Chapter 14 –
Resource Planning
Operations Management
by
R. Dan Reid & Nada R. Sanders
3rd Edition © Wiley 2007
Enterprise Resource Planning
(ERP)

What Is ERP?

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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

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Sales and marketing

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Handles pricing, availability, orders, shipments, &
billing
Production and materials management


Investment, cost, asset, capital, and debt
management
Budgets, profitability analysis, and performance
reports
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

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Managed all internal business activities
Second Generation ERP

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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


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Many companies with ERP use e-commerce
E-commerce needs to interface with ERP
Cybex International is a good example:

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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

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
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

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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


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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

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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

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There are two types of demand.
Independent Demand

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Is the demand for finished products
Does not depend on the demand of other products
Needs to be forecasted
Dependent Demand

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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?

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What does it take to make it?

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Bill of materials.
What have we got?

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Master production schedule.
Inventory records.
What do we have to get?

Material Requirements plan: planned orders.
Objectives of MRP

Determines the quantity and timing of
material requirements

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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:

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Parent items:

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The product sold as a completed item or
repair part (an independently demanded
item)
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.
Table 14-1 Initial MPS Record for CD Cabinet
Item: CD Cabinet
Lot size rule: FOQ=100
Lead time: 1 week
Gross Requirements:
Projected Available:
MPS
80
1
25
55
2
25
30
3
25
5
4
25
-20
5
30
6
30
7
30
8
30
9
35
10
35
11
35
12
35
5
30
50
6
30
20
7
30
90
100
8
30
60
9
35
25
10
35
90
100
11
35
55
12
35
20
Table 14-2 Updated MPS Record for CD Cabinet
Item: CD Cabinet
Lot size rule: FOQ=100
Lead time: 1 week
Gross Requirements:
Projected Available:
MPS
80
1
25
55
2
25
30
3
25
5
4
25
80
100
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.
Table 14-3 First Inventory Record for CD Cabinet
Item: CD Cabinet
Lot size rule: L4L
Lead time: 1 week
Gross Requirements:
Scheduled Receipts:
Projected Available:
Planned Orders
0
1
0
2
0
3
0
4
100
0
0
0
-100
5
0
6
0
7
100
8
0
9
0
10
100
11
0
12
0
Table 14-4 Updated Inventory Record for CD Cabinet
Item: CD Cabinet
Lot size rule: L4L
Lead time: 1 week
Gross Requirements:
Scheduled Receipts:
Projected Available:
Planned Orders
0
1
0
2
0
3
0
4
100
5
0
6
0
7
100
8
0
9
0
10
100
11
0
12
0
0
0
0
100
0
0
0
100
0
0
0
100
0
0
0
Bill of Materials (BOM)

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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
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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:
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Scheduled receipts:
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An open order with an assigned due date
Projected available:
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The total period demand for the item
The projected inventory balance for the period
Planned orders:

Quantities & released dates suggested by the MRP
system
Lot Sizing Rules

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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:

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Fixed Order Quantity (FOQ)
Lot-for-Lot (L4L)
Periodic Order Quantity (POQ)
MRP Record Processing
1
2
Period
3
4
5
6
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned order receipts
Planned order releases
Lead time = [# periods]
Lot size = [order quantity]
Safety stock = [quantity]
Gross requirements: anticipated future usage of (or demand for) the item during each period.
Scheduled receipts: existing replenishment orders due in at the beginning of the period.
Projected on hand: projected inventory status for the item at the beginning of each period.
Net requirements: Gross Requirements minus Scheduled Receipts minus Projected on hand.
Planned order receipt: planned receipt of replenishment orders at the beginning of the period.
Planned order release: release of planned replenishment orders for the item using lead-time offset.
MRP Terms
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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
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Time buckets:

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Action bucket:
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The column in an inventory record that
represents a unit of time
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
Inventory Record for Pie Safe
Item: Pie Safe
Lot size rule: L4L
Lead time: 1 week
0
Gross requirements
1
2
3
4
0
0
0
100
Scheduled receipts
Projected available
Planned orders
6 Bucket
7
8
A 5Time
0
0
100
0
0
0
0
100
0
100
0
9
10
11
12
0
100
0
0
0
0
100
0
0
100
0
100
0
0
100
0
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
Table 14-6 Updated Inventory Record for CD Cabinet
Item: CD Cabinet
Lot size rule: L4L
Lead time: 1 week
Gross Requirements:
Scheduled Receipts:
Projected Available:
Planned Orders:

Parent: none
Children: Top, bottom, door, left side, right side, shelves, shelf supports
0
1
0
2
0
3
0
4
100
5
0
6
0
7
100
8
0
9
0
10
100
11
0
12
0
0
0
0
100
0
0
0
100
0
0
0
100
0
0
0
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– Components
(cont.)
Inventory Records – Remaining Components
Inv. Records – Remaining Components
(cont.)
Inv. Records – Remaining Components
(cont.)
MRP System—Other Issues
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Safety stock?
Lot size?
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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 $133.50.
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 14-11 show items scheduled for work Center 101.
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17


A
B
C
D
Table 14-11 Workload for Work Center 101
Period
4
5
6
Item
Number
DN100
DP100
DS119
DT136
EQ555
ER616
ES871
FA314
FF369
FR766
FS119
FY486
Quantity
250
250
150
400
1000
500
100
250
100
50
200
500
Setup
Time
(hours)
3.0
5.0
2.5
3.5
8.0
4.0
2.0
3.0
1.5
0.5
3.0
6.0
E
F
Run Time
per Unit in
Standard
Hours
0.20
0.18
0.30
0.27
0.08
0.22
0.35
0.30
0.12
0.15
0.35
0.27
Total
Item
Time
(hours)
53.0
50.0
47.5
111.5
88.0
114.0
37.0
78.0
13.5
8.0
73.0
141.0
G
Weekly
Workload
(hours)
262.0
239.0
313.5
Available = 4 machines x 2 shifts x 10 hours x 5 days x 0.85 utiliza- x 0.95 effiCapacity
per shift per wk.
tion
ciency
Available = 323.0 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
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

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 14.1-3, 3sp. Use the data given to:

1.
2.
3.
3sp.

prepare a product structure tree.
determine the product lead time.
calculate gross requirements, starting with 100 units of the end
item (Q).
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 14.23-24. Do a CRP:
23.
24.
Calculate the required capacity (based on each job’s set up and
run times).
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).