The Concept and Evolution of MRP-Type Systems

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The Concept and Evolution of MRP-type Systems

Assistant Professor Dr. Mahmoud Abbas Mahmoud

Department of Production Engineering and Metallurgy

University of Technology

Baghdad - Iraq

[email protected] [email protected]

2013

mailto:[email protected]








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Dr Mahmoud Abbas Mahmoud



Assistant Professor Dr. Mahmoud Abbas Mahmoud

Department of Production Engineering and MetallurgyUniversity of Technology

Baghdad - [email protected]

[email protected]

1- Introduction

Determining actual production requirements is difficult in the typical

firms having large number of finished goods assembled from many thousands of

subassemblies and piece parts. Some of the components may be purchased, and

others produced with many different lead times need to be considered.

Material Requirements Planning (MRP), combined with computer

technology gave the most adequate successful computerized production

requirement system.

The early MRP systems were primarily inventory control application that

presented a valid alternative to ROP, EOQ, and SIC approaches of inventory

control [1].

No doubt, production requirements techniques always need a lot more

due to the competition in businesses and the growing requirements of

manufacturing systems. Thus, MRP systems are developed with the time to be

capable to cover these growing requirements.

As a result, this led to generate a series of MRP-type systems through the

following five evolution stages:-

1. Evolution stage I: Material Requirements Planning (MRP).

2. Evolution stage II: Closed- loop MRP.

3. Evolution stage III: Manufacturing Resource Planning (MRP II).

4. Evolution stage IV: Enterprise Resource Planning (ERP).5. Evolution stage V: Enterprise Resource Planning Extended (ERP II).









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Practically, MRP is still in use as the core (central module) in all of MRP-

type systems and the other modules in all of these systems are built around this

core. The stages of MRP-type systems evolution can be represented as shown in

Figure (1).

In this chapter these systems and their developments are explained

consequently according to their evolution stages.

ERP II

ERP

MRP II

Closed-

loop MRP

MRP

Figure (1) The Evolution Stages of MRP-type Systems.



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2- Evolution Stage I: Material Requirements Planning

Material Requirements Planning system is primarily designed to handle

ordering and scheduling of dependent demand inventories in terms of raw

materials, component parts… etc. But ordering and scheduling of assembled

products is not an easy process, it needs to maintain track of the enormous

number of inventories, and to differentiate between "dependent" and

"independent" demand [2], [3].

2.1 Dependent and Independent Demand

"Dependent demand" refers to the demand for subassemblies or

components, parts and raw materials to be used in the production of finished

products.

"Independent demand" refers to the demand of finished products, which

not related to the demand of any other items.

Practically, Independent demand tends to be continuous and fluctuates

because of random influences, whereas dependent demand is not random, but

tends to occur in a "lumpy" manner at a specific point in time [4], [5].

The lumpiness occurs because most manufacturing is in lots, and all the

items needed to produce the lots usually are withdrawn from inventory at the

same time instead of unit by unit [6].

2.2 Objectives of MRP

MRP was devised to answer the following key issues [7], [5], [8]:-

1. What is needed?

2. How much is needed?

3. When is needed?



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Obviously, MRP system is concerned with both production scheduling

and inventory control. It provides a precise scheduling (priorities) system, an

efficient material control system, and a rescheduling mechanism for revising

plans as changes occur [6].

Production organizations adopt MRP for the following reasons [9]:-

1. To improve customer service.

2. To reduce inventory investment.

3. To improve plant operating efficiency.

2.3 Inputs to MRP

There are three component sources of data needed to feed the MRP

system. These three sources (inputs) are [10], [11], [12]:-

1. Master production schedule.

2. Bill of materials.

3. Inventory records.

The above three inputs are shown in Figure (2). Without these inputs

MRP system cannot function. The Master Production Schedule (MPS) outlines

the production plan for all end items*. The Bill of Materials (BOM) contains

information on all materials components, or assemblies required for each end

item. The inventory records contain information about inventory status of all

inventory items.

MRP system translates the master production demand into the

requirements for all subassemblies, components, and raw materials needed to

produce the required "parent items" **.

…………………………………………………………………………………………………...* The term end item is used in reference to the master schedule. The end item may be the final

product or a major assembly.** Parent is any product that manufactured from one or more components, whereas

component is an item that may go through one or more operations to be transformed into partof one or more parents.



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This process is called an "MRP explosion" because it converts the

requirements of various final products into "material requirement plan" that

specifies the replenishment schedule of all the subassemblies, components, and

raw materials needed by the final products [4].

2.3.1 Master Production Schedule

The aggregate production plan specifies product groups. It does not

specify exact items. Master production schedule details how many end items

will be produced within specified period of time. It breaks the aggregate

production plan into specific product schedules [4].

The master production schedule is the time-phased plan specifying how

many and when the firm plans to build each specific end item [12].

Practically, master production schedule also uses other issues for this

purpose, including; forecast, known customers orders, demand for spares…etc,

as shown in Figure (3).

An MRP system is driven by the master production schedule which

records the independent demand for top level items [10].

Inventory

Records

Master

Production

Schedule (MPS)

Bill of

Materials

(BOM)

Material

Requirements

Planning (MRP)

Figure (2) Inputs to Material Requirements Planning



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Figure (3) Inputs into Master Production Schedule [13]

Typically, with an MRP system, the "planning horizon" refers to the span

of time the master production schedule cover. The minimum length of master

production schedule should be equal to or greater than the longest lead time of

the item in process. The master production schedule separates the planning

horizon into a series of time "periods" or time "buckets" , which are often

expressed in weeks [5], [6]. Also, MRP can be set to plan everything daily or

even hourly instead of weekly [14], [15].

Forecast

Demand

Sister Plant

Demand

Research and

Development

Demand

Exhibitions/

Promotion

Requirements

Safety Stock

Requirements

Spares

Demand

Inventory

Levels

Key CapacityConstraints

Known

Orders

Master

Production

Schedule



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2.3.2 Bill of Materials

Bill of materials contains data for the complete description of a product.

Listing not only the materials, parts, and components but also the sequence in

which the product is created [12].

