Chapter 14 -Material Requirements Planning (MRP) and ERP PDF

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IAF716 - Operations Management Chapter 14 -Material Requirements Planning (MRP) and ERP December 4, 2018 Material Requirements Planning ➔ For all components that a firm produces to go into a final product, material requirements planning (MRP) determines when to begin producing them and in what quantities ➔ An MRP system has three objective: 1. Ensure Materials are available for production and products are available for deliver to customers 2. Maintain lowest inventory 3. Plan manufacturing activities, delivery schedules and purchasing activities ➔ Most MRP systems are software-based, while it is possible to conduct MRP by hand as well Dependent Demand ➔ When the demand for one item is dependent on the demand for another ◆ There is a clearly identifiable parent ➔ Taking lead times into consideration, components are scheduled far enough in advance to ensure that the final product can be completed when scheduled ➔ Benefits of MRP: 1. Better response to customer orders 2. Faster response to market changes 3. Improved utilization of facilities and labour 4. Reduced inventory levels Master Production Schedule (MPS) ➔ Specifies what product is to be made and when and when ➔ Must be in accordance with the aggregate production plan ➔ Inputs from financial plans, customer demand, engineering, supplier performance ➔ As the process moves from planning to execution, each step must be tested for feasibility ➔ Is the result of the production planning ➔ It specifies the resources available (overtime, allowable inventory, regular workforce, etc) ➔ Specifies exactly how many final products will be made and when ◆ Example of master production schedule - a document outlining the production of 50 grinders in week 1; 50 blenders in week 2; 100 mixers and 200 food processors in week 3; and 100 food mizers in week 4 Bills of Materials ➔ List of components, ingredients, and materials needed to produce one unit of finished product ➔ Provides product structure: ◆ Items above given level are called parents ◆ Items below given level are called children ➔ Kinds: 1) Modular Bills - modules are not final products but components that can be assembled into multiple end items - different final products

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a) e.g mixing basic colours to make products of numerous colors b) Modular bills represent subassemblies that actually exist are inventoried 2) Planning Bills - created to assign an artificial parent to the BOM a) Used to group subassemblies to reduce the number of items planned and scheduled b) Used to create standard “kits” for production c) Aka “pseudo” or super bills 3) Phantom Bills - part of another assembly and never go into inventory a) Describe subassemblies that exist only temporarily 4) Low-level coding - item is coded at the lowest level at which it occurs a) BOMs are processed one level at a time Accurate Records - accurate inventory records are absolutely required for MRP to operate correctly. ➔ Generally MRP systems require more than 99% accuracy 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 Safety Stock - may be necessary in dependent demand systems to account for uncertainty Gross Requirements Plan - a schedule that shows: ➔ The total demand for an item (prior to subtraction of on-hand inventory and scheduled receipts) ➔ When it must be ordered from suppliers ➔ When production must be started Net Requirement = Gross requirement - on the hand inventory ●

Linking a part of requirement with the parent component that caused the requirement is referred to as pegging

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Each R requires 2 of component S and 1 of part T. The lead time for assembly of R is 3 days. The lead time for the manufacture of S is 5 days. The lead time for the manufacture of T is 10 days. The cumulative lead time for R is 13 days

Product Structure Tree

MRP and JIT ➔ MRP provides a daily or weekly plan, but it does not provide more detailed scheduling than that ◆ Requires fixed lead times, which might actually vary with batch size

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➔ JIT excels at rapidly moving small batches of material through the system ➔ MRP II (manufacturing resource planning) - similar to basic MRP, the system can determine needs not only fro units, but also for scheduling resources - such as labour hours, machine hours, scrap, and payables (cost) ➔ Distribution Resource Planning (DRP) extends MRP beyond one firm into multiple firms within the supply chain. ◆ Is a time-phased stock-replenishment plan for all levels of a distribution network ◆ Represents an excellent mechanism for enhancing supply chain coordination MRP in Services ➔ Some services or service items are directly linked to demand for other services ➔ Services or service items may have dependent demand as well (and hence require MRP) ◆ For examples: ● Restaurants have ingredients and side dishes dependent upon the demand for meals ● Hospitals utilize equipment, materials, and supplies based on the demand for surgeries ● Hotels require materials, furniture, and decorations in response to demand for renovations Enterprise Resource Planning (ERP) ➔ The extension of MRP which extends to resources such as labour hours and machine hours, as well as to order entry, purchasing, and direct interface with customers and suppliers ➔ ERP is software that allows companies to: 1) Automate and integrate many of their business processes 2) Share a common database and business practice throughout the enterprise 3) Produce information in real time ➔ ERP modules include: ◆ BAsic MRP ◆ Finance ◆ HR ◆ Supply chain management (SCM) ◆ Customer relationship management (CRM) ➔ It ties all information systems together so that employees can have access to relevant data from any department ➔ Data are entered only once in a common, complete, and consistent database shared by all applications ➔ These are almost always custom-designed systems provided by companies specializing in ERP ➔ The cost of setting up such systems is usually counted in the millions of dollars and take longer than anticipated ◆ General: ERP does not solve problems - it only provides the information ➔ ERP systems have the potential to reduce transaction costs ➔ Increase the speed and accuracy of information

Advantages of ERP Systems

Disadvantages of ERP Systems

1. Provides integration of the supply chain, production, and administration

1. Is very expensive to purchase and even more to customize

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2. Creates commonality of databases

2. Implementation may require major changes in the company and its processes

3. Can incorporate improved best processes

3. Is so complex that many companies cannot adjust to it

4. Increases communication and collaboration between business units and sites

4. Involves an ongoing, possibly never completed, process for implementation

5. Has an off-the-shelf software database (ready made)

5. Expertise is limited with ongoing staffing problems

6. May provide a strategic advantage ERP in the Service Sector ➔ ERP systems have been developed for health care, govèt, retail stores, hotels, and financial services ➔ Aka efficient consumer response (ECR) ➔ Objective: to tie sales to buying, inventory, logistics, and production

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