Operations

Management
Material Requirements Planning
(MRP) & ERP
Chapter 14

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 Outline
 GLOBAL COMPANY PROFILE: COLLINS
INDUSTRIES
 DEPENDENT INVENTORY MODEL
REQUIREMENTS
 Master Production Schedule
 Bills of Materials
 Accurate Inventory records
 Purchase Orders Outstanding
 Lead Times for Each Component

 MRP STRUCTURE
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 Outline - Continued
 MRP MANAGEMENT
 MRP Dynamics
 MRP and JIT
 LOT-SIZING TECHNIQUES
 EXTENSIONS IN MRP
 Closed-Loop MRP
 Capacity Planning
 Material Requirements Planning II (MRP II)
 MRP IN SERVICES

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 Outline - Continued
 DISTRIBUTION RESOURCE PLANNING (DRP)
 ENTERPRISE RESOURCE PLANNING (ERP)
 Advantages and Disadvantages of ERP System
 ERP in the Service Sector

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 Learning Objectives

When you complete this chapter, you should be able

to :
Identify or Define:
 Planning bills and kits
 Phantom bills
 Low-level coding
 Lot sizing

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 Learning Objectives - Continued

When you complete this chapter, you should be able

to :
Describe or Explain:
 Material requirements planning
 Distribution requirements planning
 Enterprise resource planning
 How ERP works
 Advantages and disadvantages of ERP systems

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 Collins Industries
 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
 MRP: IBM’s MAPICS

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 Collins Industries
 Collins requires:
 Material plan must meet both the requirements of the master
schedule and the capabilities of the production facility
 Plan must be executed as designed
 Effective “time-phased” deliveries, consignments, and
constant review of purchase methods
 Maintenance of record integrity

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Requirements for Effective Use of Dependent
Demand Inventory Models
 Effective use of dependent demand inventory models
requires that the operations manager know the:

 master production schedule (what is to be made and when)

 specifications or bills-of-material (amount of materials and parts
required to make the product)
 inventory availability
 purchase orders outstanding (what is on order)
 lead times (time it takes to get various components)

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 Inputs to the
Aggregate Production Plan
Marketing
Production Customer Finance
Capacity Demand Cash Flow
Inventory

Aggregate Human
Procurement
Production Plan Resources
Supplier
Manpower
Performance
Planning

Management Engineering
Return on Design
Investment Completion
Capital
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 The Planning Process
Aggregate production plan
Change
production plan?
Master production
schedule
Change master
Change requirements? production schedule?
Material requirements plan

Change capacity?
Detail capacity plan
Is capacity Is
Realistic plan being execution
No meeting
Yes met?
the plan?
Execute capacity plans

Execute material plans

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 Aggregate Production Plan
Months January February
Aggregate Production Plan
(shows the total quantity of
1,500 1,200
amplifiers
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type
and quantity of amplifier to
be produced
240 watt amplifier 100 100 100 100

150 watt amplifier 500 500 450 450

75 watt amplifier 300 100

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 Typical Focus of the Master
Production Schedule
Assemble to Stock to Forecast
Make to Order Order or Forecast
(Process Focus) (Repetitive) (Product Focus)
Number of end Schedule finished
items product

Typical focus of the

Schedule
master production
Schedule modules
schedule
orders
Number of
inputs
Print shop Motorcycles, autos, Steel, Beer,
Examples:
Machine shop TVs, fast-food Bread Light
Fine dining restaurant restaurant bulbs, Paper

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 Bill-of-Material

 List of components & quantities needed to make

product
 Provides product structure (tree)
 Parents: Items above given level
 Children: Items below given level

 Shows low-level coding

 A part gets the lowest level code in item structure.
 Top level is 0; next level is 1 etc.

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 Product Structure for “Awesome” A

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 Ex: Calculate the Part Requirements
For an order size of 50 A items:
 #Part B=2(#A)=(2)(50)=100
 #Part C=3(#A)=(3)(50)=150
 #Part E=2(#B)+2(#C)=(2)(100)+2(150)=500
 #Part F=2(#C)=(2)(150)=300
 #Part D=2(#B)+2(#F)=(2)(100)+2(300)=800
 #Part G=1(#F)=300

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 Issues in MRP:
Accurate Inventory Records

 Good inventory management is an absolute

necessity for an MRP system to work, i.e., one
needs to know what is in stock.

 If the firm has not yet received at least 99%

record accuracy, then MRP will not work.

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 Issues in MRP:
Purchase Orders Outstanding

 When purchase orders are executed, records of

those orders and their scheduled delivery dates
must be available to production personnel.

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 Issues in MRP:
Lead Times

 The time required to acquire an item is the lead

time
 Lead time of a manufactured item consists of
move, setup, assembly or run times.
 Lead time of a purchased item includes the time
between order release and its retreival.

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 Time-Phased Product Structure
for Awesome Speakers
Must have D and E completed
here so production can begin
Start production of on B
D 1 week
D 2 weeks to
produce
2 weeks B
E
A
2 weeks
E 1 week
2 weeks 1 week
G 3 weeks C
1 week F
D
1 2 3 4 5 6 7 8
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 Material Requirements Planning
(MRP)
 Manufacturing computer information system
 Determines quantity & timing of dependent demand
items 1 2 3 4 5
Gross Requirements 2 20 25 15
Scheduled Receipts 5 30
Available 25 23 33 33 8
Net Requirements 7
Planned Order Receipts 7
Planned Order Releases 7

© 1995
Corel
Corp.

