inventory management and mrp-erp

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12 – 1 Departament d’Economia de l’Empresa / Department of Business Economics & Administration Operations Management Session 6 – Session 6 – Inventory Management Inventory Management & MRP / ERP & MRP / ERP

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MRP / ERP and Inventory

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Page 1: Inventory Management and Mrp-erp

12 – 1

Departament d’Economia de l’Empresa / Department of Business Economics & Administration

Operations ManagementOperations Management

Session 6 – Session 6 – Inventory Management Inventory Management & MRP / ERP& MRP / ERP

Page 2: Inventory Management and Mrp-erp

12 – 2Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

OutlineOutline Global Company Profile: Global Company Profile:

Amazon.comAmazon.com

Functions of InventoryFunctions of Inventory Types of InventoryTypes of Inventory

Inventory ManagementInventory Management ABC AnalysisABC Analysis

Record AccuracyRecord Accuracy

Cycle CountingCycle Counting

Control of Service InventoriesControl of Service Inventories

Page 3: Inventory Management and Mrp-erp

12 – 3Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Outline – ContinuedOutline – Continued

Inventory ModelsInventory Models Independent vs. Dependent DemandIndependent vs. Dependent Demand

Holding, Ordering, and Setup CostsHolding, Ordering, and Setup Costs

Page 4: Inventory Management and Mrp-erp

12 – 4Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Outline – ContinuedOutline – Continued

Inventory Models for Independent Inventory Models for Independent DemandDemand The Basic Economic Order Quantity The Basic Economic Order Quantity

(EOQ) Model(EOQ) Model

Minimizing CostsMinimizing Costs

Reorder PointsReorder Points

Production Order Quantity ModelProduction Order Quantity Model

Quantity Discount ModelsQuantity Discount Models

Page 5: Inventory Management and Mrp-erp

12 – 5Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Outline – ContinuedOutline – Continued

Probabilistic Models and Safety Probabilistic Models and Safety StockStock Other Probabilistic ModelsOther Probabilistic Models

Fixed-Period (P) SystemsFixed-Period (P) Systems

Page 6: Inventory Management and Mrp-erp

12 – 6Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

1.1. Understand an ABC analysisUnderstand an ABC analysis

2.2. Explain cycle countingExplain cycle counting

3.3. Explain the EOQ model for Explain the EOQ model for independent inventory demandindependent inventory demand

4.4. Understand service levels and Understand service levels and probabilistic inventory modelsprobabilistic inventory models

Page 7: Inventory Management and Mrp-erp

12 – 7Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Amazon.comAmazon.com

Amazon.com started as a “virtual” Amazon.com started as a “virtual” retailer – no inventory, no retailer – no inventory, no warehouses, no overhead; just warehouses, no overhead; just computers taking orders to be filled computers taking orders to be filled by othersby others

Growth has forced Amazon.com to Growth has forced Amazon.com to become a world leader in become a world leader in warehousing and inventory warehousing and inventory managementmanagement

Page 8: Inventory Management and Mrp-erp

12 – 8Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Amazon.comAmazon.com

1.1. Each order is assigned by computer to Each order is assigned by computer to the closest distribution center that has the closest distribution center that has the product(s)the product(s)

2.2. A “flow meister” at each distribution A “flow meister” at each distribution center assigns work crewscenter assigns work crews

3.3. Lights indicate products that are to be Lights indicate products that are to be picked and the light is resetpicked and the light is reset

4.4. Items are placed in crates on a conveyor. Items are placed in crates on a conveyor. Bar code scanners scan each item 15 Bar code scanners scan each item 15 times to virtually eliminate errors.times to virtually eliminate errors.

