RESOURCE PLANNING SYSTEMS Chapter 6 RESOURCE PLANNING SYSTEMS Prepared by Mark A. Jacobs, PhD ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Learning Objectives You should be able to: Describe the hierarchical operations planning process in terms of materials planning (APP, MPS, MRP) and capacity planning (RRP, RCCP, CRP). Describe MRP, closed-loop MRP, MRP-II, DRP, ERP, and their relationships. Understand the terms used in MRP computations. Know how to compute available-to-promise quantities, MRP explosions, and DRP implosions. Understand the limitations of legacy MRP systems. ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

LEARNING OBJECTIVES (Continued) Describe an ERP system, and understand its advantages and disadvantages. Understand why manufacturers and service firms are migrating from legacy MRP systems to integrated ERP systems. Describe the various modules of an integrated ERP system, and have a general knowledge of the ERP market. Understand best-of-breed versus single integrator ERP implementations. Understand why many ERP implementations fail. Understand how an integrated ERP system works. 3 ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Chapter Outline Introduction Operations Planning The Aggregate Production Plan Master Production Scheduling The Bill of Materials Material Requirements Planning Capacity Planning Distribution Requirements Planning ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

CHAPTER OUTLINE (Continued) The Legacy Material Requirements Planning Systems The development of the Enterprise Resource Planning Systems (ERP) Implementing ERP Systems ERP Software Applications ERP Software Providers 5 ©2012 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

Introduction Scheduling & inventory management influence how assets are deployed. Problem: A missed due date or stock-out may cascade downstream, magnifying the bullwhip effect Operations managers are continuously involved in balancing capacity & output.

Operations Planning Operations planning is usually hierarchical & can be divided into three broad categories: Long-range – Aggregate Production Plan (APP) involves the construction of facilities & major equipment purchase Intermediate – Shows the quantity & timing of end items (i.e., master production schedule – MPS) Short-range - detailed planning process for components & parts to support the master production schedule (i.e., materials requirement planning – MRP)

Operations Planning (Continued) Computer based “push” resource systems: Closed-loop MRP - incorporates the aggregate production plan, the master production schedule material requirements plan, & capacity requirements plan. Manufacturing resource planning (MRP II) -incorporates the business & sales plans with the closed-loop MRP system. Enterprise resource planning (ERP) - is an extension of MRP-II Distribution requirement planning (DRP) - describes the time-phased net requirements from warehouses & distribution centers customer demand minus any on hand in-transit inventories.

Aggregate Production Plan Hierarchical planning - process that translates annual business & marketing plans & demand forecasts into a production plan for a product family (products that share similar characteristics) in a plant or facility leading to the Aggregate Production Plan (APP) Planning horizon of APP is at least one year & is usually rolled forward by three months every quarter Includes costs relevant to the aggregate planning decision include inventory, setup, machine operation, hiring, firing, training, & overtime costs

Aggregate Production Plan (Continued) Figure 6.1

Aggregate Production Plan (Continued) Three basic production strategies : Chase Strategy - Adjusts capacity to match demand. Firm hires & lays off workers to match demand. Finished goods inventory remains constant. Works well for make-to-order firms Level Strategy - Relies on a constant output rate while varying inventory & backlog according to fluctuating demand. Firm relies on fluctuating finished goods & backlogs to meet demand. Works well for make-to-stock firms Mixed Production Strategy - Maintains stable core workforce while using other short-term means, such as overtime, subcontracting & part time helpers to manage short-term demand

Graph of Level vs. Chase Strategy In a level production strategy demand will fluctuate while production will remain relatively constant at the average demand level. In a chase demand strategy, as demand increases and decreases, workers will be hired and fired as necessary to match production with demand.

Master Production Scheduling Master Production Schedule (MPS) - A detailed disaggregation of the aggregate production plan, listing the exact end items to be produced by a specific period. More detailed than APP & easier to plan under stable demand. Planning horizon is shorter than APP, but longer than the lead time to produce the item. Note: For the service industry, the master production schedule may just be the appointment log or book, where capacity (e.g., skilled labor or professional service) is balanced with demand.

Master Production Scheduling (Continued) The MPS - the production quantity to meet demand from all sources & is used for computing the requirements of all time-phased end items System nervousness - small changes in the upper-level-production plan cause major changes in the lower-level production plan Firms use a time fence to deal with nervousness by separating the planning horizon into – Firmed Segment (AKA demand time fence), from current period to several weeks into future. Can only be altered by senior management Tentative segment (AKA planning time fence), from end of firmed segment to several weeks into the future

Master Production Scheduling (Continued) Available-to-Promise (ATP) Quantity - The difference between confirmed customer orders & the quantity the firm planned to produce Three basic methods of calculating the available-to-promise quantities – Discrete available-to-promise Cumulative available-to-promise without look ahead, & Cumulative available-to-promise with look ahead

Master Production Scheduling (Continued) Discrete Available-to-Promise Add the Beginning Inventory to the MPS for Period 1, subtracting the Committed Customer Orders from Period 1 up to but not including the period of the next scheduled MPS For all subsequent periods, there are two possibilities – If no MPS has been scheduled for the period, the ATP is zero If an MPS has been scheduled for the period, the ATP is the MPS minus the sum of all the CCOs from that period up to the period of the next scheduled MPS If an ATP for any period is negative, the deficit must be subtracted from the most recent positive ATP, and the ATP quantities must then be revised to reflect these changes

