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Chapter 13

MRP and ERP

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Material requirements planning (MRP): Computer-based information system (i.e. glorified database) for ordering and scheduling of dependent demand inventories

It is a production planning process that starts from the demand for finished products and plans the production step by step of subassemblies and parts.

MRP

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Independent and Dependent Demand

Independent Demand

A

B(4) C(2)

D(2) E(1) D(3) F(2)

Dependent Demand

Independent demand is uncertain. Dependent demand is certain.

Independent demand: Demand for final products.

Dependent demand: Demand fort items that are subassemblies or component parts to be used in production of finished goods.

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The book claims that “the independent demand is continuous while the dependent demand is lumpy”. I do not believe in this statement.

Is Dependant Demand lumpier?

Time Time

Time Time

Ind

ep.

Dem

and

Dep

. D

eman

d

Stable demand“Lumpy” demand

Am

ou

nt

on

han

d

Am

ou

nt

on

han

d

Safety stock

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The dependent demand is not necessarily any lumpier than the independent demand

• Example: Say shoe demand rate is 80 pairs per week at a retailer. The demand rate for shoe sole is 80 for left and 80 for the right pair. The demand rate for shoe laces is 160 per week.

• Example continued: What is the demand rate for the shoe lace supplier? Still 160 per week. But if the orders for the

laces are placed once a week, lace demand is lumpy.

Order once in a week Order twice Order 4 times

Lumpy dependent demand

Smooth dependent demand

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MRP Inputs MRP Processing MRP Outputs

Masterschedule

Bill ofmaterials

Inventoryrecords

MRP computerprograms

Changes

Order releases

Planned-orderschedules

Exception reports

Planning reports

Performance-controlreports

Inventorytransaction

Primaryreports

Secondaryreports

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• Master Production Schedule: MPS– Time-phased plan specifying timing and quantity of production for

each end item.– MPS comes from sales and marketing– MPS covers about 1-3 months into the future

• Must cover cumulative lead time

Cumulative lead time: The sum of the lead times that sequential phases of a process require, from ordering of parts or raw materials to completion of final assembly. – From Now until Cumulative lead time plans are generally

frozen• Sometimes MPS is capacity filtered; MPS is curtailed after

taking the available capacity into account.

MRP Inputs: 1. MPS

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MRP inputs: 2. BOM

Bill of materials (BOM): A listing of all of the raw materials, parts, subassemblies, and assemblies needed to produce one unit of a product.

Product structure tree: Visual depiction of the requirements in a bill of materials, where all components are listed by levels.

Most often people do not use the term product structure tree. Instead use BOM to mean the product structure tree.

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Product Structure Tree

Chair

Seat

Legs (4) CrossBar(2)

SideRails (2)

Crossbar

BackSupports (3)

LegAssembly

BackAssembly

Level 0

1

2

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Explosion Example

• How many leg assemblies are needed for 1 chair?

• How many Cross bars are needed for 5 chairs?

• Computing how many parts are required per a final product is called BOM explosion.

• MRP answers these questions by taking production lead times into account: Not only it tells how many, but also when.

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How many more of each component is needed to make 15 Xs if there are 5 of each already in stock?

X

F(2)E(2)ED(3)

CB(2)

Bill of Materials – Example 1

E(4)

X:10, B:15, C:5, D:40, E: 180, F:5

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How many more of each component is needed to make 15 Xs if there are 8 of each already in stock?

X

F(2)E(2)ED(3)

CB(2)

Bill of Materials – Example 2

E(4)

X:7, B:6, C:0, D:10, E: 38, F:0

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Lead Times

1 2 3 4 5 6 7 8 9 10

Procurement

Fabrication

Subassembly

Assembly

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Assembly Time Chart

1 2 3 4 5 6 7 8 9 10 11

Procurement ofraw material D

Procurement ofraw material F

Procurement ofpart C

Procurement ofpart H

Procurement ofraw material I

Fabricationof part G

Fabricationof part E

Subassembly A

Subassembly B

Final assemblyand inspection

Days

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MRP input: 3. Inventory levels

• Beginning inventory on hand

• Scheduled receipts – Pipeline inventory not received yet but it is in the

process of coming to the inventory. We know when this will be available for use.

