Microcomputer-based manufacturing software: what it can do for you.
What it can do for you.
A very sophisticated form of planning and cost control is called manufacturing resource planning II (MRP II). It integrates all aspects of the manufacturing organization from basic accounting applications through specialized manufacturing functions. Because of the diverse applications involved, MRP II requires a highly automated and tightly controlled operation.
This article will familiarize accountants with the elements of MRP II. It also explores the two categories of micro-based software: packages for full MRP II systems and those for partial cost control systems.
THE MANUFACTURING ELEMENTS
MRP II is a comprehensive systems approach that coordinates accounting functions (such as order processing, accounts receivable and payable, payroll and general ledger) and manufacturing operations. MRP II manufacturing functions include
* Inventory control.
* Bill of materials (BOM).
* Capacity planning.
* Master production scheduling (MPS).
* Product cost accounting.
Inventory control. This is the foundation of all manufacturing applications. It maintains desired stocks of raw materials, work in process and finished goods. Based on product information, engineering specifications and planning data, inventory control helps determine what's on hand, what has been allocated and ordered and what needs to be ordered (either from within a plant or from an outside vendor) to meet demand.
Bill of materials. A BOM lists all subassemblies and raw materials that go into a parent assembly (or finished part) with the quantity of each required to make the assembly. BOMs facilitate inventory control because they show where items are used, where substitutions can be made and where overall inventory can be cut. Since they contain an analysis of the total costs of a product and all its components, they also help reduce product costs. Knowing the makeup of production items is the first and most valuable step in automating production.
Capacity planning/product routing. Capacity planning indicates what can be produced given plant constraints--labor, space or equipment. Product routing moves manufacturing materials according to an efficient operation sequence so items are at the proper workstation when needed. Direct labor (usually a major portion of production costs) is used more efficiently because workers spend less time waiting to receive materials.
Master production scheduling. MPS is calculated by determining, on a time-phased basis, what will be produced, what inventory will be carried and what orders should be placed to meet the production schedule. MPS, an essential component and driver of MRP II, is based on a forecast of the items that will be sold. It takes into account such things as plant and labor capacity and availability of material. In MRP II, this schedule is very comprehensive and integrates all pieces of the company's planning process, such as forecast data from sales planners, in generating the production plan. For example, a plant manager is concerned with receiving raw materials only when needed for the manufacturing cycle and may not want to order 1,000 units of an item that has a one-week lead time (order to receipt time) when 800 of the units will not be needed for eight weeks. A master production schedule allows the manager to order efficiently.
Product cost accounting. The cost accounting system allows developing and maintaining standard costs for all elements of the production process. Materials, labor and overhead costs (broken out by product, part, service, work center and operation) all can be monitored. The cost system tracks actual costs against standard and provides variance reports showing differences in the costs of materials, labor and overhead usage.
CANDIDATES FOR MRP II
There are three basic types of manufacturers and a fourth that is a combination of the others. They are
* Job shop.
* Mixed mode.
The first two types are ideal for MRP II.
Repetitive. These companies make items in long production runs to build up inventories. They include manufacturers of individually identifiable finished products, such as pencils or nuts and bolts. Most manufacturing cost control software is designed to handle this type of manufacturer because of the manufacturer's ability to forecast and the repetitive nature of the production operation.
Process. These companies, such as paint or processed meat manufacturers, produce items in batches and measure the amount produced. Forecasting is important because process operations carry large quantities of raw materials that must be ordered in sufficient time to meet production plans. These companies can benefit greatly from software that controls production and other MRP II functions.
Job shop. This type of manufacturer makes fewer, more expensive items to fill specific orders. The process is usually labor- and equipment-intensive and the allocation of overhead is an important factor in determining both the cost of production and the price to the customer (that is, cost plus pricing). Forecasting is not an issue since more costly parts are ordered only when needed. Frequently this type of manufacturer can use a job cost system, which captures all relevant costs by individual job, rather than an MRP II system.
Mixed mode. These companies' manufacturing processes have the characteristics both of repetitive and process manufacturers and of job shops. MRP II for these companies is not feasible because of the difficulty of forecasting for a job shop.
