or ERP II systems through 2004, the
actual time and money they spend on these implementations will exceed their
original estimates by at least 50 percent (.07 probability). [19] With such high
failure rate, it is imperative to make studies on its limitation and malfunction to
enhance the success rate of implementation.
CRITICAL SUCCESS FACTOR
Critical Success Factor (CSF) is defined as those things that you must do well in
order to be successful. The CSF may be broken down into sub-factors to further
define the actions, measurements, roles, responsibilities and behaviors that each
slice of the organization must demonstrate to assure success and get significant
results. [20] In order to prevent ERP implementation failure, it is important to
define a good CSF. A study by Toni Somers and Klara Nelson on the mean
ranking of CSF shows that top management support, project team competence
and interdepartmental cooperation are the top three CSF in ERP implementation.
[21]
The determination of success in ERP implementation varies from different

companies. The Key Performance Indicators (KPI) is used to assess the level of
success for ERP implementation. Examples of KPI are percentage reduction in
inventory level, inventory accuracy, manufacturing schedule compliance and on-
time shipments. To achieve good KPI, ERP as a standalone system is never
enough. Adoption of business management tools, business intelligence and a
flexible approach is essential to maximize the benefit of ERP implementation.
20
2.5 OVERVIEW OF ERP MARKET
Today, ERP vendors not only target big organization but small and medium
(SME) business as well. German software, SAP remains the largest ERP
provider for the past decade despite competition. They are recognized as the
worldwide 2006 market share leader for the enterprise resource planning (ERP),
customer relationship management (CRM) and supply chain management (SCM)
markets, according to Gartner Research. [22] However, with acquisitions of J.D.
Edwards, PeopleSoft ($10 billion), CRM leader Siebel ($5.85 billion), retailer
specialist Retek ($650 million) and others by Oracle, SAP is facing a much
stronger competitor unlike the past. However there are huge potential risks in
major software acquisitions. One example is Dutch software BAAN. Despite a
success story in 1990s with acquisitions of nine companies including Aurum
Software and Coda, poor management and accounting probe eventually caused
the fall of BAAN. [23]
“If Ellison can pull it off, the strategy has the potential to not only reshape his
company but the entire industry,”
-comment by one analyst (2005) on Oracle buying spree of PeopleSoft and
Retek. [24]
“Twenty percent? That’s for pikers. We’ve been growing 26 percent,”

- Catz (Oracle’s president and chief financial officer) said at a meeting of
Wall Street analysts on the sidelines of OpenWorld, the company’s annual
user conference in San Francisco. [25]
This report addresses the approach to a common operation framework and

highlights the integrative role of ERP to operations planning and purchasing.
21
CHAPTER 3: OPERATION PLANNING AND CONTROL

MANAGEMENT
3.1 OPERTION MANAGEMENT
Operation management is concerned with making the most efficient use of

whatever resources an organization has, so as to provide the goods, or services
their customers need, in a timely and cost effective manner according to
H.Barnett. [26] The immediate success in attaining this objective lies largely on
the organizational effort to perform wisely and produce results within a specific
timeframe. However, in the long run, as the production increases at the expense
of the capacity, detailed management of capacity, time and resources in meeting
schedule become ominously crucial. An internal arrangement to coordinate the
movement of material and transformation into finish goods with minimum cost
has to be proposed and executed.
Organizations exist in different models; each with a different approach towards

order fulfillment. Table 3.1 [27] shows the four different production strategies
employed by organization. However it is unlikely to classify an organization
specifically under any one category in modern manufacturing, as the current
trend proposes that organization tend to exist in the form of hybrid and
combination due to the nature of the component. For components that are
standardized and fast moving which are commonly used in assembly, a make to
stock strategy will work best. Buffer or safety stocks are kept in inventory to
prevent a stock out of the component during heavy demand. For a custom
component with infrequent demand, a make to order or procured to order
strategy will work better since excess inventory will likely take up the limited
warehouse capacity.
22
The design of operation functions arises from the business and operation
strategy of the organization. In order to cultivate a competitive advantage in the
dynamic economic, the priority to develop low costing strategy and elimination of
wastage has to be developed. The role of operation planning plays a crucial role
in attaining maximum productivity through the management of resources and
capacity.
TABLE 3.1: PRODUCTION STRATEGIES
OPERATION STRATEGY CHARACTERISTICS APPLICATION SITUATION
MADE TO PRODUCTION IS TRIGGERED BY LOW CUSTOMIZATION PRESSURE

STOCK (MTS) INVENTORY FORECAST
MADE TO PRODUCTION IS TRIGGERED BY HIGH CUSTOMIZATION PRESSURE

ORDER (MTO) SALES ORDER BUT LOW RESPONSIVENESS
ASSEMBLED FINAL ASSEMBLY IS ORDER HIGH CUSTOMIZATION PRESSURE

TO ORDER DRIVEN, BUT THE COMPONENT HIGH RESPONSIVENESS,
(ATO) PARTS ARE FORCAST DRIVEN PRODUCT DIFFERENTIATION LATE
AND BUILT TO STOCK IN OFP
ENGINEERED PRODUCTION IS TRIGGERED BY HIGH CUSTOMIZATION PRESSURE

TO ORDER SALES ORDER LOW RESPONSIVENESS,
(ETO) PRODUCT DIFFERENTIATION
Source: F.R. Lin, M.J.Shaw
23
3.2 ROLE OF OPERATION PLANNING
According to George W.Ploss [5],
“The essence of manufacturing is the flow of materials from suppliers, through

plants to customers, and of information to all parties about what was planned,
what has happened, and what should happen next.”
Without systematic planning in the long-short run and firm control techniques
over operation, an organization will not be able to attain the essence of
manufacturing. The evolution of planning, together with the dynamic economic
has placed a strong focus in planning and control techniques in organization over
past decades. In a completive and demand-driven economy where the lead time
requirement from customers is shorter than the total accumulative production
lead time, time has displaced cost as the most important element in production.
The main responsibility of operation planning is the successful management and
completion of all activities necessary to produce the product on time with the
objective of minimizing inventory and maximizing the utilization of company
resources. [26, 28] The major activities in production planning can be classified
into 3 major stages (TABLE 3.2).
24
TABLE 3.2: MAJOR PHASES OF OPERTATION PLANNING AND CONTROL
PHASE RANGE/DURATION SUMMARY
SUPPLY LONG – USUALLY TAKE PLACE DURING SALES AND OPERATION

PLANNING 1-2 YEAR OR MORE PLANNING. IT INVOLVES LONG TERM PLANNING AND
STRATEGIES TO MEET FUTURE OPERATION EVENTS
RESOURCE MEDIUM – DETAILED MATERIAL REQUIREMENT PLANNING (MRP)

PLANNING QUARTERLY, AND CAPACITY REQUIREMENT PLANNING (CRP),
ABOUT 3-4 TOGETHER WITH MASTER PRODUCTION SCHEDULE
(MPS) TO EXECUTE THE PLANNING BASED ON S&OP
EXECUTION SHORT – ENSURING THE EFFECTIVENESS IN EXECUTION OF

AND DAILY, WEEKLY, PLANNING AND SHOP FLOOR CONTROL, MEASURE
CONTROL MONTHLY VARIATION FROM PLANNING AND PROVOKE
CORRECTIVE ACTION
3.3 SALES AND OPERATIONS PLANNING (S&OP)
Sales and operation planning (S&OP), also known as Integrated Business

Management is formulated for purpose of collaborating demand management
with supply planning. It defines the game plan and overall direction for the firm to
strategize the OFP to meet demands. [28, 29] A top-management planning
process, whereby a continuous cycle of monthly reviewing, monitoring and
planning of operation to manage customer expectation and synchronize
resources. [30] The regular meeting identifies shortcomings of current operation,
evaluating company mission by setting common goals at all manufacturing
stages in ensuring the synchronization of planning at different department.
Different company has a unique approach towards S&OP, based on their

business planning. Business planning focuses on setting objectives and
company directions for the future. Demand planning and supply planning
represent two major elements of S&OP as they provide the basis for balancing
demand and supply in a supply chain.
25
Demand planning has an important role in modern manufacturing in this demand

driven environment. It identify future requirement and provides forecast for
coordination with supply planning. Other elements may include new product
(development) planning and financial planning.
3.3.1 SUPPLY PLANNING
One key aspect of supply planning is to analyze on the company resources and
strategies for future consumption. It involves resource management and
elimination of undesired constraint in the short medium and long run. The
aggregate supply plan defines the aggregate production rate, size of overall
workforce and capacity. It influences the critical aspect of operation in
determination of the inventory level, make or buy strategy, expansion of
workforce, capacity, and segregation of product family to sustain the business
plan criteria. [6, 31]
An aggregate supply plan provides the information and plan on requirement of

products at each given period after which a master production schedule (MPS)
which indicates the amount of products planned for a given period is developed
based on the supply plan.[6] The responsibility of a master scheduler in
determining, managing and constant reviewing of the anticipated schedule based
on the constraint on resource and capacity ensures the satisfaction of customer
demand. Rough cut capacity and material planning provides a calculation of the
rough estimate of workload to find the right combination of resource and capacity
based on MPS. It identifies potential bottleneck in operation at early stage. In
addition, it addresses the issues whether the equipment, workforce and materials
are adequate to support future demand. Besides, it also provides some form of
visibility into future and gauges the validity of the aggregate supply plan in
response to the changing requirement.
26
The rough-cut planning will be converted into plans from S&OP into detailed
material requirement planning and capacity requirement planning in the next few
months [32] The output of sales and operations planning is then fed on to the
next stage of resource planning.
3.4 RESOURCE PLANNING
If S&OP, the mastermind of the operation is being compared to as the composer

