• a) Purchased items or extracted materials that are converted into components and products during the mfg process
• b) Include components such as mfg’d parts or subassemblies that are transformed into finished products
• c) Lowest-level components in a BOM
• d) Typically very low inventories in Lean mfg environments

• a) Goods in various stages of completion in a production process
• b) Includes
• (1) Raw material that has been released for initial processing
• (2) Semi-finished stock and components
• (3) Completely processed materials awaiting final inspection and acceptance as finished goods inventory

1. Raw materials

2. WIP

3. Finished goods and distribution inventories

4. Maintenance, repair and operating supplies (MRO)

 direct material

+

labor

+

overhead costs

• production layouts (continuous flow and cellular) and methods facilitate a continuous one-piece flow of material from raw material to finished product that is synchronized with customer demand, or pull rate.

• Mfg and WIP decrease by design.

a) Finished good (~end item) is a product sold by a company as a completed item…service part or spare as well

b) Can be stored at production facility, central warehouse, or distribution center to reduce delivery lead times and delivery costs

c) In Lean environment, because of the philosophy of producing to customer demand and not to forecast, finished goods inventories are minimized.

a) Support general operations and maintenance

b) Used to support uptime and availability requirements, and may include items costing a small or large amount

• a) Two perspectives
• (1) Occur by plan from lot-sizing rules, seasonality, or anticipation builds
• (2) Shows the influence of the Theory of Constraints (TOC) production philosophy…any inventory in the system that exceeds the minimum amount necessary to achieve the desired throughput rate at the constraint or that exceeds the minimum amount necessary to achieve the desired due date.

Total inventory = productive inventory + protective inventory + excess inventory

(a) In Lean mfg, JIT material deliveries and demand-pull scheduling reduce the incidence of excess inventory

(b) One of the eight wastes of mfg in the Lean philosophy is overproduction

Total inventory = productive inventory + protective inventory + excess inventory

Excess inventory is...

Inv that is not actually required, e.g., inventory held as buffers

a) Stock that has exceeded consumption (demand) within a defined period of time, or has not been used for a defined period

b) Like excess and obsolete, it is an asset from an accounting perspective, but it entails ongoing carrying costs

c) Often is the direct result of inv not being used within 12 to 18 months with no foreseeable future use

d) For proper asset reporting, this inv should be valued at zero and the cost written off against current profits

a) Not typically used or sold at full value because the products are no longer produced or supported

b) Disposing of the inv means that its costs cannot be recovered through revenues, which means lost revenue and reduced profit

c) Removed from inv by ECR

a) Material that is outside of specifications and is not practical to rework

b) A scrap factor should be built into determining material requirements

Quantity of raw materials or semi-finished goods requiring further processing, often purposely maintained at a work center to achieve desired throughput

Buffers at a CCR or shipping point are often evaluated daily to ensure they are not too high or too low…constant adjustments to minimize inv investments costs are considered to be a good practice

Used to protect the throughput of an operation or the schedule from delays in delivery, quality problems, and delivery of incorrect quantities

(1) Materials transformed into goods (restaurant meal ingredients, custom clothing, baked goods)

(2) Materials not transformed (retail store items, auto parts)

(1) Newspapers

(2) Event brochures (bought for event, but not sold, so worthless)

a) Lot-sizing

b) Safety stock

(1) Mfg strategy or production environment, such as MTS, MTO, ATO, ETO, and mass customization

(2) Mfg process, such as intermittent, repetitive, continuous, and project

(1) High customer service levels – high product variety and quality, and shorter lead times and production flexibility to respond to customer orders

(2) Efficient plant operations – long production runs to minimize changeovers and reduce per-unit production costs; high raw material inventory levels at low costs

(3) Minimum inventory investment – low levels of inventory and high inventory turns (or turnover)

(1) Eliminating wasteful movements and procedures in the production process and fostering a culture of employee empowerment

(2) Ensuring a continuous flow of production from raw materials to finished products by buffering critically constrained resources (CCR) to maintain full utilization

(4) Establishing supplier relationships and supply management practices that synchronize delivery of raw materials to the point of use at time of production

a) Enables you to determine impact of inv on the financial condition of the business; provides info for strategic and policy decisions such as inv turns and performance metrics

b) Useful in determining operational approaches to order quantities, safety stock, and replenishment

In mfg,

the three most popular cost systems are...

project

process

job-order costing

• labor
• material
• factory overhead

converts raw material and purchased components into finished goods.

