Inventory Management Notes PDF

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MRP; MRPII, DRP AND JIT

 Managers of manufacturing companies are being suddenly confronted these days with an array of new systems to improve production efficiency. As in many areas of business, choosing the best operations management technique making trade-offs.  MRP allows for an extraordinary degree of advance planning for mediuminventory, mass-production companies but at a cost in flexibility and informality.  Kanban keeps inventory costs down and involves employees but requires well-structured supply lines and cooperative workers.  Optimized production technology focuses on clearing up bottlenecks in the manufacturing process but can adversely affect no bottleneck areas and is a proprietary system.  Flexible manufacturing systems offer the hope of eliminating many of the weaknesses of the other three approaches but possible at a cost of cutting out many jobs Materials Requirement Planning MRP System? A Material Requirements Planning (MRP) system is a planning and decision-making tool used in the production process which analyses current inventory levels vs production capacity and the need to manufacture goods, based on forecasts. MRP schedules production as per bills of materials while minimizing inventory. Main features of an MRP system? 

A master production schedule: A statement of the planning including orders, forecasts and capacity.

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Bill of materials (BOM): All the materials and components required to make the final product.

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Inventory status file: Stock records that allow gross requirements to be adjusted to net requirements.

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How MRP system work  

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Step 1. Exploding: achieved by using the Bill of Materials (BOM), i.e. how many components are needed to prepare one item of manufacturing? Step 2. Netting: the net quantity of material calculated by computing the difference between the stocks available in the factory from the overall, gross requirement. This figure is provided by exploding. Step 3. Offsetting: lead time is estimated for the entire operation that helps practitioners to compute the expected time for manufacturing. It also advises when the manufacturing process should begin so that items are available on the promised date

MRP STEPS AND PROCESSES The MRP process can be broken down into four major steps: 1. Identifying requirements to meet demand The first step of the MRP process is identifying customer demand and the requirements needed to meet it, which starts with inputting customer orders and sales forecasts. Using the bill of materials required for production, MRP then disassembles demand into the individual components and raw materials needed to complete the build while accounting for any required sub-assemblies. 2. Checking inventory and allocating resources Utilizing the MRP to check demand against inventory and allocating resources accordingly, you can see both what items you have in stock and where they are—this is especially important if you have inventory across several locations. This also lets you see the status of items, which gives visibility into items that are already allocated to another build, as well as items not yet physically in the warehouse that are in transit, or on order. The MRP then moves inventory into the proper locations and prompts reorder recommendations. 3. Scheduling production Using the master production schedule the system determines how much time and labor are required to complete each step of each build and when they need to happen so that the production can occur without delay. The production schedule also identifies what machinery and workstations are needed for each step and generates the appropriate work orders, purchase orders and transfer orders. 2

If the build requires subassemblies, the system takes into account how much time each subassembly takes and schedules them accordingly. 4. Identifying issues and making recommendations Finally, because the MRP links raw materials to work orders and customer orders, it can automatically alert your team when items are delayed and make recommendations for existing orders: automatically moving production in or out, performing what-if analyses, and generating exception plans to complete the required builds.

MRP Inputs How well your MRP system works depends on the quality of the data you provide it. For an MRP system to work efficiently, each input must be accurate and updated. Here are some of the inputs an MRP depends on: 

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Demand – Including sales forecasts and customer orders. When working with predicted demand, a system that is integrated with an enterprise-wide ERP system allows forecasting using historical sales vs. just sales forecasts. Bill of materials (BOM) – Keeping a single updated version of the bill of materials is essential for accurate supply forecasting and planning. A system that’s integrated into the enterprise-wide inventory management system avoids version control issues and building against outdated bills, which result in reworks and increased waste. Inventory – It’s essential to have a real-time view of inventory across the organization to understand what items you have on hand and which are en route or have purchase orders issued, where that inventory is and what the inventory’s status is. Master production schedule – The master production schedule takes all build requirements and plans machinery usage, labor and workstations to account for all outstanding work orders to be completed. MRP Outputs

Using the provided inputs, the MRP calculates what materials are needed, how much is needed to complete the build and when in the build process they are needed. With this information defined, businesses are able to execute on just-in-time (JIT) production, scheduling production based on material availability. This minimizes inventory levels and carrying costs, as inventory is not stored in the warehouse for future production but arrives as needed. By scheduling materials to arrive and production to begin soon after, businesses can move materials through the workflow process without delay. The MRP lays out the plan of when materials should arrive, based on when they’re needed in the production process, and when subassemblies should be scheduled. Using a master production plan and taking into account subassembly build times minimizes materials sitting on shelves and bottlenecks in the build process. 3

Advantages of an MRP system A Material Requirements Planning (MRP) system is a planning and decision-making tool used in the production process which analyses current inventory levels vs production capacity and the need to manufacture goods, based on forecasts. MRP schedules production as per bills of materials while minimizing inventory. The technique is computerized and looks at requirements within a fixed period. i. ii.