of a symphony, master production scheduling represents the conductor that
direct the band in an orchestra. Master production scheduling is based on the
decision from S&OP, converting them into reality by means of detailed material
requirement planning and capacity requirement planning. The construction of an
effective master production schedule (MPS) to meet customer lead time
requirement provides the basis for supporting available to promise (ATP),
synchronizing customer order against capacity competency. It provides
coordination of each functional group in an organization. [5, 9] MPS also covers
the aspect of timely internal production and purchasing in maintaining optimal
inventory. Material and capacity constraints pose a significant problem to smooth
operation. MPS tackles these constraints, together with input from the feedback
system of material requirement planning (MRP) and capacity requirement
planning (CRP), in ensuring the continuous flow manufacturing process.
Resource planning represents the intermediate stage of production planning.
The resource planning system consists of a feedback loop system of MPS, MRP
and CRP processes. Instructions from top management are translated from
S&OP to MPS. MPS, linked to detailed bills of material for production end items,
is responsible for driving MRP which produce, monitor and revise schedules.
CRP is integrated to ensure the availability of facilities, machine and work center.
CRP also calculates the capacity required for timely allocation of work station for
the production.
27
An evaluation to MRP and CRP will be assessed to predetermine if the

formulation is realistic for execution. The loop is closed when the formulation is
deemed do-able; otherwise the process repeats in attempt to create a valid MPS.
3.5 EXECUTION AND CONTROL
Good planning doesn’t guarantee results without proper execution. A holistic

approach towards planning and fundamental controls in execution is the
ingredient to success in operation management. No planning is perfect as future
event can never be predicted accurately but good planning is still essential to
minimize alteration during execution. Attentions have shifted from planning to
execution techniques in the demand-driven environment due to the smaller
production lot size and higher product variety. Final production and assembly
schedule no longer follow the norms as disruptions force deviations in scheduling
to provoke corrective actions that rely on appropriate and timely execution
techniques. The role of MRP has been reduced to supporting role in modern
manufacturing but still powerful tool in long range scheduling and planning.
Short range planning undertaken by various operating department covers routine

schedules of production output, schedule, material purchases, product quality
and production yield improvement. [33] It addresses immediate issues pertaining
to the production, and serves as a feedback to the production planning system
for corrective actions to achieve better shop floor control. Finite/Infinite loading
and Input/Output Capacity Control represent two types of short range capacity
management which serves as bottleneck management in daily operation.
28
3.5.1 LOADING
Loading refers to the assignment of jobs to machine and work centers. In modern
manufacturing where a job is assigned to multiple machine and work centers, the
complexity in scheduling jobs results in increase of set-up and queue time
lengthening production lead time. An infinite approach to loading refers to
scheduling of work centers without regard to capacity to the work centre whereas
a finite approach only load up to the predetermined amount of capacity and
schedule to the actual start and stop time of the centre based on prioritization of
jobs.[6]Infinite loading enable the identification of bottleneck operation over
specific period which feedback to supply planning and master scheduling for
corrective actions. However highly prioritized jobs may have to wait longer since
the capacity is always fully loaded. Finite loading enable optimal capacity
utilization by loading prioritized job to available capacity without congestion.
However in practical, the waiting time for the next prioritized job may increase the
machine idle time and eventually cause underutilization of capacity. Furthermore,
the routing sequence may not be accurate and exceed the planned schedule.
3.5.2 INPUT/OUTPUT CAPACITY CONTROL
Input/Output (I/O) Capacity Control is used to achieve shorter manufacturing lead

time and tight shop floor control and by keeping constant amount of work on
shop floor [31] and monitoring work flow at individual work centres.[6]
I/O capacity control measures the actual I/O against the planned I/O to identify
potential underloading or overloading problem if the actual amount of work
deviate from the planned amount of work over period of time.
29
Table 3.3 shows an I/O report for a particular work centre. The cumulative
deviation measured the difference between the planned I/O and actual I/O over
time. The fairly reasonable cumulative deviation of 3 hours for input indicates that
optimal work is entering the work centre while a high negative cumulative
deviation of 92 hours for output indicates the work centre is not producing
enough work. This report provides planner with essential information to identify
problem work centre and take actions to rectify the situation.
TABLE 3.3. I/O CONTROL REPORT
UNIT OF I/O IN HRS
WEEK 1/2 1/9 1/16 1/23 1/30 2/7
PLANNED 120 120 120 120 120 120

INPUT
ACTUAL 125 115 120 125 118

INPUT
CUMULATIVE +5 0 0 +5 +3
DEVIATION
PLANNED 150 150 150 150 120 120

OUTPUT
ACTUAL 160 130 140 145 120

OUTPUT
CUMULATIVE +10 -10 -20 -25 -25

DEVIATION
CUMULATIVE -35 -50 -70 -90 -92

CHANGE IN
BACKLOG
30
3.6 DISCUSSION
Operation planning plays a vital role in operation management, be it top

management planning at the top of hierarchy to day-to-day execution and control
in the routine operation. With evolution in planning to suit the dynamic economic
added on the complexity factor of supply chain, the need for an efficient tool to
integrate the process and provide visibility to the operation is imperative. ERP is
a popular tool to support the planning process. The production modules of ERP
assist the planner in master scheduling by facilitating MRP and CRP. It allows
transaction and work entry into system to monitor progress for proper shop floor
control. This chapter serves as an introduction to the basics of production
planning. Figure 3.1 shows the conceptual model of operation planning in an
organization.
Today, with higher expectation from customers, organization has developed a

strategic focus towards operation planning. Introduction of lean concept to
reduce cost and improve operation is widely adopted by much organization in
recent years. ERP provides an informative platform to integrate these
methodologies and strategies into the process.
31
SALES &
OPERATION
PLANNING
BUSINESS
PLANNING
SET UP ITEMS
DEMAND PLANNING DEVELOPMENT SUPPLY PLANNING MASTER
PLANNING BOM PHAMTON
BOM
FINANCIAL DEFINE SET UP
SALES PLANNING PRODUCT ITEM
ORDERS STRUCTURE MASTER
SALES & SET UP

SALES OPERATION COMMODITY MASTER
FORECAST PLANNING GROUPING ROUTING
RESOURCE
PLANNING MASTER
PRODUCTION
SCHEDULING MANPOWER
FACILITIES
MATERIAL CAPACITY
REQUIREMENT REQUIREMENT INTERNAL
PLANNING PLANNING ANALYSE WORK
CENTER EXTERNAL
SET UP JOB
CALENDER
NO NO
OK?
YES
BUY
MAKE ISSUE PR PURCHASE ORDER
OR TO PROCESSING
BUY PROCUREMENT
MAKE
EXECUTION
AND CONTROL PRODUCTION GNATT CHART
ORDER
PROCESSING
INPUT/OUTPUT
SHOP FLOOR CONTROL
CONTROL
FINITE/INFINITE
LOADING
PRODUCTION
COMPLETION
RESPONSIBILITY
PRODUCTION SALES
REPORTING PROCUREMENT
OPERATION
PLANNING
FIGURE 3.1: OPERATION PLANNING GENERAL FRAMEWORK
32
CHAPTER 4: PURCHASING MANAGEMENT
4.1 NEEDS FOR OUTSOURCING
Since the transformation of business landscape, forecasting and planning has

become a complicated job. The increase in demand variability has led to a
blurred demand and vastly reduces visibility throughout the operation network.
This demand variability, together with the constraints of resources and capacity
limitation results in ineffective production process. In period of high demand,
expansion and newly requisition of resources can meet the short run capacity.
However, in period of relatively lower demand, wastage in term of machine and
manpower idling could prove to be substantial. [34]
Outsourcing enables an organization maximum utilization of their limited capacity

and at the same time, utilizing resources from external source to meet order
fulfillment through purchasing of material items. Organization can have better
control over their resources to take advantage of the competitive edge that
external source can provide in term of quality, lead time, technology and
technical know-how. Therefore, procurement plays a supportive role in the
operation planning through supplier selection, management and strategic
sourcing, especially in an outsourcing environment, for instance the Original
Equipment Manufacturers (OEMs).
Effective purchasing management is essential as they perform a vital role in the

reduction of the overall supply chain cost and external coordination. According to
Mark S. Miller and Thomas M. Gaddy, they identify six actions which purchasing
management can help reduce total supply chain cost : 1) Improve SCM flow 2)
Make supplier arrangements to reduce assets 3)Reduce cycle time, 4) Outsource
non-core functions, 5) Improve customer service, and 6) Select a supplier based
on supply chain capability. [35]
33
4.2 PROCUREMENT CYCLE
Traditional purchasing has rapidly evolved under the force of globalization. From
purchasing supplies to negotiation with supplier to achieving favorable deal and
tracking deliveries, the duties of purchaser have extended beyond these basics.
The modern procurement activities can be broadly divided into two role, buyer
and vendor scheduler. [29] The buyer role focuses on the strategic and tactical
management of purchasing while a vendor scheduler focuses on the execution of
purchasing activity.
1. Execution phase
• Purchase order processing
2. Strategic and tactical phase

• Spend Analysis
• Supply Strategy
• Sourcing
• Contract Management
• Vendor Management
The execution phase deals with the primary transactional functions of

purchasing, from the point of receiving Purchase Requisition (PR) to arrival of
purchased items The strategic phase involves supporting operation planning and
the effective matching of resources to the customers through vendor selection
and management in order to achieve low price, good quality and on time delivery.
Other strategic priority of procurement includes identification and implementation
of cost reduction measures to obtain substantial saving, and continuous
improvement of supplier’s processes to establish a mutual beneficial relationship.
34
4.3 PURCHASE ORDER PROCESSING
Purchasing Order Processing is the basic duty of a purchaser in his/her role as a

vendor scheduler. The process can be classified into 3 different stages below:
STAGE 1: PURCHASE REQUSITION
Material to be acquired can be classified into several category: Raw material,

