Operations Management Chapter13 MRP and ERPChapter 133: Learning Objectives You should be able to: LOA LO13.2 Los LO 13.4 Logs LO 13.6 LO37 L038 Describe the conditions under which MRP is most appropriate Describe the inputs, outputs, and nature of MRP processing Explain how requirements in a master production schedule are translated into material requirements for lower-level items Discuss the benefits and requirements of MRP Describe some of the difficulties users have encountered with MRP Describe MRP II and its benefits Explain how an MRP system is useful in capacity planning requirements planning Describe ERP, what it provides, and its hidden costsDependent vs Independent Demand Indopandent demand Dependent demand i i | i i 133MRP °Material 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. What is needed? 2 How machisnecdea aa 3. When is it needed? Losen|Overview of MRP MRP inputs MRP processing ‘MRP outputs I =] | “ ei — é < o7 Design stone yg ee Co Wihdeonls Re Secondary| reports Lo 32 |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 thecumulative 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 the final assembly.Cumulative Lead Time Time period (weeks)MRP Inputs: Bill of Materials ° Bill of Materials (BOM) ° A listing of all of the assemblies, subassemblies, parts, and raw materials 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Assembly Diagram and Product Structure Tree Finished chair Assembly dingram rt Back supports Back supper Frontlegs Ss ay am! ross cross Seat A ber ber Sido ‘ots Product structure Chair tog oat ack assombly assembly Legs 2) Cross Side Cross Back ‘bot rails(2) bat supports (2) 139Low-Level Coding ° Low-level coding * Restructuring the bill of materials so that multiple occurrences of a component all coincide with the lowest level at which the component occurs Level ° x 1340MRP Inputs: Inventory Records ° Inventory records e Includes information on the status of each item by time period, called time buckets Information about * Quantities on hand * Quantities ordered © Other details for each item such as * Supplier + Lead time * Lot size policy * Changes due to stock receipts and withdrawals * Canceled orders and similar events 13411Assembly Time Chart T Procurement a ow material D Fabrication ~~ of pant E ‘Subassembly A Procurement al Azam material F Procurement Final assembly ene and inspection Procurement AofpartH —— |supassembly 8 Procurement of] Fabrication Arow material! | of part G 7 2@ 8 4 § 6 7 8 9 0 W Week number Available A. Order point for delivery 1033 1342MRP Processing ° MRP processing takes the end item requirements specified by the master schedule and “explodes” them into time-phased requirements for assemblies, parts, and raw materials offset by lead times } 1343MRP Processing ° MRP processing combines the time phasing and “explosion” into a sequence of spreadsheet SectiONS: {Week Number Be.|1]2|3]4]5]e|7]s Iw. Item: Gross requirements Scheduled receipts Projected on hand ‘Net requirements, Planned-order receipts Planned order releases 13-14MRP Record Week Number 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 13-15MRP Record Week Number 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 1346MRP Calculations ° Projected inventory on-hand for current period Project inventory on-hand for current period = Planned receipts for previous period — Net requirements for previous period + Scheduled receipts for current period e Net material requirements ¢ Materials a firm must acquire to meet the demand generated by the master schedule ¢ Is the core of MRP processing Net requirements for current period = Gross requirements for current period — Projected on-hand inventory for current period | 13-17MRP: 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 1Lon3 | 1348Example MRP Shutter -—_, Wood sections (4) Frames (2) | Lows 1349Example MRP Mower sched wanmes [ES] 72] 2] *]e] [7] Ounty l ‘Sharore | Grose requires 13:20Using the MRP ° Pegging * The process of identifying the parent items that have generated a given set of material requirements for an item A c B D D(2) F ) 13:21 1033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 ) 13-22Updating the System ° Two basic systems to update MRP records ° Regenerative system ¢ Updated periodically Batch-type system ¢ Best suited to fairly stable systems ° Net-change system ¢ Continuously updated Production plan is modified to reflect changes as they occur ¢ Best suited to systems that have frequent changes | 13-23MRP Outputs: Primary e Primary Reports ° Planned orders ¢ A schedule indicating the amount and timing of future orders ¢ Order releases Authorizing the execution of planned orders ° Changes e Revisions of the dates or quantities, or the cancellation of orders 13-24MRP Outputs: Secondary ¢ Secondary Reports ¢ Performance-control reports « Evaluation of system operation, including deviations from plans and cost information * e.g., missed deliveries and stockouts ¢ Planning reports * Data useful for assessing future material requirements * eg., purchase commitments « Exception reports * Data on any major discrepancies encountered + Eg., late and overdue orders, excessive scrap rates, requirements for nonexistent parts 13-25Other MRP Considerations: Safety Stock ° 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 ofsafety 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 ) 13:26Other MRP Considerations: Lot Sizing Rules ° Lot-for-Lot (L4L) ordering ¢ Economic Order Quantity (EOQ) ° Fixed Period Ordering 13.27 1033 —Lot-for-Lot (L4L) Ordering ° Advantages ° Simplest of all the methods * Order or run size is set equal to the demand for that period ¢ Minimizes investment in inventory ¢ Virtually eliminates holding costs ° Disadvantages ¢ Results in variable order quantities ° Anew setup is required for each production run 13.28Economic Order Quantity (EOQ) ° Can lead to minimum costs if usage 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 13.29Fixed Period Ordering ° Provides coverage for some predetermined number of periods e Asimple rule: ¢ Order to cover a two-period interval ¢ Can be modified when common sense suggests a better way ] 13-30MRP in Services ° Applications involve material goods that form part of the