SAP ERP1. Describe the Production Planning and Execution process.docx

SAP ERP
1. Describe the Production Planning and Execution process (as
implemented in SAP ERP) starting from sales and operations
planning all the way to the receiving of the finished goods into
stock. Use a diagram to show the linkages between the
different modules.
The diagram above shows the role of the application
functionality, Production Planning and Control, within the SAP
ERP system. The Production Planning and Control application
deals mostly with quantity and time-based planning and controls
the production process. Within the Production Planning and
Control system, various modules are interconnected to facilitate
data exchange and document flow, and to increase functionality.
The diagram below shows a breakdown of these main modules
within Production Planning and Control.
Sales and Operations Planning contains some of the higher level
planning. For example, it includes the overall planning at the
company level. The main function of Sales and Operations
Planning is to determine the quantities to be produced. To this
end, Sales and Operations Planning is a forecasting and
planning tool where sales and production goals can be set on the
basis of historical, existing, and estimated future data.
Consequently, Sales and Operations Planning is mostly useful
for medium and long-term planning. Additionally, Sales and
Operations Planning gives the user the ability to do rough-cut
planning to come up with an idea of the different types of
resources and production capacities required to meet the goals
set by the Sales and Operations Planning function itself. Once
the goals are set, and the production quantities are determined,
it is time to utilize the next module, Demand Management.
The main function of Demand Management is to pick up where
Sales and Operations Planning left off by calculating the

independent requirements for production. To do this, once the
data from Sales and Operations Planning is transferred to
Demand Management, requirement dates and requirement
quantities can be determined in accordance with planning
strategy. The planned independent requirements will then, in
turn, be given individual dates and will go on to facilitate
production planning.
The next step in the process is Material Requirements Planning,
or MRP. MRP is the main function of production planning. It
will take the demand program that was created within Demand
Management and integrate that information with things like lead
times, lot sizes, and scrap quantities. MRP will create the
planned orders at every bill of materials level to cover the
requirements. The long-term planning part of this step is used to
determine how a change in the planned independent
requirements will affect capacity utilization, stocks, and
external procurement.
The next step in the Production Planning and Execution Process
is to create the planned orders that will ultimately be integral to
the production process. It is important to know that the planned
orders are not binding and will not trigger any type of
procurement directly. However, it is necessary for planning
purposes. Planned orders are procurement proposals that stem
from MRP and they will eventually be changed into production
orders or purchase requisitions.
Capacity Planning is a process where a production sequence can
be created. It is in Capacity Planning that an economic use of
resources throughout the production run can be achieved. In the
process of doing this, capacity evaluation takes place. Capacity
evaluation is the process of determining the available capacity
and the capacity requirements for the production orders. They
are then compared across the board and capacity leveling takes
place. Capacity leveling is the process of selecting appropriate
resources and ensuring optimal capacity commitment.

The next step is to create the production orders that will
eventually be utilized. The production orders specify which
material or materials to be produced, where they are to be
produced, which operations will produce them, and the date that
the production will take place. Additionally, this is the step
where costs are to be settled. It is worth noting that this module
will allow the end user to either create the production order
manually or to create it by converting an existing planned order.
Once the production order is in place, Production Execution can
take place, which includes the issuance of materials for
production, the confirmation of production orders, and goods
receipt and inventory placement.
The final step of the process, as previously mentioned, is
Production Execution, which covers the last three process
modules in the diagram. It allows for the control and
management of manufacturing and shop floor functions. It
specifies the aspects of production, and it is here that materials
can be withdrawn from stock for production, the production
process is recorded and monitored, and the finished goods are
received into stock. Production Execution is most likely the step
where many people recognize the transparency and real-time
visibility that SAP brings to multiple business functions. Lastly,
now that all the planning has been done, Production Execution
consequently enables the end users to make quick, informed
decisions and helps optimize profitability. Lastly, the figure
below which is taken from chapter 3.2 of Production Planning
and Control with SAP ERP, by Dickersbach and Keller, shows a
more in-depth illustration of the process overview, showing how
some of the elements are concurrently connected. For example,
it shows that sales orders contribute to MRP as well.
2. What is Master Data? Describe the different types of master
data (with sample attributes) needed to enable production
planning and execution.
Master data is data that contains the most important information

