ATDPRO APS Material Management Rules FC A

Material management rules
Industrial Excellence
Areva T&D, BU Products
Date and Location

Introduction
=> This document aims at explaining how to

order the material
Production is focused on value added operations,

Supply chain function will manage material delivery with a
target of
 Service rate at 100%
 Batches sizes as small as necessary
 Inventory as low as required and under control (min-max)
2 > ATDPRO_APS_Material management_FC_A_20090530.ppt 2

Contents
 Procurement modes
 Elements to consider for decision tree and

parameter determination
 Decision tree and parameters determination
 Appendix

These procurement modes will be explained
MRP (Material requirement planning)

Reorder point
Pull management of supermarket
 Kanban
 Visual reorder
Synchronized flow
And associated lot sizing codes

MRP & Lot sizing policy explanations
MRP calculation will propose an order based on

 Bill of material (BOM),
 Dynamic data’s (On hand quantity, pending orders,..)
 Forthcoming requirements (MPS)
But also parameters and Lot sizing policy codes which indicates
how to group the requirements to generate purchase orders
Lot for Lot (LFL) or Each requirement generates a separate
Exact planned order for the same quantity (in a
discrete mode)
Fixed Order Quantity Constant lot size: the quantity proposed will
(FOQ) always be this lot size
Fixed Order Interval The quantity proposed will be the sum of the
(FOI) or Coverage requirements for a given period

Reorder point procurement explanations
Reorder point: The system will propose an order as soon

as the quantity in stock (in the ERP) reach the reorder
point quantity
 Reorder point doesn’t consider the forthcoming requirements
 It’s a reactive mode
Stock
Reorder
Point
LT
Purchase Purchase
order order
Reorder point is always with “Fix order qty” lot

sizing code
Pull management of supermarket: rules of the
game
Stock belongs to the producer

Producer only produces what has been taken by the
customer:
 Kanban loop
 Visual re-order
Never produce more than defined by supermarket
Op
Supplier
Max
Min
Supermarket
A simple and visual production scheduling system

based upon reality, performed by operators
Pull management of supermarket: kanban loop
A kanban is a signal from the customer (typically a

card or an empty pack carrying all required data)
sent to a supplier (internal or external)
 that tells that a fixed quantity of product has been
taken from supermarket
 that serves as a replenishment order
 no replenishment w/o kanban!
x
x
x
x
x
x
batch Op
Batch Size: 3
Supplier
Max
Min
Note: Animated in presentation mode!
Pull management of supermarket: visual re-order
Re-ordering of parts performed on the shop floor at

fixed intervals (daily, weekly, …) visually comparing
actual real stock level with an indicated order-up-to
(maximum) level
P/N
Qty
2
Max: 5
Ext. f
suppliers
Max
Min
Supermarket
Supplier lead time should be shorter or equal to

re-order interval to keep process simple
Note: Animated in presentation mode!
Advantages of pull management
Typical characteristics of a pull approach

 Based upon reality on the shop floor, not
assumptions in an IT system
 Simple and comprehensible, no complex IT-system
 Decentralized approach
 No “heavy” scheduling function required
 Planning can focus on anticipating the future
 Facilitating autonomy and ownership
 Responsibility towards the next operation
 Creating a customer-oriented culture
KISS... Keep it stupid simple !

Synchronized orders overall concept
1. The Forecasts will allow the supplier to plan resources

2. The order will allow the supplier to book material and
launch manufacturing
3. The call will set material delivery in the same sequence as
AREVA is producing (based upon the sequenced
Customer Order Schedule)
 As Synchronized flow with a supplier can be difficult to
coordinate, safety time may be needed to protect against
disturbances
Forecasts
Planning
Order
Call
Customer Order
Schedule
Sequence
supplier In sequence
Op
f
AREVA unit

Contents

 Appendix

Elements to be considered
 Each component / material will be analyzed through 6

elements to implement the right procurement mode and
parameters:
1. Collective or Individual management

2. Consumption value class (A,B,C)
3. Procurement lead time
4. Frequency of delivery
5. Consumption flow
6. Criticality of the component