Page 9: Inventory Management and Mrp-erp

12 – 9Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Amazon.comAmazon.com

5.5. Crates arrive at central point where items Crates arrive at central point where items are boxed and labeled with new bar codeare boxed and labeled with new bar code

6.6. Gift wrapping is done by hand at 30 Gift wrapping is done by hand at 30 packages per hourpackages per hour

7.7. Completed boxes are packed, taped, Completed boxes are packed, taped, weighed and labeled before leaving weighed and labeled before leaving warehouse in a truckwarehouse in a truck

8.8. Order arrives at customer within a weekOrder arrives at customer within a week

Page 10: Inventory Management and Mrp-erp

12 – 10Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

InventoryInventory

One of the most expensive assets One of the most expensive assets of many companies representing as of many companies representing as much as 50% of total invested much as 50% of total invested capitalcapital

Operations managers must balance Operations managers must balance inventory investment and customer inventory investment and customer serviceservice

Page 11: Inventory Management and Mrp-erp

12 – 11Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Functions of InventoryFunctions of Inventory

1.1. To decouple or separate various To decouple or separate various parts of the production processparts of the production process

2.2. To decouple the firm from To decouple the firm from fluctuations in demand and fluctuations in demand and provide a stock of goods that will provide a stock of goods that will provide a selection for customersprovide a selection for customers

3.3. To take advantage of quantity To take advantage of quantity discountsdiscounts

4.4. To hedge against inflationTo hedge against inflation

Page 12: Inventory Management and Mrp-erp

12 – 12Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

4 Main Types of Inventory4 Main Types of Inventory

Raw materialRaw material Purchased but not processedPurchased but not processed

Work-in-processWork-in-process Undergone some change but not completedUndergone some change but not completed A function of cycle time for a productA function of cycle time for a product

Maintenance/repair/operating (MRO)Maintenance/repair/operating (MRO) Necessary to keep machinery and processes Necessary to keep machinery and processes

productiveproductive

Finished goodsFinished goods Completed product awaiting shipmentCompleted product awaiting shipment

Page 13: Inventory Management and Mrp-erp

12 – 13Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

The Material Flow CycleThe Material Flow Cycle

Figure 12.1Figure 12.1

InputInput Wait forWait for Wait toWait to MoveMove Wait in queueWait in queue SetupSetup RunRun OutputOutputinspectioninspection be movedbe moved timetime for operatorfor operator timetime timetime

Cycle timeCycle time

95%95% 5%5%

Page 14: Inventory Management and Mrp-erp

12 – 14Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Inventory ManagementInventory Management

How inventory items can be How inventory items can be classifiedclassified

How accurate inventory records How accurate inventory records can be maintainedcan be maintained

Page 15: Inventory Management and Mrp-erp

12 – 15Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

ABC (Or Pareto) AnalysisABC (Or Pareto) Analysis

Divides inventory into three classes Divides inventory into three classes based on annual dollar volumebased on annual dollar volume Class A - high annual dollar volumeClass A - high annual dollar volume

Class B - medium annual dollar Class B - medium annual dollar volumevolume

Class C - low annual dollar volumeClass C - low annual dollar volume

Used to establish policies that focus Used to establish policies that focus on the few critical parts and not the on the few critical parts and not the many trivial onesmany trivial ones

Page 16: Inventory Management and Mrp-erp

12 – 16Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Control of Service Control of Service InventoriesInventories

Can be a critical component Can be a critical component of profitabilityof profitability

Losses may come from Losses may come from shrinkage or pilferageshrinkage or pilferage

Applicable techniques includeApplicable techniques include

1.1. Good personnel selection, training, and Good personnel selection, training, and disciplinediscipline

2.2. Tight control on incoming shipmentsTight control on incoming shipments

3.3. Effective control on all goods leaving Effective control on all goods leaving facilityfacility

Page 17: Inventory Management and Mrp-erp

12 – 17Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Independent Versus Independent Versus Dependent DemandDependent Demand

Independent demand - the Independent demand - the demand for item is independent demand for item is independent of the demand for any other of the demand for any other item in inventoryitem in inventory

Dependent demand - the Dependent demand - the demand for item is dependent demand for item is dependent upon the demand for some upon the demand for some other item in the inventoryother item in the inventory

