Industrial management I Procurement, MRP,...

Lehrstuhl für Industrie, Energie und Umwelt

Universität Wien Fakultät für Wirtschaftswissenschaften Lehrstuhl für Industrie, Energie und Umwelt Brünner Straße 72, 1210 Wien

Industrial management I Procurement, MRP, ERP

procurement Material Requirement Planning (MRP) Enterprise Resource Planning (ERP)

Industriebetriebslehre I Lehrstuhl f. Industrie, Energie und Umwelt

| Prof. Wirl WS 2010/11 Seite 3

Material Requirements Planning (MRP)

MRP or material requirements planning deals with the company related demand of raw materials, intermediate products, modules, components, services, etc. for the firm‘s final goods and services.

What are the advantages of MRP? Better reaction to customer orders through compliance of schedules. Faster reaction to market changes. Improved work- and machine uitilization. Reduced quantity stocked and so reduced capital binding, etc.

These advantages result from the characteristic of Dependent Demand and the connected strategic decision to establish so called Dependent Inventory Scheduling Systems.

Dependent Demand: The demand for e.g. a turbo diesel engine of a BMW is dependent of the demand for a BMW 320diesel. When a car is ordered, BMW has a dependent demand for e.g. motor, tires, electronic components etc.



MRP requirements

The effective use of MRP and so of Dependent Inventory Models requires the following points: Master Production Schedule: What, when produced. Bill of Material/Specification: Materials and pieces needed for the production. Inventory Availability: What is on stock, capacity of inventory. Purchase Order Outstanding: What is still in the order process, which deliveries are still open. Lead Times: How long does it take to deliver pieces, moduls, components,

etc.



MRP Planning and hierarchy

The material requirements planning is normally determined by the Master Production Schedule derived from the dependent demand.

The Master Production Schedule determines what and how much will be produced in which period. This is derived from the production plan from the aggregated planning, which is determined and influenced by single divisions.

Master ProductionSchedule

ExecuteMaterial Plans

Material Requirements Plan

MarketingCustomer Demand

FinanceCash Flow

ProductionCapacity, Inventory

ProcurementSupplier Information

ManagementROI, Capital

Human ResourcesManpower Planning

EngineeringDesign Completion

Aggregate Production

Plan

Detail CapacityRequirements Plan

ExecuteCapacity Plan

Realistic ?

Change Production Plan?

Change Master ProductionSchedule?

Is Execution meetingthe Plan?

Change Requirements?

Change Capacity?

No

Yes

Is theCapacity

Plan beeing

met?

Master ProductionSchedule

ExecuteMaterial Plans

Material Requirements Plan

MarketingCustomer Demand

FinanceCash Flow

ProductionCapacity, Inventory

ProcurementSupplier Information

ManagementROI, Capital

Human ResourcesManpower Planning

EngineeringDesign Completion

Aggregate Production

Plan

Detail CapacityRequirements Plan

ExecuteCapacity Plan

Realistic ?

Change Production Plan?

Change Master ProductionSchedule?

Is Execution meetingthe Plan?

Change Requirements?

Change Capacity?

No

Yes

Is theCapacity

Plan beeing

met?



Master Production Schedule |1

While aggregated planning considers product families, total output etc., the Master Production Schedule focuses on single products – the MPS disaggregates the aggregated plans into single products.

Normally, MPS applies for a certain and limited time (normally for most of the

production cycle).

Companies often establish a policy not to change MPS during a short period - Fixed, Firm or Frozen Schedule. Only changes beyond the fixed period are allowed.

Important: A MPS is a guideline what gets produced and not a forecast, but of

course, a MPS is based on a forecast.



The MPS, or its focus, depends on a general production strategy. The Production strategy determines the focus and so the approach of an MPS:


Make to Order Assemble-to-Order Make-to-Stock

Steel, Beer, Light bulbs, Paper, etc.

Print shopMachines,

Airplanes, etc.

Examples:

Number of end items

Number of inputs

Typical focus of the master production

schedule

Schedule orders

Schedule modules

Motorcycles, Autos,

TVs, etc.

