BA339 – Chapter 14

1. BA339 – Chapter 14 • Material Requirements Planning (MRP) • Dependent Inventory Model Components • Master Production Schedule • BOM • Accurate Inventory Records • POs Outstanding • Lead time for each component • MRP structure • MRP Management – Dynamics, Lot-sizing techniques & JIT • Extension of MRP • ERP, DRP & MRP in services

2. BA339 – Chapter 14 • MRP Benefits • More responsive to customer orders as a result of improved adherence to schedules • Faster response to market changes • Improved utilization of facilities & labor • Reduced inventory levels • Dependent Inventory Model - Components • Independent inventory model used EOQ and ROP to manage inventory levels and cost • Demand for one item is related to demand for another item • Most common in various production environments and some service environments • Can be used for any item for which a schedule can be established – recognition that all items (except for raw materials) are made up of components, subassemblies, and assemblies

3. BA339 – Chapter 14 • Dependent Inventory Model Components • Master production schedule (derivative of aggregate production plan but at a lower level of detail • Specifies what is to be made (number of items) and when • Schedule must be in accordance with the master production plan (aka. Aggregate production plan) • Establishes the overall level of output in broad terms (product families, dollar volume, etc.) • Also includes inputs from financial plans, customer demand, capacity planning, engineering capabilities, labor availability, inventory, supplier performance. • As planning moves to execution > each of the lower level plans must be feasible, if not adjustments have to be made • Tells us what is required to satisfy demand and meet the production plan • Disaggregates the aggregate production plan • What is to be produced, not a forecast of demand • Some companies “fix” “freeze” or “firm” short-term portions of the schedule > no changes for a set period of time (6-8 weeks) > rolling production schedule

4. BA339 – Chapter 14 • Dependent Inventory Model Components • Bills of Material (BOM) • List of quantities of components, ingredients, parts, & materials required to make a product • Errors/changes to BOM are processed by engineering change notice (ECN) • Product structure – exploded BOM, parent > children/component • Useful for costing, inventory management (defining items to be issued to production – pick lists)

5. BA339 – Chapter 14 • Dependent Inventory Model Components • Bills of Material (BOM) • Modular bills • BOMs organized around product modules (not final products) > chassis, engine, wheels for a motorcycle • Can be used to build aggregate production plan around modules > allows MPS to be prepared for a reasonable number of items and to postpone assembly > modules then can be configured for specific order at final assembly • Planning bills • Created to assign an artificial parent to a BOM • Used when we want to group subassemblies so that the number of items to be schedule is reduced and when we want to issue kits (efficiently groups inexpensive items together to support subassemblies)

6. BA339 – Chapter 14 • Dependent Inventory Model Components • Bills of Material (BOM) • Phantom bills • BOMs for components, usually subassemblies, that exist only temporarily. • Components go directly into an assembly or subassembly and are never inventoried. • Lead times are usually zero and are usually handled as part of the parent assembly • Low-level coding • Used for identical items that exist at various levels in the BOM • Coding occurs at the lowest level at which it occurs

7. BA339 – Chapter 14 • Dependent Inventory Model Requirements • Accurate inventory records • 99% accuracy required for MRP system to be effective • Purchase orders outstanding • Knowledge of this is a by-product of a well-managed purchasing and inventory control system • Required to develop accurate production plans that support the MRP system – need accurate quantities and need date/delivery times • Lead times for each component • Purchasing system – time between recognition of an order and receiving it > must be accurate and current • Production system – includes the order, wait, move, queue, setup, and run times for each component produced • Used to develop a time-phased product structure > see figure 14.4 on page 581 in text

8. BA339 – Chapter 14 • MRP Structure • Most are computerized, but can be done by hand • Inputs: Master production schedule, BOM, inventory records, purchase records, lead times for each item • Development of gross material requirements plan (based on no inventory available) • Schedule that combines the master production schedule and time-phased schedule • Shows when an item must be ordered from supplier if not available in inventory or when production of an item must be started in order to satisfy demand of that finished product by a specific date • Development of net requirements plan (includes consideration of available inventory) • Flowdown from parent item is addressed

9. BA339 – Chapter 14 • MRP Management - Dynamics • BOMs/MRPs driven by changes in design, schedule, production processes, or master production schedule • Degree of change drives system nervousness. Can be addressed by: • Time fences – defines segment of master production schedule that cannot be changed during periodic regeneration of schedules • Pegging – tracing upward in the BOM from component to parent item > production planner can determine cause for the requirement change and make a judgment regarding necessity of the change

