Operation Management Online quiz

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Dependent
Demand Inventory

Chapter 7

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Learning Objectives

Contrast dependent and independent demand, and trace the development of material requirements planning (MRP).

Explain the inputs to an MRP system.

Compute single-level MRP records.

Compute multiple-level MRP records and explain the outputs generated.

Describe the evolution of MRP to enterprise resource planning (ERP) and identify ways in which ERP is utilized to integrate all the functions of an organization.

Explain how dependent demand is handled in service organizations and describe the use of technology.

Define three critical features for success with ERP.

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Dependent Demand at Kellogg’s

Kellogg’s employs dependent demand planning techniques, including material requirements planning.
Every 2 months, a plan is developed for all production items in a given group of plants.
For the morning foods division, Kellogg’s develops a plan for three plants that produce Pop-Tarts.
The plan calls for 61,500 boxes of Hot Fudge Sundae Pop-Tarts and 54,000 boxes of Strawberry Pop-Tarts, along with other varieties during one week.

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History of Dependent Demand Planning

Independent demand: demand for items that are considered end items that go directly to a customer, and for which demand is influenced by market conditions and not related to inventory decisions for an other item
Dependent demand: demand for items that are used to make another item or are considered to be parts of another item

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Material Requirements Planning (MRP)

MRP: a computer-based system that develops plans for ordering and producing dependent demand items.

MRP utilizes two basic principles:

Requirements for dependent demand items are derived from the production schedule for their parents (the items that are assembled from component parts).

The production order is offset to account for the lead time.

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Figure 7.3: Demand Pattern for Independent versus Dependent Items

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Material Requirements Planning (MRP)

MRP is a technique that
has been employed since the 1940s and 1950s.
Joe Orlicky is known as
the Father of MRP
The use and application
of MRP grew through the 1970s and 1980s as the power of computer hardware and software increased.
MRP gradually evolved into a broader system called manufacturing resource planning (MRP II).

Source: © Image Source/Corbis

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MRP Inputs

Material requirements plan: a plan that specifies the timing and size of new production orders, adjustments to existing order quantities, and expediting or delay of late/early orders

 Developed through a combination of three inputs:

The Master Schedule

The Bill of Materials

Inventory Records

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Material Requirements Plan

Material requirements plan: a plan that specifies the timing and size of new production orders, adjustments to existing order quantities, and expediting or delay of late/early orders.
The process of developing the material requirements plan is call MRP explosion; it is a technique for converting the requirements of final products into a material requirements plan that specifies the production/order quantities and timing for all subassemblies, components, and raw materials needed by final products.

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Figure 7.4: Material
Requirements Plan Inputs

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The Master Schedule

Master schedule (MS): a document that details the quantity of end items to be produced within a specified period of time
Objectives:

The MS must balance the workload for a given company in terms of not only total capacity, but also capacity at each workstation and for each worker.

The MS seeks to minimize total cost and provides a way of assessing the impact of new orders and providing delivery dates for accepted orders.

The planned production quantities in the MS are intended to satisfy demand, which is estimated based on computer orders and forecasts.

The MS is should be frozen or unchangeable in the near term.

The goal is to plan production but allow some flexibility to change

orders as demand or customer requirements change.

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Discussion Starter

What may require you to change the MPS?

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Table 7.1: Master
Schedule for a Family of Bicycles

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Key Aspects of Master Scheduling

The sums of the quantities in the MS must equal those in the aggregate production plan.
Aggregate production quantities should be planned efficiently over time in order to minimize setup, production, and inventory costs.
Capacity limitations must be considered before finalizing the MS, including labor and machine capacity, storage space, transportation equipment, and other factors.

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The Bill of Materials

Bill of materials (BOM): a document that specifies all assemblies, subassemblies, parts, and raw materials that are required to produce one unit of the finished product

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Figure 7.5: Partial Bill
of Materials for a Bicycle

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Bill of Materials for a Bicycle

Every part in a bill of materials is assigned a level.
End items or finished products that are sold directly to an end customer are Level 0.
The handle bars, frame assembly and sear are Level 1 parts that are components of a complete bicycle.
The wheels and frame are Level 2 parts that are components of the frame assembly.
The spokes and tire rim are Level 3 components of the frame.

