MRP and ERP Chapter 12

Learning Objectives Describe the inputs, outputs, and nature of MRP processing. Explain bill of materials Explain time-phased product structure Describe differences between MRP and ERP

MRP Material requirements planning (MRP): A computer-based information system that translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials. The MRP is designed to answer three questions: What is needed? How much is needed? When is it needed?

Overview of MRP How much and when finished product is desired Composition of a finished products How much inventory is on hand or on order

MRP Inputs: Master Schedule States: Which end items are to be produced When these are needed In what quantities (customer orders, forecasts, order from warehouses to build up seasonal inventories). Item X at beginning of week 14 and at beginning of week 18 100 at beginning of week 14 150 at beginning of week 18 Weekly Quantity Item X 11 12 13 14 15 16 17 18 Quantity 100 150

Cumulative Lead Time The master schedule should cover a period that is at least equivalent to the cumulative lead time Cumulative lead time The sum of the lead times that sequential phases of a process require, from ordering of parts or raw materials to completion of final assembly. CLT = 9 weeks

Cumulative Lead Time Following the previous example, if CLT=9 When should we start work for the demand on the week 14? When should we start work for the demand on the week 18? Weekly Quantity Item X 11 12 13 14 15 16 17 18 Quantity 100 150

MRP Inputs: Bill of Materials Bill of Materials (BOM) A hierarchical listing of all of the assemblies, subassemblies, parts, and raw materials needed to produce one unit of a product Each finished product has its own BOM Product structure tree A visual depiction of the requirements in a bill of materials, where all components are listed by levels

Assembly Diagram and Product Structure Tree parent Level 0 = end item component Level 1 parent Level 2 component Amount needed for assembly at the next higher level only

Low-Level Coding Low-level coding Restructuring the bill of materials so that multiple occurrences of a component all coincide with the lowest level at which the component occurs Example: 1 X requires: 2 B, 1 C, 6 D, 28 E, and 2 F Level 0 X X: 1 B: 2 x 1 = 2 Level 1 B(2) C C: 1 x 1 = 1 D: 3 x 2 = 6 Level 2 E: 2 x 1 = 2 D(3) E E(2) F(2) F: 2 x 1 = 2 E: 1 x 2 = 2 E: 4 x 6 = 24 Level 3 E(4)

Low-Level Coding: 1 X 1 X requires: Level 0 X X: 1 B: 2 x 1 = 2 C: 1 x 1 = 1 D: 3 x 2 = 6 Level 2 E: 2 x 1 = 2 D(3) E E(2) F(2) F: 2 x 1 = 2 E: 1 x 2 = 2 E: 4 x 6 = 24 Level 3 E(4) 1 X requires: B: 2 C: 1 D: 6 E: 2+24+2=28 F: 2

Low-Level Coding: 10 X with on hand inventory B(2) C Level 2 D(3) E E(2) F(2) Level 3 E(4) 1 X requires: B: 2 C: 1 D: 6 E: 28 F: 2 10 X require: B: 2x10-4=16 C: 1x10-10=0 D: 6x10-8=52 E: 28x10-60=220 F: 2x10-0=20 Does not consider item hierarchy! On hand inventory B: 4 C: 10 D: 8 E: 60 F: 0

Low-Level Coding: 10 X with on hand inventory B(2) C B: 2 x 10 - 4 = 16 C: 1 x 10 -10=0 Level 2 D(3) E E(2) F(2) D: 3 x 16 – 8=40 F: 2 x 0 = 0 Level 3 E: 4 x 40 – 60=100 E(4) “Low-level coding” E: 1 x 16 = 16 E: 2 x 0 = 0 10X require: B: 16 C: 0 D: 40 E: 100+16+0=116 F: 0 On hand inventory B: 4 C: 10 D: 8 E: 60 F: 0

MRP Processing MRP processing takes the end item requirements specified by the master schedule and “explodes” them into time-phased requirements for assemblies, parts, and raw materials offset by lead times Part E fabrication lead-time Sub assembly lead-time Material F delivery lead-time Final assembly lead-time

MRP Inputs: Inventory Records Includes information on the status of each item by time period (called time buckets) Information about Gross requirements Scheduled receipts Expected amount on hand Other details for each item such as Supplier Lead time Lot size policy Changes due to stock receipts and withdrawals Canceled orders and similar events

MRP Record Gross requirements Scheduled receipts Projected on hand Total expected demand (during each period) without regard to the amount on hand. Scheduled receipts Open orders scheduled to arrive (at the beginning of a period) Projected on hand Expected inventory on hand (at the beginning of each time period) Week Number 1 2 3 4 5 6 Gross Requirements Scheduled Receipts Projected on hand Net requirements Planned-order-receipt Planned-order release Net requirements Actual amount needed in each time period Planned-order receipts Quantity expected to received (at the beginning of the period) Under Lot-for-lot will equal net requirements Planned-order releases Planned amount to order in each time period. Equal planned-order receipts offset by lead time. 12-16