Page 18: Inventory Management and Mrp-erp

12 – 18Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Holding, Ordering, and Holding, Ordering, and Setup CostsSetup Costs

Holding costs - the costs of holding Holding costs - the costs of holding or “carrying” inventory over timeor “carrying” inventory over time

Ordering costs - the costs of Ordering costs - the costs of placing an order and receiving placing an order and receiving goodsgoods

Setup costs - cost to prepare a Setup costs - cost to prepare a machine or process for machine or process for manufacturing an ordermanufacturing an order

Page 19: Inventory Management and Mrp-erp

12 – 19Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Inventory Models for Inventory Models for Independent DemandIndependent Demand

Basic economic order quantityBasic economic order quantity

Production order quantityProduction order quantity

Quantity discount modelQuantity discount model

Need to determine when and how Need to determine when and how much to ordermuch to order

Page 20: Inventory Management and Mrp-erp

12 – 20Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Basic EOQ ModelBasic EOQ Model

1.1. Demand is known, constant, and Demand is known, constant, and independentindependent

2.2. Lead time is known and constantLead time is known and constant

3.3. Receipt of inventory is instantaneous and Receipt of inventory is instantaneous and completecomplete

4.4. Quantity discounts are not possibleQuantity discounts are not possible

5.5. Only variable costs are setup and holdingOnly variable costs are setup and holding

6.6. Stockouts can be completely avoidedStockouts can be completely avoided

Important assumptionsImportant assumptions

Page 21: Inventory Management and Mrp-erp

12 – 21Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Inventory Usage Over TimeInventory Usage Over Time

Figure 12.3Figure 12.3

Order Order quantity = Q quantity = Q (maximum (maximum inventory inventory

level)level)

Usage rateUsage rate Average Average inventory inventory on handon hand

QQ22

Minimum Minimum inventoryinventory

Inve

nto

ry le

vel

Inve

nto

ry le

vel

TimeTime00

Page 22: Inventory Management and Mrp-erp

12 – 22Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Minimizing CostsMinimizing Costs

Objective is to minimize total costsObjective is to minimize total costs

Table 11.5Table 11.5

An

nu

al c

ost

An

nu

al c

ost

Order quantityOrder quantity

Curve for total Curve for total cost of holding cost of holding

and setupand setup

Holding cost Holding cost curvecurve

Setup (or order) Setup (or order) cost curvecost curve

Minimum Minimum total costtotal cost

Optimal order Optimal order quantity (Q*)quantity (Q*)

Page 23: Inventory Management and Mrp-erp

12 – 23Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Reorder PointsReorder Points

EOQ answers the “how much” questionEOQ answers the “how much” question

The reorder point (ROP) tells when to The reorder point (ROP) tells when to orderorder

ROP ROP ==Lead time for a Lead time for a

new order in daysnew order in daysDemand Demand per dayper day

== d x L d x L

d = d = DDNumber of working days in a yearNumber of working days in a year

Page 24: Inventory Management and Mrp-erp

12 – 24Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Reorder Point CurveReorder Point Curve

Q*Q*

ROP ROP (units)(units)In

ven

tory

lev

el (

un

its)

Inve

nto

ry l

evel

(u

nit

s)

Time (days)Time (days)Figure 12.5Figure 12.5 Lead time = LLead time = L

Slope = units/day = dSlope = units/day = d

Page 25: Inventory Management and Mrp-erp

12 – 25Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Production Order Quantity Production Order Quantity ModelModel

Used when inventory builds up Used when inventory builds up over a period of time after an over a period of time after an order is placedorder is placed

Used when units are produced Used when units are produced and sold simultaneouslyand sold simultaneously

Page 26: Inventory Management and Mrp-erp

12 – 26Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Production Order Quantity Production Order Quantity ModelModel

