Heizer 14

© 2008 Prentice Hall, Inc. 14 – 1

Operations ManagementOperations 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


Outline – ContinuedOutline – Continued

MRP StructureMRP Structure

MRP ManagementMRP Management MRP DynamicsMRP Dynamics

MRP and JITMRP and JIT

Lot-Sizing TechniquesLot-Sizing Techniques



Extensions of MRPExtensions of MRP Material Requirements Planning II Material Requirements Planning II

(MRP II)(MRP II)

Closed-Loop MRPClosed-Loop MRP

Capacity PlanningCapacity Planning

MRP In ServicesMRP In Services Distribution Resource Planning Distribution Resource Planning

(DRP)(DRP)



Enterprise Resource Planning (ERP)Enterprise Resource Planning (ERP) Advantages and Disadvantages of Advantages and Disadvantages of

ERP SystemsERP Systems

ERP in the Service SectorERP in the Service Sector


Learning ObjectivesLearning Objectives

When 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 structure

2.2. Build a gross requirements planBuild a gross requirements plan

3.3. Build a net requirements planBuild a net requirements plan

4.4. Determine lot sizes for lot-for-lot, Determine lot sizes for lot-for-lot, EOQ, and PPBEOQ, and PPB


Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

5.5. Describe MRP IIDescribe MRP II

6.6. Describe closed-loop MRPDescribe closed-loop MRP

7.7. Describe ERPDescribe ERP


Wheeled CoachWheeled Coach

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


Wheeled CoachWheeled Coach

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


Benefits of MRPBenefits of MRP

1.1. Better response to customer Better response to customer ordersorders

2.2. Faster response to market Faster response to market changeschanges

3.3. Improved utilization of facilities Improved utilization of facilities and laborand labor

4.4. Reduced inventory levelsReduced inventory levels


Dependent DemandDependent Demand

The demand for one item is related The demand for one item is related to the demand for another itemto the demand for another item

Given a quantity for the end item, Given a quantity for the end item, the demand for all parts and the demand for all parts and components can be calculatedcomponents can be calculated

In general, used whenever a In general, used whenever a schedule can be established for an schedule can be established for an itemitem

MRP is the common techniqueMRP is the common technique


Dependent DemandDependent Demand

1.1. Master production scheduleMaster production schedule

2.2. Specifications or bill of materialSpecifications or bill of material

3.3. Inventory availabilityInventory availability

4.4. Purchase orders outstandingPurchase orders outstanding

5.5. 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



MPS is established in terms of specific MPS is established in terms of specific productsproducts

Schedule must be followed for a Schedule must be followed for a reasonable length of timereasonable length of time

The MPS is quite often fixed or frozen in The MPS is quite often fixed or frozen in the near term part of the planthe near term part of the plan

The MPS is a rolling scheduleThe MPS is a rolling schedule The MPS is a statement of what is to be The MPS is a statement of what is to be

produced, not a forecast of demandproduced, not a forecast of demand


The Planning ProcessThe Planning Process

Figure 14.1Figure 14.1

Change production

plan?Master production schedule

ManagementReturn oninvestmentCapital

EngineeringDesigncompletion

Aggregate production

plan

ProcurementSupplierperformance

Human resourcesManpowerplanning

ProductionCapacityInventory

MarketingCustomerdemand

FinanceCash flow


The Planning ProcessThe Planning Process


Is capacity plan being

met?

Is execution

meeting the plan?

Change master

production schedule?

Change capacity?

Change requirements?

NoNo

Execute material plans

Execute capacity plans

Yes

Realistic?