Projected on hand inventory + Scheduled receipts MRP Processing Gross requirements are generated by exploding the bill of materials The core of MRP processing is determining net requirements (netting) -> materials that are actually needed to meet demand Net requirements Gross requirements Available inventory = - Available inventory Projected on-hand Scheduled receipts = + Projected on hand inventory + Scheduled receipts Net requirements Gross requirements = -

MRP: Development The MRP is based on the product structure tree diagram Requirements are determined level by level, beginning with the end item and working down the tree The timing and quantity of each “parent” becomes the basis for determining the timing and quantity of the “children” items directly below it. The “children” items then become the “parent” items for the next level, and so on

Example MRP Shutter Wood sections (4) Frames (2) Orders: 100 units for delivery at (the start of) week 4 150 units at (the start of) week 8. Assembly: Wood sections made by the firm. Fabrication takes 1 week. Frames are ordered. Lead time is 2 weeks. Shutter assembly requires 1 week. Schedule receipts: 70 wood sections at (the beginning of) week 1. Determine the size and timing of planned-order releases (under Lot-for-Lot ordering) Shutter Frames (2) Wood sections (4)

MRP Lot-For-Lot Ordering Shutter [LT=1 week] Frames (2) [LT=2 weeks] Wood sections (4) [LT= 1 weeks]

MRP Lot-For-Lot Ordering Shutter [LT=1 week] Frames (2) [LT=2 weeks] Wood sections (4) [LT= 1 weeks] 200*1 330*3 300*1 600*3 Widget (1) [LT=1 weeks] Widget (3) [LT=1 weeks]

Updating the System An MRP is not a static document As time passes Some orders get completed Other orders are nearing completion New orders will have been entered Existing orders will have been altered Quantity changes Delays Missed deliveries Rolling Horizon

MRP Outputs: Primary Primary Outputs Planned orders Order releases A schedule indicating the amount and timing of future orders Order releases Authorizing the execution of planned orders Changes Revisions of the dates or quantities, or the cancellation of orders

MRP Outputs: Secondary Secondary Outputs Performance-control reports Evaluation of system operation, including deviations from plans and cost information e.g., missed deliveries and stockouts Planning reports Data useful for assessing future material requirements e.g., purchase commitments Exception reports Data on any major discrepancies encountered E.g., late and overdue orders, excessive scrap rates, requirements for nonexistent parts

Enterprise Resource Planning (ERP) Many organizations use a functional structure. Information tends to flow freely within each function but less so between functions. Enterprise Resource Planning (ERP) ERP was the next step in an evolution that began with MRP ERP typically has an MRP core ERP represents an expanded effort to integrate standardized record keeping that will permit information sharing among different areas of an organization in order to manage the system more effectively A system to capture and make data available in real-time to decision makers throughout the organization. ERP systems are composed of a collection of integrated modules

ERP Software Modules Module Brief Description Accounting/Finance A central component of most ERP systems. It provides a range of financial reports, including general ledger, accounts payable, accounts receivable, payroll, income statements, ad balance sheets Marketing Supports lead generation, target marketing, direct mail, and sales Human Resources Maintains a complete data base of employee information such as date of hire, salary, contact information, performance evaluations, and other pertinent information Purchasing Facilitates vendor selection, price negotiation, making purchasing decisions, and bill payment Production Planning Integrates information on forecasts, orders, production capacity, on-hand inventory quantities, bills of material, work in process, schedules, and production lead times Inventory Management Identifies inventory requirements, inventory availability, replenishment rules, and inventory tracking Distribution Contains information on third-party shippers, shipping and delivery schedules, delivery tracking Sales Information on orders, invoices, order tracking, and shipping Supply Chain Management Facilitates supplier and customer management, supply chain visibility, and event management

Focused Reading (MIS Major Required) Enterprise resource planning (ERP)—A brief history 13 Common ERP Mistakes and How to Avoid Making Them ERP and Business Process Re-engineering ERP: The Business Process Re-engineering Dilemma To BPR, or not to BPR, that is the question Cloud ERP What Is Cloud ERP, and How Is It Different from Traditional Solutions? Benefits of Cloud ERP Software

ERP History tapes IBM 1960~1970 1980s SAP, Peoplesoft, 1990 MRP: focus on cost reporting, materials, manufacturing tapes IBM 1960~1970 MRPII: scheduling, procurement 1980s ERP SAP, Peoplesoft, 1990 Client-server architecture

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

ERP & Business Process Re-engineering Take place before ERP system selection Output of BPR  ERP To be process vs. as is process Difference ways to do business globally Process standardization after acquisition Legacy systems Make sure the process lead to higher values

Cloud ERP Outsource operation, easy to setup, monthly/annually fee Cloud ERP vs. traditional ERP Traditional: Cloud: Outsource operation, easy to setup, monthly/annually fee Minimal initial cost Automate operation cons Less control, data security, service outage