Supplementary materials, Semi-manufactured products, Components, Finished/
Trade Product, Investment Goods/Capital Equipment, Maintenance, Repair,
Operating (MRO items) Materials and Services, according to Arjan J.Van Weele.
[36] The purchase requisition (PR), also known as the statement of work,
signifies the recognition of need for items in an organization. It specifies the detail
of the purchase and usually states the product description, quantity, planned
delivery date, ship-to information and delegated purchaser.
Depending on the nature of industry, the purchaser takes different actions upon
receiving the purchase requisitions. For instance in electronics industry, a single
order for chips can measured up to million in quantity. A review team will be set
up. Otherwise, for an original equipment manufacturer (OEM), the order varies
and measure to as little as one to as many as hundreds. Usually the purchaser
makes independent decision on the source and the issue of purchase order.
STAGE 2: BID EVALUATION AND AWARDING
The purchaser’s evaluation on the supplier capabilities in aligning with supply

chain objectives (low price, good quality service, and on time delivery) is vital in
governing the decision on selection of supplier. Other exogenous criteria include
the technical know-how, facilities, past relationship, working experience, and
geographical location of supplier. [37]
35
With the antiqued concept of vertical integration fast disintegrating in modern

supply chain management, organization practices supply base rationalization
whereby a group of specialized vendors is elected for aggregate product family.
In some case, a preferred vendor may be decided for the product in advance.
This depends on the supply and sourcing strategy that will be elaborated in later
sections under strategic procurement.
A request for quotation (RFQ) is prepared and sent to potential supplier for price
inquiry. It translates the essential information from PR to the supplier who can
prepare for the production upon issue of purchase order (PO). The purchaser will
analysis the bid and negotiates for favorable price before selecting the supplier
and issuing the PO.
The PO is a form of commercial obligation and acknowledgement between the

buyer and seller which indicates the agreed price, quantity, promised delivery
promises, payment term and penalty indicated in the document. There are
several types of PO which include:
• Blanket Purchase Order. A blanket purchase order (BPO) is an order

method in which the supplier delivers to the buyer over a period of time.
BPO is beneficial to supplier in providing better visibility into future
demands for effective planning and to buyer in achieving cost saving from
the economies of scale. It is suitable for recurring purchased product
whereby it is difficult to plan replenishment. [38]
• Subcontracting. Subcontracting refers to the purchasing of services from

the supplier. A good ordering technique for goods that are explicitly
complex to define especially for large structural component in the
Aerospace and Construction industry which is time consuming and
costly.[37]
36
With the extension of internet capabilities to purchasing, e-procurement software

provider has introduced the concept of reverse auction. Reverse Auction
represent an online auction between the buying organization and a group of pre-
qualified suppliers who attempt to outbid each other with competitive price to win
the order for the goods or service that have clearly defined specifications for
design, quantity, quality, delivery, and related terms and conditions over a
specific time frame. The benefits associated with reverse auction are:
1. Price reduction through aggressive price competition among

vendors.
2. Reduce or eliminate the negotiation phase of the purchasing
process
3. Automate and ease the purchasing process, reducing vendor
response lead time. With competition, the vendor must response
within the given time frame.
Despite the success of reverse auction in procurement acquisitions, the process

can be contradictory as it may neglect long term collaboration of buyer-supplier
alliance. [39]
STAGE 3: SYNCHRONZED DELIVERIES AND EXPEDIATING
The first two stages describe the processing of direct material replenishment.
Stage 3 focuses on the PO execution in synchronizing deliveries and monitoring.
Purchaser follows up and expediate to ensure that the supplier meets the
delivery promises. Upon delivery receipt, the purchaser is to acknowledge the
invoice and receipt for payment; otherwise perform return management in case
of rejected goods or non-conformities. Figure 4.1 shows the overview of
purchase order processing.
37
STAGE 1:
PURCHASE
REQUISITION ISSUE PURCHASE
REQUISITION
REVIEW
PURCHASE
REQUISITION
BUYER A BUYER B BUYER D BUYER C BUYER D

RAW SUPPLYMENTARY MRO COMPONENT/ SERVICE
MATERIAL MATERIAL FINISHED
PRODUCT
STAGE 2: SEND REQUEST FOR

BID QUOTATION TO
EVALUATION & VENDORS
AWARDING
RECEIVE
LEAD TIME QUOTATION FROM COMPETITIVE
CONSIDERATION VENDORS PRICE
REVIEW &
PAST VENDOR NEGOTIATION WITH TECHNICAL
PERFORMANCE VENDORS KNOW-HOW
ISSUE PURCHASE
ORDER
NORMAL PURCHASE BLANKET SUBCONTRACTING

ORDER PURCHASE ORDER
STAGE 3: FOLLOW UP &

SYNCHRONIZING EXPEDIATE
DELIVERY &
EXPEDIATING
FAIL
QUALITY PURCHASE RETURN
CHECK & REWORK
PASS
STATUS:
INCOMPLETE CHECK STATUS FOR CLOSE PURCHASE
BLANKET ORDER
PURCHASE ORDER
STATUS: RESPONSIBILITY
COMPLETE
PROCUREMENT
OPERATION
FIGURE 4.1: PURCHASE ORDER PROCESSING PLANNING
38
4.4 STRATEGIC PROCUREMENT
The current trend of purchasing no longer focus entirely on the efficiencies in

execution of purchase order. To achieve substantial cost savings and long term
collaboration with supplier, the need to develop strategies in procurement to
bring values to supply chain arises. From the cumbersome component
outsourcing to the more strategic system outsourcing, purchasing activities have
streamlined with the advancement in computing technology. The need to build
trust and alliance with supplier in order to build a strategic relationship which
require total commitment from both parties become imperative.
Figure 4.2 illustrates the strategic procurement flow from spend analysis to
vendor management.
SPEND The process of identifying current expenditure to

ANALYSIS
determine what is being spent on, with whom,
and for what
SOURCING Development of vendor base through continuous

searching and evaluating of new vendors, locally
or globally
SUPPLY Address supply issue, such as supply base

STRATEGY
rationalization from data of spend analysis
CONTRACT Management of contract pricing, renewal,

MANAGEMENT
discount, policy, monitoring, and negotiation
Vendor appraisal based on quality and delivery

SUPPLIER
RELATIONSHIP
and establish good working relationship though
MANAGEMENT SRM
FIGURE 4.2 STRATEGIC PROCUREMENT CYCLE
39
4.4.1 SPEND ANALYSIS
In Andrew Bartolini and William Browning II research on Spend Analysis, they

identify three actions to cost savings in purchasing [40]:
1. Identify opportunities to aggregate spend and negotiate superior contracts

2. Identify and reduce non-compliant or “maverick” spend
3. Improve procurement operations and supplier performance
Spend analysis allows in-depth examination on the expenditure and provides a

basis for devising strategic policy and decision. It is the starting point and
provides visibility for the identification and implementation of any strategic
sourcing and supply strategy.
Spend analysis addresses three key purchasing questions [41]
1. How much we are spending?

2. Whom are we buying from?
3. How much we are spending with each supplier and what parts, materials
and other tools we are getting from each supplier?
The increasing recognition and relevance of spend analysis over the years lead
the evolution of purchasing practices, shifting towards strategic procurement.
Data analysis has became an important skills as more buyers are reliant on data
analysis skills now as compared to five years ago. [42]
Strategic sourcing is performed to constantly identify new and competitive

vendors locally or globally. Supply strategy addresses supply issues such as
supplier base rationalization. Through spend analysis, purchasers are able to
identify competitive suppliers and recognize their comparative advantage. Many
companies today are facing the problem of keeping an optimal supplier base.
40
Having too many suppliers prevent stockout, however it is difficult to achieve

significant cost saving without long term collaboration with supplier to achieve the
lowest cost. Therefore, there is a need to establish a firm suppliers base who
comprise of the best performing vendors to reduce “maverick” spend and non-
compliance.
4.4.2 CONTRACTUAL MANAGEMENT
A supply contract is a fixed mutual obligations and agreements that protect

involving parties against breaching of term, thereby preventing any unexpected
changes to planning and production in supply chain within the validity of contract.
It covers services or purchases that require condition that extend beyond the
scope of purchase order or within a considerably long period of time. Common
types of agreement, such as fixed-price, cost-reimbursable and incentive exist,
however usually in combination.
The availability of contract agreement serves to streamline the order processing

and direct material replenishment. It is an extremely useful tool for lead time
management and cost savings. A stocking agreement can reduce the lead time.
This reduction in lead time is due to absence of vendor response lead time and
the shorter deliver lead time. For instance, in the OEMs hierarchy structure, the
vendor response lead time is typically longer than most industry as the chain of
response extends from the material supplier to the main supplier. The response
lead time may be even longer given the complexity of product design and stock
out of base material. Moreover, the company can indirectly increase their
inventory level by having stocking agreement with the supplier. The contracted
subassemblies can be stock in the form of raw, semi-finished or work in progress
(WIP). These will greatly reduce the delivery lead time upon purchase order. A
pricing agreement specifies fixed price from supplier within validity date.
41
Other cost saving measures such as line discount and invoice discount upon
minimum order quantity and minimum invoice amount are included as part of a
pricing agreement. Effective contract management is a key procurement function.
Negotiation skill is an essential skill of a buyer to achieve the lowest possible
price. In addition, buyer is responsible in monitoring supplier performance metrics
and ensures contract compliance and renewal when expiring. Therefore, buyer
plays a pivotal role in contract authoring, negotiation, execution and monitoring
for the organization.
4.4.3 SUPPLIER RELATIONSHIP MANAGEMENT
For companies to be successful, they need to build a strong supplier relationship