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 MRP Requirements

 Computer system
 Mainly discrete products
 Accurate bill-of-material
 Accurate inventory status
 99% inventory accuracy
 Stable lead times
© 1984-1994 T/Maker Co.

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 MRP Benefits

 Increased customer satisfaction due to meeting

delivery schedules
 Faster response to market changes
 Improved labor & equipment utilization
 Better inventory planning & scheduling
 Reduced inventory levels without reduced customer
service

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 Structure of the MRP System
Master Production
BOM
Schedule
MRP by Period Report

MRP by date report

Lead Times Planned order report

(Item Master File)

Purchase advice

Exception report

Inventory Data Exception report

MRP planning
programs
(computer and
software)
Purchasing data

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 Time-Phased Product Structure
for Awesome Speakers
Must have D and E completed
here so production can begin
Start production of on B
D 1 week
D 2 weeks to
produce
2 weeks B
E
A
2 weeks
E 1 week
2 weeks 1 week
G 3 weeks C
1 week F
D
1 2 3 4 5 6 7 8
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 Gross Material Requirements Plan
for 50 “Awesome A” Speaker Kits

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 Net Material Requirements Plan

Item Onhand
A 10
B 15
C 20
D 10
E 10
F 5
G 0
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 Net Requirements Plan

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 Net Requirements Plan

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 Derivation of Master Schedule
A S

B C B C Master schedule for

Lead time = 4 for A Lead time = 6 for S S sold directly
Master schedule for A Master schedule for S
Periods 5 6 7 8 9 10 11 8 9 10 11 12 13 1 2 3
40 50 15 40 20 30 10 10

Periods 1 2 3 4 5 6 7 8
Therefore, these are the
Gross requirements: B 10 40+10
= 50 40 50 20 15+30
= 45
gross requirements for
B

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 MRP Dynamics
 Supports “replanning”
 Problem with system “nervousness”
 “Time fence” - allows a segment of the master
schedule to be designated as “not to be
rescheduled”
 “Pegging” - tracing upward in the bill-of-materials
from the component to the parent item
 That a manager can react to changes, doesn’t
mean he/she should
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 MRP and JIT
 MRP - a planning technique but not a detailed scheduling
technique, so there may be capacity problems!
 Does not machine schedule
 Plan with fixed lead times
 JIT - a way to move material expeditiously
 Integrating the two:
 Finite capacity scheduling with time buckets (say weekly)
 Small bucket approach and back flushing
 Balanced flow approach: pulling material in small lot sizes
 Supermarket: An inventory area that holds common items
replenished by Kanban systems

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 Lot-Sizing Techniques

 Lot-for-lot
 Economic Order Quantity
 Part Period Balancing
 Wagner-Whitin Algorithm

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MRP Lot-Sizing Problem: Lot-for-Lot
Techniques

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MRP Lot-Sizing Problem: EOQ Technique

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 Extensions of MRP

 Closed loop MRP

 Capacity planning - load reports
 MRP II - Material Resource Planning
 Enterprise Resource Planning

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 Closed Loop MRP

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 Extensions of MRP
Capacity Planning
 Tactics for smoothing the load and minimizing the
impact of changed lead time include:
 Overlapping - reduces the lead time, entails sending pieces
to the second operation before the entire lot has completed
the first operation
 Operations splitting - sends the lot to two different machines
for the same operation
 Lot splitting - breaking up the order and running part of it
ahead of the schedule

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 Initial Resource
Requirements/Smoothed Resource
Requirements

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 Extensions to MRP
Material Requirements Planning II
 MRP plan is measured in quantities or units.
 MRPII allows the inventory data to be
augmented by other resources like labor hours,
m/c hours, accounts payable.
 MRP II should be integrated to other systems
like MRP, purchasing, production scheduling,
capacity planning, warehouse management, etc.

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 Extensions to MRP
Enterprise Resource Planning
 MRP II is enhanced by the additional ties to customers
and suppliers to achieve ERP systems.
 ERP is a software system to
 Automate and integrate many of their business processes
 Share common data base and business practices
 Produce information in real time
 Objective is to coordinate a firm’s whole business
 Basic modules: MRP, Finance, HR, SCM, CRM

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 MRP and ERP Information Flows,
Integrated with Other Systems

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 Advantages of ERP Systems

1. Provides integration of the supply chain, production,

and administration
2. Creates commonality of databases
3. Can incorporate improved best processes
4. Increases communication and collaboration between
business units and sites
5. Has an off-the-shelf software database
6. May provide a strategic advantage
 Disadvantages of ERP Systems
1. Is very expensive to purchase and even more so to
customize
2. Implementation may require major changes in the
company and its processes
3. Is so complex that many companies cannot adjust to it
4. Involves an ongoing, possibly never completed,
process for implementation
5. Expertise is limited with ongoing staffing problems
 MRP in Services

 Can be used when demand for service or service

items is directly related to or derived from demand
for other services
 restaurant - rolls required for each meal
 hospitals - implements for surgery
 etc.

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Product Structure, Bill of Materials, Bill
of Labor for Veal Picante

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