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Material Requirements Planning

Material requirements planning (MRP) was introduced in the 1970s as a computerized inventory control system that would calculate the demand for component items, keep track of when they are needed, and generate work orders and purchase orders that take into account the lead time required to make the items in-house or buy them from a supplier. Much of the credit for introducing MRP and educating industry about its benefits goes to three individuals, Joseph Orlicky, George Plossl, and Oliver Wight, and to a professional society they endorsed, known as the American Production and Inventory Control Society APICS. Basically an information system, MRP was quite revolutionary in its early days, because it brought computers and systematic planning to the manufacturing function. Since its introduction, the system has undergone several revisions that reflect the increased power and accessibility of computers and the changing role of manufacturing. For example, MRP II for manufacturing resource planning is much broader in scope than the original material planner, incorporating marketing and financial functions as well. In today's modern factories, MRP II is the standard for management information systems and an important component of computer-integrated manufacturing (CIM).


Objectives and Applicability of MRP

The main objective of any inventory system is to ensure that material is available when needed--which can easily lead to a tremendous investment of funds in unnecessary inventory. One objective of MRP is to maintain the lowest possible level of inventory. MRP does this by determining when component items are needed and scheduling them to be ready at that time, no earlier and no later.

MRP was the first inventory system to recognize that inventories of raw materials, components, and finished goods may need to be handled differently. In the process of planning inventory levels for these various types of goods, the system also planned purchasing activities (for raw materials and purchased components), manufacturing activities (for component parts and assemblies), and delivery schedules (for finished products). Thus, the system was more than an inventory control system; it became a production scheduling system as well.

One of the few certainties in a manufacturing environment is that things rarely go as planned--orders arrive late, machines break down, workers are absent, designs are changed, and so on. With its computerized database, MRP is able to keep track of the relationship of job orders so that if a delay in one aspect of production is unavoidable, other related activities can be rescheduled, too. MRP systems have the ability to keep schedules valid and up-to-date.

When to Use MRP

Managing component demand inventory is different from managing finished goods inventory. For one thing, the demand for component parts does not have to be forecasted; it can be derived from the demand for the finished product. For example, suppose demand for a table, consisting of four legs and a tabletop, is 100 units per week. Then, demand for tabletops would also be 100 per week and demand for table legs would be 400 per week. Demand for table legs is totally dependent on the demand for tables. The demand for tables may be forecasted, but the demand for table legs is calculated. The tables are an example of independent demand. The tabletop and table legs exhibit dependent demand.

Another difference between finished products and component parts is the continuity of their demand. For the inventory control systems in the previous chapter, we assumed demand occurred at a constant rate. The inventory systems were designed to keep some inventory on hand at all times, enough, we hoped, to meet each day's demand. With component items, demand does not necessarily occur on a continuous basis. Let us assume in our table example that table legs are the last items to be assembled onto the tables before shipping. Also assume that it takes one week to make a batch of tables and that table legs are assembled onto the tabletops every Friday. If we were to graph the demand for table legs, it would be zero for Monday, Tuesday, Wednesday, and Thursday, but on Friday the demand for table legs would jump to 400. The same pattern would repeat the following week. With this scenario, we do not need to keep an inventory of table legs available on Monday through Thursday of any week. We need table legs only on Fridays. Looking at our graph, demand for table legs occurs in lumps; it is discrete, not continuous. Using an inventory system such as EOQ for component items would result in inventory being held that we know will not be needed until a later date. The excess inventory takes up space, soaks up funds, and requires additional resources for counting, sorting, storing, and moving.

Industries that manufacture complex products, requiring the coordination of component production, find MRP especially useful. A complex product may have hundreds of component parts, dozens of assemblies, and several levels of assembly. MRP tries to ensure that multiple components of an assembly are ready at the same time so that they can be assembled together. Products with simple structures do not need MRP to plan production or monitor inventory levels.

The advantages of MRP are more evident when the manufacturing environment is complex and uncertain. Manufacturing environments in which customer orders are erratic, each job takes a different path through the system, lead time is uncertain, and due dates vary need an information system such as MRP to keep track of the different jobs and coordinate their schedules. The type of environment we are describing is characteristic of batch, or job shop, processes.1 Although MRP is currently available for continuous and repetitive manufacturing, it was designed primarily for systems that produce goods in batches.

Finally, MRP systems are very useful in industries where the customer is allowed to choose among many different options. These products have many common components and are inventoried in some form before the customer order is received. For example, customers of a well-known electronics firm routinely expect delivery in six weeks on goods that take twenty-eight weeks to manufacture. The manufacturer copes with this seemingly unrealistic demand by producing major assemblies and subassemblies in advance of the customer order and then completing the product upon receipt of the order. This type of operation is called assemble-to-order.

