2008 Prentice Hall, Inc. 14 – 1 Operations Management Chapter 14 – Chapter 14 – Material Requirements Material Requirements Planning (MRP) and ERP Planning (MRP) and ERP PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7e Principles of Operations Management, 7e Operations Management, 9e Operations Management, 9e
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Operations ManagementChapter 14 – Chapter 14 – Material Requirements Material Requirements Planning (MRP) and ERPPlanning (MRP) and ERP
PowerPoint presentation to accompany PowerPoint presentation to accompany Heizer/Render Heizer/Render Principles of Operations Management, 7ePrinciples of Operations Management, 7eOperations Management, 9e Operations Management, 9e
OutlineOutline Global Company Profile: Wheeled Global Company Profile: Wheeled
CoachCoach Dependent DemandDependent Demand Dependent Inventory Model Dependent Inventory Model
RequirementsRequirements Master Production ScheduleMaster Production Schedule Bills of MaterialBills of Material Accurate Inventory RecordsAccurate Inventory Records Purchase Orders OutstandingPurchase Orders Outstanding Lead Times for ComponentsLead Times for Components
Learning ObjectivesLearning ObjectivesWhen you complete this chapter you When you complete this chapter you should be able to:should be able to:
1.1. Develop a product structureDevelop a product structure2.2. Build a gross requirements planBuild a gross requirements plan3.3. Build a net requirements planBuild a net requirements plan4.4. Determine lot sizes for lot-for-lot, Determine lot sizes for lot-for-lot,
Largest manufacturer of Largest manufacturer of ambulances in the worldambulances in the world
International competitorInternational competitor 12 major ambulance designs12 major ambulance designs
18,000 different inventory items18,000 different inventory items 6,000 manufactured parts6,000 manufactured parts 12,000 purchased parts12,000 purchased parts
Four Key TasksFour Key Tasks Material plan must meet both the Material plan must meet both the
requirements of the master schedule requirements of the master schedule and the capabilities of the production and the capabilities of the production facilityfacility
Plan must be executed as designedPlan must be executed as designed Minimize inventory investment Minimize inventory investment Maintain excellent record integrityMaintain excellent record integrity
1.1. Master production scheduleMaster production schedule2.2. Specifications or bill of materialSpecifications or bill of material3.3. Inventory availabilityInventory availability4.4. Purchase orders outstandingPurchase orders outstanding5.5. Lead timesLead times
Effective use of dependent demand Effective use of dependent demand inventory models requires the inventory models requires the followingfollowing
Master Production Schedule Master Production Schedule (MPS)(MPS)
Specifies what is to be made and whenSpecifies what is to be made and when Must be in accordance with the aggregate Must be in accordance with the aggregate
production planproduction plan Inputs from financial plans, customer Inputs from financial plans, customer
demand, engineering, supplier performancedemand, engineering, supplier performance As the process moves from planning to As the process moves from planning to
execution, each step must be tested for execution, each step must be tested for feasibilityfeasibility
The MPS is the result of the production The MPS is the result of the production planning processplanning process
AggregateAggregate Production Plan Production Plan
Months January FebruaryAggregate Production Plan 1,500 1,200(Shows the totalquantity of amplifiers)Weeks 1 2 3 4 5 6 7 8Master Production Schedule(Shows the specific type andquantity of amplifier to beproduced240-watt amplifier 100 100 100 100150-watt amplifier 500 500 450 45075-watt amplifier 300 100
Accurate RecordsAccurate Records Accurate inventory records are Accurate inventory records are
absolutely required for MRP (or absolutely required for MRP (or any dependent demand system) to any dependent demand system) to operate correctlyoperate correctly
Generally MRP systems require Generally MRP systems require 99% accuracy99% accuracy
Outstanding purchase orders must Outstanding purchase orders must accurately reflect quantities and accurately reflect quantities and scheduled receipts scheduled receipts
The time required to purchase, The time required to purchase, produce, or assemble an itemproduce, or assemble an item For production – the sum of the For production – the sum of the
order, wait, move, setup, store, order, wait, move, setup, store, and run timesand run times
For purchased items – the time For purchased items – the time between the recognition of a need between the recognition of a need and the availability of the item for and the availability of the item for productionproduction
