Copyright 2009 John Wiley & Sons, Inc. Beni Asllani University of Tennessee at Chattanooga Resource Planning Operations Management - 6 th Edition Chapter 15 Roberta Russell & Bernard W. Taylor, III

Copyright 2006 John Wiley & Sons, Inc.14-2 ERP—Enterprise Resource Planning  Starts with slide 56  We will not be covering the material on pages of Chapter 15 until after the second exam

Copyright 2009 John Wiley & Sons, Inc.15-3 Lecture Outline   Material Requirements Planning (MRP)   Capacity Requirements Planning (CRP)   Enterprise Resource Planning (ERP)   Customer Relationship Management (CRM)   Supply Chain Management (SCM)   Product Lifecycle Management (PLM)

Copyright 2009 John Wiley & Sons, Inc.15-4 Resource Planning for Manufacturing

Copyright 2009 John Wiley & Sons, Inc.15-5 Material Requirements Planning (MRP)   Computerized inventory control and production planning system   When to use MRP? Dependent demand items Discrete demand items Complex products Job shop production Assemble-to-order environments

Copyright 2009 John Wiley & Sons, Inc.15-6 Demand Characteristics Week – – – – No. of tables Continuous demand M T W Th F M T W Th F – – – – No. of tables Discrete demand Independent demand 100 tables Dependent demand 100 x 1 = 100 tabletops 100 x 4 = 400 table legs

Copyright 2009 John Wiley & Sons, Inc.15-7 Material Requirements Planning Material requirements planning Planned order releases Work orders Purchase orders Rescheduling notices Item master file Product structure file Master production schedule

Copyright 2009 John Wiley & Sons, Inc.15-8 MRP Inputs and Outputs  Inputs Master production schedule Master production schedule Product structure file Product structure file Item master file Item master file  Outputs Planned order releases Planned order releases Work orders Work orders Purchase orders Purchase orders Rescheduling notices Rescheduling notices

Copyright 2009 John Wiley & Sons, Inc.15-9 Master Production Schedule  Drives MRP process with a schedule of finished products  Quantities represent production not demand  Quantities may consist of a combination of customer orders and demand forecasts  Quantities represent what needs to be produced, not what can be produced  Quantities represent end items that may or may not be finished products

Copyright 2009 John Wiley & Sons, Inc Master Production Schedule (cont.) PERIOD MPS ITEM12345 Pencil Case Clipboard Lapboard Lapdesk

Copyright 2009 John Wiley & Sons, Inc Product Structure Top clip (1)Bottom clip (1) Pivot (1)Spring (1) Rivets (2) Finished clipboardPressboard (1) Clipboard

Copyright 2009 John Wiley & Sons, Inc Product Structure Tree Clipboard Level 0 Level 1 Level 2 Spring (1) Bottom Clip (1) Top Clip (1) Pivot (1) Rivets (2) Clip Ass’y (1) Pressboard (1)

Copyright 2009 John Wiley & Sons, Inc Multilevel Indented BOM Clipboardea Clip Assemblyea Top Clipea Bottom Clipea Pivotea Springea Rivetea Press Boardea1 LEVELITEMUNIT OF MEASUREQUANTITY

Copyright 2009 John Wiley & Sons, Inc Specialized BOMs  Phantom bills Transient subassemblies Transient subassemblies Never stocked Never stocked Immediately consumed in next stage Immediately consumed in next stage  K-bills Group small, loose parts under pseudo-item number Group small, loose parts under pseudo-item number Reduces paperwork, processing time, and file space Reduces paperwork, processing time, and file space

Copyright 2009 John Wiley & Sons, Inc Specialized BOMs (cont.)  Modular bills Product assembled from major subassemblies and customer options Product assembled from major subassemblies and customer options Modular bill kept for each major subassembly Modular bill kept for each major subassembly Simplifies forecasting and planning Simplifies forecasting and planning X10 automobile example X10 automobile example 3 x 8 x 3 x 8 x 4 = 2,304 configurations 3 x 8 x 3 x 8 x 4 = 2,304 configurations = 26 modular bills = 26 modular bills