Collective or individual management?
Definition:
“Individual” / “Collective” is a SAP wording with a sense

common to all ERP
“Collective” management also “Individual” management

called anonymous (also called customer specific, order
related, PRP)
Purchase orders are driven by MPS Purchased orders are based on
which is based on firm orders and firm orders only
forecasts
All transactions (Purchase orders, All transactions (Purchase
receptions, transfers, consumptions) orders, receptions, transfers,
have no direct link with customer consumptions) have a direct
orders: link with customer orders
 Material is managed with stock
 Low runners with low occurrence can
be ordered when receiving firm orders
only
Costing is based on standard price Costing is based on actual price
with a cost collector allocated to the financial WIP of
the project
Prefer “collective” instead of “individual”
management
Constraints of “individual” management for components

with standard design:
 When the project is postponed and you have the components
already in stock, if a new project needs the same components,
the ERP won’t tell you that you can use it but will ask you to
order the components again
 Vice versa when the project is advanced
 People in production don’t understand this management, they
often issue the material for project A which was ordered for
project B, this create discrepancies
 Even in engineering department, if the rule isn’t clear and
simple, they get confused and create for a same material
many codes: One as collective and several as individual
 You create a lot of parts in your ERP and make it heavier
=> Every unit must insure that a maximum number

of components are managed as “collective”

Rule
Individual or
Design of Costing at project
collective
the part? level?
management?
Designed
to order
Negotiated for Individual
some big orders
Standard
design
Prices are defined by

Standard
a frame agreement Collective
design
or a price list
For some business with spot contracts,

decided at project management level
In parallel, standardization has to be addressed as

a structural solution to reduce stock and
simplify material management
ABC classification on consumption value
 Consumption Value = unit cost x consumption

quantity during a given period
Cumulative %
of stock value
100%
95%
80%
A B C
items items items
items
Focused efforts on a limited quantity of items (A items),

will optimize the savings (80%)

Delivery frequency has a big impact on stock
Increased delivery frequency has important benefits:

 Reduced stock due to smaller batch size
Monthly Weekly
replenishment replenishment
1000
Average
500
stock
250
Average
125
stock

Delivery frequency has a big impact on stock
 Then, reduced safety stock
Monthly Weekly
replenishment replenishment
Average
Stock level
Safety
stock Delivery
interval
But also many others benefits like

 More intense supplier relationship
 Improved reactivity to problems

Solutions to increase delivery frequency
1. Milk run, consolidation of trucks with cross docking

platform
2. Very often, reduced batch sized is possible without
increasing delivery frequency
 Parts A/B/C/D are ordered with different due dates => 1

delivery per period for each part
Part A
Part B
Part C
Part D Areva
 Batch size reduction => 4 deliveries per period
Part ABCD Areva

There are 3 kinds of consumption flow to consider
Consumption flow has to be defined according to its

continuity and its fluctuation
 Consumption flow : quantity of components used on
assembly line on a fixed period (week, month)
Continous comsumption Discontinous consumption
Low fluctuation Discontinuous

+ 20/30% Consumption
Consumption
medium.
Time
- 20/30% Time
> 1 month > 1 month
High fluctuation
+ 20/30%
Consumption
medium.
- 20/30% Time

Consumption flow determination
Every unit has to formalize its own limit for,

 Low fluctuations
 High fluctuations
 Discontinuous flow
... by using a pragmatic approach
Beware,
 if you work with ERP data’s, they’re not fully aligned
with the reality of the physical consumption
 The period to be analyzed could be in a first step
monthly, then weekly for some parts

Criticality of the component
This criteria has to be defined and explained by the

unit
 Single and critical source
 Quality issue
 Size of the part
 Components mandatory to start production
 ...
! Important point is to start production with all

components ready or foreseen to be ready

Contents

 Appendix

Decision tree
YES Can ERP management NO
1/ Synchronized orders
be collective?
2/ MRP individual
- Lot for Lot
- SS=0
- Safety lead-time possible
Procurement Lead-time < 2wks
& Deliveries every week YES
- Min Batch size =1
and / or
continuous flow with low
fluctuations 1/ Pull management of supermarket
- Kanban
-Visual reorder
2/ Reorder point based on ERP
NO
Continuous flow YES

