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MRP / ERP and Inventory
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12 – 1
Departament d’Economia de l’Empresa / Department of Business Economics & Administration
Operations ManagementOperations Management
Session 6 – Session 6 – Inventory Management Inventory Management & MRP / ERP& MRP / ERP
12 – 2Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
OutlineOutline Global Company Profile: Global Company Profile:
Amazon.comAmazon.com
Functions of InventoryFunctions of Inventory Types of InventoryTypes of Inventory
Inventory ManagementInventory Management ABC AnalysisABC Analysis
Record AccuracyRecord Accuracy
Cycle CountingCycle Counting
Control of Service InventoriesControl of Service Inventories
12 – 3Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Outline – ContinuedOutline – Continued
Inventory ModelsInventory Models Independent vs. Dependent DemandIndependent vs. Dependent Demand
Holding, Ordering, and Setup CostsHolding, Ordering, and Setup Costs
12 – 4Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Outline – ContinuedOutline – Continued
Inventory Models for Independent Inventory Models for Independent DemandDemand The Basic Economic Order Quantity The Basic Economic Order Quantity
(EOQ) Model(EOQ) Model
Minimizing CostsMinimizing Costs
Reorder PointsReorder Points
Production Order Quantity ModelProduction Order Quantity Model
Quantity Discount ModelsQuantity Discount Models
12 – 5Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Outline – ContinuedOutline – Continued
Probabilistic Models and Safety Probabilistic Models and Safety StockStock Other Probabilistic ModelsOther Probabilistic Models
Fixed-Period (P) SystemsFixed-Period (P) Systems
12 – 6Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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. Understand an ABC analysisUnderstand an ABC analysis
2.2. Explain cycle countingExplain cycle counting
3.3. Explain the EOQ model for Explain the EOQ model for independent inventory demandindependent inventory demand
4.4. Understand service levels and Understand service levels and probabilistic inventory modelsprobabilistic inventory models
12 – 7Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Amazon.comAmazon.com
Amazon.com started as a “virtual” Amazon.com started as a “virtual” retailer – no inventory, no retailer – no inventory, no warehouses, no overhead; just warehouses, no overhead; just computers taking orders to be filled computers taking orders to be filled by othersby others
Growth has forced Amazon.com to Growth has forced Amazon.com to become a world leader in become a world leader in warehousing and inventory warehousing and inventory managementmanagement
12 – 8Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Amazon.comAmazon.com
1.1. Each order is assigned by computer to Each order is assigned by computer to the closest distribution center that has the closest distribution center that has the product(s)the product(s)
2.2. A “flow meister” at each distribution A “flow meister” at each distribution center assigns work crewscenter assigns work crews
3.3. Lights indicate products that are to be Lights indicate products that are to be picked and the light is resetpicked and the light is reset
4.4. Items are placed in crates on a conveyor. Items are placed in crates on a conveyor. Bar code scanners scan each item 15 Bar code scanners scan each item 15 times to virtually eliminate errors.times to virtually eliminate errors.
12 – 9Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Amazon.comAmazon.com
5.5. Crates arrive at central point where items Crates arrive at central point where items are boxed and labeled with new bar codeare boxed and labeled with new bar code
6.6. Gift wrapping is done by hand at 30 Gift wrapping is done by hand at 30 packages per hourpackages per hour
7.7. Completed boxes are packed, taped, Completed boxes are packed, taped, weighed and labeled before leaving weighed and labeled before leaving warehouse in a truckwarehouse in a truck
8.8. Order arrives at customer within a weekOrder arrives at customer within a week
12 – 10Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
InventoryInventory
One of the most expensive assets One of the most expensive assets of many companies representing as of many companies representing as much as 50% of total invested much as 50% of total invested capitalcapital
Operations managers must balance Operations managers must balance inventory investment and customer inventory investment and customer serviceservice
12 – 11Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Functions of InventoryFunctions of Inventory
1.1. To decouple or separate various To decouple or separate various parts of the production processparts of the production process
2.2. To decouple the firm from To decouple the firm from fluctuations in demand and fluctuations in demand and provide a stock of goods that will provide a stock of goods that will provide a selection for customersprovide a selection for customers
3.3. To take advantage of quantity To take advantage of quantity discountsdiscounts
4.4. To hedge against inflationTo hedge against inflation
12 – 12Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
4 Main Types of Inventory4 Main Types of Inventory
Raw materialRaw material Purchased but not processedPurchased but not processed
Work-in-processWork-in-process Undergone some change but not completedUndergone some change but not completed A function of cycle time for a productA function of cycle time for a product
Maintenance/repair/operating (MRO)Maintenance/repair/operating (MRO) Necessary to keep machinery and processes Necessary to keep machinery and processes
productiveproductive
Finished goodsFinished goods Completed product awaiting shipmentCompleted product awaiting shipment
12 – 13Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
The Material Flow CycleThe Material Flow Cycle
Figure 12.1Figure 12.1
InputInput Wait forWait for Wait toWait to MoveMove Wait in queueWait in queue SetupSetup RunRun OutputOutputinspectioninspection be movedbe moved timetime for operatorfor operator timetime timetime
Cycle timeCycle time
95%95% 5%5%
12 – 14Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Inventory ManagementInventory Management
How inventory items can be How inventory items can be classifiedclassified
How accurate inventory records How accurate inventory records can be maintainedcan be maintained