The Bill of Materials Bill of Materials (BOM) - document that shows an inclusive listing of all component parts & assemblies making up the final product Dependent Demand - the internal demand for parts based on the demand of the final product in which the parts are used (e.g., subassemblies) Independent Demand - demand for final products affected by trends, seasonal patterns, & general market conditions Multilevel Bill of Materials - shows the parent-component relationships & the specific units of components known as the planning factor. Often presented as an indented bill of materials Super Bill of Materials (AKA planning BOM, pseudo BOM, phantom BOM, or family BOM) enables the firm to forecast the total demand end products

The Bill of Materials (Continued) (Fig. 6.4)

Material Requirements Planning MRP - A computer-based materials management system that calculates the exact quantities, need dates, & planned order releases for subassemblies & materials required to manufacture a final product. MRP requires – The independent demand information Parent-component relationships from the BOM Inventory status of final product & components. Planned order releases (the output of the MRP system) Advantage of MRP - provides planning information Disadvantage of MRP - loss of visibility, especially acute for products with a deep BOM, & ignores capacity & shop floor conditions.

Material Requirements Planning (Continued) Terms used in MRP: Parent - Item generating demand for lower-level components. Components - parts demanded by a parent. Gross requirement - A time-phased requirement prior to netting out on-hand inventory & lead-time Net requirement - The unsatisfied item requirement for a specific time period. Gross requirement for period minus current on-hand inventory. Scheduled receipt - A committed order awaiting delivery for a specific period. Projected on-hand inventory - Projected closing inventory at end of period. Beginning inventory minus gross requirement, plus scheduled receipt & planned receipt & planned receipt from planned order releases. Planned order release - Specific order to be released to the shop or to the supplier.

Material Requirements Planning (Continued) Time bucket - Time period used on the MRP. Days or weeks Explosion - Process of converting a parent item’s planned order releases into component gross requirements Planning factor - Number of components needed to produce a unit of the parent item Firmed planned order - Planned order that the MRP computer logic system does not automatically change when conditions change to prevent system nervousness Pegging - Relates gross requirements for a part to the planned order releases Low-level coding - assigns the lowest level on BOM to all common components to avoid duplicate MRP computations Lot size - order size for MRP logic Safety Stock - Protects against uncertainties in demand supply, quality, & lead time

Material Requirements Planning (Continued) Example 6.2 The production schedule for the ATV corporation is obtained from the MPS (table 6.4) and inventory status shows that 30 units of Model A are available at the beginning of the period. The parent-component relationships and planning factors are available in the BOM (figure 6.4). Assuming the following lot sizes (Q), lead times (LT), and safety stocks (SS), compute the MRP record

Example 6.2

MRP Record Gross requirements Scheduled receipts Projected Available Week Number 1 2 3 4 5 6 Gross Requirements Scheduled Receipts Projected on hand Net requirements Planned-order-receipt Planned-order release 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

MRP Record Net requirements Planned-order receipts Week Number 1 2 3 4 5 6 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 received at the beginning of the period offset by lead time Planned-order releases Planned amount to order in each time period

Capacity Planning Excess (or insufficient) capacity - prevents firm from taking advantage of the efficiency of manufacturing planning & control system Resource Requirement Planning (RRP) - a long-range capacity planning module, checks whether aggregate resources are capable of satisfying the aggregate production. Resources considered include gross labor hours & machine hours Medium-range capacity plan, or rough-cut capacity plan (RCCP) - used to check feasibility of MPS. Converts MPS from production needed to capacity required, then compares it to capacity available Capacity requirement planning (CRP) - a short-range capacity planning technique that is used to check the feasibility of the material requirements plan

Distribution Requirements Planning (DRP) Distribution requirements planning (DRP) - a time-phased finished good inventory replenishment plan in a distribution network DRP is a logical extension of the MRP system & ties physical distribution to manufacturing planning and control system

Development of ERP Systems Enterprise Resource Planning Systems (ERP) - information system connecting all functional areas & operations of an organization &, in some cases, suppliers and customers via common software infrastructure and database ERP provides means for supply chain members to share information so that scarce resources can be fully utilized to meet demand, while minimizing supply chain inventories

Development of ERP Systems (Continued) (Fig. 6.6)

Implementing ERP Systems Two types of ERP implementation Best-of-breed - pick the best application for each individual function. Disadvantage- software may not integrate well but this may not be a major issue in future Single integrator solution - pick all the desired applications from a single vendor Implementation Problems: Lack of top management commitment Lack of adequate resources Lack of proper training Lack of communication Incompatible system environment

Advantages & Disadvantages Of ERP Systems Added visibility reduce supply chain inventories Helps to standardize manufacturing processes Measure performance & communicate via a standardized method Disadvantages Substantial time & capital investment Complexity Firms adapt processes to meet ERP system

ERP Software Applications Major ERP applications include – Accounting and finance Customer relationship management Human resource management Manufacturing Supplier relationship management Supply chain management:

ERP Software Providers The 3 major ERP providers are now – Oracle SAP Microsoft Other small software firms provide applications (e.g., Sage’s MAS 90) as well as full ERP solutions but lack applistructure - the merger of enterprise application and infrastructure technology