MRP, lot size:
with high - Fixed order interval, variable qty
fluctuations - Fixed order qty, variable frequency
NO
MRP
Not continuous YES - Lot for Lot
flow - Safety lead-time is possible
- Min Batch size = 1
Phasing out
item

Lot sizing policy choice
Advantages Disadvantages
Fixed Order If the activity is growing, the We are never sure that
Quantity average level of inventory is we’ll consume what we
stable => the supplier and buy
forwarder should adapt the
frequency of deliveries to
the load variations
Fixed Order You buy only what you need The volume of
Interval => more adapted for high inventory increases
(coverage) fluctuations with the activity
You can set a fixed date for
deliveries

Setting of procurement lead-time
Analyze with a “receipts” file the procurement lead-time* for

every part compared to contractual lead-time previously
negotiated by sourcing:
 Real average lead-time performed by the supplier
 Std deviation around the average lead-time
 Average delay compared to requested LT
Nb of
deliveries * Procurement lead-time =
Time from order to delivery
Std
deviation
early Late
Time
Contractual Real average

LT LT
ERP LT
What decision should we take?

Work with realistic procurement lead-time
 When average lead time is inconsistent with

contract
1. Understand why,
 supplier issue? => Sourcing team have to work with the
supplier to come back to the required LT or..., change
the supplier
 planning issue? => don’t expect short and reliable lead-
time without any forecasts and not leveled demand
2. Whatever the reason, set in ERP realistic data’s
according receipts analysis:
 Set safety lead-time to compensate the average delay
 In parallel, check the lead-time consistency between
procurement data’s, sourcing data’s in ERP and real
contract

Reorder point calculation
Reorder point: The system will propose an order as soon

as the quantity in stock (in the ERP) reach the reorder
point quantity
 Reorder point doesn’t consider the forthcoming requirements
 It’s a reactive mode associated to pull flow
Stock
Reorder
Point
LT
Purchase Purchase
order order
Reorder point is always with “Fix order qty” lot

sizing code
We can have shortages if

 Consumption is higher than expected
 Supplier is late
Stock
Reorder
Point
A B C Time
Shortage

The reorder point level should include some safety

to prevent from potential shortages
Stock
Reorder
Point
Safety quantity Time

Reorder point level =

Replenishment lead-time (days) x Average daily consumption +
Safety quantity for demand variability (Sv)
Replenishment lead-time
Stock Average consumption
Reorder
point
Safety
Time
Average daily consumption should be updated

 A class parts: Monthly
 B class parts: Twice a year
 C class parts: Yearly
Kanban loop sizing
Kanban loop sizing is similar as reorder point

calculation
Number of cards =
Replenishment lead-time (days) x Average daily consumption
Qty of pieces per card
+1+
Safety quantity for demand variability (Sv)
Qty of pieces per card
Qty of pieces per card <= delivery frequency

Average daily consumption should be updated like
for reorder point

Prerequisite for pull implementation
Pull is a reactive mode, no anticipation is possible

when we have some fluctuations in the
consumption:
 We need whether short and very reliable lead-time
 Whether a stock ready for delivery on supplier side
The material will be stored in a supermarket, a
packaging instruction must be set
Ordering process is different, you should be ready
on this point
To be reviewed and completed

Why do we set safety?
Whatever the procurement mode, you can put safety for 2

types of problems:
Sv - To cover variability of Sd - To cover potential disturbances

consumption compared to  risk on deliveries (supplier or
 the original plan (load higher forwarder late)
than what was planned)  quality problems
 or average demand  Inventory discrepancies...
Can be calculated Can be estimated
Overall safety stock determination must me a management

decision as you’ll pay for a stock
 Which hides problems instead of solving them
 Which will prevent you (or the supplier) from
being reactive to the problems (express deliveries,...)