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Figure 7.6: Product
Structure Tree for Item A

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BOMs

Common parts: parts that are used in more than one place in a single product or in more than one product
Low-level coding: involves assigning a part to the lowest level at which it appears anywhere in the BOM
It is critical that the bill of materials is an accurate representation of the parts required to produce a product, since errors at one level are magnified when they are multiplied by parts requirements at lower levels.
Attention to detail and accuracy, combined with periodic updates and checks of BOMs, are essential if an MRP system is to work effectively.

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Figure 7.7: Bill of
Materials with a Buried Component

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Inventory Records

Inventory record: a document that specifies order/lot size policy and lead time and records all transactions made for parts, assemblies, and components

Includes: transactions made for parts, assemblies, and components both from manufacturing within an organization and from purchasing items from external suppliers

Inventory transaction: any change in the quantity of a specific part or material

Includes: receipt of new orders, shipment of complete orders, scrapping of defective parts, release of new orders, adjustment of due dates for scheduled receipts, cancellation of orders, and confirmation of scrap losses and returns.

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MPR Processing—Creating an
Inventory Record for a Single Item

Developing Inventory Records for Single Items
Determining Planning Factors

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Developing Inventory
Records for Single Items

Planning factors: three parameters—lot size, lead time, and safety stock—that are chosen by managers utilizing the MRP system
Lot size: the quantity of a part to be produced or ordered when additional inventory is required
Lead time: the time between when an order is placed and when it is expected to arrive or be finished
Safety stock: excess inventory that a company holds to guard against uncertainty in demand, lead time, and supply

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Planning Factors for an MRP Record

The planning factors for an MRP record are fairly constant—they are entered into the system once and may not be updated for months or years.
Time buckets: the periods of time into which an MRP record is divided
Planning horizon: the time period in the future that the MRP system plans for
Beginning inventory: the amount of inventory that was physically in stock at the end of the most recent time bucket

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Gross Requirements/Scheduled Receipts

Gross requirements: the total number of units of a part or material derived from all parent production plans
Scheduled receipts: orders that have been placed but not yet received or completed

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Projected On-hand Inventory

Projected on-hand inventory: the estimated inventory that will be available after the gross requirements have been satisfied, plus any planned or scheduled receipts for that time bucket

Abbreviated: projected OH inventory

Is adjusted according to every inventory transaction

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Table 7.3: Illustration
of Projected On-hand Inventory

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Planned Receipts

Planned receipts: future orders that which have not yet been released but are planned in order to avoid a shortage or backlog of inventory

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Planned Order Release

Planned order release: when an order must be released in order to offset for the lead time so that the order will be received when planned
The difference between a planned and a scheduled receipt: a planned receipt is not firmly committed to and can be changed relatively easily up until the time the order is released.
As soon as the order is released, it becomes a scheduled order, which is much harder to change.

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Determining Planning Factors

Every MRP record includes three planning factors:

Lead time

Lot size

Safety stock

These are called planning factors because the

decisions managers make regarding these

quantities have a large impact on how well the

MRP system, and by extension the entire inventory

system and supply chain, functions.

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Lead Time

Lead time is an estimate of the time between releasing an order and receiving that order.
Accuracy in lead times is very important, since early or late orders can greatly affect other items and production schedules through excessive inventory holding costs or shortage, stock-out, and expediting costs.

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Lead Time

For items that are manufactured or produced within the company, the lead time must take into account a number of factors, including:

Set up time

Processing time

Materials handling time

Waiting time

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Discussion Starter

Lead Time = Inventory

What do we mean by this?

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Lot Size

Lot size rules determine:

the size of the order placed, and by extension the timing of orders,

the frequency of set-ups, and

the inventory holding costs for an item.

