Operations Management in the Supply Chain

Decisions and Cases

Alt text will be entered here.Seventh Edition

Chapter 15 Material Requirements

Planning and ERP

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Learning Objectives

  1. Recall the elements, inputs and outputs of an MRP system.
    1. Contrast and compare MRP versus order-point systems.
    1. Construct a materials plan given the gross requirements.
    1. Describe in detail each element of an MRP system.
    1. Discuss DRP and different ways to deal with uncertain demand.
    1. Explain the five requirements for a successful MRP system.
    1. Describe what an ERP system does.

Materials Requirements Planning (MRP)

  • Used to manage dependent demand items
    • Raw materials, WIP parts
    • Parts used to make higher-level components
  • Driven by the master schedule (which is driven by S&OP)
  • Parts explosion breaks end items into all requirements for components/parts using bill of materials (BOM)
  • Schedule is offset based on lead times
  • Push system used because master schedule is constantly changing

Closed Loop MRP System (Figure 15.1)

Figure 15.1 illustrates a typical closed-loop MRP system. This figure uses a series of labeled circles, squares, and ovals connected by arrows to illustrate a closed-loop MRP system. At the top of the figure is a circle labeled “S&OP (aggregate production plan).” Below this circle are two circles arranged side-by-side; the first (on the left) is labeled “Firm orders and customers or from finished-goods inventory” and the other (on the right) is labeled “Forecast of demand.” Arrows point downward from all three of these circles to a square labeled “Master schedule.” An arrow also points upward from forecast of demand to S&OP. An arrow points downward from master schedule to a square labeled “Parts explosion.” On either side of parts explosion are two circles; on the left side, the circles are labeled (moving left to right) “Engineering design changes” and “Bill of materials.” On the right side, the circles are labeled (moving right to left) “Inventory transactions” and “Inventory records.” An arrow points rightward from engineering design changes to bill of materials, and from bill of materials to parts explosion. An arrow points leftward from inventory transactions to inventory records and from inventory records to parts explosion. An arrow points vertically downward from parts explosion and then splits into two arrows, each pointing downward at a column of rectangles. The left column contains two rectangles, which are labeled (from top to bottom) “Purchase orders” and “Suppliers.” The right column contains four rectangles, which are labeled (from top to bottom) “Shop orders,” “Capacity planning,” “Shop-floor control,” and “Operations.” A dashed arrow points rightward from suppliers in the first column to operations in the second column, and a dashed arrow labeled “Product” points rightward away from operations. A dotted line points upward and then leftward from capacity planning to master schedule.

Comparison of MRP & Order-Point Systems

AttributeMRPOrder Point
DemandDependentIndependent
Order philosophyRequirementsReplenishment
ForecastBased on master scheduleBased on past demand
Control conceptControl all itemsABC
ObjectivesMeet manufacturing needsMeet customer needs
Lot sizingDiscreteEOQ
Demand patternLumpy but predictableRandom
Types of inventoryWork in process and raw materialsFinished goods and spare parts
  • •        Inputs

MRP Elements

  • Master schedule
    • Bill of materials (BOM)
    • Inventory records
  • Outputs
    • Capacity planning
    • Purchasing
    • Shop-floor control

MRP Example

Figure 15.2 shows a table with a flat circular top a leg assembly. The leg assembly consists of four legs, with two short rails between the legs on the short end of the rectangle and two long rails between the legs on the long end of the rectangle.

BOM (Product Structure)

  • Table (end item) 1 week
    • Leg assembly (1) 1 week
      • Short rails (2) 1 week
      • Long rails (2) 1 week
      • Legs (4) 1 week
    • Top (1) 2 weeks

Indented BOM

Level CodeComponent
0Table (end-item)
1Leg assembly (1)
2Short rails (1)
2Long rails (2)
2Legs (4)
1Top (1)

Materials Plan for BOM Levels 0 and 1 (1 of 2)

