MRP and ERP

Chapter 12

Learning Objectives

• Describe the inputs, outputs, and nature of MRP processing.

• Explain bill of materials• Explain time-phased product structure• Describe differences between 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?

Overview of MRP

Composition of a finished products

How much and when finished product is desired

How much inventory is on hand or on order

Weekly Quantity

Item X 11 12 13 14 15 16 17 18

Quantity 100 150

MRP Inputs:Master Schedule

• Master schedule: – States:

• Which end items are to be produced

• When these are needed

• In what quantities (customer orders, forecasts, order from warehouses to build up seasonal inventories).

Item X

at beginning of week 14 andat beginning of week 18

100 at beginning of week 14150 at beginning of week 18

Cumulative Lead Time

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.

CLT = 9 weeks

Cumulative Lead Time

• Following the previous example, if CLT=9– When should we start work for the demand on the week

14?– When should we start work for the demand on the week

18?Weekly Quantity

Item X 11 12 13 14 15 16 17 18

Quantity 100 150

MRP Inputs:Bill of Materials

• Bill of Materials (BOM)– A hierarchical listing of all of the assemblies,

subassemblies, parts, and raw materials needed to produce one unit of a product

– Each finished product has its own BOM– Product structure tree

• A visual depiction of the requirements in a bill of materials, where all components are listed by levels

Assembly Diagram and Product Structure Tree

Level 0 = end itemparent

componentparent

component

Level 1

Level 2

Amount needed for assembly at the next higher level only

Low-Level Coding

• Low-level coding– Restructuring the bill of materials so that multiple

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

• Example: 1 X requires: 2 B, 1 C, 6 D, 28 E, and 2 F

Level 3

Level 2

Level 1

Level 0 X

B(2)

D(3)

E(4)

E

C

E(2) F(2)

B: 2 x 1 = 2

D: 3 x 2 = 6E: 1 x 2 = 2

E: 4 x 6 = 24

C: 1 x 1 = 1

E: 2 x 1 = 2F: 2 x 1 = 2

X: 1

Low-Level Coding: 1 X

Level 3

Level 2

Level 1

Level 0 X

B(2)

D(3)

E(4)

E

C

E(2) F(2)

• 1 X requires:B: 2C: 1D: 6E: 2+24+2=28F: 2

B: 2 x 1 = 2

D: 3 x 2 = 6E: 1 x 2 = 2

E: 4 x 6 = 24

C: 1 x 1 = 1

E: 2 x 1 = 2F: 2 x 1 = 2

X: 1

Low-Level Coding: 10 Xwith on hand inventory

Level 3

Level 2

Level 1

Level 0 X

B(2)

D(3)

E(4)

E

C

E(2) F(2)

• 1 X requires:B: 2C: 1D: 6E: 28F: 2

10 X require:

B: 2x10-4=16

C: 1x10-10=0

D: 6x10-8=52

E: 28x10-60=220

F: 2x10-0=20

• On hand inventory

B: 4

C: 10

D: 8

E: 60

F: 0

Does not consider item hierarchy!

Low-Level Coding: 10 Xwith on hand inventory

Level 3

Level 2

Level 1

Level 0 X

B(2)

D(3)

E(4)

E

C

E(2) F(2)

B: 2 x 10 - 4 = 16

D: 3 x 16 – 8=40

E: 1 x 16 = 16

E: 4 x 40 – 60=100

C: 1 x 10 -10=0

E: 2 x 0 = 0

F: 2 x 0 = 0

• 10X require:

B: 16

C: 0

D: 40

E: 100+16+0=116

F: 0

X: 10

“Low-level coding”

• On hand inventory

B: 4

C: 10

D: 8

E: 60

F: 0

MRP Processing

• MRP processing takes the end item requirements specified by the master schedule and “explodes” them into time-phased requirements for assemblies, parts, and raw materials offset by lead times

Final assembly lead-time

Part E fabrication lead-time

Material F delivery

lead-time

Sub assembly lead-time

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 policy– Changes due to stock receipts and withdrawals– Canceled orders and similar events

MRP RecordGross requirements

• Total expected demand (during each period) without regard to the amount on hand.

Scheduled receipts• Open orders scheduled to arrive (at the

beginning of a period)Projected on hand

• Expected inventory on hand (at the beginning of each time period)

Week Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

12-16

Net requirements• Actual amount needed in each time period

Planned-order receipts• Quantity expected to received (at the

beginning of the period)• Under Lot-for-lot will equal net

requirementsPlanned-order releases

• Planned amount to order in each time period.

• Equal planned-order receipts offset by lead time.

