12-1
MRP and ERP
12-2
CHAPTER
12
MRP and ERP
Dependent Demand
•  Dependent
demand
•  Demand
for items that are subassemblies or
component parts to be used in the production of
finished goods.
•  Dependent demand tends to be sporadic or “lumpy”
MRP and ERP
H.W.: 2,6,8, and 17.
12-3
MRP and ERP
Independent and Dependent Demand
12-4
MRP and ERP
Independent & Dependant Demand Pattern
continuous
Independent Demand
discrete
2000 —
Dependent Demand
D(2)
E(1)
D(3)
MRP and ERP
1500 —
1000 —
F(2)
500 —
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1
Independent demand is uncertain.
Dependent demand is certain.
12-5
Order
1000 on
day 8
Rims
C(2)
B(4)
Order
1000 on
day 3
Bicycles
A
Dependent vs Independent Demand
12-6
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Reorder point
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5
10
Day
MRP and ERP
• Material
|
01
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5
Day
|
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10
MRP
requirements planning (MRP):
•  A computer-based
information system that
translates master schedule requirements for end
items into time-phased requirements for
subassemblies, components, and raw materials.
•  The MRP is designed to answer three questions:
1.
2.
3.
What is needed?
How much is needed?
When is it needed?
12-7
MRP and ERP
12-8
MRP and ERP
Overview of MRP
What went wrong when EOQ is used to
manage a dependent demand item ?
12-9
•
Incorrect assumption of uniform, continuous
demand
•
Incorrect assumption on item independence
•
Lack of Forward visibility
MRP and ERP
12-10 MRP and ERP
MPR Inputs
MRP Inputs: Master Schedule
•  Master
Production Schedule (MPS)
•  Bill of Materials (BOM)
•  Inventory Records
t
uc
od
Pr e
e
Tr
12-11 MRP and ERP
re
ctu
u
r
St
Planning Horizon
•
Master schedule:
•
One of three primary inputs in MRP; states which end
items are to be produced, when these are needed, and
in what quantities.
•
Managers like to plan far enough into the future so
they have reasonable estimates of upcoming demands
•
The master schedule should cover a period that is at
least equivalent to the cumulative lead time
•
Cumulative lead time
•
The sum of the lead times that sequential phases of a
process require, from ordering of parts or raw materials
to completion of final assembly.
12-12 MRP and ERP
MRP Inputs: Bill-of-Materials
•  Bill
of Materials (BOM)
•  A listing
of all of the raw materials, parts,
subassemblies, and assemblies needed to
produce one unit of a product
•  Product structure tree
•
A visual depiction of the requirements in a bill
of materials, where all components are listed by
levels
12-13 MRP and ERP
Product Structure Tree
12-14 MRP and ERP
Product Structure Tree
Q. Determine the quantities of B,C,D,E and F needed to assemble one X.
12-15 MRP and ERP
Product Structure Tree
12-16 MRP and ERP
Low-Level Coding
•  Low-level
coding
•  Restructuring
the bill of material so that multiple
occurrences of a component all coincide with the
lowest level at which the component occurs
X
Level 0
B(2)
Level 1
12-17 MRP and ERP
MRP Inputs: Inventory Records
•
12-18 MRP and ERP
Level 2
D(3)
Level 3
E(4)
C
F(2)
E
E(2)
Assembly Time Chart
Inventory records
•
Procurement of
raw material D Fabrication
of part E
Includes information on the status of each item by time
period, called time buckets
•
•
•
•
•
Subassembly A
Information about
Procurement of
raw material F
Procurement of
part C
Gross requirements
Scheduled receipts
Expected amount on hand
Procurement of
part H
Other details for each item such as
•
•
•
•
•
Supplier
Lead time
Lot size
Changes due to stock receipts and withdrawals
Canceled orders and similar events
Final assembly
and inspection
1
2
3
Subassembly B
Fabrication
of part G
Procurement of
raw material I
4
5
6
7
8
9
10
11
12-19 MRP and ERP
12-20 MRP and ERP
MRP Record
Week Number
1
2
3
4
5
6
Week Number
Gross Requirements
Scheduled Receipts
Scheduled Receipts
Projected on hand
Projected on hand
Net requirements
Net requirements
Planned-order-receipt
Planned-order-receipt
Planned-order release
Planned-order release
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 on
•  Planned amount to order in each time period
12-22 MRP and ERP
•
MPR Lot Sizing Rules
•  Lot-for-Lot
(L4L) ordering
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
•  The
MPR Consideration
Safety Stock
•
•
Theoretically, MRP systems should not require safety stock
