Operations
Management
Material Requirements Planning
(MRP) & ERP
Chapter 14
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Outline
 GLOBAL COMPANY PROFILE: COLLINS
INDUSTRIES
 DEPENDENT INVENTORY MODEL
REQUIREMENTS
Master Production Schedule
 Bills of Materials
 Accurate Inventory records
 Purchase Orders Outstanding
 Lead Times for Each Component

 MRP STRUCTURE
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Outline - Continued
 MRP MANAGEMENT
MRP Dynamics
 MRP and JIT

 LOT-SIZING TECHNIQUES
 EXTENSIONS IN MRP
Closed-Loop MRP
 Capacity Planning
 Material Requirements Planning II (MRP II)

 MRP IN SERVICES
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Outline - Continued
 DISTRIBUTION RESOURCE PLANNING (DRP)
 ENTERPRISE RESOURCE PLANNING (ERP)
Advantages and Disadvantages of ERP System
 ERP in the Service Sector

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Learning Objectives
When you complete this chapter, you should be
able to :
Identify or Define:
Planning bills and kits
 Phantom bills
 Low-level coding
 Lot sizing

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Learning Objectives - Continued
When you complete this chapter, you should be
able to :
Describe or Explain:
Material requirements planning
 Distribution requirements planning
 Enterprise resource planning
 How ERP works
 Advantages and disadvantages of ERP systems

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Collins Industries
 Largest manufacturer of ambulances in the world
 International competitor
 12 major ambulance designs


18,000 different inventory items

6,000 manufactured parts

12,000 purchased parts
MRP: IBM’s MAPICS
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Collins Industries
 Collins requires:
Material plan must meet both the requirements of the master
schedule and the capabilities of the production facility
 Plan must be executed as designed
 Effective “time-phased” deliveries, consignments, and
constant review of purchase methods
 Maintenance of record integrity

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Inventory Classifications
Inventory
Process
stage
Raw Material
WIP
Finished Goods
Number
& Value
Demand
Type
A Items
B Items
C Items
Independent
Dependent
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Other
Maintenance
Operating
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Dependent versus Independent
Demand
Item
Demand
Source
Material
Type
Method of
Estimating
Demand
Planning
Method
Materials With
Independent Demand
Materials With
Dependent Demand
Company Customers
Parent Items
Finished Goods
WIP & Raw Materials
Forecast & Booked
Customer Orders
EOQ & ROP
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Calculated
MRP
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Requirements for Effective Use of Dependent
Demand Inventory Models
Effective use of dependent demand inventory
models requires that the operations manager
know the:
master production schedule
 specifications or bills-of-material
 inventory availability
 purchase orders outstanding
 lead times

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Inputs to the
Production Plan
Marketing
Customer
Demand
Production
Capacity
Finance
Cash Flow
Inventory
Procurement
Supplier
Performance
Human
Resources
Manpower
Planning
Aggregate
Production Plan
Management
Return on
Investment
Capital
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Engineering
Design
Completion
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The Planning Process
Aggregate production plan
Change
production plan?
Master production
schedule
Change requirements?
Material requirements plan
Change capacity?
Change master
production schedule?
Detail capacity plan
No
Realistic
Yes
Is capacity
plan being
met?
Execute capacity plans
Is
execution
meeting
the plan?
Execute material plans
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Aggregate Production Plan
Months
January
Aggregate Production Plan
(shows the total quantity of
amplifiers
Weeks
February
1,500
1
2
3
1,200
4
5
6
7
8
Master Production Schedule
(Shows the specific type
and quantity of amplifier to
be produced
240 watt amplifier
150 watt amplifier
75 watt amplifier
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100
100
500
500
300
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100
100
450
450
100
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Typical Focus of the Master
Production Schedule
Make to Order
Assemble to
Order or Forecast
Stock to Forecast
(Process Focus)
(Repetitive)
(Product Focus)
Schedule finished
product
Number of end
items
Typical focus of the
master production
schedule
Number of
inputs
Schedule
orders
Schedule
modules
Motorcycles, autos,
Print shop
Machine shop
TVs, fast-food
Fine dining restaurant
restaurant
Examples:
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Steel, Beer,
Bread Light
bulbs, Paper
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Bill-of-Material
 List of components & quantities needed to make
product
 Provides product structure (tree)
Parents: Items above given level
 Children: Items below given level

 Shows low-level coding
Lowest level in structure item occurs
 Top level is 0; next level is 1 etc.