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MPR Processing

• Gross requirements– Total expected demand

• Scheduled receipts– Open orders scheduled to arrive

• Planned on hand– Expected inventory on hand at the beginning of each time period

• Net requirements– Actual amount needed in each time period

• Planned-order receipts– Quantity expected to received at the beginning of the period

– Offset by lead time

• Planned-order releases– Planned amount to order in each time period

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MRP Processing

• Gross requirements: (Forecasted)Demand period by period

• Net requirements(t)

=Gross requirements(t)-Projected inventory(t-1)

-Scheduled receipt(t)

• If Net requirement(t) > 0

set Planned order receipts(t)>=Net requirement(t)

• Planned-order receipts is the production planned• Projected inventory(t)

=Projected inventory(t-1)+Scheduled receipt(t)+Planned order receipts(t)-Gross requirements(t)

• Planned order release(t-LT)=Planned-order receipts(t)

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MRP example with LT=2 and 1 level

Periods 0 1 2 3

Gross requirements 6 11 7

Scheduled receipts 2 3 0

Projected on hand 10 6 0 0

Net requirements 0 2 7

Planned order receipts 2 7

Planned order releases 2 7

Inputs

Outputs

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Figure 13-8

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Other Considerations

• Safety Stock– Not much for items with dependent demand

• Lot sizing– Lot-for-lot ordering– Economic order quantity– Fixed-period ordering– Part-period model

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MRP example with Lot size=5, LT=2 and 1 level

Periods 0 1 2 3

Gross requirements 6 11 9

Scheduled receipts 2 3 0

Projected on hand 10 6 3 4

Net requirements 5 10

Planned order receipts 5 10

Planned order releases 5 10

Inputs

Outputs

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Figure 13-9

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MRP updates

• Regenerative MRP– Do the planning from scratch– Time between regenerations is long– Ok for stable environments

• Net Change MRP– Update the plan according to changes

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MRP Outputs

• Planned orders - schedule indicating the amount and timing of future orders.

• Order releases - Authorization for the execution of planned orders.

• Changes - revisions of due dates or order quantities, or cancellations of orders.

• Performance-control reports

• Planning reports

• Exception reports

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Capacity Planning

Capacity requirements planning: The process of determining short-range capacity requirements.

Load reports: Department or work center reports that compare known and expected future capacity requirements with projected capacity availability.

Time fences: Series of time intervals during which order changes are allowed or restricted.

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MRP Planning

Develop a tentativemaster production

schedule

Develop a tentativemaster production

schedule

Use MRP tosimulate material

requirements

Use MRP tosimulate material

requirements

Convert materialrequirements to

resource requirements

Firm up a portionof the MPS

Is shopcapacity

adequate?

Cancapacity be

changed to meetrequirements

Revise tentativemaster production

schedule

Changecapacity

Yes

No

Yes

No

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• Food catering service– End items are the catered food– Dependent demands are ingredients for

each recipe, i.e. bill of materials• Taco Bell menu items

• Hotel renovation– Activities and materials “exploded” into

component parts

MRP in Services

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Benefits of MRP

• Low levels of in-process inventories

• Ability to track material requirements

• Ability to evaluate capacity requirements

• Means of allocating production time

Eventually it is a database with limited decision making capability

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Requirements of MRP

• Computer and necessary software

• Accurate and up-to-date inputs:

– Master schedules

– Bills of materials

– Inventory records

• Integrity of data

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• Expanded MRP with and emphasis placed on integration

– Financial planning

– Marketing

– Engineering

– Purchasing

– Manufacturing

MRP II

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MarketDemand

Productionplan

Problems?

Rough-cutcapacity planning

Yes No YesNo

Finance

Marketing

Manufacturing

Adjustproduction plan

Masterproduction schedule

MRP

Capacityplanning

Problems?Requirements

schedules

Ad

just

mas

ter

sch

edu

le

MRP II

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• Enterprise resource planning (ERP): An expanded effort to integrate standardized record

keeping that will permit information sharing throughout the organization

• Strategic considerations– High initial cost– High cost to maintain– Future upgrades– Training

• See ERP courses in the course catalog

ERP

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Summary

• MRP:– Dependent vs Independent demand– Inputs (BOM), – Processing, – Outputs– Benefits and requirements

• Capacity planning • MRP-II and ERP

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Practice Questions

1. The master production schedule states which end items are to be produced both when and how many.

Answer: True Page: 577 2.Load reports show capacity requirements for departments

or work centers which may be more or less than the capacity available in that work center.

Answer: True Page: 5933.MRP II permits the simultaneous planning of production,

marketing, and financial resources to support a production plan.