MRP Inputs

There are three major inputs to the MRP process:

Master Production Schedule

The master production schedule (MPS), also called the master schedule, specifies which end items or finished products a firm is to produce, how many are needed, and when they are needed. Recall that aggregate production planning creates a similar schedule for product lines or families, given by months or quarters of a year. The master production schedule works within the constraints of the production plan but produces a more specific schedule by individual products. The time frame is more specific, too. An MPS is usually expressed in days or weeks and may extend over several months to cover the complete manufacture of the items contained in the MPS. The total length of time required to manufacture a product is called its cumulative lead time. Several comments should be made concerning the quantities contained in the MPS:

The MPS for clipboards and lapboards shown in Table 13.1 illustrates two approaches to future scheduling. For clipboards, production beyond period 3 is based on demand forecasts of an even 100 units per period. Projecting these requirements now based on past demand data helps in planning for the availability of resources. For lapdesks, production beyond period 3 appears sparse, probably because it is based on actual customer orders received. We can expect those numbers to increase as the future time periods draw nearer. Evidently, a lengthy lead time is not necessary to gather the resources for producing lap desks.

The master production schedule drives the MRP process. The schedule of finished products provided by the master schedule is needed before the MRP system can do its job of generating production schedules for component items.

Product Structure File

Once the MPS is set, the MRP system accesses the product structure file to determine which component items need to be scheduled. The product structure file contains a bill of material (BOM) for every item produced. The bill of material for a product lists the items that go into the product, includes a brief description of each item, and specifies when and in what quantity each item is needed in the assembly process.

When each item is needed can best be described in the form of a product structure diagram, for a clipboard. An assembled item is sometimes referred to as a parent, and a component as a child. The number in parentheses beside each item is the quantity of a given component needed to make one parent. Thus, one clip assembly, two rivets, and one board are needed to make each clipboard. The clip assembly, rivets, and board appear at the same level of the product structure because they are to be assembled together.

A diagram can be converted to a computerized bill of material by labeling the levels in the product structure. The final product, or end item, at the top of the structure--in this case, the clipboard--is labeled level 0. The level number increases as we move down the product structure. The clipboard has three levels of assembly. The bill of material for the clipboard, shows some levels indented underneath others. This specifies which components belong to which parents and can easily be matched to the product structure diagram.

Several specialized bills of material have been designed to simplify information requirements, clarify relationships, and reduce computer processing time. They include phantom bills, K-bills, and modular bills.

The creation of a product structure file can take a considerable amount of time. Accurate bills of material are essential to an effective MRP system. The bill of material must specify how a product is actually manufactured rather than how it was designed to be manufactured. Redundant or obsolete part numbers must be purged from the system. This may not seem like a big task, but in some companies every time a part is purchased from a different supplier, it is assigned a different part number. One firm in the process of implementing MRP was able to eliminate 6,000 extra part numbers from its database and dispose of thousands of dollars of obsolete inventory that had not previously been identified as such!

Inventory Master File

The inventory master file contains an extensive amount of information on every item that is produced, ordered, or inventoried in the system. It includes such data as on-hand quantities, on-order quantities, lot sizes, safety stock, lead time, and past usage figures. The inventory master file is updated whenever items are withdrawn from or added to inventory or whenever an order is released, revised, or completed. Accuracy of inventory transactions is essential to MRP's ability to keep inventory levels at a minimum. It is estimated that 95 percent inventory accuracy is a prerequisite for an effective MRP system. Although technologies such as bar codes, voice-activated systems, and automated "picking" equipment can improve inventory accuracy considerably, a general overhaul of inventory procedures is often needed. This involves:

  1. Maintaining orderly stockrooms;
  2. Controlling access to stockrooms;
  3. Establishing and enforcing procedures for inventory withdrawal;
  4. Ensuring prompt and accurate entry of inventory transactions;
  5. Taking physical inventory count on a regular basis; and
  6. Reconciling inventory discrepancies in a timely manner.

If you have taken part in an end-of-year inventory count, you can verify the wide discrepancies that are commonly found between what the records say is in inventory and what is physically there. Unfortunately, by the time the errors are discovered, it is too late to correct them or find out why they occurred. The slate is merely cleaned for next year's record, with the hope or promise that next time will be better.

Cycle counting is taking physical counts of at least some inventory items daily and reconciling differences as they occur. The system specifies which items are to be counted each day on a computer printout and may tie the frequency of the count to the frequency of orders for the item within the MRP system. Thus, items that are used more often are counted more often. The cycle counting system may also be related to the ABC classification system. A items would be counted more often than B items. C items may still be counted only once a year. Approved cycle counting systems are accepted by the accounting standards board as valid replacements for end-of-year physical inventories.

The MRP Process

The MRP system is responsible for scheduling the production of all items beneath the end item level. It recommends the release of work orders and purchase orders, and issues rescheduling notices when necessary.

The MRP process is best explained through an example. We will use a worksheet called the MRP matrix to record the calculations that are made. Example13.1 follows.

