Planning and

controlling of
operations 4
Demand forecasting

© 2014 Pearson Education 14 - 1

 Outline
 Dependent vs. Independent Demand
 What is MRP?
 The benefits and requirements of MRP
 Inputs, outputs, and nature of MRP processing
 How to translate the requirements in a Master
Production Schedule into material requirements
for lower-level items (components)
 Lot Sizing Techniques
 Extensions of MRP (MRP II, Closed-Loop MRP,
ERP)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 2

 Wheeled Coach

 Largest manufacturer of
ambulances in the world
 12 major ambulance designs
 18,000 different inventory
items
 6,000 manufactured parts
 12,000 purchased parts

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 3

 Hierarchy of
Production Decisions

Long-range Capacity Planning

Long-range Capacity Planning

14 - 4
Dependent vs Independent
Demand

12-5
14 - 5
 Dependent Demand
 For any product, all
components of that product
are dependent demand
items.
 Given a quantity for the
product, the demand for all
parts and components can
be calculated.
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 6
 What is MRP
 Material requirements planning (MRP) is
a dependent demand production
planning and inventory control system.
 MRP integrates data from production
schedules (MPS) with inventory records,
scheduled receipts and the bill of
materials (BOM) to determine
purchasing and production schedules
for the components required to build a
product.

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 7

 Trumpet and
Subassemblies

14 - 8
Bill-of-Material
for Trumpet

14 - 9
 MRP
A computer-based information
system that translates master
production schedule (MPS)
requirements for end items
into time-phased requirements
for subassemblies,
components, and raw
materials.
12-10
14 - 10
 MRP
 The MRP is designed to
answer three questions:
What is needed?
How much is needed?
When is it needed?

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 11

 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

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 12

 Inputs to MRP
 MRP is a dependent demand
technique that uses
 Bill-of-Material (BOM)
 On-hand inventory data
 Expected receipts (outstanding
purchase orders)
 Master Production Schedule (MPS)
 Lead Time information
to determine material requirements.
14 - 13
Overview of MRP

14 - 14
Master Production Schedule (MPS)
 Time-phased plan specifying how many
and when the company plans to produce
each end item
Aggregate
Aggregate Plan
Plan
(Product
(Product Groups)
Groups)

MPS
(Specific End Items)

14 - 15
 Master Production Schedule
(MPS)
 MPS is established in terms of
specific products
 The MPS is a statement of what is to
be produced, not a forecast of
demand
 Must be in accordance with the
aggregate production plan
 Before it is executed, MPS must be
tested for feasibility (Capacity
Requirements Planning)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 16
 Bills of Material (BOM)
 List of components,
ingredients, and materials
needed to make product
 Provides product structure
Items above given level are
called parents
Items below given level are
called children
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 17
Assembly Diagram and
Product Structure Tree

12-18
14 - 18
 BOM Example (Determine requirements for all
components to satisfy demand for 50 Awesome
Speaker Kits)
Level Product structure for “Awesome” (A)
0 A

Std. 12” Speaker kit w/

1 B(2) Std. 12” Speaker kit C(3) amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws

Amp-booster

12” Speaker 12” Speaker

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 19

 BOM Example
Level Product structure for “Awesome” (A)
0 A

Part B: 2 x number of As = (2)(50) =Std. 12” Speaker100

kit w/
1 BPart
(2) Std. 12” Speaker kit
C: 3 x number of As = C
(3)(50)
(3) =amp-booster 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
2 Part E: E(2) 2 x number of Bs E(2) F(2) Std. 12” Speaker
booster assembly
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x Packing
numberbox ofand
Cs = (2)(150) = 300
3 D(2) installation kit of wire,
Part G: 1 x bolts,number of Fs = G(1) =
(1)(300) D(2) 300
and screws

Amp-booster

12” Speaker 12” Speaker

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 20

 Accurate Records for Outstanding
Purchase Orders (Scheduled Receipts)
 Accurate inventory records are
absolutely required for MRP (or
any dependent demand system) to
operate correctly
 Generally MRP systems require
more than 99% accuracy
 Outstanding purchase orders must
accurately reflect quantities and
scheduled receipts

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 21

 Lead Times
 The time required to purchase,
produce, or assemble an item
 For production – the sum of the
order, wait, move, setup, store,
and run times
 For purchased items – the time
between the recognition of a need
and the availability of the item for
production

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 22

 Time-Phased Product
Structure
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 Figure 14.4
Time in weeks
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 23
 MRP Outputs: Primary
Planned orders
A schedule indicating the
amount and timing of
future
production and/or
purchasing orders

14 - 24
 MRP Outputs: Secondary
 Secondary Outputs
 Performance-control reports
 e.g., missed deliveries and stockouts
 Planning reports
 Data useful for assessing future material
requirements
 e.g., purchase commitments
 Exception reports
 excessive scrap rates,

14 - 25
 MRP Processing
 MRP processing takes the end
item requirements specified by
the master production
schedule (MPS) and
“explodes” them into time-
phased requirements for
assemblies, parts, and raw
materials offset by lead times

