Choosing the Right Replenishment Strategy for Your NetSuite Manufacturing

By Kåre Kaasamoen, NetSuite Solution Architect at Staria

NetSuite has historically faced challenges in establishing its reputation as a manufacturing-focused ERP system. Now, that wind is about to change. Over the last couple of years, NetSuite has released new and enhanced functionality that brings the system up to speed on most manufacturing cases. An experienced consultant can easily adapt NetSuite to most manufacturing models with minimal changes. 

Manufacturing models and replenishment strategy is much about balancing market requirements against inventory risk. Your customers have requirements regarding delivery time and configurability, while the CFO doesn't want capital to be tied up in a high-risk inventory. In this article, we will shed light on how four manufacturing models handle lead-time, configurability and inventory risk, and also how the four models can be configured in NetSuite. Let market demands shape your manufacturing setup, not ERP system constraints. 

Make-to-order 

When manufacturing is done using a make to order model, everything starts (and ends) with the sales order. On a model perspective, the same applies to project-based production (make-to-project), basically the difference is that what you make in a make-to-project scenario is much bigger - and it also usually includes more than just the manufacturing. However, from the perspective of a manufacturing model, the situation remains largely unchanged. 

MTO: Make-to-order

The process flow is as follows: a sales order is placed, needed components are purchased, sub-productions to create assembled components are run, and the end-product is assembled. Finally, the product is delivered to the customer as ordered. 

The advantage of this model is that it maximizes configurability. If the final product differs from a standard product, this approach should be considered. Additionally, it satisfies the CFO because all production purchases are accounted for in terms of cost. The inventory risk is minimized. 

The drawback is the lead-time involved. Producing a custom-made end-product requires time, resulting in a low score for lead-time. In a Make-To-Order (MTO) scenario, the market must accommodate some lead-time. 

Lean make-to-order 

Often, the product is somewhat customized and not completely generic. It resembles a standard product to a certain extent, which can lead to challenges with extended lead times. In such cases, adjusting the push-pull line may be necessary. The push-pull line indicates the stage in production where the order initiates pulling and the extent to which a manufacturing forecast pushes material through production. The initial configuration to consider is a lean make-to-order model. 

Lean MTO: Lean-Make-To-Order

The basic idea with everything "lean" is to simplify. Reduce "waste" and simplify. In a MTO scenario that generally means; "just produce it". The main idea is that you should always have just enough sub-components to put an order on the main product line at any time. Later on, you replenish components up to the minimum stock. The model balances the need for low lead-time on order-based production, with the need for low inventory risk. The downside here is configurability. It suits production lines that follow Henry Ford's T-Ford principle. "...you can have it in any color you like as long as it is black...". The score is low on configurability, but it lowers the lead-time to an acceptable inventory risk. 

Assemble-to-order 

In the automotive industry, the T-Ford principle is no longer applicable. When purchasing a new vehicle, consumers have the flexibility to not only choose their preferred color but also customize various aspects of the car within a specific model range. The automotive industry has been a pioneer in utilizing Configure, Price & Quote scenarios (CPQ). Many manufacturing businesses operate within a common CPQ scenario, where they do not sell standard products but rather multiple variants within a range.  

For those kinds of businesses, product engineering is crucial. You should model your products in a way that makes it possible to put together a lot of end products (the variants) from a set of common components. You use the same building blocks for most of your products; it is the end assembly that makes the difference. You assemble to order. 

ATO: Assemble-To-Order

The primary process is similar to the Lean MTO methodology, with added configurability beyond the ATO model. This allows for shorter lead times and greater flexibility. However, this model also increases inventory risk because sub-assemblies must be pre-produced and kept in stock, as replenishment after delivery isn't possible. Thus, you need to maintain higher inventory levels, raising the risk, but still achieve a lean production approach in the market. 