Capacity requirements plan

Material requirements plan

Master production schedule


AggregateAggregate Production Plan Production Plan

Months January February

Aggregate Production Plan 1,500 1,200(Shows the totalquantity of amplifiers)

Weeks 1 2 3 4 5 6 7 8

Master Production Schedule(Shows the specific type andquantity of amplifier to beproduced

240-watt amplifier 100 100 100 100

150-watt amplifier 500 500 450 450

75-watt amplifier 300 100




A customer order in a job shop (make-A customer order in a job shop (make-to-order) companyto-order) company

Modules in a repetitive (assemble-to-Modules in a repetitive (assemble-to-order or forecast) companyorder or forecast) company

An end item in a continuous (stock-to-An end item in a continuous (stock-to-forecast) companyforecast) company

Can be expressed in any of the Can be expressed in any of the following terms:following terms:


Focus for Different Focus for Different Process StrategiesProcess Strategies

Stock to ForecastStock to Forecast

(Product Focus)(Product Focus)

Schedule finished product

Assemble to Order Assemble to Order or Forecastor Forecast(Repetitive)(Repetitive)

Schedule modules

Make to OrderMake to Order

(Process Focus)(Process Focus)

Schedule orders

Examples: Print shop Motorcycles Steel, Beer, BreadMachine shop Autos, TVs Lightbulbs

Fine-dining restaurant Fast-food restaurant Paper

Typical focus of the Typical focus of the master production master production

scheduleschedule

Number of Number of end itemsend items

Number of Number of inputsinputs



MPS ExamplesMPS Examples

Gross Requirements for Crabmeat QuicheGross Requirements for Crabmeat Quiche

Gross Requirements for Spinach QuicheGross Requirements for Spinach Quiche

DayDay 66 77 88 99 1010 1111 1212 1313 1414 and so onand so onAmountAmount 5050 100100 4747 6060 110110 7575

DayDay 77 88 99 1010 1111 1212 1313 1414 1515 1616 and so onand so onAmountAmount 100100 200200 150150 6060 7575 100100

Table 14.1Table 14.1

For Nancy’s Specialty FoodsFor Nancy’s Specialty Foods


Bills of MaterialBills of Material

List of components, ingredients, List of components, ingredients, and materials needed to make and materials needed to make product product

Provides product structureProvides product structure Items above given level are called Items above given level are called

parentsparents

Items below given level are called Items below given level are called childrenchildren


BOM ExampleBOM Example

BB(2)(2) Std. 12” Speaker kitStd. 12” Speaker kit CC(3)(3)

Std. 12” Speaker kit w/ Std. 12” Speaker kit w/ amp-boosteramp-booster11

EE(2)(2)EE(2)(2) FF(2)(2)

Packing box and Packing box and installation kit of wire, installation kit of wire,

bolts, and screwsbolts, and screws

Std. 12” Speaker Std. 12” Speaker booster assemblybooster assembly

22

DD(2)(2)

12” Speaker12” Speaker

DD(2)(2)


GG(1)(1)

Amp-boosterAmp-booster

33

Product structure for “Awesome” Product structure for “Awesome” ((AA))

AA

LevelLevel

00


BOM ExampleBOM Example

BB(2)(2) Std. 12” Speaker kitStd. 12” Speaker kit CC(3)(3)

Std. 12” Speaker kit w/ Std. 12” Speaker kit w/ amp-boosteramp-booster11

EE(2)(2)EE(2)(2) FF(2)(2)

Packing box and Packing box and installation kit of wire, installation kit of wire,

bolts, and screwsbolts, and screws

Std. 12” Speaker Std. 12” Speaker booster assemblybooster assembly

22

DD(2)(2)


DD(2)(2)


GG(1)(1)

Amp-boosterAmp-booster

33

Product structure for “Awesome” Product structure for “Awesome” ((AA))

AA

LevelLevel

00

Part B: 2 x number of As = (2)(50) = 100Part C: 3 x number of As = (3)(50) = 150Part D: 2 x number of Bs

+ 2 x number of Fs = (2)(100) + (2)(300) = 800Part E: 2 x number of Bs

+ 2 x number of Cs = (2)(100) + (2)(150) = 500Part F: 2 x number of Cs = (2)(150) = 300Part G: 1 x number of Fs = (1)(300) = 300



Modular BillsModular Bills Modules are not final products but Modules are not final products but

components that can be assembled components that can be assembled into multiple end itemsinto multiple end items

Can significantly simplify planning Can significantly simplify planning and schedulingand scheduling



Planning Bills (Pseudo Bills)Planning Bills (Pseudo Bills) Created to assign an artificial parent Created to assign an artificial parent

to the BOMto the BOM

Used to group subassemblies to Used to group subassemblies to reduce the number of items planned reduce the number of items planned and scheduledand scheduled

