Material Requirements Planning (MRP) and ERP 14 Material Requirements Planning (MRP) and ERP © 2011 Pearson Education, Inc. publishing as Prentice Hall

Outline Dependent vs. Independent Demand The benefits and requirements of MRP Inputs, outputs, and nature of MRP processing How to translate the requirements in a Master Production Schedule into material requirements for lower-level items Lot Sizing Techniques Extensions of MRP (MRP II, Closed-Loop MRP, ERP) © 2011 Pearson Education, Inc. publishing as Prentice Hall

Wheeled Coach Largest manufacturer of ambulances in the world 12 major ambulance designs 18,000 different inventory items 6,000 manufactured parts 12,000 purchased parts © 2011 Pearson Education, Inc. publishing as Prentice Hall

Hierarchy of Production Decisions Long-range Capacity Planning

Dependent vs Independent Demand

Dependent Demand The demand for one item is related to the demand for another item Given a quantity for the end item, the demand for all parts and components can be calculated © 2011 Pearson Education, Inc. publishing as Prentice Hall

Trumpet and Subassemblies

Bill-of-Material for Trumpet

MRP A computer-based information system that translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.

MRP The MRP is designed to answer three questions: What is needed? How much is needed? When is it needed? © 2011 Pearson Education, Inc. publishing as Prentice Hall

Benefits of MRP Better response to customer orders Faster response to market changes Improved utilization of facilities and labor Reduced inventory levels © 2011 Pearson Education, Inc. publishing as Prentice Hall

Inputs to MRP MRP is a dependent demand technique that uses Bill-of-Material (BOM) On-hand inventory data Expected receipts (outstanding purchase orders) Master Production Schedule (MPS) Lead Time information to determine material requirements.

Overview of MRP

Master Production Schedule (MPS) Time-phased plan specifying how many and when the firm plans to build each end item Aggregate Plan (Product Groups) MPS (Specific End Items) 8 8

Master Production Schedule (MPS) MPS is established in terms of specific products The MPS is a statement of what is to be produced, not a forecast of demand Must be in accordance with the aggregate production plan Before it is executed, MPS must be tested for feasibility (Capacity Requirements Planning) © 2011 Pearson Education, Inc. publishing as Prentice Hall

MPS Example – 1 One possible MPS…

MPS Example – 2 Months January February Aggregate Production Plan 1,500 1,200 (Shows the total quantity of amplifiers) Weeks 1 2 3 4 5 6 7 8 Master Production Schedule (Shows the specific type and quantity of amplifier to be produced 240-watt amplifier 100 100 100 100 150-watt amplifier 500 500 450 450 75-watt amplifier 300 100 Figure 14.2 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Bills of Material (BOM) List of components, ingredients, and materials needed to make product Provides product structure Items above given level are called parents Items below given level are called children © 2011 Pearson Education, Inc. publishing as Prentice Hall

Assembly Diagram and Product Structure Tree LO 12.2

Packing box and installation kit of wire, bolts, and screws BOM Example Product structure for “Awesome” (A) A Level B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/ amp-booster 1 E(2) F(2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D(2) 12” Speaker G(1) Amp-booster 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Packing box and installation kit of wire, bolts, and screws BOM Example Product structure for “Awesome” (A) A Level B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/ amp-booster 1 Part B: 2 x number of As = (2)(50) = 100 Part C: 3 x number of As = (3)(50) = 150 Part D: 2 x number of Bs + 2 x number of Fs = (2)(100) + (2)(300) = 800 Part E: 2 x number of Bs + 2 x number of Cs = (2)(100) + (2)(150) = 500 Part F: 2 x number of Cs = (2)(150) = 300 Part G: 1 x number of Fs = (1)(300) = 300 E(2) F(2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D(2) 12” Speaker G(1) Amp-booster 3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Accurate Records for Outstanding Purchase Orders Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly Generally MRP systems require more than 99% accuracy Outstanding purchase orders must accurately reflect quantities and scheduled receipts © 2011 Pearson Education, Inc. publishing as Prentice Hall

Lead Times The time required to purchase, produce, or assemble an item For production – the sum of the order, wait, move, setup, store, and run times For purchased items – the time between the recognition of a need and the availability of the item for production © 2011 Pearson Education, Inc. publishing as Prentice Hall

Time-Phased Product Structure Must have D and E completed here so production can begin on B Start production of D | | | | | | | | 1 2 3 4 5 6 7 8 Time in weeks 2 weeks 1 week D E 1 week 2 weeks to produce B C E 1 week A F 2 weeks 3 weeks 2 weeks D G 1 week Figure 14.4 © 2011 Pearson Education, Inc. publishing as Prentice Hall

MRP Outputs: Primary Planned orders A schedule indicating the amount and timing of future production and/or purchasing orders