on sites, vendors, and customers as well as things like materials
that the company procures, produces, stores, or sells. Master
data also includes pricing and cycle control data and is stored in
the system as master records for retrieval when the user
processes business transactions. Maintaining correct and
accurate master data is one of the most important elements in
the administration of an effective SAP system. If used correctly,
it will dramatically reduce the time required to process
transactions. This is because, as previously exemplified, various
modules and functionalities of SAP will share the data cross-
functionally and will draw from the master data, automatically
copying it into relevant fields.
There are different types of master data such as Site, Business
Partner, Article, Merchandise Category, and Conditions Data.
Site data is mostly time and place data. For example, included
in Site Data are pieces of information such as addresses, sizes,
opening hours, control information, classification information,
departments, merchandise categories, and receiving points.
Business Partner Data is data about the various vendors and
customers of the business. Examples of vendor data include
name, address, type of currency the vendor uses, and the vendor
number assigned to the system. As for customer data, addresses,
sales data, and accounting information such as the customers’
bank names, routing numbers, and account numbers
Article Data is data on things that the company procures,
produces, stores, or sells. The Article Data contains information
such as descriptions of the items and their units of measure, for
example. The Merchandise Category Data helps to group the
articles into merchandise categories and facilitate inventory
management and logistics. This data can be used to coordinate
things like price structures and advertising. This is because it
can be used to group different products of a business into the
different categories, for example making groups of textiles and
perishables for a supermarket that sells both. Lastly, Conditions
Data contains information on arrangements used for pricing in

purchasing and sales. For example, Conditions Data can include
things like the terms of payment that are negotiated with
vendors.
3. Discuss how Master Production Scheduling might be carried
out in an Assemble-to-Order environment. What planning
strategies does SAP ERP offer in this area?
Assemble-to-Order is an environment where a product or
service can be assembled after the receipt of a customer’s order.
Consequently, there exist various types of components used in
the Master Production Scheduling that work toward this
objective such as semifinished goods, subassemblies, fabricated
goods, purchased goods, and so on. Due to the nature of
Assemble-to-Order, it can make good business sense to stock
these and other types of components ahead of time in
anticipation of a customer order. Additionally, due to the nature
of Assemble-to-Order, it is the receipt of the customer order
that will trigger the assembly of the customized product.
Therefore, in an Assemble-to-Order scenario, the Master
Production Scheduling would be carried out in such a way
where common components could be quickly procured and
assembled in response to a sudden customer order from a large
selection of possible end products. Additionally, in the instance
of Assemble-to-Order, space would be required to store these
parts until the customer orders are received.
Assemble-to-Order generally requires a Master Scheduling
approach that is intermediate to the types required by Made-to-
Order and Made-to-Stock. This is because with Assemble-to-
Order, products of both standard and special design are
produced according to the previously mentioned customer
product selection process. The scheduling approach should also
accommodate changes in the product mix. In summarization, the
SAP ERP system can offer the ability to optimize this type of
setup. Since the production process would involve drawing from
a large array of standardized components, SAP would be able to
help because of the advantages in how it populates master data
across business functions. Additionally, the ability to utilize the