The nature of this aspect of a bill of materials is clear when considering a

product structure tree, which provides a visual depiction of the subassemblies

and components, needed to assemble a product [5]. The product structure

records contain the bills of materials for the end items in levels representing the

way they are actually manufactured: from raw materials to subassemblies to

assemblies to end items. Some times a product may not be assembled in the way

it is designed. For MRP it is necessary to generate a bill of materials that

represent the way in which the product is manufactured [6].

"Indented bill of materials" show several levels of parts at the same time,

but in "single-level bill of materials" , the details of the relationships between

parts and subassemblies are stored as one single level at a time.

For example, the product structure tree with level coding of a Flashlight is

shown in Figure (4), and its indented bill of materials is shown in Figure (5).

It is clear that the finished product (Flashlight) is said to be at level (0),

the parts and subassemblies that go into Flashlight are at level (1), the parts go

into subassemblies are at level (2), and so on.

Practically, bill of materials is a tool which enables MRP to identify that,

which part and how many or how much is required for any particular item. It is

common that the required quantity is not written when it equals to one unit.

In most manufacturing situations some component parts and many kinds

of raw materials are used in two or more subassemblies and end products. Thus,

their requirements are the sums of requirements being generated from two or

more sources. These several requirements for common use items often are

combined into single orders to vendors or manufacturing lots in order to save onordering and set-up costs [8].



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Bill of Materials

Item: 0010 Flashlight Level: 0

Part No. Description No. Level

1001 Head Assembly 1 1

2001 Plastic Head 1 2

4001 Plastic Powder 2 4

2002 Lens 1 2

2003 Bulb Assembly 1 2

3001 Bulb 1 3

3002 Bulb Holder 1 3

2004 Reflector 1 2

1002 Batteries 2 1

1003 Body Assembly 1 1

2005 Shell Assembly 1 2

3003 On-off Switch 1 3

4002 Knob 1 4

4003 Metal Slides 2 4

3004 Connector Bars 2 3

3005 Plastic Shell 1 3

4001 Plastic Powder 3 4

2006 Spring 1 2

Figure (5) Indented Bill of Materials of Flashlight [7]

Plastic head Lens Bulb assembly SpringShell assemblyReflector

Head assembly Body assemblyBatteries

(2)

Flashlight

Plastic powder(2)

Bulb holder Plastic shellON-off switchBulb

Knob Metal slides(2)

Plastic powder(3)

Connector bars(2)

Figure (4) Product Structure Tree with Level Coding of Flashlight [7]

Level 0

Level 1

Level 2

Level 3

Level 4



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Here it is important to pay attention to bring all identical items or parts

down to their lowest common level during constructing the structure tree of any

product. This is a rule referred to as "low-level coding" . The low level coding

rule is applied in Figure (4) by bringing down plastic powder from level (3) to

level (4).

From other side, according to Slack et al [13] four typical shapes of

product structure can be recognized, namely A-shaped, T- shaped, V- shaped,

and X- shaped, Figure (6) shows these shapes.

Figure (6) Different Shapes of Product Structures

In the A-shape, a wide range of part variants is resulting in a few number

of end product variants. The previous Flashlight example represents an A- shape

product structure.

T-shape describes a large amount of customized product variants,

manufactured from a low number of part variants in relatively standardized

processes. The suitable example is producing different models of "Personal

Computers" (PC)s, by adding different internal cards to modify their

characteristics.

V-shape describes a situation similar to the T-shape with the difference

that the V-shape has less standardized processes. The best example of V-shape

is producing different petroleum products from crude oil.

Finally, the X-shape describes a situation with modular products wheresmall numbers of module variants are assembled into a large amount of end

Finished products…………...........

Raw materials &/or

parts…………………………

T-shape V-shape X-shapeA-shape



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product variants. The modules are however manufactured from a wider range of

part variants. The typical example of this type is manufacturing of cars with

different options may be its number in the thousands from much less number of

original models.

2.3.3 Inventory Records

The inventory records in a computerized system can be quite lengthy.

Each item in inventory is carried as a separate file, and the range of details

carried about on item is almost limitless [12]. The inventory records file

contains three segments [3], [16]:-

1. Item master data segment.

2. Inventory status segment.

3. Subsidiary data segment.

The first segment is "item master" data segment includes the item's

identification, part number, and other data, such as lead time, cost, and order

quantity. The second segment is "inventory status" segment provides a time-

phased record of inventory status. In MRP it is important to know not only the

current level of inventory, but also the future changes that will occur against the

inventory status. Therefore, the inventory status segment lists the gross

requirements for the item, scheduled receipts, on-hand status, and planned- order

releases. The third file segment "subsidiary data" segment contains

miscellaneous information pertaining to purchase orders, scrap or rejects,

engineering change actions, and so forth.

However, the type of data contained in the records for a given item would

typically include the categories shown in Figure (7).



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Item

Master

Data

Segment

Part No. Description Lead time Std. cost Safety stock

Order quantity Set up Cycle Last year's usage Class

Scrap allowance Cutting data Pointers Etc.

Inventory

StatusSegment

Allocation Control balance

Period

Totals1 2 3 4 5 6 7 8

Gross requirementsSchedule receipts

On hand

Planned order releases

Subsidiary

Data

Segment

Order details

Pending action

Counters

Keeping track

Figure (7) The Inventory Records for an Item in Inventory [12]

2.4 MRP Logic

The MRP system operates on the data contained in the three inputs

(master production schedule, bill of materials, and inventory records), that

discussed previously. The master production schedule specifies a period-by-

period list of end items required, and then derives MRP using the steps shown in

Figure (8). All levels on the bill of materials are computed in turn which

determine component parts demand. The first step is to "explode" the bill of

materials to identify the lower level component being scheduled. After the part

is identified, its gross requirements are determined by multiplying the previous

levels requirements by the number of those components that go into that level.

Each level of bill of materials must be taken in turn, and no level may beskipped. The gross requirement may however not be what we must actually

produce or purchase, because we may have some in inventory or on order. Next

then, the gross requirements are adjusted by any uncommitted item in inventory

to provide actual net requirements. The new quantity may additionally be

adjusted by any lot sizing rules to determine actual order quantities (lot sizing

will be discussed in a subsequent section). This process is known as "MRP

netting" [13].



