Chapter 14: Material Requirements Planning (MRP) and ERP EXAM 3

Accurate Inventory Records

- Accurate inventory records are absolutely required for material requirements planning (MRP) (or any dependent demand system) to operate correctly - Generally MRP systems require more than 99% accuracy or it will not work.

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 ending, process for implementation. 5. Expertise is limited with ongoing staffing problems.

3 Extensions of MRP:

1. Material requirements planning II (MRP II) 2. Closed-Loop MRP 3.. Capacity Planning

system nervousness

frequent changes in an MRP system. can create havoc in purchasing and production departments if implemented. (goal is to minimize changes)

material requirements planning (MRP)

a dependent demand technique that is used in a production environment and uses a bill of material, inventory, expected receipts, and a master production schedule to determine material requirements.

lot-for-lot (a lot-sizing technique)

a lot-sizing technique that generates exactly what is required to meet the plan. - Lots-for-lot techniques order just what is required for production based on net requirements. - The objective of an MRP system, which is to meet the requirements of dependent demand. An MRP system should produce units only as needed, with no safety stock and no anticipation of further orders. - When frequent orders are economical (when setup costs are low) and just-in-time inventory techniques implemented, lot-for-lot can be very efficient. However, when setup costs are significant, lot-for-lot can be expensive. - May not always be feasible (easy) - If setup costs are high, lot-for-lot can be expensive

load report

a report showing the resource requirements in a work center for all work currently assigned there as well as all planned and expected orders.

closed loop MRP system (second extension of MRP)

a system that provided feedback to the capacity plan, master production schedule, and production plan so planning can be kept valid at all times. - Implies that it is an MRP system that provides feedback to scheduling from the inventory control system. - All commercial MRP systems are closed-loop.

supermarket

an inventory area that holds common items that are replenished by a kanban system

part period balancing (PPB)

an inventory ordering technique that balances setup and holding costs by changing the lot size to reflect requirements of the next lot size in the future

Phantom Bills of material (bills of material)

bills of material for components, usually subassemblies, that exist only temporarily; they go directly into another assembly and they are never inventoried. - lead times are zero, and they are handled as an integral part of their parent item. - An example is a transmission shaft with gears and bearings assembly that is placed directly into a transmission.

modular bills

bills of material organized by major subassemblies or by product options

efficient consumer response (ECR)

supply chain management systems in the grocery industry that tie sales to buying, to inventory, to logistics, and to production

planned order receipt

the quantity planned to be received at a future date

planned order release

the scheduled date for an order to be released

+bucket less system

time phased data are referenced using data records rather than defined time periods, or buckets

Purchase Orders Outstanding

- A by-product of well-managed purchasing and inventory control departments. - It is an order that hasn't been completed yet - when purchase orders are executed, records of those orders and their scheduled delivery dates must be available to production personnel. - Outstanding purchase orders must accurately reflect quantities and scheduled receipts. - Only with good purchasing data can managers prepare meaningful production plans and effectively execute a material requirements planning (MRP) system.

Enterprise Resource Planning (ERP) modules (software) includes:

- Basic MRP - Finance - Human resources - Supply chain management (SCM) - Customer relationship management (CRM) - Sustainability ERP systems have the potential to: - reduce transaction costs - increase the speed and accuracy of information - Facilitates a strategic emphasis on JIT systems and supply chain integration - Can be customized to meet their specific process requirements for much more money - Can be expensive and time-consuming to install. - In an ERP system. data are entered only once into a common, complete, and consistent database shared by all applications. Ex: when a Nike salesperson enters an order into his ERP system for 20,000 pairs of sneakers for Foot Locker, the data are instantly available on the manufacturing floor. Production crews start filling the order if it is not in stock, accounting prints Foot Locker's invoice, and shipping notifies Foot Locker of the future delivery date.

Safety Stock

- Bill of materials, inventory records, purchase and production quantities, and lead times may not be perfect. This means that consideration of safety stock may be prudent (wise) - Should be minimized, with a goal of ultimate elimination. - When safety stock is deemed absolutely necessary, the usual policy is to build into (increase) the projected on-hand inventory requirement of the material requirements planning (MRP) logic. - Distortion can be minimized when safety stock is held at the finished goods or module level and at the purchased component or raw material level.