Inve

nto

ry l

evel

Inve

nto

ry l

evel

TimeTime

Demand part of cycle Demand part of cycle with no productionwith no production

Part of inventory cycle during Part of inventory cycle during which production (and usage) which production (and usage) is taking placeis taking place

tt

Maximum Maximum inventoryinventory

Figure 12.6Figure 12.6

Page 27: Inventory Management and Mrp-erp

12 – 27Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Probabilistic Models and Probabilistic Models and Safety StockSafety Stock

Used when demand is not constant or Used when demand is not constant or certaincertain

Use safety stock to achieve a desired Use safety stock to achieve a desired service level and avoid stockoutsservice level and avoid stockouts

ROP ROP == d x L d x L + + ssss

Annual stockout costs = the sum of the units short Annual stockout costs = the sum of the units short x the probability x the stockout cost/unit x the probability x the stockout cost/unit

x the number of orders per yearx the number of orders per year

Page 28: Inventory Management and Mrp-erp

12 – 28Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Safety stock 16.5 units

ROP ROP

Place Place orderorder

Probabilistic DemandProbabilistic DemandIn

ven

tory

lev

elIn

ven

tory

lev

el

TimeTime00

Minimum demand during lead timeMinimum demand during lead time

Maximum demand during lead timeMaximum demand during lead time

Mean demand during lead timeMean demand during lead time

Normal distribution probability of Normal distribution probability of demand during lead timedemand during lead time

Expected demand during lead time Expected demand during lead time (350(350 kits kits))

ROP ROP = 350 += 350 + safety stock of safety stock of 16.5 = 366.516.5 = 366.5

Receive Receive orderorder

Lead Lead timetime

Figure 12.8Figure 12.8

Page 29: Inventory Management and Mrp-erp

12 – 29Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Probabilistic DemandProbabilistic Demand

Safety Safety stockstock

Probability ofProbability ofno stockoutno stockout

95% of the time95% of the time

Mean Mean demand demand

350350

ROP = ? kitsROP = ? kits QuantityQuantity

Number of Number of standard deviationsstandard deviations

00 zz

Risk of a stockout Risk of a stockout (5% of area of (5% of area of normal curve)normal curve)

Page 30: Inventory Management and Mrp-erp

12 – 30Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Fixed-Period (P) SystemsFixed-Period (P) Systems

Orders placed at the end of a fixed periodOrders placed at the end of a fixed period

Inventory counted only at end of periodInventory counted only at end of period

Order brings inventory up to target levelOrder brings inventory up to target level

Only relevant costs are ordering and holdingOnly relevant costs are ordering and holding

Lead times are known and constantLead times are known and constant

Items are independent from one anotherItems are independent from one another

Page 31: Inventory Management and Mrp-erp

12 – 31Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Fixed-Period (P) SystemsFixed-Period (P) SystemsO

n-h

and

in

ven

tory

On

-han

d i

nve

nto

ry

TimeTime

QQ11

QQ22

Target quantity Target quantity ((TT))

PP

QQ33

QQ44

PP

PP

Figure 12.9Figure 12.9

Page 32: Inventory Management and Mrp-erp

12 – 32Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Fixed-Period SystemsFixed-Period Systems

Inventory is only counted at each Inventory is only counted at each review periodreview period

May be scheduled at convenient timesMay be scheduled at convenient times

Appropriate in routine situationsAppropriate in routine situations

May result in stockouts between May result in stockouts between periodsperiods

May require increased safety stockMay require increased safety stock

Page 33: Inventory Management and Mrp-erp

12 – 33

Departament d’Economia de l’Empresa / Department of Business Economics & Administration

Operations ManagementOperations Management

Material Requirements Material Requirements Planning (MRP) and ERPPlanning (MRP) and ERP

Page 34: Inventory Management and Mrp-erp

12 – 34Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

OutlineOutline Global Company Profile: Wheeled Global Company Profile: Wheeled

CoachCoach Dependent DemandDependent Demand Dependent Inventory Model Dependent Inventory Model