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Figure (8) MRP Logic

Master Production

Schedule

Apply Lot Sizing

Rules

Net Against On –

hand plus On-order

Recommend Work

Orders and /or

Purchase Orders

Explode Next Level

of Bill of Materials

Apply Lead TimeOffset

Any More

Level /s in

BOM?

No

Yes



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After the order quantity is determined, it is scheduled by subtracting the

lead time of the component from its due date. Its due date is the date it is

required to produce its next higher level in bill of materials. Thus all dependent

component orders can be scheduled in turn by cycling each level through the

MRP logic.

2.5 MRP Planning Format and Calculations

The planning format for a typical MRP is shown in Figure (9) below.

L o t s i z e

L e a d t i m e

O n h a n d

S a f e t y s t o c k

A l l o c a t e d

L o w l e v e l c o d e

I t e m

Period

1 2 3 4 5 6 7 8

Gross requirements

Scheduled receipts

Projected on hand

Net requirements

Planned order

receipts

Planned order

releases

Figure (9) Typical MRP Planning Format [9]

The columns are as explained in the previous sections, whereas the rows

have the following meanings:-

Gross requirements: The total expected demand for an item or raw

material during each time period without regard to the amount on hand. For end

item, these quantities are shown in the master schedule, for components, these

quantities are derived from the planned order releases of their immediate

parents, using the formula:



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Gross requirements

for component

In period (t)=

Planned order

releases for parent

In period (t)×

Quantity of the

component required to

produce parent..........( 1)

Where (t) is period number

Scheduled receipts: Material that is already ordered (from manufacturing

orders or purchase orders) that is expected to arrive.

Projected on hand : The expected quantity in inventory at the end of the

period, available for demand in subsequent periods. This is calculated by

subtracting the gross requirements for the period from the scheduled receipts

and planned order receipts for the same period as well as the projected on hand

from the previous period, using the formula:

Projected on hand

At the end of period (t) = [ Scheduled receipts

In period (t) +Planned order receipts

In period (t) +

Projected on hand

From period (t -1) -Gross requirement

In period (t) ] .........( 2)

Net requirements: The actual amount needed in each time period. It is the

reduction of gross requirements and safety stock by the scheduled receipts in the

period plus the projected on hand in the previous period using the formula:

Net requirementsIn period (t) = [

Gross

requirementsIn period (t)

+Safety

stock -Scheduled

receiptsIn period (t)

-

Projected on

handIn period (t -1)

].................................................( 3)



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Planned order receipts: The size of the planned order and when it is

needed. This appears in the same time period as the net requirements, but the

size is modified by the appropriate lot sizing rules. Under lot-for-lot ordering,

this quantity will equal net requirements. Under other lot-size ordering, this

quantity may exceed net requirements. Any excess is added to the projected on

hand inventory.

Planned order releases: When the order should be released so the items

are available when needed by the parent. This is the same as the planned order

receipts offset for lead times plus safety lead time, using the formula:

Planned order releasesIn period (t -lead time - safety lead time) = Planned order receipts

In period (t).................( 4)

Planned order releases at one level generate material requirements at

lower levels. When an order is executed, it is removed from planned order

releases and entered in the scheduled receipts. Planned order releases show the

what, how much, and when of MRP.

2.6 MRP Algorithm

The preceding two sections show that the logic and calculations required

in the MRP process are not complicated. They involve only simple arithmetic.

Practically, the logic and calculations of MRP process can be outlined by

the algorithm shown in Figure (10).

The steps of MRP are relatively straightforward, but they clearly require

computers to apply for large numbers of products and subassemblies, in addition

to the number of parts involved which can be in the thousands.

Requirements generation, inventory control, time phasing of orders and

capacity requirements all clearly need to be coordinated. This job can be done

and controlled only by computers.



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START

n = 0

Establish G (t) for all items exist in level n by time period(Level 0 items are from MPS and lower level items are

derived from the planned order releases R(t) of their parentitem/s)

Determine N(t) for all items exist in the level n for time period t

N(t) = G(t) + SS - H(t-1) - S(t)

If N(t) < 0 then N(t) = 0

Apply lot-sizing Q into P(t) If N(t) ≥Q then P(t)=N(t) If 0<N(t)<Q then P(t) =Q If N(t) = 0

then P(t) = 0

Calculate H(t) for all items exist in level n for time period t H(t) = S(t) + P(t) + H(t-1) - G(t)

Have all time periods beencompleted?

Replace t

with t+1 No

Establish the planned order releases for all items exist inlevel n

R(t-L-SL) =P(t)

Have allBOM levels

been

exploded?

Stop

No

Yes

Yes

AB

Figure (10) Algorithm of MRP Process



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Explode planned order releases for all level n items (The

explosion multiplies planned order releases quantities bythe quantities required for assembly of lower levelcomponents) this establish the G(t) for lower level

components

G(t) component = R(t) parent × q

Replace n with n+1

(Iteration repeated until the lowest level is completed)

AB

Key

n = Level number in product structure treet = Period number G(t) = Gross requirement for period t R(t) = Planned order releases for period t N(t) = Net requirement for period t SS = Safety stockH(t) = Projected on hand inventory for period t S(t) = Scheduled receiptsQ = Lot size quantityP(t) = Planned order receipts for period t

L = Lead timeSL = Safety lead timeq = Quantity of the component required to produce the parent item

Figure (10) (Continued)



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2.7 Lot Sizing in MRP

An MRP system is an excellent way to determine production schedules

and net requirements. However, whenever we have a net requirement, a decision

must be made about how much to order. This decision is called lot sizing

decision. Commercial MRP software usually includes the choice of several lot

sizing rules. These rules are ranging from relatively simple procedure to very

complicated algorithms.

