Operations Management: Processes and

Supply Chains
Twelfth Edition, Global Edition

Chapter 11
Resource Planning

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What is Resource Planning?

• Resource Planning
– A process that takes sales and operations plans;
processes information in the way of time standards,
routings, and other information on how services or
products are produced; and then plans the input
requirements

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Materials Requirements Planning (1 of 3)

• Material Requirements Planning (MRP)

– A computerized information system developed
specifically to help manufacturers manage dependent
demand inventory and schedule replenishment orders
• MRP Explosion
– A process that converts the requirements of various
final products into a material requirements plan that
specifies the replenishment schedules of all the
subassemblies, components, and raw materials
needed to produce final products

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MRP Inputs
Figure 11.1 Material Requirements Plan Inputs

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Materials Requirements Planning (2 of 3)

• Dependent demand
– The demand for an item that occurs because the
quantity required varies with the production plans for
other items held in the firm’s inventory
• Parent
– An product that is manufactured from one or more
components
• Component
– An item that goes through one or more operations to
be transformed into or become part of one or more
parents
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Materials Requirements Planning (3 of 3)
Figure 11.2 Lumpy Dependent Demand Resulting from
Continuous Independent Demand

(a) Parent inventory (b) Component demand

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Master Production Scheduling (1 of 7)

• Master Production Schedule (MPS)

– A part of the material requirements plan that details
how many end items will be produced within specified
periods of time
• In a Master Production Schedule:
– Sums of quantities must equal sales and operations
plan.
– Production quantities must be allocated efficiently
over time.
– Capacity limitations and bottlenecks may determine
the timing and size of MPS quantities.
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Master Production Scheduling (2 of 7)
Figure 11.3 MPS for a Family of Chairs

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Master Production Scheduling (3 of 7)
Figure 11.4 Master Production Scheduling Process

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MRP Explosion (1 of 8)
• Bill of Materials
– A record of all the components of an item, the parent-
component relationships, and the usage quantities derived
from engineering and process designs
• End items
• Intermediate items
• Subassemblies
• Purchased items
• Part commonality (sometimes called standardization of parts
or modularity)

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MRP Explosion (4 of 8)

• Inventory record
– A record that shows an item’s lot-size policy, lead
time, and various time-phased data.

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MRP Explosion (5 of 8)

• The time-phase information contained in the inventory

record consists of:
– Gross requirements
– Scheduled receipts
– Projected on-hand inventory
 Projected on - hand   Inventory on   Scheduled or   Gross 
       
 inventory balance =
  hand at end of +
  planned receipts −
  requirements 
 at end of week t   week t − 1   in week t   in week t 
       

– Planned receipts
– Planned order releases
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 13

BOM for a Ladder-Back Chair

Figure 15.5

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Struktur Produk Ladder-Back Chair

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Matriks MRP(3)
• PD (past-due)
orders behind schedule
• Gross requirements
The total demand derived from all parent production
plans
• Scheduled receipts
orders that have been placed but not yet completed

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Parts Of MRP Matrix
• Projected on hand inventory
– An estimate of the amount of inventory available each
week after gross requirements have been satisfied.
• Net requirements
– Gross requirement – projected on hand inventory
• Planned order receipts
– Net requirements has been change to the lot size
• Planned order releases
– An indication of when an order for a specified quantity of
an item is to be issued

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Mekanik MRP

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Matriks MRP(1)

Lot size: LT: PD 1 2 3 4 5 6 7 8 9 10

Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned order receipts
Planned order releases

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The Alpha Beta Company
A B
LT=3 LT=2

C(3) D(2) D(3)

LT=4 LT=2 LT=2

Item On Hand Scheduled Receipts Lot Size MPS

A 10 0 LFL 100, period 8
B 5 0 LFL 200, period 6
C 140 0 150 ---
D 200 250, period 2 250 ---

