Operations
Management
MRP and ERP Course
Notes Operations
Management
MRP and ERP
Charles E. Oyibo
MRP is a planning and scheduling technique used for batch production of assembled items. ERP involves the use of extensive software to integrate record keeping and information sharing throughout an organization.
A major distinction in the way inventories are managed result from the nature of demand for those items. When demand for an item is based on the need to use it to produce other products (as with raw materials and parts), those items are said to have dependent demand. The parts and materials that go into the production of an automobile are examples of dependent demand; but the demand for the finished cars is independent--a car is not a component of another item.
While independent demand is fairly stable (once allowances are made for seasonal variations), dependent demand tends to be sporadic; large quantities are used at specific points in time with little or no usage at other times. Because of these tendencies, independent-demand items must be carried on a continual basis, but dependent-demand items need only be stocked just prior to the time they will be needed in the production process. Moreover, the predictability of usage of dependent-demand items means that there is little or no need for safety stock.
Material requirement planning (MRP) is a computer-based information system designed to handle ordering and scheduling of dependent-demand inventories (raw materials, components parts, etc.). A production plan for a specified number of finished products is translated into requirements for component parts and raw materials working backward from the due date, using lead times and other information to determine when and how much to order.
MRP begins with a schedule for finished goods that is converted into a schedule of requirements for the subassemblies, component parts, and raw materials needed to produce the finished item in the specified time frame. Hence MRP answers three questions: what is needed? how much is needed? and when is it needed?
The primary inputs of MRP are:
The planner processes this information to determine the net requirements for each period of the planning horizon.
Outputs from the process include:
The master (production) schedule states which end items are to be produced, when they are needed, and in what quantities. The quantities in a master schedule come from a number of sources, including customer orders, forecasts, orders from warehouses to build up seasonal inventories, and external demand.
The master schedule separates the planning horizon into a series of time periods or time buckets, which are often expressed in weeks. It is important that the master schedule cover the stacked or cumulative lead time necessary to produce the end items.
A bill of materials (BOM) contains a listing of all of the assemblies and subassemblies, parts, and raw materials that are needed to produce one unit of a finished product. The listing in the BOM is hierarchical and shows the quantity of each item needed. The BOM could be thought of as a product tree structure that provides a visual depiction of the subassemblies and components needed to assemble a product.
Inventory records refer to stored information on the status of each item by time period. This includes gross requirements, scheduled receipts, and expected amount on hand. It also includes other details for each item, such as supplier, lead time, and lot size. Changes due to stock receipts and withdrawals, cancelled orders, and similar events also are recorded in this file.
MRP processing takes the end item requirements specified by the master schedule and "explodes" then into time-phased requirements for assemblies, parts, and raw materials using the bill of materials offset by lead times. The quantities that are generated by exploding the bill of materials are gross requirements; they do not take into account any inventory that is currently on hand or due to be received. The materials that a firm must actually acquire to meet demand generated by the master schedule are the net material requirements. We determine the net requirements by subtracting the sum of inventory on hand and any scheduled receipts from gross requirements, and then adding in safety stock requirements, if applicable:
Net requirements in period t = Gross requirements in period t - Projected inventory on period t + Safety stock (where projected inventory = inventory on hand + schedule receipts)
The timing and sizes of orders (i.e. materials ordered from suppliers or work started within the firm) are determined by planned-order releases. The timing of the receipts of these quantities is indicated by planned-order receipts.
The following "formal" definitions might prove to be helpful:
A material requirements plan is not a static document, but one that changes over time. The two basic systems used to update MRP records are regenerative and net change. A regenerative system is updated periodically (in batches); a net-change system is continuously updated. The former is best suited to fairly stable systems, while the latter is best suited to systems that have frequent changes.
MRP systems have the ability to provide management with a fairly broad range of outputs, which are often classified as:
Production and inventory planning and control are part of primary reports. These reports normally include:
The task of the manager using MRP is to (1) identify activities or operations that are subject to variability, (2) determine the extent of that variability, and (3) take steps to address the variability. When lead times are variable, the concept of safety time instead of safety stock is used.
Lot sizing refers to determining a lot size to order or produce. For independent-demand items (finished goods), managers often use economic order sizes and economic production quantities. Methods for lot sizing in dependent -demand system include:
We recall that a primary goal of inventory management is to minimize the sum of ordering (or setup) costs and holding cost. With dependent-demand items, unlike independent-demand items, demand tends to be sporadic (or "lumpy"), and the planning horizon shorter, so that economic lot sizes are much more difficult to identify.
Capacity requirements planning is the process of determining short-range capacity planning requirements. The necessary inputs include planned-order releases for MRP, the current shop load, routing information, and job times. Key outputs include load reports for each work center. When variances (under- or overloads) are projected, managers might consider remedies such as alternative routing, changing or eliminating lot sizing or safety stock requirements.
Stability in short-term production plans is very important; the term system nervousness describes the way a system might react to changes (e.g formation of queues and bottlenecks). The reaction can sometimes be disproportionately larger than the cause. To minimize such problems, many firms establish a series of time intervals, called time fences, during which changes can be made to orders; the nearest fence (say, 4 weeks) is the most restrictive to change; and the farthest fence (say, 12 weeks) is the least restrictive. We might "freeze" the plan from now to the 4 week fence, allow slight changes from 8 to 12 weeks, and allow (or even expect) bigger changes or entire substitutions after the 12-week fence.
In establishing fences, managers must weigh the benefit of stability in the program plan against the possible negative impact on the competitive advantage of being able to respond to new orders.
To conclude this segment, it is note worthy to mention load reports, which are department or work center reports that compare known and expected future capacity requirements with projected capacity availability.
MRP II represents an effort to expand (not replace, or improve) the scope of resource planning and to involve other functional areas of the firm (such as marketing, finance, personnel, purchasing, and engineering) in the planning process.
ERP represents and expanded effort to integrate standardized record-keeping that will permit information sharing among different areas of an organization in order to manage the system more effectively.
ERP attempts to integrate all departments and functions across a company onto a single computer system that can serve all those different department's particular needs. Of course, each department will typically have the system optimized for the particular way it does it work; but ERP combines them all together into a single, integrated software program that runs off a single database so that various departments can more easily share information and communicate with each other.
There are three major reasons to undertake ERP:
Aside from the Total Cost of Ownership (TCO) of ERP, including hardware, software, professional services, and internal staff costs, the following are "hidden" costs of ERP
It is crucial to remember that with transition to ERP comes the imperative to supply information to the system in real time. As decision are made on minute-by-minute basis, any delays in information increases the changes of wrong decisions being made. As companies implement ERP systems, the must upgrade their data management systems as well. It wouldn't do to implement an ERP system and still batch process orders on your factory floor.
Page Last Updated: Wednesday December 8, 2004 6:10 PM