Principles for safety stock determination
1. Safety stock determination must me a management

decision
2. Don’t stack safeties
 Safety stock, safety lead-time and other types (dock
to stock, administrative lead-time...)
 your global safety level will be too high and you won’t
be able to master your stock level
3. If you use theoretical calculation, it’ll be over
x
estimated 68.26%
95.44%
99.74%
4. If you let procurement staff determine the safety

stock level, they’ll over estimate it as well
5. You can start by calculating it: SS = Sv + Sd, See
next
6. Then use a pragmatic approach with control card slides

Safety stock determination: Sv part
Pull mode
 Sv= Maximum consumption – average consumption
1600
1400
1200
1000
800
600
400
200
0
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
For MRP mode

 Sv= Average difference between forecast and real
consumption

Safety stock determination: Sd part
Safety stock should be sized in relation with

 the frequency of delivery not the lead-time in order to
cover the risk between 2 deliveries
LT = 4 Wks
1 Wk
 Criteria N° 6 (criticality of the component)
=> 0 < Sd part < 1 batch size
If you’re scared to decrease it, do it step by step but

put it under control...

Stock under control with control card
For all those parts, you should complete your

analysis with a “Control card” which is very rich
Why order
Higher variability in twice and so
the consumption early?
Why such a
high level?
Actual SS
level
Why did we have SS is never impacted,

shortages? so not useful !!l

Stock under control with control card
SAP can issue control card (see instruction)

You can also ask your team to issue it manually for
main items (A class for example) / commodities
 This force them to look at it daily / Weekly
 Example of Daily “Flash 5” applied to procurement
Actions decided
and followed
daily
Stock level
recorded daily
and manually

Impact of parameters compared to stock target
The set of parameters (batch size and safety stock)

will give you the normative level of stock
 To be compared to the target
 To use to build your road map
Days
170
160 Consumption value

150
0-80% 80-95% 95-100%
140
130
ABC Class A B C
120
110 Days Days Days

100
Delivery frequency (days) 7 28 28
90
80
70
60
Normative level Days Days Days
50
40
Batch size impact (days) 3,5 14 14
30 Safety stock (days) 7 14 14
20 Total normative stock (days) 10,5 28 28
10
0
Commitment Open orders Stock (days) Safety (days) Replenishement d items (not Other Total Days
(days) (days) lot size /2 turning)
14,0
15 days target
Develop logistic protocol
 New procurement mode,

 Reduced lead-time with a good A2,
 Reduced batch size, increased frequency,...
 All of those issues will be reached trough a logistic
protocol
A logistic protocol is a part of the frame sourcing

contract which covers:
 Procurement mode  Ordering process
 Forecasting  Packing
 Lead-time  Marking
 Batch size  Invoicing process
 Schedule and frequency of delivery
Contents

 Appendix

ABC classification principle: Example
You want to reduce a stock made of 100 items

You’ll focus on the stock value
Calculate the stock value of each item, calculate its
relative weight in % of the total stock value, then sort it
decreasingly
Qty on Stock Stock
Items Price
hand value value %
PC-ABCD123 342 87 29 754 13%
PC-ABCD124 68 256 17 408 8%
PC-ABCD125 25 585 14 625 6%
PC-ABCD126 30 442 13 260 6%
PC-ABCD127 13 995 12 935 6%
PC-ABCD128 11 582 6 402 3%
Then cumulate this stock value in % of the total stock

value
Qty on Stock Stock Cumulated
Items Price
hand value value % Stock value %
PC-ABCD123 342 87 29 754 13% 13%
PC-ABCD124 68 256 17 408 8% 21%
PC-ABCD125 25 585 14 625 6% 27%
PC-ABCD126 30 442 13 260 6% 33%
PC-ABCD127 13 995 12 935 6% 38%
PC-ABCD128 11 582 6 402 3% 41%

ABC classification principle: Example
ABC classification has the following rule:

A items are from 0 to 80%
B items are from 80% to 95%
C items are from 95% to 100%
Stock Stock Stock value Stock value Classification
Items Price
Qty value % cumulated % ABC
PC-ABCD127 178 248 44144 33% 33%
PC-ABCD123 311 89 27679 21% 53% A
PC-AAAD124 77 237 18249 14% 67%
PC-ABCD133 25 366 9150 7% 74%
PC-ABCD126 30 300 9000 7% 81%
PC-ABCD127 13 521 6773 5% 86% B
PC-ABCD128 11 507 5577 4% 90%
PC-ABCD129 19 294 5586 4% 94%
PC-ABCD130 81 58 4698 3% 97%
PC-ABCD125 13 167 2171 2% 99% C
PC-ABCD132 0,77 1 288 992 1% 100%
PC-ABCD346 0,65 416 270 0% 100%
PC-ABCD134 1,95 66 129 0% 100%

On which criteria should ABC be based
ABC classification can be applied on many criteria's

according to your target:
Target: Criteria:
Inventory optimization Consumption value
(consumption qty x unit price)
Stock value
Optimize physical Quantity of movements
allocation in the
warehouse
Product dimensions or
floor occupation
Choose the right Consumption value

frequency for cycle
counting
Sales optimization Margin by item

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ATDPRO APS Material Management Rules FC A

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Material management rules

Date and Location

=> This document aims at explaining how to

Production is focused on value added operations,

2 > ATDPRO_APS_Material management_FC_A_20090530.ppt 2

 Elements to consider for decision tree and

 Decision tree and parameters determination

3 > ATDPRO_APS_Material management_FC_A_20090530.ppt 3

MRP (Material requirement planning)

And associated lot sizing codes

4 > ATDPRO_APS_Material management_FC_A_20090530.ppt 4

MRP calculation will propose an order based on

5 > ATDPRO_APS_Material management_FC_A_20090530.ppt 5

Reorder point: The system will propose an order as soon

Reorder point is always with “Fix order qty” lot

Stock belongs to the producer

A simple and visual production scheduling system

A kanban is a signal from the customer (typically a

Re-ordering of parts performed on the shop floor at

Supplier lead time should be shorter or equal to

Typical characteristics of a pull approach

KISS... Keep it stupid simple !

10 > ATDPRO_APS_Material management_FC_A_20090530.ppt 10

1. The Forecasts will allow the supplier to plan resources

11 > ATDPRO_APS_Material management_FC_A_20090530.ppt 11

 Elements to consider for decision tree and

 Decision tree and parameters determination

12 > ATDPRO_APS_Material management_FC_A_20090530.ppt 12

 Each component / material will be analyzed through 6

1. Collective or Individual management

13 > ATDPRO_APS_Material management_FC_A_20090530.ppt 13

“Individual” / “Collective” is a SAP wording with a sense

“Collective” management also “Individual” management

Constraints of “individual” management for components

=> Every unit must insure that a maximum number

15 > ATDPRO_APS_Material management_FC_A_20090530.ppt 15

Prices are defined by

For some business with spot contracts,

In parallel, standardization has to be addressed as

 Consumption Value = unit cost x consumption

Focused efforts on a limited quantity of items (A items),

17 > ATDPRO_APS_Material management_FC_A_20090530.ppt 17

Increased delivery frequency has important benefits:

18 > ATDPRO_APS_Material management_FC_A_20090530.ppt 18

 Then, reduced safety stock

But also many others benefits like

19 > ATDPRO_APS_Material management_FC_A_20090530.ppt 19

1. Milk run, consolidation of trucks with cross docking

 Parts A/B/C/D are ordered with different due dates => 1

 Batch size reduction => 4 deliveries per period

Part ABCD Areva

20 > ATDPRO_APS_Material management_FC_A_20090530.ppt 20

Consumption flow has to be defined according to its

Continous comsumption Discontinous consumption

Low fluctuation Discontinuous

21 > ATDPRO_APS_Material management_FC_A_20090530.ppt 21

Every unit has to formalize its own limit for,

22 > ATDPRO_APS_Material management_FC_A_20090530.ppt 22

This criteria has to be defined and explained by the

! Important point is to start production with all

23 > ATDPRO_APS_Material management_FC_A_20090530.ppt 23

 Elements to consider for decision tree and

 Decision tree and parameters determination

24 > ATDPRO_APS_Material management_FC_A_20090530.ppt 24