Starts with a production schedule for the Starts with a production schedule for the end item – end item – 5050 units of Item A in week 8 units of Item A in week 8
Using the lead time for the item, Using the lead time for the item, determine the week in which the order determine the week in which the order should be released – a should be released – a 11 week lead time week lead time means the order for means the order for 5050 units should be units should be released in week 7released in week 7
This step is often called “lead time This step is often called “lead time offset” or “time phasing”offset” or “time phasing”
From the BOM, every Item A requires From the BOM, every Item A requires 22 Item Bs – Item Bs – 100100 Item Bs are required in Item Bs are required in week 7 to satisfy the order release for week 7 to satisfy the order release for Item AItem A
The lead time for the Item B is The lead time for the Item B is 22 weeks – weeks – release an order for release an order for 100100 units of Item B in units of Item B in week 5week 5
The timing and quantity for component The timing and quantity for component requirements are determined by the requirements are determined by the order order releaserelease of the parent(s) of the parent(s)
The process continues through the entire The process continues through the entire BOM one level at a time – often called BOM one level at a time – often called “explosion”“explosion”
By processing the BOM by level, items By processing the BOM by level, items with multiple parents are only processed with multiple parents are only processed once, saving time and resources and once, saving time and resources and reducing confusionreducing confusion
Low-level coding ensures that each item Low-level coding ensures that each item appears at only one level in the BOMappears at only one level in the BOM
Determining Net Determining Net RequirementsRequirements
Starts with a production schedule for the Starts with a production schedule for the end item – end item – 5050 units of Item A in week 8 units of Item A in week 8
Because there are Because there are 1010 Item As on hand, Item As on hand, only only 4040 are actually required – (net are actually required – (net requirement) = (gross requirement - on- requirement) = (gross requirement - on- hand inventory)hand inventory)
The planned order receipt for Item A in The planned order receipt for Item A in week 8 is week 8 is 4040 units – units – 40 = 50 - 1040 = 50 - 10
Determining Net Determining Net RequirementsRequirements
Following the lead time offset procedure, Following the lead time offset procedure, the planned order release for Item A is the planned order release for Item A is now now 40 40 units in week 7units in week 7
The gross requirement for Item B is now The gross requirement for Item B is now 8080 units in week 7 units in week 7
There are There are 1515 units of Item B on hand, so units of Item B on hand, so the net requirement is the net requirement is 6565 units in week 7 units in week 7
A planned order receipt ofA planned order receipt of 65 65 units in units in week 7 generates a planned order release week 7 generates a planned order release of of 6565 units in week 5 units in week 5
Determining Net Determining Net RequirementsRequirements
A planned order receipt ofA planned order receipt of 65 65 units in units in week 7 generates a planned order release week 7 generates a planned order release of of 6565 units in week 5 units in week 5
The on-hand inventory record for Item B The on-hand inventory record for Item B is updated to reflect the use of theis updated to reflect the use of the 15 15 items in inventory and shows no on-hand items in inventory and shows no on-hand inventory in weekinventory in week 8 8
This is referred to as the Gross-to-Net This is referred to as the Gross-to-Net calculation and is the third basic function calculation and is the third basic function of the MRP processof the MRP process
MRP is a dynamic systemMRP is a dynamic system Facilitates replanning when changes Facilitates replanning when changes
occuroccur System nervousness can result from System nervousness can result from
too many changestoo many changes Time fences put limits on replanningTime fences put limits on replanning Pegging links each item to its parent Pegging links each item to its parent
allowing effective analysis of changesallowing effective analysis of changes
Finite Capacity SchedulingFinite Capacity Scheduling MRP systems do not consider MRP systems do not consider
capacity during normal planning capacity during normal planning cyclescycles
Finite capacity scheduling (FCS) Finite capacity scheduling (FCS) recognizes actual capacity limitsrecognizes actual capacity limits
By merging MRP and FCS, a finite By merging MRP and FCS, a finite schedule is created with feasible schedule is created with feasible capacities which facilitates rapid capacities which facilitates rapid material movementmaterial movement