Copyright 2009 John Wiley & Sons, Inc Cylinder (.40)Bright red (.10)Leather (.20)Grey (.10)Sports coupe (.20) 6-Cylinder (.50)White linen (.10)Tweed (.40)Light blue (.10)Two-door (.20) 8-Cylinder (.10)Sulphur yellow (.10)Plush (.40)Rose (.10)Four-door (.30) Neon orange (.10)Off-white (.20)Station wagon (.30) Metallic blue (.10)Cool green (.10) Emerald green (.10)Black (.20) Jet black (.20)Brown (.10) Champagne (.20)B/W checked (.10) X10 Automobile EnginesExterior colorInteriorInterior colorBody (1 of 3)(1 of 8)(1 of 3)(1 of 8)(1 of 4) Modular BOMs

Copyright 2009 John Wiley & Sons, Inc Time-phased Bills Forward scheduling: start at today‘s date and schedule forward to determine the earliest date the job can be finished. If each item takes one period to complete, the clipboards can be finished in three periods Backward scheduling: start at the due date and schedule backwards to determine when to begin work. If an order for clipboards is due by period three, we should start production now   an assembly chart shown against a time scale

Copyright 2009 John Wiley & Sons, Inc Item Master File DESCRIPTIONINVENTORY POLICY ItemPressboardLead time1 Item no.7341Annual demand5000 Item typePurchHolding cost1 Product/sales classCompOrdering/setup cost50 Value classBSafety stock 0 Buyer/plannerRSRReorder point39 Vendor/drawing07142EOQ316 Phantom codeNMinimum order qty100 Unit price/cost1.25Maximum order qty500 PeggingYMultiple order qty1 LLC1Policy code3

Copyright 2009 John Wiley & Sons, Inc Item Master File (cont.) PHYSICAL INVENTORYUSAGE/SALES CODES On hand150YTD usage/sales1100 LocationW142MTD usage/sales75 On order100YTD receipts1200 Allocated75MTD receipts0 Cycle3Last receipt8/25 Last count9/5Last issue10/5 Difference-2 Cost acct Routing00326 Engr07142

Copyright 2009 John Wiley & Sons, Inc MRP Processes  Exploding the bill of material  Netting out inventory  Lot sizing  Time-phasing requirements  Netting process of subtracting on- hand quantities and scheduled receipts from gross requirements to produce net requirements process of subtracting on- hand quantities and scheduled receipts from gross requirements to produce net requirements  Lot sizing determining the quantities in which items are usually made or purchased determining the quantities in which items are usually made or purchased

Copyright 2009 John Wiley & Sons, Inc MRP Matrix

Copyright 2009 John Wiley & Sons, Inc MRP: Example Master Production Schedule Clipboard Lapdesk Item Master File CLIPBOARDLAPDESKPRESSBOARD On hand On order175 (Period 1)00 (sch receipt) (sch receipt) LLC001 Lot sizeL4LMult 50Min 100 Lead time111

Copyright 2009 John Wiley & Sons, Inc MRP: Example (cont.) Product Structure Record Clipboard Lapdesk Pressboard (2) Trim (3’) Beanbag (1) Glue (4 oz) Level 0 Pressboard (1) Clip Ass’y (1) Rivets (2) Level 1

Copyright 2009 John Wiley & Sons, Inc ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand25 Net Requirements Planned Order Receipts Planned Order Releases MRP: Example (cont.)

Copyright 2006 John Wiley & Sons, Inc Basic MRP formulas  Net Requirements = Gross Requirements – scheduled receipts – On-hand Inventory (previous period)  Planned Order Receipt = function (Net Requirements, order policy)  Planned Order Release = Planned Order Receipt backed up by the lead time Planned Order Release i-LT = Planned Order Receipt i Planned Order Release i-LT = Planned Order Receipt i

Copyright 2006 John Wiley & Sons, Inc More formulas  On-hand inventory i = on-hand inventory i-1 + scheduled receipts i + Planned Order Receipt i – Gross Requirements i  Gross Requirements for next level down are determined from the Planned Order Releases at the level above

Copyright 2006 John Wiley & Sons, Inc On-hand inventory  Is always the amount of on-hand inventory at the end of the period  All other items (gross req., net req., scheduled receipts, planned order receipts) are amounts at the beginning of the period

Copyright 2009 John Wiley & Sons, Inc MRP: Example (cont.) ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand25115 Net Requirements0 Planned Order Receipts Planned Order Releases ( ) = 200 units available ( ) = 115 on hand at the end of Period 1

