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The Manufacturing module in ERPNext helps you maintain multi-level Bill of Materials (BOMs) for your Items, help you in Product Costing, plan your production via Production Plan, create Production Orders for your manufacturing shop floor and plan your inventory by getting your material requirement via your BOMs (also called Material Requirements Planning MRP).
Types of Production Planning
Broadly there are three types of Production Planning Systems
- Make-to-Stock: In these systems, production is planned based on a forecast and then the Items are sold to distributors or customers. All fast moving consumer goods that are sold in retail shops like soaps, packaged water etc and electronics like phones etc are Made to Stock.
- Make-to-Order: In these systems, manufacturing takes place after an firm order is placed by a Customer.
- Engineer-to-Order: In this case each sale is a separate Project and has to be designed and engineered to the requirements of the Customer. Common examples of this are any custom business like furniture, machine tools, speciality devices, metal fabrication etc.
Most small and medium sized manufacturing businesses are based on a make-to-order or engineer-to-order system and so is ERPNext.
For engineer-to-order systems, the Manufacturing module should be used along with the Projects module.
Manufacturing and Inventory
 You can track you work-in-progress by creating work-in-progress Warehouses.
ERPNext will help you track material movement by automatically creating Stock Entries from your Production Orders by building form Bill of Materials.
Material Requirements Planning (MRP):
The earliest ERP systems were made for manufacturing. The earliest adopters were automobile companies who had thousands of raw materials and sub-assemblies and found it very hard to keep track of requirements and plan purchases. They started using computers to build the material requirements from forecasts and Bill of Materials.
Later these systems were expanded to include Financial, Payroll, Order Processing and Purchasing and became the more generic Enterprise Resource Systems (ERP). More recently Customer Relationship Management (CRM) was added as a function and is now an integral part of ERP systems.
These days the term ERP is used to describe systems that help manage any kind of organization like education institutes (Education ERP) or Hospitals (Hospital ERP) and so on.
Best Practice: Lean Manufacturing
The state of art manufacturing philosophy (the rationale behind the planning processes) comes from Japanese auto major Toyota. At the time when American manufacturers depended on MRP systems to plan their manufacturing based on their sales forecasts, they turned the problem on its head and discovered a leaner way of planning their production. They realized that:
The biggest cause of wastage in manufacturing is variation (in product and quantity).
So they standardized their products and sub-assemblies and sold fixed quantities based on what they produced not produce based on what they sold. This way, they had an extremely predictable and stable product mix. If they sold less than planned, they would simple stop production.
Their card signaling system kanban, would notify all their suppliers to stop production too. Hence they never used any of the complex material planning tools like MRP to play day-to-day material requirements, but a simple signaling system that said either STOP or GO.
They combined this system with neatly managed factories with well labeled racks.
Like we discussed before, small manufacturing companies are usually make-to-order or engineer-to-order and can hardly afford to have a high level of standardization. But that should be the aim. Small manufacturing businesses should aim for repeatability by innovating processes so that there is a common platform for products.