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Operations Management: Sustainability and Supply Chain Management

Third Canadian Edition

Chapter 14

Material Requirements Planning (MRP) and ERP

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Outline (1 of 2)

Global Company Profile: Wheeled Coach

Dependent Demand

Dependent Inventory Model Requirements

MRP Structure

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Outline (2 of 2)

MRP Management

Lot-Sizing Techniques

Extensions of MRP

MRP In Services

Enterprise Resource Planning (ERP)

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Learning Objectives (1 of 2)

When you complete this chapter you should be able to:

Develop a product structure

Build a gross requirements plan

Build a net requirements plan

Determine lot sizes for lot-for-lot, EOQ, and POQ

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Learning Objectives (2 of 2)

When you complete this chapter you should be able to:

Describe MRP II

Describe closed-loop MRP

Describe ERP

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Wheeled Coach (1 of 2)

Largest manufacturer of ambulances in the world

International competitor

12 major ambulance designs

18,000 different inventory items

6,000 manufactured parts

12,000 purchased parts

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Because Wheeled Coach deals with so many parts for its custom-made assembled ambulances, an excellent MRP system is crucial for getting the right parts at the right place at the right time.

Wheeled Coach (2 of 2)

Four Key Tasks

Material plan must meet both the requirements of the master schedule and the capabilities of the production facility

Plan must be executed as designed

Minimize inventory investment

Maintain excellent record integrity

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Dependent Demand (1 of 4)

For any product for which a schedule can be established, dependent demand techniques should be used

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While Chapter 12 introduced techniques for independent demand, Chapter 14 illustrates how to handle dependent demand, which occurs when the demand for one item is dependent on the demand for another. In short, for all components that a firm produces to go into a final product, material requirements planning (MRP) determines when to begin producing them and in what quantities. Taking lead times into consideration, components are scheduled far enough in advance to ensure that the final product can be completed when scheduled. Slide 9 identifies four benefits of MRP.

Dependent Demand (2 of 4)

Benefits of MRP

Better response to customer orders

Faster response to market changes

Improved utilization of facilities and labour

Reduced inventory levels

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Dependent Demand (3 of 4)

The demand for one item 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

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Dependent Demand (4 of 4)

Effective use of dependent demand inventory models requires the following

Master production schedule

Specifications or bill of material

Inventory availability

Purchase orders outstanding

Lead times

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Operations managers must have knowledge about each of the items identified in this slide in order to implement MRP.

Master Production Schedule (MPS) (1 of 2)

Specifies what is to be made and when

Must be in accordance with the aggregate production plan

Inputs from financial plans, customer demand, engineering, supplier performance

As the process moves from planning to execution, each step must be tested for feasibility

The MPS is the result of the production planning process

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The master production schedule (MPS) stems from the aggregate plan (Chapter 13). The MPS specifies exactly how many final products will be made and when. This schedule applies to the independent demand items. Based on the MPS, MRP schedules all of the dependent demand items.

Master Production Schedule (MPS) (2 of 2)

MPS is established in terms of specific products

Schedule must be followed for a reasonable length of time

The MPS is quite often fixed or frozen in the near term part of the plan

The MPS is a rolling schedule

The MPS is a statement of what is to be produced, not a forecast of demand

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The Planning Process

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These slides (Figure 14.1) show where the MPS and MRP fit within the overall planning process. Feedback loops are included in case any of the plans is deemed infeasible.

Aggregate Production Plan

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This slide (Figure 14.2) nicely illustrates how an aggregate production plan based on quantity of product families per month is disaggregated into an MPS showing weekly production of specific products. This slide is arguably the most useful visual tool in the presentation slides to help students understand the relationship between Chapters 13 and 14.

Master Production Schedule (MPS) (1 of 3)

Can be expressed in any of the following terms:

A customer order in a job shop (make-to-order) company

Modules in a repetitive (assemble-to-order or forecast) company

An end item in a continuous (stock-to-forecast) company

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This slide emphasize that the MPS applies to end products no matter what process strategy is being used.