MRP Processing • Gross requirements are generated by exploding the

bill of materials• The core of MRP processing is determining net

requirements (netting) -> materials that are actually needed to meet demand

Net requirements

Gross requirements

Available inventory

Available inventory

Projected on-hand

=

=

-

Net requirements

Gross requirements

Projected on hand inventory +

Scheduled receipts= -

Scheduled receipts

+

MRP: 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

Example MRP

Shutter

Frames (2) Wood sections (4)

•Orders:• 100 units for delivery at (the start of) week

4• 150 units at (the start of) week 8.

• Assembly:• Wood sections made by the firm.

Fabrication takes 1 week.• Frames are ordered. Lead time is 2 weeks.• Shutter assembly requires 1 week.

• Schedule receipts:• 70 wood sections at (the beginning of) week

1.• • Determine the size and timing of planned-order releases (under Lot-for-Lot ordering)

MRPLot-For-Lot Ordering

Shutter[LT=1 week]

Frames (2)[LT=2 weeks]

Wood sections (4)[LT= 1 weeks]

MRPLot-For-Lot Ordering

Shutter[LT=1 week]

Frames (2)[LT=2 weeks]

Wood sections (4)[LT= 1 weeks]

Widget (1)[LT=1 weeks]

Widget (3)[LT=1 weeks]

200*1 300*1330*3 600*3

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

– Rolling Horizon

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

MRP Outputs: SecondarySecondary Outputs

Performance-control reportsEvaluation of system operation, including deviations from

plans and cost information– e.g., missed deliveries and stockouts

Planning reportsData useful for assessing future material requirements

– e.g., purchase commitmentsException reports

Data on any major discrepancies encountered– E.g., late and overdue orders, excessive scrap rates, requirements

for nonexistent parts

Enterprise Resource Planning (ERP)• Many organizations use a functional structure. Information tends

to flow freely within each function but less so between functions.

• Enterprise Resource Planning (ERP) – ERP was the next step in an evolution that began with MRP

– ERP typically has an MRP core

– ERP represents an expanded effort to integrate standardized record keeping that will permit information sharing among different areas of an organization in order to manage the system more effectively

– A system to capture and make data available in real-time to decision makers throughout the organization.

– ERP systems are composed of a collection of integrated modules

ERP Software ModulesModule Brief Description

Accounting/Finance A central component of most ERP systems. It provides a range of financial reports, including general ledger, accounts payable, accounts receivable, payroll, income statements, ad balance sheets

Marketing Supports lead generation, target marketing, direct mail, and salesHuman Resources Maintains a complete data base of employee information such as date of hire, salary,

contact information, performance evaluations, and other pertinent informationPurchasing Facilitates vendor selection, price negotiation, making purchasing decisions, and bill

paymentProduction Planning Integrates information on forecasts, orders, production capacity, on-hand inventory

quantities, bills of material, work in process, schedules, and production lead timesInventory Management Identifies inventory requirements, inventory availability, replenishment rules, and

inventory trackingDistribution Contains information on third-party shippers, shipping and delivery schedules, delivery

trackingSales Information on orders, invoices, order tracking, and shipping

Supply Chain Management

Facilitates supplier and customer management, supply chain visibility, and event management

Focused Reading (MIS Major Required)

1. Enterprise resource planning (ERP)—A brief history

2. 13 Common ERP Mistakes and How to Avoid Making Them

3. ERP and Business Process Re-engineering• ERP: The Business Process Re-engineering Dile

mma• To BPR, or not to BPR, that is the question

4. Cloud ERP• What Is Cloud ERP, and How Is It Different from T

raditional Solutions?• Benefits of Cloud ERP Software

ERP History• MRP: focus on cost reporting, materials, manufacturing

– tapes– IBM– 1960~1970

• MRPII: scheduling, procurement

– 1980s

• ERP

– SAP, Peoplesoft, – 1990– Client-server architecture

ERP Common Mistakes• Poor Planning• Not properly vetting ERP vendors• Not understanding or using key features• Understanding the time and resources required• Not having the right people on the team from the start• Not setting priorities• Not investing in training and change management• Underestimating the importance of accurate data• Taking the kitchen sink approach• Not decommissioning legacy applications• Not having an active load testing environment• Ignoring third-party support alternatives• Not having a maintenance strategy

ERP & Business Process Re-engineering

• Take place before ERP system selection• Output of BPR ERP• To be process vs. as is process

• Difference ways to do business globally• Process standardization after acquisition• Legacy systems• Make sure the process lead to higher values

Cloud ERP• Cloud ERP vs. traditional ERP

• Traditional: • Cloud:

– Outsource operation, easy to setup, monthly/annually fee

– Minimal initial cost– Automate operation

– cons• Less control, data security, service outage