MRP and ERP

Chapter 12

Learning Objectives
Describe the inputs, outputs, and
nature of MRP processing.
Explain bill of materials
Explain time-phased product
structure
Describe differences between MRP
and ERP

MRP
Material requirements planning (MRP):
A computer-based information system that
translates master schedule requirements for
end items into time-phased requirements for
subassemblies, components, and raw
materials.
The MRP is designed to answer three
questions:
1. What is needed?
2. How much is needed?
3. When is it needed?

Overview of MRP
How much and
when finished
product is
desired
Composition
of a finished
products

How much
inventory is on
hand or on
order

MRP Inputs:
Master Schedule
Master schedule:
States:
Which end items are to be produced

Item X

When these are needed

at beginning of week 14 and

at beginning of week 18

In what quantities (customer orders,

forecasts, order from warehouses to
build up seasonal inventories).

100 at beginning of week 14

150 at beginning of week 18

Weekly Quantity
Item X
Quantity

11

12

13

14
100

15

16

17

18
150

Cumulative Lead Time

The master schedule should cover a period that
is at least equivalent to the cumulative lead time
Cumulative lead time
The sum of the lead times that sequential phases of a process require,
from ordering of parts or raw materials to completion of final assembly.

CLT = 9 weeks

Cumulative Lead Time

Following the previous example, if CLT=9
When should we start work for the demand on
the week 14?
When should we start work for the demand on
the week 18?
Weekly Quantity
Item X
Quantity

11

12

13

14
100

15

16

17

18
150

MRP Inputs:
Bill of Materials
Bill of Materials (BOM)
A hierarchical listing of all of the
assemblies, subassemblies, parts, and
raw materials needed to produce one
unit of a product
Each finished product has its own BOM
Product structure tree
A visual depiction of the requirements in a
bill of materials, where all components are
listed by levels

Assembly Diagram and

Product Structure Tree

parent
component

Amount needed for assembly

at the next higher level only

parent

Level 0 = end item

component

Level 1
Level 2

Low-Level Coding
Low-level coding
Restructuring the bill of materials so that multiple
occurrences of a component all coincide with the
lowest level at which the component occurs
Example: 1 X requires: 2 B, 1 C, 6 D, 28 E, and 2 F
X: 1

Level 0

B: 2 x 1 = 2

Level 1

D: 3 x 2 = 6
E: 1 x 2 = 2

Level 2

D(3
)

E: 4 x 6 = 24

Level 3

E(4)

B(2)

C: 1 x 1 = 1

C
E

E(2)

F(2)

E: 2 x 1 = 2
F: 2 x 1 = 2

Low-Level Coding: 1 X
X: 1

Level 0

B: 2 x 1 = 2

Level 1

D: 3 x 2 = 6
E: 1 x 2 = 2

Level 2

D(3
)

E: 4 x 6 = 24

Level 3

E(4)

X
B(2)

C: 1 x 1 = 1

C
E

E(2)

1 X requires:
B: 2
C: 1
D: 6
E: 2+24+2=28
F: 2

F(2)

E: 2 x 1 = 2
F: 2 x 1 = 2

Low-Level Coding: 10 X
with on hand inventory
Level 0
Level 1

1 X requires:
B: 2
C: 1
D: 6
E: 28
F: 2

X
B(2)

Level 2

D(3
)

Level 3

E(4)

C
E

10 X require:
B: 2x10-4=16
C: 1x10-10=0
D: 6x10-8=52
E: 28x10-60=220
F: 2x10-0=20

E(2)

F(2)

Does not
consider item
hierarchy!

On hand
inventory
B: 4
C: 10
D: 8
E: 60
F: 0

Low-Level Coding: 10 X
with on hand inventory
X: 10

Level 0

B: 2 x 10 - 4 = 16

Level 1

D: 3 x 16 8=40

Level 2

D(3
)

E: 4 x 40 60=100

Level 3

E(4)

10X require:
B: 16
C: 0
D: 40
E: 100+16+0=116
F: 0

X
B(2)

C
E

E: 1 x 16 = 16

E(2)

C: 1 x 10 -10=0

F(2)

F: 2 x 0 = 0
Low-level coding

E: 2 x 0 = 0

On hand
inventory
B: 4
C: 10
D: 8
E: 60
F: 0

MRP Processing
MRP processing
takes the end item
requirements
specified by the
master schedule and
explodes them
into time-phased
requirements for
assemblies, parts,
and raw materials
offset by lead times

Part E
fabrication
lead-time
Material F
delivery
lead-time

Sub
assembly
lead-time

Final
assembly
lead-time

MRP Inputs:
Inventory Records
Inventory records
Includes information on the status of each
item by time period (called time buckets)
Information about
Gross requirements
Scheduled receipts
Expected amount on hand
Other details for each item such as
Supplier
Lead time
Lot size policy
Changes due to stock receipts and withdrawals
Canceled orders and similar events

MRP Record

Gross requirements

Total expected demand (during

each period) without regard to
the amount on hand.

Scheduled receipts
Open orders scheduled to arrive
(at the beginning of a period)

Projected on hand
Expected inventory on hand (at
the beginning of each time
Netperiod)
requirements
Actual amount needed in each
time period

Planned-order receipts
Quantity expected to received (at
the beginning of the period)
Under Lot-for-lot will equal net
requirements

Week
Number

Gross
Requirements
Scheduled
Receipts
Projected on
hand
Net
requirements
Planned-orderreceipt
Planned-order
release

Planned-order releases
Planned amount to order in
each time period.
Equal planned-order receipts
12-16
offset by lead time.

