1. Material Requirements Planning (MRP)
and ERP 14
PowerPoint presentation to accompany
Heizer and Render
Operations Management, Global Edition, Eleventh Edition
Principles of Operations Management, Global Edition, Ninth Edition
PowerPoint slides by Jeff Heyl
© 2014 Pearson Education

2. Outline Dependent vs. Independent Demand What is MRP?
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 (components)
Lot Sizing Techniques
Extensions of MRP (MRP II, Closed-Loop MRP, ERP)
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3. 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
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4. Hierarchy of Production Decisions
Long-range Capacity Planning

5. Dependent vs Independent Demand

6. Dependent Demand
For any product, all components of that product are dependent demand items.
Given a quantity for the product, the demand for all parts and components can be calculated.
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7. What is MRP
Material requirements planning (MRP) is a dependent demand production planning and inventory control system.
MRP integrates data from production schedules (MPS) with inventory records, scheduled receipts and the bill of materials (BOM) to determine purchasing and production schedules for the components required to build a product.
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8. Trumpet and Subassemblies

9. Bill-of-Material for Trumpet

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

11. MRP The MRP is designed to answer three questions: What is needed?
How much is needed?
When is it needed?
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12. Benefits of MRP Better response to customer orders
Faster response to market changes
Improved utilization of facilities and labor
Reduced inventory levels
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13. 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.

14. Overview of MRP

15. Master Production Schedule (MPS)
Time-phased plan specifying how many and when the company plans to produce each end item
Aggregate Plan
(Product Groups)
MPS
(Specific End Items) 8 8

16. 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)
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17. MPS Example – 1
One possible MPS…

18. MPS Example – 2 Months January February
Aggregate Production Plan 1,500 1,200 (Shows the total quantity of amplifiers)
Weeks
Master Production Schedule (Shows the specific type and quantity of amplifier to be produced
240-watt amplifier
150-watt amplifier
75-watt amplifier
Figure 14.2
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19. 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
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20. Assembly Diagram and Product Structure Tree

21. Packing box and installation kit of wire, bolts, and screws
BOM Example (Determine requirements for all components to satisfy demand for 50 Awesome Speaker Kits)
Product structure for “Awesome” (A) A
Level
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
G(1)
Amp-booster 3
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22. Packing box and installation kit of wire, bolts, and screws
BOM Example
Product structure for “Awesome” (A) A
Level
B(2) Std. 12” Speaker kit
C(3)
Std. 12” Speaker kit w/ amp-booster 1
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
E(2)
F(2)
Packing box and installation kit of wire, bolts, and screws
Std. 12” Speaker booster assembly 2
D(2)
12” Speaker
G(1)
Amp-booster 3
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23. Accurate Records for Outstanding Purchase Orders (Scheduled Receipts)
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
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24. 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
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25. Time-Phased Product Structure
Must have D and E completed here so production can begin on B
Start production of D
| | | | | | | |
Time in weeks
2 weeks
1 week D E
1 week
2 weeks to produce B C E
1 week A F
2 weeks
3 weeks
2 weeks D G
1 week
Figure 14.4
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26. MRP Outputs: Primary Planned orders
A schedule indicating the amount and timing of future
production and/or
purchasing orders

27. MRP Outputs: Secondary
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,

28. MRP Processing
MRP processing takes the end item requirements specified by the master production schedule (MPS) and “explodes” them into time-phased requirements for assemblies, parts, and raw materials offset by lead times

29. MRP Record Total expected demand Open orders scheduled to arrive
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 On Hand
Expected inventory on hand at the beginning of each time period

30. MRP Record Actual amount needed in each time period Net requirements
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 be received at the beginning of the period offset by lead time
Planned-order releases
Planned amount to order in each time period

31. MRP: Processing 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

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

33. Example MRP

34. Updating the MRP System
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

35. 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

36. 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

37. 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

38. Lot-for-Lot Example 1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 55
Scheduled receipts
Projected on hand
Net requirements
Planned order receipts
Planned order releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
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39. Lot-for-Lot Example 1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 55
Scheduled receipts
Projected on hand
Net requirements
Planned order receipts
Planned order releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
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40. Lot-for-Lot Example 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 1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 55
Scheduled receipts
Projected on hand
Net requirements
Planned order receipts
Planned order releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
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41. EOQ Lot Size Example 1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 55
Scheduled receipts
Projected on hand 43 66 26 69 39
Net requirements 16
Planned order receipts 73
Planned order releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Average weekly gross requirements = 27; EOQ = 73 units
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42. Calculating EQO Annual demand (D): (270/10)*52=1404
Setup Cost (S)= $100
Holding Cost (H) = $1*52= $52
EOQ= 73 units
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43. EOQ Lot Size Example 1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 55
Scheduled receipts
Projected on hand 43 66 26 69 39
Net requirements 16
Planned order receipts 73
Planned order releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Average weekly gross requirements = 27; EOQ = 73 units
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44. EOQ Lot Size Example
Total cost = setup cost + holding cost
Total Cost = D/Q x S + Q/2 x H
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
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45. Periodic Order Quantity
The EOQ attempts to minimize the total cost of ordering and carrying inventory and is based on the assumption that demand is uniform.
Often demand is not uniform, particularly in material requirements planning, and using the EOQ does not produce a minimum cost.
The period-order quantity lot-size rule is based on the same theory as the economic-order quantity.
It uses the EOQ formula to calculate an economic time between orders. This is calculated by dividing the EOQ by the demand rate.
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46. Periodic Order Quantity
Periodic order quantity (POQ) method sets:
the size of each production lot equal to the requirements for a fixed number of periods
Interval (period) = EOQ / average demand per period
Order quantity is set to cover the interval

