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Unit 4: Manufacturing Perspective of ERP

components of pDm notes

There are four principal components of PDM namely; Order processing, Stock levels or inventory,
Warehousing and Transportation.

Order Processing

Order processing is the first of the four stages in the logistical process. The efficiency of order
processing has a direct effect on lead times. Orders are received from the sales team through the
sales department. Many companies establish regular supply routes that remain relatively stable
over a period of time ensuring that the supplier performs satisfactorily. Very often contracts are
drawn up and repeat orders (forming part of the initial contract) are made at regular intervals
during the contract period. Taken to its logical conclusion this effectively does away with ordering
and leads to what is called ‘partnership sourcing’. This is an agreement between the buyer and
seller to supply a particular product or commodity as and when required without the necessity
of negotiating a new contract every time an order is placed.

Order-processing systems should function quickly and accurately. Other departments in the
company need to know as quickly as possible that an order has been placed and the customer
must have rapid confirmation of the order’s receipt and the precise delivery time. Even before
products are manufactured and sold the level of office efficiency is a major contributor to a
company’s image. Incorrect ‘paperwork’ and slow reactions by the sales office are often the un-
recognized source of ill will between buyers and sellers. When buyers review their suppliers,
efficiency of order processing is an important factor in their evaluation. A good computer system
for order processing allows stock levels and delivery schedules to be automatically updated so
management can rapidly obtain an accurate view of the sales position. Accuracy is an important
objective of order processing, as are procedures that are designed to shorten the order processing
cycle.

Inventory

Inventory, or stock management, is a critical area of PDM because stock levels have a direct effect
on levels of service and customer satisfaction. The optimum stock level is a function of the type of
market in which the company operates. Few companies can say that they never run out of stock,
but if stock-outs happen regularly then market share will be lost to more efficient competitors.
The key lies in ascertaining the re-order point. Carrying stock at levels below the re-order point
might ultimately mean a stock-out, whereas too high stock levels are unnecessary and expensive
to maintain. Stocks represent opportunity costs that occur because of constant competition for
the company’s limited resources. If the company’s marketing strategy requires that high stock
levels be maintained, this should be justified by a profit contribution that will exceed the extra
stock carrying costs.
Warehousing

Many companies function adequately with their own on-site warehouses from where goods are
dispatched direct to customers. When a firm markets goods that are ordered regularly, but in
small quantities, it becomes more logical to locate warehouses strategically around the country.
Transportation can be carried out in bulk from the place of manufacture to respective warehouses
where stocks wait ready for further distribution to the customers. This system is used by large
retail chains, except that the warehouses and transportation are owned and operated for them by
logistics experts. Levels of service will of course increase when number of warehouse locations
increases, but cost will increase accordingly. Again, an optimum strategy must be established
that reflects the desired level of service.

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