sales and operations planning function and categorize the
product mix would help with inventory management for the
subassemblies and other parts. The cross-departmental
functionality SAP would bring would also help to reduce lead
times, which is a key component of Assemble-to-Order. Since
SAP naturally operates in this way, it could also be assumed
that it might give some insight in planning strategy for a
company with a lot to learn about Assemble-to-Order.
4. Explain the meaning of the following terms (as used in SAP
ERP):
a. Planning Time Fence and the Firming Type
The Planning Time Fence is basically the period where no
changes to the plan can happen automatically throughout the
MRP run. This is the time period where no automatic changes
can be made to the master plan. Only manual changes are
allowed during this period. It is worth noting that the Planning
Time Fence is only used for materials that are planned using an
MRP type which includes a firming type. A firming type
determines how order proposals are to be created or scheduled
within the planning time fence. There are five firming types, 0,
1, 2, 3, and 4, which has various meanings. Basically, the
Firming Type selected determines the course of whether the
system would automatically “firm” and “unfirmed” planned
orders that are outside of the Planning Time Fence as they move
inside it as time goes by.
b. In-House Production (Time)
In-House Production Time is the time that is needed to produce
a material in-house. This time is used to determine the planned
dates of the planned orders in material planning.
c. Reservation
A Reservation is a request to the warehouse or stores to keep a
material ready for issue at a future date for a specific purpose.
Essentially, it is to “reserve” a material and ensure that it is
available when required.

d. Backflushing
If a material component is Backflushed, the SAP system will
only post the withdrawal of the material upon confirmation of
the operation. After which the withdrawal will be posted
automatically. Whenever a material is withdrawn during order
processing, the goods issue needs to be posted. This can be done
either concurrently at the time the goods are issued, or it can be
done when the operation is confirmed, in which case any
associated goods would then be posted.
5. Contrast the following terms:
a. Variant BOM vs. Summarized BOM
A Variant Bill of Material will group together several Bills of
Material that describe different articles or products that have a
high proportion of identical parts. In other words, a Variant
BOM would most likely be used in situations where mapping of
articles of products with similar product structures is desired
and there exist variants in only a few BOM items. This approach
can minimize storage and maintenance requirements in this
situation because the type of grouping it uses helps to
circumvent the need to create a complete, individual data record
for all of the different variations. The Variable BOM will detail
the different variations of the products, showing all of the
components and assemblies included. In contrast, the
Summarized BOM offers a complete listing of the assemblies
and individual components in a product structure. It will present
a listing of all types of subassemblies and materials without
structure information for them in the BOM header.
b. Dependent Requirement vs. Independent Requirement
An Independent Requirement is the demand for a particular
product or material that is independent of any other demand. In
other words, it is the demand for a product or material that is
not based on the demand for another item. On the other hand, a
Dependent Requirement is the opposite. Here, the demand for a

product or material can stem from the demand for another
product or material.
c. Scheduled Receipt vs. Planned Order
Essentially, the Scheduled Receipt represents a commitment and
the Planned Order is only a plan. The Scheduled Receipt means
that a purchase order has been readied. Of course, this makes
the Scheduled Receipt more difficult to change than the Planned
Order and Planned Orders explode to gross requirements for
components and Scheduled Receipts do not. This is because in
using Planned Orders, the components still could be available
for other uses. A Planned Order is a request created in the
planning run for a plant to trigger the procurement of a plant
material for a certain quantity for a specific date. Scheduled
Receipts are exiting replenishment orders for the item due in at
the beginning of each period.
d. Safety Stock vs. Safety Lead Time
Safety Stock is a quantity of stock to be held to prevent material
shortages from occurring. It takes into account the risk of a
shortage for the specific material in question and the desired
service level the business wishes to keep. In contrast, Safety
Lead Time is done to plan goods receipts to be received in
advance in a specified time period. The time period specified is
considered Safety Lead Time. In this case, the danger of
stockout is mitigated as a function of days supply, rather than
actual quantity of supply.
e. Forward Scheduling vs. Backward Scheduling
Forward Scheduling and Backward Scheduling both deal with
the calculation of deadline dates. In Backward Scheduling, the
start date of the production order is based on the latest finish
date, which is the order finish date of the planned order. In
Forward Scheduling, the finish date is determined based on the
earliest start date, which is the order start date of the planned
order.
6. Describe several (say 4-5) of the lot sizing methods used in

