12-1 MRP and ERP

CHAPTER 12

MRP and ERP

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

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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.

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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

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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?

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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

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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 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.

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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)

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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

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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

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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

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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

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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

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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

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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

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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 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

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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

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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

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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

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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

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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

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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.)

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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.

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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).

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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/Failure

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ERP Strategy Considerations

• High initial cost • High cost to maintain • Future upgrades • Training

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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.