The selection of which rule to use is depends on the inventory policies of

the individual firm, the value of the individual item, and management

philosophy. Lot sizing procedures and calculations are well discussed in relevant

literature such as; [3], [4], [10], [14], [17]. However, the ten popular lot sizing

rules are:

1. Lot for Lot

2. Fixed Order Quantity

3. Economic Order Quantity

4. Fixed Period Requirements

5. Periodic Order Quantity

6. Wagner-Whitin Algorithm

7. Silver-Meal Heuristic Procedure

8. Least Unit Cost

9. Least Total Cost

10. Part-Period Balancing

However, the most applicable three rules - Lot for Lot, Fixed Order

Quantity, and Economic Order Quantity - will be reviewed in the following

three sections;



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2.7.1 Lot for Lot

Lot for lot (LFL) is the simplest of the lot sizing rules and involves the

direct translation of net requirements into order quantities. This rule ensures that

the planned order is just large enough to prevent a shortage in the single period

it covers. The aim of this rule is to minimize inventory levels.

2.7.2 Fixed Order Quantity

Fixed Order Quantity (FOQ) rule is quite frequently used in practice. This

rule maintains the same order quantity each time an order is issued. The fixed lot

size quantity may be set for an item based on local constraints around

packaging, material handling or minimum purchase quantity.

2.7.3 Economic Order Quantity

Large batch sizes result in high inventory levels which are, of course,

expensive in terms of the cost of capital tied up in inventory. Small batches

imply a proportionately lower inventory cost. However, there is a set-up cost

incurred with the placing of an order or the start-up of a batch on a machine.

This set-up cost (for manufactured items) or ordering cost (for purchased items)

must be distributed over the batch or order size. If set-up or ordering costs are

high then we may need to resort to larger batches to reduce the "per unit cost" of

set-up and thereby incur larger inventory costs. It is clear, therefore, that there is

a tradeoff between order or set-up costs and inventory costs. The Economic

Order Quantity (EOQ) rule is simply a mathematical expression of this tradeoff

and reflects the minimum total cost of holding stock and set-up. The EOQ can

be calculated using the following formula [10]:



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EOQ =)(

))((2

Hc

DSc .........................................( 5)

Where EOQ = the economic batch or order sizeSc = set-up cost per batch or ordering cost per orderD = the annual demand for the itemHc = inventory holding cost, on annual basis per unit

2.8 Shrinkage Allowances Calculations in MRP

Sometimes net requirement quantity needs to be modified to include an

extra amount of material to cover the percentage of loss whenever it is expected

during manufacturing operations due to any cause such as scrap or wastage. This

percentage of loss is called "shrinkage factor" . MRP systems do the required

modification by multiplying the net requirement by the outcome of One plus

shrinkage factor. So, net requirements after modification can be calculated using

the formula:

Net

requirementsAfter

modification

= [Net

requirementsBefore

modification] × [ 1 +

Shrinkage

factor ] ....( 6)

Some MRP systems do the required modification by dividing the net

requirement by the outcome of subtracting shrinkage factor from One. So, net

requirements after modification can be calculated using the formula [13]:

Net

requirements

Aftermodification

= [Net

requirements

Beforemodification

] ÷ [ 1 -Shrinkage

factor ] ....( 7)

Practically, the difference between the results generated from using the

two formulas is very slight especially when the net requirement quantity issmall. However, in all cases, the extra amount which is included in planned



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order releases is expected to be lost during manufacturing operations. Hence, the

expected quantity to be receipted is equal to the net requirement before

modification.

2.9 Outputs of MRP

Basically, MRP system uses mainly the three inputs (MPS, BOM, and

inventory records) to generate its outputs. The output from MRP calculations is

the determination of the amount of each bill of materials item required and the

dates they are needed. This information is used to plan order releases for both;

purchased items and in-house production of components. Hence, MRP generate

outputs of two type of orders; "purchase orders" for purchased items and "work

orders" for manufactured items as shown in Figure (11).

Inventory

Records

MasterProduction

Schedule (MPS)

Bill ofMaterials

(BOM)

Material

Requirements

Planning (MRP)

Purchase

Orders Work Orders

MRP Inputs

MRP Outputs

Figure (11) Material Requirements Planning Inputs and Outputs



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Practically, MRP output reports can take on an almost unlimited range of

format and content. These reports are classified as "primary" and "secondary"

output reports as following [5], [12]:-

1. Primary reports: Primary reports are the main or normal reports used

for inventory and production control. These include:-

a. "Planned orders" to be released at a future time.

b. "Order release notice" to execute the planned orders.

c. "Changes in due data" of open orders due to rescheduling.

d. "Cancellations or suspensions" of open order due to cancellation or

suspension of orders on the MPS.

e. "Inventory status data" .

2. Secondary reports: Additional reports, which are optional in an MRP

program, fall into the following main categories:-

a. "Planning reports" to be used, for example in forecasting inventory

and specifying requirements over some future time horizon.

b. "Performance reports" for purposes of pointing out inactive items

and determining the agreement between actual and programmed

item lead times and between actual and programmed quantity usage

and costs.

c. "Exceptions reports" that point out serious discrepancies, such as

errors, out-of-range situations, late or overdue orders, excessive

scrape or nonexistent parts.

Obviously, MRP system outputs are very accurate and effective tools in

guiding production planning and management of manufacturing operations.



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2.10 Updating of MRP

MRP is not a static type system. It is working in the dynamic situations. It

must be able to effectively cope possible changes. These changes include [18]:-

1. Changes in the master schedule or in direct external demand for

components.

2. Identified discrepancies in inventory records.

3. Change in machines availability (for example, due to breakdowns).

4. Actual completion time or quantity different from planned.

5. Engineering changes in product structure (bill of materials).

6. Changes in costs, lead times, etc.

Practically, there are two methods of updating the system. These are [9]

[10] [19]:-

1. Regeneration.

2. Net change.

2.10.1 Regeneration

Regeneration method, involves literally throwing away the previous plan

and starting over with a new master schedule and totally re-explodes it down

through all the bills of materials to generate valid priorities, net requirements,

and planned orders are completely regenerated at that time. In the regeneration

method the entire MRP process is carried out once per period (typically one

week) using batch processing computer technique [18].

2.10.2 Net Changes

Net change method, involves rework the plan and introducing into themaster schedule only those changes which have occurred since the last plan was



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made. The net change method tends to be preferred in most dynamic

manufacturing situations [10], [19].