Its cost of sales includes the conversion costs (labor and overhead) as well as the raw materials and component costs of the goods it sells…

(1) Shipment is usually immediate upon completing production

(2) Once sold, the materials are subtracted from inv and are included in a company’s income statement, along with labor and overhead costs, as COGS

a) Average cost

b) Standard cost

c) Actual cost

d) Transfer cost and price

e) First in, first out (FIFO)

f) Last In, first out (LIFO)

(1) Inventory turns

(2) Days of supply

(3) Cash-to-cash cycle

(4) Customer service

(a) = annual COGS / ave inv ($)

(b) If annual sales is $1MM in COGS and ave inv $.5MM, then turn is 2…so it takes about six months to recover cost (cash).  That is, inventory turns two times a year.

(a) Measures the timespan between paying for raw materials and paying for product

(b) = days of inv + days of sales outstanding (A/R) – days of payables outstanding (A/P)

(c) Note- use cautiously, as timing of pmt for raw materials can lag receipt, which will cause the cycle time to be understated

(a) Operational metrics

(b) Customer satisfaction metrics

(c) Customer loyalty

• (i) These focus on how a supplier supports its customers’ business goals and requirements and can be subjective
• (ii) Cycle time to respond to a customer request
• (iii) Total units delivered vs RMAs
• (iv) Cycle time from order placement to receipt on dock at customer site
• (v) Others…responsiveness, design suggestions for cost reductions, cycle time improvements, service, and warranty
• (vi) Note- these are critical success factors for satisfying customers

(i) Orders shipped on time

(ii) low number of back orders

(iii) order periods without a stockout

(a) Objective of upper limits is to control inv investment costs

(b) Objective of lower limits is to prevent numerous orders for low-cost items, which can lead to excessive ordering costs

(a) Adjust quantities to supplier lot size requirements

(b) Adjust quantities for price breaks

(c) Adjust quantities to cover an entire period’s supply

(d) Adjust order quantities for scrap or yield factors

(1) In a ERP system, a time-phased record is created that permits developing discrete lot sizes supporting the L4L and POQ methods

(2) For Project and L4L manufacturers, items are obtained only for each order. Example is a business that performs contract work tor the government

(3) In lean and repetitive environments, L4L method makes sense…in lean, customers determine the rate of production, which is converted to takt time that sets the pace of production

(a) The ideal flow pattern is one-piece flow – the ideal lot size is one

(b) When one-piece flow cannot be obtained, then inv buffering is established between processes

(c) Inv investment in this environment is minimized to what is needed to support the continuous flow of product to the customer

also factors in services parallel to those in mfg, especially in purchasing.

The environment in which they are employed can be slightly different in terms of storage capacity, shelf life, replenishment cycles, and demand pattern

a) Inv carrying cost

b) Ordering cost

• Opportunity costs
• Typically the largest component of carrying cost
• Referred to as cost of capital…the rate of return (ROR) the company could earn from its best investment opportunities

• Storage costs
• Labor and equipment, to include costs for counting and material handling
• Space, including utilities and other operating costs to accommodate the order when it first arrives rather than just the average inv level

• (1) Cost to prepare and place an order to suppliers or factory for production
• (2) Setup costs for internal mfg
• (3) Costs of receiving, handling, and inspection
• (4) Usually expressed as the cost to place a single order in absolute dollars