RequirementsRequirements Master Production ScheduleMaster Production Schedule Bills of MaterialBills of Material Accurate Inventory RecordsAccurate Inventory Records Purchase Orders OutstandingPurchase Orders Outstanding Lead Times for ComponentsLead Times for Components

Page 35: Inventory Management and Mrp-erp

12 – 35Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Outline – ContinuedOutline – Continued

MRP StructureMRP Structure

MRP ManagementMRP Management MRP DynamicsMRP Dynamics

MRP and JITMRP and JIT

MRP In ServicesMRP In Services Distribution Resource Planning Distribution Resource Planning

(DRP)(DRP)

Page 36: Inventory Management and Mrp-erp

12 – 36Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Outline – ContinuedOutline – Continued

Enterprise Resource Planning (ERP)Enterprise Resource Planning (ERP) Advantages and Disadvantages of Advantages and Disadvantages of

ERP SystemsERP Systems

ERP in the Service SectorERP in the Service Sector

Page 37: Inventory Management and Mrp-erp

12 – 37Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

1.1. Develop a product structureDevelop a product structure

2.2. Build a gross requirements planBuild a gross requirements plan

3.3. Build a net requirements planBuild a net requirements plan

4.4. Determine lot sizes for lot-for-lot, Determine lot sizes for lot-for-lot, EOQ, and PPBEOQ, and PPB

Page 38: Inventory Management and Mrp-erp

12 – 38Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Learning ObjectivesLearning Objectives

When you complete this chapter you When you complete this chapter you should be able to:should be able to:

5.5. Describe MRP IIDescribe MRP II

6.6. Describe closed-loop MRPDescribe closed-loop MRP

7.7. Describe ERPDescribe ERP

Page 39: Inventory Management and Mrp-erp

12 – 39Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Wheeled CoachWheeled Coach

Largest manufacturer of Largest manufacturer of ambulances in the worldambulances in the world

International competitorInternational competitor

12 major ambulance designs12 major ambulance designs 18,000 different inventory items18,000 different inventory items

6,000 manufactured parts6,000 manufactured parts

12,000 purchased parts12,000 purchased parts

Page 40: Inventory Management and Mrp-erp

12 – 40Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Wheeled CoachWheeled Coach

Four Key TasksFour Key Tasks Material plan must meet both the Material plan must meet both the

requirements of the master schedule requirements of the master schedule and the capabilities of the production and the capabilities of the production facilityfacility

Plan must be executed as designedPlan must be executed as designed

Minimize inventory investment Minimize inventory investment

Maintain excellent record integrityMaintain excellent record integrity

Page 41: Inventory Management and Mrp-erp

12 – 41Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Benefits of MRPBenefits of MRP

1.1. Better response to customer Better response to customer ordersorders

2.2. Faster response to market Faster response to market changeschanges

3.3. Improved utilization of facilities Improved utilization of facilities and laborand labor

4.4. Reduced inventory levelsReduced inventory levels

Page 42: Inventory Management and Mrp-erp

12 – 42Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Dependent DemandDependent Demand

The demand for one item is related The demand for one item is related to the demand for another itemto the demand for another item

Given a quantity for the end item, Given a quantity for the end item, the demand for all parts and the demand for all parts and components can be calculatedcomponents can be calculated

In general, used whenever a In general, used whenever a schedule can be established for an schedule can be established for an itemitem

MRP is the common techniqueMRP is the common technique

Page 43: Inventory Management and Mrp-erp

12 – 43Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Dependent DemandDependent Demand

1.1. Master production scheduleMaster production schedule

2.2. Specifications or bill of materialSpecifications or bill of material

3.3. Inventory availabilityInventory availability

4.4. Purchase orders outstandingPurchase orders outstanding

5.5. Lead timesLead times

Effective use of dependent demand Effective use of dependent demand inventory models requires the inventory models requires the followingfollowing

Page 44: Inventory Management and Mrp-erp

12 – 44Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Master Production Schedule Master Production Schedule (MPS)(MPS)