Small Bucket ApproachSmall Bucket Approach1.1. MRP “buckets” are reduced to daily or hourlyMRP “buckets” are reduced to daily or hourly
The most common planning period (time The most common planning period (time bucket) for MRP systems is weeklybucket) for MRP systems is weekly
2.2. Planned receipts are used internally to sequence Planned receipts are used internally to sequence productionproduction
3.3. Inventory is moved through the plant on a JIT Inventory is moved through the plant on a JIT basisbasis
4.4. Completed products are moved to finished goods Completed products are moved to finished goods inventory which reduces required quantities for inventory which reduces required quantities for subsequent planned orderssubsequent planned orders
5.5. Back flushing based on the BOM is used to Back flushing based on the BOM is used to deduct inventory that was used in productiondeduct inventory that was used in production
Items used by many products are Items used by many products are held in a common area often called held in a common area often called a supermarketa supermarket
Items are withdrawn as neededItems are withdrawn as needed Inventory is maintained using JIT Inventory is maintained using JIT
systems and proceduressystems and procedures Common items are not planned by Common items are not planned by
Lot-Sizing TechniquesLot-Sizing Techniques Lot-for-lot techniques order just what Lot-for-lot techniques order just what
is required for production based on is required for production based on net requirementsnet requirements May not always be feasibleMay not always be feasible If setup costs are high, lot-for-lot can If setup costs are high, lot-for-lot can
be expensivebe expensive Economic order quantity (EOQ)Economic order quantity (EOQ)
EOQ expects a known constant EOQ expects a known constant demand and MRP systems often deal demand and MRP systems often deal with unknown and variable demandwith unknown and variable demand
Part Period Balancing (PPB) looks at Part Period Balancing (PPB) looks at future orders to determine most future orders to determine most economic lot sizeeconomic lot size
The Wagner-Whitin algorithm is a The Wagner-Whitin algorithm is a complex dynamic programming complex dynamic programming techniquetechnique Assumes a finite time horizonAssumes a finite time horizon Effective, but computationally Effective, but computationally
Lot sizes can be modified to allow for Lot sizes can be modified to allow for scrap, process constraints, and purchase scrap, process constraints, and purchase lotslots
Use lot-sizing with care as it can cause Use lot-sizing with care as it can cause considerable distortion of requirements considerable distortion of requirements at lower levels of the BOMat lower levels of the BOM
When setup costs are significant and When setup costs are significant and demand is reasonably smooth, PPB, demand is reasonably smooth, PPB, Wagner-Whitin, or EOQ should give Wagner-Whitin, or EOQ should give reasonable resultsreasonable results
Extensions of MRPExtensions of MRP Closed-Loop MRPClosed-Loop MRP
MRP system provides input to the capacity MRP system provides input to the capacity plan, MPS, and production planning plan, MPS, and production planning processprocess
Capacity PlanningCapacity Planning MRP system generates a load report which MRP system generates a load report which
details capacity requirementsdetails capacity requirements This is used to drive the capacity planning This is used to drive the capacity planning
processprocess Changes pass back through the MRP Changes pass back through the MRP
Material Requirements Material Requirements Planning IIPlanning II
Once an MRP system is in place, inventory Once an MRP system is in place, inventory data can be augmented by other useful data can be augmented by other useful informationinformation Labor hoursLabor hours Material costsMaterial costs Capital costsCapital costs Virtually any Virtually any
resourceresource System is generally called MRP II or System is generally called MRP II or
Material Resource PlanningMaterial Resource Planning
Material Resource PlanningMaterial Resource PlanningWeekWeek
55 66 77 88A.A. Units (lead time Units (lead time 11 week) week) 100100
Labor: 1Labor: 100 hours each hours each 1,0001,000Machine: Machine: 22 hours each hours each 200200Payable: Payable: $0$0 each each 00
B.B. Units (lead time Units (lead time 22 weeks, weeks, 22 each required) each required) 200200Labor: Labor: 1010 hours each hours each 2,0002,000Machine: Machine: 22 hours each hours each 400400Payable: Raw material at Payable: Raw material at $5$5 each each 1,0001,000
C.C. Units (lead time Units (lead time 44 weeks, weeks, 33 each required) each required) 300300Labor: Labor: 22 hours each hours each 600600Machine: Machine: 11 hour each hour each 300300Payable: Raw material at Payable: Raw material at $10$10 each each 3,0003,000
