SCM 302

OPERATIONS
MANAGEMENT
MRP
 SCM 302 - MRP & ERP

Chapter 14 2

Agenda for this Module

1. What is dependent demand?
2. What is the Master Production Schedule?
3. Construct a bill of materials and time-phased
product structure tree.
4. Describe how MRP fits into the Planning
Process.
5. Describe shortcoming and solutions for MRP.
6. Describe use of MRP in services.
7. Compute MRP tables for dependent demand
items.
 SCM 302 - MRP & ERP

Chapter 14 3

ERP Implementation Haunts Air Force

 SCM 302 - MRP & ERP

Chapter 14 4

MRP: Managing Dependent Demand

• Demand for a dependent demand
items is related to the demand for
another item
• Given a quantity for the end item, the
demand for all parts and components
can be calculated
• In general, used whenever a schedule
can be established for an item
• MRP is the common technique

• Benefits of MRP
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities
and labor
4. Reduced inventory levels
 SCM 302 - MRP & ERP

Chapter 14 5

The Big Picture: Planning Process

Figure 14.1
 SCM 302 - MRP & ERP

Chapter 14 6

MRP Structure Figure 14.4

Data Files 1 Output Reports

MRP by
BOM Master period report
2 production schedule
MRP by
date report

Lead times
3
(Item master file) Planned order
report

Inventory data
Purchase advice
4 Material
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
5 Order early or late
or not needed

Order quantity too

small or too large
=5 key inputs for MRP
 SCM 302 - MRP & ERP

Chapter 14 7

1. Master Production Schedule (MPS)

• Specifies what is to be made and when
• Statement of what is to be produced, not a forecast of
demand
• Established in terms of specific products
• Result of the production planning process
• Must follow the aggregate production plan
• Inputs from financial plans, customer demand,
engineering, supplier performance
• Rolling Schedule
• Schedule must be followed for a reasonable length of time
• Fixed or frozen in the near term part of the plan
• As process moves from planning to execution, each step
must be tested for feasibility
 SCM 302 - MRP & ERP

Chapter 14 8

Master Production Schedule

Figure 14.2

Months January February

Aggregate Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
 SCM 302 - MRP & ERP

Chapter 14 9

Product Structure Tree for ABCs Digital Camera

Model 1001
Digital Camera

x1 x1 x1 x1 x1
Viewfinder
Front Back Flash Sub Optics/Imaging
Sub
Enclosure Enclosure Assembly Sub Assembly
Assembly

x5 x2 x1 x1 x1 x1
Imaging
Plastic Shutter Sub Electronic Lens Sub
Lens Prism
Housing Assembly Sub Assembly
Assembly

Why did I not “break down” the Flash Sub Assembly into its components?
 SCM 302 - MRP & ERP

Chapter 14 10

2. Bill of Materials (BOM):

for Digital Camera Model 1001
Item or Part Quantity Low Level
Description
number required1 Code

DC 1001 Digital Camera 1 0

DCF200 Front Enclosure 1 1
DCB325 Back Enclosure 1 1
DCV623 Viewfinder Sub Assembly 1 1
DCL104 Lens 5 2
DCP342 Prism 2 2
DCX254 Plastic housing 1 2
DCF934 Flash Sub Assembly 1 1
DCO8213 Optics/Imaging Sub Assembly 1 1
DCS819 Shutter Sub Assembly 1 2
DCIE563 Imaging Electronics Sub Assembly 1 2
DCL9000 Lens Sub Assembly 1 2

1. Quantity required is often referred to as “goes-into”

 SCM 302 - MRP & ERP

Chapter 14 11

2. Bill of Materials (BOM) Example

Bill of Material
Low Level Code Tree Structure Low
Item or Part Quantity
Description Level
0 Final Product number required
Code
x1 x2 x3 Final Product Product 1 0
1 A1 A2 A3 A1 Part A1 1 13X
x4 x2 A2 Part A2 2 1
A3 Part A3 3 1
2 B1 B2
B1 Part B1 4 2
x2 x1 B2 Part B2 2 2
3 C1 A1 C1 Part C1 2 3
A1 Part A1 1 3

• Some products might have a component (e.g. A1) that shows up at various levels.
• The component is assigned a level code equal to the lowest level where it appears
 SCM 302 - MRP & ERP