Used to create standard “kits” for Used to create standard “kits” for productionproduction



Phantom BillsPhantom Bills Describe subassemblies that exist Describe subassemblies that exist

only temporarilyonly temporarily

Are part of another assembly and Are part of another assembly and never go into inventorynever go into inventory

Low-Level CodingLow-Level Coding Item is coded at the lowest level at Item is coded at the lowest level at

which it occurswhich it occurs

BOMs are processed one level at a timeBOMs are processed one level at a time


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


Lead TimesLead Times

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


Time-Phased Product Time-Phased Product StructureStructure

|| || || || || || || ||

11 22 33 44 55 66 77 88Time in weeksTime in weeks

FF

2 weeks2 weeks

3 weeks3 weeks

1 week1 week

AA

2 weeks2 weeks

1 week1 week

DD

EE

2 weeks2 weeks

DD

GG

1 week1 week

1 week1 week

2 weeks to 2 weeks to produceproduce

BB

CC

EE

Start production of DStart production of DMust have D and E Must have D and E completed here so completed here so

production can production can begin on Bbegin on B



MRP StructureMRP Structure


Output ReportsOutput Reports

MRP by period report

MRP by date report

Planned order report

Purchase advice

Exception reports

Order early or late or not needed

Order quantity too small or too large

Data FilesData Files

Purchasing data

BOM

Lead times

(Item master file)

Inventory data

Masterproduction schedule

Material requirement

planning programs

(computer and software)


Determining Gross Determining Gross 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

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


Gross Requirements PlanGross Requirements Plan


WeekWeek

1 2 3 4 5 6 7 8 Lead Time

A. Required date 50Order release date 50 1 week

B. Required date 100Order release date 100 2 weeks

C. Required date 150Order release date 150 1 week

E. Required date 200 300Order release date 200 300 2 weeks

F. Required date 300Order release date 300 3 weeks

G. Required date 600 200Order release date 600 200 1 week

G. Required date 300Order release date 300 2 weeks


Net Requirements PlanNet Requirements Plan


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



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



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



The logic of net requirementsThe logic of net requirements

Available inventoryAvailable inventory

Net Net requirementsrequirements

On On handhand

Scheduled Scheduled receiptsreceipts++–– ==

Total Total requirementsrequirements

Gross Gross requirementsrequirements AllocationsAllocations++


Gross Requirements Gross Requirements ScheduleSchedule

Figure 14.6Figure 14.6 A

BB CC

5 6 7 8 9 10 11

40 50 15

Lead time = 4 for ALead time = 4 for AMaster schedule for AMaster schedule for A

S

BB CC

12 138 9 10 11

20 3040

Lead time = 6 for SLead time = 6 for SMaster schedule for SMaster schedule for S

1 2 3

10 10

Master scheduleMaster schedulefor for B

sold directlysold directly

PeriodsPeriods

Therefore, these Therefore, these are the gross are the gross requirements for Brequirements for B

Gross requirements: BGross requirements: B 1010 4040 5050 202040+10 15+30=50 =45

11 22 33 44 55 66 77 88PeriodsPeriods


MRP Planning SheetMRP Planning Sheet



Safety StockSafety Stock

BOMs, inventory records, purchase BOMs, inventory records, purchase and production quantities may not and production quantities may not be perfectbe perfect

Consideration of safety stock may Consideration of safety stock may be prudentbe prudent

Should be minimized and ultimately Should be minimized and ultimately eliminatedeliminated

Typically built into projected on-Typically built into projected on-hand inventoryhand inventory


MRP ManagementMRP Management

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


MRP and JITMRP and JIT

MRP is a planning system that MRP is a planning system that does not do detailed schedulingdoes not do detailed scheduling

MRP requires fixed lead times MRP requires fixed lead times which might actually vary with which might actually vary with batch sizebatch size

JIT excels at rapidly moving small JIT excels at rapidly moving small batches of material through the batches of material through the systemsystem


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 Approach

1.1. 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


Balanced FlowBalanced Flow

Used in repetitive operationsUsed in repetitive operations

MRP plans are MRP plans are executed using executed using JIT techniques JIT techniques based on “pull” based on “pull” principlesprinciples