12 – 15Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
ABC (Or Pareto) AnalysisABC (Or Pareto) Analysis
Divides inventory into three classes Divides inventory into three classes based on annual dollar volumebased on annual dollar volume Class A - high annual dollar volumeClass A - high annual dollar volume
Class B - medium annual dollar Class B - medium annual dollar volumevolume
Class C - low annual dollar volumeClass C - low annual dollar volume
Used to establish policies that focus Used to establish policies that focus on the few critical parts and not the on the few critical parts and not the many trivial onesmany trivial ones
12 – 16Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Control of Service Control of Service InventoriesInventories
Can be a critical component Can be a critical component of profitabilityof profitability
Losses may come from Losses may come from shrinkage or pilferageshrinkage or pilferage
Applicable techniques includeApplicable techniques include
1.1. Good personnel selection, training, and Good personnel selection, training, and disciplinediscipline
2.2. Tight control on incoming shipmentsTight control on incoming shipments
3.3. Effective control on all goods leaving Effective control on all goods leaving facilityfacility
12 – 17Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Independent Versus Independent Versus Dependent DemandDependent Demand
Independent demand - the Independent demand - the demand for item is independent demand for item is independent of the demand for any other of the demand for any other item in inventoryitem in inventory
Dependent demand - the Dependent demand - the demand for item is dependent demand for item is dependent upon the demand for some upon the demand for some other item in the inventoryother item in the inventory
12 – 18Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Holding, Ordering, and Holding, Ordering, and Setup CostsSetup Costs
Holding costs - the costs of holding Holding costs - the costs of holding or “carrying” inventory over timeor “carrying” inventory over time
Ordering costs - the costs of Ordering costs - the costs of placing an order and receiving placing an order and receiving goodsgoods
Setup costs - cost to prepare a Setup costs - cost to prepare a machine or process for machine or process for manufacturing an ordermanufacturing an order
12 – 19Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Inventory Models for Inventory Models for Independent DemandIndependent Demand
Basic economic order quantityBasic economic order quantity
Production order quantityProduction order quantity
Quantity discount modelQuantity discount model
Need to determine when and how Need to determine when and how much to ordermuch to order
12 – 20Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Basic EOQ ModelBasic EOQ Model
1.1. Demand is known, constant, and Demand is known, constant, and independentindependent
2.2. Lead time is known and constantLead time is known and constant
3.3. Receipt of inventory is instantaneous and Receipt of inventory is instantaneous and completecomplete
4.4. Quantity discounts are not possibleQuantity discounts are not possible
5.5. Only variable costs are setup and holdingOnly variable costs are setup and holding
6.6. Stockouts can be completely avoidedStockouts can be completely avoided
Important assumptionsImportant assumptions
12 – 21Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Inventory Usage Over TimeInventory Usage Over Time
Figure 12.3Figure 12.3
Order Order quantity = Q quantity = Q (maximum (maximum inventory inventory
level)level)
Usage rateUsage rate Average Average inventory inventory on handon hand
QQ22
Minimum Minimum inventoryinventory
Inve
nto
ry le
vel
Inve
nto
ry le
vel
TimeTime00
12 – 22Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Minimizing CostsMinimizing Costs
Objective is to minimize total costsObjective is to minimize total costs
Table 11.5Table 11.5
An
nu
al c
ost
An
nu
al c
ost
Order quantityOrder quantity
Curve for total Curve for total cost of holding cost of holding
and setupand setup
Holding cost Holding cost curvecurve
Setup (or order) Setup (or order) cost curvecost curve
Minimum Minimum total costtotal cost
Optimal order Optimal order quantity (Q*)quantity (Q*)
12 – 23Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Reorder PointsReorder Points
EOQ answers the “how much” questionEOQ answers the “how much” question
The reorder point (ROP) tells when to The reorder point (ROP) tells when to orderorder
ROP ROP ==Lead time for a Lead time for a
new order in daysnew order in daysDemand Demand per dayper day
== d x L d x L
d = d = DDNumber of working days in a yearNumber of working days in a year
12 – 24Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Reorder Point CurveReorder Point Curve
Q*Q*
ROP ROP (units)(units)In
ven
tory
lev
el (
un
its)
Inve
nto
ry l
evel
(u
nit
s)
Time (days)Time (days)Figure 12.5Figure 12.5 Lead time = LLead time = L
Slope = units/day = dSlope = units/day = d
12 – 25Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Production Order Quantity Production Order Quantity ModelModel
Used when inventory builds up Used when inventory builds up over a period of time after an over a period of time after an order is placedorder is placed
Used when units are produced Used when units are produced and sold simultaneouslyand sold simultaneously
12 – 26Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Production Order Quantity Production Order Quantity ModelModel
Inve
nto
ry l
evel
Inve
nto
ry l
evel
TimeTime
Demand part of cycle Demand part of cycle with no productionwith no production
Part of inventory cycle during Part of inventory cycle during which production (and usage) which production (and usage) is taking placeis taking place
tt
Maximum Maximum inventoryinventory
Figure 12.6Figure 12.6
12 – 27Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Probabilistic Models and Probabilistic Models and Safety StockSafety Stock
Used when demand is not constant or Used when demand is not constant or certaincertain
Use safety stock to achieve a desired Use safety stock to achieve a desired service level and avoid stockoutsservice level and avoid stockouts
ROP ROP == d x L d x L + + ssss
Annual stockout costs = the sum of the units short Annual stockout costs = the sum of the units short x the probability x the stockout cost/unit x the probability x the stockout cost/unit