EXAMPLE
13.1
The Alpha Beta Company
The Alpha Beta Company produces two products, A and B, that are made from components C and D. Given the following product structures, master scheduling requirements, and inventory information, determine when orders should be released for A, B, C, and D and the size of those orders.

 

SOLUTION: The matrices were completed first for the level 0 items, A and B, then for the level 1 items, C and D.

  • Item A: First, we fill in the gross requirements for A, 100 units in period 8. Since A is an end item, we read this information from the master production schedule. In the projected on-hand row, we begin with 10 units of A in inventory and continue with 10 units on hand until we need to use them. At the end of period 7, we have 10 units of A in inventory. We need 100 A's in period 8. We can use the 10 A's we have on hand and make 90 more. The subtraction of the on-hand quantity from the gross requirements is called netting. The net requirement of 90 A's is the gross requirement net of inventory. It appears in the same time period as the gross requirement. There is no lot-sizing requirement (A's are ordered in multiples of 1), so the planned order receipts are the same as the net requirements.
    If we need to receive 90 A's by period 8 and it takes 3 periods to make A, we need to release an order for A in period 5. Thus, the quantity of 90 appears in period 5 of the planned order release row. This process of subtracting the lead time from the due date is called lead time offsetting, or time phasing, of requirements. The planned order release row is the result, or output, of the MRP calculations for item A. Only the entries in the final row of each matrix will be used in subsequent MRP calculations for component items.
  • Item B: Item B's matrix is completed in the same fashion as item A's. The gross requirement of 200 B's in period 6 is given in the master production schedule. Since there are 5 units of B on hand, the net requirement for B is 195 in period 5. There are no scheduled receipts for B and no lot-sizing requirements. If 195 B's are needed in period 5 and it takes 2 weeks to make B's, we need to release an order to begin production of B's in period 4.
  • Item C: For all level 1 items, we need to calculate the gross requirements by multiplying the quantity per assembly given in parentheses on the product structure diagram times the planned order release (POR) of the parent item. This multiplication process is called explosion.
    An order for 90 A's is set to be released in period 5. Three C's are needed for every A, so we place a gross requirement for 270 C's in period 5. We have 140 C's in inventory. They remain in inventory until period 5, when we use them to satisfy partially the demand for C's. The net requirement for C is thus 130 units. But instead of ordering the net requirement of 130, we order the lot-size quantity of 150. If 130 C's need to be received by period 5 and it takes 4 weeks to make C's, we need to release the order for C in period 1. The 150 C's will arrive in period 5. We will use 130 of them to meet A's demand for C's. The remaining 20 units will be placed into inventory.
  • Item D: Item D has two parents, A and B. We need to gather all the gross requirements for D first before completing the rest of the matrix. Item A has a planned order release of 90 units in period 5. Two D's are required for every A, so (90 2) = 180 D's need to be available by period 5. D's other parent, item B, has a planned order release of 195 units scheduled in period 4. Every B requires three D's, so (195 3) = 585 D's are also needed by period 4.
    We have 200 D's on hand at the end of period 1. An order of 250 D's is scheduled to be received in period 2. By the end of period 2, we project that (200 + 250) = 450 D's will be on hand. We plan to use those 450 D's to fill partially the first gross requirement entry, leaving a net requirement of (585 - 450) = 135 D's in period 4. Since D's are ordered in lots of 250, even though we need only 135 D's, we will place an order for 250. It takes 2 weeks to make D's. Since they are needed in period 4, we will plan to release the order in period 2. When the order arrives, 135 D's will go toward making B's, and the remaining (250 - 135) = 115 will be placed into inventory.
    The 115 D's projected to be on hand by the end of period 4 can be used to satisfy partially the gross requirement for 180 D's in period 5, leaving a net requirement of (180 - 115) = 65 D's. Because of lot-sizing requirements, we will order 250 D's. Item D has a lead time of two periods. If we need to receive D's by period 5, we need to release an order for D in period 3. We plan the order release for 250 and project that (250 - 65) = 185 units will be left over and placed into inventory at the end of period 5.
  • We have now completed the MRP calculations. To summarize the results, we construct a planned order report from the planned order release row of each matrix, as follows:

 

The MRP matrices are the worksheets that determine the planned orders for each inventory item. They are generally not printed out unless requested by the MRP planner. Looking at the MRP matrix for item D, it appears that the objective of maintaining the lowest possible level of inventory has been violated. This is due to the lot-sizing requirement that orders item D in multiples of 250 and the scheduled receipt for D that arrives before it is needed. The MRP system will issue an error message asking that the scheduled receipt be postponed until period 4, but it will not comment on the excess inventory due to lot sizing because the user has input those requirements. Unless there is some problem in obtaining the two orders for item D, the planner will probably never notice the excess inventory of item D either. This illustrates one of the problems with MRP systems. Users tend to input policies that undermine the basic objectives of the system, and the logic of the system is often hidden from the user.

