Material Requirements
Planning (MRP)
and ERP
14
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Global Edition, Eleventh Edition
Principles of Operations Management, Global Edition, Ninth Edition
© 2014 Pearson Education
14 - 1
Outline
 Dependent vs. Independent Demand
 What is MRP?
 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 (components)
 Lot Sizing Techniques
 Extensions of MRP (MRP II, ClosedLoop MRP, ERP)
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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
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Hierarchy of
Production Decisions
Long-range Capacity Planning
14 - 4
Dependent vs Independent
Demand
12-5
14 - 5
Dependent Demand
For any product, all
components of that product
are dependent demand
items.
Given a quantity for the
product, the demand for all
parts and components can
be calculated.
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14 - 6
What is MRP
 Material requirements planning (MRP)
is a dependent demand production
planning and inventory control
system.
 MRP integrates data from production
schedules (MPS) with inventory
records, scheduled receipts and the
bill of materials (BOM) to determine
purchasing and production schedules
for the components required to build a
product.
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Trumpet and
Subassemblies
14 - 8
Bill-of-Material
for Trumpet
14 - 9
MRP
A computer-based
information system that
translates master production
schedule (MPS) requirements
for end items into timephased requirements for
subassemblies, components,
and raw materials.
12-10
14 - 10
MRP
The MRP is designed to
answer three questions:
What is needed?
How much is needed?
When is it needed?
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Benefits of MRP
1. Better response to customer
orders
2. Faster response to market
changes
3. Improved utilization of facilities
and labor
4. Reduced inventory levels
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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.
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Overview of MRP
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Master Production Schedule (MPS)
 Time-phased plan specifying how many
and when the company plans to produce
each end item
Aggregate Plan
(Product Groups)
MPS
(Specific End Items)
14 - 15
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)
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MPS Example – 1
One possible MPS…
Product
Month
Week
Tricycle
Wagon
Scooter
Totals
41
300
300
October
42
43
44
45
300
300
300
300
300
300
300
2,400
300
November
46
47
300
300
300
300
2,400
48
49
300
250
250
300
December
50
51
250
250
250
250
52
250
250
2,000
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MPS Example – 2
Months
Aggregate Production Plan
(Shows the total
quantity of amplifiers)
Weeks
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier
150-watt amplifier
75-watt amplifier
January
1,500
1
2
100
3
February
1,200
4
100
500
6
100
500
300
5
7
8
100
450
450
100
Figure 14.2
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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
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Assembly Diagram and
Product Structure Tree
12-20
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BOM Example (Determine requirements for all
components to satisfy demand for 50 Awesome
Speaker Kits)
Level
Product structure for “Awesome” (A)
0
A
E(2)
2
3
12” Speaker kit w/
C(3) Std.
amp-booster
B(2) Std. 12” Speaker kit
1
D(2)
F(2) Std. 12” Speaker
E(2)
Packing box and
installation kit of wire,
bolts, and screws
booster assembly
G(1)
D(2)
Amp-booster
12” Speaker
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12” Speaker
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BOM Example
Level
Product structure for “Awesome” (A)
0
A
1
2
3
D(2)
Part B: 2 x number of As =
(2)(50) =Std. 12” Speaker100
kit w/
BPart
12” Speaker kit
C
(2) Std.