Specifies what is to be made and whenSpecifies what is to be made and when Must be in accordance with the aggregate Must be in accordance with the aggregate

production planproduction plan Inputs from financial plans, customer Inputs from financial plans, customer

demand, engineering, supplier performancedemand, engineering, supplier performance As the process moves from planning to As the process moves from planning to

execution, each step must be tested for execution, each step must be tested for feasibilityfeasibility

The MPS is the result of the production The MPS is the result of the production planning processplanning process

Page 45: Inventory Management and Mrp-erp

12 – 45Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Master Production Schedule Master Production Schedule (MPS)(MPS)

MPS is established in terms of specific MPS is established in terms of specific productsproducts

Schedule must be followed for a Schedule must be followed for a reasonable length of timereasonable length of time

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

The MPS is a rolling scheduleThe MPS is a rolling schedule The MPS is a statement of what is to be The MPS is a statement of what is to be

produced, not a forecast of demandproduced, not a forecast of demand

Page 46: Inventory Management and Mrp-erp

12 – 46Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

The Planning ProcessThe Planning Process

Figure 14.1Figure 14.1

Change production

plan?Master production schedule

ManagementReturn oninvestmentCapital

EngineeringDesigncompletion

Aggregate production

plan

ProcurementSupplierperformance

Human resourcesManpowerplanning

ProductionCapacityInventory

MarketingCustomerdemand

FinanceCash flow

Page 47: Inventory Management and Mrp-erp

12 – 47Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

The Planning ProcessThe Planning Process

Figure 14.1Figure 14.1

Is capacity plan being

met?

Is execution

meeting the plan?

Change master

production schedule?

Change capacity?

Change requirements?

NoNo

Execute material plans

Execute capacity plans

Yes

Realistic?

Capacity requirements plan

Material requirements plan

Master production schedule

Page 48: Inventory Management and Mrp-erp

12 – 48Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

AggregateAggregate Production Plan Production Plan

Months January February

Aggregate Production Plan 1,500 1,200(Shows the totalquantity of amplifiers)

Weeks 1 2 3 4 5 6 7 8

Master Production Schedule(Shows the specific type andquantity of amplifier to beproduced

240-watt amplifier 100 100 100 100

150-watt amplifier 500 500 450 450

75-watt amplifier 300 100

Figure 14.2Figure 14.2

Page 49: Inventory Management and Mrp-erp

12 – 49Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Master Production Schedule Master Production Schedule (MPS)(MPS)

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

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

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

Can be expressed in any of the Can be expressed in any of the following terms:following terms:

Page 50: Inventory Management and Mrp-erp

12 – 50Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Bills of MaterialBills of Material

List of components, ingredients, List of components, ingredients, and materials needed to make and materials needed to make product product

Provides product structureProvides product structure Items above given level are called Items above given level are called

parentsparents

Items below given level are called Items below given level are called childrenchildren

Page 51: Inventory Management and Mrp-erp

12 – 51Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

BOM ExampleBOM Example

BB(2)(2) Std. 12” Speaker kitStd. 12” Speaker kit CC(3)(3)

Std. 12” Speaker kit w/ Std. 12” Speaker kit w/ amp-boosteramp-booster11

EE(2)(2)EE(2)(2) FF(2)(2)

Packing box and Packing box and installation kit of wire, installation kit of wire,

bolts, and screwsbolts, and screws

Std. 12” Speaker Std. 12” Speaker booster assemblybooster assembly

22

DD(2)(2)

12” Speaker12” Speaker

DD(2)(2)

12” Speaker12” Speaker

GG(1)(1)

Amp-boosterAmp-booster

33

Product structure for “Awesome” Product structure for “Awesome” ((AA))

AA

LevelLevel

00

Page 52: Inventory Management and Mrp-erp

12 – 52Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Lead TimesLead Times

The time required to purchase, The time required to purchase, produce, or assemble an itemproduce, or assemble an item For production – the sum of the For production – the sum of the

order, wait, move, setup, store, order, wait, move, setup, store, and run timesand run times