If the MRP calculations seem tedious, remember that the system is computerized and no manual calculations are required. POM for Windows can be used to solve simple MRP problems.

MRP Outputs

The outputs of the MRP process are planned orders from the planned order release row of the MRP matrix. These can represent work orders to be released to the shop floor for in-house production or purchase orders to be sent to outside suppliers. MRP output can also recommend changes in previous plans or existing schedules. These action notices, or rescheduling notices, are issued for items that are no longer needed as soon as planned or for quantities that may have changed. One of the advantages of the MRP system is its ability to show the effect of a change in one part of the production process on the rest of the system. It simulates the ordering, receiving, and usage of raw materials, components, and assemblies into future time periods and issues warnings to the MRP planner of impending stockouts or missed due dates.

A monthly planned order report for an individual item, in this case, item #2740. The report maps out the material orders planned and released orders scheduled to be completed in anticipation of demand. Notice that safety stock is treated as a quantity not to be used and that a problem exists on 10-01, when projected on hand first goes negative. To correct this, the system suggests that the scheduled receipt of 200 units due on 10-08 be moved forward to 10-01. The MRP system will not generate a new order if a deficit can be solved by expediting existing orders. It is up to the MRP planner to assess the feasibility of expediting the scheduled receipt and to take appropriate action.

An MRP action report for a family of items for which a particular MRP planner is responsible. It summarizes the action messages that have been compiled for individual items. On 10-08, we see the action message for item #2740 that appeared on the previous report. Notice the variety of action messages listed. Some suggest that planned orders be moved forward or backward. Others suggest that scheduled receipts be expedited or de-expedited.

It is the planner's job to respond to the actions contained in the action report. If a planner decides to expedite an order--that is, have it completed in less than its average lead time--he or she might call up a supplier or a shop supervisor and ask for priority treatment. Giving one job higher priority may involve reducing the priority of other jobs. This is possible if the MRP action report indicates that some jobs are not needed as early as anticipated. The process of moving some jobs forward in the schedule (expediting) and moving other jobs backward (de-expediting) allows the material planner, with the aid of the MRP system, to fine-tune the material plan. Temporary lead time adjustments through overtime or outside purchases of material can also fix a timing problem in the MRP plan, but at a cost. An MRP action report that is exceedingly long or does not strike a balance between speeding up some orders and slowing down others can signify trouble. Action messages that recommend only the expediting of orders indicate an overloaded master schedule and an ineffective MRP system.

The MRP system, as the name implies, ensures that material requirements are met. However, material is not the only resource necessary to produce goods--a certain amount of labor and machine hours are also required. Thus, the next step in the planning process is to verify that the MRP plan is "feasible" by checking for the availability of labor and/or machine hours. This process is called capacity requirements planning and is similar to MRP.

Capacity Requirements Planning

Capacity requirements planning (CRP) is a computerized system that projects the load from a given material plan onto the capacity of a system and identifies underloads and overloads. It is then up to the MRP planner to level the load--smooth out the resource requirements so that capacity constraints are not violated. This can be accomplished by shifting requirements, reducing requirements, or temporarily expanding capacity.

There are three major inputs to CRP:

With this information, CRP can produce a load profile for each machine or work center in the shop. The load profile compares released orders and planned orders with work center capacity.

Capacity, usually expressed as standard machine hours or labor hours, is calculated as follows:

Capacity = (no. machines or workers) (no. shifts) (utilization) (efficiency)

Utilization refers to the percentage of available working time that a worker actually works or a machine actually runs. Scheduled maintenance, lunch breaks, and setup time are examples of activities that reduce actual working time. Efficiency refers to how well a machine or worker performs compared to a standard output level. Standards can be based on past records of performance or can be developed from the work-measurement techniques. An efficiency of 100 percent is considered normal or standard performance, 125 percent is above normal, and 90 percent is below normal. Efficiency is also dependent on product mix. Some orders obviously will take longer than others to process, and some machines or workers may be better at processing certain types of orders.

Load is the standard hours of work (or equivalent units of production) assigned to a production facility. After load and capacity have been determined, a load percent can be calculated as

Centers loaded above 100 percent will not be able to complete the scheduled work without some adjustment in capacity or reduction in load.

EXAMPLE
13.2
Determining Loads and Capacities

Copy Courier is a fledging copy center in downtown Richmond run by two college students. Currently, the equipment consists of two high-speed copiers that can be operated by one operator. If the students work alone, it is conceivable that two shifts per day can be staffed. The students each work 8 hours a day, 5 days a week. They do not take breaks during the day, but they do allow themselves 30 minutes for lunch or dinner. In addition, they service the machines for about 30 minutes at the beginning of each shift. The time required to set up for each order varies by the type of paper, use of color, number of copies, and so on. Estimates of setup time are kept with each order. Since the machines are new, their efficiency is estimated at 100 percent.