• a) Economic order quantity
• b) Fixed order quantity (FOQ)
• c) Lot for lot (L4L)
• d) Order n periods of supply
• e) Period order quantity (POQ)

• (1) POQ is more responsive to the discrete net requirements in the periods
• (2) Both of these used at the end-item level result in relatively large order quantities…this can cause a cascading effect on lower levels of MRP
• (3) Planners need to decide whether the cost of consolidating net requirements at the end-item level for discrete periods as in POQ is offset by reduction in ordering cost
• (4) FOQ is often justified by other factors such as supplier minimums or customer constraints on storage and handling

• (1) Opposite of FOQ…the order quantity may vary, but the interval between orders remains fixed
• (2) The lot size is equal to the net requirements for a given number of periods, e.g., four days or one week
• (3) Consolidates the L4L requirements for a number of periods to reduce ordering (including handling) costs
• (4) Calculation of number of periods and net requirements
• (a) Calculate demand
• (b) Determine ave demand during the period Determine the number or periods of demand to be used in the POQ system
• (i) Divide EOQ by ave demand
• (ii) Add the net requirements for the next periods to determine the lot size

• (1) Amount required to satisfy demand over a certain number of periods is ordered
• (2) No unused lot-size inv is created
• (3) The technique is used…
• (a) For dependent and independent demand items
• (b) For inexpensive components (C items)

• (1) Only the required amount is ordered
• (2) Order quantities change as requirements change
• (3) No unused lot-size inv is created
• (4) The technique is used…
• (a) For planning (and time phasing) dependent demand in MRP
• (b) For planning independent demand items in master scheduling
• (c) For expensive components (A items)
• (d) For perishable items
• (e) In a lean/JIT environment

• (1) Usually dictated by conditions related to shipping, handling, or line replenishment
• (2) Suppliers receive consistent orders with consistent quantities, but at a variable frequency
• (3) Quantity may be determined very informally, or it might be based on some form of calculation, such as EOQ
• (4) It is simple to use; relies on judgment and past history
• (5) It leads to inv buildup
• (6) Supplier/factory policies are standard lot sizes, production efficiency, and capacity availability

• (1) Based on the following assumptions-
• (a) Demand is relatively constant and known
• (b) The item is produced or purchased in lots or batches, not continuously
• (c) Ordering and inv carrying costs are constant and known
• (d) Replenishment occurs all at once
• (2) Theoretically, the optimum order quantity is the quantity indicated on the horizontal axis below where the two cost curves intersect, which also coincides with the point at which the total cost curve is at a minimum
• (3) The broad dip in the cost curve indicates some flexibility in determining the EOQ

• a) It provides an incremental quantity of finished goods to protect against fluctuations in independent customer demand, and is especially important in forecasting MTS products at the master production schedule level
• b) It provides an incremental quantity of purchased raw materials and components, which is dependent demand

a) After inv is replenished because demand during the order lead time was less than expected

b) Just as inv is replenished because demand during the order lead time was as expected

c) Before inv is replenished because demand during lead time was greater than expected, and no further orders can be fulfilled until replenishment occurs unless there is safety stock

• protects against problems with demand fluctuations, raw material supply uncertainties, and production problems, especially in MTS mfg environments

• contributes to customer service objectives

• (1) Orders shipped on the original committed date
• (2) Line items of orders shipped on the original committed dates
• (3) Dollar volume shipped on the original committed date
• (4) Ordering periods without a stockout
• (5) Number of backorders

Statistical (often applied to independent demand items)

Time period

Fixed SS

the planning of a ss quantity for parts that call for special oversight.  Generally applies when-

(1) A new part is being phased in

(2) A part is being phased out

• (1) = forecast monthly usage * SS period
• (2) A time period safety stock allows an even amount of safety stock, equal to the usage, over a designated time frame
• (3) Providing a one-month time period of safety stock protects against the following situation:
• (a) End-of-month review does not indicate reorder
• (b) Next-day, available balance goes below the reorder point