for joint venture. Modern supply chain now includes supplier relationship
management in the extended ERP model. The buyer/vendor relationship has
transformed from simple purchasing transactions to joint collaboration which
require commitment to supplier from the buying organization. Supplier
performance has a direct influence on the efficiency of the business operation
unlike the past, where they are merely commodity provider. It has become
imperative that suppliers take participation in organization planning and merge
themselves into company future vision. It has become the responsibilities of the
buyer to take up the job of a liaison person between the company and supplier.
To create an environment to foster the strategic partnership, regular meeting to
understand the supplier problems and discuss future policies are essential for
better understanding of each other business process.
42
4.5 DISCUSSION
Purchasing is evolving with the unprecedented changes in business

environment. Internet capability has transformed the traditional paper-based
purchasing activities to highly automated and strategic purchasing management.
The emphasis for automation in purchasing activities to free up time for strategic
sourcing and contract management is the key to an effective procurement
function. The shift from price focus to total cost focus redefines the priority,
knowledge and skills of a purchaser. Knowledge in area of supplier relationship
management, total cost analysis, purchasing strategies planning and supplier
analysis has became the most important criterion to define a good buyer. [43]
Despite the importance of possessing such knowledge, a buyer requires tool that
enable them to put their knowledge into practice. ERP not only provides varying
degree of automation to the transactional activities but also allows analyzing and
reporting, which supports spend analysis and vendor evaluation. Therefore, ERP
is a necessity to support the purchaser daily activities and a tool for supporting
decision making.
43
CHAPTER 5: OPERATION INTEGRATION WITH ERP
5.1 BACKGROUND
Manufacturer faces a mounting problem in meeting the constant changes from

customers and suppliers. Ability to attract and retain customers depends on
largely on the organization effort in coordinating the supply chain to provide
excellent customer support in order promising and responding to last minute
changes. Moreover, the need to adhere agile, lean strategy or Six Sigma
methodology to increase total supply chain profit, reduce cost and maintain
competitiveness requires a platform to handle the complexity of backoffice
application in manufacturing. Therefore, in order to achieve supply chain
coordination, an integrated system whereby the customers, manufacturer,
suppliers are aligned to common objectives is required to improve
communication, responsiveness and flexibility.
The benefit of an ERP system to support electronic data interchange (EDI) in

maintaining data integrity, inventories accuracy, transaction consistency, data
storage and retrieval serves as a tool for backend manufacturing integration in
the supply chain. Elimination of paperwork enhances the manufacturing process,
creating a conducive working environment. Manufacturing integration involves a
range of functions from production planning to execution of operations and
purchasing from external supplier. ERP provides the solution to manage
manufacturing process including production order processing, maintaining
planning bills and support material/capacity requirement planning. This chapter
illustrates the benefits and integrative nature of ERP system in manufacturing
modules.
44
Most of the companies do not get quantifiable financial benefit through the
implementation. [44] With the possible benefits from S&OP process, many ERP
software vendors, such as SAP have introduced S&OP modules to cater to the
increasing need even though many companies only require a well organized
spreadsheet to excel for this process. However, ERP still plays a critical role in
enhancing the execution and planning of the strategic process. It provides
accurate point-of-sales (POS) data in enabling creation of demand plan for better
forecasting. In addition, supply chain activities and resources need to be closely
monitored through MRP and CRP.
Supply planning defines the overall plan for the production process to satisfy the
customer demands, aligning with internal management to achieve operational
efficiencies in allocation of resources and capacity. It involves planning for the
entire supply chain activities, including defining product structure in BOM level,
replenishment methods, reordering policy, resources management, scheduling
and evaluation of performance. ERP enable the set up of manufacturing
database in the system and materialize top management decision into concrete
instructions and plan for production.
5.2 MANUFACTURING DATABASE
The common manufacturing database represents the fundamental of ERP and

provides user with real-time access of information in the database. With a
common relational database, it enables users to access same data for purpose
of checking, planning and analysis. ERP serves as a storage and retrieval
system which enable user to input, store, alter and display data from within the
system with the click of the mouse. Information pertaining to the product
structure, vendor information and user responsibility are set up prior to
production. This information provides the platform for the configuration of
decision logic, entrusting responsibilities to the respective buyer or planner in
charge of the commodity for setting up any planning and purchasing activities.
45
Table 5.1 illustrates a list of master file in the database. Each of the following
document and information is recognized by a unique identifier.
TABLE 5.1: MASTER FILE IN ERP DATABASE
MASTER FILE DESCRIPTION
ITEM PROBABLY THE MOST CRITICAL MASTER FILE IN THE ERP

DATABASE. IT CONTAINS PRODUCT INFORMATION RANGING FROM
PRODUCT COSTING, PLANNING, REPLENISHMENT, BILL OF MATERIAL
AND ROUTING WHICH ALLOW THE PROGRAMMING OF DECISION
LOGIC FOR PLANNING, PRODUCTION AND PURCHASING
BILL OF DESCRIBE THE ENGINEERING FEATURES AND LIST THE

MATERIAL
SUBCOMPONENTS, SUBASSEMBILIES AND PHAMTON BOM THAT BUILT
THE PRODUCT. MAINTAINANCE OF BOM MASTER FILE IS CRITICAL
FOR MATERIAL REQUIREMENT PLANNING AND MASTER
PRODUCTION SCHEDULING
ROUTING DEFINE THE SEQUENCE OF THE OPERATION PROCESS. ROUTING

DATA SET THE TIME REQUIREMENT NEEDED FOR EACH STAGE OF
THE PRODUCTION PROCESS WHICH IS USED IN CAPACITY PLANNING
AND CONTROL OF WORK CENTRE
USER CONSIST OF SALES, PLANNER AND PURCHASER OF THE

RESPONSIBILITY
ORGANIZATION. EACH USER IS BEING ASSIGNED TO THEIR
RESPONSIBILITIES THROUGH THE ALLOCATION OF THE USER
UNIQUE INDENTIFIER.
VENDOR CONTAIN ALL THE INFORMATION OF A VENDOR WHICH INCLUDE

COMMUNICATION, INVOICING, PAYMENT, TRADING DETAILS AND
PRODUCT CATALOUGE.
INVENTORY LIST ALL THE INVENTORY LOCATION OF A MULTI-SITE OPERATING

LOCATION
ORAGNIZATION FOR DELIVERY AND STOCKEEPING PURPOSE.
46
5.3 MASTER SCHEDULING
The challenge for master scheduling lies in maintaining a balance between the
frequent changing demand and supply. It aims to satisfy customers within the
constraints of factory and the supplier base. The ability to manage, alter, report,
track the scheduling and operations within the plant provides a mean to identify
errors in master scheduling and respond quickly. John Proud identifies some
symptoms of master scheduling problems: Uncontrollable costs, Disruptions on
the shop floor, Late deliveries to customers, Late deliveries from suppliers,
Unplanned overtime/off-losing, High work-in process, Mismatched inventories,
Over-/Under/Utilized resources, Long queues and Finger pointing/low morale.[28]
The balance of demand and supply depends on the master scheduler and a
software computer system which maintains scheduling by detecting any problem
through structured decision logic. The programmed decision logic forges a data
and process linkage in automating the system to prompt action message to the
responsible parties upon the imbalance of supply and demand. This feedback
allows master scheduler to order production or purchase when the stock fall
below its safety level or reorder point. In chapter 6, the author will demonstrate
the configuration of decision logic from the item card to assist in master
scheduling using Microsoft Dynamics NAV.
Monitoring production progress through ERP enhances visibility in the supply

chain through functions in reporting usage, item tracking, production status
control, supporting available-to-promise, and capable-to- promise. Master
scheduler can identify problems relating to backlogs and over-/under-utilization of
resources, etc and reschedule or feedback to top management in proposing
solutions to rectify the situation.
47
Master scheduling performs strategically and tactically at different level of

planning. ERP serves as an analytic tool in production planning and controlling,
but also to convey instructions to work centre for operation. In the next few
sections, the author will examine how ERP integrate key operation functions in
manufacturing.
5.3.1 MATERIAL REQUIREMENT PLANNING
MRP is a major component of master scheduling. It plays a critical role in

planning of projected demand to avoid shortage, and ensuring that items arrive in
a timely fashion. MRP utilize expanded bill of material to compute the demand
based on the requirement of the parent item. ERP system maintains the bill of
material and routing, and provides handling of version management which allows
flexibility and alteration into the anatomy of planning bill.
To practice effective MRP in manufacturing, it is necessary that a computerized

integrated system provides the essential data for gross requirement, scheduled
receipts, projected available, planned order/purchase receipts and release, which
are used to compute the forecast demand. Using these information and preset
decision logics, MRP monitors the inventory level, create planned orders upon
consumption from sales order or reschedule delivery dates to changing demand.
[45] The inputs from production and purchase orders, and consumptions from
sales order from the system provide sanity check to item availability. It
regenerate the planned order according to prevent shortage and excess
inventory. MRP is at the heart of manufacturing process; however the
assumption of infinite capacity means the in adept of capacity constraint into
consideration which leads to unrealistic scheduling.
48
5.3.2 CAPACITY REQUIREMENT PLANNING
To optimize capacity and resources utilization, Capacity Requirement Planning