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: supply chain management systems in the grocery industry that tie sales to buying, to inventory, to logistics, and to production. - Objective is to tie sales to buying, inventory, logistics, and production

Capacity Planning (third extension of MRP)

- Feedback about workload from the MRP system is obtained from each work center. - Load reports show resource requirements for work centers for all work currently assigned to the work center. - Work can be moved between work centers to smooth the load or bring it within capacity

Lot-Sizing Summary

- In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change. But if done, in practice, this results in system nervousness and instability. So as a result these changes are not made. So all lot sizes are wrong because the production system cannot and should not respond to frequent changes. - Lot-for-lot should be used when low-cost setups can be achieved. Lot-for-lot is the goal. - Lot sizes can be modified to allow for scrap, process constraints (ex: a heat-treatment process may require a lot of a given size), and raw material purchase lots (ex: a truckload of chemicals may be available in only one lot size). - Caution should be exercised prior to any modification of lot size because the modification can cause substantial distrotion of actual requirements at lower levels in the MRP hierarchy. Use lot-sizing with care as it can cause considerable distortion of requirements at lower levels of the bill of material - When setup costs are significant and demand is reasonably smooth, POQ or EOQ should give reasonable results.

MRP management limitations:

- MRP does not do detailed scheduling-it plans - Works best in product-focused and repetitive environments, but it has limitations in process (make-to-order) environments. - Requires fixed lead time that loads work into infinite size time "buckets." The buckets are time units, usually one week.

MRP in services

- Some services or service items are directly linked to demand for other services. - Such services often require product-structure trees, bills of material and labor, and scheduling. - These can be treated as dependent demand services or items: - Restaurants- ingredients and side dishes are typically meal components. These components are dependent on the demand for meals. Meals are an end item. - Hospitals- for surgeries that require known equipment, materials, and supplies. Could use this technique to improve the scheduling and management of expensive surgical inventory. - Hotels- develops a bill of material and a bill of labor when it renovates each of its hotel rooms. Uses it to compute requirements for materials, furniture, and decorations. MRP then provides net requirements and a schedule for use by purchasing and contractors.

Material Requirements Planning (MRP) management dynamics:

- facilitates replanning when changes occur - System nervousness can result from too many changes - time fences put limits on replanning - Pegging links each item to its parent allowing effective analysis of changes. - With MRP, the operations manager can react to the dynamics of the real world. If the nervousness is caused by legitimate changes, then the proper response may be to investigate the production environment- not adjust via MRP.

Modular Bills (bills of material for modules)

- modules are not final products but components that can be assembled into multiple end items. They are often major components of the final product or product option. - Modular bills are convenient because production scheduling and production are often facilitated by organizing around relatively few modules rather than a multitude of final assemblies. - Can significantly simplify planning and scheduling - Ex: there may be 138,000 different final products but may have only 40 modules that are mixed and matched to produce all those final products.

Lot-Sizing techniques (how to get the right components) include:

1. (most popular) lot-for-lot sizing technique- order them the way the plan wants you to. 2. Economic order quantity (EOQ) 3. Periodic order quantity (POQ) 4. Part period balancing (PPB) (also called least total cost) 5. Wagner-Whitin algorithm

Master Production Schedule (MPS) can be expressed in any of the following in 3 ways/terms:

1. A CUSTOMER ORDER in a job shop (make-to-order) company (exs: print shops or fine-dining restaurant) 2. MODULES in a repetitive (assemble-to-order or forecast) company (exs: motorcycles, tvs, fast-food restaurants) 3. An END ITEM in a continuous (stock-to-forecast) company (exs: steel, beer, bread, light bulbs, paper)

Material requirements planning (MRP) benefits

1. Better response to customer orders as the result of improved adherence to schedules. 2. Faster response to market changes 3. Improved utilization of facilities and labor 4. Reduced inventory levels - Better response to customer orders and to the market wins orders and market share. - Better utilization of facilities and labor yields higher productivity and return on investment. - Less inventory frees up capital and floor space for other uses. - These benefits are the result of a strategic decision to use a dependent inventory scheduling system.

Smoothing Tactics: Tactics for smoothing the load and minimizing the impact of changed lead time includes the following:

1. Overlapping: -Sends part of the work to following operations before the entire lot is complete. Sends pieces to the second operation before the entire lot is completed on the first operation. -Reduces lead time 2. Operations splitting: -Sends the lot to two different machines for the same operation. -Additional setup costs but results in shorter throughput times because only part of the lot is processed on each machine. 3. Order splitting or lot splitting -Breaking up the order into smaller lots and running part of it earlier (or later) in the schedule - When the workload consistently exceeds work-center capacity, the smoothing tactics are not adequate. This means adding capacity through personnel, machinery, overtime, or subcontracting.

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.