Master Production Schedule (MPS) (2 of 3)

Figure 14.3

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Master Production Schedule (MPS) (3 of 3)

Table 14.1 Master Production Schedule for Crabmeat Quiche and Spinach Quiche at Nancy’s Specialty Foods

Gross Requirements for Crabmeat Quiche

Day	6	7	8	9	10	11	12	13	14	and so on	Blank
Amount	50	Blank	100	47	60	Blank	110	75	Blank	Blank	Blank

Gross Requirements for Spinach Quiche

Day	7	8	9	10	11	12	13	14	15	16	and so on
Amount	100	200	150	Blank	Blank	60	75	Blank	100	Blank	Blank

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Bills of Material

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

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A bill of material (BOM) breaks a product down into all of its subassemblies and components and identifies how many units of each component go into each parent component/subassembly, all the way up to making one unit of the final product. Note that certain components may appear in more than one place in the BOM, e.g., one-inch fasteners might be used in both an inner casing and an outer casing. (A good test question that catches a lot of students off-guard provides a BOM and asks for the total units of a certain subassembly needed to produce one unit of final product, where the subassembly appears in two places in the BOM.) A BOM is probably best explained visually by going quickly to the one shown in Slide 19 (from Example 1). Slide 20 computes the number of each part needed to make one unit of final product. Students need to be aware that the numbers on the BOM refer to the amount required for the immediate parent, not the final product, so the amount needed for the final product has a multiplicative relationship.

LO 1: Develop a product structure.

BOM Example (1 of 2)

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LO 1: Develop a product structure.

BOM Example (2 of 2)

Part B:	2 x number of As =	(2)(50) =	100
Part C:	3 x number of As =	(3)(50) =	150
Part D:	2 x number of Bs + 2 x number of Fs =	(2)(100) + (2)(300) =	800
Part E:	2 x number of Bs + 2 x number of Cs =	(2)(100) + (2)(150) =	500
Part F:	2 x number of Cs =	(2)(150) =	300
Part G:	1 x number of Fs =	(1)(300) =	300

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Bills of Material (1 of 3)

Modular Bills

Modules are not final products but components that can be assembled into multiple end items

Can significantly simplify planning and scheduling

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When firms practice modular production (see Chapter 5), or postponement, they produce major subassemblies or modules to stock but make final products to order. This allows for hundreds or even tens of thousands of different final product configurations based on combinations of perhaps 10–50 modules. When production is organized this way, modular bills are used for each module, and no bills of material for final products are needed.

Bills of Material (2 of 3)

Planning Bills

Also called “pseudo” or super bills

Created to assign an artificial parent to the BOM

Used to group subassemblies to reduce the number of items planned and scheduled

Used to create standard “kits” for production

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These slides describe two other special kinds of bills of material, planning bills (or kits) and phantom bills. Low-level coding is necessary when identical items exist at various levels in the BOM (for example, item D in Slide 19).

Bills of Material (3 of 3)

Phantom Bills

Describe subassemblies that exist only temporarily

Are part of another assembly and never go into inventory

Low-Level Coding

Item is coded at the lowest level at which it occurs

BOMs are processed one level at a time

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Accurate Records

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

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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

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Time-Phased Product Structure

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Structure of the MRP System

Figure 14.5

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Determining Gross Requirements (1 of 3)

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”

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These slides discuss the development of the gross material requirements plan (from Example 2, a continuation of Example 1), which is a schedule showing the total demand for an item each time period (which is based on the order release of the parent), as well as the order release of the item (i.e., when production must begin or the item must be ordered). Note that demand for an item with multiple parents is combined into a single gross material requirements plan for that item.

LO 2: Build a gross requirements plan.

Determining Gross Requirements (2 of 3)

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)

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Determining Gross Requirements (3 of 3)

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

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Table 14.3 Gross Material Requirements Plan for 50 Awesome Speaker Kits (As)

