12-1 MRP and ERP

CHAPTER12

MRP and ERP

H.W.: 2,6,8, and 17.

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Dependent DemandDependent Demand

Dependent demand Demand for items that are subassemblies or

component parts to be used in the production of finished goods.

Dependent demand tends to be sporadic or “lumpy” Large quantities are used at specific points in

time with little or no usage at other times

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Independent and Dependent DemandIndependent and Dependent Demand

Independent Demand

A

B(4) C(2)

D(2) E(1) D(3) F(2)

Dependent Demand

Independent demand is uncertain. Dependent demand is certain.

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Independent & Dependant Demand PatternIndependent & Dependant Demand Pattern

| | | | | | | | | |1 5 10

Day

Order1000 onday 3

Order1000 onday 8

Bic

ycle

s

Reorder point

Rim

sR

ims

2000 —

1500 —

1000 —

500 —

0

| | | | | | | | | |1 5 10

Day

continuous discrete

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Dependent vs Independent DemandDependent vs Independent Demand

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MRPMRP

Material requirements planning (MRP): A computer-based information system that

translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.

The MRP is designed to answer three questions:1. What is needed?

2. How much is needed?

3. When is it needed?

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What went wrong when EOQ is used to What went wrong when EOQ is used to manage a dependent demand item ?manage a dependent demand item ?

Incorrect assumption of uniform, continuous demand

Incorrect assumption on item independence

Lack of Forward visibility

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Overview of MRP

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Master Production Schedule (MPS) Bill of Materials (BOM) Inventory Records

Product Structure

Tree

MPR InputsMPR Inputs

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MRP Inputs: Master ScheduleMRP Inputs: Master Schedule

Master schedule:

One of three primary inputs in MRP; states which end items are to be produced, when these are needed, and in what quantities.

Managers like to plan far enough into the future so they have reasonable estimates of upcoming demands

The master schedule should cover a period that is at least equivalent to the cumulative lead time

Cumulative lead time The sum of the lead times that sequential phases of a

process require, from ordering of parts or raw materials to completion of final assembly.

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Planning HorizonPlanning Horizon

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MRP Inputs: Bill-of-MaterialsMRP Inputs: Bill-of-Materials

Bill of Materials (BOM) A listing of all of the raw materials, parts,

subassemblies, and assemblies needed to produce one unit of a product

Product structure tree A visual depiction of the requirements in a bill

of materials, where all components are listed by levels

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Product Structure TreeProduct Structure Tree

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Product Structure TreeProduct Structure Tree

Q. Determine the quantities of B,C,D,E and F needed to assemble one X.

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Product Structure TreeProduct Structure Tree

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Low-Level CodingLow-Level Coding

Low-level coding Restructuring the bill of material so that multiple

occurrences of a component all coincide with the lowest level at which the component occurs

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MRP Inputs: Inventory RecordsMRP Inputs: Inventory Records

Inventory records Includes information on the status of each item by time

period, called time buckets Information about

Gross requirements Scheduled receipts Expected amount on hand

Other details for each item such as Supplier Lead time Lot size Changes due to stock receipts and withdrawals Canceled orders and similar events

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Assembly Time ChartAssembly Time Chart

1 2 3 4 5 6 7 8 9 10 11

Procurement ofraw material D

Procurement ofraw material F

Procurement ofpart C

Procurement ofpart H

Procurement ofraw material I

Fabricationof part G

Fabricationof part E

Subassembly A

Subassembly B

Final assemblyand inspection

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MRP RecordMRP RecordWeek Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

Gross requirements• Total expected demand

Scheduled receipts• Open orders scheduled to arrive

Projected Available• Expected inventory on hand at the beginning of each time

period

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MRP RecordMRP RecordWeek Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

Net requirements• Actual amount needed in each time period

Planned-order receipts• Quantity expected to received at the beginning of the period

offset by lead timePlanned-order releases

• Planned amount to order in each time period

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MPR: DevelopmentMPR: Development

The MRP is based on the product structure tree diagram Requirements are determined level by level, beginning

with the end item and working down the tree The timing and quantity of each “parent” becomes the

basis for determining the timing and quantity of the children items directly below it.