14 - 26
 MRP Record
Week Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order
release
Gross requirements
• Total expected demand
Scheduled receipts
• Open orders scheduled to arrive
Projected On Hand
• Expected inventory on hand at the
beginning of each time period 14 - 27
 MRP Record
Week Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order
release
Net requirements
• Actual amount needed in each time period
Planned-order receipts
• Quantity expected to be received at the beginning
of the period offset by lead time
Planned-order releases
• Planned amount to order in each time period
14 - 28
 MRP: Processing
 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
12-29
14 - 29
Example MRP

12-30
14 - 30
 Updating the MRP 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

14 - 31
 Updating the System
 Two basic systems
 Regenerative system: MRP records are
updated periodically
 Essentially a batch system that
compiles all changes that occur within
the time interval and periodically
updates the system
 Net-change system: MRP records are
updated continuously
The production plan is modified to
reflect changes as they occur
12-32
14 - 32
 Safety Stock
Theoretically, MRP systems should not require safety
stock
Variability may necessitate the strategic use of
safety stock
 A bottleneck process or late delivery of raw
materials may cause shortages in downstream
operations
 When lead times are variable, the concept of
safety time is often used
 Safety time: Scheduling orders for arrival or
completions sufficiently ahead of their need
so that the probability of shortage is
eliminated or significantly reduced

12-33
14 - 33
 Lot Sizing Rules
 Lot-for-Lot (L4L) ordering
 The order or run size is set equal to the demand
for that period
 Minimizes investment in inventory
 It results in variable order quantities
 A new setup is required for each run
 Economic Order Quantity (EOQ)
 Can lead to minimum costs if usage of item is
fairly uniform
 This may be the case for some lower-level
items that are common to different ‘parents’
 Periodic Order Quantity (POQ): Provides coverage
for some predetermined number of periods

12-34
14 - 34
 Calculating EQO

 Annual demand (D):

(270/10)*52=1404
 Setup Cost (S)= $100
 Holding Cost (H) = $1*52= $52
 EOQ= 73 units

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 35

 EOQ Lot Size Example
Total cost = setup cost + holding cost
Total Cost = D/Q x S + Q/2 x H
Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52
weeks)=$3,798
Cost for 10 weeks = $3,798 x (10 weeks/52
weeks) = $730
OR
Total Cost = 4*100 + 375(including 57 units
for week 11) = $775

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 36

 Periodic Order Quantity
 The EOQ attempts to minimize the total cost of
ordering and carrying inventory and is based on
the assumption that demand is uniform.
 Often demand is not uniform, particularly in
material requirements planning, and using the
EOQ does not produce a minimum cost.
 The period-order quantity lot-size rule is based on
the same theory as the economic-order quantity.
 It uses the EOQ formula to calculate an economic
time between orders. This is calculated by
dividing the EOQ by the demand rate.

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 37

 Periodic Order Quantity
• Periodic order quantity (POQ) method
sets:
• the size of each production lot equal to
the requirements for a fixed number of
periods
• Interval (period) = EOQ / average
demand per period
• Order quantity is set to cover the
interval

14 - 38
 POQ Lot Size Example
 Setups = 3 x $100 = $300
 Holding cost = (40 + 70 + 30 + 55)
units x $1 = $195
 Total cost = $300 + $195 = $495

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 39

 Lot-Sizing Summary
For these three examples

Lot-for-lot $700
EOQ $730
POQ $495

e y i e l de d a
i n w o ul d h av
a gne r - Wh it f $ 4 55
W t ot al c os t o
plan w i t h a

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 40

 BOM Example (Determine requirements for all
components to satisfy demand for 50 Awesome
Speaker Kits)
Level Product structure for “Awesome” (A)
0 A

Std. 12” Speaker kit w/

1 B(2) Std. 12” Speaker kit C(3) amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws

Amp-booster

12” Speaker 12” Speaker

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 41

 Awesome Speaker Kits

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 42

 Awesome Speaker Kits

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 43

 Gross Requirements Plan
(Note that components with multiple parents
are only processed once, see component E)
Week
1 2 3 4 5 6 7 8 Lead Time
Required date 50
Order release date 50 1 week
Required date 100
Order release date 100 2 weeks
Required date 150
Order release date 150 1 week
Required date 200 300
Order release date 200 300 2 weeks
Required date 300
Order release date 300 3 weeks
Required date 600 200
Order release date 600 200 1 week
Required date 300
Order release date 300 2 weeks
Table 14.3
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 44
 Determining Gross
Requirements
 Starts with a production schedule for the
end item – 50 units of Item A in week 8
 Using the lead time for the item,
determine the week in which the order
should be released – a 1 week lead time
means the order for 50 units should be
released in week 7
 This step is often called “lead time
offset” or “time phasing”