2.11 Pegging

If an item is used as a component of several other items then the use of

MRP will leads to gross requirements on this item that are generated from a

number of sources [18].

In some circumstances, it may be important to know which items

generated which amounts of these requirements.

Pegging allows the users of MRP to identify the sources of demand for a

particular component's gross requirements [10].

These gross requirements are originate either from its parent

subassemblies or from independent demand in the master schedule, or from the

direct external demand for components.

For example the gross requirements for the item X arise from a number of

sources as shown in Table (1) below.

Table (1) Pegged Requirements for Item X

Requirement Source

Item

Quantity

Period

NumberParent

Parent

Quantity

Quantity per

Unit of

Parent

30 4 B 10 3160 5 A 40 4

210 7 B 70 3

320 8 A 80 4

A report such as in Table (1) allows the planner to retrace the steps of

MRP analysis and to understand the source of the total gross requirements for

the item.



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Pegging is a selective "where-used" file and its information can be used to

trace the impact of a material problem all the way up to the order it will effect

[17], [20].

Pegging technique is useful in the circumstances of an unexpected event,

such as a supplier being unable to deliver in the planning lead time. By retracing

the original calculations the user can detect which orders are likely to be

affected then identify appropriate remedial action/s.

2.12 Benefits of MRP

MRP users reported many benefits among these [11]:-

1. Reduction in inventory.

2. Improved customer service.

3. Quicker response to changes in demand and in the MPS.

4. Reduce set-up and product changeover costs.

5. Better machine utilization.

6. Increased sales and reduction in sales price.

2.13 Limitations of MRP

It is great that MRP is a super power computerized tool offering its users

the benefits listed hereabove, but they faced the following limitations in

Practice:-

1. It assumed the infinite capacity is available, and that suppliers always

delivered correctly and at time. It caused the MRP processor to

generate schedules and requirements that could not be accomplished

by the factory.

2. It is an "open-loop" system that sent plans to purchasing and production

personnel but could not receive feed back. As a result, adjustmentcould not be made to plans in order to keep the schedules valid.



26



3. It generates valid schedules in the sense that they follow logically from

the demand. But practically after planned orders are lunched, some of

planning factors may be changed.

4. When any change in demand fed to the system, it became "nervous"

and causes an excessive amount of re-planning.

3- Evolution Stage II: Closed-loop MRP

MRP was initially developed without any capacity checks or input from

other departments. Thus, the production plan often was not believable to anyone

outside of production function. "Closed-loop MRP" is an enhancement that

includes capacity checks. Which are used interactively with the master

production schedule and the component production plans (from MRP), to

generate feasible schedules [18].

Closed-loop MRP made feedback possible by including schedule,

rescheduling actions and "Shop Floor Control" (SFC)*, thus it "closed the loop"

to overcome the fundamental weakness of "open-loop MRP" .

3.1 The Structure of Closed-loop MRP

The first closed loop diagram, is shown in Figure (12). That was drawn in

1969, at the Markem Corporation in Keene, New Hampshire [21].

Practically, the term "closed-loop" has two meanings. It means that the

missing elements in a system were filled in, and that there must be a feedback

from purchasing, production, and other departments.

……………………………………………………………………………..* Production Activity Control (PAC), is the term favored by the American [10]



27



Yes

No

Production Planning

Master Production

Scheduling

Material RequirementsPlanning

Capacity Requirements

Planning

Realistic?

Executing Capacity

Plans

Executing Material

Plans

Figure (12) The First Closed-loop MRP Diagram [21]



28



A basic structure of closed-loop MRP with several additions to the open-

loop MRP system can be developed as in Figure (13), which shows, how

information and feedback flow through the system and loops generated in

practice. The most important additions are:-

1. Rough Cut Capacity Planning.

2. Capacity Requirement Planning.

3.1.1 Rough Cut Capacity Planning

Rough Cut Capacity Planning (RCCP) involves a relatively quick check

on a few key resources required to implement the MPS, in order to ensure that it

is feasible from the capacity point of view. The MPS and the RCCP are

developed interactively [16], [10]. The technique determines the impact of the

MPS on the key or aggregate resources, such as man hours and machine hours.

Rough cut capacity plans are "finite capacity plans" because they have to

operate within certain constraints [13].

3.1.2 Capacity Requirement Planning

Capacity Requirement Planning (CRP) generates amore detailed capacity

profile than that generated by RCCP. CRP is only performed after each MRP

run. This is done by exploding the manufacturing orders (planned and actual)

through the routing specified in the shop floor control system. This generates a

detailed profile of what capacity is required in each work center. The required

capacity is then compared with the available capacity and over load/ under load

conditions are identified.



29



Master

Production

Schedule (MPS)

Figure (13) The Basic Structure of Closed-Loop MRP with FeedbackLoops

Bill of

Materials

(BOM)

Material

Requirements

Planning (MRP)

Purchase

Orders

Work

Orders

Inventory

Records

Capacity

Requirement

Planning (CRP)

AggregateProduction

Planning

Demand

Management

Rough Cut

Capacity

Planning

(RCCP)

ExecutionPurchasing

ExecutionShop Floor

Control (SFC)

Routing &

Work

Centers

Information



30



Practically, CRP does not facilitate interactive planning and it is used

primarily as a verification tool [10]. Capacity requirement plans are "infinite

capacity plans" insomuch as they do not take the capacity constraints of each

machine or work center into account. If this load is lumpy it may be smoothed

by re-planning to a "finite capacity" or by allocating temporary resources to the

work center [13].

3.2 How Closed-loop MRP Work

The sequence of events that might take place in this type of MRP systems

is as follows:-

1. The planner "master production scheduler" constructs the master

production schedule from the view of the aggregate production

planning.

2. The master production schedule passes information to the rough cut

capacity planning module for evaluation.

3. The rough cut capacity planning gives feedback on the

realism/achievability of the master production schedule.

4. The master production scheduler continues to use this information loop,

modifying the master production schedule until it is been achievable.

5. The revised master production schedule then drives (MRP), which

calculates/recalculates all purchasing and manufacturing needed to

fulfill the master production schedule.

