Tactical SCM Production and Purchase Planning, Product Cost Calculation

Typical Industries for the scenario:

The price for crude oil and its derivatives, which determine the raw material costing of lubricant and wax refineries, is extremely volatile. Due to the large size of the production facilities, the great level of vertical integration, as well as the variation of finished products and the short-term delivery requests of the customers, a high inventory level is required. The decisions of raw material purchases in the right quantity and quality at the right time have substantial economic impacts since raw materials represent by far the biggest costing block. Planning with anticipated price changes in mind can create a significant competitive advantage.

"Tactical SCM" departments are responsible to establish and maintain a midterm plan for production and purchase quantities and to determine projected material and production costs of this plan. They forward the resulting cost for finished products to the sales department as a basis for price determination and negotiation of sales portfolios. They discuss purchase requirements and opportunities with the purchase department, who also enter the projected raw material prices for the future.

Their business processes include planning monthly production quantities for a business year along the overall supply chain - based on monthly sales forecasts and budget plans - and planning of monthly raw material purchase quantities, as well as calculating the resulting cost of finished products.

ORSOFT Manufacturing Workbench supports these business processes with the combination of standard APS and SCM functions and specific functions that take into account the special requirements of the oil industries.

Midterm production and purchase planning

A latest sales forecast (LSF) over a time frame of a year and more represents the input for the Midterm Planning. To create a cost optimal purchase plan for the next three to 12 months the following major constraints have to be considered:

A tactical SCM planning workframe within the ORSOFT Manufacturing Workbench - using planning books for planning production quantities and detailed order editors for make-or-buy decisions - supports the midterm planner. They can also evaluate the resulting resource utilization and thus take capacity restrictions into account. This is supported by conflict indicators as well as separate resource utilzation planning books.

tactical SCM planning

The screenshot shows how the tactical SCM planning workframe helps optimise inventory levels and maintain production and purchase quantities. The upper window is used to maintain future raw material prices.

Calculation of projected product costs

At any time in the midterm planning process, the planner can start the cost calculation function. It calculates future product cost based on the projected future raw material costs, future inventory level, planned production and purchase quantities and resource utilization. As a result, the updated values for marginal and full costs per month are visible in a separate browser. They are used as a guideline for the sales department when negotiating sales prices and volumes with prospective customers.

Data Model and Integration

The basis of midterm planning are the same resources, planning recipes, and other master data stored in the ERP system as used on the detailed scheduling level and for production execution.

The only difference is the level of detail in the resulting operational data. From planning level to planning level, the data objects cover shorter time frames and the information is enriched with more details.

The midterm planning process creates process orders for each month. These process orders define the input and output material quantities - on overall plant material level - and the allocation to a specific production resource with the resulting capacity requirement.

The result of the midterm production planning is also used by the individual production units along the supply chain - e.g. base component production, blending and filling - as a guideline input for the detailed scheduling of their production. The targeted inventory level for the various base components ensures a stable operation including the satisfaction of seasonal peaks. The supply of raw materials is planned and safeguarded for the operation.

Benefits

With the help of this kind of planning, the raw material supply is safeguarded for a time frame of approximately one year. Bottlenecks are identified in an early phase of planning and can be managed by the Tactial SCM department before problems will occur.

A tremendous advantage of the solution is the product cost projection for the finished goods based on crude oil derivative price development. This feature enables the sales force an immediate reaction to future product cost developments.

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