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 45

 Determining Gross
Requirements
 From the BOM, every Item A requires 2
Item Bs – 100 Item Bs are required in
week 7 to satisfy the order release for
Item A
 The lead time for the Item B is 2 weeks –
release an order for 100 units of Item B in
week 5
 The timing and quantity for component
requirements are determined by the order
release of the parent(s)
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 46
 Determining Gross
Requirements
 The process continues through the entire
BOM one level at a time – often called
“explosion”
 By processing the BOM by level, items
with multiple parents are only processed
once, saving time and resources and
reducing confusion
 Low-level coding ensures that each item
appears at only one level in the BOM

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 47

 Net Requirements Plan
The logic of net requirements

Gross
Allocations
requirements +

Total
requirements
On Scheduled Net
– hand + receipts = requirements

Available inventory
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 48
 Allocations
 Allocated items refer to the number
of units in inventory that have been
assigned to specific future
production but not yet used or
issued from the stock room.
 The following slide illustrates how
allocated items increase gross
requirements

14 - 49
 Awesome Speaker Kits

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 50

 Awesome Speaker Kits

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 51

 Net Requirements Plan
(Awesome Speaker Kits)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 52

 Net Requirements Plan

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 53

 Determining Net
Requirements
 Starts with a production schedule for the
end item – 50 units of Item A in week 8
 Because there are 10 Item As on hand,
only 40 are actually required – (net
requirement) = (gross requirement - on-
hand inventory)
 The planned order receipt for Item A in
week 8 is 40 units – 40 = 50 - 10

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 54

 Determining Net
Requirements
 Following the lead time offset procedure,
the planned order release for Item A is
now 40 units in week 7
 The gross requirement for Item B is now
80 units in week 7
 There are 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
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 55
 Determining Net
Requirements
 A planned order receipt of 65 units in
week 7 generates a planned order release
of 65 units in week 5
 The 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
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 56
 MRP Evolution

MRP Schedule Materials

Closed Loop Schedule Materials

MRP Incorporate Feedback

Schedule & Purchase Materials

MRP II Coordinate w/ Mfg Resources

ERP
14 - 57
 Closed-Loop MRP
Production Planning
Master Production Scheduling
Material Requirements Planning
Capacity Requirements Planning

No
Realistic? Feedback
Feedback
Yes
Execute:
Capacity Plans
Material Plans

14 - 58
Manufacturing Resource Planning
(MRP II)
 Goal: Plan and monitor all
resources of a manufacturing firm
(closed loop):
 manufacturing
 marketing
 finance
 engineering
 Simulate the manufacturing system

14 - 59
Enterprise Resource Planning
(ERP)
 A computer system that integrates
application programs in accounting,
sales, manufacturing, and other
functions in the firm
 This integration is accomplished
through a common database shared
by all the application programs
 Produces information in real time
and ties in customers and suppliers

14 - 60
Typical ERP System

14 - 61
 Enterprise Resource
Planning (ERP)
 ERP modules include
 Basic MRP
 Finance
 Human resources
 Supply chain management (SCM)
 Customer relationship management
(CRM)

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 62

Risks Associated with ERP
Implementation
 High Cost and Cost Overruns
 Common areas with high costs:
 Training
 Testing and Integration
 Database Conversion
 Disruptions to Operations
 ERP is reengineering--expect major
changes in how business is done

63 14 - 63
 ERP Products
 SAP: largest ERP vendor
 modules can be integrated or used
alone
 J.D. Edwards
 flexibility: users can change features;
less of a pre-set structure than SAP’s

64 14 - 64
 ERP Products
 Oracle
 tailored to e-business focus
 PeopleSoft
 open, modular architecture allows rapid
integration with existing systems
 Baan
 use of “best-of-class” applications

65 14 - 65
 Leading ERP Vendors
Worldwide
 SAP
 Oracle
 PeopleSoft
 Sage
 J.D.Edwards
 Lawson
 Microsoft Dynamics AX
 Great Plains/Solomon
 Invensys (BaaN)
 IFS

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 66

 Leading ERP Vendors in
 SAP
Turkey
 Oracle
 GlobalSoft
 IAS-CANIAS
 NETSİS
 LOGO BUSINESS SOLUTIONS
 Microsoft Navision
 IFS

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 67

 Advantages of ERP
Systems
1. Provides integration of the
supply chain, production, and
administration
2. Creates commonality of
databases
3. Improves information quality
4. May provide a strategic
advantage
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 68
 ERP Drawbacks
1. Very expensive to purchase and even more
so to customize
2. Implementation may require major
changes- Resistance to change
3. So complex that many companies cannot
adjust to it
4. Involves an ongoing, possibly never
completed, process for implementation
5. Training is an on-going activity

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 69

 ERP in the Service Sector
 ERP systems have been developed
for health care, government, retail
stores, hotels, and financial
services
 Also called efficient consumer
response (ECR) systems
 Objective is to tie sales to buying,
inventory, logistics, and production

© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 70

 Distribution Resource
Planning (DRP)
Using dependent demand techniques
through the supply chain
 Expected demand or sales forecasts
become gross requirements
 Minimum levels of inventory to meet
customer service levels
 Accurate lead times
 Definition of the distribution structure
© 2011 Pearson Education, Inc. publishing as Prentice Hall 14 - 71