Answer: True Page: 592

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Practice Questions

• 1. The output of MRP is: • A) gross requirements • B) net requirements • C) a schedule of requirements for all

parts and end items • D) inventory reorder points • E) economic order quantities and

reorder points • Answer: C Page: 577

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Practice Questions

2. The MRP input listing the assemblies, subassemblies, parts, and raw materials needed to produce one unit of finished product is the:

• A) master production schedule • B) bill-of-materials • C) inventory-records • D) assembly-time chart • E) net-requirements chart • Answer: B Page: 578

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Practice Questions

• 3. Which one of the following most closely describes net material requirements?

• A) gross requirements - amount on-hand - scheduled receipts

• B) gross requirements - planned receipts • C) gross requirements - order releases +

amount on-hand • D) gross requirements - planned order

releases • E) gross requirements - amount on-hand +

planned order releases • Answer: A Page: 581

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Practice Questions

4.In MRP, "scheduled receipts" are: • A) identical to "planned-order receipts" • B) identical to "planned-order releases" • C) open orders (that is, ordered before the

first time bucket, but not delivered yet) • D) "net requirements" • E) available to promise inventory • Answer: C Page: 582

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Practice Questions

5. Which is true of a net-change system?

A) It is a batch-type system which is updated periodically.

B) It is usually run at the beginning of each month.

C) The basic production plan is modified to reflect changes as they occur.

D) It is used to authorize the execution of planned orders.

E) It indicates the amount and timing of future changes. • Answer: C Page: 588

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Chapter 14

Just-In-Time Systems

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JIT/Lean Production

• Just-in-time: Repetitive production system in which processing and movement of materials and goods occur just as they are needed, usually in small batches

• JIT is characteristic of lean production systems

• JIT operates with very little “fat”

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JIT Goals

• Eliminate disruptions

• Make system flexible by reduce setup and lead times

• Eliminate waste, especially excess inventory

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Sources of Waste

• Overproduction

• Waiting time

• Unnecessary transportation

• Processing waste

• Inefficient work methods

• Product defects

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• Big JIT – broad focus– Vendor relations– Human relations– Technology management– Materials and inventory management

• Little JIT – narrow focus– Scheduling materials– Scheduling services of production

Big vs. Little JIT

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JIT Building Blocks

• 1. Product design

• 2. Process design

• 3. Personnel/organizationalelements

• 4. Manufacturing planning and control

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1. Product Design

• Standard parts

• Modular design

• Highly capable production systems

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2. Process Design

• Small lot sizes

• Setup time reduction

• Manufacturing cells

• Limited work in process

• Quality improvement

• Production flexibility

• Little inventory storage

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Benefits of Small Lot Sizes

Reduces inventory

Less storage space

Less rework

Problems are more apparent

Increases product flexibility

Easier to balance operations

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Production Flexibility

• Reduce downtime by reducing changeover time

• Use preventive maintenance to reduce breakdowns

• Cross-train workers to help clear bottlenecks

• Reserve capacity for important customers

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3. Personnel/Organizational Elements

• Workers as assets

• Cross-trained workers

• Continuous improvement

• Cost accounting

• Leadership/project management

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4. Manufacturing Planning and Control

• Level loading

• Pull systems

• Visual systems

• Close vendor relationships

• Reduced transaction processing

• Preventive maintenance

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Pull/Push Systems

• Pull system: System for moving work where a workstation pulls output from the preceding station as needed. (e.g. Kanban)

• Push system: System for moving work where output is pushed to the next station as it is completed

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Kanban Production Control System

• Kanban: Card or other device that communicates demand for work or materials from the preceding station

• Kanban is the Japanese word meaning “signal” or “visible record”

• Paperless production control system

• Authority to pull, or produce comes from a downstream process.

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Traditional Supplier Network

BuyerBuyer

SupplierSupplierSupplierSupplierSupplierSupplier SuppilerSuppiler

SupplierSupplier

SupplierSupplier

SupplierSupplier

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Tiered Supplier Network

SupplierSupplier

SupplierSupplier

SupplierSupplier

SupplierSupplierSupplierSupplier SupplierSupplier

BuyerBuyer

SupplierSupplierFirst Tier Supplier

Second Tier Supplier

Third Tier Supplier

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Summary JIT Goals and Building Blocks