(CRP) is needed to eliminate the shortcoming of MRP. The identification of
capacity problems leads to corrective measures by planners in rescheduling to
alternative work centers, outsourcing or extension of working hours. ERP assess
usage variance and utilization by means of man-hours through calculation of
working hours for items through the routing bills and setting of work center,
working calendars and shift to determine the available capacity. It reports the
output from individual work centers and provides planner with the needed
information to identify problem work centers from the system. Automatic flushing
at each operational process provides a reliable and accurate data for the
machine usage. Computerized tracking of usage also enables finite loading and
scheduling of each work center preventing overloading or underloading,
optimizing its utilization.
5.4 MANUFACTURING EXECUTION SYSTEM
With increasing computing technology, traditional ERP has evolved to enhance

shop floor integration to close the gap between planning and execution.
Communication and shop floor data exchange between planners and shop floor
is the key to effective execution and production control in manufacturing.
Manufacture Execution System (MES) provides visibility of actual production
activity compared to planned activity and is essential in maintaining control of the
production operation. It allows immediate response, monitor, feedback on
performance and coordination on the shop floor process based on real time
activities to readjust the planning and scheduling. Thus, it provides better
manufacturing control and track capabilities which reduces variability, scraps and
reworks, aligning with lean strategy.
49
A form of factory floor information and communication system as defined by

APICS to achieve shop floor integration, the data are connected and linked to
ERP system by means of bar coding, discrete counters, middleware etc to
enable bidirectional seamless flow of manufacturing information. [31] For
instance QAD, an innovative enterprise software maker, has introduced Just-in-
time Sequencing (JIT/S) modules which managed sequence production and
Manufacturing Executing Workbench (MEW) which enable event-driven control
system with minutes to minutes planning of the shop floor. [46] These modules
can be integrated with ERP to improve shop floor control. More manufacturers
have already implemented MES within the past two years. [47] This indicates
resurgence in the interest of MES. SAP introduced SAP Xapp Manufacturing
Integration and Intelligent (SAP Xmii) which provide a direct connection between
shop floor system and business process for better visibility, responsiveness and
shop floor control after their acquisitions of Lighthammar in late 2005. Oracle
latest E-Business Suite Release 12 includes manufacturing functionality for shop
floor management, including complex lot transactions, dynamic routing, end-to-
end genealogy of products, and modeling and tracking of operation yield costs.
[48]
5.5 ADVANCED PLANNING SCHEDULING
Planning and scheduling is two major components in supply chain management.

While planning explores the possibility of the future, scheduling examines the
realism of implementation to meet demand and overcome constraint in a short
range of period. Traditional time-consuming concept of master scheduling,
material requirement planning and capacity requirement planning is fast
becoming obsolete and replaced by a newer breed of computerized Advanced
Planning Scheduling (APS) System in the new economy.
50
APS, a leading edge in manufacturing technology capitalized on the computing

technology to optimize resources and constraints to make decision on planning
and scheduling. It uses linear programming to optimize feasible schedules and
comprises a range of functionalities in forecasting, order promising, purchasing,
cost shipping, shop floor control, finite capacity scheduling and constraint based
planning. [45, 49] A great enabler for lean scheduling, it employs Just-In-Time
(JIT) concept and prevents overloading of bottleneck resources, reducing work in
progress (WIP). Unlike MRP which require multiple iteration and re-feasibility,
APS recognizes the resource/capacity constraint and makes use of complex
algorithms to generate an optimal schedule in a single run.
5.6 PURCHASING
The primary functions of purchasing include procuring in optimal quantities and

scheduling a timely receipt into inventory. The fluent flow of procuring activities is
essential for an effective order fulfilment process and inventory control.
Purchasing order management from request of quotation, handling purchasing
transaction to receiving deliveries can be electronically managed with an ERP
system. The system facilities the executions of purchases order processing and
return management which ensures transaction transparency in purchasing.
Moreover, with automatic creation of contractual agreement and reverse auction

in place, varying degree of system automation is achieved in the execution
process. Relevant agreement details are negotiated and agreed during the pre-
purchase stage which is inputted into the ERP system for future transaction
reference. When the requisition is reviewed and approved, the system
automatically creates an Auto PO to the preferred vendor with the contractual
price, delivery terms and promises based on the agreement.
51
Computing technology has evolved the traditional paper based procedure to

using the system to capture purchasing detail. Such data is useful for spend
analysis and supplier evaluation. Computerization and a common relational
database is the essential criteria to a success spend analysis. Most organization
still adopt the traditional manual consolidation and analysis of spend data, and
thus has not reap the ultimate benefit of spend analysis given the limited spend
visibility. The four major barriers to effective spend analysis are poor data quality,
multiple source data, lack of standardization process and insufficient automation.
[41] ERP provides integration of purchasing process in supply chain and provides
a common relational database which negates the possibility of analyzing from
multiple data source. Highly trained professionals in the ERP software are
required to ensure that the purchasing order processing is effectively executed in
a standardized fashion. Purchasing data will be captured in the system and these
ensure data integrity. Some ERP software allows generation of crystal reports
such as Purchase Order History, Supplier History, and Items History which are
very useful for analysis. Skilled purchasers are able to import the data to
Microsoft Excel and manipulate the crystal report by means of pivot table into a
wide variety of comprehensive data for analysis. Through the ERP system,
information on aggregate expenditure can be timely retrieved and manipulated.
The need to identify potential vendors and establish long term working
relationship is the key to achieve competitive edge in an outsourcing
environment. Supplier history such as price, non conformance, returns to
vendors, purchase order history and delivery performance can be captured by
the system in the routine purchase order processing. These data are indicators of
appraisal in vendor evaluation. Periodic reviews on vendor performance enable
the filtration of potential vendors capable of meeting the company requirement
and policy. With ERP, a performance –based evaluation of vendor can be
analyzed through transactional data. A vendor ranking system can be
established with a formal process of rating their performance.
52
Today, empowered by the implementation of computing software, SRM software

and module have surfaced to enhance the connectivity between supplier and
company. SRM software compatibility with ERP reaps the benefit of technology,
resulting in streamline processes and engaging real-time communication through
communication portal to achieve inter-operability among suppliers. It automates
the sourcing process which enables better negotiation with supplier
electronically.
For Microsoft Dynamics NAV, BizTalk Server provides enterprise with effective
trading partner connectivity and business to business integration. It facilitates
data exchange with customers and vendors. Data exchanges include outbound
documents (request for quotation, purchase order, purchase return) and inbound
documents (purchase quote, purchase order confirmation and purchase
receipts), thus BizTalk further enhances real time communication in purchasing
order processing (Figure 5.1). BizTalk provides Navision with varying degree of
SRM/CRM capabilities in communication electronically.
SENDING RECEIVING
PURCHASE PURCHASE
QUOTE QUOTE*
RECEIVING SENDING
PURCHASE PURCHASE
QUOTE QUOTE*
BUYER VENDOR
ISSUING RECEIVING
PURCHASE PURCHASE
ORDER ORDER
BIZTALK
RECEIVING SERVER SENDING
PURCHASE PURCHASE
ORDER ORDER
CONFIMATION CONFIMATION
RECEIVING SENDING
PURCHASE PURCHASE
RECEIPT RECEIPT
SENDING RECEIVING
PURCHASE PURCHASE
RETURN RETURN
INBOUND DOCUMENT
OUTBOUND DOCUMENT
* VENDOR RECEIVE AND INTERPRET THE PURCHASE QUOTE AS A REQUEST FOR QUOTATION,
THEN SEND THE FINAL QUOTE TO THE BUYER
FIGURE 5.1: BIZTALK COMMUNICATION PROCESS
53
5.6.1 PURCHASING MANAGEMENT USING MICROSOFT DYNAMICS NAV
The author will demonstrate the purchasing functionalities in Microsoft Dynamics

NAV in this section. Refer to Figure 4.1 for the purchasing order processing
framework. Figure 5.2 shows how Microsoft Dynamics NAV is used in the
purchasing process.
SEND RFQ TO VENDORS * REVERSE AUCTION*
1 RECEIVE QUOTATION,
ENTRY INTO PRICE LINE
2 CREATE PURCHASE QUOTE

FOR SELECTION OF
VENDOR
3 CONVERT PURCHASE
QUOTE/BID TO PURCHASE
ORDER
FOR SELECTED VENDOR
4
CREATE WAREHOUSE
RECEIPT
POST RECEIPT IN SYSTEM

UPON DELIVERY
QC INVOICE AND
PAYMENT REMIT
CHECK PASS
5 FAIL
CREATE PURCHASE
RETURN ORDER
6 7
CREATE PURCHASE CREATE PURCHASE

CREDIT MEMO AND CREDIT MEMO FOR
REPLACEMENT OF ITEMS PURCHASE ALLOWANCE
FIGURE 5.2 PURCHASING SOLUTION MAP AND RESPONSIBILITY