Flows are carefully Flows are carefully balanced with balanced with small lot sizessmall lot sizes


SupermarketSupermarket

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 the MRP systemthe MRP system



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 burdensomeburdensome


Lot-for-Lot ExampleLot-for-Lot Example

11 22 33 44 55 66 77 88 99 1010

Gross Gross requirementsrequirements 3535 3030 4040 00 1010 4040 3030 00 3030 5555

Scheduled Scheduled receiptsreceipts

Projected on Projected on handhand 3535 3535 00 00 00 00 00 00 00 00 00

Net Net requirementsrequirements 00 3030 4040 00 1010 4040 3030 00 3030 5555

Planned order Planned order receiptsreceipts 3030 4040 1010 4040 3030 3030 5555

Planned order Planned order releasesreleases 3030 4040 1010 4040 3030 3030 5555

Holding cost = Holding cost = $1$1/week; Setup cost = /week; Setup cost = $100; $100; Lead time =Lead time = 1 1 weekweek


Lot-for-Lot ExampleLot-for-Lot Example

11 22 33 44 55 66 77 88 99 1010





Planned order Planned order receiptsreceipts 3030 4040 1010 4040 3030 3030 5555

Planned order Planned order releasesreleases 3030 4040 1010 4040 3030 3030 5555


No on-hand inventory is carried through the systemTotal holding cost = $0

There are seven setups for this item in this planTotal setup cost = 7 x $100 = $700


EOQ Lot Size ExampleEOQ Lot Size Example

11 22 33 44 55 66 77 88 99 1010





Planned order Planned order receiptsreceipts 7373 7373 7373 7373

Planned order Planned order releasesreleases 7373 7373 7373 7373


Average weekly gross requirementsAverage weekly gross requirements = 27; = 27; EOQEOQ = 73 = 73 unitsunits


EOQ Lot Size ExampleEOQ Lot Size Example

11 22 33 44 55 66 77 88 99 1010





Planned order Planned order receiptsreceipts 7373 7373 7373 7373

Planned order Planned order releasesreleases 7373 7373 7373 7373

Holding cost = Holding cost = $1$1/week; Setup cost = /week; Setup cost = $100; $100; Lead time =Lead time = 1 1 weekweekAverage weekly gross requirementsAverage weekly gross requirements = 27; = 27; EOQEOQ = 73 = 73 unitsunits

Annual demand = 1,404Total cost = setup cost + holding costTotal cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)Total cost = $3,798Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) =

$730


PPB ExamplePPB Example

11 22 33 44 55 66 77 88 99 1010



Projected on Projected on handhand 3535


Planned order Planned order receiptsreceipts

Planned order Planned order releasesreleases

Holding cost = Holding cost = $1$1/week; Setup cost = /week; Setup cost = $100; $100; Lead time =Lead time = 1 1 weekweekEPPEPP = 100 = 100 unitsunits



11 22 33 44 55 66 77 88 99 1010



Projected on Projected on handhand 3535


Planned order Planned order receiptsreceipts

Planned order Planned order releasesreleases

Holding cost = Holding cost = $1$1/week; Setup cost = /week; Setup cost = $100;$100;EPPEPP = 100 = 100 unitsunits

2 30 02, 3 70 40 = 40 x 12, 3, 4 70 402, 3, 4, 5 80 70 = 40 x 1 + 10 x 3 100 70 1702, 3, 4, 5, 6 120 230 = 40 x 1 + 10 x 3

+ 40 x 4

+ =

Combine periods 2 - 5 as this results in the Part Period closest to the EPP

Combine periods 6 - 9 as this results in the Part Period closest to the EPP

6 40 06, 7 70 30 = 30 x 16, 7, 8 70 30 = 30 x 1 + 0 x 26, 7, 8, 9 100 120 = 30 x 1 + 30 x 3 100 120 220+ =