Copyright 2009 John Wiley & Sons, Inc ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand Net Requirements00 Planned Order Receipts Planned Order Releases 115 units available ( ) = 20 on hand at the end of Period 2 MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand Net Requirements00100 Planned Order Receipts100 Planned Order Releases units available ( ) = -100 — 100 additional Clipboards are required Order must be placed in Period 2 to be received in Period 3 MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand Net Requirements Planned Order Receipts Planned Order Releases Following the same logic Gross Requirements in Periods 4 and 5 develop Net Requirements, Planned Order Receipts, and Planned Order Releases MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Gross Requirements Scheduled Receipts Projected on Hand20 Net Requirements Planned Order Receipts Planned Order Releases MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Gross Requirements Scheduled Receipts Projected on Hand Net Requirements04050 Planned Order Receipts5050 Planned Order Releases5050 Following the same logic, the Lapdesk MRP matrix is completed as shown MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc ITEM: PRESSBOARDLLC: 0PERIOD LOT SIZE: MIN 100LT: Gross Requirements Scheduled Receipts Projected on Hand150 Net Requirements Planned Order Receipts Planned Order Releases ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Planned Order Releases ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Planned Order Releases5050 MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc ITEM: PRESSBOARDLLC: 0PERIOD LOT SIZE: MIN 100LT: Gross Requirements Scheduled Receipts Projected on Hand150 Net Requirements Planned Order Receipts Planned Order Releases ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Planned Order Releases ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Planned Order Releases5050 x2 x2 x1 x1 x1 MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc ITEM: PRESSBOARDLLC: 0PERIOD LOT SIZE: MIN 100LT: Gross Requirements Scheduled Receipts Projected on Hand Net Requirements Planned Order Receipts Planned Order Releases ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Planned Order Releases ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Planned Order Releases5050 MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc Planned Order Report PERIOD ITEM12345 Clipboard Lapdesk5050 Pressboard MRP: Example (cont.)

Copyright 2009 John Wiley & Sons, Inc Lot Sizing in MRP Systems   Lot-for-lot ordering policy   Fixed-size lot ordering policy Minimum order quantities Maximum order quantities Multiple order quantities Economic order quantity Periodic order quantity

Copyright 2009 John Wiley & Sons, Inc Using Excel for MRP Calculations

Copyright 2009 John Wiley & Sons, Inc Advanced Lot Sizing Rules: L4L Total cost of L4L = (4 X $60) + (0 X $1) = $240

Copyright 2009 John Wiley & Sons, Inc Advanced Lot Sizing Rules: EOQ minimum order quantity Total cost of EOQ = (2 X $60) + [( ) X $1)] = $220

Copyright 2009 John Wiley & Sons, Inc Advanced Lot Sizing Rules: POQ periods worth of requirements Total cost of POQ = (2 X $60) + [( ) X $1] = $180

Copyright 2009 John Wiley & Sons, Inc Planned Order Report Item#2740Date On hand100Lead time2 weeks On order200Lot size200 Allocated50Safety stock50 SCHEDULEDPROJECTED DATEORDER NO.GROSS REQS.RECEIPTSON HANDACTION AL AL GR SR Expedite SR CO GR GR GR Release PO Key:AL= allocatedWO= work order CO= customer orderSR= scheduled receipt PO= purchase orderGR= gross requirement

Copyright 2009 John Wiley & Sons, Inc MRP Action Report Current date ITEMDATEORDER NO.QTY.ACTION # ExpediteSR10-01 # Move forwardPO10-07 # Move forwardPO10-05 # Move backwardPO10-25 # De-expediteSR10-30 # ReleasePO10-13 # ReleaseWO10-24

Copyright 2009 John Wiley & Sons, Inc Capacity Requirements Planning (CRP)   Creates a load profile   Identifies under-loads and over-loads   Inputs Planned order releases Routing file Open orders file

Copyright 2009 John Wiley & Sons, Inc CRP MRP planned order releases Routing file Capacity requirements planning Open orders file Load profile for each process

Copyright 2009 John Wiley & Sons, Inc Calculating Capacity  Maximum capability to produce  Rated Capacity Theoretical output that could be attained if a process were operating at full speed without interruption, exceptions, or downtime Theoretical output that could be attained if a process were operating at full speed without interruption, exceptions, or downtime  Effective Capacity Takes into account the efficiency with which a particular product or customer can be processed and the utilization of the scheduled hours or work Takes into account the efficiency with which a particular product or customer can be processed and the utilization of the scheduled hours or work Effective Daily Capacity = (no. of machines or workers) x (hours per shift) x (no. of shifts) x (utilization) x ( efficiency)