Sends part of the work to following Sends part of the work to following operations before the entire lot is completeoperations before the entire lot is complete
Reduces lead timeReduces lead time 2.2. Operations splittingOperations splitting
Sends the lot to two different machines for Sends the lot to two different machines for the same operationthe same operation
Shorter throughput time but increased setup Shorter throughput time but increased setup costscosts
3.3. Order or lot splittingOrder or lot splitting Breaking up the order into smaller lots and Breaking up the order into smaller lots and
running part ahead of schedulerunning part ahead of schedule
Some services or service items are Some services or service items are directly linked to demand for other directly linked to demand for other servicesservices
These can be treated as dependent These can be treated as dependent demand services or itemsdemand services or items RestaurantsRestaurants HospitalsHospitals HotelsHotels
Distribution Resource Planning Distribution Resource Planning (DRP)(DRP)
Using dependent demand techniques Using dependent demand techniques through the supply chainthrough the supply chain Expected demand or sales forecasts Expected demand or sales forecasts
become gross requirements become gross requirements Minimum levels of inventory to meet Minimum levels of inventory to meet
customer service levelscustomer service levels Accurate lead timesAccurate lead times Definition of the distribution structureDefinition of the distribution structure
An extension of the MRP system to An extension of the MRP system to tie in customers and supplierstie in customers and suppliers1.1. Allows automation and integration of Allows automation and integration of
many business processesmany business processes2.2. Shares common data bases and Shares common data bases and
business practicesbusiness practices3.3. Produces information in real timeProduces information in real time
Coordinates business from supplier Coordinates business from supplier evaluation to customer invoicingevaluation to customer invoicing
ERP systems have the potential toERP systems have the potential to Reduce transaction costsReduce transaction costs Increase the speed and accuracy of Increase the speed and accuracy of
informationinformation Facilitates a strategic emphasis on Facilitates a strategic emphasis on
JIT systems and integration JIT systems and integration
AdvantagesAdvantages of ERP Systems of ERP Systems
1.1. Provides integration of the supply chain, Provides integration of the supply chain, production, and administrationproduction, and administration
2.2. Creates commonality of databasesCreates commonality of databases3.3. Can incorporate improved best processesCan incorporate improved best processes4.4. Increases communication and Increases communication and
collaboration between business units and collaboration between business units and sitessites
5.5. Has an off-the-shelf software databaseHas an off-the-shelf software database6.6. May provide a strategic advantageMay provide a strategic advantage
DisadvantagesDisadvantages of ERP of ERP SystemsSystems
1.1. Is very expensive to purchase and even Is very expensive to purchase and even more so to customizemore so to customize
2.2. Implementation may require major changes Implementation may require major changes in the company and its processesin the company and its processes
3.3. Is so complex that many companies cannot Is so complex that many companies cannot adjust to itadjust to it
4.4. Involves an ongoing, possibly never Involves an ongoing, possibly never completed, process for implementationcompleted, process for implementation
5.5. Expertise is limited with ongoing staffing Expertise is limited with ongoing staffing problemsproblems
Cash to CashCovers all financial related activity:Accounts receivable General ledger Cash managementAccounts payable Treasury Asset management
Dock to DispatchCovers internal inventory management:Warehousing Forecasting Physical inventoryDistribution planning Replenishment planning Material handling
Promote to DeliverCovers front-end customer-oriented activities:MarketingQuote and order processingTransportationDocumentation and labelingAfter sales serviceWarranty and guarantees
ERP in the Service SectorERP in the Service Sector
ERP systems have been developed ERP systems have been developed for health care, government, retail for health care, government, retail stores, hotels, and financial stores, hotels, and financial servicesservices
Also called efficient consumer Also called efficient consumer response (ECR) systemsresponse (ECR) systems
Objective is to tie sales to buying, Objective is to tie sales to buying, inventory, logistics, and productioninventory, logistics, and production