12-1
MRP and ERP
CHAPTER
12
MRP and ERP
H.W.: 2,6,8, and 17.
12-2
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”

Large quantities are used at specific points in
time with little or no usage at other times
12-3
MRP and ERP
Independent and Dependent Demand
Independent Demand
Dependent Demand
A
C(2)
B(4)
D(2)
E(1)
D(3)
F(2)
Independent demand is uncertain.
Dependent demand is certain.
12-4
MRP and ERP
Independent & Dependant Demand Pattern
continuous
discrete
2000 —
Order
1000 on
day 8
1500 —
Rims
Bicycles
Order
1000 on
day 3
1000 —
500 —
|
1
|
Reorder point
| | | | | | | |
5
10
Day
0
|
1
|
|
|
| |
5
Day
|
|
|
|
10
12-5
MRP and ERP
Dependent vs Independent Demand
12-6
MRP and ERP
 Material
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
What went wrong when EOQ is used to
manage a dependent demand item ?

Incorrect assumption of uniform, continuous
demand

Incorrect assumption on item independence

Lack of Forward visibility
12-8
MRP and ERP
Overview of MRP
12-9
MRP and ERP

MPR Inputs
Master Production Schedule (MPS)
 Bill of Materials (BOM)
 Inventory Records
12-10 MRP and ERP
MRP Inputs: Master Schedule

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.
12-11 MRP and ERP
Planning Horizon
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
Level 1
B(2)
Level 2
D(3)
Level 3
E(4)
C
F(2)
E
E(2)
12-17 MRP and ERP
MRP Inputs: Inventory Records

Inventory records

Includes information on the status of each item by time
period, called time buckets

Information about




Gross requirements
Scheduled receipts
Expected amount on hand
Other details for each item such as





Supplier
Lead time
Lot size
Changes due to stock receipts and withdrawals
Canceled orders and similar events
12-18 MRP and ERP
Assembly Time Chart
Procurement of
raw material D Fabrication
of part E
Subassembly A
Procurement of
raw material F
Procurement of
part C
Final assembly
and inspection
Procurement of
part H
Fabrication
of part G
Procurement of
raw material I
1
2
3
Subassembly B
4
5
6
7
8
9
10
11
12-19 MRP and ERP
Week Number
MRP Record
1
2
3
4
5
6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-order-receipt
Planned-order release
Gross requirements
• Total expected demand
Scheduled receipts
• Open orders scheduled to arrive
Projected Available
• Expected inventory on hand at the beginning of each time
period
12-20 MRP and ERP
Week Number
MRP Record
1
2
3
4
5
6
Gross Requirements
Scheduled Receipts
Projected on hand
Net requirements
Planned-order-receipt
Planned-order release
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
12-21 MRP and ERP


MPR: Development
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 on
12-22 MRP and ERP

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

Safety time
 Scheduling orders for arrival or completions sufficiently ahead of
their need that the probability of shortage is eliminated or
significantly reduced
12-23 MRP and ERP
MPR 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
12-24 MRP and ERP
MPR Lot Sizing Rules
 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’
Less appropriate for ‘lumpy demand’ items
because inventory remnants often result
12-25 MRP and ERP
MPR Lot Sizing Rules
 Fixed
Period Ordering (POQ)
 Provides coverage for some
predetermined number of periods
12-26 MRP and ERP
Example MPR
12-27 MRP and ERP
Example MRP: L-4-L ordering
12-28 MRP and ERP
Example MRP: EOQ
12-29 MRP and ERP
MRP Processing Example
Note: Component D is required by two parents.
12-30 MRP and ERP
MRP Processing Example
0
30
12-31 MRP and ERP
Other Considerations

Safety Stock
 Lot sizing rules

Lot-for-lot (L4L) ordering
 Economic (fixed) order quantity
 Fixed-period ordering = periodic ordering= POQ
 Pros and cons of each?
12-32 MRP and ERP
Example: L4L rule with safety stock
Item: C
Lot Size: L4L
Description: Pedestal assembly
Lead time: 2 weeks
Date
1
Gross Requirements
150
Scheduled Receipts
230
Projected on hand
Net requirements
Planned order receipts
Planned order releases
47
2
3
4
120
Safety Stock: 50 units
5
6
7
8
150
120
12-33 MRP and ERP
Example: POQ rule with safety stock
Item: C
Lot Size: P = 3
Description: Pedestal assembly
Lead time: 2 weeks
Date
1
Gross Requirements
150
Scheduled Receipts
230
Projected on hand
Net requirements
Planned order receipts
Planned order releases
47
127
2
3
4
120
127
127
Safety Stock: 50 units
5
6
7
8
150
120
12-34 MRP and ERP
BOM for End Items A and B
From which item(s) shall we derive
the gross requirements of item D?
12-35 MRP and ERP
Deriving G.R. from parent(s)
12-36 MRP and ERP

Updating the 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
12-37 MRP and ERP

MRP Outputs: Primary
Primary Outputs

Planned orders


Order releases


A schedule indicating the amount and timing of
future orders
Authorizing the execution of planned orders
Changes

Revisions of the dates or quantities, or the
cancellation of orders
12-38 MRP and ERP
MRP Outputs: Secondary

Secondary Outputs

Performance-control reports
 Evaluation of system operation, including deviations
from plans and cost information


Planning reports
 Data useful for assessing future material requirements


e.g., missed deliveries and stockouts
e.g., purchase commitments
Exception reports
 Data on any major discrepancies encountered

E.g., late and overdue orders, excessive scrap rates, requirements
for nonexistent parts
12-39 MRP and ERP


MRP in Services
Food catering service

End item => catered food

Dependent demand => ingredients for each
recipe, i.e. bill of materials
Hotel renovation

Activities and materials “exploded” into
component parts for cost estimation and
scheduling
12-40 MRP and ERP

Enables managers to easily




Benefits of MRP
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
12-41 MRP and ERP

MRP Requirements
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
12-42 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

This evaluation is referred to as capacity requirements
planning
12-45 MRP and ERP

Capacity Planning
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
12-46 MRP and ERP
Using MRP to Assist in CRP
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
ERP Systems
 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.
 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.
12-50 MRP and ERP
A Typical ERP System
Financials
Receivable and
payable
Cash management
General ledger
Product-cost
accounting
Profitability analysis
Executive information
system
Suppliers
Operations & Logistics
Production planning
Materials planning (MRP)
Inventory management
Quality management
Project management
Vendor evaluation
Purchasing
Shipping
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
ERP Potential Benefits:
Drastic decline in inventory ($146 billion/year).
 Breakthrough 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).

12-52 MRP and ERP
ERP Implementation Success/Failure

ERP success/failure:

40% achieved partial implementation
 60-90% do not achieve return on investment
 20% total failure/abandoned
 50+% failure rate
 90% late or over-budget
12-53 MRP and ERP
ERP Strategy Considerations

High initial cost
 High cost to maintain
 Future upgrades
 Training
12-54 MRP and ERP
ERP Additional Reading:
Additional Reading:
Chen, I.J., “Planning for ERP Systems: Analysis and Future
Trend," Business Process Management Journal, Vol. 7, No.
5, 2001, pp. 374-386.