10 55 0 100 0 100Total cost 300 190 490

+ =+ =

Trial Lot SizePeriods (cumulative net Costs

Combined requirements) Part Periods Setup Holding Total



11 22 33 44 55 66 77 88 99 1010





Planned order Planned order receiptsreceipts 8080 100100 5555

Planned order Planned order releasesreleases 8080 100100 5555

Holding cost = Holding cost = $1$1/week; Setup cost = /week; Setup cost = $100; $100; Lead time =Lead time = 1 1 weekweekEPPEPP = 100 = 100 unitsunits


Lot-Sizing SummaryLot-Sizing Summary

For these three examplesFor these three examples

Lot-for-lotLot-for-lot $700$700EOQEOQ $730$730PPBPPB $490$490

Wagner-Whitin would have yielded a

plan with a total cost of $455



In theory, lot sizes should be recomputed In theory, lot sizes should be recomputed whenever there is a lot size or order whenever there is a lot size or order quantity changequantity change

In practice, this results in system In practice, this results in system nervousness and instabilitynervousness and instability

Lot-for-lot should Lot-for-lot should be used when be used when low-cost JIT can low-cost JIT can be achievedbe achieved



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 system for reschedulingsystem for rescheduling


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 Planning

WeekWeek55 66 77 88

A.A. Units (lead time Units (lead time 11 week) week) 100100Labor: 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



Closed-Loop MRP SystemClosed-Loop MRP System





Capacity Planning

Resource Resource planningplanningFirst cut First cut capacitycapacity

No

Capacity Capacity requirements requirements

(detailed)(detailed)

Yes

Material Material requirements requirements

(detailed)(detailed)

Priority Planning

Desired Desired master production master production

schedulescheduleRealistic?Realistic?

Production planProduction plan

Planning




Capacity Control(work center throughput)

Priority Control(detailed scheduling)

Execution

Yes

Execute the plan

No No

Input/output Input/output reportreport

IsIsaverage average capacity capacity adequateadequate

??

Dispatch listDispatch list

IsIsspecific specific capacity capacity adequateadequate

??


Resource Requirements ProfileResource Requirements Profile


Lot1

Lot2

Lot4

Lot7

Lot8Lot

3Lot5

Lot10 Lot

13

Lot9 Lot

12

Lot14 Lot

16

Lot6

Lot15

Lot11

Available Available capacitycapacity

Capacity exceeded Capacity exceeded in periods 4 & 6in periods 4 & 6

Lot1

Lot2

Lot4

Lot7

Lot8Lot

3Lot5

Lot10 Lot

13

Lot9 Lot

12

Lot14 Lot

16

Lot6

Lot15

Lot11


Lot 6 “split”Lot 6 “split”Lot 11 movedLot 11 moved200 200 –

150 150 –

100 100 –

50 50 –

–11 22 33 44 55 66 77 88

PeriodPeriod(a)(a)

Sta

nd

ard

lab

or

ho

urs

Sta

nd

ard

lab

or

ho

urs

200 200 –

150 150 –

100 100 –

50 50 –

–11 22 33 44 55 66 77 88

PeriodPeriod(b)(b)

Sta

nd

ard

lab

or

ho

urs

Sta

nd

ard

lab

or

ho

urs


Resource Requirements ProfileResource Requirements Profile


Lot1

Lot2

Lot4

Lot7

Lot8Lot

3Lot5

Lot10 Lot

13

Lot9 Lot

12

Lot14 Lot

16

Lot6

Lot15

Lot11


Capacity exceeded Capacity exceeded in periods 4 & 6in periods 4 & 6

Lot1

Lot2

Lot4

Lot7

Lot8Lot

3Lot5

Lot10 Lot

13

Lot9 Lot

12

Lot14 Lot

16

Lot6

Lot15

Lot11


Lot 6 “split”Lot 6 “split”Lot 11 movedLot 11 moved200 200 –

150 150 –

100 100 –

50 50 –

–11 22 33 44 55 66 77 88

PeriodPeriod(a)(a)

Sta

nd

ard

lab

or

ho

urs

Sta

nd

ard

lab

or

ho

urs

200 200 –

150 150 –

100 100 –

50 50 –

–11 22 33 44 55 66 77 88

PeriodPeriod(b)(b)

Sta

nd

ard

lab

or

ho

urs

Sta

nd

ard

lab

or

ho

urs

It is also possible to split lots 6 and 11 and move them earlier in the schedule. This would avoid any potential problems with late orders

but would increase inventory holding cost.