ELEMENTS OF SUCCESSFUL INSTALLATIONS
To ensure successful implementation of MRP II, a plant's operations should have certain characteristics.
Accurate inventory records. The number of units of an item recorded as on hand should approximate the true physical count. If the company cannot measure its inventory precisely, a scheduling and forecasting program will create additional problems.
High predictability of vendor delivery times. The MPS is driven by lead times and anticipated deliveries. If these are irregular and unpredictable, production schedules are invalidated.
Accurate BOMs. Obviously inventory and production can't be controlled when the items to be used to make certain assemblies or finished parts aren't known. Yet many plants don't have accurate bills and rely on informal systems to know, for example, that substitutes have been used to make an item. BOMs have to be correct before converting to a new system.
Efficient routing. The best software in the world cannot compensate for an inefficient plant layout. If workers waste time retrieving or moving items and the physical layout is not conductive to moving items from one workstation to another, the benefits of the scheduling program will be nullified.
Knowledge of one's role. Everyone in the system must know his or her role in supplying necessary data and how the rest of the plant interacts with it. For example, the controller must understand how purchasing, inventory and accounts payable are integrated in the system. Data must be entered accurately; otherwise errors may be magnified throughout the system.
Commitment. Effective MRP II systems are created by committed managers who must periodically (some say at least once each week) rerun the MPS to include revised forecasts. These adjustments are needed to keep inventories, purchases and production schedules as close to actual needs as possible.
The two main categories of micro-based manufacturing software programs are production control systems, for partially integrated companies, and full MRP II systems, for completely integrated manufacturers.
Production control systems. Packages in this area are designed primarily for general purpose accounting. However, their capabilities have been extended to handle many of the basic manufacturing functions including BOMs, purchase orders, product costing and inventory control.
These packages are appropriate for companies that do not have the resources or need for a complete MRP II system. They can facilitate more cost-effective purchasing, help reduce inventories and perform cost accounting. Production control systems rely on after-the-fact entry of data and should be considered by companies doing light manufacturing.
Some representative programs, listed on page 78, are Macola, MAS90, Open Systems and Platinum. These packages cost between $995 and $1,995 for the manufacturing applications and $795 for the financial accounting programs.
Full MRP II systems. These packages offer everything production control systems do plus complete MRP II with MPS and forecasting, shop floor control, capacity planning and routing. They have more flexibility and features for controlling manufacturing functions. However, some of them are weak in financial accounting. (The exhibit shows that some integrate with various accounting systems.)
Full systems in this category include Fourth Shift, INMASS II, MICRO-MAX MRP, MYTE MYKE, NAVIGATOR and SYMIX. The cost from $12,000 to $25,000 for an average system. Some of these packages are as powerful as mainframe-based manufacturing systems.
THE REAL COST OF AUTOMATION
Software represents a fraction of the total cost of a full MRP II implementation. For example, installing an MRP II for a company which is currently semi-automated and has a 10-workstation network would be as follows:
* $60,000 for hardware.
* $10,000 for software modifications.
* $20,000 for training.
* $30,000 for consulting fees.
* $20,000 to $50,000 for upgrading the plant to meet the demands of an automated manufacturing program.
That's roughly between $150,000 and $200,000 to automate.
But if the plant is a $15-million-a-year operation and could add an estimated 2% to its profit margin (through greater plant efficiencies, better purchasing and reduced inventories) by adopting an MRP II system, that would mean a $300,000 saving in the first year of full implementation, which can take two years or more to accomplish.
Cost justification is the easy part. The hard parts are developing a total management and organizational commitment and learning how to run a manufacturing facility with a computer. Using manufacturing software to control operations can be a daunting challenge but the payoff can be enormous.
SHELDON NEEDLE is chief executive officer of Computer Training Services, a publisher of software evaluation materials for CPAs, located in Rockville, Maryland.
|Printer friendly Cite/link Email Feedback|
|Publication:||Journal of Accountancy|
|Date:||Jun 1, 1990|
|Previous Article:||Think twice before selling that subsidiary: without proper planning, the new IRS regulations could prevent taking deductions for a loss.|
|Next Article:||Microcomputer security and control: six inexpensive and simple techniques.|