OP management(11)

Operations Management (Material Requirements
Planning (MRP and ERP)
Chapter 11
Planning process
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 …is a planning and scheduling technique used for batch
production of assembled items.
 … is a computer-based information system that translates master
schedule requirements for end items into time-phased
requirements for subassemblies, components, and raw materials.
 MRP…
- enables low levels of in-process inventories
- helps to track material requirements
- helps to evaluate capacity requirements
- is a means of allocating production time
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Batch Production
When tens, hundreds or even
thousands of the same product, are
manufactured on a production line,
this is called Batch Production.
Batch production takes place on a
production line. A production line is
one stage of manufactured followed
by another stage. A production line
can be made up of several or
hundreds of different stages.
Companies tend to order batches of
products. Customers usually order
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Independent and dependent demand
 A demand is independent if it is needed for its own. The demand
of end-products are usually independent.
 Dependent demand is a demand for items that are subassemblies
or component parts to be used in production of finished goods.
 Once the independent demand is known, the dependent demand
can be determined.
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Comparison of independent and dependent demand
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Comparison of independent and dependent demand
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 Based on the master schedule, it is
working backward from the due date using lead times and
other information,
to determine when and how much to order from materials,
components, subassemblies etc.
So that ordering, fabrication, and assembly can be scheduled
for timely completion of end items while inventory levels are
kept low.
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Inputs of MRP
 Master production schedule: states which end products are to
be produced, when and in what quantities. Inputs of the master
schedule are customer orders and forecasts. Separates the
planning horizons into time buckets. It should cover the
cumulative lead time.
 Bill-of-Materials (BOM): a listing of all of the raw materials,
parts, subassemblies, and assemblies needed to produce one
unit of a product. It is hierarchical and shows the quantities,
too (assembly diagram, product structure tree, low level
 Inventory records: Includes information on the status of each
item by time period (Gross requirements, scheduled receipts,
amount on hand, lead times, lot sizes, etc.)
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Overview of MRP
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Processing MRP (assembly time chart)
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Bills of Material
 List of components, ingredients, and materials needed to make
 Provides product structure
Items above given level are called parents
Items below given level are called children
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Bills of Material Example
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Bills of Material Example
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MPR Processing
 Gross requirements
Total expected demand
 Scheduled receipts
Open orders scheduled to arrive
 Planned on hand
Expected inventory on hand at the beginning of each time period
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MPR Processing (Cont‘d)
 Net requirements
Actual amount needed in each time period
 Planned-order receipts
Quantity expected to received at the beginning of the period
Offset by lead time
 Planned-order releases
Planned amount to order in each time period
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MPR Processing (Cont‘d)
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Updating the System
 Regenerative system
Updates MRP records periodically
 Net-change system
Updates MPR records continuously
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MRP Outputs
 Planned orders - schedule indicating the amount and timing of
future orders.
 Order releases - authorization for the execution of planned
 Changes - revisions of due dates or order quantities, or
cancellations of orders.
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MRP Secondary Reports
 Performance-control reports: evaluate system operation
 Planning reports: help to forecast future inventory
requirements, e. g. purchase commitments
 Exception reports: call attention to major discrepancies
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Safety Stock
 Safety Stock
- BOMs, inventory records, purchase and production quantities may not
be perfect
- Consideration of safety stock may be prudent
- Should be minimized and ultimately eliminated because of its domino
- Typically built into projected on-hand inventory
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Lot-size technique
 Lot-for-lot techniques order just what is required for production
based on net requirements
- May not always be feasible
- If setup costs are high, lot-for-lot can be expensive
 Economic order quantity (EOQ)
- EOQ expects a known constant demand and MRP systems often deal
with unknown and variable demand
 Periodic Order Quantity (POQ) looks at future orders to determine
most economic lot size
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Lot-size example
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Lot-size example
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Lot-size example
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Closed-loop MRP
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 Goal: Plan and monitor all resources of a manufacturing firm
(closed loop):
 Simulate the manufacturing system
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 Next step in an evolution that began with MPR and evolved into
 Integration of financial, manufacturing, and human resources
on a single computer system.
 A computer system that integrates application programs in
accounting, sales, manufacturing, and other functions in the
 This integration is accomplished through a common database
shared by all the application programs
 Produces information in real time and ties in customers and
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Typical ERP System
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Advantage and disadvantage of ERP System
 Advantages
- Provides integration of the
supply chain, production,
and administration
- Creates commonality of
- Improves information quality
- May provide a strategic
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 Disadvantages
- Very expensive to purchase
and even more so to
- 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
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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
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Mathematical Techniques (Linear programming)
 Linear programming models are methods for obtaining optimal
solutions to problems involving the allocation of scarce resources
in terms of cost minimization or profit maximization.
 With aggregate planning, the goal is usually to minimize the sum of
costs related to regular labor time, overtime, subcontracting,
carrying inventory, and cost associated with changing the size of
the workforce. Constraints involve the capacities of the workforce,
inventories, and subcontracting.
 The aggregate planning problem can be formulated as a
transportation problem (special case of linear programming).
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