Process Manufacturing & Microsoft Dynamics AX

Today’s process manufacturers face enormous pressures. In order to remain competitive, these businesses need to convert raw materials efficiently and cost-effectively into final products, while addressing a broad range of regulatory and customer requirements. They must constantly review and evaluate their internal processes to keep their operating costs low while controlling the variability of raw materials at each stage of production. Regulations may change, trading partners and suppliers may be replaced, and raw material quality may improve or degrade, all of which potentially dictate adjustments in formulas or recipes.

Process manufacturers require solutions that combine the planning and reporting capabilities of traditional business management systems with the unique tracking, control, and multi-dimensional inventory requirements of process manufacturing. Using these capabilities they can integrate the entire process manufacturing life cycle and increase the flow of information internally and with customers and trading partners. As a result, process manufacturers can better manage all the variables required to make and deliver high-quality products to custom specifications, gain visibility into production and supply chain activities, optimize capacity, comply with regulatory requirements, and drive continuous process improvement.

Designed specifically for the process manufacturer, Process Industries for Microsoft Dynamics AX, formerly Microsoft® Business Solutions–Axapta®, can help companies increase the speed and efficiency of their manufacturing operations, communicate more effectively with their extended supply chain, and provide real-time information to gain deeper insight into their businesses. This white paper describes the unique requirements of process manufacturers and discusses how Process Industries for Microsoft Dynamics AX can address those needs.

This white paper contains an overview of Process Industries for Microsoft Dynamics AX and a summary of key functions and concepts. Process manufacturing encompasses a wide range of operations. For example, chemical companies often use formulas, while most food and beverage manufacturers use recipes. Likewise, manufacturers in different process industry segments configure products for customers differently. Food, chemical, and pharmaceutical companies tend to use containers and packaging, while basic metals and pulp and paper companies often use variations of end items. For the purposes of this paper, the terms “formula management” and “recipe management” are synonymous.

While the unique characteristics of certain process manufacturing segments may seem important to differentiate, the underlying management and planning techniques used in all segments are similar. A single software solution can address most of the collective set of business requirements. The differences, however, between process and discrete manufacturers are fundamental and cannot be addressed well with a single software solution.

Recipe or Formula Management

Discrete products are assembled from a fixed quantity of components included in a bill of materials and are produced in a relatively linear, predictable manner. On the other hand, process industry products result from a series of mixing operations, chemical reactions, extractions, or other actions that transform raw materials into a final, sellable product. Recipes generally include more variations than the typical discrete bill of material.

 

In addition, variations in intermediate results and material flow are much greater in process than in discrete manufacturing. Some raw materials used in a recipe may be lost through evaporation, spillage, and the like. Process industry manufacturing personnel often must make adjustments in quantities, ingredients, and production steps as the result of unanticipated outcomes. In many companies, managing actual production variances is considered an art and frequently represents the key to ensuring manufacturing efficiency and profitability.

 

A recipe has three forms:

 

• Standard Recipe: The standard recipe defines the basic formula or listing of ingredients for an item and includes raw materials, quantity or volume of those ingredients, the routing the product follows through the plant, and the standard or anticipated costs of production. Most manufacturers freeze the standard recipe for some period of time, such as a year, a quarter, or a month.

 

• Adjusted Recipe—as planned: When production is planned using the exploded recipe, the production manager makes on-the-fly adjustments to the recipe, such as increasing the amount of raw materials required, changing the raw material itself, or selecting alternate routings. Generally changes such as these are made because the production manager has evaluated the production environment, condition of on-hand materials and equipment, and similar information not available to the system. From this information the production manager determines which variations must be made to achieve the desired result. At this point the production order has not been released to the floor, so these one-time changes are made to process and recipe details included in the production order itself. An example of this sort of decision is increasing the amount of flour in a recipe for a batch of bread based on the relative humidity of the plant.