The “children” items then become the “parent” items for the next level, and so on

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MPR ConsiderationMPR Consideration

Safety Stock Theoretically, MRP systems should not require safety stock Variability may necessitate the strategic use of safety stock

A bottleneck process or one with varying scrap rates may cause shortages in downstream operations

Shortages may occur if orders are late or fabrication or assembly times are longer than expected

When lead times are variable, the concept of safety time is often used Safety time

Scheduling orders for arrival or completions sufficiently ahead of their need that the probability of shortage is eliminated or significantly reduced

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MPR Lot Sizing RulesMPR Lot Sizing Rules

Lot-for-Lot (L4L) ordering The order or run size is set equal to the

demand for that period Minimizes investment in inventory It results in variable order quantities A new setup is required for each run

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MPR Lot Sizing RulesMPR Lot Sizing Rules

Economic Order Quantity (EOQ) Can lead to minimum costs if usage of

item is fairly uniform This may be the case for some lower-level items

that are common to different ‘parents’ Less appropriate for ‘lumpy demand’ items

because inventory remnants often result

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MPR Lot Sizing RulesMPR Lot Sizing Rules

Fixed Period Ordering (POQ) Provides coverage for some

predetermined number of periods

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Example MPRExample MPR

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Example MRP: L-4-L orderingExample MRP: L-4-L ordering

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Example MRP: EOQExample MRP: EOQ

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MRP Processing ExampleMRP Processing Example

Note: Component D is required by two parents.

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MR

P P

roce

ssing

Exam

ple

MR

P P

roce

ssing

Exam

ple

30 0

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Other ConsiderationsOther Considerations

Safety Stock Lot sizing rules

Lot-for-lot (L4L) ordering Economic (fixed) order quantity Fixed-period ordering = periodic ordering= POQ Pros and cons of each?

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Example: L4L rule with safety stockExample: L4L rule with safety stockItem: C

Description: Pedestal assemblyLot Size: L4L

Lead time: 2 weeks

Safety Stock: 50 unitsDate 1 2 3 4 5 6 7 8

Gross Requirements 150 120 150 120 Scheduled Receipts 230Projected on hand 47Net requirements

Planned order receipts

Planned order releases

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Example: POQ rule with safety stockExample: POQ rule with safety stockItem: C

Description: Pedestal assemblyLot Size: P = 3

Lead time: 2 weeks

Safety Stock: 50 unitsDate 1 2 3 4 5 6 7 8

Gross Requirements 150 120 150 120 Scheduled Receipts 230Projected on hand 47 127 127 127Net requirements

Planned order receipts

Planned order releases

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BOM for End Items A and BBOM for End Items A and B

From which item(s) shall we derive the gross requirements of item D?

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Deriving G.R. from parent(s)Deriving G.R. from parent(s)

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Updating the SystemUpdating the System

An MRP is not a static document As time passes

Some orders get completed Other orders are nearing completion New orders will have been entered Existing orders will have been altered

Quantity changes Delays Missed deliveries

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MRP Outputs: PrimaryMRP Outputs: Primary

Primary Outputs Planned orders

A schedule indicating the amount and timing of future orders

Order releases Authorizing the execution of planned orders

Changes Revisions of the dates or quantities, or the

cancellation of orders

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MRP Outputs: Secondary MRP Outputs: Secondary

Secondary Outputs Performance-control reports

Evaluation of system operation, including deviations from plans and cost information e.g., missed deliveries and stockouts

Planning reports Data useful for assessing future material requirements

e.g., purchase commitments

Exception reports Data on any major discrepancies encountered

E.g., late and overdue orders, excessive scrap rates, requirements for nonexistent parts

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Food catering service End item => catered food

Dependent demand => ingredients for each recipe, i.e. bill of materials

Hotel renovation Activities and materials “exploded” into

component parts for cost estimation and scheduling

MRP in ServicesMRP in Services

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Benefits of MRPBenefits of MRP

Enables managers to easily determine the quantities of each component for a given order size To know when to release orders for each component To be alerted when items need attention

Additional benefits Low levels of in-process inventories The ability to track material requirements The ability to evaluate capacity requirements A means of allocating production time The ability to easily determine inventory usage via backflushing

