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12-1 MRP and ERP
CHAPTER 12
MRP and ERP
H.W.: 2,6,8, and 17.
12-2 MRP and ERP
Dependent 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”
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Independent 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.
12-4 MRP and ERP
Independent & Dependant Demand Pattern
| | | | | | | | | | 1 5 10
Day
Order 1000 on day 3
Order 1000 on day 8
Bic
ycle
s
Reorder point R
ims
Rim
s
2000 —
1500 —
1000 —
500 —
0 | | | | | | | | | | 1 5 10
Day
continuous discrete
12-5 MRP and ERP
Dependent vs Independent Demand 12-6 MRP and ERP
MRP
• 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?
12-7 MRP and ERP
What went wrong when EOQ is used to manage a dependent demand item ?
• Incorrect assumption of uniform, continuous demand
• Incorrect assumption on item independence
• Lack of Forward visibility
12-8 MRP and ERP
Overview of MRP
12-9 MRP and ERP
• Master Production Schedule (MPS) • Bill of Materials (BOM) • Inventory Records
Product Structure
Tree
MPR Inputs 12-10 MRP and ERP
MRP 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.
12-11 MRP and ERP
Planning Horizon 12-12 MRP and ERP
MRP 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 Tree 12-14 MRP and ERP
Product Structure Tree
Q. Determine the quantities of B,C,D,E and F needed to assemble one X.
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Product Structure Tree 12-16 MRP and ERP
Low-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
Level 3
Level 2
Level 1
Level 0 X
B(2)
D(3)
E(4) E
C
E(2)
F(2)
12-17 MRP and ERP
MRP 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
12-18 MRP and ERP
Assembly Time Chart
1 2 3 4 5 6 7 8 9 10 11
Procurement of raw material D
Procurement of raw material F
Procurement of part C
Procurement of part H
Procurement of raw material I
Fabrication of part G
Fabrication of part E
Subassembly A
Subassembly B
Final assembly and inspection
12-19 MRP and ERP
MRP Record Week 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
12-20 MRP and ERP
MRP Record Week 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 time Planned-order releases
• Planned amount to order in each time period
12-21 MRP and ERP
MPR: 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
12-22 MRP and ERP
MPR 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 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 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 Rules
• Fixed Period Ordering (POQ) • Provides coverage for some
predetermined number of periods
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Example MPR
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Example MRP: L-4-L ordering 12-28 MRP and ERP
Example MRP: EOQ
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MRP Processing Example
Note: Component D is required by two parents.
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MR
P Proc
essin
g Exa
mp
le
30 0
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Other 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 stock Item: C Descrip9on: Pedestal assembly
Lot Size: L4L Lead 9me: 2 weeks
Safety Stock: 50 units Date 1 2 3 4 5 6 7 8
Gross Requirements 150 120 150 120 Scheduled Receipts 230 Projected on hand 47 Net requirements
Planned order receipts
Planned order releases
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Example: POQ rule with safety stock Item: C Descrip9on: Pedestal assembly
Lot Size: P = 3 Lead 9me: 2 weeks
Safety Stock: 50 units Date 1 2 3 4 5 6 7 8
Gross Requirements 150 120 150 120 Scheduled Receipts 230 Projected on hand 47 127 127 127 Net requirements
Planned order receipts
Planned order releases
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BOM 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) 12-36 MRP and ERP
Updating 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
12-37 MRP and ERP
MRP 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
12-38 MRP and ERP
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
12-39 MRP and ERP
• 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 Services 12-40 MRP and ERP
Benefits 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
12-41 MRP and ERP
MRP 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
12-42 MRP and ERP
MRP 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
12-43 MRP and ERP
MRP II 12-44 MRP and ERP
Closed 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
12-45 MRP and ERP
Capacity 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 CRP
12-47 MRP and ERP
ERP
• 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
12-48 MRP and ERP
Requirements 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.)
12-49 MRP and ERP
ERP Systems
l 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.
l 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 System
Financials Receivable and payable Cash management General ledger Product-cost accounting Profitability analysis Executive information system
Sales and Marketing
Order management Sales management Sales planning Pricing After-sales services
Operations & Logistics Production planning Materials planning (MRP) Inventory management Quality management Project management Vendor evaluation Purchasing Shipping
Human Resources
Payroll Personal planning H/R time accounting Travel expenses Training
ERP Customers Suppliers
*Adapted from I..Chen (2002) “Planning for ERP Systems: Analysis and Future Trend”, Business Process Management Journal.
12-51 MRP and ERP
ERP 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).
12-52 MRP and ERP
• 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/Failure
12-53 MRP and ERP
ERP Strategy Considerations
• High initial cost • High cost to maintain • Future upgrades • Training
12-54 MRP and ERP
Additional Company Experience with ERP
Muscatello, J., Small, M., and Chen, I.J. “Implementing Enterprise Resource Planning (ERP) Systems in Small and Midsize Manufacturing Firms,” International Journal of Operations and Production Management, Vol. 23, No. 8, 2003, pp. 850-871.