  Week: 1Week: 2Week: 3Week: 4Week: 5Week: 6
 Tables      
On hand = 50Gross Requirement   200150100
LT = 1 wkScheduled Receipts      
Lot size: L4LProjected Ending Inventory505050   
Saftey Stock = 0Net Requirement   150150100
 Planned order receipts   150150100
 Planned order releases  150150100 
 Tops      
On hand = 50Gross Requirement  150150100 
LT = 2 wkScheduled Receipts 50    
Lot size: L4LProjected Ending Inventory50100    
Saftey Stock = 0Net Requirement  50150100 
 Planned order receipts  50150100 
 Planned order releases50150100   

Materials Plan for BOM Levels 0 and 1 (2 of 2)

  Week: 1Week: 2Week: 3Week: 4Week: 5Week: 6
 Leg Assembly      
On hand = 100Gross Requirement  150150100 
LT = 1 wkScheduled Receipts      
Lot size: L4LProjected Ending Inventory100100    
Saftey Stock = 0Net Requirement  50150100 
 Planned order receipts  50150100 
 Planned order releases 50150100  

Materials Plan

On previous slide, note the following:

  • Gross requirements in level 0 (Tables) come from the master schedule.
  • Gross requirements in level 1 (Tops, Leg assemblies) come from the planned order releases in level 0.
  • Planned order releases are offset by the lead times.
  • Planned order releases are planned!                                         Actual order releases must take available capacity into account.
  • Net requirements are the gross requirements minus the projected ending inventory.

Master Schedule

•        Quantities derived from aggregate production plan (product families).

  • Frozen within production lead time (so all parts can be obtained).
  • Quantities reflect “build” schedule rather than demand forecasts.
  • Quantities represent what needs to be produced (infinite capacity assumed)

Bill of Materials [BOM]

  • Structured list of all parts and materials
  • Must be 100 percent accurate
  • Should be one BOM per product per company
  • Engineering-change-order (ECO) system used to update BOM as product redesigned

Inventory Records

  • Item master data segment
    • Constant info (part number, cost, etc.)
  • Inventory status segment
    • Materials plan for each item
  • Subsidiary data segment
    • Info on outstanding orders, demand history, etc.
  • Records must be accurate
    • Cycle counting: physical count of a few items each day, so that all items are counted on a regular cycle

Capacity Planning

•        Purpose is to aid management in checking validity of master schedule

  • Is there enough capacity to produce as scheduled?
  • Two methods
    • Shop loading: assign work to work centers
    • Finite capacity scheduling: considers resource limitations

Purchasing

  • Greatly enhanced by use of MRP
  • Past due orders mostly eliminated
  • Order expediting mostly eliminated
  • Can provide suppliers with reports of planned future orders
  • Can use electronic data interchange (EDI) to communicate directly with suppliers
  • •        Purposes

Shop Floor Control

  • Release orders to the shop floor
    • Manage the orders for on-time completion
      • Can use manufacturing execution system (MES)

•        Set job priorities (dispatching rules)

  • Manage lead times on basis of priority
    • Expedite and de-expedite orders
  • Minimize inventory while meeting completion dates

Operating an MRP System

  • Should MRP carry safety stock?
  • How much safety stock should be carried?
  • Safety lead time, safety capacity

•        Couple its use downstream with distribution requirements planning (DRP)

  • Use upstream to give suppliers visibility into schedule

Required Elements for a Successful MRP System

  1. Implementation planning
  2. Appropriate and adequate IT support
  3. Accurate data
  4. Management support
  5. User knowledge (all levels of firm)

Enterprise Resource      Planning (ERP) Systems

  • Extension and integration of all functions through a common database –

Forces standardized systems throughout firm

  • Accounting controls systems
    • Marketing and sales transactions
    • Human resource planning and payroll transactions
  • Coordinate decisions along the supply chain
  • Major software vendors
    • SAP
    • Oracle

Summary

  1. Recall the elements, inputs and outputs of an MRP system.
    1. Contrast and compare MRP versus order-point systems.
    1. Construct a materials plan given the gross requirements.
    1. Describe in detail each element of an MRP system.
    1. Discuss DRP and different ways to deal with uncertain demand.
    1. Explain the five requirements for a successful MRP system.
    1. Describe what an ERP system does.

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