product-service package ¢ Example: Food catering service e Have to determine the quantities of the ingredients (bill of materials) The ingredients are then combined with the number of each meal to be prepared (MRP plan) ° May involve mainly service components e Examples: reconfiguring a workplace or modifying software Lose 13:31MRP in Services ° Applications involve material goods that form part of the product-service package ¢ Example: Food catering service e Have to determine the quantities of the ingredients (bill of materials) The ingredients are then combined with the number of each meal to be prepared (MRP plan) ° May involve mainly service components e Examples: reconfiguring a workplace or modifying software Lose 13:31MRP Benefits ¢ Enables managers to easily ¢ 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 | 13:32 1013.4MRP Benefits ¢ 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 ¢ Exploding an end item's BOM to determine the quantities of the components that were used to make the item Loma 13:33 \______ ee EeMRP Requirements ° To implement an effective MRP system requires: ° Acomputer 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 1334 Lo35 |MRP Difficulties ° Consequence of Inaccurate Data ° Missing parts * Ordering incorrect numbers of items * Inability to stay on schedule ° Other problems ¢ Assumptions of constant lead times ¢ Products being produced differently from the BOM ¢ Failure to alter a BOM when customizing a product * Inaccurate forecasts 13-35MRP II ° Expanded approach to production resource planning ¢ Involves other functional areas of the firm in the planning process ¢ Includes capacity requirements planning 13-36MRP II: Overview Lowen ‘WalClosed Loop MRP © When MRP II systems began to include feedback loops, they were referred to asclosed loop MRP ¢ Closed Loop MRP ¢ Systems evaluate a proposed material plan relative to available capacity ¢ Ifa proposed plan is not feasible, it must be revised ¢ This evaluation is referred to as capacity requirements planning 13:38Capacity Requirements Planning ° Capacity requirements planning (CRP) ° The process of determining short-range capacity requirements. ¢ Inputs to capacity requirement planning ¢ Planned-order releases for the MRP ¢ Current shop loading © Routing information ° Job time ° Key outputs © Load reports for each work center 13:39Load Reports ° Load reports * Department or work center reports that compare known and expected future capacity requirements with projected capacity availability. 67 8 9 WN 2 13 Time poriod 13.40Distribution Resource Planning (DRP) ° Method used for planning orders in a supply chain e Also known as distribution requirements planning ° Extends MRP concepts ¢ Enables planner to compute time-phased inventory requirements for a supply chain ° Goal: ¢ To achieve a balance of supply and demand throughout the supply chain ) 13.41Distribution Resource Planning (DRP) Super Supple Factory etal Ponnedorder recat Pannedkoider eleates Panned-order recente 13.42Enterprise Resource Planning (ERP) ° 103.8 | 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 ERP provides a system to capture and make data available in real time to decision makers and other users throughout an organization. ERP systems are composed of a collection of integrated modules 13.43Enterprise Resource Planning (ERP) +o 1 @ © , or ‘pOverview of ERP Software Modules on Eotaert ‘Accounting/Finance A centeal component of most ERP systems. I provides a range of financial reports, including general ledger, accounts payable, accounts receivable, payroll, income statements, and balance sheets. Marketing Supports lead gener nd sales, y, contact information, Human Resources Maintains a complete database of employee information such as date of hire sl performance evaluations, and other pertinent information Purchasing Facilitates vendor selection, price negotiation, making purchasing decisions, and bill payment Produetion Pl states information on foreeasts, orders, production capacity, on hand inventory quantities, bills of material, ‘work in process, schedules, and production lead times. nning tn Inventory entities inventory requirements, inventory availabilty, replenishment rules, and inventory tracking. Management Distribution ‘Contains information on thitd patty shippers shipping and delivery schedules, delivery tacking Sales Information on orders, invoices, oer tracking, and shipping Supply Chain Facilitates supplier and customer management, supply chain visibility, and event management. Management Customer ‘Contact information, buying behavior, shipping preferences. contracts. payment terms, and credit history Relationship Management ose 1945ERP Project Organization ¢ The 'big bang’ ¢ Companies cast off all of their legacy systems at once and implement a single ERP system across the entire company ¢ The most ambitious and difficult implementation approach ¢ Franchising strategy e Independent ERP systems are installed in each business unit of the enterprise while linking common processes across the enterprise © Suits large or diverse companies that do not share many common processes across business units 13-46 1038 |ERP Project Organization ° Slam Dunk e ERP dictates the process design where the focus is on a few key processes ¢ More appropriate for smaller companies expecting to grow into ERP 103.8 | SsERP in Services ° Initially developed for manufacturing but now has a long list of service applications ¢ Now about enterprise application integration e Example: Universities employ ERP systems Typically used to integrate and access student: * Information * Course schedules * Room schedules * Human resources * Accounting and financial information 13.48 | L038 |ERP Considerations ¢ How can ERP improve a company's business performance? ¢ How long will an ERP implementation project take? ¢ How will ERP affect current business processes? ¢ What is the ERP total cost of ownership? ¢ What are the hidden costs of ERP ownership? 13.49Operations Strategy ° Valuable strategic planning tool ° Acquisition of technology on the order of ERP has strategic implications ¢ Considerations: ¢ Initial high cost ¢ High cost to maintain e The need for future upgrades ¢ Intensive training 13:50