Chapter 14 – Materials

Planning

Operations Management
by
R. Dan Reid & Nada R. Sanders
4th Edition © Wiley 2010

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 Learning Objectives
 Describe enterprise resource management
 Describe the evolution of ERP Systems
 Describe the benefits and costs of ERP
systems
 Provide an overview of MRP
 Explain the different types of demand
 Describe the objectives of MRP
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 Learning Objectives con’t
 Describe the inputs needed for MRP
 Explain MRP operating logic
 Describe action notices
 Use different lot size rules with MRP
 Describe the role of capacity requirements
planning (CRP)
 Calculate the work loads at critical work
centers using CRP
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 Enterprise Resource Planning
 ERP is software designed for organizing
and managing business processes
 Modules share information across all business
functions
 Can share customer sales data with the supply
chain to help with global replenishment
 All modules are fully integrated and use a
common database – some PC based

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Integration of ERP

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 ERP Modules-4 Categories
 Finance and accounting
 Investment, cost, asset, capital, and debt management
 Budgets, profitability analysis, and performance reports
 Sales and marketing
 Handles pricing, availability, orders, shipments, & billing
 Production and materials management
 Process planning, BOM, product costing, ECN’s, MRP,
allocates resources, schedules, PO’s, & inventory
 Human resources
 Workforce planning, payroll & benefits, & org. charts
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 Evolution of ERP
 First generation ERP
 Managed all routine internal business activities
 From order entry to after-sales customer service
 Lacked supply chain support modules (added in
second generation)

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 Evolution of ERP
 Second Generation ERP
 Late 1990’s software integrated supply chains
 Systems focused on decision-making
 SCM modules include linear programming (LP)
and simulation support
 SCI capability allows collection of intelligence
along the entire supply chain
 ASP suppliers set-up and run systems for others

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 Integrating ERP and E-Commerce
 Many companies with ERP use e-commerce
 E-commerce needs to interface with ERP
 Cybex International is a good example:
 Needed to integrate B2C and B2B transactions
 Cybex installed a Peoplesoft, Inc. ERP system
 Reduced BOM’s from 15,200 to 200, suppliers
from 1000 to 550, paperwork by 2/3
 Reduced supplier material shortages and
customer order-to-ship time from 4 to 2 weeks
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 Benefits of ERP
 ERP presents a holistic view of the business functions from
a single information and IT architecture
 Increases organizational information flow
 Increases ability to incorporate better management
control, speedier decision making, and cost reductions
 Allows replacement of disparate systems
e.g. ExxonMobile used ERP to replace 300 different
systems
 A study of ERP implementations reports that benefits
typically start 8 months after implementation with median
annual savings of $1.6 million

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 The Cost of ERP Systems
 Major suppliers are SAP AG, Peoplesoft,
Oracle, and Baan. Also smaller PC based
suppliers.
 Costs for larger ERP systems range from
hundreds of thousands to several million
dollars.
 Outside consultants are usually involved in
selection, configuration, & implementation.
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 The Cost of ERP Systems
 Consultant costs can run up to 3 times the
cost of the system itself.
 Added costs also include additional people,
new computer hardware, and the cost to
develop a new, integrated database
 Successful implementation requires
leadership and top management
commitment to a vision for the business
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 Material Planning Systems

 MRP translated a master schedule of final

products into time-phased net requirements for
subassemblies, assemblies, and parts
 First MRP systems evolved from closed-loop MRP
 Closed-loop MRP included production planning,
master scheduling, and capacity requirements
 In mid 1970’s, MRPII systems added functionality
to plan and execute all internal functions

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 An Overview of MRP
MRP uses the concept of backward scheduling to
determine how much and when to order and
replenish
 The CPR module checks to make sure the
scheduled work load profile is feasible
 The MPS module contains the authorized schedule

 The BOM module contains the product structure

for each unique product
 MRP output includes schedules for all internal
activities and parts as well as orders for all supply
chain items.
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Input/Output - MRP Process