Product Design

ProcessDesign

PersonnelElements

Manufactur-ing Planning

Eliminate disruptionsMake the system flexible

Reduce setupand lead times

Eliminate wasteMinimize inventories

Abalancedrapid flow

UltimateGoal

SupportingGoals

BuildingBlocks

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Converting to a JIT System

• Get top management commitment

• Decide which parts need most effort

• Obtain support of workers

• Start by trying to reduce setup times

• Gradually convert operations

• Convert suppliers to JIT

• Prepare for obstacles

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Obstacles to Conversion

• Management may not be committed

• Workers/management may not be cooperative

• Suppliers may resist

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JIT in Service

The basic goal of the demand flow technology in the service organization is to provide optimum response to the customer with the highest quality service and lowest possible cost. – Eliminate disruptions– Make system flexible– Reduce setup and lead times– Eliminate waste– Minimize WIP– Simplify the process

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• New challenges– Meeting manufacturing requirements– Changing from traditional thinking and practices –

frequent on-time delivery of small quantities– Long term relationships with suppliers as

partners

• How about Exchange purchasing: Auctions?

JIT Purchasing

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• JIT II: the practice of allowing vendors to manage some aspects of buying their products or services for the buyer

JIT II

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Benefits of JIT Systems

• Reduced inventory levels

• High quality

• Flexibility

• Reduced lead times

• Increased productivity

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Benefits of JIT Systems (cont’d)

• Increased equipment utilization

• Reduced scrap and rework

• Reduced space requirements

• Pressure for good vendor relationships

• Reduced need for indirect labor

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• Smooth flow of work (the ultimate goal)• Elimination of waste• Continuous improvement• Eliminating anything that does not add

value• Simple systems that are easy to manage• Use of product layouts to minimize

moving materials and parts• Quality at the source

Elements of JIT

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• Poka-yoke – fail safe tools and methods

• Preventative maintenance

• Good housekeeping

• Set-up time reduction

• Cross-trained employees

• A pull system

Elements of JIT (cont’d)

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Case Study based on a trip on Nov 19, 02

NUMMI

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History/Products

• Late 70’s oil crisis• GM closes Fremont, CA plant firing 6000 in 1982• Toyota approaches GM to set up Toyota production system

at a GM plant, United Auto Workers accepts the deal• GM and Toyota put together $400M in 1984. GM owns the

infrastructure, Toyota is the tenant.• Nummi = New United Motor Manufacturing, Inc is born in

1984 as the unique example of a Toyota – GM joint venture• Products: Toyota Corolla, Tacoma Trucks, Pontiac Vibe

(Toyota bottom, GM top) and Toyota Voltz (Toyota bottom, GM top, sold in Japan) , GM Prism until 13/12/01

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Workers

• Nummi has about 4500 unionized workers• Workers are under two types:

– Production, high school graduates– Maintenance

• Workers work in teams of 4-6• Workers in a team rotate the tasks every 1-3 hours• Team leader is responsible for the rotation. • Team leader withdraws parts from the inventory (every 1-

2 hours) and provides the tools as necessary • Workers make $17 per hour

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Capacity

• Nummi has a cycle time of – 60 seconds for Corolla, 1 body– 82 seconds for Tacoma, 3 bodies (only cabin is

produced at Nummi, the bottom and the back are bought from suppliers)

• Nummi works in two shifts– I: 6:00-14:30, II: 16:30-1:00– Each shift has 1 hour lunch/dinner break– Starting the first shift at 6:00 workers avoid heavy

morning traffic– Two hours between shifts I and II is to allow for

overtime after the first shift when necessary

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Work Flow

• Stamping: Forming metal (side, back, front) panels with presses• Body & Weld: Putting panels together• Paint: Paint inspection is the current bottleneck

– Primer body paint applied by robots (chemically hazardous task)

– Door jambs painted manually• Plastics: Making bumpers, inside panels• Assembly: Putting in tires, engine, seats, bumpers, harnessing.

Cars , trucks on 2 km , 0.8 km conveyors• Cars contain Building manifest = BOM = Ingredients list at every

step of these operations

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Just in time

• Kaizen: continuous improvement• Kanban: replenishment every 1-2 hours• Jidoka: Assure 100% quality. Otherwise pull the Andon

chord– 1000 times per shift– 9% of line stops are longer than 30 seconds– Line stops longer than an hour once every month

• Muda: Waste to be eliminated• Genchi Genbutsu: Go to the source to learn and to solve

the problems• This Japanese terminology is all over the boards in the

plant

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Creative Tool / Work Place Design

• Die change at the stamping in 3 hours• Tilted storage bins for ease of access• Collapsing storage boxes when empty

– To reduce the empty box storage requirements in trucks returning to suppliers, say in Indiana

– These boxes save about $10M annually– The worker who suggested the boxes earned several

thousand points. 1 point = $1.

• More info www.nummi.com