Schedule finished productSchedule:

Strategy:

Focus: (Process Focus) (Repetitive Focus) (Product Focus)

Make to Order Assemble-to-Order Make-to-Stock

Steel, Beer, Light bulbs, Paper, etc.

Print shopMachines,

Airplanes, etc.

Examples:

Number of end items

Number of inputs

Typical focus of the master production

schedule

Schedule orders

Schedule modules

Motorcycles, Autos,

TVs, etc.

Schedule finished productSchedule:

Strategy:

Focus: (Process Focus) (Repetitive Focus) (Product Focus)



Make-to-Order: Low-Volume Industries, high customer specific adaption, flexible processes (e.g. airplane industry)

Make-to-Stock: High-volume Industries, mass production, immediate supply to the stock, high standardization of the products, good predictions (e.g. for steel industry, standardized mass products).

Assemble-to-Order: High-volume Industries, mass production, high component standardization, customer specific adaption of the end product, inaccurate forecasts for end product, good forecasts for components, end production similar to Make-to-Order (e.g. cars).

Assemble-to-Stock: High-volume Industries, mass production, immediate supply to the stock, high standardization of the components, accurate forecasts (e.g. electronic industry).

Production strategies

Customers‘ orders Production delivery

Production inventory Customer‘s orders delivery

order completion delivery

Completion inventory orders delivery




Starting from the Master Production Schedule the detailed planning (e.g. Capacity Requirement Planning, etc.) can be done.

Starting from the MPS the production plans for single parts and components of the final products have to be done using the so called Bills of Material (BOM).



A Bill of Material contains information of the needed pieces and their quantities for the production of an output.

Cuts give information about the complexity and quantity of single pieces needed and which should exist for the final production timely and in the right quantity.

In practice Bills of Material are done at the

construction level and electronically managed. So subsequent corrections are made easier and automatisation can be supported.

Bills of Material |1




What does a Bill of Material represent? On the one hand a list of all parts and components

(quantity planning) On the other hand a production structure

(Scheduling): Produktstruktur #A521Level

#A5210

#C145(3)#B315(2)

#F236(2)#E921(2)#D417(2)

3 #G697(1)

#E921(2)

#D417(2)

1

2




Starting from the production structure the needed quantity of singe pieces can be determined for each product.

So the company knows exactly how many pieces #E921 they need for an order of 50 products of the category #A521, so they know how much they have to order at suppliers or internal.

Bills of Material also have side-effects. They can be taken for cost determination. More over they can be taken as material list

for the production- and manufacturing employees, then they are usually called

Pick List. Pick List for product #A521:



MRP and lead time |1

After discussing the MPS and the BOM, there are still 2 points from the Outline of Inventory Management left (comp. Slides to Inventory Management) and the topic of Lead Times.

Since the Mgmt. knows which single pieces and components are needed for each product (BOM) the production has to be planned in a way that the needed quantities of products can be delivered at the planned completion date.

Due to the fact that the singe parts and components have individual Lead Times – they have to be either ordered at the supplier, or (self) produced and manufactured – these Lead Times have to be considered in the production planning to guarantee a smooth material- and workflow in the production.



The integration of Lead Time leads to a so-called Time-Phased Schedule, with whom you can determine when you have to start the production of a good, or when a certain good has to be delivered to be ready for production.

For the Time-Phased Schedule it is irrelevant wheter a good is bought or only the Lead Time is relevant.

MRP and Lead Time |1

1 week

1 week

3 weeks

2 weeks 1 week2 weeks

1 week

2 weeks

1 2 3 4 5 6 7 8

F

E

A

CG

D

E

D

B

Time in Weeks

2 weeks

1 week

1 week

3 weeks

2 weeks 1 week2 weeks

1 week

2 weeks

1 2 3 4 5 6 7 8

F

E

A

CG

D

E

D

B

Time in Weeks

2 weeks



MRP Structure

MRP Systems need the following raw data: Master Production Schedule (MPS) Bill of Material (BOM) Lead Time Data Inventory Data Purchase Data

Raw data determines the Gross Material Requirements Plan and the Net Material Requirements Plan.

