Horizontal and vertical planning – interconnection is the key

Horizontal integration

Horizontal integration of planning reflects the timescale of planning. The planning horizon determines the timescale that our planning should cover. Looking at scientific literature, planning is often classified in temporal dimensions. Usually, the following timescales are distinguished:

• short-term planning (up to one year)
• middle-term planning (two to five years)
• long-term planning (more than five years)

Short-term planning is very detailed and shows specifics to a great extent. Its timescale can optionally be subdivided into quarters, months, weeks or even days. Due to its completeness, sophistication and flexibility, probability of realization of short-term planning goals are relatively high.

Middle-term planning divides the long-term plan in sub plans, whereas the level of detail gets more specific according to the subdivisions of the long-term planning. Completeness, sophistication and flexibility are lower compared to short-term planning. Middle-term planning has the equal ratio to long-term planning as short-term to middle-term planning.

Top priority of long-term planning is to ensure the long-term existence of the company. It is a global planning, highly aggregated with focus on innovation, technologies, diversification and other important topics for the continued existence of the company.

Summarizing the above, horizontal integration displays the course of time. The further you look into the future, the more you have to condense the planning elements. The shorter the viewing angle, the more granular you have to plan.

Vertical integration

Vertical integration takes into account the hierarchical relations of different plans in a company. There are plans according to various hierarchical levels in a company which have a hierarchical relation. Overarching plans represent a framework for secondary plans, within which they have to be drafted. A distinction is made between the following three levels:

• Strategical planning
• Tactical planning
• Operative planning

Strategical planning aims at planning the fundamental development of the entire company for a fairly long period of time. Subject is the analysis of chances and risks as well as the development of strategies in order to perceive chances and fight risks. The timescale of planning covers five to ten years and has a high forecast risk. This is the reason for which qualitative statements dominate. You will find strategical planning only on the highest level of a company hierarchy. Its goal is to ensure existing as well as open up new success potentials. No specific action programmes are being developed but a consistent framework is set.

Tactical planning puts the framework specifications of strategic planning in concrete terms. The definition focuses on middle-term capacity planning as well as optimizing it. Staff and resources are defined. You will find tactical planning in middle management (divisional management). Its aim is to draft concrete operational goals for the whole company and its divisions. Another part is to state resources and measures for target achievement.

Operative planning stands for a short-term process planning for performance and output with given capacities. It is a detailed planning aimed at minimizing negative effects of tactical planning errors (e.g. overcapacities or capacity bottlenecks). You will find operative planning mainly on the middle and lower management levels.
When solving a complex problem concerning company planning, the concept of strategical, tactical and operative planning contributes highly to the solution. The interlocking between strategical, tactical and operative planning is also described as vertical integration.

The connection between different planning levels and time-frames is visualized in the following illustration.

Horizontal and vertical integration

The added value of planning

Different elements of horizontal and vertical integration should not be considered on a stand-alone basis. You will achieve an added value by taking into account all different elements and by interlocking them. Each element serves a purpose in the context of planning. However, most important is the consistent interlocking between them. Unfortunately, single planning elements exist as isolated solutions in many companies, without being connected. This results in disadvantages such as extra work for planning, speed loss when it comes to necessary changes of plan or missing transparency. Often, key figures are not aligned, thus cannot be matched. Ideally, key figures are derived from strategic company goals and consistently carried down to the execution level so that each employee knows how he/she is measured and what he/she can contribute to reach the goals set on the highest management level.

Introduction to manufacturing and non-manufacturing costs!!

A manufacturing company incurs both manufacturing costs (also called product costs) and non-manufacturing costs or expenses (also called selling and administrative expenses). In the illustration below you can see the difference between manufacturing and non-manufacturing costs and their classification:

Manufacturing vs. non-manufacturing costs

Let us review these types of manufacturing and non-manufacturing costs in more detail.

Manufacturing costs and their classification

Manufacturing costs are the costs that a company incurs in producing a product.

From the managerial accounting standpoint, there are three types of manufacturing costs:

-Direct materials
-Direct labor
-Factory (or manufacturing) overhead

1. Direct materials as a type of manufacturing costs

Direct materials are raw materials that become an integral part of the finished goods.

Direct materials always have a variable nature. Variable costs change in proportion to production. For example, the company purchases metal parts (raw material) to produce valves. The more valves are produced, the more parts Company has to acquire. Therefore, parts have a variable nature; the amount of raw materials bought and used changes in direct proportion to the amount of valves created. For this Company, other direct materials would include, for example, plastic parts and paint.
Different manufacturing companies will have different direct material costs depending on the types of finished goods they produce. The table below provides a few examples:
Examples of direct material costs

Publishing company- Paper, ink, book covers
Automobile manufacturer- Tires, automobile metal parts
Computer manufacturer- Hard drives, monitors

From this you can see that direct materials are the integral part and a significant portion of finished goods.

