2.1 The planning hierarchy

Supply chain execution requires clear, aligned signals to function efficiently. When Sales, Production, and Engineering operate on different assumptions—such as conflicting forecasts, disparate schedules, or uncommunicated BOM changes—the result is often excess inventory or component shortages. To stabilize the supply chain, we must rely on a reliable hierarchy of demand signals. Procurement should execute against a single, validated dataset (the “Source of Truth”) rather than informal conversations or speculative requests.

The signal hierarchy (the source of truth)

The ERP system serves as the formal mechanism for demand generation. Sourcing decisions and financial commitments should be driven by the highest fidelity signal available, following a clear priority structure.

Priority 1: firm sales orders (SO)

• The Definition: Contracted demand backed by a formal Customer PO and a defined ship date.
• The Action: Execution must occur immediately. Buying against Firm SOs generally requires minimal executive approval up to the contract value, as the revenue is contractually secured.
• The Risk: Very Low. Inventory is directly allocated to guaranteed revenue.

Priority 2: approved master production schedule (MPS)

• The Definition: The formal “Build Plan” authorized by Operations Leadership, typically blending Firm SOs with statistical, risk-adjusted forecasts.
• The Action: Purchases must be executed to support the calculated build start date.
• The Risk: Moderate to High. Success is highly dependent on the accuracy of the sales forecast.

Priority 3: unconstrained forecast (“the pipeline”)

• The Definition: Uncommitted demand or speculative projections from the Sales team.
• The Action: Caution must be exercised. Materials must not be procured based solely on this signal without formal, documented “Risk Buy Authorization” from leadership. This data should primarily be used for long-term supply chain visibility and capacity planning.

MRP to buy signal: the conversion protocol

Material Requirements Planning (MRP) generates computational suggestions. The Buyer’s role is to logically validate these suggestions before converting them into Purchase Orders. A “Buy Task” must contain a complete dataset to be actionable.

The validation gate

Before executing, it must be ensured that the MRP Output includes:

1. Need Date (Dock Date): The date the parts must arrive at the Receiving dock.
2. Net Quantity: The true calculated demand (Gross Requirement – Stock on Hand – Open POs).
3. Approved Source: A link to an active, AVL-approved supplier.
4. Buffer Policy: Confirmation of whether Safety Stock is included in the calculation.

If the signal is missing key parameters, it must be returned to the Planning team for clarification. Guessing dates or quantities must be avoided.

Decision logic: actioning the signal

When the Supplier Lead Time is less than the Time to Need Date (Normal State):

• This should be processed as a Standard Purchase Order (PO). Demand must be aggregated where possible to optimize pricing and freight.

When the Supplier Lead Time is greater than the Time to Need Date (Expedite State):

• This should be processed immediately as an Expedite / Shortage Event.
  • Action 1: Franchised Distributor networks must be checked for available stock (Spot Buy).
  • Action 2: This must be escalated to the Planning team: “The requested date is inside the supplier lead time. Please adjust the production schedule or authorize premium freight/broker sourcing.”

Process Optimization

The MRP engine should be configured with a “Reschedule In/Out” horizon (e.g. 7 days) to dampen system noise. If a need date shifts organically by only a few days, the system shouldn’t automatically demand a PO change order. This reduces supply base fatigue.

The planning handshake contract

Alignment between Planning (Demand Generation) and Procurement (Supply Execution) is essential. A clear definition of responsibilities maintains this alignment.

Responsibilities

• Planning: Owns the “What” and “When”. Responsible for forecast accuracy, master scheduling, and BOM release timing. Planning should establish a “Frozen Zone” (e.g. a rolling 2 weeks) where the production schedule remains stable.
• Procurement: Owns the “How” and “From Whom”. Responsible for executing the purchase at the target cost and securing a firm commit date from the supplier.
• Joint Ownership: Both teams collaborate closely to resolve Critical Shortages (Gap Lists).

The suggested execution cadence

• Weekly MRP Regen: (e.g. Monday Morning). Fresh demand signals are generated.
• Shortage Review: (e.g. Tuesday Morning). Collaborative review of unfulfilled demand.
• Clear to Build (CTB): (e.g. Thursday Afternoon). Formal sign-off confirming material availability for the upcoming production period.

Escalation guidelines

• Scenario 1: Planning requests a date that violates the established Supplier Lead Time.
  • The Guideline: Procurement attempts to expedite. If significant premium freight or broker risk is involved, Planning must authorize the variance or adjust the build schedule.
• Scenario 2: Procurement encounters a significant, unforecasted price increase (e.g. >10%).
  • The Guideline: A formal budget PPV review must be requested or Engineering asked to identify an alternative component before finalizing the purchase.

System driven demand

Procurement must operate tightly bound by the constraints of the ERP system. Issuing Purchase Orders against informal hallway requests, instant messages, or unlogged emails must be avoided.

If demand is not formally entered and calculated in the ERP, it risks becoming orphaned inventory that Finance cannot track accurately. If a Project Manager or Engineer needs material, they must submit a formal requisition into the system.

---

Recap: Signal Priority and Procurement Actions

Signal Priority	Definition	Procurement Action	Risk Level
1. Firm Sales Order (SO)	Contracted demand with formal Customer PO and defined ship date.	Execute purchase immediately. Minimal approval required up to contract value.	Very Low
2. Approved Master Production Schedule (MPS)	Formal “Build Plan” authorized by Operations Leadership (blends Firm SOs and forecasts).	Procure to support the calculated build start date.	Moderate to High
3. Unconstrained Forecast (“Pipeline”)	Uncommitted demand or speculative sales projections.	Do not procure based solely on this signal. Requires formal, documented “Risk Buy Authorization” from leadership.	High
MRP Validation Gate	MRP output must contain: 1) Need Date (Dock Date), 2) Net Quantity, 3) Approved Source (AVL), 4) Buffer Policy confirmation.	If signal is incomplete, return to Planning for clarification. Do not guess dates or quantities.	N/A
Lead Time Decision Logic	Compare Supplier Lead Time (SLT) to Time to Need Date.	SLT < Time to Need: Process as Standard PO. SLT > Time to Need: Declare Expedite/Shortage Event. Check distributor stock (Spot Buy) and escalate to Planning for schedule adjustment or premium sourcing authorization.	N/A