Blank

Week

Blank

Blank	Blank	1	2	3	4	5	6	7	8	Lead Time
A.	Required date	Blank	Blank	Blank	Blank	Blank	Blank	Blank	50	Blank
Blank	Order release date	Blank	Blank	Blank	Blank	Blank	Blank	50	Blank	1 week
B.	Required date	Blank	Blank	Blank	Blank	Blank	Blank	100	Blank	Blank
Blank	Order release date	Blank	Blank	Blank	Blank	100	Blank	Blank	Blank	2 weeks
C.	Required date	Blank	Blank	Blank	Blank	Blank	Blank	150	Blank	Blank
Blank	Order release date	Blank	Blank	Blank	Blank	Blank	150	Blank	Blank	1 week
E.	Required date	Blank	Blank	Blank	Blank	200	300	Blank	Blank	Blank
Blank	Order release date	Blank	Blank	200	300	Blank	Blank	Blank	Blank	2 weeks
F.	Required date	Blank	Blank	Blank	Blank	Blank	300	Blank	Blank	Blank
Blank	Order release date	Blank	Blank	300	Blank	Blank	Blank	Blank	Blank	3 weeks
D.	Required date	Blank	Blank	600	Blank	200	Blank	Blank	Blank	Blank
Blank	Order release date	Blank	600	Blank	200	Blank	Blank	Blank	Blank	1 week
G.	Required date	Blank	Blank	300	Blank	Blank	Blank	Blank	Blank	Blank
Blank	Order release date	300	Blank	Blank	Blank	Blank	Blank	Blank	Blank	2 weeks

Gross Requirements Plan

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Net Requirements Plan (1 of 2)

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These slides (Example 3, a continuation of Example 2) discuss the net material requirements plan, which adjusts the gross material requirements plan to account for on-hand inventory (and allocations and scheduled receipts—see Slide 35). Slides 30–31 provide the actual plan for each item, while Slides 32–34 describe the calculations for items A and B. The superscripts indicate the source (parent) of the demand. The planned order release indicates when to start producing or ordering the part, time-phased from the planned order receipt to account for the lead time.

LO 3: Build a net requirements plan.

Net Requirements Plan (2 of 2)

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Determining Net Requirements (1 of 3)

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

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Determining Net Requirements (2 of 3)

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

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Determining Net Requirements (3 of 3)

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

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Gross Requirements Schedule

Figure 14.6

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MRP gross requirements can combine multiple products, spare parts, and items sold directly into a single gross material requirements plan. This slide (Figure 14.6) provides an example.

Net Requirements Plan

The logic of net requirements

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Most inventory systems also note the number of units in inventory that have been assigned to specific future production but not yet used or issued from the stockroom. Such items are often referred to as allocated items. Allocated items increase requirements and may then be included in an MRP planning sheet. This slide presents the formula for net requirements.

Safety Stock

BOMs, inventory records, purchase and production quantities may not be perfect

Consideration of safety stock may be prudent

Should be minimized and ultimately eliminated

Typically built into projected on-hand inventory

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As with independent demand (Chapter 12), safety stock may be necessary in dependent demand systems to account for uncertainty.

MRP and JIT

MRP is a planning system that does not do detailed scheduling

MRP requires fixed lead times which might actually vary with batch size

JIT excels at rapidly moving small batches of material through the system

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MRP provides a daily or weekly plan, but it does not provide more detailed scheduling than that. When MRP and JIT are combined, MRP can provide the plan and an accurate picture of requirements; then JIT can rapidly move material in small batches, reducing WIP inventory.

Finite Capacity Scheduling

MRP systems do not consider capacity during normal planning cycles

Finite capacity scheduling (FCS) recognizes actual capacity limits

By merging MRP and FCS, a finite schedule is created with feasible capacities which facilitates rapid material movement

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This slide describes finite capacity scheduling (Chapter 15), which considers department and machine capacity—as opposed to basic MRP, which assumes no capacity limits.

Balanced Flow

Used in repetitive operations

MRP plans are executed using JIT techniques based on “pull” principles

Flows are carefully balanced with small lot sizes

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Lot-Sizing Techniques (1 of 2)

Lot-for-lot techniques order just what is required for production based on net requirements

May not always be feasible

If setup costs are high, lot-for-lot can be expensive

Economic order quantity (EOQ)

EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand

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LO 4: Determine lot sizes for lot-for-lot, EOQ, and PPB.