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MRP Matrices For A & B
Item: A LLC: 0 Period
Lot size: 1 LT: 3 PD 1 2 3 4 5 6 7 8
Gross requirements 100
Scheduled receipts
Projected on hand 10 10 10 10 10 10 10 10 0
Net requirements 90
Planned order receipts 90
Planned order releases 90

Item: B LLC: 0 Period

Lot size: 1 LT: 2 PD 1 2 3 4 5 6 7 8
Gross requirements 200
Scheduled receipts
Projected on hand 5 5 5 5 5 5 0 0 0
Net requirements 195
Planned order receipts 195
Planned order releases 195

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MRP Matrics For C & D
Item: C LLC: 1 Period
Lot size: 150 LT: 4 PD 1 2 3 4 5 6 7 8
Gross requirements 270
Scheduled receipts
Projected on hand 140 140 140 140 140 20 20 20 20
Net requirements 130
Planned order receipts 150
Planned order releases 150

Item: D LLC: 1 Period

Lot size: 250 LT: 2 PD 1 2 3 4 5 6 7 8
Gross requirements 585 180
Scheduled receipts 250
Projected on hand 200 200 450 450 115 185 185 185 185
Net requirements 135 65
Planned order receipts 250 250
Planned order releases 250 250

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Outputs from MRP

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MRP, Core Processes, and Supply Chain
Linkages (1 of 2)

• The MRP system interacts with the four core processes

of an organization
– Supplier relationship process
– New service/product development process
– Order fulfillment process
– Customer relationship process

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Enterprise Resource Planning (1 of 2)

• Enterprise process
– A companywide process that cuts across functional
areas, business units, geographic regions, product
lines, suppliers, and customers
• Enterprise resource planning (ERP) systems
– Large, integrated information systems that support
many enterprise processes and data storage needs

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Enterprise Resource Planning (2 of 2)
Figure 11.20 ERP Application Modules

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Resource Planning for Service Providers

• Dependent demand for services

– Restaurants
– Airlines
– Hospitals
– Hotels
• Bill of Resources (BOR)
– A record of a service firm’s parent-component
relationships and all of the materials, equipment time,
staff, and other resources associated with them,
including usage quantities.

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Bill of Resources (1 of 7)

• Consider a regional hospital that among many other

procedures performs aneurysm treatments. The BOR
(Figure 11.21) for treatment has 7 levels.
• The hospital is interested in understanding how much of
each critical resource of nurses, beds and lab tests will
be needed if the projected patient departures from the
aneurysm treatment process over the next 15 days are
as shown in Table 11.1.

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Bill of Resources (2 of 7)
Figure 11.21 BOR for Treating an Aneurysm

Cumulative lead time, or the patient stay time at

the hospital, across all seven levels for the
entire duration of the aneurysm treatment is 10
days.

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Bill of Resources (3 of 7)
Table 11.1 Projected Patient Departures From Aneurysm
Treatment
Day of the
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Month
Aneurysm
1 2 1 3 2 3 0 1 2 1 2 2 2 2 2
Patient

The first 10 days of the projected departures represent actual

patients who have started the process (booked orders) while the
last 5 days are patients who were prescheduled or forecasted
based on historical records.

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Bill of Resources (4 of 7)
Table 11.2 Resource Requirements For Treating an Aneurysm at Each
Level of BOR
Resources Required for Nurse Hours Required Beds Required Per Lab Tests Required
Each Aneurysm Patient Per Day Per Patient Day Per Patient Per Day Per Patient
Level 1 0 0 0
Level 2 6 0 0
Level 3 16 1 4
Level 4 12 1 6
Level 5 22 1 2
Level 6 6 1 3
Level 7 1 0 0

Use the information above to calculate the daily resource requirements for
treating aneurysm patients (similar to the gross requirements in a MRP record).
Begin by calculating the number of patients that will be at each level (or stage)
of treatment each day.
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Bill of Resources (5 of 7)
As shown below, the aneurysm patient departures become the Master
Schedule for Level 1 and these departures drive the need for resources at each
level of the process.
Figure 11.22 Number of Patients at Each Level of the Aneurysm Treatment

