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 Demand  Dependent Inventory Model Requirements  Master Production Schedule  Bills of Material  Accurate Inventory Records  Purchase Orders Outstanding  Lead Times for Components

14 - 3© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline – Continued  MRP Structure  MRP Management  MRP Dynamics  MRP and JIT  Lot-Sizing Techniques

14 - 4© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline – Continued  Extensions of MRP  Material Requirements Planning II (MRP II)  Closed-Loop MRP  Capacity Planning  MRP In Services  Distribution Resource Planning (DRP)

14 - 5© 2011 Pearson Education, Inc. publishing as Prentice Hall Outline – Continued  Enterprise Resource Planning (ERP)  Advantages and Disadvantages of ERP Systems  ERP in the Service Sector

14 - 6© 2011 Pearson Education, Inc. publishing as Prentice Hall Learning Objectives When you complete this chapter you should be able to: 1.Develop a product structure 2.Build a gross requirements plan 3.Build a net requirements plan 4.Determine lot sizes for lot-for-lot

14 - 7© 2011 Pearson Education, Inc. publishing as Prentice Hall Learning Objectives When you complete this chapter you should be able to: 5.Describe MRP II 6.Describe closed-loop MRP 7.Describe ERP

14 - 8© 2011 Pearson Education, Inc. publishing as Prentice Hall Wheeled Coach  Largest manufacturer of ambulances in the world  International competitor  12 major ambulance designs  18,000 different inventory items  6,000 manufactured parts  12,000 purchased parts

14 - 9© 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  In general, used whenever a schedule can be established for an item  MRP is the common technique

Trumpet and Subassemblies

Bill-of-Material for Trumpet

MRP  MRP is a dependent demand technique that uses Bill-of-Material (BOM),on-hand inventory data, expected receipts (purchase orders), and a Master Production Schedule (MPS) to determine material requirements.

© 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

MRP inputs and outputs © 2011 Pearson Education, Inc. publishing as Prentice Hall

© 2011 Pearson Education, Inc. publishing as Prentice Hall Key Success Factors For MRP 1.Master production schedule 2.Specifications or bill of material 3.Inventory availability 4.Purchase orders outstanding 5.Lead times Effective use of dependent demand inventory models requires the following

© 2011 Pearson Education, Inc. publishing as Prentice Hall MRP Structure Figure 14.5 Output Reports MRP by period report MRP by date report Planned order report Purchase advice Exception reports Order early or late or not needed Order quantity too small or too large Data Files Purchasing data BOM Lead times (Item master file) Inventory data Master production schedule Material requirement planning programs (computer and software)

© 2011 Pearson Education, Inc. publishing as Prentice Hall Master Production Schedule (MPS)  Specifies what is to be made and when  Must be in accordance with the aggregate production plan  The MPS is the result of aggregate production planning process  MPS is established in terms of specific products  The MPS is a statement of what is to be produced, not a forecast of demand

© 2011 Pearson Education, Inc. publishing as Prentice Hall Aggregate Production Plan 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  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

© 2011 Pearson Education, Inc. publishing as Prentice Hall BOM Example: Awesome Speaker Kits 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” Speaker Kits (A) A Level 0

© 2011 Pearson Education, Inc. publishing as Prentice Hall BOM Example: Component requirements to satisy the demand for an order of 50 “Awesome” Speakers 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall Determining Gross Requirements  This step is often called “lead time offset” or “time phasing”  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 S BC Lead time = 6 for S Master schedule for S MRP Gross Requirements Schedule can combine multiple products, spare parts and components sold directly Figure Master schedule for B sold directly Periods Therefore, these are the gross requirements for B Gross requirements: B =50= Periods A B C Lead time = 4 for A Master schedule for A

© 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall MRP Planning Sheet Figure 14.7

© 2011 Pearson Education, Inc. publishing as Prentice Hall Safety Stock  BOMs, inventory records, purchase and production quantities may not be perfect  Consideration of safety stock may be prudent  Should be minimized and ultimately eliminated because of its domino effect  Typically built into projected on-hand inventory

© 2011 Pearson Education, Inc. publishing as Prentice Hall MRP Management  MRP is a dynamic system  Facilitates replanning when changes occur  Regenerating  Net change

© 2011 Pearson Education, Inc. publishing as Prentice Hall Finite Capacity Scheduling  MRP systems do not consider capacity during normal planning cycles  Finite capacity scheduling (FCS) recognizes actual capacity limits  By merging MRP and FCS, a finite schedule is created with feasible capacities which facilitates rapid material movement

© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-Sizing Techniques  Lot-for-lot techniques order just what is required for production based on net requirements  May not always be feasible  If setup costs are high, lot-for-lot can be expensive  Economic order quantity (EOQ)  EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand

© 2011 Pearson Education, Inc. publishing as Prentice Hall Lot-Sizing Techniques  Part Period Balancing (PPB) looks at future orders to determine most economic lot size  The Wagner-Whitin algorithm is a complex dynamic programming technique  Assumes a finite time horizon  Effective, but computationally burdensome

© 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-Sizing Summary For these three examples Lot-for-lot$700 EOQ$730 PPB$490 Wagner-Whitin would have yielded a plan with a total cost of $455

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

MRP (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

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

© 2011 Pearson Education, Inc. publishing as Prentice Hall Enterprise Resource Planning (ERP)  An extension of the MRP system to tie in customers and suppliers  Allows automation and integration of many business processes  Shares common data bases and business practices  Produces information in real time  Coordinates business from supplier evaluation to customer invoicing  ERP can be highly customized to meet specific business requirements

How does ERP Improve Performance? Example: Order fulfillment with ERP  When a customer representative takes an order from a customer, she has access to all information she needs:  customer’s credit rating and order history  the company’s inventory levels  the trucking schedule at the shipping dock

How does ERP Improve Performance?  The other functions can also access the same order information  When one department finishes with the order, the order is routed automatically to the next department  This is what happens ideally… The reality may be different, though © 2011 Pearson Education, Inc. publishing as Prentice Hall

Consistency Requirements  ERP requires the company to have consistent definitions across functional areas  Example 1: How is a “sale” defined?  when manufacturing completes an order?  when items leave the finished goods inventory?  when the order is invoiced?  when the items arrive at the customer site?  Example 2: Common part numbers among different plants

The Cost of ERP  According to surveys conducted in a range of industries :  average cost of ownership: $15 million  minimum cost: $400,000  maximum cost: $300 million  it takes 8 months on average to observe any benefits

The Hidden Costs of ERP  Employees need to learn a new software, and also a new processes  Problems to integrate ERP with other company software  Implementation teams within the company is required  some of the best personnel dedicated full time to implementation  some may leave their jobs to become ERP consultants

© 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)

SAP  SAP, started in 1972 by five former IBM employees in Mannheim, GermanyIBM  It is the world's largest inter-enterprise software company and the world's fourth-largest independent software supplier, overall.software  The original name for SAP was German: Systeme, Anwendungen, Produkte, German for "Systems Applications and Products © 2011 Pearson Education, Inc. publishing as Prentice Hall

© 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