The most important managerial decision in standard MRP is the lot-sizing decisions. Firms may utilize a lot-for-lot approach, which means producing or ordering exactly the planned order release for that period. However, a setup cost may be incurred every time, which is why other lot-sizing rules consider producing in larger batches that take advantage of economies of scale. Like the EOQ model, these techniques look for a balance between holding and setup costs. The main alternate method discussed in the text is part period balancing, which selects the order quantity each time that best matches holding and setup costs (based on the idea that for the infinite time horizon EOQ model, annual holding cost exactly equals annual setup cost). The Wagner-Whitin algorithm is the optimal solution to the finite-horizon scheduling problem, but it is generally too onerous to compute by hand. (Note that other lot-sizing heuristics have been proposed that are beyond the scope of this text, including Silver-Meal and least unit cost. A nice modification of the EOQ lot size is known as a periodic order quantity, which determines the average number of periods of demand that the EOQ would cover and has the user always order enough to cover that many periods. The EOQ itself generally performs poorly because in some periods it may leave enough inventory in place to cover only a partial period of demand—this is a waste because a setup would still have to be incurred that period anyway. Finally, instructors might note that for purchased parts, researchers have modified and tested these lot-sizing heuristics for the case of both all-units and incremental quantity discounts.)

Lot-Sizing Techniques (2 of 2)

Part Period Balancing (PPB) looks at future orders to determine most economic lot size

The Wagner-Whitin algorithm is a complex dynamic programming technique

Assumes a finite time horizon

Effective, but computationally burdensome

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Lot-Sizing Summary (1 of 2)

In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change

In practice, this results in system nervousness and instability

Lot-for-lot should be used when low-cost JIT can be achieved

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These slides provide some summary information about lot sizing. No matter which method is used, the changes caused by the rolling horizon, new orders, and other factors cause nervousness in the system, which needs to be managed. As a long-term goal, firms should try to reduce setup costs to the point where lot-for-lot (hence just-in-time production) becomes economically viable.

Lot-Sizing Summary (2 of 2)

Lot sizes can be modified to allow for scrap, process constraints, and purchase lots

Use lot-sizing with care as it can cause considerable distortion of requirements at lower levels of the BOM

When setup costs are significant and demand is reasonably smooth, PPB, Wagner-Whitin, or EOQ should give reasonable results

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Extensions of MRP

MRP II

Closed-Loop MRP

MRP system provides input to the capacity plan, MPS, and production planning process

Capacity Planning

MRP system generates a load report which details capacity requirements

This is used to drive the capacity planning process

Changes pass back through the MRP system for rescheduling

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LO 5: Describe MRP II.

LO 6: Describe closed-loop MRP.

These slides describe material resource planning, known as MRP II. Similar to basic MRP, the system can determine needs not only for units, but also for scheduling resources such as labour hours, machine hours, scrap, and payables (cost).

Material Requirements Planning II (1 of 3)

Requirement data can be enriched by other resources

Generally called MRP II or Material Resource Planning

Outputs include

Scrap

Packaging waste

Carbon emissions

Data used by purchasing, production scheduling, capacity planning, inventory

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LO 5: Describe MRP II.

Table 14.4 Material Resource Planning (MRP II)

Blank

WEEKS

Blank

	Lead Time	5	6	7	8
Computer	1				100
Labour-hours: 0.2 each	Blank	Blank	Blank	Blank	20
Machine-hours: 0.2 each					20
Scrap: 28 grams fiberglass each	Blank	Blank	Blank	Blank	2.8 kg
Payables: $0					$0
PC board (1 each)	2	Blank	Blank	100	Blank
Labour-hours: 0.15 each				15
Machine-hours: 0.1 each				10
Scrap: 14 grams copper each				1.42 kg
Payables: raw material at $5 each				$500	Blank

Material Requirements Planning II (2 of 3)

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Material Requirements Planning II (3 of 3)

Table 14.4 Continued

Blank

WEEKS

Blank

	Lead Time	5	6	7	8
Processors (5 each)	4	500
Labour-hours: 0.2 each		100
Machine-hours: 0.2 each		100
Scrap: 0.3 grams of acid waste each		0.14 kg
Payables: processors at $10 each		$5000

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Closed-Loop MRP System

Figure 14.8

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Virtually all commercial MRP software applications provide closed-loop MRP systems, which provide feedback to the capacity plan, master production schedule, and production plan. This slide (Figure 14.8) provides a schematic of the interactions.

LO 6: Describe closed-loop MRP.

