Operations Management Contemporary Concepts and Cases Chapter Sixteen Material Requirements Planning and ERP Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

16-2 Chapter 16 Outline Definitions of MRP Systems MRP versus Order Point Systems MRP Example MRP Elements Operating an MRP System The Successful MRP System Enterprise Resource Planning Systems

16-3 Introduction to MRP Used to manage dependent demand items –Raw materials and purchased parts –Work in process (WIP) Driven by the master schedule (which is driven by S&OP) End items ‘exploded’ into all requirements for components using bill of materials (BOM) Schedule offset based on lead times Is a push system used when the master schedule is constantly changing

16-4 Definitions of MRP Systems Developed by Joe Orlicky at IBM, 1975 –IBM 370 was the first computer with the capacity to handle MRP calculations Types of MRP –Type I: An inventory control system (MRP) –Type II: Manufacturing Resource Planning system (MRPII) –Type III: Enterprise Resource Planning (ERP) system

16-5 Definitions of MRP Systems Three principal functions of MRP (Orlicky): Inventory –Order the right part –Order in the right quantity –Order at the right time Priorities –Order with the right due date –Keep the due date valid Capacity –A complete load –An accurate (valid) load –An adequate time span for visibility of future load

16-6 Firm orders from Customers Sister plants Stock replenishment Engineering Design changes BOM Forecast of Demand Purchase Orders Vendors MRP Parts Explosion Rough-cut capacity planning Capacity planning Shop Orders Shop-floor control Master schedule S & OP Closed Loop MRP System (Fig. 16.1) Operations Product Raw Materials Inventory Records Inv. Transactions

Comparison of MRP & Order-Point Systems 16-7

16-8 MRP Elements Inputs 1.Master Schedule 2.Bill of Materials (BOM) 3.Inventory Records Capacity Planning (feasibility) Planned Order Releases (outputs) –Purchasing (buy) –Shop Floor Control (make)

16-9 MRP Inputs Master schedule Product structure file (bill of materials, BOM) –Parts & subassemblies of product –Sequence of operations Inventory master file –Item master information –Balances & ordering information

16-10 MRP Example of BOM Top Leg Long Rail Short Rail

16-11 BOM (Product Structure) Short Rails (2) 1 week Table (End Item) 1 week Long Rails (2) 1 week Legs (4) 1 week Top (1) 2 weeks Leg Assembly (1) 1 week

16-12 Indented BOM Level CodeComponent 0Table (end-item) 1Leg assembly (1) 2Short rails (2) 2Long rails (2) 2Legs (4) 1Top(1)

16-13 Table 16.4 Materials plan for Levels 0 and 1 in BOM MATERIALS PLAN WEEK *****PART***** TablesGROSS REQUIREMENTS: SCHEDULED RECEIPTS PROJECTED ON HAND50 00 NET REQUIREMENTS PLAN. ORDER RELEASES TopsGROSS REQUIREMENTS: SCHEDULED RECEIPTS PROJECTED ON HAND NET REQUIREMENTS PLAN. ORDER RELEASES LegGROSS REQUIREMENTS: AssemblySCHEDULED RECEIPTS PROJECTED ON HAND NET REQUIREMENTS PLAN. ORDER RELEASES

16-14 Materials Plan In Table 16.4, note the following: Gross requirements in level 0 (Tables) come from the master schedule. Gross requirements in level 1 (and below) come from the planned order releases in the level above. Planned order releases are offset by the lead times. Planned order releases are planned! Actual order releases must take available capacity into account. Net requirements are the gross requirements minus the projected on-hand.

16-15 Master Schedule Quantities derived from S&OP production plan (product groups) [input] Drives MRP process with a schedule of finished products (actual items by week) [output] Quantities may consist of a combination of customer orders & demand forecasts Quantities represent what needs to be produced, not what can be produced (infinite capacity planning)

16-16 Bill of Materials (BOM) Structured list of all parts and materials Must be 100 percent accurate Should be one BOM per product per company Requires an effective engineering change order (ECO) system

16-17 Inventory Records Item master segment –Information that is fairly constant (part number, etc.) Inventory status segment –Materials plan for each item Subsidiary data segment –Outstanding orders –Demand history, etc. Records must be accurate, i.e., counting required

16-18 Counting Inventory (1) In the past, inventory was counted to learn how much was on hand. Now, inventory is counted to confirm the computer records. Two basic methods of counting inventory –Annual count (all at once) –Cycle counting

16-19 Counting Inventory (2) Annual Count –Shut down and have everyone count –Hire a counting firm –Problems No guarantee of accuracy Lost production or work Boring! –Advantage Everything done at once (as/of date)

16-20 Counting Inventory (3) Cycle Counting –Count continuously throughout year –Use ABC methods to set priorities and frequency of counting –Count by calendar or ‘trigger’ –Problems Not everything is counted at once May interfere with normal work –Advantages More accurate Less disruptive

16-21 Counting Inventory (4) The Future? RFIS/RFIT/RFID –Chip imbedded in items –Transmits when polled –Everything done from base station –“Smart Shelves” know what is on them –Problems Cost/market penetration May not read –Advantages No explicit counting Continuous tracking

16-22 Capacity Planning Purpose is to aid management in checking on the validity of the master schedule Two ways it can be done –Rough-cut capacity (resource) planning –Shop loading Alternative is finite capacity scheduling

16-23 Purchasing Greatly enhanced by use of MRP Past due orders largely eliminated Order expediting eliminated Can provide vendors with reports of planned future orders Can use EDI to communicate directly with vendors

16-24 Shop Floor Control Purposes –Release orders to the shop floor –Manage the orders on their way through the factory Can use Manufacturing Execution System (MES) Set job priorities (dispatching rules) Manage lead times on basis of priority –Both expedite and deexpedite orders Requires valid due dates

16-25 Operating an MRP System Should MRP carry “safety stock”? How much “safety stock” should be carried? Issue of “safety lead time” Danger of “informal” system driving out the “formal” system

16-26 Required Elements for a Successful MRP System 1. Implementation planning 2. Adequate computer support 3. Accurate data 4. Management support 5. User knowledge

16-27 Operating a Successful MRP System Accurate inventory records Stable master production schedule Realistic master production schedule Good control of engineering change orders (impacts BOM) Good interface with capacity planning (CRP) Reports that are useful

16-28 Enterprise Resource Planning (ERP) Systems Extension and integration of all functions through a common database –Forces standard systems throughout the organization ERP used to coordinate decisions along the supply chain Expensive and time-consuming to implement.

16-29 Enterprise Resource Planning (ERP) Systems Major large-scale ERP software vendors –SAP (Systems, Applications & Products) –Oracle See:

16-30 Summary Definitions of MRP Systems MRP versus Order Point Systems MRP Example MRP Elements Operating an MRP System The Successful MRP System Enterprise Resource Planning Systems

16-31 End of Chapter Sixteen