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Case study for OEM Stampings manufacturing industry.

I have designed, developed and implemented ERP in many SME manufacturing companies in India.

Manufacturing as per contract of original equipment manufacturer.

Complete ERP Case study of Electro Stampings Limited (ESL).

BACKGROUND:

To understand above ERP modules thoroughly let us visit a plant that is manufacturing an item that is called ‘Stampings’.  Stampings are used in turn to make the Electric Motors.  ESL sales the Stampings as per exact specification given by the Motor manufacturing company.  Therefore, it is called OEM customer. 

 

Raw Material:  Special steel -CRGO

Finished Goods

First, let us identify various types of vendors and make a ‘Vendor type master’.  This will help the purchase officer to group all vendors and get the vendor type wise reports.  Example of types of vendor (or supplier) can be as follows:

Consumables

Die Steel

Export Services

Furniture & Fixture

Gauges

General Vendor

Hardware

I. T.

Imported Steel

Indigenous Steel

Legal Advisor

Lubricant

Machine Maintenance

Machine Parts

Packing Material

Plant & Machinery

Printing & Stationary

Raw Material General

Service Provider

Tools

Transport Service

Next, we have to create the vendor master.  The purpose is to enter vendor details such as Name, address etc.  This is used while preparing purchase related transactions such as PO (purchase order), etc.  Some of the major fields are to be entered:

Organization name

Vendor type (one of the type as explained above)

Contact person name

Telephone number

Email id

Address

City

State

Country

In India, all manufacturing companies must pay tax to the Government called Excise duty.  So in ERP user must enter the ECC number, Excise Range, Division, State Sales Tax (SST) number, Central Sales Tax Number (CST), of the vendor in the vendor master.

 

One of the important transactions of the purchase department is the Purchase Order (PO).  This transaction is used to ask vendor to supply the material.  PO is given to an approved vendor only.  Information such as vendor name, item to be procured, item quantity, rate, etc. is entered in the PO.  The PO is used to procure Raw material, packing material, bought out items, etc.

 

The material is received in the store based on the PO only.  Stores manager cannot receive material if PO is not raised.  Stores manager does not have authority to enter item or rate.  PO is a parent document against which the Stores GRN and the Purchase Voucher is made.  PO neither is posted in inventory nor accounts ledger therefore it is a passive document.  PO does not affect the inventory or accounts.  For example,  PO is raised on the vendor ‘Thysenkrupp Electrical Steel, Nashik for CRNGO Parent Coil, for say 3 Metric Ton for a given rate.  ERP also prints name of the person who has login to prepare the transaction, and prints date on the PO.  All relevant additional amount is entered such as Discount, Excise, Cess, Sales tax, Insurance, etc. 

In ERP, it is necessary to know who wanted the material.  The manager who is asking is called the indenter.  Indent By menu appears as follows  "Indent By" :   User selects name of the indenter from the Indent By drop down box.  This is the name of the person who wanted) the material.  It is also called the purchase requisition.

In case customer is giving the material, it is necessary to enter as ‘Customer Material IN’ transaction.  When customer is paying authority, user will tick the ‘Labor Purchase Order’ box as shown.  

Purpose: When the material is received from vendor, a purchase voucher ( PV)  is prepared.  However, if the material is received from customer (payment to vendor will be made by customer), then user will tick Labour PO.  It is important that the customer type is ‘Labour Bill’.  The customer name should be in Address master, if the same is also third Party, (e.g. Kirloskar Copeland Ltd.), user will select customer type as ‘Labour Bill’.  The customer name should be in customer master, if the same is also normal customer but also paying authority, (e.g. Hematic Motors.), user will select customer type as ‘Labour Bill’.   

It is necessary to give document number to each transaction entered in ERP unlike in Telly accounting software.  The idea is once the document number is given,  the transaction cannot be changed or deleted.  For each kind of transaction, there is a separate series of document number.  

In India, the accounting year starts from 1st April and the year-end is 31st March.  Whereas rest of the world the accounting year start from 1st January and the year-end is 31st December.  Each new accounting year the document number, in each series, is reset to 001.

Now let us consider that the item is received in the stores.  The store’s manager will enter a transaction in ERP called the Purchase Voucher or PV and GIIR Goods Receipt cum inspection transaction.  The purpose of this transaction is to inform ERP software when material is received in the stores.  PO is a parent document to make a PV.  User will select vendor name.  All pending PO will default automatically.  User will enter Quantity information and save the PV.  This document is active document.  In ERP, user does not have to enter documents twice.  PV will be posted automatically in the accounts ledger and inventory ledger.  Traditionally this transaction is known as Stores Memo.  