Variability may necessitate the strategic use of safety stock
•  A bottleneck process or one with varying scrap rates may
cause shortages in downstream operations
•  Shortages may occur if orders are late or fabrication or
assembly times are longer than expected
•  When lead times are variable, the concept of safety time is
often used
•
12-23 MRP and ERP
6
Planned-order releases
•  Expected inventory on hand at the beginning of each time
period
•
5
•  Quantity expected to received at the beginning of the period
offset by lead time
Projected Available
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
4
Planned-order receipts
•  Open orders scheduled to arrive
MPR: Development
3
•  Actual amount needed in each time period
Scheduled receipts
12-21 MRP and ERP
2
Net requirements
•  Total expected demand
•
1
Gross Requirements
Gross requirements
•
MRP Record
Safety time
•  Scheduling orders for arrival or completions sufficiently ahead of
their need that the probability of shortage is eliminated or
significantly reduced
12-24 MRP and ERP
MPR Lot Sizing Rules
•  Economic
Order Quantity (EOQ)
lead to minimum costs if usage of
item is fairly uniform
•  Can
•
•
This may be the case for some lower-level items
that are common to different ‘parents’
Less appropriate for ‘lumpy demand’ items
because inventory remnants often result
12-25 MRP and ERP
MPR Lot Sizing Rules
12-26 MRP and ERP
Example MPR
•  Fixed
Period Ordering (POQ)
coverage for some
predetermined number of periods
•  Provides
12-27 MRP and ERP
12-28 MRP and ERP
12-29 MRP and ERP
12-30 MRP and ERP
Example MRP: L-4-L ordering
MRP Processing Example
MRP Processing Example
Note: Component D is required by two parents. Example MRP: EOQ
30
0
12-31 MRP and ERP
12-32 MRP and ERP
Other Considerations
Example: L4L rule with safety stock
Item: C •  Safety
Stock
•  Lot sizing rules
Lot Size: L4L Descrip9on: Pedestal assembly Date •  Lot-for-lot
(L4L) ordering
(fixed) order quantity
•  Fixed-period ordering = periodic ordering= POQ
•  Pros and cons of each?
•  Economic
12-33 MRP and ERP
Example: POQ rule with safety stock
Item: C Lead 9me: 2 weeks 1 2 3 4 Gross Requirements 150 120 Scheduled Receipts 230 Projected on hand Safety Stock: 50 units 5 6 7 8 150 47 Net requirements Planned order receipts Planned order releases 12-34 MRP and ERP
BOM for End Items A and B
Lot Size: P = 3 Descrip9on: Pedestal assembly Date Lead 9me: 2 weeks 1 2 3 4 Gross Requirements 150 120 Scheduled Receipts 230 127 127 Projected on hand 47 127 Safety Stock: 50 units 5 6 7 8 150 120 Net requirements Planned order receipts Planned order releases From which item(s) shall we derive the gross requirements of item D? 12-35 MRP and ERP
Deriving G.R. from parent(s)
120 12-36 MRP and ERP
•  An
Updating the System
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
12-37 MRP and ERP
MRP Outputs: Primary
•  Primary
Outputs
•  Planned
•
MRP Outputs: Secondary
•
•
orders
•
Authorizing the execution of planned orders
•  Food
MRP in Services
catering service
•  End
demand => ingredients for each
recipe, i.e. bill of materials
•  Hotel
•
•
•
•
•
To implement an effective MRP system requires:
A computer and the necessary software to handle
computations and maintain records
•  Accurate and up-to-date
•  Master schedules
•  Bills of materials
•  Inventory records
•  Integrity of data files
•
determine the quantities of each component for a given order size
To know when to release orders for each component
To be alerted when items need attention
Additional benefits
•
Low levels of in-process inventories
The ability to track material requirements
The ability to evaluate capacity requirements
A means of allocating production time
•
The ability to easily determine inventory usage via backflushing
•
•
•
and materials “exploded” into
component parts for cost estimation and
scheduling
12-42 MRP and ERP
•
Benefits of MRP
Enables managers to easily
•
renovation
MRP Requirements
E.g., late and overdue orders, excessive scrap rates, requirements
for nonexistent parts
12-40 MRP and ERP
•  Activities
12-41 MRP and ERP
e.g., purchase commitments
Exception reports
•  Data on any major discrepancies encountered
•
item => catered food
•  Dependent
e.g., missed deliveries and stockouts
Planning reports
•  Data useful for assessing future material requirements
•
•
Revisions of the dates or quantities, or the
