MRP and ERP Chapter 12 MIS 373: Basic Operations Management Additional content from Jeff Heyl and L. Beril Toktay

Learning Objectives After this lecture, students will be able to Describe the inputs, outputs, and nature of MRP processing. Explain bill of materials Explain time-phased product structure Describe differences between MRP and ERP MIS 373: Basic Operations Management

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: What is needed? How much is needed? When is it needed? MIS 373: Basic Operations Management

MRP Overview How much and when finished product is desired Composition of a finished products How much inventory is on hand or on order MIS 373: Basic Operations Management

MRP Inputs MRP Inputs Master schedule How much and when finished product is desired Bill of Materials (BOM) Composition of a finished products Inventory Records How much inventory is on hand or on order MIS 373: Basic Operations Management

MRP Inputs: Master Schedule States: Which end items are to be produced When these are needed In what quantities (customer orders, forecasts, order from warehouses to build up seasonal inventories). Weekly Quantity Item X 11 12 13 14 15 16 17 18 Quantity 100 150 MIS 373: Basic Operations Management

MRP Inputs: Master Schedule States: Which end items are to be produced When these are needed In what quantities (customer orders, forecasts, order from warehouses to build up seasonal inventories). Item X Weekly Quantity Item X 11 12 13 14 15 16 17 18 Quantity 100 150 MIS 373: Basic Operations Management

MRP Inputs: Master Schedule States: Which end items are to be produced When these are needed In what quantities (customer orders, forecasts, order from warehouses to build up seasonal inventories). Item X at beginning of week 14 and at beginning of week 18 Weekly Quantity Item X 11 12 13 14 15 16 17 18 Quantity 100 150 MIS 373: Basic Operations Management

MRP Inputs: Master Schedule States: Which end items are to be produced When these are needed In what quantities (customer orders, forecasts, order from warehouses to build up seasonal inventories). Item X at beginning of week 14 and at beginning of week 18 100 at beginning of week 14 150 at beginning of week 18 Weekly Quantity Item X 11 12 13 14 15 16 17 18 Quantity 100 150 MIS 373: Basic Operations Management

Cumulative Lead Time 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. CLT = 9 weeks MIS 373: Basic Operations Management

Cumulative Lead Time Following the previous example, if CLT=9 When should we start work for the demand on the week 14? When should we start work for the demand on the week 18? Weekly Quantity Item X 11 12 13 14 15 16 17 18 Quantity 100 150 MIS 373: Basic Operations Management

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 MIS 373: Basic Operations Management

Assembly Diagram and Product Structure Tree parent Level 0 = end item component Level 1 parent Level 2 component Amount needed for assembly at the next higher level only MIS 373: Basic Operations Management

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 Example: 1 X requires: 2 B, 1 C, 6 D, 28 E, and 2 F Level 0 X X: 1 B: 2 x 1 = 2 Level 1 B(2) C C: 1 x 1 = 1 D: 3 x 2 = 6 Level 2 E: 2 x 1 = 2 D(3) E E(2) F(2) F: 2 x 1 = 2 E: 1 x 2 = 2 E: 4 x 6 = 24 Level 3 E(4) MIS 373: Basic Operations Management

Low-Level Coding: 1 X 1 X requires: Level 0 X X: 1 B: 2 x 1 = 2 C: 1 x 1 = 1 D: 3 x 2 = 6 Level 2 E: 2 x 1 = 2 D(3) E E(2) F(2) F: 2 x 1 = 2 E: 1 x 2 = 2 E: 4 x 6 = 24 Level 3 E(4) 1 X requires: B: 2 C: 1 D: 6 E: 2+24+2=28 F: 2 MIS 373: Basic Operations Management

Low-Level Coding: 10 X with on hand inventory B(2) C Level 2 D(3) E E(2) F(2) Level 3 E(4) 1 X requires: B: 2 C: 1 D: 6 E: 28 F: 2 10 X require: B: 2x10-4=16 C: 1x10-10=0 D: 6x10-8=52 E: 28x10-60=220 F: 2x10-0=20 Does not consider item hierarchy! On hand inventory B: 4 C: 10 D: 8 E: 60 F: 0 MIS 373: Basic Operations Management

Low-Level Coding: 10 X with on hand inventory B(2) C B: 2 x 10 - 4 = 16 C: 1 x 10 -10=0 Level 2 D(3) E E(2) F(2) D: 3 x 16 – 8=40 F: 2 x 0 = 0 Level 3 E: 4 x 40 – 60=100 E(4) “Low-level coding” E: 1 x 16 = 16 E: 2 x 0 = 0 10X require: B: 16 C: 0 D: 40 E: 100+16+0=116 F: 0 On hand inventory B: 4 C: 10 D: 8 E: 60 F: 0 MIS 373: Basic Operations Management

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 Part E fabrication lead-time Sub assembly lead-time Material F delivery lead-time Final assembly lead-time MIS 373: Basic Operations Management

Example: Time-Phased Product Structure An example BOM The respective lead time Parts / Product Process Lead Time A 10 B 15 C D E A B(2) C(1) D(3) E(3) D(1) Question: When do we start producing/ordering each part? MIS 373: Basic Operations Management

Example: Time-Phased Product Structure Let’s assume that we need 50 units of A… Based on the BOM, we will need Level 1: 100 units of B Level 2: 300 units of D Level 1: 50 units of C Level 2: 50 units of D Level 2: 150 units of E Putting together: 100 B, 50 C, 350D, 150 E Assembly A B(2) C(1) Purchase D(3) E(3) D(1) MIS 373: Basic Operations Management