• (1) Can be determined mathematically
• (2) Historical demand is assumed to be a valid indicator of future demand
• (3) Deviations are assumed to be distributed symmetrically (bell curve)
• (4) The smaller the sigma, the lower the SS
• (5) Sigma and MAD can be used to derive SS
• (6) SS value is calculated by
• (a) Determining the sigma in physical units
• (b) Deciding on a customer service level
• (c) Using a safety factor table to locate the safety factor for the desired service level

def - the inv method that places an order for a lot whenever the quantity on hand is reduced to a predetermined level known as the order point

The intent is to receive a replenishment order just as the item stocks out (for an item without SS)

1. Order point (~reorder point)-

2. Periodic review, known as fixed-interval order system

3. MRP

4. Visual review

5. Kanban

• 1. Important for pull systems that are characteristic of lean/JIT
• 2. Signal for upstream workstation to start producing parts…the equivalent of a work order
• 3. Control the movement of raw materials and semi-finished products through subsequent workstations
• 4. Minimize WIP, improves workflow, increasing throughput, and producing to customer demand

• When the min is reached, inv is replenished to the max (min max system)
• Good for low-value items
• If the costs of carrying inv are not significant, exact estimates of sales or usage are not necessary in establishing max inv level

• The job of MRP is to plan the release of orders to purchase, make, and assemble components of dependent demand items…independent demand is planned by MPS, which is the starting point for MRP

• The planned releases and receipts are for...
• (1) Purchases of raw materials and subassemblies
• (2) Manufacture of components and sub-assemblies in the factory
• (3) Exception- MTO, in many cases, the order for the end item can be directly scheduled by MRP as orders are received

(1) Both used to replenish independent and dependent

(2) Not in the same category as periodic order and MRP, but apply some of the same techniques in planning and managing the inv

• (a) Customer shares visibility of its demand, such as promotions and point-of-sales rates
• (b) The customer’s information is an input to the planning process used by the supplier, which assumes the entire role for planning and replenishment
• (c) Often the customer owns the goods until the customer uses them
• (d) Ownership of the item is negotiable and depends on the business requirements and contractual agreements between the two parties

(a) Occurs when a supplier provides a customer with inv for use but retains ownership of the product until it is used or sold

(b) Supplier bills the customer and replenishes the consigned inv, or customer may pay periodically based on usage

• Logic
• (1) Calculation is cumbersome
• (2) Mgr estimates during a review period where      Q = T – I, Q is order quantity, T is target or max level, I is inv on hand i)
• Application/Advantages
• (1) Receiving deliveries of many different items from one source at one time is economical
• (2) Tracking and posting trxs of many small issues from inv is expensive
• (3) It is safe to assume that sufficient inv has been ordered to last until the next review interval
• (4) Items have a limited shelf life, such as farm produce, chemicals, and food products
• (5) Ordering costs are low; ordering once a week or month in not a cost issue

• (1) The average will fluctuate...so SS is very important
• (a) if Demand is as predicted, all is good
• (b) If D increases, may be stockout and possible lost sales and/or customer dissatisfaction
• (i) Some SS could be planned to avoid stockout, Order Point = DDLT + SS, where DDLT is demand during lead time
• (c) If D decreases, inv levels fall below order point, so some inv still remains when the replenishment order is received

• (1) Primarily for independent demand items (finished goods, MRO items)
• (2) For dependent demand items such as raw materials when demand is stable and continuous
• (3) Not for high-value class A items because of inv costs
• (4) For limiting lot sizes due to truckload and storage capacity at the receiving warehouse

MPC

MRP II for Service

• a) Top-down approach...planning and execution related to strategic goals
• b) Layered approach to planning
• c) Cross-functional coordination of different roles
• d) Closed-loop system – plans at all levels, including production activity control, continually adjusted to ensure consistency among them in response to internal and external events before, during, and after production

