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© Wiley 2010 1
Chapter 14 – Resource Planning
Operations Managementby
R. Dan Reid & Nada R. Sanders4th Edition © Wiley 2010
© Wiley 2010 2
Learning Objectives Describe enterprise resource
management Describe the evolution of ERP Systems Describe the benefits and costs of ERP
systems Provide an overview of MRP Explain the different types of demand Describe the objectives of MRP
© Wiley 2010 3
Learning Objectives con’t Describe the inputs needed for MRP Explain MRP operating logic Describe action notices Use different lot size rules with MRP Describe the role of capacity
requirements planning (CRP) Calculate the work loads at critical
work centers using CRP
© Wiley 2010 4
Enterprise Resource Planning ERP is software designed for organizing
and managing business processes Modules share information across all
business functions Can share customer sales data with the
supply chain to help with global replenishment
All modules are fully integrated and use a common database – some PC based
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Integration of ERP
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ERP Modules-4 Categories Finance and accounting
Investment, cost, asset, capital, and debt management Budgets, profitability analysis, and performance reports
Sales and marketing Handles pricing, availability, orders, shipments, & billing
Production and materials management Process planning, BOM, product costing, ECN’s, MRP,
allocates resources, schedules, PO’s, & inventory Human resources
Workforce planning, payroll & benefits, & org. charts
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Evolution of ERP First generation ERP
Managed all routine internal business activities
From order entry to after-sales customer service
Lacked supply chain support modules (added in second generation)
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Evolution of ERP Second Generation ERP
Late 1990’s software integrated supply chains Systems focused on decision-making SCM modules include linear programming (LP)
and simulation support SCI capability allows collection of intelligence
along the entire supply chain ASP suppliers set-up and run systems for
others
© Wiley 2010 9
Integrating ERP and E-Commerce
Many companies with ERP use e-commerce
E-commerce needs to interface with ERP Cybex International is a good example:
Needed to integrate B2C and B2B transactions Cybex installed a Peoplesoft, Inc. ERP system Reduced BOM’s from 15,200 to 200, suppliers
from 1000 to 550, paperwork by 2/3 Reduced supplier material shortages and
customer order-to-ship time from 4 to 2 weeks
© Wiley 2010 10
Benefits of ERP ERP presents a holistic view of the business functions
from a single information and IT architecture Increases organizational information flow Increases ability to incorporate better management
control, speedier decision making, and cost reductions Allows replacement of disparate systems e.g. ExxonMobile used ERP to replace 300 different
systems A study of ERP implementations reports that benefits
typically start 8 months after implementation with median annual savings of $1.6 million
© Wiley 2010 11
The Cost of ERP Systems Major suppliers are SAP AG, Peoplesoft,
Oracle, and Baan. Also smaller PC based suppliers.
Costs for larger ERP systems range from hundreds of thousands to several million dollars.
Outside consultants are usually involved in selection, configuration, & implementation.
© Wiley 2010 12
The Cost of ERP Systems Consultant costs can run up to 3 times
the cost of the system itself. Added costs also include additional
people, new computer hardware, and the cost to develop a new, integrated database
Successful implementation requires leadership and top management commitment to a vision for the business
© Wiley 2010 13
Material Planning Systems MRP translated a master schedule of final
products into time-phased net requirements for subassemblies, assemblies, and parts
First MRP systems evolved from closed-loop MRP
Closed-loop MRP included production planning, master scheduling, and capacity requirements
In mid 1970’s, MRPII systems added functionality to plan and execute all internal functions
© Wiley 2010 14
An Overview of MRPMRP uses the concept of backward scheduling
to determine how much and when to order and replenish
The CPR module checks to make sure the scheduled work load profile is feasible
The MPS module contains the authorized schedule
The BOM module contains the product structure for each unique product
MRP output includes schedules for all internal activities and parts as well as orders for all supply chain items.