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Bill of Resources (6 of 7)

Once we know how many patients will need each level of

treatment on each day, we can multiply this demand by the
amount of each resource required to treat them.
Example:
Total Number of Lab Tests Projected for Day 5
= 0 ( 2 ) + 0 ( 3 ) + 4 ( 3 ) + 6 ( 3 ) + 2 ( 2 ) + 3 ( 2 ) + 0 ( 2 ) 
= 40

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Bill of Resources (7 of 7)
Table 11.3 Total Resource Requirements For Treating Aneurysm
Patients
Day of the
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15
Month

Nursing Hours
179 198 170 170 160 170 190 184 150 132 108 76 44 12 0
Required

Beds required 12 12 11 11 10 12 13 11 10 8 6 4 2 0 0

Lab Tests
50 45 46 44 40 50 54 48 48 36 24 16 8 0 0
Required

This table shows the resources needed from Day 1 to Day 15 for
the current master schedule.

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Solved Problem 1 (1 of 2)
Refer to the bill of materials for product A shown below.
If there is no existing inventory and no scheduled receipts, how many
units of items G, E, and D must be purchased to produce 5 units of end
item A?
Figure 11.23 BOM for Product A

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Solved Problem 1 (2 of 2)
• Five units of item G, 30 units of item E, and 20 units of item D must be
purchased to make 5 units of A.

• The usage quantities indicate that 2 units of E are needed to make 1 unit of
B and that 3 units of B are needed to make 1 unit of A; therefore, 5 units of A
require 30 units of E (2 × 3 × 5 = 30).

• One unit of D is consumed to make 1 unit of B, and 3 units of B per unit of A

result in 15 units of D (1 × 3 × 5 = 15)

• One unit of D in each unit of C and 1 unit of C per unit of A result in another 5
units of D (1 × 1 × 5 = 5).

• The total requirements to make 5 units of A are 20 units of D (15+ 5).

• The calculation of requirements for G is simply 1 × 1 × 1 × 5 = 5 units.

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Solved Problem (1 of 9)

• The Pet Training Academy offers a 5-day training program for

troubled dogs. As seen below, the training process requires 5
days, beginning with the dog’s arrival at 8 A.M. on day one,
and departure after a shampoo and trim, at 5 P.M. on day five.
Table 11.5 Lead Time Data For the Pet Training Academy

Pet Training Academy Process Lead time in Days

Level 1: Departure Day 1
Level 2: 3rd Day 1
Level 3: 2nd Day 2
Level 4: Arrival Day 1
Total 5

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Solved Problem (2 of 9)

• To adequately train a dog, the Academy requires Training

Coaches, Dog Dieticians, Care Assistants, and Boarding
Kennels where the dogs rest.
• The time required by each employee and resource
classifications by process level is given below:
Table 11.6 Lead Time Data For the Pet Training Academy
Pet Training Academy Training Coach Dog Dietitian Care Assistant Boarding
Process Resources (Hours Per (Hours Per (Hours Per Kennel (Hours
Required Dog) Dog) Dog) Per Dog)
Level 1: Departure Day 2 1 1 12
Level 2: 3rd Day 3 1 2 24
Level 3: 2nd Day 3 1 2 24
Level 4: Arrival Day 2 1 1 12

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Solved Problem (3 of 9)

• The master schedule for the trained dogs is shown below,

noting that departures for trained dogs are actual
departures for days 1-5 and forecasted departures for
days 6-12.

Day of the month 1 2 3 4 5 6 7 8 9 10 11 12

Master Schedule of Trained Dogs 5 2 2 8 3 0 1 8 4 3 6 0

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Solved Problem (4 of 9)

a. Use the above information to calculate the daily

resource requirements in hours for employees in each
category, and the hours of boarding room needed to
train the dogs.
b. Assuming that each boarding kennel is available for 24
hours in a day, how many kennels will be required each
day?
c. Assuming that each employee is able to work only eight
hours per day, how many people in each employee
category will be required each day?