Example: Time-Phased Product Structure Let’s assume that we need 50 units of A… Delivery date for final product Parts-Products A B C D E MIS 373: Basic Operations Management 5 days

Example: Time-Phased Product Structure 50 units of A Start assembly for 50 units of A A B(2) C(1) Parts-Products A B C D E D(3) E(3) D(1) Parts / Product Process Lead Time A 10 B 15 C D E 5 days MIS 373: Basic Operations Management

Example: Time-Phased Product Structure 50 units of A Start assembly for 100 units of B A B(2) C(1) Parts-Products A B C D E D(3) E(3) D(1) Parts / Product Process Lead Time A 10 B 15 C D E 5 days MIS 373: Basic Operations Management

Example: Time-Phased Product Structure 50 units of A Start assembly for 50 units of C A B(2) C(1) Parts-Products A B C D E D(3) E(3) D(1) Parts / Product Process Lead Time A 10 B 15 C D E 5 days MIS 373: Basic Operations Management

Example: Time-Phased Product Structure 50 units of A Order 300 units of D for B’s process A B(2) C(1) Parts-Products A B C D E D(3) E(3) D(1) Parts / Product Process Lead Time A 10 B 15 C D E 5 days MIS 373: Basic Operations Management

Example: Time-Phased Product Structure 50 units of A Order 50 units of D for C’s assembly A B(2) C(1) Parts-Products A B C D E D(3) E(3) D(1) Parts / Product Process Lead Time A 10 B 15 C D E 5 days MIS 373: Basic Operations Management

Example: Time-Phased Product Structure 50 units of A Order 150 units of E for C’s assembly A B(2) C(1) Parts-Products A B C D E D(3) E(3) D(1) Parts / Product Process Lead Time A 10 B 15 C D E 5 days MIS 373: Basic Operations Management

MRP Outputs: Primary Primary Outputs Planned orders Order releases A schedule indicating the amount and timing of future orders Order releases Authorizing the execution of planned orders Changes Revisions of the dates or quantities, or the cancellation of orders MIS 373: Basic Operations Management

MRP Outputs: Secondary Secondary Outputs 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 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 MIS 373: Basic Operations Management

Enterprise Resource Planning (ERP) ERP was the next step in an evolution that began with MRP ERP typically has an MRP core Many organizations use a functional structure. Information tends to flow freely within each function but less so between functions. ERP represents an expanded effort to integrate standardized record keeping that will permit information sharing among different areas of an organization in order to manage the system more effectively A system to capture and make data available in real-time to decision makers throughout the organization. ERP systems are composed of a collection of integrated modules MIS 373: Basic Operations Management

ERP Software Modules Module Brief Description Accounting/Finance A central component of most ERP systems. It provides a range of financial reports, including general ledger, accounts payable, accounts receivable, payroll, income statements, ad balance sheets Marketing Supports lead generation, target marketing, direct mail, and sales Human Resources Maintains a complete data base of employee information such as date of hire, salary, contact information, performance evaluations, and other pertinent information Purchasing Facilitates vendor selection, price negotiation, making purchasing decisions, and bill payment Production Planning Integrates information on forecasts, orders, production capacity, on-hand inventory quantities, bills of material, work in process, schedules, and production lead times Inventory Management Identifies inventory requirements, inventory availability, replenishment rules, and inventory tracking Distribution Contains information on third-party shippers, shipping and delivery schedules, delivery tracking Sales Information on orders, invoices, order tracking, and shipping Supply Chain Management Facilitates supplier and customer management, supply chain visibility, and event management MIS 373: Basic Operations Management

Focused Reading Enterprise Resource Planning (ERP) Instruction: Enterprise resource planning (ERP)—A brief history 13 Common ERP Mistakes and How to Avoid Making Them ERP and Business Process Re-engineering ERP: The Business Process Re-engineering Dilemma To BPR, or not to BPR, that is the question Cloud ERP What Is Cloud ERP, and How Is It Different from Traditional Solutions? Benefits of Cloud ERP Software Instruction: A group should have 4 persons, each with a different article Take a few minutes to read the article you have; take notes Share the key ideas from your reading to your team members

ERP History MRP: focus on cost reporting, materials, manufacturing tapes IBM 1960~1970 MRPII: scheduling, procurement 1980s ERP SAP, Peoplesoft, 1990 Client-server architecture

ERP Common Mistakes Poor plan Not hiring correct people Need time to plan and to revise Revise process Not hiring correct people Experience third party IT consultants Referencing Restrictions, lack of capability No sufficient training Underestimation: accurate data, time, resources, training, Maintenance strategy

ERP & Business Process Re-engineering Take place before ERP system selection Output of BPR  ERP To be process vs. as is process Difference ways to do business globally Process standardization after acquisition Legacy systems Make sure the process lead to higher values

Cloud ERP Cloud ERP vs. traditional ERP Traditional: Cloud: Outsource operation, easy to setup, monthly/annually fee Minimal initial cost Automate operation cons Less control, data security, service outage

Key Points The usage of components in production of assembled items depends on how many of each component are needed per item, and how many items are to be produced. Hence the term dependent demand. MRP is a tool used for dependent-demand components, to assist in making the two basic decisions in inventory management: how much of each component to order, and when to order it. ERP is a software-based enterprise-wide system that allows access to production, sales, accounting, warehouse, and supply chain information. MIS 373: Basic Operations Management