Master ProductionScheduleBOM

Lead Times

(Item Master File)

Inventory Data

Purchasing Data

MRP planning programs

(computer and software)

MRP by Period Report

MRP by date report

Planned order report

Purchase advice

Exception report

Exception report


Lead Times

(Item Master File)

Inventory Data

Purchasing Data




MRP by date report


Purchase advice

Exception report

Exception report


Lead Times

(Item Master File)

Inventory Data

Purchasing Data




MRP by date report


Purchase advice

Exception report

Exception report



Gross Material Requirements Plan

The Gross Material Requirements Plan is a production plan that links the Master Production Schedule and the Time-Phased Schedule:

The Gross MRP does not take the quantities on inventory into account!



Net Material Requirements Plan

The Net MRP expands the planning for the

inventories and thus includes Gross Requirements,

(on-hand) Inventory to obtain the Net Requirements .



Net Material Requirements Plan | Detail |1



Net Material Requirements Plan | Detail |2



Derivation of GMRP, NMRP Derivation of the Gross Requirements for the components B, which gets into products A and S, as well as getting sold directly. Additionally the allocation and Scheduled Receipts are taken into account.

B

A S

C CB

B

10105040 15 5040 15

B

A S

C CB

B

10105040 15 5040 15



Lot-Sizing Techniques

Until now, the MRP has determined the needed quantities at a certain point in time. Hence management knows which parts have to be ordered at what time.

Given the so determined demand it must decide about date and quantities of their orders.

The NMRP does not show order quantities and order times, but shows the need.

So there is still the decision about order time and quantity. To define the quantites and the time Lot-Sizing Techniques (e.g. the Lot-for-

Lot, the EOQ and the Part Period Balancing procedure) are used. Generally you have to take care that there is no dominant technique, but you

have to implement the most suitable one for the situation.



Lot-for-Lot

Lot-for-Lot Technique = produce/order exactly the amount needed. The Lot-for-Lot Technique corresponds to the requirements of the Dependent Demand,

and is especially reasonable if frequent orders are economical and Just-in-Time Inventory was implemented.

Especially in a Just-in-Time environment Lot-for-Lot Techniques are considered to be efficient because the inventories are minimized (e.g. no security stocks).

Total costs (Lot-for-Lot) = $ 700 = 7*$ 100 (Setup Costs) + 0 (Holding Costs)



Economic Order Quantity Technique |1

As mentioned before the EOQ-Technique is relatively efficient for Independent Demand.

In case of Depedent Demand, the EOQ-Technique is not the first choice.

The EOQ is a statistical technique using averages, whereas MRP at the Master Production Schedule have a known (dependent) demand as starting point.

In case of dependent demand the management should use this information advantages instead of assuming a constant demand.



Economic Order Quantity Technique |2 For the previous example the EOQ is:

The calculated total costs for the EOQ-Techniques are:

The real total costs for the observed period are:

.Stk7352

100*404.1*22* ===H

O

cDcQ

Total costs (EOQ) = $ 718 = 4*$ 100 (Setup Costs) + 318*$ 1 (Holding Costs)



Part Period Balancing |1

Part Period Balancing (PPB) is a dynamic approach to balance order- and inventory costs. PPB uses the informations about future lots and tries to balance the order- and inventory costs for the dependent demand.

PPB uses a Economic Part Period (EPP), the ratio of order- and inventory costs, as a reference number.

PPB assigns needed quantities to the Part Periods until the number approximated the EPP.

With order costs of $ 100 and inventory costs of $ 1 the is (100/1) = 100. So the storage of one unit for one period would cost $ 100.




Procedure at Part Period Balancing (PPB calculation):




From the PPB-calculation we know, that we will do a collection order for the periods 2, 3, 4 and 5 and for the periods 6, 7, 8 and 9:

Even if in this example the Part Period Balancing Technique is too favorable this does not mean, that PPB is generally the best technique. On the contrary, the used procedure is dependend of the situation and with other parameter constellations a EOQ can be the most economic procedure!

