Unit 2

Management of Conversion System

Chapter 11: Resource Planning
Lesson 35 – MRP-II

Learning Objectives
After reading this lesson you will be able to understand
Manufacturing resource planning
Purchasing objectives

Good Morning students, today we are going to introduce the concept of what is known as
MRP-II. We will discuss about how an integrated information system that shares
data among and synchronizes the activities of production and the other functional
areas of the business.

MANUFACTURING RESOURCES PLANNING (MRPII)

Historically, MRP systems typically were developed on a segregated

basis, rather than as part of highly integrated information system. More recently,
however, companies are beginning to logically relate many of their information
subsystems to the MRP system. Bills of materials data, for example, can be
shared with an engineering information system data base; order release and
order receipts data can be shared by the order billing and accounts payable
information systems; and inventory status data from MRP can be part of
marketing or purchasing information systems. This type of information
integration, in fact, is exactly the impetus for a new generation of manufacturing
planning and control systems.

Manufacturing resource planning (MRP II, or “closed loop” MRP) is an

integrated information system that steps beyond first-generation MRP to
synchronize all aspects (not just manufacturing) of the business. The MRPII
system coordinates sales, purchasing, manufacturing, finance, and engineering
by adopting a focal production plan and by using one unified data base to plan
and update the activities in all the systems.

As shown in figure the process involves developing a production plan

from the business plan to specify monthly levels of production for each product
line over the next one to five years. Since the production plan affects all the
functional departments, it is developed by the consensus of executives and
becomes their “game plan” for operations. The production department then is
expected to produce at the committed levels, the sales department to sell at
these levels, and the finance department to ensure adequate financial resources
for these levels. Guided by the production plan, the master production schedule
specifies the weekly quantities of specific products to be built. At this point a
check is made to determine whether the capacity available is roughly adequate
to sustain the proposed master schedule. If not, either the capacity or the master
schedule must be changed. Once settled, the master schedule is used in the
MRP logic, as previously described, to create material requirements and priority
schedules for production. Then, an analysis of detailed capacity requirements
determines whether capacity is sufficient for producing the specific components
at each work center during the scheduled time periods. If not, the master
schedule is revised to reflect the limited available capacity. After a realistic,
capacity-feasible schedule is developed, the emphasis shifts to execution of plan:
purchase schedules and shop schedules are generated. From these schedules,
work center loadings, shop floor control, and vendor follow-up activities can be
determined to ensure that the master schedule is met.

An integrated system for planning and control

Manufacturing
Business plan (materials; capacity;
production schedules)
Production plan
Purchasing
(vendor Master productive schedule
orders)

Rough-cut
capacity plan

Materials requirements plan Engineering (process

and
Product design)

Detailed
capacity plan

Shop floor control; purchases control

 Marketing (sales order
Entry; delivery
Projections)

Finance (capital require-

-ments for capacity;
working capital
requirements)

Accounting (accounts
payable;
Accounts receivable)

One use of the MRPII system is to evaluate various business proposals. If,
for example, the output of product X increases by 20 percent in weeks 15 to 20
and that of Y decreases by 15 percent in weeks 10 to 15, how would operations
and profitability be affected? the system can simulate how purchases and,
hence, accounts payable are affected? The system can simulate how purchases
and, hence, accounts payable are affected, when delivers to customers and
accounts receivable occur, what capacity revisions are needed, and so on. The
company-wide implications of the proposed change can be evaluated, and
various departments can be coordinated according to a common purpose.

PURCHASING

Materials management brings together under one manager all the

planning, organizing, and control activities associated with the flow of materials
into and through an organization. Physical distribution is even broader,
encompassing managing materials flow into the organization as well as
managing materials storage and transportation flow out as finished products. In
the context of operations management, we focus here on the narrower
purchasing function, which provides materials, supplies, and services from
outside vendors (suppliers). Accordingly, purchasing is an important boundary
function that supports operations by acquiring major resources for the conversion
process. For manufacturing firms involved in assembly, it is not unusual for the
cost of purchased materials to exceed, as a percent of total product cost, the
value added internally to the product through manufacturing and assembly. The
importance of the purchasing function to the firm’s performance and to
operations performance is substantial.

PURCHASING OBJCTIVES
The objectives of purchasing can be summarized thusly: to efficiently provide
fairly valued materials, supplies, and services in a timely manner. The following
objectives are particularly important to operations:
1. Good value: Value is the combination of price and quality. Good value
means a competitive price, though not always the lowest one.
2. Reliable schedules: On-time, just-in-time delivery means schedules are
reliable, a crucial quality.
3. Minimized investment: Through careful analysis, the economics of
order size, caring costs, and stock out costs determine the investment
level. For example, quantity discounts must justify the larger
investment (for a larger order) or investment unnecessarily increases.
4. Efficient administration: Included here are executing a low-cost
purchasing function, effectively coordinating activities with other
internal functions (operations, engineering, etc.), and maintaining good
relations with vendors.

EFFECIVE PURCHASING

Effective purchasing means learning the purchase requirements, identifying

qualified sources of supplies, minimizing the total cost of supplies and
administering the purchase.

PURCHASING REQUIREMENTS

Typically, purchasing receives an item requisition that states quantity,

description, and date needed. These internally generated requisitions are
necessary because management allows only purchasing to deal with outside
vendors – the proven, most efficient approach for acquisitions.

SOURCES OF SUPPLY

Qualified sources of supplies are identified from salespersons, personal

knowledge, advertisements, requistioners, executives, trade and industry
associations, peers (other purchasing professionals), company records, and
many other sources.

COST OF SUPPLY

Useful approaches for evaluating supply costs include analyzing supply item
histories, make-or-buy decisions, value analysis, traditional inventory
economic analysis, and discounts.

PRICES AND VALUE

 One of the functions of centralized purchasing is to get better prices than if
purchasing were decentralized. Federal and state laws regulate pricing
practices: price fixing, for example, is illegal, as is pricing differently the same
item at the same quantity for different customers.

ADMINISTERING THE PURCHASE

Once purchase requirements are understood, costs evaluated, sources

identified, and prices and values established, purchasing issues the supply
order.

With that, we have come to the end of today’s discussions. I hope it has been an
enriching and satisfying experience. See you around in the next lecture. Take care. Bye.