BUSINESS FRAMEWORK FOR MICROSOFT DYNAMICS FINANCE
NAV PROCUREMENT
*Require BizTalk WAREHOUSE
54
Company faces problem in maintaining alternative purchase price and discounts

without ERP. Often, buyer negotiates for better price with vendors in long term
collaboration to continuously lower the cost. ERP assists in purchase pricing and
discount management which specifies line discount upon minimum quantity. The
set up of alternative prices and discounts in the system allows purchaser to
select the most appropriate vendor who offers the most competitive price.
1. Upon receiving the quotation, the buyer will enter the price line (Figure 5.3a)
and discount (Figure 5.3b) into the system.
FIGURE 5.3: a) PURCHASE PRICE ENTRY b) DISCOUNT ENTRY INTO SYSTEM
55
2. The next step is creating a purchase quote for comparison of prices. A

purchaser will source, enquire and negotiate the price from vendors for the most
competitive price before turning it into order Figure 5.4 shows the quotation from
the 3 vendors: Koekamp Leerindustrie (31568974), Houtindustrie Bruynsma
(31147896) and Beekhuysen BV (31580305). Houtindustrie Bruynsma
quotation is the most favorable, after a line discount of 5% to Blanking Plug and
Union Cap stated in the agreement upon minimum order quantity.
56
FIGURE 5.4: PURCHASE QUOTES
3. A purchase order (106373) is created from the purchase quote(1024) which is

sent via email to the vendor in Figure 5.5. Navision calculates the expected
receipt and latest order date for the delivery from the formula below:
Planned Receipt Date + Safety Lead Time + Inbound = Expected Receipt
Warehouse Handling Time Date
Requested Receipt Date – Lead Time Calculation = Order Date
FIGURE 5.5: PURCHASE ORDER
57
4. A warehouse receipt RE000032 is then created to inform the warehousing

department of the pending delivery in Figure 5.6
FIGURE 5.6: WAREHOUSE RECEIPT
5. In event of non-conformances, the items will be returned to the vendors for

rework, replacement or compensation. Return management using Navision
provide an efficient handling of items in a timely fashion which is important in
establishing good relationships.
The purchaser is responsible for informing the vendors regarding the non-
conformance and compensation if applicable. Navision handles return activity by:
I. Create purchase return
II. Issue credit memo and request for replacement items
III. Request purchase allowance (price deduction from original price)
58
I. A purchase return order (1005) is created which indicates that 2 units of Union
Cap are defective and thus will be shipped back to vendors. Under the item
tracking line, the 2 defective items are allocated with serial no S/N1000 and
S/N2000.
FIGURE 5.7: a) PURCHASE RETURN ORDER b) ITEM TRACKING LINES
59
II. After creation of credit memo, 2 items are returned to the vendors. The
inventory of union cap will drop by 2.
FIGURE 5.8: PURCHASE CREDIT MEMO FOR RETURN SHIPMENT

III. Figure 5.9 shows the creation of credit memo for purchase allowance. Instead
of returning to vendor, a 50% purchase allowance or claim is requested from the
company
FIGURE 5.9: PURCHASE CREDIT MEMO FOR PURCHASE ALLOWANCE
60
5.7 DISCUSSION
ERP is the starting point and platform for integration of manufacturing activities
from planning to execution. With evolving dynamic business landscape, ERP
vendors are improving their services and modules to provide state-of-art
technology solution to cater to the upcoming challenges. The need to develop
add-ons to existing ERP platform is essential for continual survival.
With an effective information system that promotes transparency and

communication, manufacturing integration can be achieved with ERP. It is also
widely recognized as a supporting tool to sustain lean performance. In fact, lean
can be achieved without IT interference as what Toyota has achieved back then.
However, the labour-intensive process can be simplified with the aid of
technology and this is needed when it comes to extension from a single plant to
multi-site operation. The inclusion of Manufacturing Execution System, Advanced
Planning & Scheduling, lean and Kanban capability modules to ERP enable lean
manufacturing with better flexibility and control over the operation. However
software alone is incapable to cultivate a lean environment or transformation.
Other factors such as top management support, user training, and effective shop
floor design are needed to complement with lean strategy.
ERP is still widely recognized as the information system to maintain sustainable

development and meet future requirements in today’s knowledge economy. In
spite of the bullish growth and demand for ERP, the failure of implementation of
ERP remains ominous. For example, FoxMeyer, pharmaceutical MNCs launched
a law suit against SAP, blaming the software as the cause of their downfall in
1994. However, the court rules the decision in favor of SAP. Hershey, a leading
manufacturer of chocolate, confectionaries and beverages in United States of
America chose implementation of SAP ERP but that prove to be a major setback
as they incurred heavy losses in sales and profit.
61
Therefore, to achieve full benefits of ERP and avoid pitfalls, companies need to
understand and identify the implementation problems. This report provides a
general framework of ERP system and its implication in manufacturing processes
and functionalities.
The main cause of ERP implementation failure is that companies are unable to
alter their existing business practices to match their ERP system. Operative
limitation exists as firms lack comprehensive knowledge of business implications
and rigidity of the ERP system to achieve a substantial return on investment
(ROI). Strict adherence of good practice and reengineering of work process to
the changes brought by ERP is the key to long run success of its implementation.
The operative barrier of ERP in manufacturing is summarized as below:
1. Lack of Data Integrity and Maintenance

Data integrity refers to being correct or consistent with the intended state
of information. Any unauthorized modification of data, whether deliberate
or accidental, is a breach to data integrity according to Donn P. Parker.
[50] Poor quality data has an undesirable impact on the business
operation as their propagation across the information infrastructure result
in erroneous information in stored data. As a result, analysis results in
inaccurate sales and production forecast which affect operation planning
and result in redundancies and inefficiencies. Maintaining data integrity in
the system depends largely on the users to input the appropriate and right
data and perform internal audit processes and data checks. Oracle
introduce Oracle data Integrator to understand the stored information of
various application by defining business rule and perform data cleansing
operation to ensure data is adequately verified and validated. [51]
62
2. Lack of Top Management Support and User Acceptance

Dedication from top management and user is crucial to ensure the system
reap its benefit in the long run. Users may not be convinced with the new
work process and lack acceptance and confidence towards the system as
they fail to adjust to the initial changes. The complex user interface poses
as a barrier to user acceptance. Training and user-involvement to instill
the right attitude and methods towards the technology will improve their
skills and knowledge to the new business process.
3. Failure of Accommodating Evolution of Business Process

Business Process Reengineering is essential to realign business principle
and strategy with the ERP system. The rigidity and inflexibility of the
system is a barrier to accommodation to evolution of business process.
For instance, Hershey’s reengineering of operation structure caused
confusion and disruption of normal functions and created uncertainties
during the implementation process. That was primarily due to their over
attention to ERP implementation and failure to rectify the uncertainties
arise from the implementation. As a result, they are unable to focus and
channel their energy on their core ability, thus losing their comparative
advantage in the market. [53] There are other instances whereby the
change in business process affect and disturb vendor’s plan and thus
resulted in poor coordination between suppliers and organization. In
addition, the implementation of ERP takes a long time before sustaining
any benefits.
4. Myth
The mythical belief of ERP as a sliver bullet technology to business
process also contributes to operative barrier. ERP is simply an integrative
technology but it is not a model in itself. The computer provides a powerful
tool in storing, display, and assisting in decision making process.
63
However, the computer lacks the innovative, evaluative, analytics ability

and product knowledge in decision making to replace human judgment
and management decision especially in scenarios of uncertainty. It only
serves to remind and inform through action messaging by defining preset
rules but the responsibility and accountability of implementing lies with
human being. For instance, ERP doesn’t replace the job of master
scheduler despite configuration of decision logic. It calculates the
requirements arithmetically and prompts the master scheduler who in turn
creates and maintains a valid master production schedule to authorize
production. The decision making involves experience in understanding the
work process and assumptions behind the operation more than simple
arithmetical calculation by the system. [28]
In the next chapter, the author will present a case study to illustrate how the
operating planning and purchasing process can be streamlined with the
implementation of turnkey project in an oil and gas OEM.
64
CHAPTER 6:
CASE STUDY: IMPROVE PROCUREMENT AND OPERATION
PLANNING IN OIL AND GAS OEM USING ERP
6.1 COMPANY BACKGROUND
The case study describes the operation planning and purchasing using ERP for
an OEM of oil and gas drilling system structural type. For clarity purpose, the
presentation of the case study will employ the use of pseudonyms widely in this
report. The presentation format will be divided into 3 major portions, 1) Company
background 2) Operation planning 3) Purchasing with ERP. In the last section,
the author will discuss the alignment of ERP with lean strategy and implication of
the case study. In addition, the limitation of ERP will be used to explain the
glitches in this idealistic situation.
WHS Corp is an oil and gas provider of flow equipment products and systems,
such as subsea tree, manifold, wellhead and mudline drilling system. It caters to
an extensive and specialize group of customer in the upstream petroleum
industry which include drilling contractors, oil & gas producers, pipeline operators
and refiners.
Within the organization, there exist complex chains of work flow in Figure 6.1.
Figure 6.1 shows the overview of work flow and role of respective department in
WHS Corp. The 2 major activities are tendering and order processing.
65
REPAIR AND
MAINTAINENCE OF
PRODUCT. PROVIDE
AFTER SALES
SERVICES
AFTER SALES
CUSTOMER
LOGISTICS &
TRANSPORTATION ASSEMBLY OF
COMPONENTS
SUBMIT TENDER INCOMING/OUTGOING BASED ON
SALES PRODUCTION
ORDER/CONFIRMATION, ORDER
CUSTOMER SERVICES
SUCH AS ANSWERING
WAREHOUSING
PLAN
ENQUIRIES AND
PRODUCTION
REQUEST FOR
REQUEST FOR SCHEDULE FOR
QUOTATION
TENDER ASSEMBLY
SALES OPERATION QUALITY