SAP ERP (e.g. EX, FX, etc.)
The Lot-for-Lot Sizing Method is a static lot size procedure
where planning is carried out per required quantity. With this,
the system will create an order proposal in each case where
there is a required quantity. Planning is carried exactly for each
day. In the case of a material shortage, it will use the exact
shortage quantity as the order quantity.
In the Fixed Lot Sizing Method, the order quantity must equal
the fixed lot size. In the case of a shortage, the quantity of the
fixed lot size that is assigned would be used.
In the Period Lot Sizing Method, the system will group several
quantity requirements within a specific time interval.
Consequently, this summation will form the lot size. This is
generally done in periods of days, weeks, or months, but can be
flexible as well.
The Reorder Point Lot Sizing Method requires continual
monitoring of the available warehouse stock. In this method, a
reorder point is established. For example, this could be a
specific quantity, and the system will check the available
warehouse stock to see if it falls below the reorder point. Safety
stock is also considered in this method along with things like
production orders and purchase orders. If there is a shortage
determined, the system will work towards procurement based on
an existing and previously established lot-sizing procedure as
defined in the material master such as Replenish Up to the
Maximum Stock Level.
7. What is Consumption-Based Planning? How is it different
from Material Requirements Planning?
Consumption Based Planning is a generic term for the procedure
within material requirements planning for which stock
requirements and post consumption values play a central role.
Consumption Based Planning is further divided into the
following procedures, reorder point planning, recast based
planning, and rhythmic planning. The goal of Consumption

Based Planning is to determine material requirements on the
basis of mathematical statistical calculations. An example of
Consumption Based Planning would be Reorder Point Planning.
This is because that once consumption drives the stock level of
a product below a defined quantity, a procurement proposal
would have to occur. Additionally, there are other methods that
forecast based on consumption data. Consumption Based
Planning is easier to use because it does not require extensive
data.
In contrast, another way to plan is to plan based on independent
requirements or concrete customer requirements. In this way,
planning is essentially done, for example, using current and
future sales figures. This is Material Requirements Planning.
Material Requirements Planning is a generic term for the
activities involved in creating a master production schedule or
an external procurement plan for all the materials in a plant of
company. An example of this is using Bills of Material. The
advantage of Material Requirements Planning is that it can work
with lower levels of safety stock due to the exact requirements
used and the comparatively extensive data.
REGIONAL TRADE AGREEMENTS (RTAs)
7
Are RTAs helpful or harmful to the world economic system?
ECN 500: global Economics
Colorado State University – Saudi Electronic University
Anas Mohammed S Althaqeb
2nd December 2013
Introduction

Regional Trade Agreements (RTAs) refer to trade accords that a
country signs with others in order to gain preferential treatment
when trading with them within the agreement (Carbaugh, 2011).
These agreements allow countries to trade preferentially with
each other capitalizing on resources and other common interest?
. Owing to the numerous advantages that RTAs have brought
not only to specific countries but also to group of countries,
they have increased in numbers across the entire world. Since
their inception in the late 20th century, RTAs have spread
rapidly. Thew foucs of this paper is to assess RTAs and their
impact on the world economic system? It is important to
mention that the lack of progress in international trade
negotiations does not undermine the steps that international
players have made to enhance global trade liberalization. To the
contrary, many governments in the international markets are
proactive in trying to negotiate new RTAs (Bhagwati, 2008).
For instance, despite the global financial crises that typified the
world in 2008-2009, World Trade Organization (WTO)
confirmed over 25 new regional trade agreements. This research
paper utilizes the latest research, global occurrences and
empirical research that expound on regionalism. In addition,
paper will draw insights from various texts that have been
instrumental throughout this course. As such, the main aim of
this paper is to explore whether the increase of RTAs have a
positive impact on development or a cause of concern.
Impacts of Regional Trade Agreements (RTAs)
At the outset, it is imperative to highlight that regional trade
agreements may lead to market liberalization as well as
discrimination Source. While it is true that trade liberalization
is critical for international trade, trade discrimination is
undesirable especially in the contemporary global economy.
However, some economists argue that such ‘objective
discrimination’ could be productive if the resources are directed
from inefficient domestic suppliers to a more efficient market
(Bhagwati, 2008). In other words, such trade discrimination
leads to the creation of new trade opportunities in the global