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Solved Problem (5 of 9)
Figure 11.28 Number of Dogs at Each Level

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Solved Problem (6 of 9)

The previous table shows the number of dogs at each level

during their stay at the Pet Training Academy.
The top row of each level shows the number of dogs who
will advance to the next level at the end of the day.
The daily resource requirements for each resource required
to train the departing dogs are shown in the following slide.
Total number of CA hours Projected for Day 2

1( 2 ) + 2 ( 2 ) + 2 (11) + 1( 0 )  = 28 hours

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Solved Problem (7 of 9)

Table 11.7 Total Resource Requirements For Training Dogs

Day of the Month 1 2 3 4 5 6 7 8 9 10 11 12

Training Coach hours
52 43 39 44 41 45 59 55 35 24 12 0
required
Dog Dietitian hours required 20 15 14 20 16 16 22 21 13 9 6 0
Care Assistant hours
32 28 25 24 25 29 37 34 22 15 6 0
required
Boarding Kennels hours
384 336 300 288 300 348 444 408 264 180 72 0
required
Number of Boarding
16 14 13 12 13 15 19 17 11 8 3 0
Kennels required

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Solved Problem (8 of 9)

b. The number of boarding kennels required per day (note

all fractional kennels are rounded to the next higher
integer) are obtained by dividing the total number of
hours needed for boarding kennels by 24, and are
shown in the last row of the previous slide.

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Solved Problem (9 of 9)

c. The number of people required per day in each employee

category is obtained by dividing the resource requirements
by working hours in each day. They are shown below. Note
that all fractional employees are rounded to the next higher
integer.
Table 11.8 Number of Employees Required Per Day For
Training Dogs

Number of Employee
1 2 3 4 5 6 7 8 9 10 11 12
Required per Day
Training Coaches 7 6 5 6 6 6 8 7 5 3 2 0
Dog Dieticians 3 2 2 3 2 2 3 3 2 2 1 0
Care Assistants 4 4 4 3 4 4 5 5 3 2 1 0

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Operations Management: Processes and
Supply Chains
Twelfth Edition, Global Edition

Chapter 9
Inventory Management

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What is a Inventory Management?

• Inventory Management
– The planning and controlling of inventories to meet
the competitive priorities of the organization.

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What is Inventory?

• Inventory
– A stock of materials used to satisfy customer demand
or to support the production of services or goods.

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Inventory Trade-Offs
Figure 9.1 Creation of Inventory

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Pressures for Small Inventories
• Inventory holding cost
• Cost of capital
• Storage and handling costs
• Taxes
• Insurance
• Shrinkage
– Pilferage
– Obsolescence
– Deterioration

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Pressures for Large Inventories

• Customer service
• Ordering cost
• Setup cost
• Labor and equipment utilization
• Transportation cost
• Payments to suppliers
– Quantity discounts

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Types of Inventory (1 of 3)

• Accounting Inventories
– Raw materials
– Work-in-process
– Finished goods

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Types of Inventory (3 of 3)

• Operational Inventories
– Cycle Inventory
– Safety Stock Inventory
– Anticipation Inventory
– Pipeline Inventory

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Cycle Inventory

• Lot sizing principles:

1. The lot size, Q, varies directly with the elapsed time
(or cycle) between orders.
2. The longer the time between orders for a given item,
the greater the cycle inventory must be.
Q+0 Q
Average cycle inventory = =
2 2

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Pipeline Inventory

Average demand during lead time = DL

Average demand for the items per period = d
Number of periods in the item’s lead time = L
Pipeline inventory = DL = dL

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Example 1 (1 of 3)

A plant makes monthly shipments of electric drills to a

wholesaler in average lot sizes of 280 drills. The
wholesaler’s average demand is 70 drills a week, and the
lead time from the plant is 3 weeks. The wholesaler must
pay for the inventory from the moment the plant makes a
shipment. If the wholesaler is willing to increase its
purchase quantity to 350 units, the plant will give priority to
the wholesaler and guarantee a lead time of only 2 weeks.
What is the effect on the wholesaler’s cycle and pipeline
inventories?

