1 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 1.Describe the inputs, outputs, and nature of MRP processing. 2.Explain bill of materials 3.Explain time-phased product structure 4.Describe differences between MRP and ERP MIS 373: Basic Operations Management2

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 much is needed? 3.When is it needed? MIS 373: Basic Operations Management3

MRP OVERVIEW MIS 373: Basic Operations Management Composition of a finished products How much and when finished product is desired How much inventory is on hand or on order 4

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 Management5

MRP INPUTS: MASTER SCHEDULE 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). MIS 373: Basic Operations Management6 Weekly Quantity Item X Quantity100150

MRP INPUTS: MASTER SCHEDULE 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). MIS 373: Basic Operations Management Item X 7 Weekly Quantity Item X Quantity100150

Weekly Quantity Item X Quantity MRP INPUTS: MASTER SCHEDULE 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). MIS 373: Basic Operations Management Item X at beginning of week 14 and at beginning of week 18 8

Weekly Quantity Item X Quantity MRP INPUTS: MASTER SCHEDULE 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). MIS 373: Basic Operations Management Item X at beginning of week 14 and at beginning of week at beginning of week at beginning of week 18

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. MIS 373: Basic Operations Management CLT = 9 weeks 10

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? MIS 373: Basic Operations Management11 Weekly Quantity Item X Quantity100150

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 Management12

ASSEMBLY DIAGRAM AND PRODUCT STRUCTURE TREE MIS 373: Basic Operations Management Level 0 = end item parent component parent component Level 1 Level 2 Amount needed for assembly at the next higher level only 13

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 MIS 373: Basic Operations Management14 Level 3 Level 2 Level 1 Level 0 X B(2) D(3) E(4) E C E(2) F(2) B: 2 x 1 = 2 D: 3 x 2 = 6 E: 1 x 2 = 2 E: 4 x 6 = 24 C: 1 x 1 = 1 E: 2 x 1 = 2 F: 2 x 1 = 2 X: 1

LOW-LEVEL CODING: 1 X MIS 373: Basic Operations Management Level 3 Level 2 Level 1 Level 0 X B(2) D(3) E(4) E C E(2) F(2) 1 X requires: B: 2 C: 1 D: 6 E: =28 F: 2 B: 2 x 1 = 2 D: 3 x 2 = 6 E: 1 x 2 = 2 E: 4 x 6 = 24 C: 1 x 1 = 1 E: 2 x 1 = 2 F: 2 x 1 = 2 X: 1 15

LOW-LEVEL CODING: 10 X WITH ON HAND INVENTORY MIS 373: Basic Operations Management Level 3 Level 2 Level 1 Level 0 X B(2) D(3) E(4) E C E(2) F(2) 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 On hand inventory B: 4 C: 10 D: 8 E: 60 F: 0 Does not consider item hierarchy! 16

LOW-LEVEL CODING: 10 X WITH ON HAND INVENTORY MIS 373: Basic Operations Management Level 3 Level 2 Level 1 Level 0 X B(2) D(3) E(4) E C E(2) F(2) B: 2 x = 16 D: 3 x 16 – 8=40 E: 1 x 16 = 16 E: 4 x 40 – 60=100 C: 1 x =0 E: 2 x 0 = 0 F: 2 x 0 = 0 10X require: B: 16 C: 0 D: 40 E: =116 F: 0 X: 10 “Low-level coding” On hand inventory B: 4 C: 10 D: 8 E: 60 F: 0 17

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 MIS 373: Basic Operations Management Final assembly lead-time Part E fabrication lead-time Material F delivery lead-time Sub assembly lead-time 18

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE An example BOM MIS 373: Basic Operations Management19 The respective lead time Parts / Product Process Lead Time A10 B15 C10 D15 E10 Question: When do we start producing/ordering each part? A B(2)C(1) D(3)E(3)D(1)

Purchase Assembly EXAMPLE: TIME-PHASED PRODUCT STRUCTURE Let’s assume that we need 50 units of A… Based on the BOM, we will need 100 units of B 300 units of D 50 units of C 50 units of D 150 units of E Putting together: 100 B, 50 C, 350D, 150 E MIS 373: Basic Operations Management20 A B(2)C(1) D(3)E(3)D(1)

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE Let’s assume that we need 50 units of A… MIS 373: Basic Operations Management21 Parts-Products A B C D E Delivery date for final product 5 days

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE 50 units of A MIS 373: Basic Operations Management22 Parts-Products A B C D E Start assembly for 50 units of A 5 days Parts / Product Process Lead Time A10 B15 C10 D15 E10 A B(2)C(1) D(3)E(3)D(1)

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE 50 units of A MIS 373: Basic Operations Management23 Parts-Products A B C D E Start assembly for 100 units of B 5 days Parts / Product Process Lead Time A10 B15 C10 D15 E10 A B(2)C(1) D(3)E(3)D(1)

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE 50 units of A MIS 373: Basic Operations Management24 Parts-Products A B C D E Start assembly for 50 units of C 5 days Parts / Product Process Lead Time A10 B15 C10 D15 E10 A B(2)C(1) D(3)E(3)D(1)

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE 50 units of A MIS 373: Basic Operations Management25 Parts-Products A B C D E Order 300 units of D for B’s process 5 days Parts / Product Process Lead Time A10 B15 C10 D15 E10 A B(2)C(1) D(3)E(3)D(1)

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE 50 units of A MIS 373: Basic Operations Management26 Parts-Products A B C D E Order 50 units of D for C’s assembly 5 days Parts / Product Process Lead Time A10 B15 C10 D15 E10 A B(2)C(1) D(3)E(3)D(1)

EXAMPLE: TIME-PHASED PRODUCT STRUCTURE 50 units of A MIS 373: Basic Operations Management27 Parts-Products A B C D E Order 150 units of E for C’s assembly 5 days Parts / Product Process Lead Time A10 B15 C10 D15 E10 A B(2)C(1) D(3)E(3)D(1)

MRP OUTPUTS: PRIMARY Primary Outputs Planned orders 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 Management28

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 Management29

ENTERPRISE RESOURCE PLANNING (ERP) 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 Management30

ERP SOFTWARE MODULES MIS 373: Basic Operations Management31 ModuleBrief Description Accounting/FinanceA 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 MarketingSupports lead generation, target marketing, direct mail, and sales Human ResourcesMaintains a complete data base of employee information such as date of hire, salary, contact information, performance evaluations, and other pertinent information PurchasingFacilitates vendor selection, price negotiation, making purchasing decisions, and bill payment Production PlanningIntegrates information on forecasts, orders, production capacity, on-hand inventory quantities, bills of material, work in process, schedules, and production lead times Inventory ManagementIdentifies inventory requirements, inventory availability, replenishment rules, and inventory tracking DistributionContains information on third-party shippers, shipping and delivery schedules, delivery tracking SalesInformation on orders, invoices, order tracking, and shipping Supply Chain Management Facilitates supplier and customer management, supply chain visibility, and event management

FOCUSED READING Enterprise Resource Planning (ERP) 1.Enterprise resource planning (ERP)—A brief historyEnterprise resource planning (ERP)—A brief history 2.13 Common ERP Mistakes and How to Avoid Making Them13 Common ERP Mistakes and How to Avoid Making Them 3.ERP and Business Process Re-engineering ERP: The Business Process Re-engineering Dilemma To BPR, or not to BPR, that is the question 4.Cloud ERP What Is Cloud ERP, and How Is It Different from Traditional Solutions?What Is Cloud ERP, and How Is It Different from Traditional Solutions? Benefits of Cloud ERP Software

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 Management33