For purchased items – the time For purchased items – the time between the recognition of a need between the recognition of a need and the availability of the item for and the availability of the item for productionproduction

Page 53: Inventory Management and Mrp-erp

12 – 53Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Time-Phased Product Time-Phased Product StructureStructure

|| || || || || || || ||

11 22 33 44 55 66 77 88Time in weeksTime in weeks

FF

2 weeks2 weeks

3 weeks3 weeks

1 week1 week

AA

2 weeks2 weeks

1 week1 week

DD

EE

2 weeks2 weeks

DD

GG

1 week1 week

1 week1 week

2 weeks to 2 weeks to produceproduce

BB

CC

EE

Start production of DStart production of DMust have D and E Must have D and E completed here so completed here so

production can production can begin on Bbegin on B

Figure 14.4Figure 14.4

Page 54: Inventory Management and Mrp-erp

12 – 54Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

MRP StructureMRP Structure

Figure 14.5Figure 14.5

Output ReportsOutput Reports

MRP by period report

MRP by date report

Planned order report

Purchase advice

Exception reports

Order early or late or not needed

Order quantity too small or too large

Data FilesData Files

Purchasing data

BOM

Lead times

(Item master file)

Inventory data

Masterproduction schedule

Material requirement

planning programs

(computer and software)

Page 55: Inventory Management and Mrp-erp

12 – 55Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

MRP ManagementMRP Management

MRP is a dynamic systemMRP is a dynamic system

Facilitates replanning when changes Facilitates replanning when changes occuroccur

System nervousness can result from System nervousness can result from too many changestoo many changes

Time fences put limits on replanningTime fences put limits on replanning

Pegging links each item to its parent Pegging links each item to its parent allowing effective analysis of changesallowing effective analysis of changes

Page 56: Inventory Management and Mrp-erp

12 – 56Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

MRP in ServicesMRP in Services

Some services or service items are Some services or service items are directly linked to demand for other directly linked to demand for other servicesservices

These can be treated as dependent These can be treated as dependent demand services or itemsdemand services or items RestaurantsRestaurants

HospitalsHospitals

HotelsHotels

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12 – 57Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Uncooked linguini #30004

Sauce #30006

Veal #30005

MRP in ServicesMRP in Services

Chef;Work

Center #1

Helper one;Work

Center #2

Asst. Chef;Work

Center #3

Cooked linguini #20002

Spinach #20004

Prepared veal and sauce

#20003

(a) PRODUCT STRUCTURE TREE

Veal picante #10001

Figure 14.10Figure 14.10

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12 – 58Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

MRP in ServicesMRP in Services

(b) BILL OF MATERIALS

Part Part NumberNumber DescriptionDescription QuantityQuantity

Unit of Unit of MeasureMeasure

Unit Unit costcost

1000110001 Veal picanteVeal picante 11 ServingServing ——

2000220002 Cooked linguiniCooked linguini 11 ServingServing ——

2000320003 Prepared veal and saucePrepared veal and sauce 11 ServingServing ——

2000420004 SpinachSpinach 0.10.1 BagBag 0.940.94

3000430004 Uncooked linguiniUncooked linguini 0.50.5 PoundPound ——

3000530005 VealVeal 11 ServingServing 2.152.15

3000630006 SauceSauce 11 ServingServing 0.800.80

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12 – 59Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

MRP in ServicesMRP in Services

(c) BILL OF LABOR FOR VEAL PICANTE

LaborLabor HoursHours

Work CenterWork Center OperationOperation Labor TypeLabor Type Setup TimeSetup Time Run TimeRun Time

11 Assemble dishAssemble dish ChefChef .0069.0069 .0041.0041

22 Cook linguiniCook linguini Helper oneHelper one .0005.0005 .0022.0022

33 Cook veal Cook veal and sauceand sauce

Assistant ChefAssistant Chef.0125.0125 .0500.0500

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12 – 60Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Distribution Resource Planning Distribution Resource Planning (DRP)(DRP)