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 Types of Demand
There are two types of demand.
 Independent Demand
 Is the demand for finished products
 Does not depend on the demand of other products
 Needs to be forecasted
 Dependent Demand
 Is the demand derived from finished products
 Is the demand for component parts based on the
number of end items being produced and is managed
by the MRP system

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 Objectives of MRP
 Determines the quantity and timing of
material requirements
 Determines what to order (checks BOM), how
much to order (lot size rules), when to place
the order (need date minus lead time), and
when to schedule delivery (on date needed)
 Maintain priorities
 In a changing environment, MRP reorganizes
priorities to keep plans current and viable
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Building a CD Cabinet With MRP

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 MRP Inputs - Authorized MPS
 From the authorized MPS, we calculate when we
need to have replenishment orders of CD cabinets;
when we need a new MPS order.
Table 14-1 Initial MPS Record for CD Cabinet
Item: CD Cabinet
Lot size rule: FOQ=100
Lead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements: 25 25 25 25 30 30 30 30 35 35 35 35
Projected Available: 80 55 30 5 -20
MPS

Table 14-2 Updated MPS Record for CD Cabinet

Item: CD Cabinet
Lot size rule: FOQ=100
Lead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements: 25 25 25 25 30 30 30 30 35 35 35 35
Projected Available: 80 55 30 5 80 50 20 90 60 25 90 55 20
MPS 100 100 100
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 MRP Inputs-Inventory Records
 System checks the inventory record for each BOM item
to see if inventory is available or if a replenishment
order is needed to build the cabinets.
Table 14-3 First Inventory Record for CD Cabinet
Item: CD Cabinet
Lot size rule: L4L
Lead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements: 0 0 0 100 0 0 100 0 0 100 0 0
Scheduled Receipts:
Projected Available: 0 0 0 0 -100
Planned Orders

Table 14-4 Updated Inventory Record for CD Cabinet

Item: CD Cabinet
Lot size rule: L4L
Lead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements: 0 0 0 100 0 0 100 0 0 100 0 0
Scheduled Receipts:
Projected Available: 0 0 0 0 0 0 0 0 0 0 0 0 0
Planned Orders 100 100 100
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 MRP Inputs-Bills of Material
 A BOM lists all of the
items needed to produce
one CD cabinet
 The BOM is exactly like a
recipe for baking a cake
 The BOM’s must be
complete and accurate
and can only be changed
by an ECN
 MRP BOM’s are indented Indented BOM
bills of materials
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A Product Structure Tree

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 The MRP Explosion Process
Table 14-6 Updated Inventory Record for CD Cabinet
Item: CD Cabinet Parent: none
Lot size rule: L4L Children: Top, bottom, door, left side, right side, shelves, shelf supports
Lead time: 1 week
1 2 3 4 5 6 7 8 9 10 11 12
Gross Requirements: 0 0 0 100 0 0 100 0 0 100 0 0
Scheduled Receipts:
Projected Available: 0 0 0 0 0 0 0 0 0 0 0 0 0
Planned Orders: 100 100 100

Using this table and the product structure tree, we will

work through an example of how the MRP explosion
process calculates the requirements for building a CD
cabinet. Next we start with the cabinet top to show
how MRP calculates the gross requirements for this
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 Inventory Records - Components
 It was noted on the previous slide that the parent item (CD
Cabinet) has planned orders in periods 3, 6, and 9.
 Its children (top, bottom, door, left & right side, shelves, and
supports) have gross requirements in periods 3, 6, and 9.

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Inventory Records - Components

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Inventory Records– Components
con’t

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Inventory Records– Components
con’t

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Inventory Records – Remaining Components

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Inv. Records – Remaining Components con’t

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Inv. Records – Remaining Components con’t

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 MRP Action Notices
 Action Notices:
 Indicate items that need a production planner’s
attention
 Are created when a planned order needs to be
released, due dates need to be adjusted, or
when there is insufficient lead time for normal
replenishment
 Often require planners to rush or expedite
orders
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 MRP Action Notices
 Action Bucket:
 Is the current period where we take actions such
as releasing, rescheduling, or canceling orders
 A positive quantity in current period’s planned
order row means that an order must be released

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Example Comparing Lot Size Rules: Three lot sizing
rules used within MRP Systems are: fixed order quantity (FOQ), lot
for lot (L4L), and period order quantity (POQ). Cost comparison is
based on Inventory holding costs ($0.10/period) and ordering cost
($25/order). In this example POQ is best at $133.50.