6. All orders to be manufactured in-house are passed to capacity

requirement planning. Any mismatch between the required workload

and the ability to perform according to the available capacity is to be

reported back to the planners, so that future plans can be suitably

modified.

7. There is a similar feedback loop from the purchase order function,which might report that planned requirements cannot be met by a



31



supplier and that action is required to resolve the problem. Such a

report could lead to changes to the purchasing plan.

8. The manufacturing process itself (the execution phase) may also fail to

go to plan, and generates a new feedback.

9. As a result of the feedback within the system, changes may be required

either to the master production schedule or to the resources required to

execute the plans. The aggregate plan must reflect any changes to the

master production schedule.

4- Evolution Stage III: Manufacturing Resource Planning

Manufacturing Resource Planning (MRP II) is essentially extended form

of closed-loop MRP that also includes strategic planning processes, "business

planning" , and a number of other business functions such as human resources

planning, profit calculations and cash flow analysis [14],[5] .

Obviously, the initial intent for MRP II was to plan and monitor all

resources of a manufacturing organization; manufacturing, marketing, finance,

and engineering, through a closed-loop system generating financial figures. The

second important intent of MRP II concept was that it "simulates" the

manufacturing system [12].

Practically, both above involved in new MRP II systems which represent

a company wide system.

4.1 The Structure of MRP II

The technical differences between closed-loop MRP and MRP II are small

compared to the real significant functional difference. Figure (14) shows the

schematic diagram of MRP II given by Wight [21].



32



NO

Production Planning

Master Production

Scheduling

Material Requirements

Planning

Capacity Requirements

Planning

Realistic?

Executing Capacity

Plans

Executing Material

Plans

Yes

Figure (14) Schematic Diagram of MRP II According to Wight [21]

Business Planning



33



Practically, MRP II requires several additions to the inputs of the system,

the key one is bill of materials. MRP II requires to extend the bill of materials to

include all the details of the resources needed to produce one unit of product.

Those included are mainly; labor, machinery, tools, space and materials. In fact

it will be a "Bill of Resources" (BOR), which can be used by MRP II to project

shortages at specific times, giving departments advance notice of required

remedial action, like need to hire or train labor, need for support resources.

MRP II can keep track of machine loads and whether there is a need for

more machines or subcontractors, or not. Also MRP II treats cash flow almost

like materials. The system calculates the cost of all planned order releases and

creating a cash flow forecast. This includes payments to suppliers, wages, power

and all other costs associated with production.

The additional functions of MRP II, means it includes extra modules to

those included in closed-loop MRP. The extra modules generate extra feedback

loops. A basic structure of MRP II can be developed as in Figure (15).

This structure includes the following extra feedback loops:-

1. A feedback from the aggregate production planning and the overall

business planning (strategic planning).

2. A feedback from profit calculations to check that the organization is

getting the profit it wants from its total manufacturing process.

4.2 Characteristics of MRP II

The characteristics of MRP II can be described as follows:-

1. The operating and financial system is one and the same. They use the

same transactions, they use the same numbers. The financial figures

are merely extensions of the operating numbers.



34



Master

Production

Schedule (MPS)

Figure (15) The Basic Structure of MRP II with its Extra Modules and

Feedback Loops

Income

from

Deliverie

Demand

Management

Cost of

Purchases

Cost of

Work

Cost of

Overheads

Profit

Calculations

Business

Planning

Bill of

Materials

(BOM)

Material

Requirements

Planning (MRP)

Purchase

Orders

Work

Orders

Inventory

Records

Capacity

Requirement

Planning (CRP)

Aggregate

Production

Planning

Rough Cut

Capacity

Planning

(RCCP)

ExecutionPurchasing

ExecutionShop Floor

Control (SFC)

Routing &

Work

Centers

Information



35



2. It has a "what if" capability, since a good system is a simulation of

reality, it can be used to simulate what would happen if various policy

decisions where implemented. This facility can be carried out at master

production scheduling stage.

3. It is a whole company system now, involving every facet of the

business because the things that MRP II is concerned with (sales,

production, inventories schedules, cash flow…etc) are the very

fundamentals of planning and controlling a manufacturing or

distribution business.

These characteristics mean that MRP II effectively builds a computer-

based planning model of the organization and gives it an opportunity to use

single database, which is accessed and used by the whole company according to

individual functional requirements. This enables the various departments of the

organization, to effectively share information and communicate with each other.

Figure (16) shows how the different departments connected to a single database,

which means that the changes are available to everyone on the system as soon as

they are made, and everyone has access to the same data. The terminals on the

shop floor provide a feedback loop that updates the files on the status of work in

process [22].

Furthermore, MRP II allows everyone in the company (marketing staff,

production, accounting ……etc) to work with the same "game plan" , using the

same valid numbers to run the business, and is capable of simulation to plan and

test alternative strategies [12], [21].

MRP II software vendors kept adding modules, to stay ahead of computers.

A finite scheduling module, capable of incorporating capacity constraints into

the planning mix is frequently available in some MRP II packages [15].

In reality, many systems have been developed and sold by many software

and consulting firms. Efforts continued in MRP II systems a long the lines ofmodification by adding and/or improving the existing modules [23].



36



Figure (16) Different Departments Connected to a Single Database [22]

4.3 Benefits of MRP II

Most of the companies that implement MRP II successfully have realized

many significant benefits. In the narrow sense, the chief benefit of MRP II is its

ability to generate valid schedules and keep them that way. A valid schedule hasdifferent benefits for the entire company, including the following [15].

1. It improves on-time completions. Industry calls this improving

customer service, and on-time completion is one good way to measure

it. MRPII companies typically achieve 95% or more on-time

completion.

2. It cuts inventories. With MRP II, inventories can be reduced at the

same time a customer service is improved. Stocks are cut because parts



37



are not ordered if not needed to meet requirement for parent items.

Typically gains are 20 to 35 %.

3. It provides data (future orders) for planning work center capacity

requirements. This benefit is attainable because the basic MRP is

enhanced by a capacity requirements planning.

4. It improves direct-labor productivity. There is less lost time and

overtime because of shortages and less need to west time due to

stopping one job to set-up for a "shortage-list job" or "hot job" .