x the number of orders per yearx the number of orders per year
12 – 28Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Safety stock 16.5 units
ROP ROP
Place Place orderorder
Probabilistic DemandProbabilistic DemandIn
ven
tory
lev
elIn
ven
tory
lev
el
TimeTime00
Minimum demand during lead timeMinimum demand during lead time
Maximum demand during lead timeMaximum demand during lead time
Mean demand during lead timeMean demand during lead time
Normal distribution probability of Normal distribution probability of demand during lead timedemand during lead time
Expected demand during lead time Expected demand during lead time (350(350 kits kits))
ROP ROP = 350 += 350 + safety stock of safety stock of 16.5 = 366.516.5 = 366.5
Receive Receive orderorder
Lead Lead timetime
Figure 12.8Figure 12.8
12 – 29Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Probabilistic DemandProbabilistic Demand
Safety Safety stockstock
Probability ofProbability ofno stockoutno stockout
95% of the time95% of the time
Mean Mean demand demand
350350
ROP = ? kitsROP = ? kits QuantityQuantity
Number of Number of standard deviationsstandard deviations
00 zz
Risk of a stockout Risk of a stockout (5% of area of (5% of area of normal curve)normal curve)
12 – 30Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Fixed-Period (P) SystemsFixed-Period (P) Systems
Orders placed at the end of a fixed periodOrders placed at the end of a fixed period
Inventory counted only at end of periodInventory counted only at end of period
Order brings inventory up to target levelOrder brings inventory up to target level
Only relevant costs are ordering and holdingOnly relevant costs are ordering and holding
Lead times are known and constantLead times are known and constant
Items are independent from one anotherItems are independent from one another
12 – 31Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Fixed-Period (P) SystemsFixed-Period (P) SystemsO
n-h
and
in
ven
tory
On
-han
d i
nve
nto
ry
TimeTime
QQ11
QQ22
Target quantity Target quantity ((TT))
PP
QQ33
QQ44
PP
PP
Figure 12.9Figure 12.9
12 – 32Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Fixed-Period SystemsFixed-Period Systems
Inventory is only counted at each Inventory is only counted at each review periodreview period
May be scheduled at convenient timesMay be scheduled at convenient times
Appropriate in routine situationsAppropriate in routine situations
May result in stockouts between May result in stockouts between periodsperiods
May require increased safety stockMay require increased safety stock
12 – 33
Departament d’Economia de l’Empresa / Department of Business Economics & Administration
Operations ManagementOperations Management
Material Requirements Material Requirements Planning (MRP) and ERPPlanning (MRP) and ERP
12 – 34Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 35Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Outline – ContinuedOutline – Continued
MRP StructureMRP Structure
MRP ManagementMRP Management MRP DynamicsMRP Dynamics
MRP and JITMRP and JIT
MRP In ServicesMRP In Services Distribution Resource Planning Distribution Resource Planning
(DRP)(DRP)
12 – 36Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Outline – ContinuedOutline – Continued
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
12 – 37Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 38Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 39Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 40Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 41Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 42Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 43Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 44Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 45Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Master Production Schedule Master Production Schedule (MPS)(MPS)
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
12 – 46Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 47Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
The Planning ProcessThe Planning Process
Figure 14.1Figure 14.1
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
12 – 48Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
Figure 14.2Figure 14.2
12 – 49Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Master Production Schedule Master Production Schedule (MPS)(MPS)
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:
12 – 50Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 51Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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)
12” Speaker12” Speaker
GG(1)(1)
Amp-boosterAmp-booster
33
Product structure for “Awesome” Product structure for “Awesome” ((AA))
AA
LevelLevel
00
12 – 52Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 53Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
Figure 14.4Figure 14.4
12 – 54Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
MRP StructureMRP Structure
Figure 14.5Figure 14.5
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)
12 – 55Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 56Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 57Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Uncooked linguini #30004
Sauce #30006
Veal #30005
MRP in ServicesMRP in Services
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
Figure 14.10Figure 14.10
12 – 58Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
MRP in ServicesMRP in Services
(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
12 – 59Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
MRP in ServicesMRP in Services
(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
12 – 60Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 61Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 62Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
Enterprise Resource Planning Enterprise Resource Planning (ERP)(ERP)
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)
12 – 63Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
ERP and MRPERP and MRP
Figure 14.11
12 – 64Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 65Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 66Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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
12 – 67Departament d’Economia de l’Empresa /
Department of Business Economics & Administration
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