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MRP RequirementsMRP Requirements

To implement an effective MRP system requires: A computer and the necessary software to handle

computations and maintain records Accurate and up-to-date

Master schedules Bills of materials Inventory records

Integrity of data files

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MRP IIMRP II

Manufacturing resources planning (MRP II) Expanded approach to production resource planning,

involving other areas of the firm in the planning process and enabling capacity requirements planning Most MRP II systems have the capability of performing

simulation to answer a variety of “what if” questions so they can gain a better appreciation of available options and their consequences

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MRP IIMRP II

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Closed Loop MRPClosed Loop MRP

When MRP II systems began to include feedback loops, they were referred to as closed loop MRP

Closed Loop MRP Systems evaluate a proposed material plan relative to

available capacity If a proposed plan is not feasible, it must be revised

This evaluation is referred to as capacity requirements planning

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Capacity PlanningCapacity Planning

Capacity requirements planning (CRP) The process of determining short-range capacity

requirements. Inputs to capacity requirement planning

Planned-order releases for the MPR Current shop loading Routing information Job time

Key outputs Load reports for each work center

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Using MRP to Assist in CRPUsing MRP to Assist in CRP

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ERPERP

Enterprise resource planning (ERP) ERP was the next step in an evolution that began with

MRP and evolved into MRPII

ERP, like MRP II, typically has an MRP core

Represents an expanded effort to integration financial, manufacturing, and human resources on a single computer system

ERP systems are composed of a collection of integrated modules

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Requirements Planning-the evolutionRequirements Planning-the evolution

MRP: generates schedules that meet the materials needs identified in the MPS

MRP II: ties basic MRP to the company’s financial system; allows for “what if” analysis (MPS, cash flow, etc.)

ERP: enables firms to deal directly with suppliers to assess their resources availability (also includes quality, field services,distribution, marketing, accounting etc.)

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ERP SystemsERP Systems

ERP represents a comprehensive information technology approach that brings all of an organization’s information, including all data related to sales and order management, manufacturing operations, financial systems, human resources, and marketing and distributions into a central repository.

When implemented successfully, an ERP can link all areas of an enterprise with external suppliers, alliances, and customers into a tightly integrated system with shared data and visibility.

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A Typical ERP SystemA Typical ERP System

FinancialsReceivable and payableCash managementGeneral ledgerProduct-cost accountingProfitability analysisExecutive information system

FinancialsReceivable and payableCash managementGeneral ledgerProduct-cost accountingProfitability analysisExecutive information system

Sales and MarketingOrder managementSales managementSales planningPricingAfter-sales services

Sales and MarketingOrder managementSales managementSales planningPricingAfter-sales services

Operations & LogisticsProduction planningMaterials planning (MRP)Inventory managementQuality managementProject managementVendor evaluationPurchasingShipping

Operations & LogisticsProduction planningMaterials planning (MRP)Inventory managementQuality managementProject managementVendor evaluationPurchasingShipping

Human ResourcesPayrollPersonal planningH/R time accountingTravel expensesTraining

Human ResourcesPayrollPersonal planningH/R time accountingTravel expensesTraining

ERP

CustomersCustomersSuppliersSuppliers

*Adapted from I..Chen (2002) “Planning for ERP Systems: Analysis and Future Trend”, Business Process Management Journal.

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ERP ERP Potential Benefits:Potential Benefits:

Drastic decline in inventory ($146 billion/year). Breakthrough reduction in working capital. Abundant information about customer wants

and needs. Ability to view and manage extended

enterprise. Reduced capacity-related costs ($240

billion/year).

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ERP success/failure: 40% achieved partial implementation 60-90% do not achieve return on investment 20% total failure/abandoned 50+% failure rate 90% late or over-budget

ERP Implementation Success/FailureERP Implementation Success/Failure

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ERP Strategy ConsiderationsERP Strategy Considerations

High initial cost High cost to maintain Future upgrades Training

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ERP Additional Reading:ERP Additional Reading:

Additional Reading:

Chen, I.J., “Planning for ERP Systems: Analysis and Future Trend," Business Process Management Journal, Vol. 7, No. 5, 2001, pp. 374-386.