Microsoft Dynamics AX users have a fundamental dilemma when implementing master planning. They typically ask something like the following: “When I have multiple warehouses within one site, should l set up master planning to plan for site and warehouse or just for site?”
This question deserves careful consideration.
For the big picture of modeling inventory locations in AX, Scott Hamilton’s article is recommended. Let’s start with the basics. Since AX 2009 we have had the construct of site dimension. It was possible to not enable it then, but in AX 2012 and in the new AX this is no longer an option. You will have at least one site. And a site does not function without a warehouse. This means that in your storage dimension groups you will have to activate site and warehouse. Always. Master planning will always run per site. We can’t change that either. There is no such thing as “MRP by company”. If we remember that “multi-site” can also be called “multi-plant”, this becomes very logical. Master planning has to be segregated by site. The big question of this article is whether it should also be segregated by warehouse.
In this storage dimension group screen we see that we cannot uncheck “coverage plan by dimension” for the site.
The AX7 version
Planning by site
Conceptually what we call MRP has nothing to do with warehouses. MRP is designed to explode Bills of Material using independent demand data like a forecast or a sales order. It will create dependent demand for all subassemblies and components in the lower levels of a Bill of Material. Warehouses are not relevant in this process. It is about quantities and lead times. If we only check “coverage planning by dimension” for the site in our AX storage dimension group, we are running MRP in its pure form. Although in AX we could plan certain items for site only and others for site/warehouse, it is typically a company-wide decision.
Planning by site and warehouse
As soon as we set the system up to plan for site and warehouse, which means that “coverage plan by dimension” is checked both for the site and the warehouse dimension, we are set up to do DRP in addition to MRP.
Distribution Requirement Planning (DRP) handles the planned replenishment of warehouses. Instead of a BOM, it explodes a hierarchy of warehouses. DRP is typically used when the same items are located in different warehouses, presumably for good business reasons. So if there is a reason to have many warehouses within one site, where the same item can live in many warehouses, we have to start thinking “DRP”. If we don’t create any replenishing relationships, so if we did not build a warehouse hierarchy, the system will look at each warehouse separately and consider each warehouse a separate planning unit that has to be replenished. If a purchased item lives in multiple warehouses in the same site, probably in proximity, we probably don’t want master planning to generate planned purchase orders for the same item in each warehouse. This means that we need to set up “transfer coverage” (for individual items) so the suppliers deliver to the “main” warehouse and we distribute from there using transfer orders. The better solution is to set up “replenishment relations” between warehouses. That is DRP: planning for replenishment of “outlet” warehouses by main warehouses or distribution centers. The warehouse in AX has a field called “warehouse level” that gets populated when a warehouse hierarchy is being built. It is shown below in a three level warehouse hierarchy example.
Shown Left is the refilling section for warehouse DC1, which is in the top of the hierarchy. No refilling checkbox. It does not get refilled by any other warehouse. In this warehouse production orders and purchase orders are received.
The warehouse shown above is DC2. We see that it is replenished by DC1, so it gets a higher warehouse level: 2.
This warehouse shown above is the “Outlet” warehouse, the bottom of our hierarchy, it is replenished by the previous one, DC2, so the level goes up two notches again. If you wonder why the level goes up by 2, the answer is: ”Transit warehouses”. As you know, they are mandatory, not for planning, but for actually posting a transfer order. The transit warehouses take the levels that we skipped! What if you use the same transit warehouse everywhere on the site? It will get a level that is one less than your highest warehouse level so it gets the lowest level it occurs at. This is an equivalent of the “Low-level code” for an item if we were talking about levels in Bills of Material. (Low-level code or LLC is a mandatory feature in every MRP calculation. For each item, the system determines what the lowest level is at which an item occurs in Bills of Material. MRP now knows to postpone the net requirements planning for this item until it has reached that lowest level) With this setup, or with a transfer order type coverage per item, master planning will follow DRP logic and create planned transfer orders between warehouses.
Let’s summarize: DRP was developed for distribution requirements where I have the same item in many different places and I need to keep inventory in each place. DRP helps me to keep inventory levels in a network of warehouses. If I consider going down the path of planning for site and warehouse, I have to first determine whether I truly have distribution requirements. Do I have a distribution network?
Let us look at two examples of companies with multiple warehouses within one site.
EXAMPLE 1 I am a manufacturing business with a central stock room and a shop floor area with multiple machines. Recently I ran out of space for my raw materials. I have now rented another warehouse across the street where I store raw steel sheets and bars.
