Materials Planning in SAP R/3- Overview

Materials planning is one of the key of good inventory control systems. The objective of materials planning is to monitor stocks to ensure material availability. As a leader in ERP software, SAP R/3 also has a special materials planning function that works like and even better than other inventory control software. With materials planning in SAP, we can determine automatically which material is required, the quantity required and when it is required. By doing so, we can prevent lacking of materials when we need it. Materials planning in SAP can automatically create procurement proposals for purchasing and production (planned orders, purchase requisitions or delivery schedules). This target is achieved by using various materials planning methods which each cover different procedures. An example of how SAP materials planning and other SAP functionalities can help company to excel its business. Sales and Distribution (SD) module of SAP receives demand from customer. Sales department will create a sales order (SO) or sales forecast which contain the information of what, how many, and when Finished Goods are needed by the customer. The SO or sales forecast will be considered as an independent requirement in SAP. This requirement will trigger materials planning process for finished goods. SAP will compare the requirements with finished goods current stock. If the requirement fulfillment will result in shortage of stocks (according to certain calculation of materials planning procedure for the finished goods), materials planning will automatically create procurement proposal, such as planned order. Planned order can be converted into production order (if finished goods are produced internally) or purchase requisition (if finished goods are procured externally). In addition, materials planning can also create purchase requisition directly as a procurement proposal (no planned order).

If the finished goods are produced internally, the production order/planned order created will be considered as dependent requirement for their components and/or raw materials. SAP will determine these dependent requirements by using the information from Bill of Materials (BOM) of finished goods. These dependent requirements will also trigger materials planning for the components and/or raw materials. SAP will compare the requirements with components/raw materials current stock. If the requirement fulfillment will result in shortage of stocks (according to certain calculation of materials planning procedure for the components/raw materials), materials planning will automatically create procurement proposal, such as planned order. Planned order can be converted into production order (if components are produced internally) or purchase requisition (if components/raw materials are procured externally). In addition, materials planning can also create purchase requisition directly as a procurement proposal (no planned order). If the finished goods/components/raw materials are procured externally, the procurement/purchasing department will process the purchase requisition into Purchase Order (PO). Production Order and Purchase Order will result in materials availability when we need them, so we can fulfill the customer demand on-time. The prerequisites for implementing all materials planning procedures is the Inventory Management must function well and should always be up-to-date. If this prerequisite is not met, then materials planning will fail to achieve its objective to monitor stocks to ensure material availability. To know more about materials planning in SAP, you can read this post.

Materials Planning Procedures in SAP (MRP & CBP)

You should read previous post about materials planning overview before reading this post. In this article we will explain in detail about materials planning procedure in SAP R/3. Its basic concept is similar with other inventory control software, but SAP R/3 has its own unique procedures for materials planning. Basically, there are two types of standard materials planning procedures in SAP, which are: 1. Traditional Material Requirements Planning (MRP) In traditional SAP MRP system, sales order, planned independent requirements, reservations, dependent requirements that are created by BOM explosion, and so on are planned directly as requirements. The materials planning procedure will create procurement proposal only if these requirements will result in shortage of material stocks at a certain time. There are no other requirement that can trigger a procurement proposal. This procedure is used in PD-MRP MRP Type in standard SAP R/3. MRP is especially useful for the planning of finished products and important assemblies and components (A materials). 2. Consumption Based Planning (CBP) Consumption-based planning (CBP) is a materials planning procedure based on past consumption values that determine future requirements by using forecast or other statistical procedures. Originally, in CBP, planned independent requirements or dependent requirement will not be considered in the net requirements calculation. Instead, it is triggered when stock levels fall below a predefined reorder point or by forecast requirements calculated using past consumption values. So, all the planned independent or dependent requirements in a certain period of time should have been considered before (when set the reorder point or calculate the requirement forecast).

Consumption-based planning procedures are simple materials planning procedures which we can use to achieve set targets with relatively little effort. Therefore, these planning procedures are used in areas without in-house production and/or in production plants for planning both B- and C-parts and operating supplies. There are three procedures in Consumption Based Planning (CBP), which are: a.Reorder point planning In reorder point planning, SAP checks whether the available stocks are below the reorder point that has been set for the material. If they are, SAP will create procurement proposal. We can determine the reorder point manually (VB-Manual reorder point planning MRP Type in standard SAP R/3) or, it can also be calculated automatically using the material forecast (VM-Automatic reorder point planning MRP Type in standard SAP R/3). The reorder point should cover the average material requirement/consumption expected during the replenishment lead time (procurement processing time + planned delivery time + GR processing time). Besides the average consumption, we also should consider safety stock. The safety stock exists to cover both excess material consumption within the replenishment lead time and any additional requirements that may occur due to delivery delays. Therefore, the safety stock is included in the reorder level. The following values are important for defining the safety stock:

Past consumption values (historical data) or future requirements Vendor/production delivery timelines Service level to be achieved Forecast error, that is, the deviation from the expected requirements

In standard SAP R/3 system, besides VB Manual Reorder Point and VM Automatic Reorder Point MRP Type, there are also other MRP Types that have reorder point as its basis to calculate requirement with additional procedure which count external requirement (sales order and manual reservation) as a requirement. The MRP Type are: V1-Manual reorder point with external requirements and V2Automatic reorder point with external requirements. b.Forecast-based planning In forecast-based planning, historical data is used in the material forecast to estimate future requirements. These requirements are known as forecast requirements and are immediately available in planning. The forecast, which calculates future requirements using historical data, is carried out at regular intervals. This offers the advantage that requirements, which are automatically determined, are continually adapted to suit current consumption needs. This procedure is used in VV-Forecast-based planning MRP Type in standard SAP R/3. c.Time-phased materials planning In time-phased planning, historical data is also used in the material forecast to estimate future requirements. However, in this procedure, the planning run is only carried out according to predefined intervals. If a vendor always delivers a material on a particular day of the week, it makes sense to plan this material according to the same cycle, in which it is delivered. This procedure is used in R1-Time-phased planning MRP Type in standard SAP R/3. Besides all procedures that have been explained above, in SAP R/3 system we can create other procedures according to our own needs. We can do it through configuration with SPRO T-code.

We will write another post about how to configure MRP in SAP R/3 System. Please come back later.