47. EOQ = 73 units; Average weekly gross requirements = 27;
POQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross requirements 35 30 40 55
Scheduled receipts
Projected on hand 70
Net requirements
Planned order receipts 80 85
Planned order releases
EOQ = 73 units; Average weekly gross requirements = 27;
POQ interval = 73/27 ≅ 3 weeks

48. POQ Lot Size Example Setups = 3 x $100 = $300
Holding cost = ( ) units x $1 = $195
Total cost = $300 + $195 = $495
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49. Wagner-Whitin would have yielded a plan with a total cost of $455
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
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50. Packing box and installation kit of wire, bolts, and screws
BOM Example (Determine requirements for all components to satisfy demand for 50 Awesome Speaker Kits)
Product structure for “Awesome” (A) A
Level
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
G(1)
Amp-booster 3
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51. Awesome Speaker Kits
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52. Awesome Speaker Kits
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53. Gross Requirements Plan (Note that components with multiple parents are only processed once, see component E)
Week
Lead Time
Required date Order release date week
Required date Order release date weeks
Required date Order release date week
Required date Order release date weeks
Required date Order release date weeks
Required date Order release date week
Required date Order release date weeks
Table 14.3
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54. 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”
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55. 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)
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56. 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
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57. Net Requirements Plan The logic of net requirements Total requirements
Gross requirements
Allocations +
Available inventory
Net requirements
On hand
Scheduled receipts + – =
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58. Allocations
Allocated items refer to the number of units in inventory that have been 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

59. Awesome Speaker Kits
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60. Awesome Speaker Kits
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61. Net Requirements Plan (Awesome Speaker Kits)
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62. Net Requirements Plan
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63. 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 =
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64. 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
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65. 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
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66. MRP Evolution MRP Closed Loop MRP MRP II ERP Schedule Materials
Incorporate Feedback
MRP II
Schedule & Purchase Materials
Coordinate w/ Mfg Resources
ERP

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

68. Manufacturing Resource Planning (MRP II)
Goal: Plan and monitor all resources of a manufacturing firm (closed loop):
manufacturing
marketing
finance
engineering
Simulate the manufacturing system 23 23

69. Enterprise Resource Planning (ERP)
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

70. Typical ERP System

71. Enterprise Resource Planning (ERP)
ERP modules include
Basic MRP
Finance
Human resources
Supply chain management (SCM)
Customer relationship management (CRM)
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72. Risks Associated with ERP Implementation
High Cost and Cost Overruns
Common areas with high costs:
Training
Testing and Integration
Database Conversion
Disruptions to Operations
ERP is reengineering--expect major changes in how business is done

73. ERP Products SAP: largest ERP vendor J.D. Edwards
modules can be integrated or used alone
J.D. Edwards
flexibility: users can change features; less of a pre-set structure than SAP’s

74. ERP Products Oracle PeopleSoft Baan tailored to e-business focus
open, modular architecture allows rapid integration with existing systems
Baan
use of “best-of-class” applications

75. Leading ERP Vendors Worldwide
SAP
Oracle
PeopleSoft
Sage
J.D.Edwards
Lawson
Microsoft Dynamics AX
Great Plains/Solomon
Invensys (BaaN)
IFS
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76. Leading ERP Vendors in Turkey
SAP
Oracle
GlobalSoft
IAS-CANIAS
NETSİS
LOGO BUSINESS SOLUTIONS
Microsoft Navision
IFS
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77. Advantages of ERP Systems
Provides integration of the supply chain, production, and administration
Creates commonality of databases
Improves information quality
May provide a strategic advantage
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78. ERP Drawbacks Very expensive to purchase and even more so to customize
Implementation may require major changes- Resistance to change
So complex that many companies cannot adjust to it
Involves an ongoing, possibly never completed, process for implementation
Training is an on-going activity
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79. 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
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80. 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
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81. #3 in the 10th edition;(#3) in the 11th edition
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82. #5 in the 10th edition;(#5) in the 11th edition
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83. #10 in the 10th edition;(#10) in the 11th edition
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84. #10 in the 10th edition;(#10) in the 11th edition
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85. #10 in the 10th edition;(#10) in the 11th edition
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86. 17-18-19 in 10th and in 11th editions
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