© Wiley 2010 15
Input/Output - MRP Process
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Types of DemandThere are two types of demand. Independent Demand
Is the demand for finished products Does not depend on the demand of other products Needs to be forecasted
Dependent Demand Is the demand derived from finished products Is the demand for component parts based on the
number of end items being produced and is managed by the MRP system
© Wiley 2010 17
Objectives of MRP Determines the quantity and timing
of material requirements Determines what to order (checks BOM), how
much to order (lot size rules), when to place the order (need date minus lead time), and when to schedule delivery (on date needed)
Maintain priorities In a changing environment, MRP reorganizes
priorities to keep plans current and viable
© Wiley 2010 18
Building a CD Cabinet With MRP
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MRP Inputs - Authorized MPS
From the authorized MPS, we calculate when we need to have replenishment orders of CD cabinets; when we need a new MPS order.
Table 14-1 Initial MPS Record for CD CabinetItem: CD CabinetLot size rule: FOQ=100Lead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12Gross Requirements: 25 25 25 25 30 30 30 30 35 35 35 35Projected Available: 80 55 30 5 -20MPS
Table 14-2 Updated MPS Record for CD CabinetItem: CD CabinetLot size rule: FOQ=100Lead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12Gross Requirements: 25 25 25 25 30 30 30 30 35 35 35 35Projected Available: 80 55 30 5 80 50 20 90 60 25 90 55 20MPS 100 100 100
© Wiley 2010 20
MRP Inputs-Inventory Records
System checks the inventory record for each BOM item to see if inventory is available or if a replenishment order is needed to build the cabinets.Table 14-3 First Inventory Record for CD CabinetItem: CD CabinetLot size rule: L4LLead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12Gross Requirements: 0 0 0 100 0 0 100 0 0 100 0 0Scheduled Receipts:Projected Available: 0 0 0 0 -100Planned Orders
Table 14-4 Updated Inventory Record for CD CabinetItem: CD CabinetLot size rule: L4LLead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12Gross Requirements: 0 0 0 100 0 0 100 0 0 100 0 0Scheduled Receipts:Projected Available: 0 0 0 0 0 0 0 0 0 0 0 0 0Planned Orders 100 100 100
© Wiley 2010 21
MRP Inputs-Bills of Material
A BOM lists all of the items needed to produce one CD cabinet
The BOM is exactly like a recipe for baking a cake
The BOM’s must be complete and accurate and can only be changed by an ECN
MRP BOM’s are indented bills of materials Indented BOM
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A Product Structure Tree
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The MRP Explosion Process
Using this table and the product structure tree, we will work through an example of how the MRP explosion process calculates the requirements for building a CD cabinet. Next we start with the cabinet top to show how MRP calculates the gross requirements for this component.
Table 14-6 Updated Inventory Record for CD CabinetItem: CD Cabinet Parent: noneLot size rule: L4L Children: Top, bottom, door, left side, right side, shelves, shelf supportsLead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12Gross Requirements: 0 0 0 100 0 0 100 0 0 100 0 0Scheduled Receipts:Projected Available: 0 0 0 0 0 0 0 0 0 0 0 0 0Planned Orders: 100 100 100
© Wiley 2010 24
Inventory Records - Components
It was noted on the previous slide that the parent item (CD Cabinet) has planned orders in periods 3, 6, and 9.
Its children (top, bottom, door, left & right side, shelves, and supports) have gross requirements in periods 3, 6, and 9.
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Inventory Records - Components
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Inventory Records– Components con’t
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Inventory Records– Components con’t
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Inventory Records – Remaining Components
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Inv. Records – Remaining Components con’t
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Inv. Records – Remaining Components con’t
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MRP Action Notices Action Notices:
Indicate items that need a production planner’s attention
Are created when a planned order needs to be released, due dates need to be adjusted, or when there is insufficient lead time for normal replenishment
Often require planners to rush or expedite orders
© Wiley 2010 32
MRP Action Notices Action Bucket:
Is the current period where we take actions such as releasing, rescheduling, or canceling orders
A positive quantity in current period’s planned order row means that an order must be released
© Wiley 2010 33
Example Comparing Lot Size Rules: Three lot sizing rules used within MRP Systems are: fixed order quantity (FOQ), lot for lot (L4L), and period order quantity (POQ). Cost comparison is based on Inventory holding costs ($0.10/period) and ordering cost ($25/order). In this example POQ is best at $133.50.
© Wiley 2010 34
Rough Cut Capacity Example: The CRP module uses data from MRP. Calculate workloads for critical work centers based on open shop orders and planned shop orders. These shop orders are translated into hours of work by work center and by time period.Table 14-11 show items scheduled for work Center 101.