PLANNING ASSURANCE/CONTROL
SUBMIT DESIGN SUBMIT

SPECIFICATION REQUEST/SUBMIT PURCHASE
FOR TENDER FOR TENDER REQUISITION
QUOTATION QUALITY
INSPECTION.
ENGINEERING PURCHASING IF FAIL,
REWORK,
OTHERWISE
KEEP IN
OUTSOURCING/ WAREHOUSE
SUBCONTRACTING
PURCHASE
FORGING
MAINTAINENCE
OF STOCKIST
MATERIAL EXTERNAL
SUPPLIER / SUPPLIER /
MILLER JOBBERS
STOCKIST
INTERNAL
SUPPLY CHAIN BUY FROM BUY FROM FURTHER
EXTERNAL MILLER STOCKIST OUTSOURCE
SUPPLY CHAIN TO
(BACKEND) EXTERNAL
SUPPLIER
EXTERNAL
SUPPLY CHAIN
(FRONTEND)
ORDER EXTERNAL
PROCESSING SUPPLIER /
TENDERING JOBBERS
AFTER SALES
FIGURE 6.1 OVERVIEW WORK FLOW IN WHS CORP
66
6.1.1 PRODUCTION STRUCTURE
One major characteristic for WHS Corp is that they practice product
differentiations and customizations which are more aligned with the new
business landscape unlike the traditional mass production model. With a varying
degree of familiarity to an engineer-to-order (ETO) where there are active
customer involvement in product design and manufacturing planning directly
linked to customer orders, WHS Corp also exhibit some degree of resemblance
to an assemble to order (ATO) production model.
Unlike the conventional ATO model in automotive and electronic industry, WHS
Corp practices a hybridized production model. The key difference between these
OEM lies in the production and purchase quantity in a single lot or order and the
frequency of the order. A single order for WHS Corp can vary from as little as 1
unit to as many as 50 units. Furthermore, the order may not be repetitive or may
exist as a one-off large scale requirement from tender. The requirement for
similar products is not as frequent as automotive vehicles and electronic devices.
Therefore it is costly and risky to stock finished product or even manufacture sub-
components and forging due to the absence of economic of scale. Instead, most
parts are procured to order and assembly before shipping to the customer.
However, problems exist in this production structure. Due to the complexity of the
product, it can be broken down into several sub assemblies. Furthermore, the
company practices global outsourcing of parts. Figure 6.2 shows the breakdown
of the sub components from its parent items, TFL tree. This results in the
existence of bottleneck as the delivery lead time differs. For instance, the lead
time for master block valve and tree connector may take 2 weeks; however the
lead time for subsea wellhead may take as long as 15 weeks due to the
complexity and difficulties in obtaining the material for internal assembly. The
subsea wellhead is recognized as the bottleneck in the production.
67
LEVEL LEVEL LEVEL LEVEL

0 1 2 3
UNION CAP WEAR BUSHING,

178MM
TREE CAP
BLANKING INTERNAL
ASSEMBLY
PLUG ASSEMBLY WEAR BUSHING,
245MM
TREE GUIDE RETAINER TEMPORARY

FRAME RING GUIDEBASE WEAR BUSHING,
RUNNING TOOL 340MM
SWAB VALVE HOUSING ANNULUS SEAL

RUNNING TOOL, ASSEMBLY A
WING 762 MM
VALVE
TFL FLOW ANNULUS SEAL
HIGHT ASSEMBLY B
LOOP
FLOW PRESSURE
LOOP A HOUSING
RUNNING TOOL ANNULUS SEAL
WYE SPOOL ASSEMBLY C
AND
TFL CASING
DIVERTER
HANGER CASING
TREE
RUNNING TOOL HANGER,
MASTER
VALVE TEST TOOL CASING
HANGER,
BLOCK
CONDUCTOR
CASING, 762MM CASING
FLOW LINE HANGER,
CONNECTOR
LOW PRESSURE
CONDUCTOR HOUSING BORE
HOUSING PROTECTOR
TREE
CONNECTOR
ANNULUS PGB
WING
VALVE
ANNULUS TGB
LOOP
FLOW
LOOP B GUIDELINE
WELLHEAD
HIGH PRESSURE
GUIDEBASE
WELLHEAD
HOUSING
SUBDSEA
SURFACE
WELLHEAD
FIGURE 6.2 BILL OF MATERIAL FOR TFL TREE
REFER TO APPENDIX A & B FOR FULL DETAIL OF ASSEMBLY
68
6.2 STRATEGIC MANAGEMENT
WHS production structure is ruled by business uncertainties. The uncertainties

lead to difficulties in forecasting and force an unexpected business model. The
company is more reliant on resource management in strategic planning,
organizing and controlling of resource instead of the traditional resource
planning. Effective strategic plan need to be defined to deal with high customer
expectation in service, quality, delivery and cost.
One major obstacle to WHS in delivery promises is the existence of bottleneck

which prevents earlier delivery date. In the next two sections, the author will
demonstrate the use of ERP to solve the bottleneck issues in operation planning
and purchasing by means of turnkey project.
6.2.1 TURNKEY PROJECT
Purchasing strategies play a critical role in supplier integration with company

objectives. In order to achieve conflicting criterion of low cost, good quality and
speedy delivery, the need for supplier to take part in operation planning is of
paramount importance. Global outsourcing and complexity of product further
pose barriers to a timely delivery.
In WHS Corp, almost 80% of the parts are either outsourced or subcontracted
while the company focuses on their core competencies in gaining comparative
advantage within the industry. The supplier performances create substantial
value as they are responsible for a large portion of the company production.
WHS Corp faced a major challenge in fast and timely delivery to meet its
customer expectation. The breakdown into sub-assemblies and existence of
bottleneck makes operation planning tedious. Furthermore, it is risky to keep
inventory of bottleneck part. Thus, the key for earlier promised date lies in
shortening the overall delivery lead time.
69
Figure 6.3 shows the delivery lead time to customer. The total delivery vendor
lead time plays a crucial role determining the promised delivery date. With close
collaboration and efficient planning with vendors, the total vendor lead time can
be vastly reduced by means of turnkey project and contract management.
TOTAL VENDOR
LEAD TIME
SENDING ISSUE OF WAREHOUSE DELIVERY TO

RFQ UPON PO HANDLING & CUSTOMER
PR QUALITY CHECK
VENDOR VENDOR ITEM ASSEMBLY TRANSPORTATION

RESPONSE DELIVERY SAFETY LEAD TIME & FREIGHT LEAD
LEAD TIME LEAD TIME LEAD TIME TIME
VENDOR MAY NEED TO EXISTENCE OF MANY SUB-ASSEMBLIES AND DEPENDING ON THE DELIVERY LOCATION
SOURCE FOR MATERIAL, OR BOTTLENECK MAY LEAD TO A LONGER PHASE LEAD USUALLY BY SEA FREIGHT DUE TO THE HIGH
FURTHER OUTSOURCE TO TIME IN VENDOR DELIVERY OF PARTS. COST USING AIR FREIGHT UNLESS OF CERTAIN
OTHER SUPPLIERS IF THEY VARIED FROM 4 -12 WEEKKS URGENCY
DO NOT POSSESS THE SEA FREIGHT MAY TAKE AS LONG AS 12 WEEKS
TECHNOLOGICAL KNOW-HOW ITEM SAFETY LEAD TIME = 2 WEEKS IF DESTINATION IS IN
VARIED 1-2 WEEKS
FIGURE 6.3 DELIVERY LEAD TIME MANAGEMENT
A well-undertaken turnkey project involves the following steps
1) Set up project team

2) Identify turnkey entities and commodity families for the project
3) Practice supplier base rationalization through selection of external
suppliers based on core competencies
4) Outline project objective and open discussion with suppliers
5) Compare quotation for selection of turnkey suppliers
6) Contract authoring, negotiation and finalization
7) Execute agreement condition
8) Review and evaluate success of project
70
The main objective of WHS Corp is to collaborate with turnkey vendor to reduce
the total vendor lead time and create a value chain. The first task involves the
identification of bottleneck parts. Most vendors experience difficulties in sourcing
for material, Inconel 718 which requires them to import from oversea. The
duration may take as long as 12 to 16 weeks. Moreover, it is costly if the
requirement for those parts is insignificant in amount. Thus parts made of Inconel
718 are outsourced to oversea vendors in Europe and USA; however that does
not solve the problem of long lead time.
WHS Corp identifies 3 local vendors for the turnkey project based on their
technological know how, core competencies, experience from past project and
performance. ERP system provides JIT information on purchase order history
and supplier history for analysis of vendors. Among them, LCH Pte Ltd
(TK00020) emerges as the most competitive vendors with an expected lead time
of 4 weeks after post-bidding
Microsoft Dynamics NAV provides a convenience tool for supporting turnkey

project execution with its pricing and discount management, decision logic
support system and requisition worksheet to streamline the order processing.
After finalizing on the agreement, the purchaser enters the agreed price or
discount into the system. Figure 6.4 shows the contracted price for the items,
with a validity of a year. This information will be available to the planners upon
the generation of requisition worksheet in later section.
71
FIGURE 6.4 CONTRACTED PURCHASE PRICE
6.2.2 DECISION LOGIC SUPPORT SYSTEM
The generation of auto purchase order depends on the decision logic support
system. Decision logic support system is a pre-configured set of planning rules
which is used to generate the requisition worksheet by arithmetical calculation of
requirement. It represents the core function of the manufacturing modules in
enterprising the concept of master production scheduling (MPS) and material
requirement planning (MRP).The creation of item card represents the first step to
definition of the products and its sub-components, followed by the definition of
their hierarchy by linkage to their parent item through production BOM.
Production BOM is used by the requisition worksheet to show what needs to be

made or purchased. Figure 6.5a shows the production BOM No.2304A for TFL
Tree on Microsoft Dynamics NAV. It shows the items and phantom BOM that
make TFL Tree.
72
FIGURE 6.5 a: PRODUCTION BOM
The next three figures highlight the key component in an item card which
comprise of general (Figure 6.5b), replenishment (Figure 6.5c) and planning
(Figure 6.5d) functions. In this example, the author will be illustrating the set up of
a Wellhead Guidebase from a TFL Tree System. The availability of ERP has
replaced the manual planning and scheduling with automation and computerized
scheduling by the software. Accurate data storage and calculation of inventory
level assist in making planning decision. Predetermination of lot size and lead
time enable planning arithmetically for production and purchasing to meet the
demand. The replenishment tab provides information for the set up of the
manufacturing strategy and replenishment method for the items in the database
while the planning tab affects the method of planning.
73
In Figure 6.5b, Wellhead Guidebase is uniquely identified as No.6655. The