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 Rough Cut Capacity Example: The CRP module uses data from
MRP. Calculate workloads for critical work centers based on open
shop orders and planned shop orders. These shop orders are
translated into hours of work by work center and by time period.
Table 14-11 show items scheduled for work Center 101.

 Available = 4 machines x 2 shifts x 10 hours x 5 days x 0.85 utiliza- x 0.95 effi-

Capacity per shift per wk. tion ciency
 Available = 323.0 standard hours
Capacity
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Workload Graph for Work Center 101: CRP enables a
company to evaluate both the feasibility of the MRP system and
how well the company is using its critical work centers.

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 Resource Planning within OM:
How it all fits together
 Enterprise resource planning provides a common database for use
by an organization, its suppliers, and its customers.
 MRP reports are used by the production and inventory planners to
(1) generate purchasing requisitions and (2) develop schedules of
different activities to be done on the manufacturing floor.
 Techniques for sequencing activities are discussed in Chapter 15.
 The authorized MPS, the bill of material (BOM) file, and the
inventory records are inputs to the MRP system. It is critical that the
MPS be feasible and that the BOM file and the inventory records be
accurate. This implies that the time standards (Chapter 11) are valid
and that cycle counting (Chapter 12) be used to maintain inventory
record accuracy. If not, material is not ordered at the appropriate
time in the right quantity.

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 Resource Planning Across the
Organization
 Since MRP determine the quantity and
timing of materials needed, it affects
several functional areas
 Accounting future material commitments
based on MRP output
 Marketing is primarily concerned with MPS as
the MRP reveals potential material shortages
 Information systems maintains the MRP and
the MPS

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 Chapter 14 Highlights
 ERP is software designed for organizing and managing all
business processes by sharing information across
functional areas using a common database and a single
computer system.
 First generation ERP systems provided a single interface
for managing routine activities performed in
manufacturing. Second generation systems or SCM –
software are designed to improve decision making in the
supply chain. The current trend is integrating e-commerce
and ERP.
 Tangible benefits from ERP include reductions in inventory
and staffing, increased production, improved order
management, and increased revenue and profits.

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 Chapter 14 Highlights con’t
 MRP systems are designed to calculate material
requirements from dependent demand items. MRP systems
use backward scheduling to determine activity start dates.
 Independent demand is the demand for finished products,
whereas dependent demand is demand that is derived
from finished products, MRP system use dependent
demand.
 The objectives of MRP are to determine the quantity and
timing of material requirements and to keep schedule
priorities updated and valid. MPR determines what to
order, how much to order, when to place the order, and
when to schedule the arrival.
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 Chapter 14 Highlights con’t
 MRP needs three inputs: the authorized MPS, the BOM file,
and the inventory records file. The MPS is the planned
build schedule, the BOM files shows the materials needed
to build an item, and the inventory records file shows the
inventory on hand.
 Once the MPS has been input, MRP checks the inventory
records to determine if enough end-item inventory is
available. If sufficient end-item inventory is not on hand,
MPR checks the end-item’s BOM file to determine what
materials are needed and in what quantities.
 Action notices show when to release planned orders,
reschedule orders, or adjust due dates. They allow the
planner to use the MRP output information effectively

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 Chapter 14 Highlights con’t
 Different lot size rules are used with MRP systems to
generate different order quantities and order frequencies.
The lot-for-lot (L$L) rule always minimizes the inventory
investment but maximized ordering costs.
 Planned orders generated by MRP, plus any open shop
orders, are inputs to capacity requirements planning (CRP).
CRP checks to see if available capacity is sufficient to
complete the orders scheduled in a particular work center
during a specific time period.
 CRP calculates the workloads at critical work centers by
using the planned orders generated by the MRP system.
These planned orders are multiplied by the standard times
to calculate individual work center loads.

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 The End
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