To reduce system nervousness you can do these two things

1. Time fencing- a means for allowing a segment of the master schedule to be designated as "not to be rescheduled" 2. Pegging- in material requirements planning systems, tracing upward in the bill of material from the component to the parent item

material requirements planning II (MRP II) (first of the extension of MRP)

A system that allows, with MRP in place, inventory data to be augmented (expanded/increased/greater) by other resource variables; in this case, MRP becomes material resource planning. - Once MRP is in place, requirement data can be enriched by resources other than just components. - Generally called MRP II or Material Resource Planning - Outputs can be generated as well. Outputs can include scrap, packaging waste, effluent, carbon emissions. - With MRP II, management can identify both the inputs and outputs as well as the relevant schedule. - Data used by purchasing, production scheduling, capacity planning, inventory, warehouse management systems are a few examples of this data integration. - Gives us the price of how much it would cost to execute the plan.

Dependent Inventory Model Requirements

Effective use of dependent demand inventory models requires the operation manager to know the following: 1. Master production schedule (what is to be made and when) 2. Specifications or bill of material (materials and parts required to make the product) 3. Inventory availability (what is in stock) 4. Purchase orders outstanding (what is on order, also called expected receipts) 5. Lead times (how long it takes to get various components)

When to use Dependent demand

For any product for which a schedule can be established, dependent demand techniques should be used

How MRP is broken into parts

MRP->MRP II MRP II--> Distribution resource planning (DRP) and Enterprise resource planning (ERP) Enterprise resource planning (ERP)--> SAP and Peoplesoft (software- people oriented like ERP)

Dynamic lot sizing techniques

Other lot-sizing techniques, they are similar to periodic order quantity as they attempt to balance the lot size against the setup cost. - Balance lot size and setup costs These other techniques are: - Part period balancing (also called least total cost) - Least unit cost - Least period cost (also called silver-meal) - Another technique called Wagner-Whitin, takes a different approach by using dynamic programming to optimize ordering over a finite time horizon.

bill of material (BOM)

a listing of quantities of components, ingredients, materials, their description, and the quantity of each required to make one unit of a product. - Bill of material is useful for costing and serve as a list of items to be issued to production or assembly personnel. When bill of material are used in this way they are called pick lists. - One way a bill of material defines a product is by providing a product structure (and "explode" it to reveal the requirements for each component): - items above given level are called PARENTS - Items below given level are called COMPONENTS or CHILDREN. - top level is always 0. - If the product requires the same material multiple times for the creation of the product you have to drag down the materials to the same lowest level it is given.

time fences

a means for allowing a segment of the master schedule to be designated as "not to be rescheduled." - This segment of the master schedule is therefore not changed during the periodic regeneration of schedules. - Don't change anything for a certain amount of time. Ex: the schedule is set for 8 weeks and will not change or be rescheduled.

Low-Level Coding (bill of material)

a number that identifies items at the lowest level at which they occur. - Item is coded at the lowest level at which it occurs - Bill of materials are processed one level at a time - If the product requires the same material multiple times for the creation of the product you have to drag down the materials to the same lowest level it is given.

economic part period (EPP)

a period of time when the ratio of setup cost to holding cost is equal

gross material requirements plan

a schedule that shows the total demand for an item (prior to subtraction of on-hand inventory and scheduled receipts) and (1) when it must be ordered from suppliers, or (2) when production must be started to meet its demand by a particular date. - It is a schedule that combines a master production schedule (including bill of material, inventory and purchase records, and lead times) and the time-phased schedule. - It shows when an item must be ordered from suppliers if there is no inventory on hand or when the production of an item must be started to satisfy demand for the finished product by a particular date. - does NOT use inventory on hand

back flush

a system to reduce inventory balances by deducting everything in the bill of material on completion of the unit

-Wagner-Written procedure

a technique for lot-size computation that assumes a finite time horizon beyond which there are no additional net requirements to arrive at an ordering strategy

Distribution Resource Planning (DRP) (subsection of MRP II)

a time-phased stock replenishment plan for all levels of a distribution network/supply chain. - Using dependent demand techniques through the supply chain. - Expected demand or sales forecasts become gross requirements. - DRP procedure starts with the forecast at the retail level (or the most distant point of the distribution network being supplied). All other levels are computed. - DRP PULLS inventory through the system. Pulls are initiated when the retail level orders more stock. - The goal of DRP system is SMALL and FREQUENT REPLENISHMENTS within the bounds of economical ordering and shipping.