• Business planning- long-term ($)
• S&OP- output is production plan, med to long-term planning for family level, corresponds to aggregate planning
• Master scheduling- output is master production schedule, short to med-term, end item product level, corresponds to disaggregate planning
• Material requirements planning (MRP)- short-term, component level, corresponds to resource scheduling
• Capacity planning- validating the production plan, MPS, and MRP using resource planning, RCCP, and CRP, respectively

• A. Overall similarity to MRP II for Mfg
• B. Notable differences
• A. The master schedule is similar to an appointment schedule
• C. Review others
• D. Conclusion: planning and control at the disaggregate level, such as detailed scheduling and planning, need to be based on decisions and tradeoffs at the aggregate level.

• Note: Tradeoffs may be among sales, operations, and finance with respect to customer service, costs of producing or delivering a good or service, and inventory

• Cause high variation in lead
• Create extra costs of OT, scrap, rework, and capital invested in inv and equipment
• Create hidden costs- mfg overhead from excessive plant size, expeditors, stockrooms, and personnel
• Reduce the rate of quality improvements

• Put a max cap on the amount of WIP to predict lead time
• Maintain supply chain velocity by maintaining an even flow of WIP, and ensuring that WIP is related to current demand
• Release material into the line in amounts consistent with appropriate batch sizes to prevent excess WIP

Use a pull system

Determine the (finished goods) buffer

Increase flexibility to deal with product line complexity.

Implement synchronous flow

• The factory produces only what the customer or distributor uses (pull)
• Each workstation makes only enough to replenish what the next workstation is using
• Each process replenishes only what the next process is using

• The buffer must be adequate to service demand during mfg lead time
• It needs to account for cycle time interval.
• This is the time that it takes production to shift back to making a part after making other parts
• It needs to account for transportation time, SS, and seasonality and promotions
• It is important because it puts a cap on the amount of WIP in the system and enables you to start CI initiatives to reduce lead times through setup and batch size reduction

• The basic pull system has no timing associated with operations in the product routing.
• Whenever a customer needs a part, the pull system responds by replenishing the part previously supplied.
• This system is asynchronous
• Adopting a synchronous pull system, through the use of takt time to control the velocity of flow through the production process, will reduce overall lead time
• This requires knowing and standardizing operation times, which will enable completion of an assembly produced at one workstation to trigger production of an assembly at the next workstation throughout the production process
• It also assumes that through process improvement, organizations can implement batch sizes that are consistent with the desired rate of flow
• Note that the trigger can be recognized by MRP application software, which can then release the assembly to the next station

Value stream mapping

Pull system

Setup reduction (important to improve velocity and throughput)

Total productive maintenance

• Begins with preventive maintenance
• Machine operators conduct maintenance, sense of responsibility, employee empowerment
• Objective- downtime reduction…35% of machine capacity is lost to DT
• Causes delays in downstream ops
• Reduces process speed
• Requires more inv buffers
• Allows less room for unexpected machine problems
• Affects quality – problematic machines can produce statistically out-of-control products

Step 1: separate internal and external setup

• Internal- when machine is shut down
• External- when machine is running
• Convert internal to external
• Streamline internal setup
• Eliminate (waste in) adjustments

Graphical representation of the process steps from raw material to finished goods (or delivery of service to a customer)

Usually, upper portion contains info flow, middle contains material flow, and lower process data and timeline

Best prepared by working backward

Questions to address

Value added questions

Non-value added questions, but needed Non-value added tasks are usually attacked first

Inventory record accuracy

• Part description or part number 
• Quantity
• Location

Important bec… for planning an high levels of customer service

Effective and efficient ops

Inventory record accuracy

Verification of inventory accuracy

Costs of inaccuracy

Accuracy goals

• Lost sales
• Excess production
• Low productivity
• Excessive expediting
• High inv levels
• Shortages
• Missed schedules
• Late delivery
• Excess freight costs
• High levels of obsolescence