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Product Structure for “Awesome” A
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Special Bills-of-Material
 Modular bills

Modules are final components used to make assemble-tostock end items
 Planning bills
Used to assign artificial parent
 Reduces number of items scheduled

 Phantom bills

Used for subassemblies that exist temporarily
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Bill-of-Material
Product Structure Tree
Bicycle(1)
P/N 1000
Handle Bars (1)
P/N 1001
Frame Assembly (1)
P/N 1002
Wheels (2)
P/N 1003
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Frame (1)
P/N 1004
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Time-Phased Product Structure
Must have D and E completed
here so production can begin
on B
Start production of
D
1 week
D 2 weeks to
produce
B
2 weeks
E
A
2 weeks
2 weeks
E
1 week
1 week
G
3 weeks
F
1 week
C
D
1
2
3
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5
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6
7
8
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Material Requirements Planning
(MRP)
 Manufacturing computer information system
 Determines quantity & timing of dependent demand
items
1
2
3
4
5
Gross Requirements
2
Scheduled Receipts
5
Available
25
20
25
15
33
8
30
23
33
Net Requirements
7
Planned Order Receipts
7
Planned Order Releases
7
© 1995
Corel
Corp.
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MRP Requirements
 Computer system
 Mainly discrete products
 Accurate bill-of-material
 Accurate inventory status

99% inventory accuracy
 Stable lead times
© 1984-1994 T/Maker Co.
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MRP Benefits
 Increased customer satisfaction due to meeting
delivery schedules
 Faster response to market changes
 Improved labor & equipment utilization
 Better inventory planning & scheduling
 Reduced inventory levels without reduced customer
service
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Structure of the MRP System
BOM
Master Production
Schedule
MRP by Period Report
MRP by date report
Lead Times
Planned order report
(Item Master File)
Purchase advice
Exception report
Inventory Data
Purchasing data
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MRP planning
programs
(computer and
software)
14-24
Exception report
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Gross Material Requirements Plan
for 50 “Awesome A” Speaker Kits
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MRP and The Production Planning
Process
Forecast &
Firm Orders
Aggregate
Production
Planning
Material
Requirements
Planning
Master
Production
Scheduling
Resource
Availability
No, modify CRP, MRP, or MPS
Capacity
Requirements
Planning
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Realistic?
14-26
Yes
Shop
Floor
Schedules
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Master Production Schedule
 Shows items to be produced

End item, customer order, module
 Derived from aggregate plan
Example
Item/Week
Oct 3
Oct 10
Oct 17
Oct 24
Drills
300
200
310
300
Saws
300
450
310
330
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Derivation of Master Schedule
A
S
C
B
10 11
15
8
B
Lead time = 4 for A
Master schedule for A
Periods
5
6 7
40
Periods
Gross requirements: B
8
50
9
1
2
10
40+10
= 50
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C
Lead time = 6 for S
Master schedule for S
4
5
40 50 20
14-29
9 10 11 12 13
40
20
30
6
7
8
15+30
= 45
Master schedule
for S sold directly
1 2
10 10
3
Therefore, these are
the gross
requirements for B
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MRP Dynamics
 Supports “replanning”

Problem with system “nervousness”
 “Time fence” - allows a segment of the master
schedule to be designated as “not to be
rescheduled”
 “Pegging” - tracing upward in the bill-of-materials
from the component to the parent item
 That a manager can react to changes, doesn’t
mean he/she should
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MRP and JIT
 MRP - a planning and scheduling technique with
fixed lead times
 JIT - a way to move material expeditiously
 Integrating the two:
Small bucket approach and back flushing
 Balanced flow approach

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Lot-Sizing Techniques
 Lot-for-lot
 Economic Order Quantity
 Part Period Balancing
 Wagner-Whitin Algorithm
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MRP Lot-Sizing Problem: Lot-for-Lot
Techniques
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MRP Lot-Sizing Problem: EOQ
Technique
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MRP Lot-Sizing Problem: PPB
Technique
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