Master Production Schedule (MPS)

a timetable that specifies what is to be made (usually finished goods) and when. - Must be in accordance with the aggregate production plan. Aggregate plan sets the overall level of output in broad terms (like with product families, standard hours, or dollar volume). -The plan developed by the sales and operations planning team includes a variety of Inputs from financial plans, customer demand, engineering capabilities, labor availability, inventory fluctuations, supplier performance. These inputs contribute in its own way to the aggregate plan. - As the process moves from aggregate planning to execution, each step must be tested for feasibility (easy). One of the major strengths of Material requirements planning (MRP) is to determine precisely the feasibility (easy) of a schedule within aggregate capacity constraints. This plan sets the upper and lower bounds on the master production schedule. - The MPS is the result of the production planning process. Is a "rolling" production schedule. - Schedule must be followed for a reasonable length of time. - The MPS is quite often fixed or frozen in the near term part of the plan - The MPS is a statement of what is to be produced, not a forecast of demand. - Master production schedule tells us how to satisfy demand by specifying what items to make and when. It disaggregates (separates) the aggregate plan. While the aggregate plan is established in gross terms such as families of products or tons of steel, the master production schedule is established in terms of specific products.

Enterprise Resource Planning (ERP)

an information system for identifying and planning the enterprise-wide resources needed to take, make, ship, and account for customer orders. - An extension of the MRP system to tie in customers and suppliers - It is software that allows companies to: 1. Allows automation and integration of many business processes. 2. Shares common databases and business practices throughout the enterprise. 3. Produces information in real time. - The objective of an ERP system is to coordinate a firm's entire business, from supplier evaluation to customer invoicing. This objective is seldom achieved, but ERP systems are umbrella systems that tie together a variety of specialized systems.

Periodic order quantity (POQ)

an inventory ordering technique that issues orders on a predetermined time interval, with the order quantity covering the total of the interval's requirements - orders quantity needed for a predetermined time period. Ex: every 3 weeks. - POQ Interval defined by= EOQ/ average demand per period - POQ is the order quantity set that covers the specific demand for that interval. - Each order quantity is recalculated at the time of the order release, never leaving extra inventory. - order different quantity of units but with the same predetermined time period like example every 4 weeks.

Economic Order Quantity (EOQ)

expects a known constant demand and MRP systems often deal with unknown and variable demand. - It is useful when we have a relatively constant demand. It also may change every period in MRP systems. Therefore, EOQ lot sizing often does not perform well in MRP. - Operations managers should take advantage of demand information when it is known, rather than assuming a constant demand. EOQ is used to do lot sizing for comparison purposes.

pegging

in material requirements planning systems, tracing upward in the bill of material from the component to the parent item - By pegging upward, the production planner can determine the cause for the requirement and make a judgment about the necessity for a change in the schedule. - Find out which order will be affected by shortages and negotiate with the customers to work something out and apologize.

Lead Times for Components

in purchasing systems, the time between recognition of the need for an order and receiving it; in production systems, it is the order, wait, move, queue, setup, and run times for each component. - The time required to purchase, produce, or assemble an item. - For production, lead time for a manufactured item consists of the sum of the move, setup, and assembly or run times. - For purchased items- the time between the recognition of a need and when its available for production

Planning bills (bills of material) (or kitted material or kits)

material groupings created in order to assign an artificial parent to a bill of material. - Also called "pseudo" or super bills - Such bills are used: 1. When we want to group subassemblies so the number of items to be scheduled is reduced. 2. When we want to issue/create standard "kits" for the production department. - Created to assign an artificial parent to the Bill of Material - Used to group subassemblies to reduce the number of items planned and schedules. - The planning bill specifies the kit to be issued. - You do not need to know all the specific parts to make these items because you are not making them, they come in already done kits. A planning bill contains all the nuts, bolts, etc. you could need for the product.

lot-sizing decisions

the process of, or techniques used in, determine lot size. - An MRP system is an excellent way to do production planning and determine net requirements. But net requirements still demand a decision about how much and when to order, this is called lot-sizing decision. - There are a variety of ways to determine lot sizes in an MRP system; commerical MRP software includes the choices of several lot-sizing techniques.

net requirements plan

the result of adjusting gross requirements for inventory on hand and scheduled receipts. - If inventory is on hand for a parent item, the requirements for the parent item and all its components decrease because each Awesome kit contains the components for lower-level items. - a schedule that shows the total demand for an item and (1) when it must be ordered from suppliers, or (2) when production must be started to meet its demand by a particular date. - It is a schedule that combines a master production schedule (including bill of material, inventory and purchase records, and lead times) and the time-phased schedule.

Dependent Demand

the demand for one item is related to the demand for another item. Demand for items is dependent when the relationship between the items can be determined. - Given a quantity for the end item, the demand for all parts and components can be calculated. - All components are dependent items. For any product, all components of that product are dependent demand items. - In general, used whenever a schedule can be established for an item - Material requirements planning (MRP) is the common technique - Used for firms like restaurants to hospitals. An example of an item that depended on the demand of another item would be wheels for a car.

buckets

time units in a material requirements planning system. Usually are one week. - MRP puts work into these buckets without regard to capacity. - Consequently, MRP is considered an infinite scheduling technique. - Techniques for the alternative, finite scheduling