The MRP system is widely credited for playing a crucial part in decreasing factory inventory. It also assists in manufacturing industrial products that are more complex MRP focus is on what materials are required and when they need to be sourced. It is also helpful in product customisation

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MRP has historically been seen as giving additional advantage because it is known to schedule and track every order whether for production or purchase

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Better inventory control – minimise the amount of inventory you are holding whilst keeping production on track. Using an MRP system means that you can avoid holding rarely used or excess materials for long periods of time whilst remaining confident that you won’t have any shortages of key materials.

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Reduced costs – both for you and your customers. By holding less stock, you have less working capital tied up. With fewer raw materials or components held in stock, you can reduce your storage costs. These cost savings can be passed onto the customer in the form of more competitive pricing.

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Improved scheduling – MRP gives a clear indication of when production operations need to be carried out. This enables your production managers to see what labour they need and when and avoid expensive overtime.

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Excellent customer service – utilising MRP enables you to deliver in full on time to your customers

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Production Planning – production of the end product (or even sub-assemblies of a complex project) is dependent on the availability of the raw materials or components. MRP highlights any shortages so that your production manager can reallocate your work centres, machinery or labour for alternative jobs that have a complete inventory.

Problems with using Material Requirements Planning (MRP) in Manufacturing Whilst there can be a few issues around using an MRP system in manufacturing, most MRP systems are proven to offer significantly more benefits than spreadsheets or manual calculations. The main concern around MRP is generally data quality. A system is only as good as the data entered into it and data that is not kept up to date or contains errors will give inaccurate results. Mistakes often arise during cycle-count adjustments, data entry and shipping stages or reporting of scrap, damage or waste. Using barcode scanners and daily recording of scrap, damage or waste is one way of minimising these errors but another is to use an MRP system as part of a wider ERP system. 4

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By integrating MRP with ERP software, all data is held within one system and is easier to keep up to date and accurate.

MANUFACTURING RESOURCE PLANNING (MRP II)

MRPII overview and implementation

Manufacturing resources planning (MRP II) is essentially an extended form of closed loop MRP that also incorporates strategic planning processes, business planning, and a number of other business functions such as human resources planning, profit calculation and cash flow analysis.

MRP II uses the master production schedule as the basis for scheduling capacity, shipments, tool changes, some design work, and cash flow. It therefore requires several additions to the reference files. One is a bill of resources, which details key resources needed to produce one unit of product. These resources may include labour, machinery, tools, space and materials. The MRP II system can use the bill of resources to project shortages at specific times, giving departments advance notice of required remedial action: for example, of the need to hire or train labour.

MRP II can also project needs for support resources; for example, design engineering support if a customer order entails prior design work. This additional resource is added to the bill of resources.

Given still more reference data, MRP II can keep track of tool wear and recommend when to replace or resharpen tooling. It can also keep track of machine loads and project machine capacity shortages, which may signal a need for more machines or a subcontractor.

For financial planning, MRP II treats cash flow almost like materials. The MPS is first exploded into component parts requirements; the system then calculates the cost and payment dates of all planned order releases, effectively creating a cash flow forecast. This includes not just payments to suppliers, but also wages, power and other consumables 5

associated with production. Cash outflows may be projected for a year or more by expense category, work centre or department, making budgeting much simpler than it would be without an MRP II system.

That’s the theory. But when studying real-life MRP II systems, two important factors need bearing in mind. First, MRP II systems can be customized to some extent by adding only the modules an organization needs, and so will often differ from one organization to another. Second, what looks like a ‘pure’ MRP II system may not have started out as an MRP II system. It may instead have evolved from an existing system until something resembling an MRP II system is being used. What is important is how the system is used to plan and control the business.

It is also essential to note that MRP II is not a computer-based production planning system. It needs to know the organization’s overall business aims and objectives and pulls in many other business functions. These appear as additional functions to material requirements planning and closed loop MRP systems. As these extra modules generate extra feedback loops, it can easily be seen from the next diagram that an MRP II feedback system should significantly improve management’s ability to plan and control the organizations activities. In operation, MRP II is much more than just material requirements planning or closed loop MRP with add-on functions. It is a way of running the entire organization with one consistent set of figures. It is also significantly better than closed loop MRP at overcoming the basic drawbacks of material requirements planning, which to recap were:

• Uncontrollable costs

• Many full-time expeditors

• Late deliveries to customers

• Customer complaints

• Late deliveries from suppliers

• High ‘past dues’

• Unplanned overtime/off loading

• Long queues

• High work-in-progress levels

• End-of-month crunches

• Mismatched inventories

• A blame culture

• Over-or under-utilized resources • Low morale • Disruptions on the shop floor

With MRP II, a proposed master production schedule can be assessed not just in terms of material requirements and capacity, but also in terms of resource requirements (such as labour), potential income and probable costs.