Due to extensive advertising and new customer incentives, orders have been pouring in. The students need help determining the capacity of their operation and the current load on their facility. Use the following information to calculate the normal daily capacity of Copy Courier and to project next Monday's load profile and load percent:

SOLUTION:

The machines and/or operators at Copy Courier are out of service for 1 hour each shift for maintenance and lunch. Utilization is, thus, 7/8, or 87.5 percent. Daily copy shop capacity is

2 machines 2 shifts 8 hours/shift 100% efficiency 87.5% utilization
= 28 hours or 1,680 minutes

The projected load for Monday of next week is as follows:

 

Copy Courier is loaded 42 percent over capacity next Monday.

Increasing utilization (even to 100 percent) would not be sufficient to get the work done. To complete the customer orders on time, another shift could be added (i.e., another person hired). With this adjustment, the copy shop's daily capacity would increase to

2 machines 3 shifts 8 hours/shift 100% efficiency 87.5% utilization
= 42 hours or 2,520 minutes

The revised load percent is:

In the future, Copy Courier should determine if it has enough capacity to complete a job by the customer's requested due date before the job is accepted.

Load profiles can be displayed graphically. The normal capacity of machine 32A is 40 hours per week. We can see that the machine is underloaded in periods 1, 5, and 6, and overloaded in periods 2, 3, and 4.

Underloaded conditions can be leveled by:

  1. Acquiring more work;
  2. Pulling work ahead that is scheduled for later periods; or
  3. Reducing normal capacity.

Additional work can be acquired by transferring similar work from other machines in the same shop that are near or over capacity, by making components in-house that are normally purchased from outside suppliers, or by seeking work from outside sources. Pulling work ahead seems like a quick and easy alternative to alleviate both underloads and overloads. However, we must remember that the MRP plan was devised based on an interrelated product structure, so the feasibility of scheduling work in an earlier time period is contingent on the availability of required materials or components. In addition, work completed prior to its due date must be stored in inventory and thus incurs a holding cost. When work is shifted to other time periods, the MRP plan should be rerun to check the feasibility of the proposed schedule.

If an underloaded condition continues for some time, reducing the size of the workforce may be necessary. Smaller underloads can be handled by reducing the length of the working day or workweek, by scheduling idled workers for training sessions or vacations, or by transferring workers to other positions at machine centers or departments where overloads are occurring.

Overloaded conditions are the primary concern of the MRP planner because an overloaded schedule left unchecked cannot possibly be completed as planned. Overloads can be reduced by:

  1. Eliminating unnecessary requirements;
  2. Rerouting jobs to alternative machines or work centers;
  3. Splitting lots between two or more machines;
  4. Increasing normal capacity;
  5. Subcontracting;
  6. Increasing the efficiency of the operation;
  7. Pushing work back to later time periods; or
  8. Revising the master schedule.

Some capacity problems are generated from an MRP plan that includes lot sizes, safety stock, or unsubstantiated requirements for service parts or forecasted demand. To verify that a capacity overload is caused by "real" need, the planner might examine the MRP matrices of the items processed through a machine center during an overloaded period as well as the matrices of the parents of those items processed, all the way up the product structure to the master schedule. Or, the MRP system could be rerun with lot sizes temporarily set to one and safety stock to zero to see if the capacity problem is eliminated.

MRP systems assume that an entire lot of goods is processed at one machine. Given the job shop environment in which most MRP systems are installed, there are usually several machines that can perform the same job (although perhaps not as efficiently). With CRP, load profiles are determined with jobs assigned to the preferred machine first, but when capacity problems occur, jobs can certainly be reassigned to alternate machines. In addition, if two or more similar machines are available at the same time, it may be possible to split a batch--that is, assign part of an order to one machine and the remainder to another machine.

EXAMPLE
13.3
Splitting Orders

Duffy's Machine Shop has a shortage of lathes. Next week's schedule loaded the lathe department 125 percent. Management's usual response is to schedule overtime, but the company is in a tight financial bind and wants to evaluate other options. The shop supervisor, who has been reading about methods for reducing processing time, suggests something called order splitting.

It turns out that some of the lathe work can actually be performed on a milling machine, but it is rarely done that way because the process takes longer and the setup is more involved. Setup time for lathes averages 30 minutes, whereas setup for milling machines averages 45 minutes. Processing time per piece is 5 minutes on the lathe, compared to 10 minutes on the milling machine. Management is wondering what the effect would be of producing an entire order of 100 pieces on the lathe or splitting the order in half between the lathe and milling machine. Further, if the objective is to complete the order as soon as possible, is there an optimum split between the two types of machines?

SOLUTION:

If the order were processed on lathe alone, it would take

If the order were equally split between lathe and milling machine, the processing time at each machine would be:

Assuming that the lathe and milling machine are run simultaneously, the completion time for the entire order of 100 units is calculated by determining the completion time at each machine and taking the largest number, in this case, 545 minutes. Thus, if the order were equally split between the two machines, it would actually take longer to complete.