Purchase Voucher cum Goods Inward transactions does the following:

(1)                                   PV will add material into stock (Hold location or material under inspection location).

(2)                                   Credit the vendor (supplier) in the books of accounts.

(3)                                   QC inspector or the Quality Assurance (QA) user can reopen PV and enter accepted quantity, this will automatically add item into main stores, and if item is rejected, it will add into Rejection Location.

(4)                                   Prepares short quantity debit note based on Challan quantity and received quantity.  In case the supplier quantity and the actual received, quantity does not match. 

 

This PV and GIIR option can be seen under the Inventory menu in the Inventory menu -> Inventory Transaction sub menu.  The PV is a unique transaction that is integrated with purchase, inventory as well as creditor account.

Suppose the item is rejected by the QA then the same has to be sent back to vendor or sometime scraped.  The goods are returned to vendor using RTV (if not excisable).  If excisable goods are to be returned, user will prepare sales invoice.    

Let us have a look at some of the main Purchase section related Reports (MIS):  User can select various filters; drop down list, to select a particular vendor or a particular item to get the transaction details.  User can double-click on the raw to see the actual transaction.  All reports (Registers) in ERP provides document level list (the first view by default) and also item level view.  Drilldown button gives item wise details. 

Vendor Master Printout.  This is basically list of vendors for the purchase department.  Vendor’s details such as Name, Address, Phone number, etc. are printed in alphabetical order.  Care should be taken to enter name directly without M/s or Messer.  Otherwise it will be listed under M and will be difficult to search.

Additional ERP reports are available to the authorized user as follows:

1.            PV Register:  List of Purchase Voucher or the Goods inward transactions.  Material Received in stores.  This menu will be under Inventory module. 

2.            Expense Voucher Register:  List of Expense Vouchers (EV) or the service provider transactions.    This may appear under the Account module.

3.            PO Register:  List of Purchase Orders raised during a given period. 

Material management:

Let us meet the material manager to see various features of ERP system. 

The most important master is the ‘Inventory Master’.  Major raw material and semi-finished goods and FG relation is established while making the Bill of Materials master (BOM).  For example the relation of Parent Coil and the Slitted Coil.  Other items are defined in the item master of this company making ‘Stampings’: 

1.            Lamination

2.            Loose lamination

3.            Stack Lamination

4.            Auto stack

5.            Welded

6.            Riveted

7.            Stack

8.            Finished Goods

Item Master:

  • The item master data is the Master database containing information about all kinds of material: Raw material, factory made items and the Finished Goods.  Everyone in the organization must call any material (item) by the same name (nomenclature).  Proper classification or categorization of material is very important in the ERP.  This discipline helps in getting useful MIS (Management Information System) reports.  It is necessary to control the access to ERP data by locking with the login id and password.  The secret password to prepare the item master should be restricted to authorised, technically qualified manger only.  This will ensure correct grouping of items.  All masters must be made on the main computer server only.  No item is allowed to be created in the local computer hard drive.   "Atit" In other words, in ERP system user has one single database on the server hard disk or in the cloud.  Cloud meaning on the internet server.

  • In ERP, it is not necessary to give alphanumerical item code to every item.  Item code once given cannot be changed.  Item code is nothing but a short name of the item.  Item description is long name of an item.  Item description can be edited later, but NOT the item code.  User should select the main category of the item carefully.  It is advisable to restrict number of category of items.  This is one time database setting, and should be restricted to experienced person only.

  • It is necessary to identify each plant and location within each plant by a code.  For example Plant A or Plant B.  Stores location in Plant A or stores location in Plant B, and so on.  Therefore, we have the ‘Main Location Master’ and the ‘Sub-Location master’.

Location Code          Sub-Location Description

1.            Plant A                         Scrap                                            

2.            Plant A                         Store                                            

3.            Plant A                         WIP                                              

4.            Plant A                         Rejection                                        

5.            Plant A                         FG                                               

6.            Plant A                         Hold

 

7.            Plant B                                      Scrap                                            

8.            Plant B                                      Store                                            

9.            Plant B                                      WIP                                               

10.          Plant B                                      Rejection.

Material is given to subcontractor for processing.  It is necessary to define the location of the subcontractor factory, called Third Party.

11.          Third Party               S Enterprises                                 

12.          Third Party               K Copeland Ltd. Unit Ii                  

13.          Third Party               G Engineering Works

When a senior executive askes: “How many?”  The stores Clark says: “Five”.  This is incomplete answer.  Five what?  Five KG, Five numbers, Five set?  To avoid such confusion it is necessary to define the UOM in the ERP master database as follows:

Accounting Unit or the Unit Of Measurement or UOM Master: It Displays Various Units of Measurement, which are regularly used.  E.g. Kg, each, pair, set, etc.  This is ‘accounting unit’ required while creating item master. 

