MGT 302: Topic 14
building the MPS
-"How do you know when you need to produce more of a specific item?" Alternatively, you might ask, "What variable will you track?" Take a moment to think -ou produce more of the item when your projected on-hand inventory turns negative (or smaller than your safety stock level). Keep this point in mind as we talk through the mechanics of building an MPS.
inventory records
-cannot cost-effectively plan future production if you do not know how much inventory you already have -For every SKU produced -or in use in production- you need to maintain accurate up-to-date information in an inventory stratus file -Item Number -Item Description -Quantity of On-hand Inventory -Inventory Already Committed to Orders -Scheduled Receipts (ordered or in process but not yet received) -Safety Stock Level -Lead Time (from supplier or internal production) -Batch Size (preferred order quantity) Other Information (e.g., cost, process descriptions, special -To maintain accurate inventory data, you need two things: good information systems and disciplined behavior. Every time you add to or take away from inventory, the transaction must be recorded and the inventory status file updated. Consistent updates are also required for changes in safety stock, lead time, batch size, and other information. Getting employees to adhere to the rules is often more challenging than investing in the needed IT.
Comparing Lot Sizing Rules
-compare the different lot sizes -To come up with a justifiable answer, you need to calculate and compare the total costs of each lot-sizing rule. Imagine your carrying costs are $0.50 per unit per week and your order costs are $150. Now, take a minute to crunch the numbers to figure out which lot-sizing rule delivers your lowest total costs for the six weeks? Total Inventory Costs = Carrying Costs + Ordering Costs -POQ offers the lowest total cost- the result may not be truly robust- -to have more confidence in your choice of lot sizing rules you really to calculate your total inventory costs for a longer period of time -running the numbers for the past year would probably give you an adequate picture of cost performance
MRP system
-demand for an end item creates demand for all inputs -goal: make sure you have all the required inputs on hand, ready to use when its time to make the end product -you could forecast demand but you dont need to -need to know what you already know about the end item (its demand, its bill of materials, and existing inventory levels—to calculate what to order and when to order it) -This process of working backward from end-item demand is known as time-phased requirements planning.
Step #1: Calculate Projected On-hand Inventory
-estimate the future demand -use the larger of forecast and actual demand -actual orders greater than your forecast the demand is higher -forecast higher than actual orders your sales team still has time to generate additional customer orders -the forecast is your best guess
net requirements
= Gross Requirements - Scheduled Receipts - Available Inventory you need to receive an order at the beginning of Week 3. Enter 75, the order quantity, in Week 3 of the "Planned Order Receipts" row (see bolded 75). Since you know your lead time is one week, you will actually need to release the order one week earlier—that is, in Week 2. You now need to recalculate your available inventory as follows. -you can repat the process for the remaining weeks in your rolling MRP horizon
available inventory
= inventory at start of period + scheduled receipts + planned order recipts - gross requirements -Simply put, you have more than enough inventory on hand or on order to meet your gross requirements for Weeks 1 and 2. You won't have a need—a time where gross requirements are greater than available inventory—until Week 3
"By failing to prepare, you are preparing to fail."
Benjamin Franklin
Step #3: Calculate & Communicate Available to Promise
Return to the MPS data shown in Table 14.5, this time focusing on the row for actual customer orders. This row tells you that some of your production is already committed to customers. The remaining production is available to promise (ATP); that is, you can use it to increase sales. You want to communicate ATP to marketing and sales so they can grow the business without promising product that doesn't—and won't—exist. To calculate the basic ATP, you need to know the following: You calculate the ATP for Week 1 differently from ATP for future weeks. The equation is as follows: ATPWeek1=(Onhand Inventory+MPS)−∑Actual Customer OrdersATPWeek1=(Onhand Inventory+MPS)−∑Actual Customer Orders ATPWeek1=(80+0)−30=50ATPWeek1=(80+0)−30=50 You only calculate ATP for weeks when you expect to receive produced items. This is the MPS row in Table 14.5. For weeks when you have a scheduled receipt—e.g., Weeks 2, 4, and 6 in Table 14.5—you calculate your ATP by taking your scheduled production receipt and subtracting the sum of all actual customer orders before your next anticipated production receipt. Here are the calculations for Weeks 2, 4, and 6. ATPWeek2=100−(8+2)=90ATPWeek2=100−(8+2)=90 ATPWeek4=100−0=100ATPWeek4=100−0=100 ATPWeek6=100−0=100ATPWeek6=100−0=100
MRP mechanics steps
Step #1: Plan Order Releases for Level 1 Items -always starts with your level "0" item (office chair) is often called the parent item -each level 1 item is called a child- office chair has four children -seat assembly, leg assemblies arm assembly and 2 bolts -Let's use the seat assembly (part #101) to exemplify the process. The MPS for the office chair shows that you need to produce 100 units in weeks 1, 3, and 5. Since you need one seat per chair, you simply transfer these quantities to the "Gross Requirements" line in the same week of your MRP record -The order quantity for seats is 75. -The lead time for assembling seats is one week. -You have 90 finished seats in inventory. -You also have one order for 75 seat assemblies that has already been placed with delivery scheduled for Week 1. -You do not have any safety stock requirements for seat assemblies.