10. BA339 – Chapter 14 • MRP Management – JIT • MRP is planning/scheduling technique with fixed leadtimes; JIT is a way to move material quickly > fixed leadtimes can be a limitation – 2 approaches to enhance MRP/JIT marriage: • Small bucket (time periods) approach: • Reduce MRP buckets from weekly to daily or hourly; can also use dates • Planned receipts that are part of planned orders are communicated to work areas for production purpose and used to sequence production • Inventory in moved thru plant on JIT basis • Products moved into inventory as completed > receipt into inventory reduces qtys. Required for subsequent planned orders in MRP system • Back-flush the system > uses the BOM to deduct component qtys. From inventory as units are completed

11. BA339 – Chapter 14 • Lot-sizing Techniques • MRP determines production schedules & net requirements • Used to determine how much to order • Lot-for-Lot – orders items as needed in lot sizes based on only amt. Needed (no safety stock, no anticipation of future orders) • Efficient when orders are economical and JIT techniques can be implemented effectively • Not useful when setup costs are significant or when JIT doesn’t work effectively

12. BA339 – Chapter 14 • Lot Sizing Techniques • EOQ • Better when using relatively constant independent demand, not when we know the demand • Typically uses avg. demand vs. known demand • Part-period balancing (PPB) • Attempts to balance setup and holding costs by changing the lot size to reflect requirements of next lot size in the future

13. BA339 – Chapter 14 • MRP Management – JIT • Balanced Flow Approach • Material flow is is balanced to production areas with small lot sizes • Use kanban, visual signals, & reliable suppliers to pull material thru the facility

14. BA339 – Chapter 14 • Extension of MRP • Closed-loop MRP • Implies an MRP system that provides feedback to scheduling from the inventory control system • Feeds capacity plan, master production schedule, and production plan • Virtually all commercial MRP systems are closed-loop • Capacity Planning • Workload feedback is provided from each work center > load reports show resource requirements for all work currently assigned, all work planned and expected orders • Allow production planners to move work between time periods in order to smooth load or bring it within capacity > permits re-scheduling of all items in net requirements plan

15. BA339 – Chapter 14 • Extensions of MRP • Capacity Planning (cont.) • Tactics for smoothing load and minimizing changed lead-times include: • Overlapping - reduces lead-times and sends pieces to second operation before the entire lot is completed on the first operation • Operations splitting - sends the lot to 2 different machine for the same operation > involves additional setup but shorter throughput times are the result • Lot splitting – involves breaking up the order and running part of it ahead of the schedule

16. BA339 – Chapter 14 • Extensions of MRP • MRP II • Incorporates labor-hours, material costs (in addition to quantity), capital costs, and any other potential “resource” • Resource is substituted for requirements • Basic MRP systems manage scheduled quantities > these units require resources to build beyond just components (labor, machine time, etc.) • MRP II systems permit comparison of all necessary resources (labor hours, machine hours, material quantities, etc.) to determine if schedule will work, identify bottlenecks, and develop work-arounds • Generally tied to other systems (purchasing, production scheduling, warehouse/inventory management and capacity planning systems)

17. BA339 – Chapter 14 • Enterprise Resource Planning (ERP) • Evolution of MRP II systems to include order entry, purchasing, and direct interfaces with customers and suppliers (EDI and advance shipping notice (ASN) • Degree of integration depends on what the firm wants to include and the system capability • Examples: accounting, finance, human resources, supply-chain features and budgeting

18. BA339 – Chapter 14 • Distribution Resource Planning (DRP) • Application of dependent techniques to distribution environments > time-phased stock replenishment plan for all levels of a distribution network • Requires the following: • Gross requirements, which are the same to meet expected demand or sales forecasts • Minimum level of inventory needed to meet customer service levels • Accurate lead-times • Definition of the distribution structure • When used, expected demand becomes gross requirements > net requirements are determined by allocating available inventory to gross requirements

19. BA339 – Chapter 14 • DRP (cont.) • DRP procedure starts with forecast at the retail level (most distant point from the distribution network) > all other levels are computed based on this • Inventory is reviewed with in order to satisfy demand so that stock will arrive when needed • Net requirements are offset by the necessary lead-times • A planned order release quantity becomes the gross requirement at the next level down the distribution chain = pull system • Allocations (of inventory to retail stock) – made to the top level from available stock after being modified to obtain shipping economies