 

• Adjusted Recipe—as produced: The adjusted recipe–as produced describes the actual combination of ingredients used in production. It differs from the standard recipe and bill of material, and from the adjusted recipe–as planned, because of any additional unplanned events that may have occurred such as:

 

• Using non-standard amounts of raw materials
• Completing more product than planned (due to a better-than-expected yield or a larger-than-needed shrinkage factor)
• Consuming more or less time at a work center or in the overall schedule than anticipated
• Obtaining unexpected co-products and/or by-products that, in turn, can be considered raw materials or finished goods
• Changes in production factors such as degrading machine tolerances or environmental changes

 

Using the example from above, the production manager adjusted the amount of flour in the bread recipe at the time the order was planned and released. When the operator actually begins to mix the dough, the relative humidity has changed again and a different amount of flour must be used. Process Industries for Microsoft Dynamics AX provides a flexible approach to formula and recipe management. Not only can Process Industries for Microsoft Dynamics AX manage multiple variations of a recipe, the system can also maintain and employ alternate recipe attributes, such as whether ingredients are defined as a percentage of the recipe size or as a fixed quantity.

Raw Materials Management

Process Industries for Microsoft Dynamics AX provides a flexible approach to handling raw materials, including:

 

• Managing and tracking co-products and by-products.
• Analyzing the costs associated with co-products and by-products.
• Managing multiple containers and packaging variations of a main item, including two-level recipes and catch weights for package variations from a single main item.

Co-Products and By-Products

Production processes can yield materials other than the planned end item. These additional outputs, called co-products or by-products, may be reused, sold at a profit, or disposed of at a cost. Co-products and by-products are symptoms of the volatility that can occur while manufacturing process items. Generally, co-products are desirable secondary outputs from the manufacture of the planned product which can be sold or reused profitably. By-products are unavoidable secondary outputs that may be sellable or usable, or they may be waste that must be disposed of at a cost. Occasionally by-products can be sold for a profit, but this is the exception rather than the rule. Process Industries for Microsoft Dynamics AX enables manufacturers to efficiently manage, track, and account for the costs of multiple outputs from a single production run

Costing for Co-Products and By-Products

While each process manufacturing company handles the costing of co-products and by-products in a slightly different way, the process generally focuses on three best practices:

 

• No cost
• A manual, hard-allocated cost
• A pro rata cost based on a percentage of the weight of the total recipe

 

Costing for co-products and by-products can be determined by the percentage of the total cost of the recipe allocated to them. If producing a by-product results in a material that can be used or sold, the cost allocation is positive. However, if the manufacturer has to pay to dispose of the by-product, the cost allocation will be negative. For example, the main item might cost 10 percent more to produce because of the cost of disposing of a by-product. As a result, the main item carries 110 percent of the cost. A negative value would be applied as a burdened cost on the remainder of the items in the recipe, based upon percentage.

 

Co-products always result in a positive cost allocation. Consequently, a co-product can assume part of the recipe costs. For example, if a co-product weighs 10 percent of the total production output, then the main item costs 10 percent less, or carries only 90 percent of the cost. To make this allocation, a user must select a pro rata cost-allocation option instead of the no-cost option when creating the recipe for the product.

 

A recurrent co-product or by-product is both a raw material in the formula and a result of production. For example, if 10 percent of a raw material does not dissolve when it is mixed with other ingredients, this quantity can be recovered at a later stage in production and received back into inventory as a co-product to be reused in a subsequent production run.

Multiple Containers, Packaging, and Variations of a Main Item

Process manufacturers generally handle packaging in one of two ways:

 

• As end items of a main item: In most cases, an end item is a main item that is produced and stored in multiple containers or variations.
• As separate stock-keeping units (SKUs) packaged with a specified unit amount: End item functionality manages the situation where each case or container has a different actual weight compared with its theoretical or standard weight.

 

Defining different item codes and recipes for each of the various end items is not necessary because each end item derives from the same main item, follows the same recipe, and probably results from the same production run. In a discrete manufacturing system the only alternative in such a situation is to assign every container/variation combination a unique finished-goods SKU and, in turn, create a separate bill of material for each combination.

 

Process industries manufacturers consider these end items as products produced in different containers (such as 10-lb. versus 20-lb.), different packaging types (such as private label packaging), or simply as variations of the main item (such as various widths). Using the enhanced configuration capability of Process Industries for Microsoft Dynamics AX, the user can capture multiple variations for a main item without creating unique item codes and recipes for each.

 

When an item is defined in this way, Process Industries for Microsoft Dynamics AX displays the total inventory balance by the base unit of measure (UOM) and the breakdown by container type at the same time, on the same screen.

 

This view enables a salesperson to accurately assess inventory levels and quickly suggest substitute products when the exact type requested by the customer is not available.

