12 – MRP and ERP Dr. Ron Lembke

Historical Perspective ERP- Enterprise Resource Planning MRP II – Manufacturing Resource Planning mrp – material requirements planning

MRP Crusade (1975) Material Requirements Planning Make sure you have enough parts when you need them Take future demands, factor in lead times (time phase), compare to on hand, order Determine order size and timing Control and plan purchasing vs. OSWO inventory management

Closed-Loop MRP Capacity Consideration: Part routings Calculate loads on each work station See if scheduled load exceeds capacity Lead-time long enough to allow some shuffling to make plan feasible

MRP II -- Manufacturing Resource Planning “A method for the effective planning of all resources of a manufacturing company” (APICS def.) Financial accounting incorporated Sales Operations Planning Simulate capacity requirements of different possible Master Production Schedules 1989, $1.2B MRPII sales in U.S., one third of total software sales

Success? MRP Crusade Begins

Electronic Data Interchange My computer talks to yours, tells you exactly what I want to order, when You fill out a form, very compressed message sent, viewed as form Software, hardware expensive to implement Sample Purchase Transaction ST88850*1 Transaction Set identifier BEG*00*NE*00498765**010698 Beginning of Segment PID*X*08*MC**Large Widget Description of Product P01**5*DZ*4.55*TD Baseline Item Data CTT*1 Transaction Totals SE*1*1 End of Segment

XML eXtensible Markup Language XML provides self-describing information. Much easier, faster to implement or modify than EDI. Expected to replace EDI. Standardization through RosettaNet efforts

ERP differences Material planning Capacity planning Product design Information warehousing All functions in the entire company operate off of one common set of data Instantaneous updating, visibility

Historical Perspective Database Server(s) Application Server(s) User PCs

ERP Sales Y2K: Worldwide sales of top 10 vendors 1995 $2.8 B 1996 $4.2 B 1997 $5.8 B $3.2 B SAP Fortune survey: 44% reported spending at least 4 times as much on implementation as on software

ERP Challenges Modules assume “best practices:” Accuracy of data Change software to reflect company ($) Change company to follow software (?) Accuracy of data Drives entire system Ownership of / responsibility for Ability to follow structure

ERP Novel? “Goal-like” novel Hero learns more about ERP, deciding if it is right for his company Company rushes through installation General introduction to ERP systems, what they do, how different from MRP SAP R/3 screen shots

3 Reasons for ERP Legacy systems outdated and need replacing anyway Desire for greater communication between locations Reconfigure business to take advantage of current and future communications and computing breakthroughs

Mostly “Best Practices” Why ERP? Common Client Multiple Processes Multiple Clients Multiple Processes High Low Flexibility Common Client “Best Practices” Multiple Clients Mostly “Best Practices” High Low Centralization

ERP Considerations 1. Control: how much centralization, drill-down visibility? 2. Structure: How large & dispersed, how tightly integrated does it need to be? 3. Database: desired structure, accessibility 4. Customization: out/in source, how willing? Ability to modify in real time. Creating in-house experts vs. continued consulting dependence 5. Best practices: how willing to embrace? Source: Carol A. Ptak “ERP: Tools, Techniques and Applications for Integrating the Supply Chain,” St. Lucie Press, APICS Series on Resource Management, 1999, p. 252.

The Heart of the Matter - mrp System for organizing WIP releases Work in Process – work that has been started, but not yet finished Consider Lead Time (LT)for each item Look at BOM to see what parts needed Bill of Materials – what goes into what Release so they will arrive just as needed Example – Snow Shovel Order quantity is 50 units LT is one week

MRP Table 6 units short

MRP Table Order 50 units week earlier

Ending Inventory Ending inventory

Terminology Projected Available balance Not on-hand (that may be greater) Tells how many will be available Available to Promise – the units aren’t spoken for yet, we can assign them to a customer Planned order releases ≠ scheduled receipts Only when material has been committed to their production Move to scheduled receipts as late as possible Preserves flexibility

1605 Snow Shovel 1605 Snow Shovel 13122 062 Nail (4) Top Handle 048 Assy 062 Nail (4) 048 Scoop-shaft connector 14127 Rivet (4) 314 scoop assembly 118 Shaft (wood)

314 scoop assembly 314 scoop assembly 019 Blade (steel) 14127 Rivet (6) 2142 Scoop (aluminum)

13122 Top Handle Assembly 13122 Top Handle Assembly 11495 Welded Top handle bracket Assembly 457 Top handle (wood) 1118 Top handle Coupling (steel) 129 Top Handle Bracket (steel) 082 Nail (2)

BOM Explosion Process of translating net requirements into components part requirements Take into account existing inventories Consider also scheduled receipts

BOM Explosion Example Need to make 100 shovels We are responsible for handle assemblies.