QUESTION: Do I need to set up AX Master Planning by site and by warehouse?
ANSWER: No. This company does not really have distribution requirements that would justify running Master Planning by site and warehouse. Assuming the warehouse across the street is defined as a warehouse and not as a number of aisles in the main warehouse, Master planning does not have to plan by the warehouse. Most items are in the main warehouse. A subset of them are located across the street (raw steel). There is no business requirement to keep multiple on -hand quantities for the same item in different locations. I gain nothing by setting up Master planning for site and warehouse.
EXAMPLE 2: I am a manufacturing business that sells through dealers that keep consigned inventory.
QUESTION: Dealers’ consigned inventory has to be put into separate dealer warehouses. Do I need Master planning by site and warehouse?
ANSWER: Maybe. If I want automatic replenishment of these dealer warehouses, then yes. Otherwise, no. The more of these dealer warehouses I have, the more likely I will want automatic replenishment. In that case, master planning by site and warehouse fits well, and I have a simple replenishment set up on the warehouse level. I don’t need to set up any “transfer item coverage” on the items.
How many warehouses do I need? (Non-Lean)
Now let’s take a small step back. Let’s discuss warehouses in AX, focusing on how many we need.
We see many AX users defining a lot of warehouses. One for finished goods, one for semi-finished, one for raw material, a warehouse for returns, a warehouse for repairs, and more. First of all, we could reduce the need for warehouses that are only there to manage the status of an item! Remember we now have “inventory status” that can be used in regular warehouses (for those of you on 2012 R3 or AX7). Of course, we would still segregate different inventory statuses in different locations.
Often separate warehouses are used to segregate inventory of product lines, to decouple manufacturing and shipping, to give a business unit its own warehouse (accountability) and there are other legitimate reasons. But for some organizations, such configurations can become too much too soon.
If we ask AX, it will tell you that it does not need many warehouses. AX has the following absolute minimum of warehouses:
- A normal warehouse
- A Quarantine warehouse (if quarantine used)
- A transit warehouse (if there are at least two normal warehouses)
The system will absolutely work fine in all transactions with just those three.
Each extra warehouse we add, adds to the potential for nonvalue-added transfers. If we set up master planning by site and warehouse while there is no clear “warehouse hierarchy”, so we can’t setup replenishments between warehouses, we will have to do that setup by item. We will face a lot of set up of item coverage transfers! We have to ask: is that really needed?
How many warehouses do I need? (Lean)
In lean manufacturing, we can potentially end up with many warehouses. In accordance with the Kanban theory, each work cell is its own warehouse, it can be called a “WIP-warehouse” (it is typically replenished once a day and will be empty at the end of each workday or shift) and in AX a work cell requires an input and an output warehouse plus a location. We also have to define one or more supermarkets in our lean implementation.
When using lean, having many warehouses seems less of a concern because we would typically have the transfers defined as replenishment Kanbans and no extra manual transfer is ever required. But this is only half true. As soon as we start using the “Kanban calculation”, which uses planned orders generated by master planning, we still need to define a large number of transfer item coverages in order to get the planned transfer orders that the Kanban calculation program is using to calculate the number of cards that should circulate for the replenishment Kanbans.
Even with lean, we can keep the number of warehouses to a minimum. Why would each work cell have its own warehouse? We can easily have just one warehouse that represents the storage area of all work cells collectively and has the input and output for each work cell be just different locations within that shop floor warehouse or “WIP warehouse”.
Non-planning considerations for warehouses
Warehouses are often defined for reasons that have nothing to do with planning, typically inventory management reasons. A warehouse is an easy way to segregate certain items or a certain type of inventory. When doing a cycle count, this approach certainly makes things easier.
But the cold reality is that every warehouse we add becomes a planning problem. If there is no real physical distance – because the warehouse is more a logical/virtual warehouse – it can become burdensome to handle the many manual transfers or set up the many transfer item coverages.
Before making the decision whether to run master planning by site only or by site and warehouse, we have to answer the following questions in sequence:
- Analyze, for each site, how many warehouses are needed and what each warehouse is supposed to represent. For every warehouse, we have to ask: why do we need it?
- If we have multiple “normal” warehouses but no item resides in more than one warehouse, we have no need to master plan by warehouse. On the other hand, if the same items can reside in different warehouses for compelling business reasons, we need to set up master planning by site and warehouse.
- Once we have master planning setup by site and warehouse, we have to analyze the replenishment goods flows within the site(s) and determine whether the replenishment relations can be kept on the warehouse level or have to be set up on the item level.