Make-to-stock 

In the final manufacturing model, products are delivered to stock and sold off the shelf. This requires inventory management similar to a wholesaler. The main advantage is that the lead-time is only logistics, as sales happen directly from the shelf. This model is usually preferrable if you have standard products, where the cost of producing one unit is low (which means that inventory cost pr. unit is low) and where demand is high. A typical alternative can also be when you have season-based products, where the demand in the season is higher than production capacity, so that you need to build up stock when you are off-season. 

In this model, you are totally dependent on a good forecasting model for your demand, so that you can dimension your manufacturing right. The forecast rules everything. Order pull is not a part of manufacturing. 

MTS: Make-To-Stock

Low lead-time is crucial in this situation. As a consumer, if you want to buy a bottle of tomato ketchup, you don't want to wait two weeks for it. You want it NOW, even if it's Saturday night. Leadtime is usually not up for discussion here. The downside is that it has no configurability. This is for standard products only. The other downside is inventory risk. If your forecast is wrong, you're either out of stock (which means no sales), or you are stuck with a large dust-collection inventory. Both situations can make you end up in the boss's office for an explanation. Leadtime is everything. Scores on configurability and inventory risk is low.

Configure NetSuite 

Key configurations to have control of in order to set up manufacturing replenishment is the Bill of Material structure, the different Item Replenishment methods, the Item Demand Plans and the Supply Planning applications. 

Supply Planning Workbench

For MTO there are two alternatives. If you want pegging throughout the order, the simplest and easiest way is to configure all sub-assemblies to source from Workorder in the bill of material and then create the workorder for the end-product directly from the sales order. This will create all required sub-workorders and inventory items need to stock. That everything is pegged, means that all work orders and material needs are connected to the sales order. No-one can "nick" your materials (in the ERP system that is, it does not peg' material on the shop floor) 

If you want a more flexible system, then you can create a similar scenario without the pegging, if you use supply planning instead. Then you set up all components in the BOM to source from stock, you need to set the replenishment method for the top assembly to Material Requirements Planning and set up the current Supply Plan Definition to source from Sales orders. Also make sure that pegging is unchecked on the supply plan definition. The the full structure is still created, you have to create workorders from planned workorders, and you need to trust the physical and system wise structure of stock to keep track of which sub-assemblies that should be used to which orders - but you have the full flexibility to re-prioritize and change which sales order that get their materials first 

For the Lean MTO model, there is a slight difference. You still set up all components in the BOM to source from stock, and in addition you set replenishment method on all assemblies to be Reorder point. You also need to set the reorder point (build point) on the assemblies. For inventory components for purchase, you set replenishment method to Material Requirements Planning. The corresponding Supply Plan Definition needs to be sourced from Demand Plans. Finally, you need to create/calculate Item Demand Plans for inventory items based on average consumption pr. week for instance. The top assembly workorder is created from the sales order, the sub-assembly production is created from reorder point in the create workorder application, and purchases are created from planned purchase orders in supply planning. It sounds a little bothersome to work from different places in the system to fulfill the end-product but remember that there are three roles sharing this work. The seller, the production planner and the purchaser. So, the process is quite seamless. 

The model for ATO is very similar to the one above. You need to make the following changes. Now you need to change the replenishment method to Material Requirements Planning for the sub-assemblies. And instead of making demand plans for inventory items, you create demand plans for the sub-assemblies. Then, when you run the supply planning scenario, you need to create sub-productions from planned workorders and still create purchases from planned purchase orders. So basically, you change replenishment method on the sub-assemblies and create demand plans for the sub-assemblies instead 

Maybe you have figured it out now, but finally, let's see how we can move further to a setup that matches MTS. Look at the change from Lean MTO to ATO. What you do now is to change replenishment method on the top assembly and create demand plans for the top assembly. Yes, that is how you move the push/pull line. You change replenishment method to MRP one level up or one level down in the BOM structure, then you create demand plans for the uppermost level of your sales forecast; it can be top assembly level, different sub-assembly levels or it can be component level. The flexibility NetSuite provides makes it quite easy to support most discrete manufacturing scenarios, and even several different scenarios on different manufacturing locations within the company or group. 

Read more about NetSuite for manufacturing companies.