RMIT Classification: Trusted

Operations Management

Week 9
MRP and ERP

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Learning Objectives
You should be able to:

 Describe the master scheduling process and explain its

importance
 Disaggregate an aggregate plan
 Describe the inputs, outputs, and nature of MRP
processing
 Explain how requirements in a master production
schedule are translated into material requirements for
lower-level items
 Discuss the benefits and requirements of MRP
 Describe some of the difficulties users have encountered
with MRP
 Describe MRP II
 Describe ERP, what it provides, and its hidden costs
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Aggregate
Plan
Disaggregation

Disaggregation

Master
Schedule

MRP
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Disaggregating the Aggregate Plan

Master schedule:
 The result of disaggregating an aggregate plan
 Shows quantity and timing of specific end items for a
scheduled horizon

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Master Scheduling
 The heart of production planning and control
 It determines the quantity needed to meet demand from all sources
 It interfaces with
 Marketing
 Capacity planning
 Production planning
 Distribution planning
 Provides senior management with the ability to determine whether
the business plan and its strategic objectives will be achieved
 The master production schedule (MPS) is one of the
primary outputs of the master scheduling process

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MPS – Example
A company that makes industrial pumps wants to prepare a
master production schedule for June and July. Marketing has
forecasted demand of 120 pumps for June and 160 pumps for
July. These have been evenly distributed over the four weeks in
each month: 30 pumps per week in June and 40 pumps per
week in July. Suppose that there are currently 64 pumps in
inventory (i.e., beginning inventory is 64 pumps), and that
there are customer orders that have been committed (booked)
and must be filled as shown in next slide. The production lot
size of 70 pumps. It means whenever the company decide to
produce pumps the production lot should be 70 pumps.

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MPS – Forecasts and Customer Orders

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MPS – Projected On Hand

the current week’s requirements are the larger of forecast and customer
orders (committed). 12-9
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Determining MPS and

Projected On Hand
Inventory
from
Previous Inventory (70) Projected
Week Week Requirements before MPS MPS Inventory
1 64 33 31 31

2 31 30 1 1

3 1 30 -29 + 70 = 41

4 41 30 11 11

5 11 40 -29 + 70 = 41

6 41 40 1 1

7 1 40 -39 + 70 = 31

8 31 40 -9 + 70 = 61

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Adding MPS and Projected On Hand

to the MPS

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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?

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Overview of MRP

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MRP Inputs: Master Schedule

 Master schedule:
 One of three primary inputs in MRP; states which end items are to
be produced, when these are needed, and in what quantities.
 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
the final assembly.

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Master Schedule

9 weeks

9 weeks

Cumulative Lead Time

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MRP Inputs: Bill of Materials

Bill of Materials (BOM)
 A listing of all of the assemblies, subassemblies, parts,
and raw materials needed to produce one unit of a
product
 Product structure tree
A visual depiction of the requirements in a bill of materials,
where all components are listed by levels

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Assembly Diagram and

Product Structure Tree

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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

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Gross requirements: The total expected demand for an item or raw material during
each time period without regard to the amount on hand.
Scheduled receipts: Open orders (orders that have been placed and are scheduled to arrive
from vendors or elsewhere in the pipeline by the beginning of a period).
Projected on hand: The expected amount of inventory that will be on hand at the beginning of
each time period: scheduled receipts plus available inventory from last period.
Net requirements: The actual amount needed in each time period.
Planned-order receipts: The quantity expected to be received by the beginning of
the period.
Planned-order releases: Indicates a planned amount to order in each time period;
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Assembly Time Chart

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MRP: Example
A firm that produces wood shutters and bookcases has received
two orders for shutters: one for 100 shutters and one for 150
shutters. The 100-unit order is due for delivery at the start of
week 4 of the current schedule, and the 150-unit order is due for
delivery at the start of week 8. Each shutter consists of two
frames and four slatted wood sections. The wood sections are
made by the firm, and fabrication takes one week. The frames are
ordered, and lead time is two weeks. Assembly of the shutters
requires one week. There is a scheduled receipt of 70 wood
sections in (i.e., at the beginning of) week 1. Ordering/setup cost
is $100 and holding cost is $0.10 per week. Determine the total
cost, size and timing of planned-order releases necessary to meet
delivery requirements under each of these conditions:
1. Lot-for-lot ordering (i.e., planned-order release equal to net requirements).
2. Lot-size ordering with a lot size of 320 units for frames and 70 units for
wood sections. 12-21
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MRP Example: Solution

First step: BOM

Shutter

Wood
Frames (2)
sections (4)

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MRP Example:

1. Lot-for-lot ordering

MRP cost:

Ordering cost: 6 order * (100) = $600

Holding cost = (70+70+70)*0.1 = $21

Total cost = $621

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MRP Example:

2. MRP schedule with lot sizes

of for components

MRP cost:

Ordering cost: 6 order * (100) = $600

Holding cost = (120+120+120+120+140+
70+ 70+ 70+ 20+ 20+ 20+ 20+ 50)*0.1= $96

Total cost = $696

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Pegging

The process of identifying the parent

items that have generated a given
set of material requirements for an
item

Example for Pegging:

The demand for products A and C are 80 and 50

units in weeks 4 and 5, respectively. One unit of A
needs one unit of D and one unit of C needs two
unit of D. 110 unit of D is available in inventory.
Lead time is 1 week. Use Lot for lot to complete
MRP.

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Other MRP Considerations:

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’
 Less appropriate for ‘lumpy demand’ items because inventory remnants often
result
 Fixed Period Ordering
 Provides coverage for some predetermined number of periods

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MRP II
 Manufacturing resources planning (MRP II)
 Expanded approach to production resource planning, involving
other areas of the firm in the planning process and enabling
capacity requirements planning
 Most MRP II systems have the capability of performing simulation to
answer a variety of “what if” questions so they can gain a better
appreciation of available options and their consequences

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Enterprise Resource Planning

 Enterprise resource planning
(ERP)
 ERP was the next step in an evolution
that began with MRP and evolved into
MRPII
 ERP, like MRP II, typically has an MRP
core
 ERP provides a system to capture and
make data available in real time to
decision makers and other users
throughout an organization.
 ERP systems are composed of a
collection of integrated modules
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Overview of 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

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Questions

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