Chapter 14 12

3. Lead Times for the Digital Camera

Digital Camera
(2 weeks)

x1 x1 x1 x1 x1
Viewfinder
Front Back Flash Sub Optics/Imaging Sub
Sub
Enclosure Enclosure Assembly Assembly
Assembly
(3 weeks) (3 weeks) (4 weeks) (3 weeks)
(3 weeks)

x5 x2 x1 x1 x1 x1
Imaging
Plastic Shutter Sub Electronic Lens Sub
Lens Prism
Housing Assembly Sub Assembly
(4 weeks) (5 weeks)
(3 weeks) (4 weeks) Assembly (4 weeks)
(5 weeks)

• Lead time: time required to purchase, produce, or assemble an item

• For production – the sum of the move, setup, and assembly or run times
• For purchased items – the time between the recognition of a need and when
its available for production
 SCM 302 - MRP & ERP

Chapter 14 13

3. Lead Times Time-Phased Product Structure

Figure 14.3
Must have D and E
Start production of D completed here so
production can begin
on B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |

1 2 3 4 5 6 7 8
Time in weeks
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Chapter 14 14

Use the Lead Times and Quantities Required to Answer

the Questions
• Need 500 cameras to be ready at start of week 10
• It takes 2 weeks to assemble cameras
• Each camera requires 1 viewfinder sub assembly

• Therefore need 500 viewfinder sub assemblies to be ready at start of

week 8
• It takes 3 weeks to assemble viewfinder sub assemblies
• Each viewfinder subassembly requires 5 lenses

• Therefore need 2500 lenses to be ready at the start of week 5

In this example we made the exact amount of viewfinders and lenses as was required.
 We used a “lot-for-lot” (“L4L”) rule
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Chapter 14 15

What If Viewfinders Were Made in Fixed Order

Quantities of 750?
• Need 500 cameras to be ready at start of week 10
• It takes 2 weeks to assemble cameras
• Each camera requires 1 viewfinder sub assembly

• Therefore need 500 viewfinder sub assemblies to be ready at start of

week 8 … But viewfinders are made in fixed order quantities of 750
(or multiples thereof) so have to make 750 by start of week 8
• It takes 3 weeks to assemble viewfinder sub assemblies
• Each viewfinder subassembly requires 5 lenses

• Therefore need 3750 lenses to be ready at the start of week 5

• Lot for Lot (L4L) and Fixed Order Quantity (FOQ) are lot sizing rules
• Many others
• Tradeoff: make only what you need only when you need it but reduce the
number of times you have to incur set up costs

Lead times and lot size rules are referred to as “planning factors”
 SCM 302 - MRP & ERP

Chapter 14 16

Let the Master Production Schedule for Digital Camera

DC 1001 be as follows
Planning Factors: Lot for Lot (L4L) lot sizing rule.
Lead time = 2 weeks.

Week 1 2 3 4 5 6 7 8 9 10
MPS
Replenishment1 500 500 500 500

MPS Order
Releases 500 500 500 500

This only shows the end-result of the MPS table: the MPS replenishment schedule.

1. Also Called Shipment

 SCM 302 - MRP & ERP

Chapter 14 17

Determining Net Requirements

• Item A: Production schedule for 50 units of Item A
in week 8
• (net requirement) = (gross requirement – on-hand
inventory)
• 10 Item As on hand, only 40 are actually required
• The planned order receipt for Item A in week 8 is 40
units – 40 = 50 – 10
• Following the lead time offset procedure, the planned
order release for Item A is now 40 units in week 7

• Item B: gross requirement for Item B is now 80 units

in week 7
• 15 units of Item B on hand, so the net requirement is 65
units in week 7
• A planned order receipt of 65 units in week 7 generates
a planned order release of 65 units in week 5
• On-hand inventory record for Item B is updated to
reflect the use of the 15 items in inventory and shows no
on-hand inventory in week 8
• This is referred to as the Gross-to-Net calculation
and is the third basic function of the MRP process
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Chapter 14 18