Capacity Planning

Feedback from the MRP system

Load reports show resource requirements for work centres

Work can be moved between work centres to smooth the load or bring it within capacity

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These slides show how closed-loop MRP can assist in capacity planning. The system produces load reports, which show the resource requirements in a work center for all work currently assigned there as well as all planned and expected orders. When capacity is exceeded, smoothing tactics can be implemented to try to bring the load back within capacity. The idea beyond overlapping is that rather than having finished parts wait around for the entire lot to be completed, they are sent ahead so that the setup on the next operation can begin. Then when the rest of the lot arrives, the setup has already been completed so there is no additional waiting time for those units. Lot splitting is a similar idea, but two full setups still might take place because the order has actually been broken up (and it’s possible that another order may come in between). Operations splitting also breaks up an order, but it sends the smaller lots to two simultaneous operations as opposed to sending them at different times.

Initial Resource Requirements Profile for a Work Centre

Figure 14.9

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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

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Services or service items may have dependent demand (and hence require MRP) as well. For example, restaurants have ingredients and side dishes dependent upon the demand for meals; hospitals utilize equipment, materials, and supplies based on the demand for surgeries; and hotels require materials, furniture, and decorations in response to demand for renovations.

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

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Distribution resource planning (DRP) extends MRP beyond one firm into multiple firms within the supply chain. DRP is a time-phased stock-replenishment plan for all levels of a distribution network. This represents an excellent mechanism for enhancing supply chain coordination (Chapter 11).

Enterprise Resource Planning (ERP) (1 of 5)

An extension of the MRP system to tie in customers and suppliers

Allows automation and integration of many business processes

Shares common data bases and business practices

Produces information in real time

Coordinates business from supplier evaluation to customer invoicing

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Enterprise resource planning (ERP) is software that allows companies to (1) automate and integrate many of their business processes, (2) share a common database and business practices throughout the enterprise, and (3) produce information in real time. The basic idea is certainly a noble one—to try to tie all information systems together so that employees can have access to relevant data from any department. In an ERP system, data are entered only once in a common, complete, and consistent database shared by all applications. These are almost always custom-designed systems provided by companies specializing in ERP. The cost of setting up such systems is usually counted in the millions of dollars and sometimes in the hundreds of millions. Most ERP implementations exceed budget projections and take longer than anticipated. Many success stories exist about ERP, as well as many horror stories. In general, ERP does not solve problems—it only provides the information. Other solution software or services need to be purchased for that kind of assistance.

LO 7: Describe ERP.

Enterprise Resource Planning (ERP) (2 of 5)

ERP modules include

Basic MRP

Finance

Human resources

Supply chain management (SCM)

Customer relationship management (CRM)

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Enterprise Resource Planning (ERP) (3 of 5)

ERP can be highly customized to meet specific business requirements

Enterprise application integration software (EAI) allows ERP systems to be integrated with

Warehouse management

Logistics

Electronic catalogs

Quality management

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Enterprise Resource Planning (ERP) (4 of 5)

ERP systems have the potential to

Reduce transaction costs

Increase the speed and accuracy of information

Facilitates a strategic emphasis on JIT systems and integration

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Enterprise Resource Planning (ERP) (5 of 5)

Figure 14.11

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Advantages of ERP Systems

Provides integration of the supply chain, production, and administration

Creates commonality of databases

Can incorporate improved best processes

Increases communication and collaboration between business units and sites

Has an off-the-shelf software database

May provide a strategic advantage

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The advantages and disadvantages of ERP systems are identified in Slides 55 and 56, respectively. ERP is a high-profile implementation with substantial potential gains but many potential pitfalls. Employees tend to either love it or hate it.

Disadvantages of ERP Systems

Is very expensive to purchase and even more so to customize

Implementation may require major changes in the company and its processes

Is so complex that many companies cannot adjust to it

Involves an ongoing, possibly never completed, process for implementation

Expertise is limited with ongoing staffing problems

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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

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Service industries have implemented ERP as well.

Summary

Materials requirement planning (MRP) schedules production and inventory when demand is dependent

Master schedule, precise requirements for all components, accurate inventory and purchasing records, and accurate lead times are all need for MRP to work

MRP can be used with lean manufacturing techniques (JIT etc.)

ERP systems are integrated systems that ties a company’s finances, production, human resources etc. together

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