Determining the optimal split between machines requires algebra. We want the machines to finish processing at the same time, so we need to equate the processing-time equations for each machine and solve for the optimum number of units processed. If we let x represent the number of units processed on the lathe, then (100 - x) is the number of units processed on the milling machine.

Thus, the optimal split would process 68 units on the lathe and 32 units on the milling machine. Completion time for the optimal split is calculated as follows:

By splitting the order, it can be completed in 370 minutes, versus the 530 minutes on the lathe alone. That is a 39 percent reduction in processing time. Applied to the weekly demand, the 25 percent overload could be alleviated by splitting orders.

Normal capacity can be increased by adding extra hours to the workday, extra days to the workweek, or extra shifts. Temporary overloads are usually handled with overtime. More extensive overloads may require hiring additional workers. Work can also be outsourced.

Improving the efficiency of an operation increases its capacity. Assigning the most efficient workers to an overloaded machine, improving the operating procedures or tools, or decreasing the percentage of items that need to be reworked or scrapped increases efficiency and allows more items to be processed in the same amount of time. Because output increases with the same amount of input, productivity increases. This is especially useful for alleviating chronic overloads at bottleneck operations, but it does take time to put into effect.

If later time periods are underloaded, it may be possible to push work back to those periods, so that the work is completed but later than originally scheduled. There are two problems with this approach. First, postponing some jobs could throw the entire schedule off, meaning customers will not receive the goods when promised. This could involve a penalty for late delivery, loss of an order, or loss of a customer. Second, filling up the later time periods may preclude accepting new orders in those periods. It is normal for time periods further in the future to be underloaded. As these periods draw nearer, customer orders accelerate and begin taking up more of the system's capacity.

If all the preceding approaches to remedying overloads have been tried, but an overload still exists, the only option is to revise the master schedule. That means some customer will not receive goods as previously promised. The planner, in conjunction with someone from marketing, should determine which customer has the lowest priority and whether its order should be postponed or canceled.

There are cost consequences associated with each of these alternatives, but there is usually no attempt to derive an optimum solution. More than likely, the MRP planner will use the options that produce a feasible solution quickly. In many manufacturing environments, new customer orders arrive daily, and feasible MRP plans can become infeasible overnight.

One possible remedy for the overloads describes below. Ten hours of work are pulled ahead from period 2 to period 1. Ten hours of overtime are assigned in period 2. An entire 40-hour shift is added in period 3. Ten hours of work from period 4 are pushed back to period 5, and 20 hours are pushed back to period 6.

CRP identifies capacity problems, but the planner solves the problems. With experience, the task of shifting work and leveling loads is not as formidable as it appears. However, it is helpful if the initial load profile is as accurate as possible and if previous planning stages (i.e., aggregate production planning and master production scheduling) have considered capacity constraints. Some companies formalize capacity planning at each stage of production planning. Resource requirements planning is associated with an aggregate production plan, and rough-cut capacity planning is performed prior to the approval of a master schedule. Capacity requirements planning may still be performed on the material requirements plan, but its role is to fine-tune existing resources, rather than to find or develop new resources.

Once the feasibility of an MRP plan has been verified by CRP, the plan can be executed by releasing orders in the time periods indicated. Early MRP systems had no mechanism for monitoring the success of their plans. Today's MRP systems include elaborate capacity and reporting modules for scheduling and monitoring daily work requirements.

Manufacturing Resource Planning (MRP II)

The MRP systems on the market today are composed of many different modules that can be purchased separately. Typically, the modules include the following:

We can recognize some of these modules as inputs to or outputs from the basic MRP process. Others represent a broadened scope of MRP-related activities, beginning with forecasting demand and ending with a financial analysis of the firm. Companies differ in their approach to implementing MRP, but seldom will a company purchase an entire MRP system at one time. Most firms install the product structure/bill-of-material (BOM) processor first and then add the inventory module, followed by the MRP module. The BOM and inventory modules have large databases and serve as major inputs to the rest of the process.

Purchasing is also brought online early, usually shortly after the BOM module is installed. Assemble-to-order companies tend to implement the customer order entry module as soon as possible.

It may be some time before the master schedule module or higher-level planning modules are added. How, you may wonder, does the MRP system run without a master schedule? Actually, a master production schedule is used, but it is not generated or maintained by the MRP system; it is input by hand.

The capacity planning module is important for a well-run MRP system, and its absence often separates the successful MRP user from the unsuccessful user.

Shop floor control is a difficult module to implement and is probably the most disappointing one in practice. As MRP evolved and more modules and features were added in the areas of capacity planning, marketing, and finance, it became clear that the name material requirements planning was no longer adequate to describe the full range of activities this system could coordinate. In keeping with the MRP acronym, the new and improved MRP became known as MRP II, for manufacturing resource planning. The term closed loop has been used to describe the numerous feedback loops between plans for production and available capacity and between planned and actual occurrences.

