From gross demand to net demand

Enterprise Resource Planning (ERP) systems are an essential tool for modern businesses, providing a comprehensive platform for managing a wide range of functions, from financials and human resources to inventory management and production planning. One of the most critical modules within an ERP system is the production planning module, which enables businesses to plan and schedule production activities, manage resources, and track inventory levels. From gross demand to net demand.

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Managing the workflow from gross demand to net demand.

One of the key features of the production planning module is its ability to convert from gross demand to net demand, taking into account factors such as current inventory levels, production schedules, and lead times. This process ensures that businesses can accurately forecast their inventory needs, reducing the risk of overstocking or stockout and optimizing their production processes.

The production planning module can also automatically generate purchase orders to suppliers based on net demand calculations. This feature eliminates the need for manual order processing, reducing the risk of errors and ensuring that orders are placed promptly to avoid delays in the production process.

Case: Material planing in a manufacturing facility

As a demand planning specialist, your daily activities center around ensuring the Enterprise Resource Planning (ERP) system reflects accurate and up-to-date data, which is critical for smooth procurement and supply chain operations. Let’s break down the connection between customer demand, gross demand of material, and net demand of material, and how these are converted into material requisitions and purchase orders.

1. Customer Demand

Customer demand represents the quantity of finished products your customers need, either based on historical sales data, forecasts, or actual customer orders. This demand drives the entire supply chain process, as it dictates how much of the final product needs to be manufactured or purchased.

Example: If customers order 500 units of a finished product (e.g., smartphones), this directly affects how much raw material or components are needed to produce those 500 units.

2. Gross Demand of Material

The gross demand of material refers to the total quantity of raw materials or components needed to fulfill customer demand before considering any stock or inventory already available. This is calculated by the Bill of Materials (BOM), which details the components required to produce each unit of the final product.

Example: To produce 500 smartphones, you might need 500 screens, 500 batteries, and 500 sets of semiconductors. These quantities form the gross demand for each component.

3. Net Demand of Material

The net demand is derived by subtracting any available inventory (on-hand stock) from the gross demand. This ensures that the system doesn’t order more material than is necessary.

Formula:
Net Demand = Gross Demand – Available Inventory

If inventory levels can partially cover the gross demand, the net demand will be reduced accordingly.

Example: If you need 500 screens for production (gross demand) but already have 200 screens in stock, your net demand for screens would be 300.

4. Material Requisitions

Once the net demand is calculated, the ERP system generates material requisitions based on this demand. A material requisition is an internal document or system process used to request materials needed for production.

Purpose: Material requisitions are used to initiate the procurement or manufacturing of the necessary materials or components. The ERP ensures that the net demand data is correctly translated into material requisitions, signaling the supply chain team to take action.
Example: If the net demand is 300 screens, the system will generate a requisition requesting the purchase or production of 300 screens.

5. Purchase Orders

After material requisitions are approved, they are converted into purchase orders (POs) if the materials need to be sourced externally from suppliers. A PO is a formal document sent to suppliers to order the necessary materials. The ERP system tracks the entire process, from requisition to PO creation, ensuring that the correct quantities and delivery schedules are communicated to suppliers.

Example: Based on the requisition for 300 screens, a PO would be issued to the supplier requesting the delivery of 300 screens by a specified date to meet production timelines.

Summary of Workflow:

Customer Demand: Drives the need for finished products.
Gross Demand of Material: Total raw materials/components needed based on BOM.
Net Demand of Material: Gross demand minus available inventory, representing the true need.
Material Requisition: Internal request for required materials based on net demand.
Purchase Order: Formal order to suppliers to fulfill material requirements, converting requisitions into actionable procurement steps.

In summary, your role ensures that the ERP system accurately reflects each stage, from tracking customer demand to creating POs for suppliers. This data accuracy is vital for smooth production, timely deliveries, and efficient resource management.

Formula behind a purchasing requisition in more detail.

The formula behind how ERP planning modules calculate the parameters of a Purchasing Requisition can vary depending on the specific ERP system and the parameters being calculated. However, some common factors that may be considered include:

Gross demand: This refers to the total amount of inventory that is needed to fulfill customer orders and meet internal demands.
Current inventory levels: This refers to the amount of inventory that is currently available in stock.
Safety stock levels: This refers to the amount of inventory that is kept in stock as a buffer to ensure that there is enough inventory available in case of unexpected demand or delays in the supply chain.
Lead time: This refers to the amount of time it takes for a supplier to deliver inventory after an order has been placed.
Production schedules: This refers to the planned production activities for a given period.

Based on these factors, the ERP planning module can calculate the parameters of a Purchasing Requisition, including the amount of inventory to be ordered, the supplier to be used, and the delivery date. The module may also take into account other variables such as pricing and quality requirements when determining which supplier to use for the order. The specific formula used by the ERP planning module will depend on the system’s algorithms and configurations.

