Chapter 14 – Resource Planning Operations Management by R. Dan Reid & Nada R. Sanders 3rd Edition © Wiley 2007 PowerPoint Presentation by R.B. Clough - UNH

Enterprise Resource Planning (ERP) What Is ERP? Software designed for organizing and managing business processes Modules share information across all business functions Can share customer sales data with the supply chain to help with global replenishment All modules are fully integrated and use a common database – some PC based

Integration of ERP

ERP Modules-4 Categories Finance and accounting Investment, cost, asset, capital, and debt management Budgets, profitability analysis, and performance reports Sales and marketing Handles pricing, availability, orders, shipments, & billing Production and materials management Process planning, BOM, product costing, ECN’s, MRP, allocates resources, schedules, PO’s, & inventory Human resources Workforce planning, payroll & benefits, & org. charts

Evolution of ERP First generation ERP Managed all internal business activities Second Generation ERP Late 1990’s software integrated supply chains Systems focused on decision-making SCM (supply chain management) modules include LP and simulation support SCI (supply chain intelligence) capability allows collection of intelligence along the entire supply chain ASP (application service provider) suppliers set-up and run systems for others

Integrating ERP and E-Commerce Many companies with ERP use e-commerce E-commerce needs to interface with ERP Cybex International is a good example: Needed to integrate B2C and B2B transactions Cybex installed a Peoplesoft, Inc. ERP system Reduced BOM’s (bill of materials) from 15,200 to 200, suppliers from 1000 to 550, paperwork by 2/3 Reduced supplier material shortages and customer order-to-ship time from 4 to 2 weeks

Benefits of ERP Implementation ERP presents a holistic view of the business functions from a single information and IT architecture Increases organizational information flow Increases ability to incorporate better management control, speedier decision making, and cost reductions Allows replacement of disparate systems e.g. ExxonMobile used ERP to replace 300 different systems A study of ERP implementations reports that benefits typically start 8 months after implementation with median annual savings of $1.6 million

Cost and Implementation Issues Major suppliers are SAP, Peoplesoft, Oracle, and Baan. Also smaller PC based suppliers. Costs for larger ERP systems range from hundreds of thousands to several million dollars. Outside consultants are usually involved in selection, configuration, and implementation. Consultant costs can run up to 3 times the cost of the system itself according to a Gartner Group study. Added costs also include additional people, new computer hardware, and the cost to develop a new, integrated database Successful implementation requires leadership and top management commitment to a vision for the business

Evolution of Material Planning Systems Back in the sixties, manufacturing planning systems were reorder point systems that simply determined when and how much to order First MRP systems translated a master schedule of final products into time-phased net requirements for subassemblies, assemblies, and parts Closed-loop MRP included production planning, master scheduling, and capacity requirements In mid 1970’s, MRPII systems added functionality to plan and execute all internal functions

Material Requirements Planning (MRP) Computer-based information system that schedules and orders dependent-demand inventory components; Uses the master production schedule, bills of materials, and inventory records as inputs; Outputs recommendations: When to release new orders. When to reschedule open orders.

An Overview of MRP MRP uses the concept of backward scheduling to determine how much and when to order and replenish The CPR module checks to make sure the scheduled work load profile is feasible The MPS module contains the authorized schedule The BOM module contains the product structure for each unique product The Inventory Record module keeps track of the inventory status for each item in the database MRP output includes schedules for all internal activities and parts as well as orders for all supply chain items

MRP System

Input/Output - MRP Process

Types of Demand There are two types of demand. Independent Demand Is the demand for finished products Does not depend on the demand of other products Needs to be forecasted Dependent Demand Is the demand derived from finished products Is the demand for component parts based on the number of end items being produced and is managed by the MRP system

MRP Responds to the fundamental manufacturing equation: What are we going to make? Master production schedule. What does it take to make it? Bill of materials. What have we got? Inventory records. What do we have to get? Material Requirements plan: planned orders.

Objectives of MRP Determines the quantity and timing of material requirements Determines what to order (checks BOM), how much to order (lot size rules), when to place the order (needed date minus lead time), and when to schedule delivery (on date needed) Maintain priorities In a changing environment, MRP reorganizes priorities to keep plans current and viable

Building a CD Cabinet With MRP

Definitions End item: The product sold as a completed item or repair part (an independently demanded item) Parent items: Items produced from one or more “children” Components: Raw materials & other items (“children”) that are part of a larger assembly

MRP Inputs - Authorized MPS From the authorized MPS, we calculate when we need to have replenishment orders of CD cabinets; when we need a new MPS order.

MRP Inputs-Inventory Records System checks the inventory record for each BOM item to see if inventory is available or if a replenishment order is needed to build the cabinets.

Bill of Materials (BOM) Contains product description (components) and sequence of assembly. Also called product structure or product tree. Levels: end item at 0, assemblies for end item at 1, subassemblies for assemblies at 2, etc. Low-level coding: placing identical items used for multiple purposes at the same level.

