The purpose of any industrial setup is to make a profit and generate revenue from customer orders. But to make this happen industry needs to plan and execute multiple business processes (order management system or business process management).These multiple processes are starts with getting a customer order till receiving a payment from the customer is called Order to cash cycle.To understand the order to cash process flow, we should know the business processes that are part of it and departments which are responsible for executing these business processes.It is also important to know the dependencies and coordination needed between these departments and business processes to complete the order to cash cycle (order to cash best practices).To understand it better, order to cash process flow chart is given below.
Order to cash cycle process starts with Sales department where Sales department receives an order from the customer. So let's go through processes involved in order to cash cycle one by one
The sales department will negotiate for price and delivery date of a product based on the quantity that customer needs. While deciding the delivery date, sales department has to consider a current stock available and lead time required for the production of shortages.Once everything is finalized, the customer will release Sales order. The sales department has to give the acknowledgment copy after receiving Sales order which is treated as confirmation of delivery date, quantity, and price mentioned in the sales order. This sales order information will be forwarded to Planning department for planning purpose. If the organization is using the ERP software then Sales department will enter sales order in ERP and same will be considered for material and production planning.
Once the information related to new order is received, the planning department will start planning for ordered quantity. Planning will take input from Bill of Material, Routing or process sheets, inventory files, and lead time information. Below is given the example for better understanding-
Material Requirement Planning Example-
Consider we are manufacturing Ball Pen. So the structure of ball pen (Bill of Material) is as follows -
For 1 ball pen, we require the Plastic case, cap, and refill (Quantity -1 each). Further to make a refill we need 1 ball, 1 tube, and 10 ml Ink.
Now assume the components at each level have existing stock as given below -
Level- 0 = Ball Pen - 450 Nos
Level- 1 = Refill - 100 Nos, Cap - 250 Nos, Case - 200 Nos,
Level- 2 = Ball - 150 Nos, Tube - 50 Nos, Ink - 3000 ml.
Suppose the customer has ordered 1000 ball pens. Then Planning department will work as follows -
Requirement Calculation -
So let's know how the requirement of items involved in the structure is calculated.
Requirement calculation of Level 0 - Ball Pen
Quantity Needed = Order quantity - Available Stock
Quantity Needed = 1000- 450 = 550 Nos
Now, this 550 nos acts as a demand or order quantity for next level components from which it is made.
Requirement calculation of Level 1 as per above-mentioned formula
Cap Quantity Needed = 550 - 250 = 300 Nos
Case Quantity Needed = 550- 200 = 350 Nos
Refill Quantity Needed = 550 - 100 = 450 Nos
Now the required quantity of refill (450 Nos) acts as a demand or order quantity for next level components from which it is made.
Ball Quantity Needed = 450- 150= 300 Nos
Tube Quantity Needed = 450- 50 = 400 Nos
Ink Quantity Needed = (450 X 10) - 3000 = 4500-3000= 1500 ml. (As 1 Ball pen require 10 ml of ink, then for 450 ball pens it is 450 X 10 )
Now Planning department will inform the Purchase order quantities for Cap, Case, Tube, Ball, Ink as these are procured items and production orders for Pen and Refill as follows -
Purchase Order of Cap - Qty - 300 Nos
Purchase Order of Case - Qty - 350 Nos
Purchase Order of Tube - Qty - 400 Nos
Purchase Order of Ball - Qty - 300 Nos
Purchase Order of Ink - Qty - 1500 ml
Production order of Ball pen - 550
Production order of Refill - 450
The order date and material receipt date for above Purchase order will be as per the delivery date of the ball pen and procurement lead time. Similarly, Production start and completion date will be as per the ball pen delivery date and manufacturing lead time
In the case of ERP software, Planning Engine will create the PO and Production orders automatically by taking inputs from BOM, Routing and Inventory tables.
Once the information on Purchase orders is received from the planning department, PO is raised against the supplier. Also, in some cases, the price negotiation and material delivery date are discussed before placing an order. Once the raw material is received in warehouse and quality check is performed, the supplier is paid for the due amount for order fulfillment.
If all the required components are in stock when we receive a customer order then production can be started immediately (Again keeping the delivery date in mind). If there are the shortage and some of the required components are not in stock, then production needs to be started once supplier supplies those raw materials against PO. Production will start to convert the raw material into finish goods. Production will be carried out for various processes on the various machines. Once the final product is ready then it will be shifted to the warehouse for delivery after the quality check.
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Once the product is ready, it will be shipped against sales order. Sales and Warehouse department will carry out this process combinedly. Invoices will be sent along with Shipment and it will have information about items, quantity, rate, amount, taxes, etc. Invoices are the document against which customer has to pay for order fulfillment. In the case of part shipment, there can be more than one invoice against one sales order.
Once the customer receives shipped material and it is approved by customer QA personnel, then the customer has to pay for the material shipped as per the payment term. Follow up and receiving of payment is generally done by accounts department.
So this completes the cycle from the order receiving from customer till collection of payment from the customer. All the above processes can be mapped and carried out effectively and accurately in ERP software.
Over to you.
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