Brief History of MRP
The good news: Modern IT in the form of materials requirements planning and enterprise resource planning (ERP) systems do most of the hard work needed to effectively manage dependent demand inventory. You can use these systems to effectively build production plans, generate purchase orders, and track inventories—whether your company produces tens or thousands of items. -emerged in 1960 and evolved gradually as computing power increased- early adoptions were slow most companies lacked the information integrity and operating disciple needed to take advantage of MRP software -1970s success stories started to emerge -the early 1980s MRP had started to catch on- MRP modules are embedded in enterprise resources planning system are are used over 80% of high preforming manufactures
introduction
You may have never heard the terms, but you already know quite a bit about the logic of dependent demand inventory and materials requirements planning (MRP). Where did you gain your know-how? In the kitchen! Preparing a delicious dinner is, in fact, a great example of day-to-day resource planning. Let's take a quick look. Imagine you want to host a dinner for some colleagues from work. You don't want to just throw burgers on the grill; you want to use dinner as a team-building activity. That means you need a fun recipe that can keep many hands busy. But, you want a foolproof recipe for delectable food. The good news: You found Sweet Dee's fun recipe for Hawaiian Fajitas (see Figure 14.1). As you read about the Hawaiian hash browns, you were especially intrigued. You were certain your colleagues would find cooking dinner together to be a culinary delight. To round out the menu—and engage your colleagues in interactive food preparation—you add a tropical fruit salad and passion fruit punch to the menu.
bill of materials
a detailed description of the end item- identifies all of the inputs needed to make one unit of the end item -its the recipe used to make the end item -created by product engineers when they develop a new product -responsible for any future design changes that impact the BOM represent the BOM in two ways 1)intended parts list 2)product structure diagram- depict the BOM more visually using a product structure diagram aka structure tree -both approaches indicate how it is assembled Both approaches indicate how the office chair is assembled. That is, the office chair, your end product, is shown as "Level 0." Direct inputs—i.e., the seat assembly, leg assemblies, arm assemblies, and #2 bolts—are depicted as "Level 1." Demand for Level 1 items depends on demand for Level 0 items. Similarly, the demand for "Level 2" items is driven by the need for "Level 1" items. Can you see the pattern? Now you can see why we call it dependent-demand inventory.
Step 3: Plan Order Release for Common Parts
-. Focusing on your Level 2 items, do you see anything that would affect the analysis that you just did? Hopefully, you noticed that #6 screws are common to both the seat assembly (which you just calculated) and the arm assembly. Thus, your total demand for #6 screws is going to be bigger than you just calculated. Wouldn't it make sense to coordinate requirements? -To coordinate your order releases for #6 screws, you first need to figure out the timing and quantity of orders for arm assemblies -key information you need to determine your order releases for arm assemblies. Please note you have a scheduled receipt of 250 in Week 1. Your first inventory shortage—i.e., positive net requirements—occurs in Week 3 when you will need an extra 30 units. If you receive 250 arm assemblies in Week 3, you will end the week with 220 seat assemblies. To arrange for an order receipt in Week 3, you need to release your order in Week 1 (remember, you have a two-week lead time). Your ending inventory of 220 in Week 3 will meet all of your gross requirements for Weeks 4, 5, and 6, with 20 units available for future demand. -timing and quantity of planned order releases for arm assembly you can combine this data with your planned order release for seat assemblies to come up with a single coordinated plan -as you transfer gross requirements for both the seat and arm assemblies you will need screws in week 1, 600 screws in week 2, and 600 screws in week 4- knowing order time and lead time is very important
MPS Mechanics
-Forecast Demand: Estimate of future demand -Actual Customer Orders: Actual orders received -Projected On-hand Inventory: The ending inventory you expect to have -Available to Promise: The amount of inventory you have to commit to new customer orders -MPS: Production quantity delivered -MPS Start: Production quantity produced (MPS adjusted by lead time) Step #1: Calculate Projected On-hand Inventory Step #2: Schedule Planned Production Step #3: Calculate & Communicate Available to Promise
MRP mechanics
-Gross Requirements: How much you need to produce. This number comes from the MPS's for all of the "parents" during each period. Scheduled Receipts: Total quantity of orders placed in the past and due to be delivered by the beginning of the period for which the quantity is shown. Available Inventory: The amount of inventory you expect to have at the end of each period. Net Requirements: The minimum number of units you need to have in the period. Planned Order Receipts: The quantity of an item you expect to arrive at the beginning of the time period. Planned Order Releases: The quantity of an item you plan to order in a time period. (Planned Order Receipt adjusted by lead time.)
