PEMP- EMM2506

ERP(Enterprise Resource Planning)

& MRP
Mr.Vijayakumar S

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• Session Objectives
– At the end of this session the delegate would
have understood
• ERP
• ERP example – SAP
• MRP and structure
• MRP1 & MRPII difference
• Lot size determination in MRP

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ERP
• ERP is a complete enterprise wide business
solution. It consists of software support
modules such as marketing &
sales,manufacturing,quality…… Intergration
between modules is stressed without
duplication of information
• This integration is accomplished through a
database shared by all the application
programs
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Advantages of ERP
• Visibility of what is happening in all parts of
Business
• Better control of operations which helps in
continuous improvements
• The discipline of process based changes
• Capability to integrate total supplychain
• Better interaction with customer,Supplier and
other Business partners
• Improvement of Quality of Information
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ERP- Few known Brands

• SAP
• Oracle
• Baan
• Peoplesoft
• …

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SAP AG’S R/3

• SAP AG, A German firm, is a world leader in ERP
software.
-Designed to
operate in a three-
tier client/server
configuration
-Applications are
fully integrated so
that data are
shared between all
applications

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R/3 System Major Functional Components

Financial
Accounting

R/3 System
Sales & Distribution Functional
Human Resources
Components

Manufacturing
& Logistics

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Financial Accounting
• Accounts payable

• Accounts receivable

• Capital Investment

• ….

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Human Resources
• Payroll
• Benefits administration
• Applicant data administration
• Personnel development planning
• Workforce planning
• Schedule & shift planning
• Time management
• Travel expense accounting

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Manufacturing & Logistics

• Materials management

• Plant maintenance

• Quality management

• Production planning & control

• Project management system

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Sales and Distribution

• Prospect & customer management
• Sales order management
• Configuration management
• Distribution
• Export controls
• Shipping and transportation management
• Billing, invoicing, and rebate processing

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ERP Implementation-Costs
• Software
• Personnel for Implementation – Including
changes needed to suit Business
• IT Infrastructure
• Training of Employees
• Cost of keeping alive and improvements

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ERP Implementation
• Standard ERP package normally does not fit
into company practices
• Many times the way process is done may
need a change to suit ERP. This is where
challenge of implementation comes
• Top management must be committed in ERP
implementation
• Selecting ERP keeping long term costs and
future changes needed is a important factor
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MRP

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Overview
• Resource Requirements Planning
• Material Requirements Planning (MRP)

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Resource Requirements Planning

Aggregate
Planning

Master Production
Scheduling (MPS)

Resource
Requirements Material Requirements
Planning Planning (MRP)

Capacity Requirements
Planning (CRP)
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Material Requirements Planning
(MRP)

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MRP
• Assume a product has 10 items
• Procurement manager assuming 5% stock
out, plans 95% of each item (service level)
• Probability that all 10 materials
simultaneously available is = 0.95x0.95x…..
i.e. 60%
He should expect 4 items to be short for
assembly

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Materials Requirements Planning
(MRP)
• Computer based system
• Explodes Master Schedule (MPS) into
required amounts of raw materials and
subassemblies to support MPS
• Nets against current orders and inventories to
develop production and purchased material
ordering schedules
• Used for dependent items

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Objectives of MRP
• Improve customer service
• Reduce inventory investment
• Improve plant operating efficiency

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Inputs
Elements of MRP Outputs
Service-Parts Inventory
Orders and Transaction Data
Forecasts
Order Changes
Inventory Order
Planned Order
Status File Schedule

Master MRP
Production System Planning
Schedule Report
Performance
Exception
Bill of
Materials File Reports

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MRP Schematic
Aggregate Forecasts
Firm orders
product of demand
from known
plan from random
customers
customers
Engineering Master production
Schedule (MPS) Inventory
design
transactions
changes
Material
planning
Bill of (MRP Inventory
material computer record file
file program)
Secondary reports
Primary reports Exception reports
Planned order schedule for
Planning reports
inventory and production
Reports for performance
control
control
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©The McGraw-Hill Companies, Inc., 2004
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MRP Computer Program

• Begins with number of end items needed
• Add service parts not included in MPS
• Explode MPS into gross requirements by consulting
bill of materials file
• Modify gross requirements to get net requirements:
• Net Requirements = Gross Requirements
+ Allocated Inventory
+ Safety Stock
- Inventory On Hand
• Offset orders to allow for lead time
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Outputs of MRP
• Planned order schedule - quantity of material
to be ordered in each time period
• Changes to planned orders - modifications to
previous planned orders
• Secondary outputs:
– Exception reports
– Performance reports
– Planning reports

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Material Requirements Planning System
• Based on a master production schedule, a
material requirements planning system:
– Creates schedules identifying the specific
parts and materials required to produce
end items

– Determines exact unit numbers needed

– Determines the dates when orders for

those materials should be released, based
on lead times

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Bill of Materials (BOM) File
A Complete Product Description
• Materials
• Parts
• Components
• Production sequence
• Modular BOM
– Subassemblies
• Super BOM
– Fractional options
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Inventory Records File

• Each inventory item carried as a separate file
– Status according to “time buckets”