 

The Stampings are made from special quality Steel.  To identify the quality of the steel Grade is given.  The Grade Master is created to ensure correct steel is used as follows:

User will create ‘Grade ID’ depending on the supplier to the item.  Grade master is the prerequisite for the item master.  That means grade id is required before making the item master.

 

GRADE DESCRIPTION                          GRADE ID

35C250C3Y                                                                                   EFH      

35H300                                                                                         NSB      

450-50PPC6W                                                                               EFF      

50C350APC6W                                                                              EFA      

50C530C6W                                                                                  EFC      

50C700C6W                                                                                  EFG      

50C800C6W                                                                                  EFB      

50H1000                                                                                       NLA      

50H1300                                                                                       NLB       

 

As explained earlier the Purchases Voucher is an active transaction that affects both accounts and inventory.

PV [or the Goods Inward Note] does the following:

1.            PV will add material into stock.

2.            Credit the vendor (supplier).  Automatic posting in creditor ledger ensures that both ledgers – item and account – are updated instantly after the material is accepted.  QC inspector / Quality Assurance will enter accepted quantity – this will automatically add item into main stores and if item is rejected, add into Rejection Location.  User may click on ‘Labour bill material’ radio button, ERP will ask user to select the paying authority.

 

Stock Transfer Challan (STC):  STC is used to transfer material from one location to another.  This does not consume material.  User will select ‘from’ location and ‘to’ location.  For CRNGO Steel raw material, ERP will capture the serial number and excise link is provided.  Whereas for other material (e.g. bearing) it will be a normal STC for internal stock transfer from, say stores to shop floor, no serial number or excise is required.  Since the material does not leave the factory premises.

Goods Delivery Note (GDN) To send material out for processing to Third Party.  ERP will allow GDN entry only when there is sufficient stock in the selected (from) location.  This will do the following:

a)    Reduce the stock of the selected location 

b)    Add the same at the selected TP (Job Worker’s) location

 

When GDN is prepared, Excise Challan IV under notification no. 214/86 (earlier 57 F4) is prepared automatically, as per the Excise rule.

Subsidiary Challan:   "Subsidiary Challan" used to transfer the material from Plant A to Plant B.  This challan is made against main challan reference.  Subsidiary challan will match stock transferred through main challan and will show the balance, if any.

Purchase return sales invoice:  User will prepare Excise invoice when material is returned back to vendor.  For non-excisable material user can prepare RTV or Return-To-Vendor.  Reference of PV is required. 

Sales Return or Return Goods Note (RGN):  This is entered when material is received back from customer.  (E.g. rejected by customer).  To prepare RGN the reference of the original invoice is required, which is to be defaulted in ERP.

Goods Inward Note (GIN):  This is transaction is entered when material is received back from the Third Party.  GIN is similar to Purchase Voucher.  When GIN is prepared, ERP will create a production entry automatically, at the Third Party location, of that much quantity.  The effect of GIN is as under:

a)                            Semi-Finished Item received will be added to the shop floor location.

b)                            Credits in the creditor account ledger.

c)                            Parent document like job order (labour PO) is a must.

d)                                    Production entry will consume the corresponding child items from the TP location.  (Linked with the BOM).

Material Issue Note:  MIN is used to consume material from a given location.  For example, when an item ‘ball bearing’ is issued to shop floor, for repairs, an STC is made.  When the spare is consumed, MIN is prepared.  This is mostly used for item other than main raw material.

Stock Adjustment Note:  SAN is used to add or remove item from the stock, for a given location.  Access to SAN is given to authorize person only.  This is useful to correct the stock balance in case of difference in the ERP stock and physical stock. 

Store Memo Challan Making:  Stores memo challan making is used when the Excise material (RM Parent coil) is transferred from Plant A Hold to Plant B coil store.  The PV or Stores memo is linked.  User will select the store memo number from the dropdown.  STC from A to B is prepared with 57 F4 Excise Challan.  Challan number is auto generated, but user can change.   Usually coil is sent to A for slitting.  However, in case a Slitted coil is purchased directly, the same need to go to A.  User may select required button ‘Make Challan’ or ‘Keep in B’ as shown in the following screen dump.  Modvat is modified value added tax, now called CENVAT, used to indicate excise transaction.

 

Main challan can be generated to keep the material in B Coil store when direct Slitted coil is purchased.

Closing Balance:  One time exercise of entering inventory stock closing balance as on given date.  From that date onwards, ERP will do the necessary arithmetic to give accurate closing stock, for a given location.  This needs to be done once but requires lot of care and understanding of the concept.


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