Chapter 14 – Resource
Planning
Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010
© Wiley 2010
1
Learning Objectives






Describe enterprise resource management
Describe the evolution of ERP Systems
Describe the benefits and costs of ERP
systems
Provide an overview of MRP
Explain the different types of demand
Describe the objectives of MRP
© Wiley 2010
2
Learning Objectives con’t






Describe the inputs needed for MRP
Explain MRP operating logic
Describe action notices
Use different lot size rules with MRP
Describe the role of capacity requirements
planning (CRP)
Calculate the work loads at critical work
centers using CRP
© Wiley 2010
3
Enterprise Resource Planning

ERP is 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
© Wiley 2010
4
Integration of ERP
© Wiley 2010
5
ERP Modules-4 Categories

Finance and accounting



Sales and marketing


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
© Wiley 2010
6
Evolution of ERP

First generation ERP

Managed all routine internal business activities


From order entry to after-sales customer service
Lacked supply chain support modules (added in
second generation)
© Wiley 2010
7
Evolution of ERP

Second Generation ERP





Late 1990’s software integrated supply chains
Systems focused on decision-making
SCM modules include linear programming (LP)
and simulation support
SCI capability allows collection of intelligence
along the entire supply chain
ASP suppliers set-up and run systems for others
© Wiley 2010
8
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 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
© Wiley 2010
9
Benefits of ERP





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
© Wiley 2010
10
The Cost of ERP Systems



Major suppliers are SAP AG, 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, & implementation.
© Wiley 2010
11
The Cost of ERP Systems



Consultant costs can run up to 3 times the
cost of the system itself.
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
© Wiley 2010
12
Material Planning Systems




MRP translated a master schedule of final
products into time-phased net requirements for
subassemblies, assemblies, and parts
First MRP systems evolved from closed-loop MRP
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
© Wiley 2010
13
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
 MRP output includes schedules for all internal
activities and parts as well as orders for all supply
chain items.
© Wiley 2010
14
Input/Output - MRP Process
© Wiley 2010
15
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
© Wiley 2010
16
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 (need 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
© Wiley 2010
17
Building a CD Cabinet With MRP
© Wiley 2010
18
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
© Wiley 2010
19
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
© Wiley 2010
20
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
Indented BOM
© Wiley 2010
21
A Product Structure Tree
© Wiley 2010
22
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 this table and the product structure tree, we will
work through an example of how the MRP explosion
process calculates the requirements for building a CD
cabinet. Next we start with the cabinet top to show
how MRP calculates the gross requirements for this
© Wiley 2010
23
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.
© Wiley 2010
24
Inventory Records - Components
© Wiley 2010
25
Inventory Records– Components
con’t
© Wiley 2010
26
Inventory Records– Components
con’t
© Wiley 2010
27
Inventory Records – Remaining Components
© Wiley 2010
28
Inv. Records – Remaining Components con’t
© Wiley 2010
29
Inv. Records – Remaining Components con’t
© Wiley 2010
30
MRP Action Notices

Action Notices:



Indicate items that need a production planner’s
attention
Are created when a planned order needs to be
released, due dates need to be adjusted, or
when there is insufficient lead time for normal
replenishment
Often require planners to rush or expedite
orders
© Wiley 2010
31
MRP Action Notices

Action Bucket:


Is the current period where we take actions such
as releasing, rescheduling, or canceling orders
A positive quantity in current period’s planned
order row means that an order must be released
© Wiley 2010
32
Example Comparing Lot Size Rules: Three 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/period) and ordering cost
($25/order). In this example POQ is best at $133.50.
© Wiley 2010
33
Rough Cut Capacity Example: The CRP module uses data from
MRP. 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.


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
© Wiley 2010
34
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.
© Wiley 2010
35
Resource Planning within OM:
How it all fits together




Enterprise resource planning provides a common database for use
by an organization, its suppliers, and its customers.
MRP reports are used by the production and inventory planners to
(1) generate purchasing requisitions and (2) develop schedules of
different activities to be done on the manufacturing floor.
Techniques for sequencing activities are discussed in Chapter 15.
The authorized MPS, the bill of material (BOM) file, and the
inventory records are inputs to the MRP system. It is critical that the
MPS be feasible and that the BOM file and the inventory records be
accurate. This implies that the time standards (Chapter 11) are valid
and that cycle counting (Chapter 12) be used to maintain inventory
record accuracy. If not, material is not ordered at the appropriate
time in the right quantity.
© Wiley 2010
36
Resource Planning Across the
Organization

Since MRP determine the quantity and
timing of materials needed, it affects
several functional areas



Accounting future material commitments
based on MRP output
Marketing is primarily concerned with MPS as
the MRP reveals potential material shortages
Information systems maintains the MRP and
the MPS
© Wiley 2010
37
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 provided a single interface
for managing routine activities performed in
manufacturing. Second generation systems or SCM –
software are designed to improve decision making in the
supply chain. The current trend is integrating e-commerce
and ERP.
Tangible benefits from ERP include reductions in inventory
and staffing, increased production, improved order
management, and increased revenue and profits.
© Wiley 2010
38
Chapter 14 Highlights con’t



MRP systems are designed to calculate material
requirements from dependent demand items. MRP systems
use backward scheduling to determine activity start dates.
Independent demand is the demand for finished products,
whereas dependent demand is demand that is derived
from finished products, MRP system use dependent
demand.
The objectives of MRP are to determine the quantity and
timing of material requirements and to keep schedule
priorities updated and valid. MPR determines what to
order, how much to order, when to place the order, and
when to schedule the arrival.
© Wiley 2010
39
Chapter 14 Highlights con’t



MRP needs three inputs: the authorized MPS, the BOM file,
and the inventory records file. The MPS is the planned
build schedule, the BOM files shows the materials needed
to build an item, and the inventory records file shows the
inventory on hand.
Once the MPS has been input, MRP checks the inventory
records to determine if enough end-item inventory is
available. If sufficient end-item inventory is not on hand,
MPR checks the end-item’s BOM file to determine what
materials are needed and in what quantities.
Action notices show when to release planned orders,
reschedule orders, or adjust due dates. They allow the
planner to use the MRP output information effectively
© Wiley 2010
40
Chapter 14 Highlights con’t



Different lot size rules are used with MRP systems to
generate different order quantities and order frequencies.
The lot-for-lot (L$L) rule always minimizes the inventory
investment but maximized ordering costs.
Planned orders generated by MRP, plus any open shop
orders, are inputs to capacity requirements planning (CRP).
CRP checks to see if available capacity is sufficient to
complete the orders scheduled in a particular work center
during a specific time period.
CRP calculates the workloads at critical work centers by
using the planned orders generated by the MRP system.
These planned orders are multiplied by the standard times
to calculate individual work center loads.
© Wiley 2010
41
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).