Using dependent demand techniques Using dependent demand techniques through the supply chainthrough the supply chain

Expected demand or sales forecasts Expected demand or sales forecasts become gross requirements become gross requirements

Minimum levels of inventory to meet Minimum levels of inventory to meet customer service levelscustomer service levels

Accurate lead timesAccurate lead times

Definition of the distribution structureDefinition of the distribution structure

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12 – 61Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Enterprise Resource Planning Enterprise Resource Planning (ERP)(ERP)

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

1.1. Allows automation and integration of Allows automation and integration of many business processesmany business processes

2.2. Shares common data bases and Shares common data bases and business practicesbusiness practices

3.3. Produces information in real timeProduces information in real time

Coordinates business from supplier Coordinates business from supplier evaluation to customer invoicingevaluation to customer invoicing

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12 – 62Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

Enterprise Resource Planning Enterprise Resource Planning (ERP)(ERP)

ERP modules includeERP modules include Basic MRPBasic MRP

FinanceFinance

Human resourcesHuman resources

Supply chain management (SCM)Supply chain management (SCM)

Customer relationship management Customer relationship management (CRM)(CRM)

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12 – 63Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

ERP and MRPERP and MRP

Figure 14.11

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12 – 64Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

AdvantagesAdvantages of ERP Systems of ERP Systems

1.1. Provides integration of the supply chain, Provides integration of the supply chain, production, and administrationproduction, and administration

2.2. Creates commonality of databasesCreates commonality of databases

3.3. Can incorporate improved best processesCan incorporate improved best processes

4.4. Increases communication and Increases communication and collaboration between business units and collaboration between business units and sitessites

5.5. Has an off-the-shelf software databaseHas an off-the-shelf software database

6.6. May provide a strategic advantageMay provide a strategic advantage

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12 – 65Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

DisadvantagesDisadvantages of ERP of ERP SystemsSystems

1.1. Is very expensive to purchase and even Is very expensive to purchase and even more so to customizemore so to customize

2.2. Implementation may require major changes Implementation may require major changes in the company and its processesin the company and its processes

3.3. Is so complex that many companies cannot Is so complex that many companies cannot adjust to itadjust to it

4.4. Involves an ongoing, possibly never Involves an ongoing, possibly never completed, process for implementationcompleted, process for implementation

5.5. Expertise is limited with ongoing staffing Expertise is limited with ongoing staffing problemsproblems

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12 – 66Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

SAP’s ERP ModulesSAP’s ERP ModulesFigure 14.12Figure 14.12

Cash to CashCovers all financial related activity:Accounts receivable General ledger Cash managementAccounts payable Treasury Asset management

Dock to DispatchCovers internal inventory management:Warehousing Forecasting Physical inventoryDistribution planning Replenishment planning Material handling

Promote to DeliverCovers front-end customer-oriented activities:MarketingQuote and order processingTransportationDocumentation and labelingAfter sales serviceWarranty and guarantees

Procure to PayCovers sourcing activities:Vendor sourcingPurchase requisitioningPurchase orderingPurchase contractsInbound logisticsSupplier invoicing/ matchingSupplier payment/ settlementSupplier performance

Design to ManufactureCovers internal production activities:Design Shop floor engineering reportingProduction Contract/project engineering managementPlant Subcontractor maintenance management

Recruit to HireCovers all HR- and payroll-oriented activity:Time and attendance PayrollTravel and expenses

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12 – 67Departament d’Economia de l’Empresa /

Department of Business Economics & Administration

ERP in the Service SectorERP in the Service Sector

ERP systems have been developed ERP systems have been developed for health care, government, retail for health care, government, retail stores, hotels, and financial stores, hotels, and financial servicesservices

Also called efficient consumer Also called efficient consumer response (ECR) systemsresponse (ECR) systems

Objective is to tie sales to buying, Objective is to tie sales to buying, inventory, logistics, and productioninventory, logistics, and production