Reduction in lost time tends to be from 5 to 10% in fabrication and

from 25 to 40% in assembly. Overtime cuts are grater, on the order of

50 to 90%.

5. It improves productivity of support staff. MRP II cuts expediting

"firefighting" , which allows more time for planning. Purchasing can

spend time saving money and selecting good suppliers. Materials

management can maintain valid records and better plan inventory

needs. Production control can keep priorities up-to-date. Supervisors

can better plan capacity and assign jobs. In some cases, fewer support

staff are needed.

6. It facilitates closing the loop with total business planning. That includes

planning capacity and cash flow, which is the chief purpose and

benefit of MRPII.

3.4.4 MRP II and Computer Integrated Manufacturing

MRP II approach was extended in the 1980's towards the more technical

areas that cover the product development and production process, and that these

functions were named with various computer aided acronyms including

"Computer Aided Design" (CAD), "Computer Aided Manufacturing" (CAM),

and "Computer Aided Quality Assurance" (CAQA). This entire conceptualframework for the integration of all administrative and technical functions of a



38



company was named "Computer Integrated Manufacturing" (CIM) [9], [24],

[25].

There are five distinct "islands" in the framework of CIM that can be

shown as in Figure (17). It is clear that the pivot and the heart of CIM

framework is the center island, which includes MRP II, and the linkages

between other islands (the bridges) are almost exclusively to the MRP II island.

This shows that MRPII is playing the key role in CIM programs and

environments, since that an excellent business plan can not be achieved without

an excellent supporting manufacturing resource plan [10], [16], [17].

Financial Control Sales/Marketing

Quality AssuranceEngineering

Activities

Manufacturing

Planning and Control

MRPII

Purchasing

MRP

SFC

MPS

Inventory

status

Manufacturing

Engineering

Design

Engineering

CAMCAD

Quality

Control

SPC SQC

Financial

Reporting

Cost Accounting

Budgeting

Sales and Market

Planning

Sales Marketing

Distribution

Figure (17) The Framework of Computer Integrated Manufacturing



39



5- Evolution Stage IV: Enterprise Resource Planning

The term Enterprise Resource Planning (ERP) was coined in 1990's to

describe the latest developments in resource planning. In the light of the

increasingly complex requirements of a global manufacturing environment, ERP

introduced among other things, extensive multi-site management and

communications functionality to the realm of resource planning [26].

However, there is a tendency within the operations management filed to

consider ERP as a natural extension of MRP II [27]. ERP systems expands the

concept of MRP II, and the key difference between MRP II and ERP is that

while MRP II has traditionally focused on the planning and scheduling of

internal resources, ERP strives to plan and schedule supplier resources as well,

based on the dynamic customer demands and schedules [28]. Figure (18) shows

MRP II and ERP, and how the information from the two systems is integrated

with other information system.

The modular functionality commonly found in ERP system includes

enhanced functionality of all of the modules of MRP II systems, as well as

"Electronic Data Interchange" (EDI), Engineering change control, Project

Management and control, and service control [26]. The typical ERP system can

be called as an umbrella system [29].

Practically, among the most important attributes of ERP is its ability to;

automate and integrate an organizations business processes, share common data

and practices across the entire enterprise and produce and access information in

a real-time environment [30].

According to Yingjie [27] ERP systems have the following

characteristics:-

1. ERP systems are packaged software designed for a "client/server"

environment.

2. ERP systems integrate the majority of a business's process.



40



InvoicingSales Order (order entry,

product configurations, sales

managements)

Masterproduction

Schedule

Inventory

ManagementBill of

Materials

Work

Orders

Routing and

Lead Times

Purchasing and

Lead Times

Accounts

Receivable

General

Ledger

AccountPayable

Vendor Communication (schedules, EDI,

advanced shipping notice ........etc.

ERP

MRPII

Figure (18) MRP II and ERP, Information Flows Integrated with

Other Organization Systems [29]



41



3. ERP systems process a large majority of an organization's transactions.

4. ERP systems use an enterprise-wide database that typically stores each

piece of data once.

5. ERP systems allow access to the data at real time

However, client/server environment means that users have personal

computers with functional modules of ERP system on their desks, while the

large database is kept centrally. Client/server system can be expanded

reasonably easily at low cost [18]. This computer network system has the ability

to link data from different server types. The information access linkages also

connect database from different server types. In addition client/server system

can also link servers in distant locations [23]. ERP use "Local Area Network"

(LAN) technology to local servers and "Wide Area Network" (WAN) technology

to wide distance locations. Figure (19) shows an Enterprise client/server model.

Figure (19) The Enterprise Client/ Server Model [23]



42



The popularity of ERP systems started to soar when SAP, a German based

company, released its next generation software known as R/3 [28]. SAP is one

of the major providers of ERP systems, like Oracle, People Soft , J.D.Edwards,

and Bann. The distribution of market share percent of leading ERP software

companies is shown in Figure (20).

The adoption of ERP systems by major corporations was accelerated in

1998 and 1999 by possible "Y2K (year 2000) problems" that exist in older

legacy computer systems that data back to 1970's. For many firms, the cost of

installing new ERP systems was comparable to fixing the old legacy systems.

The total sales of ERP software reached $3.9 billion in 1995 alone, a 68%

increase over 1994 [18] and the total 1999 ERP software and service is $18.2

billion [12]. The main reason for this growth is the rapid development and the

increase in the applications and use of internet.

Figure (20) The Distribution of Market Share Percent of Leading ERP Software

Companies for Year 1999 [12]



43



6- Evolution Stage V: Enterprise Resource Planning Extended

Enterprise Resource Planning Extended (ERP II) is the last generation of

MRP-type systems. It is a development or an extension of ERP systems. The

new systems included extra modules which gave ERP II systems the following

characteristics [31]:-

1. Integrated systems that cover the firm's entire value by transition from

an internal view of the firm to business network vision.

2. "Electronic commerce" by developing "HTML"* interfaces for the

internet/internet and supporting complete commercial transactions.

3. Applications with an object-oriented structure by transition from a

highly integrated structure to modules with a higher complementarity

and "plug and play" facilities.