MRP Outputs: Secondary Secondary Outputs Performance-control reports e.g., missed deliveries and stockouts Planning reports Data useful for assessing future material requirements e.g., purchase commitments Exception reports excessive scrap rates,

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

MRP Record Total expected demand Open orders scheduled to arrive Week Number 1 2 3 4 5 6 Gross Requirements Scheduled Receipts Projected on hand Net requirements Planned-order-receipt Planned-order release Gross requirements Total expected demand Scheduled receipts Open orders scheduled to arrive Projected Available Expected inventory on hand at the beginning of each time period

MRP Record Actual amount needed in 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 be received at the beginning of the period offset by lead time Planned-order releases Planned amount to order in each time period

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 Frames (2) Wood sections (4)

Example MRP

Updating the MRP 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

Updating the System Two basic systems Regenerative system: MRP records are updated periodically Essentially a batch system that compiles all changes that occur within the time interval and periodically updates the system Net-change system: MRP records are updated continuously The production plan is modified to reflect changes as they occur

Safety Stock Theoretically, MRP systems should not require safety stock Variability may necessitate the strategic use of safety stock A bottleneck process or late delivery of raw materials may cause shortages in downstream operations

Safety Stock When lead times are variable, the concept of safety time is often used Safety time: Scheduling orders for arrival or completions sufficiently ahead of their need so that the probability of shortage is eliminated or significantly reduced © 2011 Pearson Education, Inc. publishing as Prentice Hall

Lot Sizing Rules Lot-for-Lot (L4L) ordering The order or run size is set equal to the demand for that period Minimizes investment in inventory It results in variable order quantities A new setup is required for each run Economic Order Quantity (EOQ) Can lead to minimum costs if usage of item is fairly uniform This may be the case for some lower-level items that are common to different ‘parents’ Periodic Order Quantity (POQ) : Provides coverage for some predetermined number of periods

Lot-for-Lot Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week © 2011 Pearson Education, Inc. publishing as Prentice Hall

Lot-for-Lot Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week © 2011 Pearson Education, Inc. publishing as Prentice Hall

Lot-for-Lot Example No on-hand inventory is carried through the system Total holding cost = $0 There are seven setups for this item in this plan Total ordering cost = 7 x $100 = $700 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week © 2011 Pearson Education, Inc. publishing as Prentice Hall

EOQ Lot Size Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand 43 66 26 69 39 Net requirements 16 Planned order receipts 73 Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units © 2011 Pearson Education, Inc. publishing as Prentice Hall

Calculating EQO Annual demand (D): (270/10)*52=1404 Setup Cost (S)= $100 Holding Cost (H) = $1*52= $52 EOQ= 73 units © 2011 Pearson Education, Inc. publishing as Prentice Hall

EOQ Lot Size Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand 43 66 26 69 39 Net requirements 16 Planned order receipts 73 Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units © 2011 Pearson Education, Inc. publishing as Prentice Hall

EOQ Lot Size Example Total cost = setup cost + holding cost Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)=$3,798 Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730 OR Total Cost=4*100+375(including 57 units for week 11)=$775 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Lot-Sizing Techniques Periodic order quantity (POQ) orders quantity needed for a predetermined time period Interval = EOQ / average demand per period Order quantity is set to cover the interval Order quantity is calculated when order is released

EOQ = 73 units; Average weekly gross requirements = 27; POQ Lot Size Example WEEK 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand 70 Net requirements Planned order receipts 80 85 Planned order releases EOQ = 73 units; Average weekly gross requirements = 27; POQ interval = 73/27 ≅ 3 weeks

POQ Lot Size Example Setups = 3 x $100 = $300 Holding cost = (40 + 70 + 30 + 55) units x $1 = $195 Total cost = $300 + $195 = $495 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Wagner-Whitin would have yielded a plan with a total cost of $455 Lot-Sizing Summary For these three examples Lot-for-lot $700 EOQ $730 POQ $495 Wagner-Whitin would have yielded a plan with a total cost of $455 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Determining Gross Requirements Starts with a production schedule for the end item – 50 units of Item A in week 8 Using the lead time for the item, determine the week in which the order should be released – a 1 week lead time means the order for 50 units should be released in week 7 This step is often called “lead time offset” or “time phasing” © 2011 Pearson Education, Inc. publishing as Prentice Hall

Determining Gross Requirements From the BOM, every Item A requires 2 Item Bs – 100 Item Bs are required in week 7 to satisfy the order release for Item A The lead time for the Item B is 2 weeks – release an order for 100 units of Item B in week 5 The timing and quantity for component requirements are determined by the order release of the parent(s) © 2011 Pearson Education, Inc. publishing as Prentice Hall

Determining Gross Requirements The process continues through the entire BOM one level at a time – often called “explosion” By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion Low-level coding ensures that each item appears at only one level in the BOM © 2011 Pearson Education, Inc. publishing as Prentice Hall