Smoothing TacticsSmoothing Tactics

1.1. OverlappingOverlapping 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


MRP in ServicesMRP in Services

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


Uncooked linguini #30004

Sauce #30006

Veal #30005


Chef;Work

Center #1

Helper one;Work

Center #2

Asst. Chef;Work

Center #3

Cooked linguini #20002

Spinach #20004

Prepared veal and sauce

#20003

(a) PRODUCT STRUCTURE TREE

Veal picante #10001




(b) BILL OF MATERIALS

Part Part NumberNumber DescriptionDescription QuantityQuantity

Unit of Unit of MeasureMeasure

Unit Unit costcost

1000110001 Veal picanteVeal picante 11 ServingServing ——

2000220002 Cooked linguiniCooked linguini 11 ServingServing ——

2000320003 Prepared veal and saucePrepared veal and sauce 11 ServingServing ——

2000420004 SpinachSpinach 0.10.1 BagBag 0.940.94

3000430004 Uncooked linguiniUncooked linguini 0.50.5 PoundPound ——

3000530005 VealVeal 11 ServingServing 2.152.15

3000630006 SauceSauce 11 ServingServing 0.800.80



(c) BILL OF LABOR FOR VEAL PICANTE

LaborLabor HoursHours

Work CenterWork Center OperationOperation Labor TypeLabor Type Setup TimeSetup Time Run TimeRun Time

11 Assemble dishAssemble dish ChefChef .0069.0069 .0041.0041

22 Cook linguiniCook linguini Helper oneHelper one .0005.0005 .0022.0022

33 Cook veal Cook veal and sauceand sauce

Assistant ChefAssistant Chef.0125.0125 .0500.0500


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


Enterprise Resource Planning Enterprise Resource Planning (ERP)(ERP)

An extension of the MRP system to An extension of the MRP system to tie in customers and supplierstie in customers and suppliers

1.1. Allows automation and integration of Allows automation and integration of many business processesmany business processes

2.2. Shares common data bases and Shares common data bases and business practicesbusiness practices

3.3. 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 modules includeERP modules include Basic MRPBasic MRP

FinanceFinance

Human resourcesHuman resources

Supply chain management (SCM)Supply chain management (SCM)

Customer relationship management Customer relationship management (CRM)(CRM)


ERP and MRPERP and MRP

Figure 14.11



Figure 14.11

Customer Relationship Management

Invoicing

ShippingDistributors,

retailers,and end users

Sales Order(order entry,

product configuration,sales management)


Table 13.6

Bills of Material

Work Orders

Purchasingand

Lead Times

Routingsand

Lead Times

Master Production Schedule

Inventory Management


Figure 14.11

MRPMRP



Figure 14.11

Supply Chain Management

Vendor Communication(schedules, EDI, advanced shipping notice,

e-commerce, etc.)



Figure 14.11Table 13.6

Finance/Accounting

General Ledger

Accounts Receivable

Payroll

Accounts Payable



ERP can be highly customized to ERP can be highly customized to meet specific business requirementsmeet specific business requirements

Enterprise application integration Enterprise application integration software (EAI) allows ERP systems software (EAI) allows ERP systems to be integrated withto be integrated with Warehouse managementWarehouse management

LogisticsLogistics

Electronic catalogsElectronic catalogs

Quality managementQuality management



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 databases

3.3. Can incorporate improved best processesCan incorporate improved best processes

4.4. 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 database

6.6. 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


SAP’s ERP ModulesSAP’s ERP ModulesFigure 14.12Figure 14.12

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

Procure to PayCovers sourcing activities:Vendor sourcingPurchase requisitioningPurchase orderingPurchase contractsInbound logisticsSupplier invoicing/ matchingSupplier payment/ settlementSupplier performance

Design to ManufactureCovers internal production activities:Design Shop floor engineering reportingProduction Contract/project engineering managementPlant Subcontractor maintenance management

Recruit to HireCovers all HR- and payroll-oriented activity:Time and attendance PayrollTravel and expenses


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

Heizer 14

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