Figure (21) shows the Evolution of ERP II and Table (2) gives a

comparison between ERP and ERP II.

However, most of the literature loosely uses the term "ERP systems" for

(ERP and ERP II) systems, referring to their origin. Therefore in the rest of this

study the same term "ERP systems" will be used for both.

6.1 Reasons to Implement ERP Systems

Organizations decide to adopt and implement ERP systems when there

are convincing reasons. The main reason is to fulfill the need of manufacturers

to a system that combines information used by different departments of an

organization, which is growing out of the scope of MRP II systems, especially

as they expand across production lines and across global borders.

…………………………………………………………………………………….*HTML (Hypertext Mark-up Language) that formats documents and links documents and

pictures in the same or remote computers [32].



44



Integrated

Plant

Systems

Collaborative

Product

Commerce

Private

Marketplace

Customer

Relation ship

Management Supply

ChainExecution

E-

Procurement

Partner

Relationship Management

Supply

Chain

Planning

Sales

MRP II

Production

Monitoring

and Control

Financials

Human

Resources

Purchasing

Distribution

ERP

Package

Components

ERP II

Package

Components

Figure (21) Evolution of ERP II from ERP [31]



45



Table (2) Comparison of ERP vs. ERP II [31]

Other reasons of demand for ERP application, according to Somers and

Nelson [33] are; competition pressures to become a low cost producer,

expectations of revenue growth, ability to compete globally, Y2K-related

replacements, and the desire to re-engineer the business to respond to market

challenges.

Although the properly selected and implemented ERP systems can be

leading to many benefits, but if that has not been carefully considered may bring

disaster rather than benefits. For example Fox Meyer Drug a $5 billion

pharmaceutical company, recently filed for bankruptcy. Fox Meyer argued that

major problems were generated by a failed ERP system, which created excess

shipments resulting from incorrect orders and costing Fox Meyer millions of

dollars. Recent ERP failures also include Dell Computer , Boeing, Dow

Chemical, Mobile Europe, Applied Materials, Hershey, and Kellogg's [28].



46



6.2 Feasibility of Implementing ERP Systems in Iraqi Manufacturing

Industries

Practically, in the present situation of Iraqi manufacturing industries it is

clear that bypassing MRP II systems and adopting ERP systems is not the

suitable decision, due to the lack of convincing reasons to implement such

sophisticated systems. Furthermore, we expect a great chance of bringing a lot

of extensive problems especially when taking the following notes of ERP

implementation into consideration:-

1. The difficulties and the high failure rate of implementing ERP systems

[30]. ERP, implementation success rate is only about 23% in western

countries and the rate is extremely low in other countries for example

it is about 10% in China [34]. Chen [28] indicated that 40% of all ERP

installations only achieve partial implementation and 20% of

attempted ERP adoptions are scrapped as total failure.

2. The process of implementing ERP systems is very costly and takes a

long time. An ERP system is a complex set of software programs so

that it takes several years and many millions of dollars to implement

[9]. According to Koch [35] Meta Group surveyed 63 companies and

found that the average "Total Cost of Ownership" (TCO)* of ERP is $

15 million (the highest was $ 300 million and the lowest was

400,000) and the average implementation takes 31 months before

benefits of any kind were realized. And according to Chen [28] a new

ERP implementation can range anywhere from $2 to $4 million for a

small firm and to over $1 billion for large companies. Parr and Shanks

[36] indicated that comprehensive implementation takes more then 7

years and costs of tens of millions of dollars.

………………………………………………………………………………………………......* TCO Include all hardware, software, professional services, and internal costs, as well as thecost of optimizing, maintaining, and upgrading the system [35].



47



3. Unlike the implementation of less sophisticated technological

innovations such as CAD/CAM and MRP II, "Business Process Re-

engineering" (BPR) is a unique planning activity in ERP projects [28].

BPR means that all the processes in a company must conform to the

ERP model, but not all companies wish to make massive changes to

their business processes [36].

4. Each of the different ERP software package has its particular strengths

and weakness [12]. So they do not meet all the needs of an

organization. Al-Mashari [37] states the fact that even the best product

available can only fit 70% of an organizations needs.

7- Conclusion

Until the 1960's many manufacturing organizations used ROP method.

ROP treats all subassemblies and raw materials demand as independent of end

item demand.

MRP is primarily designed to handle ordering and scheduling of

dependent demand inventories and to differentiate between dependent and

independent demand. MRP has the ability to answer the key issues; "what" ,

"how much" , and "when" a material is needed.

MRP systems has evolved dramatically and its logic has been extended

with the time in order to be capable to cover the growing requirements of

manufacturing organizations, by adding modules around the original MRP

system which is still in the core of all of MRP-type systems.

Generally, most of the companies that adopted and implement MRP-type

systems successfully have achieved significant benefits.

Implementing ERP systems is not recommended when there are no

convincing reasons for that.

Obviously, the degree of success of implementing MRP-type systemsdepends on the existence of many requirements and on the environments of the



48



industry in which these systems to be implemented. Therefore, these subjects

must be studied in depth in order to achieve a successful implementation and get

the maximum benefits of these systems.

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[10]. Browne, J., Harden, J., and Shivnan, J., "Production Management System:

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[24]. Johnasson, L., and Soderberg, K., "MPC Systems and Small Companies"

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[27]. Yingjie, J., "Critical Success Factors in ERP implementation in Finland"

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Businesses Administration, 2005.

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[29]. Heizer, J., and Render, B., "Operations Management" Prentice Hall, 2001.

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[32]. Waller, D.L., "Operations Management: A Supply Chain Approach"

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[33]. Somers, T.M., and Nelson, K., "The Impact of Critical Success Factors

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[34]. Zhang, L., Lee, M.K.O., Zhang, Z., and Banerjee, P., "Critical Success

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[35]. Koch, C., "The ABC's of ERP", CIO Magazine,CXO Media, Inc.online

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[36]. Parr, A.N. and Shanks, G., "A Taxonomy of ERP Implementation

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http://www.ises.edu/en/home.asp


http://www.cio.com/research/erp




Documents

The Concept and Evolution of MRP-Type Systems