Copyright 2009 John Wiley & Sons, Inc Calculating Capacity (cont.)  Utilization Percent of available time spent working Percent of available time spent working  Efficiency How well a machine or worker performs compared to a standard output level How well a machine or worker performs compared to a standard output level  Load Standard hours of work assigned to a facility Standard hours of work assigned to a facility  Load Percent Ratio of load to capacity Ratio of load to capacity Load Percent = x 100% load capacity

Copyright 2009 John Wiley & Sons, Inc Load Profiles  graphical comparison of load versus capacity  Leveling underloaded conditions: Acquire more work Acquire more work Pull work ahead that is scheduled for later time periods Pull work ahead that is scheduled for later time periods Reduce normal capacity Reduce normal capacity

Copyright 2009 John Wiley & Sons, Inc Reducing Over-load Conditions   Eliminating unnecessary requirements   Rerouting jobs to alternative machines, workers, or work centers   Splitting lots between two or more machines   Increasing normal capacity   Subcontracting   Increasing efficiency of the operation   Pushing work back to later time periods   Revising master schedule

Copyright 2009 John Wiley & Sons, Inc Initial Load Profile Hours of capacity Time (weeks) Normalcapacity – – – – – – – – – – – – 0 0 –

Copyright 2009 John Wiley & Sons, Inc Adjusted Load Profile Hours of capacity Time (weeks) Normalcapacity – – – – – – – – – – – – 0 0 – Pull ahead Push back Overtime Work an extra shift  Load leveling process of balancing underloads and overloads process of balancing underloads and overloads

Copyright 2006 John Wiley & Sons, Inc Determining Loads and Capacities 2 copiers, 2 operators 5 days/wk, 8 hr/day 1/2 hr meals, 1/2 hr maintenance per day Efficiency= 100% Utilization= 7/8 = 87.5% Daily capacity= 2 machines x 2 shifts x 8 hours/shift x 100% efficiency x 87.5% utilization = 28 hours or 1,680 minutes Example 12.2

Copyright 2006 John Wiley & Sons, Inc Determining Loads and Capacities Example 12.2 JOBNO. OFSETUPRUN TIME NO.COPIESTIME (MIN)(MIN/UNIT) TOTAL TIME (500 x 0.08) = , (1,000 x 0.10) = , (5,000 x 0.12) = , (10,000 x 0.14) =1, , (2,000 x 0.10) = min Load percent = 2,385.7 / 1,680 = 1.42 x 100% = 142% Add another shift: Daily capacity= 2 machines x 3 shifts x 8 hours/shift x 100% efficiency x 87.5% utilization = 42 hours or 2,520 minutes Revised load percent = 2,385.7 / 2,520 = x 100% = 94.67%

Copyright 2009 John Wiley & Sons, Inc Relaxing MRP Assumptions   Material is not always the most constraining resource   Lead times can vary   Not every transaction needs to be recorded   Shop floor may require a more sophisticated scheduling system   Scheduling in advance may not be appropriate for on-demand production.

Copyright 2009 John Wiley & Sons, Inc Enterprise Resource Planning (ERP)   Software that organizes and manages a company’s business processes by sharing information across functional areas integrating business processes facilitating customer interaction providing benefit to global companies

Copyright 2006 John Wiley & Sons, Inc ERP and MRP  First came MRP around 1970 Thanks to George Plossl, Oliver Wight, Joseph Orlicki Thanks to George Plossl, Oliver Wight, Joseph Orlicki MRP is Material Requirements Planning MRP is Material Requirements Planning  Then came MRP II around 1980 MRP II is Manufacturing Resource Planning MRP II is Manufacturing Resource Planning  Then came ERP around 1990  Today, its ERP II

Copyright 2006 John Wiley & Sons, Inc Evolution of ERP II

Copyright 2006 John Wiley & Sons, Inc A lesson in Information Architecture  First, we need a problem-solving methodology

Copyright 2006 John Wiley & Sons, Inc Goldratt Methodology (Thinking Process)  What to change??  What to change to??  How to cause the change??