• 100 percent inv accuracy
• 100 percent of the parts
• 100 percent of the time
• Above is not practical, so establish tolerances
• (1) Value of item, ABC
• (2) Critical nature of the item
• (3) Ability to stop production
• (4) Lead time
• (5) Difficulty of precise measurement

• Cycle count
• Periodic

• A 20 percent of items, 80% value
• B 30 percent of items, 15% of value
• C 70 percent of items, 5 percent of value

Uses of ABC

• (a) Cycle counting
• (b) Customer service
• (c) Engineering priorities
• (d) Replenishment systems
• (e) Investment decisions

(1) Space on a shelf

(2) Vat or liquid container

(3) Space on a floor

(4) Outdoor space in a storage lot

(5) Designated segment of a rack

(1) Sequence bin-location codes so warehouse personnel can gather materials using the shortest possible route

(2) Identify the location for bin numbers where multiple storage sites exist

(3) Include an aisle number on shelving or racking to facilitate the sequencing of pick lists

(4) Design a grid arrangement that point out where cell locations are incorporated in the bin location code

• 1. Fixed location system
• Each bin holds a particular item number
• 2. Random location system
• Bins are assigned each time a shipment arrives
• 3. Zone location system
• Zone is a compromise between the two

• Material in the yard can be assigned with random placement
• Can be used to assign flammability, dimensions, value, risk of pilferage, or whether items are fast-, medium-, or slow-moving
• Zones can be used for linens, tools, and metals

• Two basic components
• (1) Racking
• (2) Storage and retrieval machine

• RFID, wireless, and Web-enabled and global satellite tracking system

• Tremendously valuable to factories that need pipeline visibility to run on fewer hours of inventory

(1) Lot size (order quantity)

(2) Lead time

(3) SS

(4) Scrap – material outside of specifications and that is not practical to rework.

When a process produces scrap, MRP increases the planned order release amount for the parent item to account for a scrap or yield factor

• (4) On-hand balance – balance of inv currently in stock
• (5) Allocations – on hand may be reserved for or allocated to specific planned orders that have been released
• (6) Scheduled receipts – this is an open order; the item may go into inv or straight into production. A scheduled receipt consists of two parts:
• (a) How much?
• (b) When the item will arrive?

• (a) Item number
• (b) Item description
• (c) Stock location(s)
• (d) On-hand balances at each stock location
• (e) On-order info by due date
• (f) Reorder and SS info
• (g) Financial info
• (h) Usage
• (i) Unit of measure
• (j) ABC classification
• (k) Source code
• (l) Lead time

(a) Balance supply and demand as dictated by the production plan

(b) Plan efficient use of company resources

(c) Determine end-item priorities (due dates) shown in the MPS

(a) Customer service

(b) Production efficiency

(c) Inventory investment

• Represents end items the company plans to produce over a planning horizon
• numerous sources of demand (forecasts, customer orders)
• called time-phased gross requirements

• Def - the amount of time the MPS extends into the future
• Usually longer than lead time to facilitate the following:
• Component lot sizing
• Shop floor and capacity planning
• Scheduling by suppliers and work centers
• Note: Longer horizon can help by giving ability to avoid future problems.  On the other hand, longer horizons in a MTS environment mean more forecast uncertainty and other unexpected changes that can lead to invalid plans.

Reconciliation of Differences (RCCP)

Options to increase capacity include...

• schedule OT
• add shifts and/or extra workers
• route through alternative work centers
• subcontract

a) Bill of Material

b) Product structure and part interdependencies

c) Lead time

Characteristics of the Material Planning Process

Material Planning in Different Production Environments

Concepts

Production environments and their process choices are based on a number of factors such as volume-variety mix and nature of the product, discrete or continuous flow, and capital costs.

Also, the nature of demand: is it stable and continuous or lumpy (dynamic) and discontinuous?