2. Direct labor as a type of manufacturing costs


Almost any production plant or factory requires employees to operate equipment, move raw materials from the warehouse to equipment, and so on. These employees are directly involved in the production process and the cost of their remuneration and benefits represents direct labor:
Direct labor is the cost of wages to be paid to individuals who work on specific products or in other words, the cost of wages of employees who are directly involved in converting raw materials into finished goods.

Usually direct labor is a variable cost. In most situations the amount of direct labor required is directly correlated with the amount of finished goods produced. For example, wages and related benefits of employees who operate machinery to produce valves represent direct labor costs for a Company. The more valves are to be produced, the more employees will be required to operate machinery, paint, assemble, etc.
Direct materials and direct labor, when added together, represent the prime cost. Direct materials and direct labor are called prime costs because they are directly (physically, "primarily") associated with the finished goods production.

3. Factory overhead as a type of manufacturing costs

Factory overhead is any manufacturing cost that is not direct materials or direct labor.

Factory overhead can have variable or fixed nature, depending on whether overhead changes in direct proportion with production volumes. The following are some examples of factory overhead costs:

Variable Factory Overhead Examples
-Electricity
-Heating
-Water
-Indirect Materials
-Indirect Labor

Fixed Factory Overhead Examples
-Depreciation
-Property taxes
-Property insurance
-Salaries for non-production employees

Most items in the list above are self-explanatory, so they don't require further explanation, while indirect materials and labor may benefit from further explication.
Indirect materials are materials that are (a) not an integral (physical) part of the finished goods, or (b) a minor part of the finished goods to be economically traced to the finished good or have a very small physical association with the finished product.

For example, a Company would treat the following costs as indirect materials: oil lubricants and light bulbs used in manufacturing equipment, package boxes, wrenches, etc.
Other companies will have different types of indirect materials depending on their manufacturing processes. The table below provides a few examples:


Examples of indirect materials cost (overhead cost)

Publishing company- Glue, printing press lubricants
Automobile manufacturer- Factory light bulbs, drill bits
Computer manufacturer- Assembly line lubricants, screwdrivers, polishers

As you can see form the list, indirect materials are an insignificant portion or not an integral part of the finished goods.
Indirect labor is the cost of production employees who are involved in the manufacturing process, but do not work on a specific product.

For example, wages of custodians, maintenance people, supplies room supervisors, etc. are considered indirect labor.
Direct labor and factory overhead, when added together, represent the conversion cost. Direct labor and factory overhead are called conversion costs because they are involved in converting raw materials into finished goods.

The image below shows the relationship between direct materials, direct labor, overhead, prime cost, and conversion cost:

This is the relationship between direct materials, direct labor, overhead, prime cost and conversion cost.

Production Resource Tools(PRT)

PRT (Production Resource Tools) are movable operating objects used to perform repeated activities in plant or production maintenance, for example, documents such as drawings or programs for which document management functions are used.

Purpose

Unlike machines and fixed assets, production resources and tools (PRTs) are movable (not stationary) operating resources that are required to perform an activity and can be used repeatedly. For example, PRTs include documents, engineering drawings, jigs and fixtures, and measurement instruments.

You can assign production resources/tools to internal and external activities. You use the assignment to determine:

-The quantity

-The operating time

-The dates of the PRTs required to carry out the activity.

There are several categories of production resources and tools in the R/3 System. The category determines the characteristics and business functions that a PRT can have.

You can create production resources/tools with the following categories:

a) Material PRT - Created with MM01 with material type FHMI

b) Miscellaneous PRT - Created with t code CF01

C) Document PRT - Created with t code CV01N

D) Equipment PRT - Created with t code IE25

A material PRT has its own material master record with the view "PRT". A material PRT can be procured, that is, it can either be purchased or produced. You can also keep it in stock and track both its value and quantity.

A miscellaneous PRT has its own PRT master record and can neither be procured nor kept in stock.

A document PRT has its own document info record, (for example engineering drawings or NC programs). You can manage these PRTs using the R/3 Document Management System.

In the Project System you can assign documents directly to activities. Consequently you will not use this type of PRT very often.

An equipment PRT has its own equipment master record and has the full equipment functionality. This category is particularly useful for those production resources or tools which you must maintain yourself or which must be serviced at regular intervals. With the equipment category, you can furnish proof of service or usage values for the production resource/tool.