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Master Scheduling

For a full understanding of MRP II it’s worth examining the work of the master scheduler, who plays a key role in the operation of an MRP II system. Let’s look first at the objectives of master scheduling. In the view of The Institute of Operations Management these are:

To create and maintain a valid master schedule for material and capacities by effectively balancing supply and demand for product. A valid master schedule is one in which priority due dates equal need dates, and planned capacity equals required capacity.

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Develop in-depth knowledge of the company’s products and processes to ensure optimal master schedule stability, order creation, rescheduling, load levelling etc. 2. Work with sales, marketing and manufacturing to (a) develop a clear understanding of competitive lead times for master scheduled items, and (b) seek ways to reduce both internal lead times and lead times to the customer. 3. Conduct rough cut capacity planning before publishing a significantly changed master schedule. 1. Summarize daily and weekly master schedules for released and firm planned orders; and compare these to the production plan to ensure that the master schedule is in line with the company’s sales and operational policy. 2.

Identify and, through negotiation, resolve any conflict between material and capacity availability and order promise.

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Maintain planned lead times, lot sizes, safety stocks, delivery times and order file data for all MPS items.

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Create a master schedule that satisfies customer demand without exceeding levels of inventory and resource utilization established by company policy.

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Ensure that a common master schedule governs all company priorities in manufacturing, marketing, sales, engineering and finance.

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Maintain planning bill structures.

The master scheduler clearly has to be someone of outstanding experience and ability; and such a challenging job description speaks volumes about the importance of master scheduling to the commercial success of a manufacturing organization. The feedback loops in an MRP II system can also do more than those in a closed loop MRP system. MRP II effectively builds a computer-based model of the organization and assesses the effects of a provisional master production schedule applied to that model. Several different master production schedules can be 7

simulated in this way. Whichever best meets the needs of both the customer(s) and the organization’s higher level plans can then be used for the ‘live’ MRP II run.

MRP II systems are also highly flexible.

Benefits of MRPII

In the narrow sense, the main benefit of MRP II is its ability to generate valid schedules and keep them valid. But valid schedules have broader benefits for the whole organization. These include, more or less in order of importance:

 Improved on-time completion A typical manufacturing organization using MRP II should be able to achieve on-time completion rates of 95 per cent or more, because completion of a parent item is less likely to be delayed for lack of a component. On-time completion helps improve customer service.

 Reduced inventories Inventory falls - typically by 20-35 per cent - because parts are not ordered until needed.

 Capacity requirements planning data Work centre capacity requirements can be planned for many periods into the future.

 Improved direct labour productivity Fewer shortages means significantly less lost time and overtime, and less disruption to accommodate shortage-list jobs.

 Improved productivity of support staff

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MRP II cuts expediting (or ‘firefighting’) and allows more time for planning. For example, purchasing can start looking for alternative or better suppliers; materials management can plan inventory needs better.

 Total business planning The ability to use one common set of data to help plan and control the whole business.

Drawbacks of MRPII

There is no getting away from the fact that MRP II is complex. As we’ll see shortly in A typical MRP II implementation programme, it takes a lot of time, effort and commitment at all levels of the organization to set up a successful MRP II system. The benefits, however, should very quickly make the exertion worthwhile.

MRPII implementation levels

MRP II systems can be implemented at different levels with varying rates of success. Most MRP II experts use The Oliver Wight ABCD Checklist for Operational Excellence - also known as ABCD classification - to identify these different levels. The ABCD Checklist is a comprehensive list of questions that organizations can use to rate their MRP II capability or potential.

According to Oliver Wight, the characteristics that put an organization into category A, B, C or D can be summed up as:

Class A

Planning and control processes are effectively used company wide, from top to bottom. Their use generates significant improvements in customer service, productivity, inventory, and costs.

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Class B

These processes are supported by top management and used by middle management to achieve measurable company improvements.

Class C

Planning and control system is operated primarily as a better method for ordering materials; contributing to better inventory management.

Class D

Information provided by the planning and control system is inaccurate and poorly understood by users; providing little help in running the business.

Class A is the level most likely to produce maximum benefits to an organization as a whole. It can be defined as MRP II implemented throughout the organization, generating significantly improved customer service and productivity with lower inventory and costs. At Class A level, the organization is run with one set of figures from top management plans down to shop-floor operating schedules, and managers mak...