Manufacturing resource planning is a misnomer because MRP II software is also used in services, such as education, architecture, health care, distribution, and the like. Thus, systems such as SRP (service requirements planning), DRP (distribution requirements planning), and BRP (business requirements planning), are also available.

Problems and Prospects of MRP/MRP II

Companies that have carefully implemented MRP have seen dramatic improvements in performance and reductions in cost. Reports of 40 percent reductions in inventory levels, 33 percent improvements in customer service levels, and 20 percent reductions in production costs are common. Still, MRP has never fully achieved the successes that were promised in the early 1970s, when the concept was first introduced. Many of its problems have been associated with poor implementation strategies, lack of support by top management, and lack of commitment by other company personnel. Expectations for what MRP could accomplish were inflated by software vendors and consultants, who seemed to assure managers that the "problem" of manufacturing could be solved if they purchased certain hardware and software products. Money was thrown at the problem, in the form of MRP-related purchases, without an understanding of actual manufacturing needs. Automated systems, especially those dealing with large amounts of information, are only as good as the input provided to them. Inaccurate data can ruin an MRP system. Adding fancy options, such as lot sizing and safety stock, and unrealistic assessments of capacity are other common sources of problems.

As a common database for the entire firm, MRP tends to be perceived initially by those in different functional areas as an intrusion into their turf. For example, with MRP, marketing can look at the production figures and determine whether manufacturing has scheduled enough production to meet demand, production can monitor the accuracy of marketing's demand forecasts by comparing planned against actual figures, and salespersons can access the status of customer orders themselves without relying on promises of service from production. Eventually, the common access to information improves managerial decision making, but there is an adjustment period while managers learn to work together.

MRP was the first computerized system used on the factory floor. And it was quite disruptive. Shop supervisors, whose jobs for the past twenty years had consisted of making daily schedules for their workers, were handed a computer printout on Monday mornings that laid out worker assignments for a week in advance. Workers accustomed to long queues of work waiting to be processed, instinctively slowed down their production rate as the results of tight MRP scheduling began to take effect and queues dwindled. These examples are representative of the behavioral problems that faced MRP in its early stages of development. As with many new technologies or concepts, the technical issues of MRP were solved far in advance of the behavioral issues. Fortunately, the passage of time and the educational efforts associated with a broadened MRP concept have helped to smooth the way for effective implementation of MRP II.

With implementation problems no longer at the forefront, practitioners and academicians alike began to search for the "real" problems inherent with MRP. They found that some aspects of the MRP concept do not match the realities of manufacturing. These mismatches include the following:

With these basic problems, what then are the prospects for MRP/MRP II in the future? Actually, they are quite good, but in a modified form. Some industries, primarily companies that produce goods in standard batches, can successfully use MRP/MRP II as is. However, for most companies, the real benefits of MRP II are obtained from its ability to coordinate a company's strategy among different functional areas--that is, to "plan." The common database and simulation capabilities are very useful in responding quickly to what-if? questions at various levels of detail. BOM processors, purchasing modules, and customer order entry are standard requirements for manufacturing information systems. They are especially helpful in monitoring design quality, vendor quality, and customer service. The transparency of MRP-related decisions to different areas of the firm is invaluable in building trust, teamwork, and better decisions. The financial tie-ins can produce superior fine-tuning of cash flow planning and profit/cost projections. These capabilities are at the heart of a new generation of planning and control systems called enterprise resource planning (ERP).

Enterprise Resource Planning

Rapid advances in information technology and the globalization of markets and production have challenged the capabilities of MRP and MRP II systems. Enterprise resource planning (ERP) updates MRP II with relational database management, simple user interfaces, and client/server architecture. Traditional MRP systems focus on an individual plant's operation, whereas ERP systems manage the resources of an entire enterprise. Contrast an MRP system concerned with customer demand, production schedules, inventory levels, and available capacity at work centers within a plant, to an ERP system concerned with customer demand and available capacity at company plants worldwide, and production schedules and inventory levels along its supply chain as well as throughout the company. ERP systems typically contain production-oriented MRP modules, as well as MRP II-type modules for business planning, customer service, financial management, and accounting. Support for multiple languages and currencies, foreign taxes and accounting rules, integrated logistics, and electronic commerce are also common.

Sales of ERP software are expected to reach $6 billion by 2002 for vendors such as PeopleSoft, Baan, Oracle, and SAP. We introduced the process orientation and supply chain portion of SAP's premier product, R/3. For consistency, we have again chosen SAP's R/3 product to use as an example--this time of an ERP system.