Material Requirements Plan for Viewfinder Sub Assembly

Planning Factors: Lot for Lot (L4L) lot sizing rule. Safety stock = 20.
Initial inventory = 20. Scheduled a receipt of 500 in week 1. Lead time = 3 weeks.
Week 1 2 3 4 5 6 7 8 9 10

MPS Replenishment 500 500 500 500

MPS Order Release 500 500 500 500

Week 1 2 3 4 5 6 7 8 9 10

Gross Requirements 500 500 500 500

Scheduled Receipts 500 -120 -135 -35

Projected On
Hand
20 20 20 -120
20 20 20 -135
20 20 -35
20 20 20

Net Requirements 0 480 480 480

Planned Order
Receipts 500 500 500
Planned Order
Releases 500 500 500
 SCM 302 - MRP & ERP

Chapter 14 19

Exploding the BOM / Material Requirements

• Given the Viewfinder MRP Record, What Action(s) Are
Required?
• In the current week place an order for 500 viewfinder subassemblies
• Plan to place an order for 500 viewfinder subassemblies in weeks 3
and 5

• Explosion: continue through the BOM one level at a time

• Do the MRP record for all camera subassemblies and components
• You can probably see why companies rely on software to do this!!
• Managers still need to understand what the software is doing

• Accurate inventory records are required for MRP to operate

correctly
• Generally MRP systems require more than 99% accuracy
 SCM 302 - MRP & ERP

Chapter 14 21

Now Let’s Do the MRP for Lenses

Planning Factors: Fixed order Quantity (FOQ) lot sizing rule of 600. Safety stock = 500. Lead time = 4 weeks.
Viewfinder MRP Record
Week 1 2 3 4 5 6 7 8 9 10

Planned Order Releases 500 500 500

Week 1 2 3 4 5 6 7 8 9 10

Gross Requirements 2500 2500 2500

Scheduled Receipts 2400 3000

-120 -135 -35
Projected On
Hand
600 600 500 -120
500 1000 1000 -135
900 900 900
-35 900 900

Net Requirements 0 0 1500

Planned Order
Receipts 2400
Planned Order
Releases 2400
 SCM 302 - MRP & ERP

Chapter 14 22

In What Order Would You Do the MRP

for Product Structure Below?
Some possible sequences
A

C D E

F I J K
 SCM 302 - MRP & ERP

Chapter 14 23

Say a Company Made Two Products With the Following

Product Structures?
In What Order Would You Do the MRP

A B

C D E F G H

F I J K K L
 SCM 302 - MRP & ERP

Chapter 14 24

MRP Shortcomings
1. MRP ignores uncertainty in end-item forecasts, lead times
• Solution: Hold safety stock or safety lead times (e.g. 2 weeks instead of 3 weeks)
• Which parts? How much?
• Minimize safety stock when possible
2. MRP does not check on resource capacities to see if plan is feasible
• Lead times are not lot size dependent
• Solution: Check capacity, iterate back and forth
• MRP II and rough cut capacity planning
• Load reports help smooth work between work centers
3. MRP exhibits system nervousness
• Plans continuously change as forecasts continue to get updated
• Solution: Implement frozen zones if possible
• Decreases changes to plan but reduces flexibility of business to react to changes in forecasts etc.
• Need to balance desire for constant plan with need for flexibility

• Push vs. Pull

• Push system: production occurs based on forecasted demand
• At start of week 2 release an order for the forecasted demand for week 4
• Pull system: production occurs based on actual demand
• At start of week 2 release an order for to produce the actual demand from week 1

• IS MRP a push or a pull system?

 SCM 302 - MRP & ERP

Chapter 14 25

MRP in Services
• Some services or service items
are directly linked to demand for
other services
• These can be treated as
dependent demand services or
items
• Restaurants
• Hospitals
• Hotels
• See MyOMLab video: “Meal
Planning at the Amway Center.”
 SCM 302 - MRP & ERP

Chapter 14 26

Enterprise Resource Planning (ERP)

• ERP: extension of MRP system to
automate and integrate many
business functions and processes
• Integrate systems for customers and
suppliers
• Shares common data bases and
business practices
• Produces information in real time

• ERP modules include

• Basic MRP
• Finance
• Human resources
• Supply chain management (SCM)
• Customer relationship management
(CRM)
• Sustainability

• See video: What is ERP?