MRP extra
-MRP calculations are done by the MRP module in companies ERP system -start-up companies are the only companies typically using an excel based system so you most likely will not have to do the calculations yourself
technology makes resource planning possible
-Nobody could keep track of that many parts or that complex of a supply base and make sure the right parts are in the right places at the right times!
Step #2: Schedule Planned Production
-note the MPS table production batch size -Returning to the MPS table, you note that the production batch size is 100 chairs (see Table 14.4). You also see that the production lead time is one week. What does this mean? To have an additional 20 chairs available at the beginning of Week 2, you need to start production in Week #1. What does this look like in Table 14.4? Since your batch size is 100, you enter 100 in the MPS row for Week 2. Taking the one-week lead time into account, you know you need to start producing these chairs in Week 1. So, enter 100 in the MPS Start row for Week 1. You are now ready to recalculate your projected on-hand inventory for Week 2 ((30 + 100) - 50 = 80). By producing in Week 1, you eliminate the projected stockout in Week 2 and have inventory for future weeks. -If you apply the same logic and process for the remaining weeks in the planning horizon, you project shortages again in Week 4 and Week 6. Producing in Week 3 and again in Week 5 will meet the forecast demand, leaving you with a projected on-hand inventory of 50 at the end of Week 6. One more thought: The quantities and timing shown in the "MPS" row indicate how much and when you should produce. These quantities are not necessarily what you will actually produce. "Why not," you ask? Remember the MPS process doesn't consider actual capacity. Once MPS quantities for each product have been established, you need to compare total planned production capacity needed for all products in each period to total available capacity. If what you want to produce exceeds what you can produce, you need to adjust individual product schedules. Until you do this, the quantities in the "MPS" row are only proposed quantities.
Step #2: Plan Order Releases for Lower-level Items
-now you have requirement plans for the eat assembly you can apply the same logic and process for lower- level inputs to the seat assembly -The process of translating end-item demand into planned order releases for lower-level parts in the BOM is called, "gross to net explosion of the bill of materials." -You see the basic information that the MRP record will use to plan order releases—that is, order quantity (100), lead time (1 week), safety stock (0), and on-hand inventory (60). You don't have any scheduled receipts. To use this information to build out your order release schedule for molded seats, you first transfer the order release information from the seat assembly MRP record. Specifically, you want to start producing 75 seat assemblies at the beginning of Weeks 2 and 4. So, you will need all of the components shown in Figure 14.13—molded seats (1), seat cushions (1), and #6 screws (8)—to be available at the beginning of Weeks 2 and 4. Let's do the basic calculations following the MRP logic. Your job is to fill in the MRP record. Calculate Available Inventory for Week 1. Available InventoryWeek1=(65+0+0)−0=60Available InventoryWeek1=(65+0+0)−0=60 Calculate Available Inventory for Week 2. Available InventoryWeek2=(60+)+0)−75=−15Available InventoryWeek2=(60+)+0)−75=−15 Calculate Net Requirements for Week 2. Net RequirementsWeek2=75−0−60=15Net RequirementsWeek2=75−0−60=15 Re-calculate Available Inventory for Week 2. Available InventoryWeek2=(60+0+100)−75=65
fixed order quanity
-order the same amount every time you place an order- -goal is to calculate an optimal FOQ- one that minimizes the sum of order and inventory holding costs -Most companies use the economic order quantity (EOQ) for the order quantity. Quantity Discount. If your supplier offers a quantity discount—e.g., price per unit is $2.50 if at least 100 units are purchased, $3 otherwise—that lowers your total costs, you would adopt that quantity as your FOQ. Machine Capacity. Imagine you are a baker and your oven can cook only 10 loaves of bread at a time. What would you use as your FOQ? Answer: 10. Materials Usage. Sometimes, your ability to optimize materials usage determines your FOQ. For example, you might be able to produce 25 leather shoes per cow hide. -almost always results in remnants and higher inventory carrying costs -extra inventory provides buffer to protect your operations against unanticipated changes in demand, quality issues or errors in inventory record keeping -If your FOQ is not large enough to meet demand, you may have to order a multiple of the order quantity.