• Pegging
– Identify each parent item that created demand

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Primary MRP Reports

• Planned orders to be released at a future

time
• Order release notices to execute the planned
orders
• Changes in due dates of open orders due to
rescheduling
• Cancellations or suspensions of open
orders due to cancellation or suspension of
orders on the master production schedule
• Inventory status data

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Secondary MRP Reports

• Planning reports, for example,
forecasting inventory requirements over
a period of time
• Performance reports used to determine
agreement between actual and
programmed usage and costs
• Exception reports used to point out
serious discrepancies, such as late or
overdue orders

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Lot-Sizing in MRP
• Lot-size is the quantity ordered/produced at one
time
• Large lots are preferred because:
– Changeovers cost less and better capacity use
– Annual cost of purchase orders less
– Price breaks and transportation breaks can be utilized
• Small lots are preferred because:
– Lower inventory carrying cost
– Reduced risk of obsolescence
– Shorter cycle time to produce customer order

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Lot-Sizing Methods
• Economic Order Quantity (EOQ)
– does not consider quantity discounts
– does not always provide the most economical
approach with lumpy demand
• Lot-for-Lot (LFL)
– accommodates lumpy demand
• Period Order Quantity (POQ)
The best method, resulting in least cost,
depends on cost and demand patterns.
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Example: Lot-Sizing Decision

The net requirements for a material from an MRP
schedule are: WEEK
1 2 3 4 5 6 7 8
NET REQUIREMENTS 1000 0 1300 800 1200 1300 0 800

It costs $400 to change over the machines for this material

in the affected work center. It costs $0.40 per unit when one
unit of this material must be carried in inventory from one
week to the next.
Identify the lot-sizing method that results in the least
carrying and changeover costs for the 8-week schedule.

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Example: Lot-Sizing Decision

• Lot-for-Lot Method
WEEK
1 2 3 4 5 6 7 8
NET REQUIREMENTS 1000 0 1300 800 1200 1300 0 800
BEGINNING INVENTORY 0 0 0 0 0 0 0 0
PRODUCTION LOTS 1000 0 1300 800 1200 1300 0 800
ENDING INVENTORY 0 0 0 0 0 0 0 0

Carrying Cost = 0($.40) = $0

Changeover Cost = 6($400) = $2,400
Total = $2,400

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Example: Lot-Sizing Decision

• Economic Order Quantity (EOQ) Method

S = $400.00
D = [(Net Req. for 8 wks)/8 weeks)](50 weeks/year)
= (6400/8)(50) = 40,000
C = ($0.40 per week)(50 weeks/year)
= $20.00

2D S 2 (4 0 ,0 0 0 )(4 0 0 )
EOQ = = = 1265
C 20
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Example: Lot-Sizing Decision

• Economic Order Quantity (EOQ) Method
WEEK
1 2 3 4 5 6 7 8
NET REQUIREMENTS 1000 0 1300 800 1200 1300 0 800
BEGINNING INVENTORY 0 265 265 230 695 760 725 725
PRODUCTION LOTS 1265 0 1265 1265 1265 1265 0 1265
ENDING INVENTORY 265 265 230 695 760 725 725 1190

Carrying Cost = 4855($.40) = $1,942

Changeover Cost = 6($400) = $2,400
Total = $4,342
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Example: Lot-Sizing Decision

• Period Order Quantity (POQ) Method

POQ = (# Weeks/year)/(# Orders/year)

= 50/(D/EOQ)
= 50/(40,000/1,265)
= 1.58 or 2 weeks

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Example: Lot-Sizing Decision

• Period Order Quantity (POQ) Method
WEEK
1 2 3 4 5 6 7 8
NET REQUIREMENTS 1000 0 1300 800 1200 1300 0 800
BEGINNING INVENTORY 0 0 0 800 0 1300 0 800
PRODUCTION LOTS 1000 0 2100 0 2500 0 800 0
ENDING INVENTORY 0 0 800 0 1300 0 800 0

Carrying Cost = 2900($.40) = $1,160

Changeover Cost = 4($400) = $1,600
Total = $2,760
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Example: Lot-Sizing Decision

• Summary
Carrying Chg.Ovr. Total
Method Cost Cost Cost
LFL 0 2,400 2,400
EOQ 1,942 2,400 4,342
POQ 1,160 1,600 2,760

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MRP I to MRP II
• MRP I simply exploded demand (MPS) into required
materials – Triggering work order for inhouse parts &
procurement notice for sourced items
• MRP II became Manufacturing Resource Planning
which provides a closed-loop business management
system
– Financial management
– Shop floor control
– Marketing
– Engineering
– Simulation studies
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MRP and JIT

• MRP can be used in everything from custom
job shops to assembly-line production
• JIT is more suited for repetitive
Manufacturing
• The combination of MRP and JIT creates a
hybrid manufacturing system and also called
Flow manufacturing
• In JIT separate pull drawing from preceding
stage happens
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Summary
• Overview of ERP given
• Structure of MRP explained
• Lot size determination in MRP demonstrated
• MRP1 & MRPII difference highlighted

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References
• Operations Management, 9th edition, 2002,
Gaither and Frazier, South-
Western/Thomson Learning
• Operations Management: For competitive
advantage, 11th edition – 2009 reprint,
Chase, et al, TMH – Special Indian edition

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