economic arena (Bhagwati, 2008). According to them therefore,
trading blocs and regionalism does not necessarily lead to
negative discrimination especially when they generate resources
from inefficient markets to efficient markets. Significantly,
Limao (2006) argues that discrimination may be apparent
particularly when a specific trading bloc generates resources
from advanced and efficient suppliers to inefficient producers
within the region. This is referred to as trade diversion. To that
end, regional trade agreements may lead either to creation of
trade or diversion of the same. Include a sentence on the effects.
Various theoretical frameworks advocate for the impacts of
RTAs especially when they create trade. They argue that the
essence of international trade is to increase movement of goods
and commodities and as such create trade (Limao, 2006). To
them, trade creation should be the primary focus of trading
blocs. As such, trade diversion is an unintended consequence
that should not overshadow the primacy of trade creation. It is
therefore important to use empirical
methods to quantify the effects of RTAs. Unfortunately,
quantifying the effects of RTAs is not always a simple matter
for both economists and other interested parties (Carbaugh,
2011). The rationale is that it requires extensive knowledge of
what could happened were the trade agreements not in place.
This is a rather assumptive argument and as such, not a reliable
and empirical method of measuring the effects of RTAs.
Other approaches are important in unraveling the arguments
made for or against trading blocs and RTAs in general. Many
models and schools of thought attempt to analyze the impacts of
regional trade agreements, h However, the results are not
consistent. The reason is that the different studies dwell on
specific research methodologies and the time frames the way
conducted (Limao, 2006). Besides, results for different regional
blocs are always dissimilar. For instance, results of a research
seeking to understand the impacts of EU-South Korea Free
Trade Agreement could be fundamentally different from a
similar research conducted on EU-Canada Economic Integration

Agreement. Despite the inconsistencies that have been apparent
in a myriad of studies, it is almost unanimous that many RTAs
create trade as opposed to diverting trade (Carbaugh, 2011). In
addition, when there is trade diversion resulting from RTAs, its
scale is usually relatively insignificant.
Trade Creation and Low Tariffs
According to various authors, trade creation dominates the
impacts of regional trading blocs. The rationale could be that
governments are always able to choose their trading partners
exemplary well. According to Baier & Bergstrand (2004), trade
creation is always the result of many bilateral agreements
because the countries within an agreement have more
similarities than differences. For instance, many countries that
form a specific trading bloc have the similar GDPs and are
located close to each other. As such, they experience similar
economic and political factors.
It is important to mention that countries that formation of
trading blocs tend to lower external tariffs or eliminate . This
does not only happen amongst the trading partners but also to
importing countries that do not belong to the RTA (Limao,
2006). In other words, when a country lowers its tariffs in order
to comply with a specific requirement of the trading bloc they
belong, it follows therefore that if they do not lower tariffs for
non-members, the other countries will not reciprocate. As such,
RTAs ensure that other countries benefit from liberalization that
follows such activities. This has been a major contributor to
economic development in developing countries. Coupled with
regional trade agreements, the double liberalization of
international trade increases the benefits accruing the
developing countries. This implies that RTAs lead to more trade
creation than the actual trade creation trading countries sign in
an agreement This is excellent, expand on this analysis In other
words, the countries’ decision to liberalize the market may lead
to reduced diversion of trade as anticipated.
Further, it is essential to emphasize that governments reduce
their tariffs voluntarily in RTAs. As such, it is not always