To automate the generation of Purchase Orders (POs) from Purchase Requisitions and thereby fully automate the flow from gross demand to net demand, involves setting up several key parameters to ensure seamless and accurate processing. Here’s a list of these essential parameters:

Vendor Information: This includes the vendor’s name, address, contact details, delivery terms and payment terms. Accurate vendor data ensures that POs are sent to the right supplier and that payment terms are in line with contractual agreements.
Item Master Data: Detailed information about each item, including item name, description, unit of measure, and item code. This data helps in accurately specifying what is being ordered.
Pricing Information: Prices for each item or service, possibly including tiered pricing based on quantity or contractual agreements. Accurate pricing is crucial to ensure financial accuracy.
Requisition Details: This includes the quantity of items needed, the required delivery date, and any specific instructions or descriptions. This ensures the purchase order reflects actual needs.
- Inventory Levels: The system should have access to current inventory levels to avoid over-ordering or under-ordering. This can be crucial in maintaining optimal inventory levels.
Approval Workflow: Defining the approval hierarchy and limits is crucial. This ensures that high value purchase requisitions are reviewed and approved by the appropriate personnel before a PO is generated.
Budget Constraints: Information about available budgets for different departments or projects. The ERP system can check against these budgets before processing the PO to ensure financial compliance.
Lead Time Data: Information about the lead time required for each item or supplier. This helps in setting realistic delivery dates in the POs. Terms of Delivery is crucial to include in order to handle the full lead time.
Preferred Supplier List: A list of preferred suppliers for specific items or services, which can be used to automatically select suppliers for specific requisitions.
Taxation and Additional Costs: Details about applicable taxes, shipping costs, and any other additional costs that need to be included in the PO.
Purchase Order Format: Customization of the PO layout and information included, such as company logo, PO number format, and other organizational details. Also Contractual details and standard information text need to be included in the PO.
Integration with Other Systems: Ensuring that the ERP system is integrated with other systems like inventory management, finance, and logistics for real-time data exchange.

By carefully configuring these parameters in an ERP system, organizations can significantly streamline their procurement process, reduce manual errors, and ensure compliance with internal and external policies

Learn more how ERP capabilities are used in the Operative buyer processes course. Converted from gross demand to net demand, the Purchasing Requisition is the starting point in the operative buyer’s responsibility.

Assignment: Create a Process Chart from Customer Demand to Purchase Order for Your Business

Objective:
The goal of this assignment is to create a customized process chart for your business that maps out the workflow from customer demand to the creation of a purchase order (PO). This exercise will help you better understand your internal processes, identify inefficiencies, and improve your overall demand planning and procurement operations.

Instructions:

Understand Your Business Context:

Begin by analyzing the nature of your business. Consider the types of products or services you provide and the dynamics of your supply chain.
Identify how customer demand is generated in your business. Is it based on sales forecasts, historical data, or actual customer orders?

Define Key Steps:
Your process chart should include the following key stages. Tailor each step to your specific business:

a. Customer Demand Generation:

Describe how customer demand is captured in your business (e.g., through direct sales orders, forecast models, or customer relationship management systems).
What tools, systems, or methods do you use to track demand?

b. Gross Demand Calculation:

Define how you calculate the total raw materials or components needed to meet the customer demand.
Do you use a Bill of Materials (BOM) or other tools to determine the quantities required for production?

c. Inventory Check:

Describe how you assess available stock in your warehouse or inventory system.
How do you ensure the accuracy of your inventory records? Do you have automated or manual processes?

d. Net Demand Calculation:

Explain how you adjust the gross demand by accounting for existing inventory to calculate the net demand.
What system or process does your company use for this calculation?

e. Material Requisition:

Outline how your business generates material requisitions based on the net demand.
Who is responsible for initiating requisitions, and how are they approved internally?

f. Purchase Order Creation:

Define how your company converts material requisitions into purchase orders (POs) for suppliers.
What software, tools, or workflows do you use to manage this transition? Are there any approval steps before POs are sent to suppliers?

Visualize the Process Flow:

Now that you have defined the key steps, create a visual process chart. Use flowchart software like Lucidchart, Microsoft Visio, or even hand-drawing tools to design your chart.
Make sure the flow of the process is logical, with each step leading to the next. Use arrows to show the flow of information or materials between stages.
Include any decision points or approval stages where certain actions might change based on the outcome (e.g., if inventory is available or not).

Add Key Information:

For each stage, add relevant details such as the tools or systems used (ERP, demand planning software), key personnel involved, and any dependencies or risks.
You may also include timelines or deadlines for each step (e.g., how long inventory checks take or typical lead times for purchase order approvals).

Evaluate and Optimize:

After completing the process chart, evaluate it for potential inefficiencies, bottlenecks, or areas for improvement.
Consider how well your process aligns with industry best practices and whether introducing new tools or methods could improve efficiency (e.g., automating inventory checks, using AI tools for demand forecasting, etc.).

Deliverable:

Submit a process chart that clearly shows the flow from customer demand to purchase order. Make sure it includes:

Customer demand capture and management.
The calculation of gross demand and its refinement into net demand.
Inventory checks and how they adjust your demand calculations.
The steps involved in generating material requisitions and creating purchase orders.

Feel free to add any additional steps that are specific to your business or supply chain.

Reflection Questions:

What did you learn about your company’s internal processes through this exercise?
Were there any stages that seemed inefficient or prone to errors? How could you improve them?
How might technology (e.g., ERP systems, AI-driven forecasting) help streamline parts of this process?

By completing this assignment, you will gain valuable insights into how customer demand translates into procurement actions, enabling you to optimize your operations and enhance your demand planning processes.

About Learn How to Source

Learn How to Source is an online platform based in Sweden, offering a range of procurement courses accessible globally. It serves as a community where procurement experts share their knowledge through online courses, designed for various experience levels from introductory to expert. Courses are concise, about 30 minutes each, and cover different aspects of procurement, tailored for different buyer roles. The courses focus on practical knowledge, presented by seasoned professionals, and include quizzes and certificates. They can be accessed from any device, emphasizing microlearning for flexibility and efficiency. More about LHTS in Swedish.

Note. Illustration to the blogpost “From gross demand to net demand” was created by Chat-GPT on September 15, 2024.

Tags: supply chain