Catch Weight

With Process Industries for Microsoft Dynamics AX, a number of weight values are defined on the item master, including normal minimum weight, absolute minimum weight, normal maximum weight, and absolute maximum weight. Process manufacturers must capture the exact weight for packaged products, because the packaged weight often varies from the standard or anticipated weight. Catch weight represents the actual weight of a product in a container, as opposed to the anticipated or theoretical weight of a container or item.

 

Process Industries for Microsoft Dynamics AX provides a conversion factor for calculating the difference between the weight of the product’s base inventory unit and that of the packaging configuration. Still, the actual weight of each case must be recorded accurately in order to evaluate pricing, generate invoicing, determine inventory valuation, and generate reporting.

 

With Process Industries for Microsoft Dynamics AX, the warehouse staff scans or enters the actual weight of each case, skid, or batch when inventory is picked, packed, and shipped. The total actual weight—the catch weight—is updated for the order, and the customer is invoiced for the actual quantity shipped. Process Industries for Microsoft Dynamics AX also maintains an additional unit identifying the pack quantity for catch weight items. This permits more accurate finished-goods management and enables manufacturers to cost and sell by container/variation combination for each main item.

Two-Level Recipes

After a user defines a recipe that can be produced and stored in multiple variations—a two-level recipe—Process Industries for Microsoft Dynamics AX automatically populates the list of raw materials specified whenever a particular packaging configuration is produced.

 

Each time a main item is produced and a corresponding packaging type is selected, Process Industries for Microsoft Dynamics AX designates the appropriate amounts of raw materials for that packaging type, without having to create multiple item numbers or recipes for each main item/end item combination. In addition, multiple packaging types can be produced at the end of a single production run.

 

Lot Management

Many process manufacturers need extensive lot management capabilities. Lot management functionality in Process Industries for Microsoft Dynamics AX goes well beyond simple lot tracking. For example, process manufacturers must be able to track materials:

 

• From a specific supplier
• As intermediate and finished goods
• When created during production
• As sold to specific customers

Production Date Tracking

For accurate reporting and tracking, Process Industries for Microsoft Dynamics AX captures the production date, as well as the lot number, of raw materials received from a specific vendor.

 

Using the production date of each raw material or finished good, the system calculates the shelf life of the given lot. Process Industries for Microsoft Dynamics AX can also manage shelf advice date (for example, “best before” date), and the retest date for every lot of a particular product. (Often a product must be retested on a regular basis to ensure the quality of the product is still acceptable.)

 

Production date and shelf life are used to determine which lots to pick, employing either first in/first out (FIFO) or first expired/first out (FEFO) rules.

Lot Picking Options

In process manufacturing, different lots of the same product can have different chemical attributes. Consequently, when a customer reorders a given item for the same use, the product from the original lot must be sold or used in production to ensure the identical result. Process Industries for Microsoft Dynamics AX enables the user to specify whether the material or product may come from any lot, must come from a full lot, or must come from the same lot that was shipped to the customer on the last order. As a result, the customers can request a specific lot to match specifications and parameters used in previous orders.

 

Although most manufacturers provide their customers with specifications for standard products, some customers order products with more precise requirements or formulas that differ slightly from the standard formula or recipe. To fulfill these orders, the manufacturer either must produce a special lot that meets the customer’s request exactly or find a lot already in inventory that meets those requirements. If a lot meeting the customer’s needs is already in inventory, locating and pulling it to fulfill the customer order usually is quicker and more cost-effective than producing a special lot. Process Industries for Microsoft Dynamics AX helps the manufacturer maintain exact lot location information and accurate specifications by lot, making it easy to quickly determine if a lot meeting the customer’s requested specifications is in stock or whether one must be planned and produced.

Shelf Life Management

Process manufacturers manage shelf life and the selection of products for sale or use in several ways:

 

• FIFO
• FEFO
• Best Before (“best if used before the given date”)

 

With Process Industries for Microsoft Dynamics AX, manufacturers can choose a picking option and link that option to the quality control (QC) system for each product. By using this capability, those lots that have been tested and those requiring retesting because they have been on the inventory floor too long can be quickly identified. Managing material shelf life helps ensure that products used or shipped still conform to specifications and have not changed or degraded over time or from exposure to air, moisture, or other environmental factors.