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Example 1 (2 of 3)

The wholesaler’s current cycle and pipeline inventories are

Q
Cycle inventory = = 140 drills
2

Pipeline inventory = DL = dL = (70 drills week)(3 weeks)

= 210 drills

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Example 1 (3 of 3)

The wholesaler’s cycle and pipeline inventories if they

accept the new proposal

Q
Cycle inventory = = 175 drills
2

Pipeline inventory = DL = dL = (70 drills week)(2 weeks)

= 140 drills

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Inventory Reduction Tactics (1 of 2)
• Cycle inventory
– Reduce the lot size
1. Reduce ordering and setup costs and allow Q to be reduced
2. Increase repeatability to eliminate the need for changeovers
• Safety stock inventory
– Place orders closer to the time when they must be received
1. Improve demand forecasts
2. Cut lead times
3. Reduce supply uncertainties
4. Rely more on equipment and labor buffers

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Inventory Reduction Tactics (2 of 2)
• Anticipation inventory
– Match demand rate with production rates
1. Add new products with different demand cycles
2. Provide off-season promotional campaigns
3. Offer seasonal pricing plans
• Pipeline inventory
– Reduce lead times
1. Find more responsive suppliers and select new carriers
2. Change Q in those cases where the lead time depends on
the lot size

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What is an ABC Analysis?
ABC Analysis Figure 9.4 Typical Chart Using
ABC Analysis
• The process of dividing
SKUs into three classes,
according to their dollar
usage, so that managers
can focus on items that
have the highest dollar
value.

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Economic Order Quantity (1 of 2)
• The lot size, Q, that minimizes total annual inventory
holding and ordering costs
• Five assumptions
1. The demand rate is constant and known with certainty.
2. No constraints are placed on the size of each lot.
3. The only two relevant costs are the inventory holding cost
and the fixed cost per lot for ordering or setup.
4. Decisions for one item can be made independently of
decisions for other items.
5. The lead time is constant and known with certainty.

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Economic Order Quantity (2 of 2)

• Don’t use the EOQ

– Make-to-order strategy
– Order size is constrained by capacity limitations
• Modify the EOQ
– Quantity discounts
– Replenishment not instantaneous
• Use the EOQ
– Make-to-stock strategy with relatively stable demand.
– Carrying and setup costs are known and relatively
stable
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Calculating EOQ (1 of 5)
Figure 9.5 Cycle-Inventory Levels

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Calculating EOQ (2 of 5)

• Annual holding cost

Annual holding cost = (Average cycle inventory) × (Unit
holding cost)
• Annual ordering cost
Annual ordering cost = (Number of orders/Year)
×(Ordering or setup costs)
• Total cost
Total costs = Annual holding cost + Annual ordering or
setup cost

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Calculating EOQ (3 of 5)
Figure 9.6 Graphs of Annual Holding, Ordering, and Total Costs

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Calculating EOQ (4 of 5)

Total cost
Q D
C = (H ) + (S )
2 Q

where
C = total annual cycle-inventory cost
Q = lot size (in units)
H = holding cost per unit per year
D = annual demand (in units)
S = ordering or setup costs per lot

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Example 2 (1 of 3)
• A museum of natural history opened a gift shop which operates 52
weeks per year.
• Top-selling SKU is a bird feeder.
• Sales are 18 units per week, the supplier charges $60 per unit.
• Cost of placing order with supplier is $45.
• Annual holding cost is 25 percent of a feeder’s value.
• Management chose a 390-unit lot size.
• What is the annual cycle-inventory cost of the current policy of using
a 390-unit lot size?
• Would a lot size of 468 be better?