Characteristics of the Material Planning Process

Project and ETO Environment

Characteristics

a) Demand is lumpy; product volume is low

b) Projects are often unique, generally large, and of lengthy duration

Characteristics of the Material Planning Process

Process Flow Environment

found in...

capital intensive industries such as chemicals, pharmaceuticals, and food and beverage…

materials flow is continuous through a series of process stages

Characteristics of the Material Planning Process

Process Flow Environment

Characteristics

a) Demand is stable and continuous

b) Usually MTS (make-to-stock)

c) All products have similar routings

d) Tend to be commodities, with exceptions in pharmaceuticals

e) Plants are designed for a specific throughput and require specialized equipment

Characteristics of the Material Planning Process

Process Flow Environment

Scheduling characteristics

• a) Production is authorized by production schedules; work orders are not issued

• b) If forecasts are less than full capacity,  then...
• plants slow down to match demand, or
• run to full capacity and then shut down temporarily

• a) In a processor-dominated scheduling approach, a finite schedule for the processor capacity is developed first and materials are planned and scheduled accordingly
• b) In a materials-dominated scheduling approach, material planning begins with a time-phased material balance record. When finished goods inventory drops below a set minimum, production is scheduled to build to a target or maximum level.
• c) Long-range contracts with suppliers are common
• d) Many companies are vertically integrated and may own their supply base and outbound logistics functions

Lean/JIT Environments

Works best when...

• Demand is stable and continuous, and volume is high
• Product variety is low, and products are standard and not complex
• Process is repetitive
• Machinery and workers in the factory are flexible

Lean/JIT Environments

Scheduling is...

• Rate of production (takt time) is determined by rate of demand. Compliance with takt time is a productivity measure
• Productions scheduling employs a technique called heijunka to level production throughout the production process to match the rate of end-item sales
• Work cell ops start in response to kanban signals rather than work orders
• Mfg lead times are short

Lean/JIT Environments

MRP is generally not used to time-phase component requirements and control work orders.  Instead...

material planning and management consist of the following:

• Frequent updating of forecasts and adjustment of customer demand quantities
• Suppliers
• (1) Receive continuous updates of usage requirements
• (2) Are local
• (3) Are partners with long-term agreements in place
• Production pull system that triggers material replenishments as downstream processes requires

MRP Environments

an MRP system can be...

• used in push or pull systems
• In job shop or ATO environment, demand is "lumpy"
• Note- In some cases, an ATO may have stable demand

The MRP system can be an independent software app and process, or integrated into MRP II or ERP apps

MRP Environments

Two types of production environments have lumpy demand:

a) Low-volume/high variety MRO job shop or batch production environments

b) Medium-to-high volume/low-to-high variety ATO repetitive flow environments

a) Planning factors

b) Inventory data (status)

c) Master production schedule

d) BOMs

• Planned order releases for purchased items
• Planned order releases for manufactured items
• Exception reports and action messages 
• Expedite or de-expedite released orders 
• Planned order due for release
• Cancel order

Three principal functions

• It plans and controls the firm’s inventories, establishing what, how much, and when to order
• It plans and controls orders released to the factory floor and suppliers in order to meet the right due dates, and it keeps due dates valid
• It provides accurate planned-order loading for use by CRP (capacity requirements planning) and constraint management

Planning Process Parameters

MRP Planning Horizon

• When BOMs are exploded, the impact of the short planning horizon is felt most at the lowest level.
• The available lead time will be less than the required lead-time offset.
• Expediting, which drives up costs, will be necessary
• Short planning horizons prevent companies from taking advantage of economic lot sizes

Planning Process Parameters

Time Buckets

• There may be a mix of different lengths to allow for both short- and long-term planning
• Daily for the first few weeks
• Weekly for the next few months
• Monthly for the final months of the planning horizon

Planning Process Parameters

In regeneration MRP, the MRP is...

Planning Process Parameters

In net change MRP, the system calculates...