(3)
C: 3 x number of As =
(3)(50) =amp-booster 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
E(2) 2 x number of Bs
E(2)
F(2) Std. 12” Speaker
Part E:
booster assembly
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x Packing
numberbox
ofand
Cs =
(2)(150) =
300
kit of wire,
G(1)
D(2)
Part G: 1installation
xbolts,
number
of
Fs
=
(1)(300)
=
300
and screws
Amp-booster
12” Speaker
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12” Speaker
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Accurate Records for Outstanding
Purchase Orders (Scheduled Receipts)
 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
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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
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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
1 week
E
1 week
2 weeks
G
C
3 weeks
F
1 week
D
|
|
|
1
2
3
|
|
4
5
Time in weeks
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|
|
|
6
7
8
Figure 14.4
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MRP Outputs: Primary
Planned orders
A schedule indicating the
amount and timing of
future
production and/or
purchasing orders
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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,
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MRP Processing
MRP processing takes the end
item requirements specified
by the master production
schedule (MPS) and
“explodes” them into timephased requirements for
assemblies, parts, and raw
materials offset by lead
times
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MRP Record
Week Number
1
2
3
4
5
6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-orderreceipt
Planned-order
release
Gross requirements
• Total expected demand
Scheduled receipts
• Open orders scheduled to arrive
Projected On Hand
• Expected inventory on hand at the
beginning of each time period
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MRP Record
Week Number
1
2
3
4
5
6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-orderreceipt
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
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MRP: Processing
 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
12-31
on
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Example MRP
Shutter
Frames (2)
Wood
sections (4)
12-32
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Example MRP
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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
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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
12-35
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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
 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
12-36
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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
12-37
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Lot-for-Lot Example
Gross
requirements
1
2
3
4
5
6
7
8
9
10
35
30
40
0
10
40
30
0
30
55
0
0
0
0
0
0
0
0
0
0
0
30
40
0
10
40
30
0
30
55
30
40
10
40
30
30
55
40
30
Scheduled
receipts
Projected on
hand
Net
requirements
35
Planned order
receipts
Planned order
releases
30
40
10
30
55
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
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Lot-for-Lot Example
Gross
requirements
1
2
3
4
5
6
7
8
9
10
35
30
40
0
10
40
30
0
30
55
0
0
0
0
0
0
0
0
0
0
0
30
40
0
10
40
30
0
30
55
30
40
10
40
30
30
55
40
30
Scheduled
receipts
Projected on
hand
Net
requirements
35
Planned order
receipts
Planned order
releases
30
40
10
30
55
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
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Lot-for-Lot Example
No on-hand inventory is carried through the system
Total holding cost1 = $0
2
3
4
5
6
7
8
9
10
Gross
30
40 this
0
10
30
0
30
There
are seven 35
setups
for
item40in this
plan
requirements
Total
ordering cost = 7 x $100 = $700
Scheduled
55
receipts
Projected on
hand
Net
requirements
35
35
0
0
0
0
0
0
0
0
0
0
30
40
0
10
40
30
0
30
55
30
40
10
40
30
30
55
40
30
Planned order
receipts
Planned order
releases
30
40
10
30
55
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
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14 - 40
EOQ Lot Size Example
Gross
requirements
1
2
3
4
5
6
7
8
9
10
35
30
40
0
10
40
30
0
30
55
0
0
43
3
3
66
26
69
69
39
0
30
0
0
7
0
4
0
0
16
Scheduled
receipts
Projected on
hand
Net
requirements
35
Planned order
receipts
Planned order
releases
73
73
73
73
73
73
73
73
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Average weekly gross requirements = 27; EOQ = 73 units
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Calculating EQO
 Annual demand (D):
(270/10)*52=1404
 Setup Cost (S)= $100
 Holding Cost (H) = $1*52= $52
 EOQ= 73 units
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14 - 42
EOQ Lot Size Example
Gross
requirements
1
2
3
4
5
6
7
8
9
10
35
30
40
0
10
40
30
0
30
55
0
0
43
3
3
66
26
69
69
39
0
30
0
0
7
0
4
0
0
16
Scheduled
receipts
Projected on
hand
Net
requirements
35
Planned order
receipts
Planned order
releases
73
73
73
73
73
73
73
73
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Average weekly gross requirements = 27; EOQ = 73 units
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EOQ Lot Size Example
Total cost = setup cost + holding cost
Total Cost = D/Q x S + Q/2 x H
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
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14 - 44
Periodic Order Quantity
 The EOQ attempts to minimize the total cost of
ordering and carrying inventory and is based on
the assumption that demand is uniform.
 Often demand is not uniform, particularly in
material requirements planning, and using the
EOQ does not produce a minimum cost.
 The period-order quantity lot-size rule is based
on the same theory as the economic-order
quantity.
 It uses the EOQ formula to calculate an
economic time between orders. This is
calculated by dividing the EOQ by the demand
rate.
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14 - 45
Periodic Order Quantity
• Periodic order quantity (POQ)
method sets:
• the size of each production lot equal
to the requirements for a fixed
number of periods
• Interval (period) = EOQ / average
demand per period
• Order quantity is set to cover the
interval
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POQ Lot Size Example
WEEK
Gross
requirements
1
2
3
4
5
6
7
8
9
10
35
30
40
0
10
40
30
0
30
55
0
0
40
0
0
70
30
0
0
55
0
30
0
0
10
0
0
30
0
85
0
Scheduled
receipts
Projected on
hand
Net
requirements
35
Planned order
receipts
Planned order
releases
70
70
80
80
0
85
EOQ = 73 units; Average weekly gross requirements = 27;
POQ interval = 73/27 ≅ 3 weeks
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POQ Lot Size Example
 Setups = 3 x $100 = $300
 Holding cost = (40 + 70 + 30 + 55)
units x $1 = $195
 Total cost = $300 + $195 = $495
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14 - 48
Lot-Sizing Summary
For these three examples
Lot-for-lot
EOQ
POQ
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$700
$730
$495
14 - 49
BOM Example (Determine requirements for all
components to satisfy demand for 50 Awesome
Speaker Kits)
Level
Product structure for “Awesome” (A)
0
A
E(2)
2
3
12” Speaker kit w/
C(3) Std.