MRP Processing
Gross requirements are generated by
exploding the bill of materials
The core of MRP processing is determining
net requirements (netting) -> materials
that are actually needed to meet demand
Net
Gross
=
requirements
requirements
Available
inventory

Available
inventory

Projecte
Schedule
+
d ond
hand
receipts

Net
Gross
=
requirements
requirements

Projected on
- hand inventory +
Scheduled

MRP: Development
The MRP is based on the product structure
tree diagram
Requirements are determined level by
level, beginning with the end item and
working down the tree
The timing and quantity of each parent becomes
the basis for determining the timing and quantity
of the children items directly below it.
The children items then become the parent
items for the next level, and so on

Example MRP

Orders:
100 units for delivery at (the start
of) week 4
150 units at (the start of) week 8.
Assembly:
Wood sections made by the firm.
Fabrication takes 1 week.
Frames are ordered. Lead time is 2
weeks.
Shutter assembly requires 1 week.
Schedule receipts:
70 wood sections at (the beginning
of) week 1.

Determine the size and timing of

planned-order releases (under Lotfor-Lot ordering)

Shutter
Frames
(2)

Wood
sections
(4)

MRP
Lot-For-Lot
Ordering
Shutter
[LT=1 week]

Frames (2)
[LT=2 weeks]

Wood sections
(4)
[LT= 1 weeks]

MRP
Lot-For-Lot
Ordering
Shutter
[LT=1
week]
Frames (2)
[LT=2
weeks]
200*
1

330*
3

300*
1

600*
3

Widget (1)
[LT=1
weeks]

Wood sections
(4)
[LT= 1 weeks]

Widget (3)
[LT=1 weeks]

Updating the System

An MRP is not a static document
As time passes

Some orders get completed

Other orders are nearing completion
New orders will have been entered
Existing orders will have been altered
Quantity changes
Delays
Missed deliveries

Rolling Horizon

MRP Outputs: Primary

Primary Outputs
Planned orders
A schedule indicating the amount and timing of
future orders

Order releases
Authorizing the execution of planned orders

Changes
Revisions of the dates or quantities, or the
cancellation of orders

MRP Outputs: Secondary

Secondary Outputs
Performance-control reports
Evaluation of system operation, including
deviations from plans and cost information
e.g., missed deliveries and stockouts

Planning reports
Data useful for assessing future material
requirements
e.g., purchase commitments

Exception reports
Data on any major discrepancies encountered
E.g., late and overdue orders, excessive scrap rates,
requirements for nonexistent parts

Enterprise Resource
Planning (ERP)
Many organizations use a functional structure. Information
tends to flow freely within each function but less so
between functions.
Enterprise Resource Planning (ERP)
ERP was the next step in an evolution that began with MRP
ERP typically has an MRP core
ERP represents an expanded effort to integrate standardized record
keeping that will permit information sharing among different areas of
an organization in order to manage the system more effectively
A system to capture and make data available in real-time to decision
makers throughout the organization.
ERP systems are composed of a collection of integrated modules

ERP Software Modules

Module

Brief Description

Accounting/Finance

A central component of most ERP systems. It provides a range of financial reports,

including general ledger, accounts payable, accounts receivable, payroll, income
statements, ad balance sheets

Marketing

Supports lead generation, target marketing, direct mail, and sales

Human Resources

Maintains a complete data base of employee information such as date of hire, salary,
contact information, performance evaluations, and other pertinent information

Purchasing

Facilitates vendor selection, price negotiation, making purchasing decisions, and bill
payment

Production Planning

Integrates information on forecasts, orders, production capacity, on-hand inventory

quantities, bills of material, work in process, schedules, and production lead times

Inventory Management

Identifies inventory requirements, inventory availability, replenishment rules, and

inventory tracking

Distribution

Contains information on third-party shippers, shipping and delivery schedules, delivery

tracking

Sales

Information on orders, invoices, order tracking, and shipping

Supply Chain
Management

Facilitates supplier and customer management, supply chain visibility, and event
management

Focused Reading (MIS Major

Required)
1. Enterprise
resource planning (ERP)A brief history
2. 13 Common ERP Mistakes and How to Av
oid Making Them
3. ERP and Business Process Re-engineering
ERP: The Business Process Re-engineering Dile
mma
To BPR, or not to BPR, that is the question

4. Cloud ERP
What Is Cloud ERP, and How Is It Different from Tra
ditional Solutions?
Benefits of Cloud ERP Software

ERP History
MRP: focus on cost reporting, materials, manufacturing

tapes
IBM
1960~1970
MRPII: scheduling, procurement

1980s
ERP

SAP, Peoplesoft,
1990
Client-server architecture

ERP Common Mistakes

Poor Planning
Not properly vetting ERP vendors
Not understanding or using key features
Understanding the time and resources required
Not having the right people on the team from the start
Not setting priorities
Not investing in training and change management
Underestimating the importance of accurate data
Taking the kitchen sink approach
Not decommissioning legacy applications
Not having an active load testing environment
Ignoring third-party support alternatives
Not having a maintenance strategy

ERP & Business Process Reengineering

Take place before ERP system selection
Output of BPR ERP
To be process vs. as is process

Difference ways to do business globally

Process standardization after acquisition
Legacy systems
Make sure the process lead to higher values

Cloud ERP
Cloud ERP vs. traditional ERP
Traditional:
Cloud:

Outsource operation, easy to setup,

monthly/annually fee
Minimal initial cost
Automate operation
cons
Less control, data security, service outage