SAP R/3

R/3, like many MRP systems before it, consists of a series of application modules that can be used alone or in concert. The modules are fully integrated, use a common database, and support processes that extend across functional areas. Transactions in one module are immediately available to all other modules at all relevant sites, whether they be corporate headquarters, manufacturing plants, suppliers, sales offices, or subsidiaries. In most cases, sites are connected via the Internet or intranets.

R/3's modules can be grouped into six main categories: (1) Accounting and Controlling, (2) Sales and Distribution, (3) Production and Materials Management, (4) Quality Management, (5) Human Resources, and (6) Project Management.

The accounting and controlling module encompasses financial accounting, investment management, cost control, treasury management, asset management, and enterprise controlling. Included are cost centers, profit centers, activity-based costing, capital budgeting, and profitability analysis, as well as enterprise measures of performance.

The sales and distribution module supports customer-related activities such as order processing, product configuration, and delivery quotations. Pricing, promotions, availability, and shipping options are determined as sales orders are entered. Managers can reserve inventory for specific customers, request certain supplier options, and customize orders. Products may be assembled-to-order, built-to-order, or engineered-to-order. Distribution requirements, transportation management, shipping schedules, and export controls are included in the module, as are billing, invoicing, rebate processing, product registrations, and customer complaints.

Materials management manages all tasks related to the supply chain, including purchasing, inventory and warehouse functions, supplier evaluations, JIT deliveries, and invoice verification. Production planning is set up to handle all types of manufacturing--make-to-order, assemble-to-order, repetitive and continuous. The module interfaces with CAD programs; performs process planning, bill-of-material processing, and product costing; processes engineering change orders; plans material requirements (MRP); allocates resources; and schedules and monitors production. Kanbans, Gantt charts, master schedules, and available-to-promise are all supported.

Quality management monitors, captures and manages all processes related to quality along the entire supply chain. It coordinates inspections of incoming and in-process material, integrates SPC initiatives with production planning, takes corrective measures, and integrates laboratory information. Included with quality management are plant maintenance and customer service. Plant maintenance plans, controls, and schedules preventive maintenance and performs breakdown maintenance to ensure the maximum availability of physical assets. Customer service relates to the repair, return, and replacement of unsatisfactory items, the availability of service parts, product reliability and customer satisfaction.

The human resources module covers all personnel management tasks, including workforce planning, employee scheduling, training and development, payroll and benefits, travel expense reimbursement, applicant data, job descriptions, organization charts, and work flow analysis.

The project management module coordinates and controls all phases of a project from quotation to design and approval, to resource management and cost settlement. It plans and monitors data and resources using work breakdown structures, critical path analysis, and project crashing.

Together, these modules form an integrated information technology strategy for effectively managing the entire enterprise. R/3 connects processes that belong together, giving every employee fast, convenient access to the information required for their jobs.

Both the scope and detail of ERP systems are impressive. As might be expected, these systems require considerable time and skill to implement. Like MRP systems of the past, ERP comes with droves of consultants promising swift, easy installations. Those companies successful with ERP have taken the time to think about how their processes work and how they can best be integrated before "automating" them. SAP has collected "best practices" from its customers and shares them in the form of industry solutions. Solution maps and stories of successful implementations are also available for aerospace and defense, apparel, automotive, chemicals, consumer products, engineering and construction, health care, high-tech industries, insurance, media, oil and gas, pharmaceuticals, the public sector, real estate, retail, telecommunications, and utilities.

Summary

Material requirements planning (MRP) is a computerized inventory control and production planning system. It has enjoyed widespread use in U.S. industry, primarily for batch manufacturing, as an information system that improves manufacturing decision making. MRP began as a system for ensuring that sufficient material was available when needed. However, in application, it became clear that material was not the only resource in short supply. Planning capabilities for machine and labor resources were added to the system in the form of capacity requirements planning (CRP).

MRP requires input from other functional areas of a firm, such as marketing and finance. As these areas began to see the power of a common database system, they encouraged the expansion of MRP into areas such as demand forecasting, demand management, customer order entry, accounts payable, accounts receivable, budgets, and cash-flow analysis. Clearly, this enhanced version was more powerful than the original MRP systems that ordered material and scheduled production. It provided a common database that the entire company could use. Its what-if? capability proved invaluable in evaluating trade-offs, and the easy access to information encouraged more sophisticated planning. The "new" MRP, called MRP II, for manufacturing resource planning, has become a standard component for computer-integrated manufacturing (CIM).

However, there are some drawbacks to MRP II. The system requires a lot of information, and the information must be accurate and timely. The reporting requirements are sometimes overwhelming, especially as manufacturers move toward more rapid production and shorter cycle times. Fixed lead time assumptions cause problems when schedules hit the shop floor.

Enterprise resource planning (ERP) systems are more technologically advanced and more comprehensive than MRP II systems. They integrate processes, information, and people across functions, plants, companies, and geographic locations. Although MRP is still at the heart of ERP, there are many other resources available, such as JIT and finite scheduling, that can improve shop floor performance.