Three types:

Fixed order quantity

Periodic order quantity

Lot for lot

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Fixed Order Quantity

Fixed order quantity (FOQ): a lot size rule with a constant order size where the same quantity is ordered every time
The FOQ can be determined by a desire to:

work with equipment capacity, such as when a certain machine has a capacity limit.

mimic the EOQ

make planning consistent

receive a quantity discount

minimize shipping costs

reach a minimum purchase quantity

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Periodic Order Quantity

Periodic order quantity (POQ): a lot size rule with a variable lot size designed to order exactly the amount required for a specified period of time

Equation:

POQ Lot Size to Arrive in Period t =

(Gross Requirements for P Periods, Including Period t) – (Projected On-Hand Inventory at End of Period t – 1) + (Safety Stock) of time of time

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Lot for Lot (L4L)

Lot for lot (L4L): a lot size rule that is a special case of the periodic order quantity with the period equal to 1

Equation:

L4L Lot Size to Arrive in Period t =

(Gross Requirements in Period t) – (Projected On-Hand Inventory at End of Period t – 1) + (Safety Stock)

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Table 7.8: MRP Record with L4L Order

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Lot Size Rules Summary

The FOQ rule has the highest average inventory because its fixed nature creates inventory remnants.

The POQ rule reduces the amount of OH inventory by matching gross requirements with planned receipts.

The L4L rule always minimizes inventory, but also requires more frequent setups/orders.

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Safety Stock

It would seem that an MRP inventory system should not require safety stock.

Why is safety stock necessary?

There may be bottlenecks or blockages that prevent orders from being complete on a timely basis.

Quality problems often arise where an order will be only 95 percent filled.

Humans may enter incorrect information into the system.

There is variability in demand, and the master schedule is made to match forecasts.

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MRP Nervousness

MRP nervousness: a situation in MRP planning where a change at one part level ripples down to affect lower-level parts

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MRP Explosion

MRP explosion: the process of translating MRP inputs into a plan that specifies required quantities and timing of all subassemblies, components, and raw materials required to produce parent items

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Action Notices

Action notice: a notice that is generated when an order needs to be released or placed or when the quantity or timing of an order needs to be changed

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MRP as a Dynamic System

Two approaches to updating:

Periodic update: an approach to updating that involves collecting all new or updated information and processing it once a week or once a day

Net change update: an approach to updating that makes changes as soon as they occur

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Figure 7.10: Illustration
of a Rolling MRP Schedule

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Capacity Planning

There are three approaches for managing capacity and ensuring that the MRP plan is feasible:

Capacity requirements planning

Finite capacity scheduling

Input/Output reports

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Capacity Requirements Planning

Capacity requirements planning: the process of determining short-range capacity requirements based on a tentative MRP plan

Short range generally refers to the next one to three months.

Inputs include the planned order releases generated from the MRP system, workloads at each work center, routing information, and job setup/processing times.
The master schedule and the MRP plan are usually generated by looking at what is needed to support sales, rather than what is possible.
Load report: a report for a department or work center that projects already scheduled and expected future capacity requirements against capacity availability

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Figure 7.11: MRP with
Capacity Planning Requirements

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Strategies for Dependent
Demand Inventory

There are strategic keys to making MRP work effectively.

Evolution of MRP to Enterprise Resource Planning

Service Resource Planning

Making MRP/ERP Work

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Evolution of MRP to
Enterprise Resource Planning

Manufacturing resource planning (MRP II): a system that links the basic MRP system to other company systems, including finance, accounting, purchasing, and logistics
Enterprise resource planning (ERP): a system that provides a complete linkage of all functional areas of a business

Allows manufacturing to see new orders as soon as marketing or sales enters them into the system.

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Service Resource Planning

Planning and control for manufacturing firms is focused on tangible goods, whereas services require more of a mix of intangible and tangible goods.
However, the concept of dependent demand also applies to services where the demand for a service is based on the demand for a parent item.

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[Need a heading]

Maintenance, repair and operating supplies (MRO): items that a store or business requires to run the business
Yield management: a management technique that offers customer incentives to shape their demand patterns

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Customer Relationship Management

Customer relationship management (CRM): a system of planning and control activities and information systems that link an organization with its downstream customers
Is the equivalent of MRP
Consists of 3 components:

Operational CRM

Collaborative CRM

Analytical CRM

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Making MRP/ERP Work

Dependent demand planning and material requirements

planning are critical components for manufacturing

businesses.

Three key factors contribute to success:

The hardware and software have to be carefully set up to fit with the organization’s method of doing business.

The users of the system (employees) need to be thoroughly trained in the system.

The input data need to be close to 100 percent accurate because MRP will magnify any inconsistencies.