Total costs (PPB) = $ 490 = 3*$ 100 (Setup Costs) + 190*$ 1 (Holding Costs)



MRP Extensions | Closed-Loop MRP |1

Closed-Loop MRP contains that the planning systems gets feedback from control systems.

Closed-Loop MRP systems make informationens and feedbacks of ther capacity planning, of the production

planning and the Master Production Schedule available:

Open loop = time paths




At capacity planning Load Reports show the current and the planned utilization of a Work Centers and the expected orders.

If the capacity is exceeded for a short period, Closed-Loop MRP Systems allow to smooth out the load and not to violate capacity limits by changing Work Orders over periods.




Strategies for Load Smoothing under minimization of the effects on

changed Lead Times are:

Overlapping: Parallel processing – befor the whole lot is completely

finished, parts of the lot get assigned to other processes.

Operations Splitting: Lots get divided on several machines – higher

troughput

Lot-Splitting: production of parts of the lots get pulled forward

If capacity is routinely exceeded, then capacity expansion is preferable.



Enterprise Resource Planning (ERP) |1

The increasing involvment of customers and suppliers in the MRP lead to the

development of Enterprise Resource Planning.

ERP allows the company:

To automate and integrate many business processes

To make data and best-practices available in the company.

Real-time information processing.

The aim of ERP-Systems is to coordinate the company‘s processes from the

supplier to the invoice to the customer.

Tries to achieve these objectives through combinations of specialized systems

using shared databases.



Enterprise Resource Planning (ERP) |2 Enterprise Resource Planning & Material Requirements Planning:




The most important components of a ERP are among others.: Finance Module MRP (Material Requirements Planning) Module HR (Human Resource) Module SCM (Supply Chain Management) Module CRM (Customer Relationship Management) Module

Which sytems get combined gets decided on a case-to-case basis. ERP Software is offerd in modules and then tailored to needs of the customers. Some of the most popular ERP Software Providers are:

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http://images.google.at/imgres?imgurl=http://www.pc.co.il/_Uploads/4930oracle-logo-140.jpg&imgrefurl=http://www.pc.co.il/Index.asp%3FCategoryID%3D72&h=150&w=140&sz=20&hl=de&start=3&tbnid=NmRPv5lPvqpdPM:&tbnh=96&tbnw=90&prev=/images%3Fq%3Doracle%2Blogo%2B%252B%2Berp%26svnum%3D10%26hl%3Dde%26lr%3D%26rls%3DSNYJ,SNYJ:2005-28,SNYJ:de

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ERP solutions | SAP – Module



ERP solutions | mySAP ERP




Advantages of ERP-systems: Supports the integration of the procurement chain, the production and of

administrative processes. Creates a communality of the database. Considers improved, over worked „best processes“. Improves the communication between Business Units and places. Uses standartizised software. Describes a Strategic Advantage against competition.

Disadvantages of ERP-Systems: High purchasing costs and expensive and long customizing. Implementation can lead to essential changes in a company und its processes. Complexity, which makes the coordination difficult/impossible Causes a permanent process of implementation that may never finish. Limited professional competence in ERP.



ERP in the automobile industry |1



ERP in the automobile industry |2

Customer Order Order Procesing

Production Component Order

Product Delivery & Invoice

Shipment

Component Delivery

ERP ERP

ERP

ERP

ERP

ERP

ERP ERP ERP



Additional literature

Heizer, J., Render, B., Operations Management, 7th ed., Prentice Hall, 8th edition 2007.

Anderson, D.R., Sweeney, D.J., Williams, T.A.; Management Science – Quantitative Approaches to Decision Making, 9th ed., South-West.

Mendenhall, W., Reinmuth, J.E., Beaver, R., Statistics for Management and Economics, 6th ed., PWS-Kent Publishing Company.

Krajewski, L.J., Ritzman, L.P., Operations Management – Strategy and Analysis, 6th ed., Prentice Hall.

Wirl, F., Skriptum zur Industriebetriebslehre.

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