MRP Inputs-Bills of Material A BOM lists all of the items needed to produce one CD cabinet The BOM is exactly like a recipe for baking a cake The BOM’s must be complete and accurate and can only be changed by an ECN MRP BOM’s are indented bills of materials

A Product Structure Tree

Inventory Records Contains information about each inventory item and its status (e.g., on-hand balance).

Inventory Record Gross requirements: The total period demand for the item Scheduled receipts: An open order with an assigned due date Projected available: The projected inventory balance for the period Planned orders: Quantities & released dates suggested by the MRP system

Lot Sizing Rules Rules are used to change the frequency of replenishment orders & set the quantity of each order (balance holding & ordering costs to reduce total costs) Common rules: Fixed Order Quantity (FOQ) Lot-for-Lot (L4L) Periodic Order Quantity (POQ)

MRP Record Processing

MRP Terms Time bucket: period, usually 1 week. Planning horizon: number of periods. Lead time offset: offsets a planned order release from a required replenishment. Net requirement: difference between the gross requirements and the available inventory.

Definitions Time buckets: The column in an inventory record that represents a unit of time Action bucket: The current time period Action notices: Output from the MRP system identifying the need for an action (e.g.: expedite or delay an order or receipt)

Example A Time Bucket

Operating Logic Explosion: Calculate the children’s time-phased gross requirements by multiplying the parent item’s planned order amount by the number of children required to produce one parent item

The MRP Explosion Process Using table 14-6 and the product structure tree, we will work through an example of how the MRP explosion process would calculate the requirements for building a CD cabinet. On the next slide we start with the cabinet top to illustrate how MRP calculates the gross requirements for this component.

Inventory Records - Components It was noted on the previous slide that the parent item (CD Cabinet) has planned orders in periods 3, 6, and 9. Its children (top, bottom, door, left & right side, shelves, and supports) have gross requirements in periods 3, 6, and 9.

Inventory Records - Components

Inventory Records– Components (cont.)

Inventory Records – Remaining Components

Inv. Records – Remaining Components (cont.)

MRP System—Other Issues Safety stock? Lot size? Lot-for-lot (L4L or LFL): lot size matches net requirements. Economic order quantity (EOQ): lot size calculated like in Chapter 12. Least total cost (LTC): calculates a lot size that equalizes holding and ordering costs. Least unit cost (LUC): averages the LTC across the lot size.

Example Comparing Lot Size Rules: Three common lot sizing rules used within MRP Systems are fixed order quantity (FOQ), lot for lot (L4L), and period order quantity (POQ). Cost comparison is based on Inventory holding costs ($0.10 per period) and ordering cost ($25 per order). In this example POQ is best at $

Capacity Requirements Planning (CRP) Similar to rough cut capacity planning CRP is a feasibility check on labor & machine utilization: Compare the open orders & planned orders (from the MRP) to the actual shop floor capacity

Rough Cut Capacity Example: The CRP module uses data from MRP. We calculate workloads for critical work centers based on open shop orders and planned shop orders. These shop orders are translated into hours of work by work center and by time period. Table show items scheduled for work Center 101. Available = 4 machines x 2 shifts x 10 hours x 5 days x 0.85 utiliza- x 0.95 effi- Capacity per shift per wk. tion ciency Available = standard hours Capacity

Workload Graph for Work Center 101: CRP enables a company to evaluate both the feasibility of the MRP system and how well the company is using its critical work centers.

Chapter 14 Highlights ERP is software designed for organizing and managing all business processes by sharing information across functional areas using a common database and a single computer system. First generation ERP systems (MPR) managed manufacturing activities only. Second generation systems or SCM –software incorporated the supply chain. The current trend is integrating e-commerce and ERP. Tangible benefits from ERP include control of operations and a host of information to manage all financial aspects of a business. Systems can be very expensive.

Chapter 14 Highlights (cont.) MRP systems are designed to calculate material requirements from dependent demand items. MRP uses backward scheduling to determine activity start dates. The objective of MRP are to determine quantity and timing of material requirements to keep schedule priorities updated and valid. MRP needs three inputs: the authorized MPS, the BOM file, and the inventory records file. Once the MPS has been input, MRP checks inventory availability. If a need is determined, MRP checks the BOM file for material needed, then generates planned orders.

Chapter 14 Highlights (cont.) MRP output includes actions notices to release planned orders, reschedule orders, or adjust due dates. Different lot sizing rules (FOQ, Period Q, L4L) generate different order quantities and order frequencies. The CPR module uses planned orders and open shop orders to see if available capacity is sufficient to meet schedules. CPR calculates the workloads at critical work centers by using planned orders generated by MRP. These planned orders are multiplied by the standard times to calculate individual work center loads.

Homework Hints Problems , 3sp. Use the data given to: 1. prepare a product structure tree. 2. determine the product lead time. 3. calculate gross requirements, starting with 100 units of the end item (Q). 3sp. do an MRP chart—using either the excel or word chart given on the website. Assume gross requirements for Q is in period 9; assume L4L is to be used for all components. Problems Do a CRP: 23. Calculate the required capacity (based on each job’s set up and run times). 24. Calculate the available capacity (based on available time for three machines adjusted for utilization and efficiency). Determine the match between required capacity (14.23) and available capacity (14.24).