Copyright 2006 John Wiley & Sons, Inc WHAT TO CHANGE CIRCA 1993: Problems with the Mainframe Architecture  Poor data visibility  Long lead times on maintenance, modifications to legacy software (36 months)  No GUI interfaces

Copyright 2006 John Wiley & Sons, Inc More problems  New software apps were expensive and time consuming to develop  Mainframes were computational bottlenecks  Desktop PCs sat idle 99% of the time

Copyright 2006 John Wiley & Sons, Inc Components of any Software Application

Copyright 2006 John Wiley & Sons, Inc Components in brief

Copyright 2006 John Wiley & Sons, Inc Mainframe Architecture

Copyright 2006 John Wiley & Sons, Inc Goldratt: We will build a tree  Called a current reality tree  Begin by identifying the UNDESIRABLE EFFECTS the stakeholders are experiencing  The basic tree relationship:  IF {box a}, then {box b}.

Copyright 2006 John Wiley & Sons, Inc Only the centralized MIS shop could do maintenance and new development work Mainframes were computational bottlenecks Each application had to reside entirely on the mainframe Many new applications were being built Change requests for existing apps were frequent and increasing Centralized MIS shop backlogs were extending out to 36 months Competitive and customer environments are changing rapidly Budgets for MIS shops were stretched to their limits

Copyright 2006 John Wiley & Sons, Inc Sales cannot see what is happening in accounts receivable Sales cannot track customer orders through the manufacturing/distribution process Information visibility across the enterprise is impossible Independent data pools are created that cannot be integrated Islands of automation are created End users develop their own independent applications that run on departmental PC’s Centralized MIS shops have lead times of 36 months or longer Centralized mainframes are computing bottlenecks

Copyright 2006 John Wiley & Sons, Inc WHAT TO CHANGE TO:  An architecture in which the data are totally integrated  An architecture in which most of the processing is not done on mainframes  Decentralization of MIS  What architecture was this???

Copyright 2006 John Wiley & Sons, Inc HOW TO CAUSE THE CHANGE:  ERP implementation  Solves the problems identified above

Copyright 2009 John Wiley & Sons, Inc Organizational Data Flows Source: Adapted from Joseph Brady, Ellen Monk, and Bret Wagner, Concepts in Enterprise Resource Planning (Boston: Course Technology, 2001), pp. 7–12

Copyright 2009 John Wiley & Sons, Inc ERP’s Central Database

Copyright 2009 John Wiley & Sons, Inc Selected Enterprise Software Vendors

Copyright 2009 John Wiley & Sons, Inc ERP Implementation   Analyze business processes   Choose modules to implement Which processes have the biggest impact on customer relations? Which processes have the biggest impact on customer relations? Which process would benefit the most from integration? Which process would benefit the most from integration? Which processes should be standardized? Which processes should be standardized?   Align level of sophistication   Finalize delivery and access   Link with external partners

Copyright 2009 John Wiley & Sons, Inc Customer Relationship Management (CRM)  Software that Plans and executes business processes Plans and executes business processes Involves customer interaction Involves customer interaction Changes focus from managing products to managing customers Changes focus from managing products to managing customers Analyzes point-of-sale data for patterns used to predict future behavior Analyzes point-of-sale data for patterns used to predict future behavior

Copyright 2009 John Wiley & Sons, Inc Supply Chain Management  Software that plans and executes business processes related to supply chains  Includes Supply chain planning Supply chain planning Supply chain execution Supply chain execution Supplier relationship management Supplier relationship management  Distinctions between ERP and SCM are becoming increasingly blurred

Copyright 2009 John Wiley & Sons, Inc Product Lifecycle Management (PLM)   Software that Incorporates new product design and development and product life cycle management Incorporates new product design and development and product life cycle management Integrates customers and suppliers in the design process though the entire product life cycle Integrates customers and suppliers in the design process though the entire product life cycle

Copyright 2009 John Wiley & Sons, Inc ERP and Software Systems

Copyright 2009 John Wiley & Sons, Inc Connectivity  Application programming interfaces (APIs) give other programs well-defined ways of speaking to them give other programs well-defined ways of speaking to them  Enterprise Application Integration (EAI) solutions  EDI is being replaced by XML, business language of Internet  Service-oriented architecture (SOA) collection of “services” that communicate with each other within software or between software collection of “services” that communicate with each other within software or between software

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