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Example 2 (2 of 3)
We begin by computing the annual demand and holding cost as
D = (18 units / week )( 52 weeks / year ) = 936 units
H = 0.25 ( $60 / unit ) = $15
The total annual cycle-inventory cost for the alternative lot size is
Q D 390 936
C= (H ) + (S ) = ($15) + ($45)
2 Q 2 390
= $2,925 + $108 = $3,033
The total annual cycle-inventory cost for the current policy is

468 936
C= ($15) + ($45) = $3,510 + $90 = $3,600
2 468

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Example 2 (3 of 3)
Figure 9.7 Total Annual Cycle-Inventory Cost Function for the
Bird Feeder

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Calculating EOQ (5 of 5)

• Economic Order Quantity (EOQ)

2DS
EOQ =
H

• Time Between Orders (TBO)

EOQ
TBOEOQ = (12 months / year)
D

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Example 3 (1 of 3)

For the bird feeders in Example 2, calculate the EOQ and

its total annual cycle-inventory cost. How frequently will
orders be placed if the EOQ is used?
Using the formulas for EOQ and annual cost, we get

2DS 2 ( 936 ) (45)

EOQ = = = 74.94 or 75 units
H 15

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Example 3 (2 of 3)
Below shows that the total annual cost is much less than the $3,033
cost of the current policy of placing 390-unit orders.
Figure 9.8 Total Annual Cycle-Inventory Costs Based on EOQ Using Tutor 9.3

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Example 3 (3 of 3)

When the EOQ is used, the TBO can be expressed in

various ways for the same time period.
EOQ 75
TBOEOQ = = = 0.080 year
D 936
EOQ 75
TBOEOQ = (12 months / year ) = (12 ) = 0.96 month
D 936
EOQ 75
TBOEOQ = ( 52 weeks / year ) = (52 ) = 4.17 weeks
D 936
EOQ 75
TBOEOQ = ( 365 days / year ) = (365 ) = 29.25 days
D 936

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Continuous Review System (4 of 13)

• Selecting the reorder point when demand is variable and

lead time is constant
Reorder point = Average demand during lead time +
Safety stock
= dL + safety stock
where
d = average demand per week (or day or months)
L = constant lead time in weeks (or days or months)

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Continuous Review System (5 of 13)

• Choosing a Reorder Point

1. Choose an appropriate service-level policy
2. Determine the distribution of demand during lead time
3. Determine the safety stock and reorder point levels

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Continuous Review System (6 of 13)

• Step 1: Service Level Policy

– Service Level (Cycle Service Level) – The desired
probability of not running out of stock in any one
ordering cycle, which begins at the time an order is
placed and ends when it arrives in stock.
– Protection Interval – The period over which safety
stock must protect the user from running out of stock.

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Continuous Review System (7 of 13)

• Step 2: Distribution of Demand during Lead Time

– Specify mean and standard deviation
▪ Standard deviation of demand during lead time

σ dLT = σ d 2 L = σ d L

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Continuous Review System (9 of 13)
Figure 9.12 Finding Safety Stock with Normal Probability
Distribution for an 85 Percent Cycle-Service Level

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Continuous Review System (10 of 13)

• Step 3: Safety Stock and Reorder Point

Safety stock = zσdLT
where
z = number of standard deviations needed to achieve
the cycle-service level
σdLT = stand deviation of demand during lead time

Reorder point = R = dL + safety stock

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Solved Problem 2 (1 of 4)

Booker’s Book Bindery divides SKUs into three classes,

according to their dollar usage. Calculate the usage values
of the following SKUs and determine which is most likely to
be classified as class A.
Quantity Used Unit Value
SKU Number Description
per Year ($)
1 Boxes 500 3.00
2 Cardboard (square feet) 18,000 0.02
3 Cover stock 10,000 0.75
4 Glue (gallons) 75 40.00
5 Inside covers 20,000 0.05
6 Reinforcing tape (meters) 3,000 0.15
7 Signatures 150,000 0.45

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Solved Problem 2 (2 of 4)

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Solved Problem 2 (3 of 4)

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Solved Problem 2 (4 of 4)
Figure 9.14 Annual Dollar Usage for Class A, B, and C SKUs
Using Tutor 9.2

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