amp-booster
B(2) Std. 12” Speaker kit
1
D(2)
F(2) Std. 12” Speaker
E(2)
Packing box and
installation kit of wire,
bolts, and screws
booster assembly
G(1)
D(2)
Amp-booster
12” Speaker
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12” Speaker
14 - 50
Awesome Speaker Kits
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14 - 51
Awesome Speaker Kits
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14 - 52
Gross Requirements Plan
(Note that components with multiple parents
are only processed once, see component E)
Week
1
A.
B.
C.
E.
F.
D.
G.
2
3
4
5
6
Required date
Order release date
8 Lead Time
50
50
Required date
Order release date
1 week
100
100
Required date
Order release date
2 weeks
150
150
Required date
Order release date
200
200
Required date
Order release date
1 week
300
300
2 weeks
300
300
Required date
Order release date
Required date
Order release date
7
3 weeks
600
600
200
200
1 week
300
300
2 weeks
Table 14.3
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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”
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14 - 54
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)
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14 - 55
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
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14 - 56
Net Requirements Plan
The logic of net requirements
Gross
Allocations
requirements +
Total requirements
–
On
Scheduled
hand + receipts
Net
= requirements
Available inventory
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14 - 57
Allocations
 Allocated items refer to the number
of units in inventory that have been
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
14 - 58
Awesome Speaker Kits
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14 - 59
Awesome Speaker Kits
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14 - 60
Net Requirements Plan
(Awesome Speaker Kits)
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14 - 61
Net Requirements Plan
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14 - 62
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 - onhand inventory)
 The planned order receipt for Item A in
week 8 is 40 units – 40 = 50 - 10
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14 - 63
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
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14 - 64
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
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14 - 65
MRP Evolution
MRP
Schedule Materials
Closed Loop
MRP
Schedule Materials
Incorporate Feedback
MRP II
Schedule & Purchase Materials
Coordinate w/ Mfg Resources
ERP
14 - 66
Closed-Loop MRP
Production Planning
Master Production Scheduling
Material Requirements Planning
Capacity Requirements Planning
No
Feedback
Realistic?
Feedback
Yes
Execute:
Capacity Plans
Material Plans
14 - 67
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
14 - 68
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
14 - 69
Typical ERP System
14 - 70
Enterprise Resource
Planning (ERP)
 ERP modules include
 Basic MRP
 Finance
 Human resources
 Supply chain management (SCM)
 Customer relationship management
(CRM)
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14 - 71
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
72
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ERP Products
 SAP: largest ERP vendor
 modules can be integrated or used
alone
 J.D. Edwards
 flexibility: users can change features;
less of a pre-set structure than SAP’s
73
14 - 73
ERP Products
 Oracle
 tailored to e-business focus
 PeopleSoft
 open, modular architecture allows rapid
integration with existing systems
 Baan
 use of “best-of-class” applications
74
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Leading ERP Vendors
Worldwide
 SAP
 Oracle
 PeopleSoft
 Sage
 J.D.Edwards
 Lawson
 Microsoft Dynamics AX
 Great Plains/Solomon
 Invensys (BaaN)
 IFS
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Advantages of ERP
Systems
1. Provides integration of the
supply chain, production, and
administration
2. Creates commonality of
databases
3. Improves information quality
4. May provide a strategic
advantage
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ERP Drawbacks
1. Very expensive to purchase and even more
so to customize
2. Implementation may require major
changes- Resistance to change
3. So complex that many companies cannot
adjust to it
4. Involves an ongoing, possibly never
completed, process for implementation
5. Training is an on-going activity
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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 production
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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
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#3 in the 10th edition;(#3) in the 11th edition
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#5 in the 10th edition;(#5) in the 11th edition
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#10 in the 10th edition;(#10) in the 11th
edition
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#10 in the 10th edition;(#10) in the 11th
edition
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#10 in the 10th edition;(#10) in the 11th
edition
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17-18-19 in 10th and in 11th editions
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