13122 Top Handle Assembly 13122 Top Handle Assembly 11495 Welded Top handle bracket Assembly 457 Top handle (wood) 1118 Top handle Coupling (steel) 129 Top Handle Bracket (steel) 082 Nail (2)

Net Requirements Sch Gross Net Part Description Inv Rec Req Req Top handle assy 25 -- 100 75 Top handle 22 25 Nail (2 required) 4 50 Bracket Assy 27 -- Top bracket 15 -- Top coupling 39 15

Net Requirements Sch Gross Net Part Description Inv Rec Req Req Top handle assy 25 -- 100 75 Top handle 22 25 75 28 Nail (2 required) 4 50 150 96 Bracket Assy 27 -- 75 48 Top bracket 15 -- Top coupling 39 15

13122 Top Handle Assembly 13122 Top Handle Assembly 11495 Welded Top handle bracket Assembly 457 Top handle (wood) 1118 Top handle Coupling (steel) 129 Top Handle Bracket (steel) 082 Nail (2)

Net Requirements Sch Gross Net Part Description Inv Rec Req Req Top handle assy 25 -- 100 75 Top handle 22 25 75 28 Nail (2 required) 4 50 150 96 Bracket Assy 27 -- 75 48 Top bracket 15 -- 48 33 Top coupling 39 15 48 --

Timing of Production This tells us how many of each we need Doesn’t tell when to start Start as soon as possible? Dependent events (oh no, not that!)

13122 Top Handle Assy Order policy: Lot-for-lot

13122 Top Handle Assy-2 Order policy: Lot-for-lot

13122 Top Handle Assy -3 Order policy: Lot-for-lot

457 Top Handle One handle for Each assembly

457 Top Handle Order policy: Lot-for-lot

457 Top Handle Order policy: Lot-for-lot

082 Nail (2 required) Two nails for Each assembly

082 Nail (2 required)

082 Nail (2 required)

082 Nail (2 required)

11495 Bracket Assembly One bracket for Each assembly

11495 Bracket Assembly One bracket for Each assembly

11495 Bracket Assembly One bracket for Each assembly

11495 Bracket Assembly Order policy: Lot-for-lot

129 Top Bracket

129 Top handle bracket

1118 Top handle coupling

1118 Top handle coupling

1118 Top handle coupling

Other considerations Safety stock if uncertainty in demand or supply quantity Don’t let available go down to 0 Safety LT if uncertainty in arrival time Place order earlier than necessary Order quantities EOQ – Economic Order Quantity, Fixed Size If that’s not enough, order what you need, OR order two or more of the Fixed Size Lot-For-Lot, Periodic Order quantity, others

MRP Priorities First: Then: Get installed, part of ongoing managerial process, get users trained Understand critical linkages with other areas Achieve high levels of data integrity Link MRP with front end, engine, back end Then: Determine order quantities more exactly Buffering concepts Nervousness

Ordering Policies Dependent Demand Complexity Not independent demand Discrete – not continuous Lumpy – may have surges Complexity Reduces costs – ordering & holding Anything other than lot-for-lot Increases lumpiness downstream

Assumptions All requirements must be available at start of period All future requirements must be met, and can’t be backordered System operated on periodic basis (e.g. weekly) Requirements properly offset for LTs Parts used uniformly through a period Use average inventory levels for holding cost

Example Demands Try several lot-sizing methods Economic Order Quantity Periodic Order Quantity Part Period Balancing Wagner Within Order cost = $300 per order = CP Inventory Carrying cost = $2 / unit/ week = CH Avg Demand = 92.1 / wk = D

EOQ Minimizes total ordering & holding costs Assumes demand same every period Definitely not always true for this use Avg. demand and holding cost need same time units (e.g. per week) Economic Lot Size: Where: D = avg demand CP = ordering cost CH = holding cost

EOQ Sqrt( 2 * 300 * 92.1 / 2) = 166

EOQ Ordering cost = 6 * 300 = $1,800 Inv carry cost = 1,532.5 * 2 = $3,065 Total $4,865

Periodic Order Quantities EOQ Gave good tradeoff between ordering & holding resulted in a lot of leftovers. Only order enough to get through a certain number of periods – no leftovers How many? EOQ / avg. demand 166 / 92.1 = 1.805 ~ 2 weeks’ worth

Periodic Order Quantities Ordering cost = 6 * 300 = $1,800 Inv carry cost =1,082.5 * 2 = $2,145 Total $3,945

Part Period Balancing (Least Total Cost) Increase the quantity until holding costs equal the ordering cost Order 10 – holding = 10/2*2 = 10 Order 20 – holding = 10 + 10*1.5*2 = $40 Order 35 = 40 + 15*2.5*2 = $115 Order 55 = 115 + 20*3.5*2 = $255 Order 125 = 255 + 70*4.5*2 = $85

Part Period Balancing Week 5: Order 70: Holding = 10*0.5*2 = $10 So I could: Order 250 units, pay $300 in ordering and $540 holding, for a total of $840, Order 70 now, 180 next week, and pay $600 in ordering and $10 + 180*0.5*2=180 in holding = $790 Seems like the second option is best.

Part Period Balancing When should we place a separate order? If 1.5*$2*D > 300. D>300/3 = 100 Whenever demand is >= 100, we might as well place a separate order. What about week 9? Order 230: holding = 230*0.5*2 = $230 Order 270: = 230 + 40*1.5*2 = $350 Order 280: = 350 + 10*3.5*2 = $420

Part Period Balancing

Wagner-Within Mathematically optimal Work back from planning period farthest in the future Consider all possibilities: Order for 5, 4 and 5, 3 and 4, then 5, etc. Uses “dynamic programming” – similar to linear programming

Simulation Experiments What is best under real-world conditions? Multiple levels to be concerned about Real-time changes