Available = 4 machines x 2 shifts x 10 hours x 5 days x 0.85 utiliza- x 0.95 effi-
Capacity per shift per wk. tion ciency Available = 323.0 standard hours Capacity
© Wiley 2010 35
Workload Graph for Work Center 101: CRP enables a company to evaluate both the feasibility of the MRP system and how well the company is using its critical work centers.
© Wiley 2010 36
Resource Planning within OM: How it all fits together
Enterprise resource planning provides a common database for use by an organization, its suppliers, and its customers.
MRP reports are used by the production and inventory planners to (1) generate purchasing requisitions and (2) develop schedules of different activities to be done on the manufacturing floor.
Techniques for sequencing activities are discussed in Chapter 15.
The authorized MPS, the bill of material (BOM) file, and the inventory records are inputs to the MRP system. It is critical that the MPS be feasible and that the BOM file and the inventory records be accurate. This implies that the time standards (Chapter 11) are valid and that cycle counting (Chapter 12) be used to maintain inventory record accuracy. If not, material is not ordered at the appropriate time in the right quantity.
© Wiley 2010 37
Resource Planning Across the Organization
Since MRP determine the quantity and timing of materials needed, it affects several functional areas Accounting future material commitments
based on MRP output Marketing is primarily concerned with MPS
as the MRP reveals potential material shortages
Information systems maintains the MRP and the MPS
© Wiley 2010 38
Chapter 14 Highlights ERP is software designed for organizing and
managing all business processes by sharing information across functional areas using a common database and a single computer system.
First generation ERP systems provided a single interface for managing routine activities performed in manufacturing. Second generation systems or SCM –software are designed to improve decision making in the supply chain. The current trend is integrating e-commerce and ERP.
Tangible benefits from ERP include reductions in inventory and staffing, increased production, improved order management, and increased revenue and profits.
© Wiley 2010 39
Chapter 14 Highlights con’t
MRP systems are designed to calculate material requirements from dependent demand items. MRP systems use backward scheduling to determine activity start dates.
Independent demand is the demand for finished products, whereas dependent demand is demand that is derived from finished products, MRP system use dependent demand.
The objectives of MRP are to determine the quantity and timing of material requirements and to keep schedule priorities updated and valid. MPR determines what to order, how much to order, when to place the order, and when to schedule the arrival.
© Wiley 2010 40
Chapter 14 Highlights con’t
MRP needs three inputs: the authorized MPS, the BOM file, and the inventory records file. The MPS is the planned build schedule, the BOM files shows the materials needed to build an item, and the inventory records file shows the inventory on hand.
Once the MPS has been input, MRP checks the inventory records to determine if enough end-item inventory is available. If sufficient end-item inventory is not on hand, MPR checks the end-item’s BOM file to determine what materials are needed and in what quantities.
Action notices show when to release planned orders, reschedule orders, or adjust due dates. They allow the planner to use the MRP output information effectively
© Wiley 2010 41
Chapter 14 Highlights con’t
Different lot size rules are used with MRP systems to generate different order quantities and order frequencies. The lot-for-lot (L$L) rule always minimizes the inventory investment but maximized ordering costs.
Planned orders generated by MRP, plus any open shop orders, are inputs to capacity requirements planning (CRP). CRP checks to see if available capacity is sufficient to complete the orders scheduled in a particular work center during a specific time period.
CRP calculates the workloads at critical work centers by using the planned orders generated by the MRP system. These planned orders are multiplied by the standard times to calculate individual work center loads.
Homework Hints Problems 14.1-3, 3sp. Use the data given to:
1. prepare a product structure tree.2. determine the product lead time.3. calculate gross requirements, starting with 100 units of
the end item (Q).3sp. do an MRP chart—using either the excel or word chart
given on the website. Assume gross requirements for Q is in period 9; assume L4L is to be used for all components.
Problems 14.23-24. Do a CRP:23. Calculate the required capacity (based on each job’s set
up and run times).24. Calculate the available capacity (based on available time
for three machines adjusted for utilization and efficiency). Determine the match between required capacity (14.23) and available capacity (14.24).
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