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12-1 MRP and ERP
CHAPTER12
MRP and ERP
H.W.: 2,6,8, and 17.
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12-2 MRP and ERP
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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12-3 MRP and ERP
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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12-4 MRP and ERP
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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12-5 MRP and ERP
Dependent vs Independent DemandDependent vs Independent Demand
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12-6 MRP and ERP
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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12-7 MRP and ERP
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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12-8 MRP and ERP
Overview of MRP
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12-9 MRP and ERP
Master Production Schedule (MPS) Bill of Materials (BOM) Inventory Records
Product Structure
Tree
MPR InputsMPR Inputs
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12-10 MRP and ERP
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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12-11 MRP and ERP
Planning HorizonPlanning Horizon
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12-12 MRP and ERP
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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12-13 MRP and ERP
Product Structure TreeProduct Structure Tree
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12-14 MRP and ERP
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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12-15 MRP and ERP
Product Structure TreeProduct Structure Tree
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12-16 MRP and ERP
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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12-17 MRP and ERP
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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12-18 MRP and ERP
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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12-19 MRP and ERP
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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12-20 MRP and ERP
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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12-21 MRP and ERP
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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12-22 MRP and ERP
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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12-23 MRP and ERP
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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12-24 MRP and ERP
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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12-25 MRP and ERP
MPR Lot Sizing RulesMPR Lot Sizing Rules
Fixed Period Ordering (POQ) Provides coverage for some
predetermined number of periods
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12-26 MRP and ERP
Example MPRExample MPR
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12-27 MRP and ERP
Example MRP: L-4-L orderingExample MRP: L-4-L ordering
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12-28 MRP and ERP
Example MRP: EOQExample MRP: EOQ
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12-29 MRP and ERP
MRP Processing ExampleMRP Processing Example
Note: Component D is required by two parents.
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12-30 MRP and ERP
MR
P P
roce
ssing
Exam
ple
MR
P P
roce
ssing
Exam
ple
30 0
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12-31 MRP and ERP
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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12-32 MRP and ERP
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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12-33 MRP and ERP
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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12-34 MRP and ERP
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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12-35 MRP and ERP
Deriving G.R. from parent(s)Deriving G.R. from parent(s)
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12-36 MRP and ERP
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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12-37 MRP and ERP
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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12-38 MRP and ERP
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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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 ServicesMRP in Services
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12-40 MRP and ERP
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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12-41 MRP and ERP
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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12-42 MRP and ERP
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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12-43 MRP and ERP
MRP IIMRP II
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12-44 MRP and ERP
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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12-45 MRP and ERP
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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12-46 MRP and ERP
Using MRP to Assist in CRPUsing MRP to Assist in CRP
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12-47 MRP and ERP
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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12-48 MRP and ERP
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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12-49 MRP and ERP
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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12-50 MRP and ERP
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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12-51 MRP and ERP
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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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/FailureERP Implementation Success/Failure
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12-53 MRP and ERP
ERP Strategy ConsiderationsERP Strategy Considerations
High initial cost High cost to maintain Future upgrades Training
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12-54 MRP and ERP
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.