MRP
-primary outputs are the requirements schedules that tell you when to produce or order each part in BOM -managing the order release process is the main reason you invest in the MRP system -update inventory records as items are produced used or received Able to produce a variety of performance planning and exception reports -the challenge is to decide what information you need to make decisions Performance. What information do you need to evaluate how well performance matches plans? The right information can help you improve planning processes. Exceptions. What warnings do you need that it might not be possible to meet demand? The right signals at the right time can help you take the right preemptive action to avoid disappointing key customers.
how much should you order?
-primary outputs of an MRP system are the requirements scheduled that tell you when to produce or order each part in BOM -order quantity or lot size decision affects both cost and service -companies use a variety of lot size rules Lot for lot, fixed order quantity, and period order quantity.
MRP information requirements
-rely on three key sources of information: master product schedule, the bill of materials and inventory records -MRP systems are susceptible to GIGO -garbage in garbage out - If your information isn't close to 100% accurate, the requirements schedules developed by your MRP system will be wrong. -poor information accuracy is the biggest pain point for companies that adapt the MPR system- if you get the data right MRP can determine the quality and timing of all inputs needed to make related podcast - helping reduce costs and improve service
brief review of ERP system
-systems enable you to get every decision maker across your organization on the same page—using the same data to make decisions -1990s managers across organizations couldn't do this- back then each function or department had its own legacy best-of-breed system and the systems did not like each other -Managers used different data, stored in different databases, to make decisions. You may be thinking, "That doesn't make a lot of sense." If so, you'd be right. ERP systems were developed to solve this problem. -"a single database surrounded by application programs that take data from the database and either conduct analysis or collect additional data for the firm." Simply put, an ERP system is your company's central nervous system. You enter information once and everyone who needs it to make a decision can easily find and use it -data from sales module can directly feed the MRP module to drive inventory planning to help you budget and information on staffing to make sure your human resources can support a production plan -enable more timely information sharing and decision making -Reduced production lead times and costs, increased database accuracy, and more effective decision making. You can even give customers and suppliers access to the information they need to work more productively with you. Your best customers and suppliers may invite you to link with their ERP systems.
Master Production Schedule (MPS)
-tells you when you need to produce more of the product in order to meet demand. The MPS actually shows you the quantities of an end item you need to produce in each time bucket—the relevant time period for your planning purposes—for a rolling time horizon -most companies use weekly or monthly buckets -dell used hourly bucket -time horizon should be longer than the longest lead time path on the bill of materials- otherwise, you will not have enough demand to plan, order, and receive the inputs needed for customer demand -you build MPS bu look at actual customer orders aka firm or committed orders as well as sales forecasts -you use the larger of the two numbers actual demand or forecast demand -MPS compares demand to existing inventory to determine when more product needs to be produced- the MPS database also incorporates lead times for each input in order to work backward and calculate order realize dates -the job is to decide on the appropriate batch size- how much to order each time you need to produce more of the product - also factor supply risk to decide if additional safety stock or safety leaf time is needed -he MPS does not promise to produce feasible production schedules. Specifically, the MPS process doesn't look at the availability of critical production resources like equipment capacity, labor, or even money. Simply put, the MPS process doesn't evaluate whether enough production capacity exists to produce to plan. That task is part of the rough-cut capacity planning process Change the MPS. You can shift production forward and spend more money on inventory or you can move production back and proactively work with customers to mitigate the negative impacts of late deliveries. Increase Capacity. You might be able to authorize overtime to increase labor and machine capacity. If lead times are long enough, you might even invest in additional equipment or qualify an added supplier. Decisions like these really depend on longer-term demand trends. -act sooner as you spot the capacity shortfall- if you wait until lack of capacity affects production its too late to proactively solve the capacity problem
Lot for Lot
-very straightforward -order exactly what you need for each period -LFL means you will order more frequently, but you won't have any inventory at the end of each period -remaining inventory is called remnants -you minimize but increase ordering costs -When should you use LFL? When ordering or setup costs are low and item value and thus carrying costs are high. LFL also makes sense when demand is relatively infrequent.
