14 - 1© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 Material Requirements Planning (MRP) and ERP

14 - 2© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline  Dependent vs. Independent Demand  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  Lot Sizing Techniques  Extensions of MRP (MRP II, Closed- Loop MRP, ERP)

14 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

Dependent vs Independent Demand

14 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall Dependent Demand  The demand for one item is related to the demand for another item  Given a quantity for the end item, the demand for all parts and components can be calculated

Trumpet and Subassemblies

Bill-of-Material for Trumpet

MRP A computer-based information system that translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.

MRP  The MRP is designed to answer three questions:  What is needed?  How much is needed?  When is it needed? © 2011 Pearson Education, Inc. publishing as Prentice Hall

Hierarchy of Production Decisions Long-range Capacity Planning

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

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.

Overview of MRP

Master Production Schedule (MPS)  Time-phased plan specifying how many and when the firm plans to build each end item Aggregate Plan (Product Groups) Aggregate Plan (Product Groups) MPS (Specific End Items)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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)

MPS Example – 1 One possible MPS…

© 2011 Pearson Education, Inc. publishing as Prentice Hall MPS Example – 2 MonthsJanuaryFebruary Aggregate Production Plan1,5001,200 (Shows the total quantity of amplifiers) Weeks Master Production Schedule (Shows the specific type and quantity of amplifier to be produced 240-watt amplifier watt amplifier watt amplifier Figure 14.2

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

Assembly Diagram and Product Structure Tree LO 12.2

© 2011 Pearson Education, Inc. publishing as Prentice Hall BOM Example B (2) Std. 12” Speaker kit C (3) Std. 12” Speaker kit w/ amp-booster 1 E (2) F (2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D (2) 12” Speaker D (2) 12” Speaker G (1) Amp-booster 3 Product structure for “Awesome” (A) A Level 0

© 2011 Pearson Education, Inc. publishing as Prentice Hall BOM Example B (2) Std. 12” Speaker kit C (3) Std. 12” Speaker kit w/ amp-booster 1 E (2) F (2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D (2) 12” Speaker D (2) 12” Speaker G (1) Amp-booster 3 Product structure for “Awesome” (A) A Level 0 Part B:2 x number of As =(2)(50) =100 Part C:3 x number of As =(3)(50) =150 Part D:2 x number of Bs + 2 x number of Fs =(2)(100) + (2)(300) =800 Part E:2 x number of Bs + 2 x number of Cs =(2)(100) + (2)(150) =500 Part F:2 x number of Cs =(2)(150) =300 Part G:1 x number of Fs =(1)(300) =300

© 2011 Pearson Education, Inc. publishing as Prentice Hall Accurate Records for Outstanding Purchase Orders  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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall Time-Phased Product Structure |||||||| |||||||| Time in weeks F 2 weeks 3 weeks 1 week A 2 weeks 1 week D E 2 weeks D G 1 week Start production of D Must have D and E completed here so production can begin on B Figure week 2 weeks to produce B C E

 Planned orders  A schedule indicating the amount and timing of future  production and/or  purchasing orders MRP Outputs: Primary

 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, MRP Outputs: Secondary

 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 MRP Processing

MRP Record 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 Week Number Gross Requirements Scheduled Receipts Projected on hand Net requirements Planned-order-receipt Planned-order release

MRP Record Week Number 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 be received at the beginning of the period offset by lead time Planned-order releases Planned amount to order in each time period

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

Example MRP Shutter Frames (2) Wood sections (4)

Example MRP

 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 Updating the MRP System

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

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

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

© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-for-Lot Example Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-for-Lot Example Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-for-Lot Example Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week No on-hand inventory is carried through the system Total holding cost = $0 There are seven setups for this item in this plan Total ordering cost = 7 x $100 = $700

© 2011 Pearson Education, Inc. publishing as Prentice Hall EOQ Lot Size Example Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts 73 Planned order releases 73 Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units

Calculating EQO © 2011 Pearson Education, Inc. publishing as Prentice Hall  Annual demand (D): (270/10)*52=1404  Setup Cost (S)= $100  Holding Cost (H) = $1*52= $52  EOQ= 73 units

© 2011 Pearson Education, Inc. publishing as Prentice Hall EOQ Lot Size Example Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts 73 Planned order releases 73 Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units

EOQ Lot Size Example  Total cost = setup cost + holding cost  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* (including 57 units for week 11)=$775 © 2011 Pearson Education, Inc. publishing as Prentice Hall

Lot-Sizing Techniques ▶ Periodic order quantity (POQ) orders quantity needed for a predetermined time period ▶ Interval = EOQ / average demand per period ▶ Order quantity is set to cover the interval ▶ Order quantity is calculated when order is released

POQ Lot Size Example WEEK Gross requirements Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases EOQ = 73 units; Average weekly gross requirements = 27; POQ interval = 73/27 ≅ 3 weeks

POQ Lot Size Example  Setups = 3 x $100 = $300  Holding cost = ( ) units x $1 = $195  Total cost = $300 + $195 = $495 © 2011 Pearson Education, Inc. publishing as Prentice Hall

© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-Sizing Summary For these three examples Lot-for-lot$700 EOQ$730 POQ$495 Wagner-Whitin would have yielded a plan with a total cost of $455

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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”

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall Gross Requirements Plan Table 14.3 Week Lead Time A.Required date50 Order release date501 week B.Required date100 Order release date1002 weeks C.Required date150 Order release date1501 week E.Required date Order release date weeks F.Required date300 Order release date3003 weeks D.Required date Order release date week G.Required date 300 Order release date3002 weeks

© 2011 Pearson Education, Inc. publishing as Prentice Hall Net Requirements Plan

© 2011 Pearson Education, Inc. publishing as Prentice Hall Net Requirements Plan

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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 - on- hand inventory)  The planned order receipt for Item A in week 8 is 40 units – 40 =

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall Net Requirements Plan The logic of net requirements Available inventory Net requirements On hand Scheduled receipts +–= Total requirements Gross requirements Allocations +

Allocations  Allocated items refer to the number of units in inventory that have ben 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

MRP Evolution MRP Closed Loop MRP MRP II ERP Schedule Materials Incorporate Feedback Schedule & Purchase Materials Coordinate w/ Mfg Resources

Closed-Loop MRP Production Planning Master Production Scheduling Material Requirements Planning Capacity Requirements Planning Realistic? No Feedback Execute: Capacity Plans Material Plans Yes Feedback

 Goal: Plan and monitor all resources of a manufacturing firm (closed loop):  manufacturing  marketing  finance  engineering  Simulate the manufacturing system Manufacturing Resource Planning (MRP II)

 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 Enterprise Resource Planning (ERP)

Typical ERP System

© 2011 Pearson Education, Inc. publishing as Prentice Hall Enterprise Resource Planning (ERP)  ERP modules include  Basic MRP  Finance  Human resources  Supply chain management (SCM)  Customer relationship management (CRM)

Major ERP Providers FirmHQ 2004 Share of $23.6B Market SAPGermany 40% OracleUS 22% Sage GroupUK 7% MicrosoftUS 3% InforUS Source: AMR Research

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 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