cancellation of orders
12-39 MRP and ERP
Performance-control reports
•  Evaluation of system operation, including deviations
from plans and cost information
•
releases
•  Changes
•
Secondary Outputs
A schedule indicating the amount and timing of
future orders
•  Order
•
12-38 MRP and ERP
MRP II
Manufacturing resources planning (MRP II)
•
Expanded approach to production resource planning,
involving other areas of the firm in the planning
process and enabling capacity requirements planning
•
Most MRP II systems have the capability of performing
simulation to answer a variety of “what if” questions so they
can gain a better appreciation of available options and their
consequences
12-43 MRP and ERP
MRP II
12-44 MRP and ERP
Closed Loop MRP
When MRP II systems began to include feedback
loops, they were referred to as closed loop MRP
•  Closed Loop MRP
•
Systems evaluate a proposed material plan relative to
available capacity
•  If a proposed plan is not feasible, it must be revised
•
•
12-45 MRP and ERP
•
Capacity Planning
This evaluation is referred to as capacity requirements
planning
12-46 MRP and ERP
Using MRP to Assist in CRP
Capacity requirements planning (CRP)
The process of determining short-range capacity
requirements.
•  Inputs to capacity requirement planning
•  Planned-order releases for the MPR
•  Current shop loading
•  Routing information
•  Job time
•  Key outputs
•  Load reports for each work center
•
12-47 MRP and ERP
•
ERP
Enterprise resource planning (ERP)
•
•
•
•
ERP was the next step in an evolution that began with
MRP and evolved into MRPII
ERP, like MRP II, typically has an MRP core
Represents an expanded effort to integration financial,
manufacturing, and human resources on a single
computer system
ERP systems are composed of a collection of
integrated modules
12-48 MRP and ERP
Requirements Planning-the evolution
•  MRP:
generates schedules that meet the
materials needs identified in the MPS
•  MRP II: ties basic MRP to the company’s
financial system; allows for “what if” analysis
(MPS, cash flow, etc.)
•  ERP: enables firms to deal directly with
suppliers to assess their resources availability
(also includes quality, field services,distribution,
marketing, accounting etc.)
12-49 MRP and ERP
12-50 MRP and ERP
ERP Systems
A Typical ERP System
Financials
Receivable and
payable
Cash management
General ledger
Product-cost
accounting
Profitability analysis
Executive information
system
l  ERP
represents a comprehensive information
technology approach that brings all of an organization’s
information, including all data related to sales and order
management, manufacturing operations, financial
systems, human resources, and marketing and
distributions into a central repository.
l  When
implemented successfully, an ERP can link all
areas of an enterprise with external suppliers, alliances,
and customers into a tightly integrated system with
shared data and visibility.
Operations & Logistics
Production planning
Materials planning (MRP)
Inventory management
Quality management
Project management
Vendor evaluation
Purchasing
Shipping
Suppliers
ER
P
Sales and
Marketing
Order management
Sales management
Sales planning
Pricing
After-sales services
Customers
Human Resources
Payroll
Personal planning
H/R time accounting
Travel expenses
Training
*Adapted from I..Chen (2002) “Planning for ERP Systems: Analysis and Future Trend”, Business
Process Management Journal.
12-51 MRP and ERP
12-52 MRP and ERP
ERP Potential Benefits:
•  Drastic
decline in inventory ($146 billion/year).
reduction in working capital.
•  Abundant information about customer wants
and needs.
•  Ability to view and manage extended
enterprise.
•  Reduced capacity-related costs ($240 billion/
year).
•  Breakthrough
12-53 MRP and ERP
ERP Strategy Considerations
•  High
initial cost
•  High cost to maintain
•  Future upgrades
•  Training
ERP Implementation Success/Failure
•  ERP
success/failure:
•  40%
achieved partial implementation
do not achieve return on investment
•  20% total failure/abandoned
•  50+% failure rate
•  90% late or over-budget
•  60-90%
12-54 MRP and ERP
Additional Company Experience with ERP
Muscatello, J., Small, M., and Chen, I.J.
“Implementing Enterprise Resource Planning
(ERP) Systems in Small and Midsize
Manufacturing Firms,” International Journal of
Operations and Production Management, Vol.
23, No. 8, 2003, pp. 850-871.