Gross Requirements Plan Week 1 2 3 4 5 6 7 8 Lead Time Required date 50 Order release date 50 1 week Required date 100 Order release date 100 2 weeks Required date 150 Order release date 150 1 week Required date 200 300 Order release date 200 300 2 weeks Required date 300 Order release date 300 3 weeks Required date 600 200 Order release date 600 200 1 week Required date 300 Order release date 300 2 weeks Table 14.3 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Net Requirements Plan The logic of net requirements Total requirements Gross requirements Allocations + Available inventory Net requirements On hand Scheduled receipts + – = © 2011 Pearson Education, Inc. publishing as Prentice Hall

Allocations Allocated items refer to the number of units in inventory that have ben assigned to specific future production but not yet used or issued from the stock room. The following slide illustrates how allocated items increase gross requirements

Net Requirements Plan © 2011 Pearson Education, Inc. publishing as Prentice Hall

Net Requirements Plan © 2011 Pearson Education, Inc. publishing as Prentice Hall

Determining Net Requirements Starts with a production schedule for the end item – 50 units of Item A in week 8 Because there are 10 Item As on hand, only 40 are actually required – (net requirement) = (gross requirement - on- hand inventory) The planned order receipt for Item A in week 8 is 40 units – 40 = 50 - 10 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Determining Net Requirements Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7 The gross requirement for Item B is now 80 units in week 7 There are 15 units of Item B on hand, so the net requirement is 65 units in week 7 A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Determining Net Requirements A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5 The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8 This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process © 2011 Pearson Education, Inc. publishing as Prentice Hall

MRP Evolution MRP Closed Loop MRP MRP II ERP Schedule Materials Incorporate Feedback MRP II Schedule & Purchase Materials Coordinate w/ Mfg Resources ERP

Closed-Loop MRP Yes Production Planning Master Production Scheduling Material Requirements Planning Capacity Requirements Planning Realistic? Feedback No Feedback Execute: Capacity Plans Material Plans Yes

Manufacturing Resource Planning (MRP II) Goal: Plan and monitor all resources of a manufacturing firm (closed loop): manufacturing marketing finance engineering Simulate the manufacturing system 23 23

Enterprise Resource Planning (ERP) A computer system that integrates application programs in accounting, sales, manufacturing, and other functions in the firm This integration is accomplished through a common database shared by all the application programs Produces information in real time and ties in customers and suppliers

Typical ERP System

Enterprise Resource Planning (ERP) ERP modules include Basic MRP Finance Human resources Supply chain management (SCM) Customer relationship management (CRM) © 2011 Pearson Education, Inc. publishing as Prentice Hall

Risks Associated with ERP Implementation High Cost and Cost Overruns Common areas with high costs: Training Testing and Integration Database Conversion Disruptions to Operations ERP is reengineering--expect major changes in how business is done

ERP Products SAP: largest ERP vendor J.D. Edwards modules can be integrated or used alone J.D. Edwards flexibility: users can change features; less of a pre-set structure than SAP’s

ERP Products Oracle PeopleSoft Baan tailored to e-business focus open, modular architecture allows rapid integration with existing systems Baan use of “best-of-class” applications

Leading ERP Vendors Worldwide SAP Oracle PeopleSoft Sage J.D.Edwards Lawson Microsoft Dynamics AX Great Plains/Solomon Invensys (BaaN) IFS © 2011 Pearson Education, Inc. publishing as Prentice Hall

Leading ERP Vendors in Turkey SAP Oracle GlobalSoft IAS-CANIAS NETSİS LOGO BUSINESS SOLUTIONS Microsoft Navision IFS © 2011 Pearson Education, Inc. publishing as Prentice Hall

Advantages of ERP Systems Provides integration of the supply chain, production, and administration Creates commonality of databases Improves information quality May provide a strategic advantage © 2011 Pearson Education, Inc. publishing as Prentice Hall

ERP Drawbacks Very expensive to purchase and even more so to customize Implementation may require major changes- Resistance to change So complex that many companies cannot adjust to it Involves an ongoing, possibly never completed, process for implementation Training is an on-going activity © 2011 Pearson Education, Inc. publishing as Prentice Hall

ERP in the Service Sector ERP systems have been developed for health care, government, retail stores, hotels, and financial services Also called efficient consumer response (ECR) systems Objective is to tie sales to buying, inventory, logistics, and production © 2011 Pearson Education, Inc. publishing as Prentice Hall

Distribution Resource Planning (DRP) Using dependent demand techniques through the supply chain Expected demand or sales forecasts become gross requirements Minimum levels of inventory to meet customer service levels Accurate lead times Definition of the distribution structure © 2011 Pearson Education, Inc. publishing as Prentice Hall