general tab shows important information regarding the item availability. It
indicates the quantity on inventory, purchase, production, sales, and service
order. This example shows that there is no purchase, production, sales and
service order for this item. The program automatically calculates and updates the
contents of the field whenever there is a creation of order for the item. Upon the
creation of purchase order for 10 units of Wellhead Guidebase, the field for
quantity on purchase order will be updated to 10 units and the quantity on
component lines will decrease to (40-10=30) units. Therefore, the general tab
exhibits the summary of the item quantity and amount requirement on a
generalized view.
The replenishment tab in Figure 6.5c defines the type of replenishment system,
purchase or production. Under the purchase section, the information on the
preferred vendor, vendor item no. and estimated lead time can be entered
according. This information will be highlighted in the requisition worksheet and
the lead time calculation field is used to compute the planned receipt date and
ending date.
The planning tab in Figure 6.5d defines the reordering policy for the item. Upon
the need for replenishment, reordering policy will calculate the lot size per
planning period based on the parameters entered. For Wellhead Guidebase, the
company does not practice any reordering policy as the requirement is linked
directly to customer order, thus the planning parameter is disabled.
74
FIGURE 6.5 b: ITEM CARD (GENERAL TAB)
FIGURE 6.5 c: ITEM CARD (REPLENISHMENT TAB)
75
FIGURE 6.5 d: ITEM CARD (PLANNING TAB)
6.2.3 REQUISITION WORKSHEET
The requisition worksheet provides a convenient tool for calculation of items

requisition plan. It analyses the projected item availability, taking into
consideration of the forecasted demand and supply by arithmetically calculation
of following formula to compute the item balance. A negative value will prompt
replenishment as predefined in the item card. It proposes a requisition plan
through action message, providing the necessary purchase details.
Projected Available Balance = Inventory + Scheduled Receipts +
Planned Receipts – Gross
Requirement.
Figure 6.6 shows the requisition worksheet generated for tree cap assembly
(3242). Since there is no inventory for these items, the system will generate a
requisition worksheet from the planned receipt. Purchase order can be created
directly to turnkey vendor LCH Pte Ltd (TK00020) from the requisition worksheet
by carrying out the action messages command, thus generating an auto
purchase order.
76
FIGURE 6.6 REQUISITION WORKSHEET
77
6.3 DISCUSSION
The turnkey project creates values for the company through collaboration with
the vendors. The implementation of turnkey project shortens the delivery lead
time and streamlines the purchasing and operation planning process as
compared to the traditional purchase order processing in Figure 4.1. Post
implementation in figure 6.7 can lead to a more than 50% reduction in lead time
and an improvement to on-time delivery to customers
TOTAL VENDOR
LEAD TIME
AUTO PO FROM WAREHOUSE DELIVERY TO

REQUSITION HANDLING & CUSTOMER
WORKSHEET QUALITY CHECK
REDUCTION IN VENDOR ITEM ASSEMBLY TRANSPORTATION

LEAD TIME DELIVERY SAFETY LEAD TIME & FREIGHT LEAD
LEAD TIME LEAD TIME TIME
DEPENDING ON THE DELIVERY LOCATION

USUALLY BY SEA FREIGHT DUE TO THE HIGH
COST USING AIR FREIGHT UNLESS OF CERTAIN
URGENCY
SEA FREIGHT MAY TAKE AS LONG AS 12 WEEKS
IF DESTINATION IS IN
FIGURE 6.7 LEAD TIME AFTER TURNKEY PROJECT
This project is aligned with lean strategy which eliminates waste through JIT
purchasing, creation of better flow process and management of materials through
auto PO generation. It offers operational improvement and cost saving to achieve
conflicting company objectives. There is no need to increase inventory to meet
customers demand. In the long run, quality improves as turnkey suppliers are
more accustomed to machining similar commodity, further eliminating waste from
rework.
ERP is needed for the turnkey project and act as a tool to sustain the lean
application. JIT information in term of quality information can be accessed real
time from the system in the right place and right time through the manufacturing
database. Without ERP, it is difficult to sustain a lean environment.
78
CHAPTER 7: CONCLUSION
In this report, the author has introduced the concept of ERP in operation planning
and purchasing. Firstly, the author highlights the underlying job scope and
functions in operation planning and purchasing to give reader a better
understanding of the theoretical concept behind the manufacturing and
purchasing modules. In Chapter 5, the author explains the benefits of ERP
integrative nature and limitation in an organization. The case studies
demonstrate ERP functionalities in auto purchase order generation using
Microsoft Dynamics NAV. It investigates the application of ERP in supporting
turnkey project and lean application in WHS Corp.
Relying solely on ERP doesn’t yield maximum benefits. The need to model a
lean process with innovation ways for continuous improvement is the key to meet
future challenges. ERP holds the key to coordination and support that
improvement. It facilitates transactions and improves internal efficiencies with
consistent routine execution. Today, ERP vendors are constantly improving the
system by introduction of new add on to the system and module to meet future
challenges. With the birth of novel business strategies, the quest for continual
integration with ERP will bring the development of the system to new height.
Future work might examine the development of ERP with lean application given
the increasing trend of lean adoption on supply chain. The current status of ERP
modules is not well-developed to satisfy the market desire in lean application.
79
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APPENDIX A: TFL TREE
86
APPENDIX B: SUBSEA WELLHEAD
87
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1

Enterprise resource planning (ERP) plays a pivotal role in providing solutions to

Keywords: Enterprise resource planning; Operation planning; Purchasing;

FIGURE 2.1: TRANSITION FROM CRAFT TO STRATEGIC OPERATIONS 7

FIGURE 2.2. JIT OBJECTIVES AND BUILDING BLOCKS 11

FIGURE 2.3: OVERVIEW SYSTEM OF ERP 16

FIGURE 2.4 : EXTENDED MODEL OF ERP 19

FIGURE 3.1: OPERATION PLANNING GENERAL FRAMEWORK 32

FIGURE 4.1: PURCHASE ORDER PROCESSING 38

FIGURE 4.2 : STRATEGIC PROCUREMENT CYCLE 39

FIGURE 5.1: BIZTALK COMMUNICATION PROCESS 53

FIGURE 5.2 PURCHASING SOLUTION MAP AND BUSINESS FRAMEWORK FOR 54

MICROSOFT DYNAMICS NAV

FIGURE 5.3a : PURCHASE PRICE ENTRY INTO SYSTEM 55

FIGURE 5.3b : DISCOUNT ENTRY INTO SYSTEM 55

FIGURE 5.4: PURCHASE QUOTES 57

FIGURE 5.5: PURCHASE ORDER 57

FIGURE 5.6: WAREHOUSE RECEIPT 58

FIGURE 5.7a : PURCHASE RETURN ORDER 59

FIGURE 5.7b : ITEM TRACKING LINES 59

FIGURE 5.8: PURCHASE CREDIT MEMO FOR RETURN SHIPMENT 60

FIGURE 5.9: PURCHASE CREDIT MEMO FOR PURCHASE ALLOWANCE 60

FIGURE 6.1 OVERVIEW WORK FLOW IN WHS CORP 66

FIGURE 6.2 BILL OF MATERIAL FOR TFL TREE 68

FIGURE 6.3 DELIVERY LEAD TIME MANAGEMENT 72

FIGURE 6.4 : CONTRACTED PURCHASE PRICE 69

FIGURE 6.5 a: PRODUCTION BOM 73

FIGURE 6.5 b: ITEM CARD (GENERAL TAB) 75

FIGURE 6.5 c: ITEM CARD (REPLENISHMENT TAB) 75

FIGURE 6.6 REQUISITION WORKSHEET 77

FIGURE 6.7 LEAD TIME AFTER TURNKEY PROJECT 78

TABLE 2.1. COMPARISON OF MRP AND JIT 13

TABLE 2.2 CHANGES IN BUSINESS MODEL FROM 1970 to 2006 14

TABLE 3.1: PRODUCTION STRATEGIES 23

TABLE 3.2: MAJOR PHASES OF OPERATION PLANNING AND CONTROL 25

TABLE 3.3. I/O CONTROL REPORT 30

TABLE 5.1: MASTER FILE IN ERP DATABASE 46

2.1 HISTORY OF PLANNING………………………………………………………. 6

3. OPERATION PLANNING AND CONTROL

3.1 OPERATION MANAGEMENT…………………………………………………. 22

4.1 NEEDS FOR OUTSOURCING………………………………………………... 33

5. OPERATION INTEGRATION WITH ERP

6. CASE STUDY: IMPROVE PROCUREMENT AND OPERATION PLANNING IN

6.1 COMPANY BACKGROUND……………………………………………………. 65

APPENDIX A: TFL TREE

Globalization and IT forces unexpected and disruptive business models. Those

1) Illustrate the evolution of planning system

2) Define Enterprise Resource Planning (ERP) and its functionalities in

3) Introduce a common framework for operation planning and purchasing

4) Investigate the linkage between operation processes with ERP system.

5) Demonstrate the use of Microsoft Dynamics NAV in operation planning

1.4 ORGANIZATION OF REPORT

Chapter 5 investigates the manufacturing processes integration with ERP. The

Chapter 6 displays the application methodology of ERP. Using realistic scenarios

Chapter 7 draws the conclusion to the report.

CHAPTER 2: LITERATURE REVIEW

2.1 HISTORY OF PLANNING

Early stock replenishment techniques, such as ABC stratification, economical

FIGURE 2.1: TRANSITION FROM CRAFT TO STRATEGIC OPERATIONS

SOURCE: S.Brown, R.Lamming, J.Bessant, P.Jones

2.1.1 MATERIAL REQUIREMENT PLANNING (MRP)

2.1.2 CAPACITY PLANNING