period order quanity
-you produce or oder exactly enough to exactly cover a fixed number of periods of demand -you might order enough to cover two periods of net requirements each time you pan an order -The POQ rule makes the timing of orders more predictable, aligning orders more closely to demand. Many companies adopt POQ because it is convenient (e.g., order every four weeks).
MRP logic and mechanics
1)Deciding how much to order 2)Deciding how to manage uncertainty
translate your dinner plans into a master production schedule (MPS) and bill of materials (BOM), compare your materials requirements to your on-hand inventory, and build a work plan using backward scheduling as follows.
Master Production Schedule. Your menu is your master production schedule. The menu tells you what end products you are going to make and when you will make them—i.e., Hawaiian Fajitas, tropical fruit salad, and passion fruit punch next Friday evening. Bill of Materials. Your recipes are your bills of materials. They tell you exactly what ingredients you need and in what quantities. These ingredients are your dependent demand items. What you need depends on the recipes you choose to make. Inventory Records. As you go over the recipes, you need to check your pantry, spice rack, and refrigerator to make sure you have the ingredients you need to make the dinner. Even if you have all the spices, you will almost certainly need to go shopping next Thursday to buy the fresh fruit. A missing ingredient could turn a celebratory event into a catastrophe. Backward Scheduling. Recipes also give you the instructions you need to plan your work. When Sweet Dee created the recipe for Hawaiian Fajitas, she figured out what had to be done—and in what order—so that the fajitas would be ready at the right time. This is a form of backward scheduling. Following the instructions (e.g., add the brown sugar to the hash browns, then mix in to the fajitas), will help you enjoy an on-time, tasty dinner. -most productions contain more parts and are made with more capital-intensive equipment using a more complex process -basic logic of material requirements planning (MRP) is the same -to scale up the corporate world you need some serious computing power and sophisticated software to help make behind the scenes decisions making -with right technology and discipline you can make sure the right inputs are available in time to put together your desired product
MRP systems
One final thought: The time-phased logic that is the heart of MRP systems isn't just for manufacturers. Any place you find dependency relationships, you can apply time-phased resource planning. For example, retailers use distribution requirements planning (DRP) systems to plan when and how to get product to the right place at the right time in their distribution systems—a bigger challenge than ever in today's omni-channel marketplace. Figure 14-18 illustrates that time-phased logic works both upstream and downstream. If you work for Amazon and are responsible for assuring on-time delivery during Amazon Prime Days, the time-phased modules in your ERP system may be the only thing that lets you get some sleep at night.
how you should manage uncertanity
Things happen. Sometimes an earthquake shakes up your supply chain. Sometimes a supplier over promises and under delivers. Sometimes your products are more popular than you forecast. If any of these things happen, you are likely to run out of inventory and disappoint your customers. MRP systems rely on two tools to help protect you against uncertainty: Safety stock and safety lead time. Safety Stock Safety stock is exactly what it sounds like—extra inventory that you hold to help you deal with uncertainty. You can calculate a cost-effective safety stock by looking at historical lead time and demand variabilities. You might add some additional safety stock if your scanning indicates a change on the horizon. How does safety stock affect MRP logic and mechanics? The answer is simple. Instead of planning to release an order when you expect inventory to go below zero, you release the order when inventory goes below your safety stock—say 5 or 10 units. Your safety stock provides you an inventory buffer to protect you from the unexpected. Safety Lead Time Safety lead times also provide a buffer, but the buffer is time, not inventory. For instance, what happens when you purchase an item from a supplier with a one-week lead time, but the supplier delivers 5 to 7 days late? Or, what if the machine you use to produce a part tends to break down, leading to frequent production delays of 5 to 7 days? Rather than increasing inventory, you could simply order one week earlier. Both safety stock and safety lead time allow you to take MRP schedules and build in buffers for when things go wrong. If you have some actual data, you can model the costs to determine whether to go with safety stock or adopt a safety lead time.