expected that such moves would lead to reciprocity from the
member countries. Although it may seem counterproductive for
some countries to reduce their tariffs, they serve the purposes of
stimulating further trade not only in the short run but also in the
long term (Baier & Bergstrand, 2004). For instance, if a
government experiences political pressures and sets
unreasonably high trade tariffs for the benefits of its domestic
economy, it would be unreasonable for the country to enter a
trade agreement with other countries. Give an example of
country and product
The rationale is that it would be forced to lower its tariffs to
salvage its import-competing firms within the same region.
They would undoubtedly suffer from tough competition and
discrimination from such trading blocs (Baier & Bergstrand,
2004). In addition, it is important to highlight that various
aspects of unreasonably high tariffs could injure the
protectionism regime of a specific country. The rationale is that
the free access to markets of members of a specific trading bloc
may adversely affects the market share of the local industry that
might be forced to liquidate or exit the market at the expense of
domestic economy (Limao, 2006). To that end, it is essential to
note that regional trade agreement makes it increasingly
difficult for other member states to raise their external tariffs.
As elucidated by Carbaugh (2011), regional trade agreements
may create an outflow of revenues in an otherwise redistributive
channel. The rationale is that external protection has become an
avenue of more costs than anticipated revenues from such
international or regional trade arrangements. In fact, raising
tariffs within a trading bloc leads to incidences of trade
diversion as opposed to trade creation. According to Carbaugh
(2011), external tariffs usually fall when RTAs are formed
because t the cost of external protection rises while at the same
time gains increase in political economy in the end. According
to various studies conducted on RTAs, lowering tariffs is
important for the development of underdeveloped countries and
has much remuneration not only for the partners but also for

non-members. This does not apply for industrialized countries
such as United States and Britain. Economists say that
preferential trade blocs of developed countries do not
necessarily need to reduce their external tariffs. This is because
their tariffs are very low for the countries and can rarely be
raised due to RTAs.
Critique
While many economists tend to argue that regional trade
agreements are always encouraged and productive, it is
important to highlight various shortcomings of the RTAs. They
argue that World Trade Organization (WTO) is currently
experiencing stagnant negotiations due to the rapid spread of
the RTAs. RATs comprise global trade arrangements? The
rationale is that many countries have pledged too much
commitment to their respective trading bloc and as such, they
are unable to commit themselves fully to WTO. This has
impeded further trade liberalization. To counter the arguments
highlighted by the opponents, proponents of RTAs pinpoint that
the increase of regional trading blocs could help countries to
have better experience of how the trading blocs work. This
would not only lead to more liberalization but also help WTO to
increase their ability to resolve issues that affect international
liberalization. As such, it is important to highlight that the
arguments and counter arguments cannot lead to a consensus
unless we evaluate the opposing views empirically. All
economists should ensure that the perspectives regarding
whether RTAs are beneficial or harmful are subjected to
empirical research methodologies. This way, it is possible to
strike a balance between various perspectives and points of
view.
Summary
Apparently, there has been a wave of trade blocs across the
world that has been instrumental in the world trading system.
Most studies point out that regional trade agreements imply

trade creation due to the ability of governments to choose their
partners appropriately due to similarities in terms of economic
performance and geographical location. However, RTAs could
lead to trade diversion especially when some countries within a
specific trading bloc decide to raise external tariffs due to
political pressures. To that end, it remains unclear whether the
RTAs threaten international trade liberalization or they
strengthen the already liberalizing world. It is therefore
imperative to conductive empirical research to ascertain
different outcomes of RTAs in various regions and specific
countries (Baier & Bergstrand, 2004).
In the next parapgran. Conclude with some
recommendations…..
References
Baier, S. & Bergstrand, J. (2004). Economic Determinants of
Free Trade Agreements Journal of International Economics,
6(4), 29-63.
Bhagwati, J. N. (2008). Termites in the Trading System: How
Preferential Agreements Undermine Free Trade. Oxford: Oxford
University Press.
Carbaugh, R. (2011). International Economics. 13th Ed. Mason,
OHIO: Cengage Learning.
Limao, N. (2006). Preferential Trade Agreements as Stumbling
Blocks for Multilateral Trade Liberalization: Evidence for the
US. American Economic Review, 9(6), 896-914.
�Empirical means your original research, not cited works.

SAP ERP1. Describe the Production Planning and Execution process.docx

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