Fabrikam Coatings: Co-Products, Potency, and Variable Yield
Fabrikam Coatings blends industrial coatings in batch orders. One formula produces 1,000 kg of primer, 60 kg of solvent co-product that can be sold or reworked, and 15 kg of sludge by-product that must be disposed of at a cost. The active ingredient is purchased at 88%–96% potency, while the formula targets 400 kg at 100% potency. Actual yield varies from 92% to 98% of the planned batch. Planners currently adjust batch orders by hand, and finance cannot explain why solvent inventory is valued at zero or why disposal cost disappears into overhead. Formula lines are fixed-quantity, no co-product or by-product lines exist, and batch orders are estimated once at creation but never synchronized with actual consumption. The company wants batch orders that estimate, consume, and report these realities without manual journal entries.
1. How should the formula be modified to produce the solvent co-product and sludge by-product, and how should costs be allocated?
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Add a co-product line for solvent with type Co-product and a quantity of 60 kg per 1,000 kg of primer. Choose the cost allocation method deliberately: market value is appropriate if solvent has a reliable selling price, because it allocates cost in proportion to relative sales value; cost allocation percent is simpler when the co-product is reworked and has no stable price. Add a by-product line for sludge with type By-product and normally zero cost allocation. Do not bury disposal cost in the sludge line as a positive material cost; capture it as a cost category on the route or as a separate service cost at batch close, so finance can see it. The reasoning is that co-products carry a share of joint cost and reduce the main product's cost, while by-products usually carry none; disposal is a processing cost, not a material credit. Test the estimate to confirm primer cost falls by the allocated solvent share.
2. How should ingredient potency and variable yield be configured so batch orders estimate and report accurately?
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Use batch attributes to capture potency at receipt instead of assuming 100%. On the active-ingredient formula line, set the quantity to 400 kg at 100% potency and use the potency attribute or a quantity-per-series calculation so the batch order adjusts consumption: at 92% potency, the required quantity is approximately 400 / 0.92 = 435 kg. Set the formula yield to the expected 95% and allow the batch order's actual yield to be updated at completion, so planned versus actual yield is reported rather than manually overwritten. Use step consumption if ingredients are added in stages, and set scrap on the lines that consistently lose material. The key is to separate planned potency and yield from actuals: estimating at target and posting actual consumption gives variance, whereas manual adjustment destroys the audit trail. Recalculate the batch order after potency is known, then synchronize actuals at report-as-finished.
3. What production method differences between formula and BOM matter when planning these batch orders?
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Use a formula, not a BOM, because the process needs batch attributes, co-products, by-products, yield, and step consumption. Create an active formula version with a site and validity dates, and let master planning generate planned batch orders from it. Confirm that the planned order type is batch order and that co-products are included as expected supply; by-products normally are not planned as supply and should not create artificial availability. For planning, decide whether to use batch merge or consolidated batch orders based on tank capacity and cleaning intervals; merging small demands can reduce cleaning cost but increases lead time. Because actual yield varies, plan with the expected yield and review the planned order quantity against the formula's batch size. The formula version must be active and have a valid from-date, otherwise planning falls back to a BOM or no supply. Test with a sales forecast and confirm co-product supply appears in master planning.