Planning Process Parameters

More frequent planning also leads to system nervousness

This occurs when requirements change rapidly and by varying amounts, causing the material plan to change back and forth

This can be disruptive to planners, suppliers, and the shop floor, as small changes in higher-level MRP planning cause timing and quantity changes at the lower level

Planning Process Parameters

MRP nervousness can also be the result of factors other than the frequency of planning. These include...

• Changes in order quantities in the MPS
• Early release of planned orders
• Unplanned demand for spare parts
• Changes in MRP planning factors: safety stock, lead time, and lot-size policy
• Unanticipated changes to the BOM or on-hand balances

Planning Process Parameters

Suggested measures for an MRP system

• Mfg orders released on time
• Data accuracy: inventory, BOMs, routings and forecast
• Purchase orders released on time
• DT due to shortages 
• Excess inventory
• Number of changes to POs
• Orders released to mfg without material shortages
• Due dates of orders met
• Action messages trends

Planning Process Parameters

Education and Training for MRP

MRP education can produce more than a four-to-one return on investment (ROI)

Education gives the knowledge, training gives the tools needed to perform their tasks

a) Create a time-phased material requirements plan, based on the master production schedule’s (MPS) quantities and due dates for end items

b) To maintain and adjust the priority plan to account for changes in customer orders and forecasts, material shortages, and production problems

• Directly linked to other mfg planning and control processes: 
• CRP: The MRP is valid only if sufficient production capacity is available when needed.
• The check against capacity availability is called capacity requirements planning 
• PAC: MRP is the input to PAC.
• It plans the release and receipt dates for orders, but it is the responsibility of purchasing and PAC to implement and control the orders

Planning factors

 Inv or stock status data

BOM

MPS

MRP Summary of inputs

Planning factors

a) Lot size

b) Lead time

c) SS

d) Scrap and yield

MRP Summary of inputs

Inv or stock status data

a) On-hand balance

b) Allocations

c) Scheduled receipts

MRP Summary of inputs

BOM & MPS

BOMs

a) Which components go into other components

b) The number of units of a component that go into a parent item

c) The sequence in which to plan the material requirements for an end item’s components

MPS

The MRP Grid

Assigning Codes

1. End-item parents are level 0

2. Items on level down form the end-item parent are assigned a 1

3. Items at the next level are assigned a 2, and so on

The MRP Grid

Significance of Low-Level Codes

1. Critical to planners and MRP software

2. Must be able to determine its net requirements for all of its parents in the bill(s)

MRP Calculation of Gross and Net Requirements

Gross and net requirements and planned orders

1. Starts at the end-item level of the product structure, or level 0, and explodes down to the lowest level

2. Calculates gross and net requirements for end items and their components

3. Based on the net requirements for each item, creates planned order receipts and releases for components

MRP Calculation of Gross and Net Requirements

 Sources of gross requirements

Gross requirements from the MPS and Service Parts Demand

• MPS is where most independent demand comes from, additional independent demand may come from service parts
• Gross requirements are the quantities that must be issued to support a parent item’s planned order release

•  Gross reqs from service parts demand

• Service part can be independent and dependent item

Maintaining the Material Plan

Maintain order priorities

Material plans need to be updated

Maintain valid priorities

Maintaining the Material Plan

Material plans need to be updated in response to the following:

• Update of the master production schedule (MPS) for new orders
• Receipt of parts into inv and completion of production
• Changes to customer order due dates and quantitites
• Changes to scheduled receipts for purchase and manufacturing orders, such as due date and quantity changes
• Inv balance corrections
• Engineering changes

Maintaining the Material Plan

Maintain valid priorities

• MRP is meant to be dynamic
• MRP software generates exception reports that suggest actions for planner
• Release planned order
• Expedite order
• Delay an order or scheduled receipt
• Cancel a planned order or scheduled receipt
• The changes made by planners will not affect gross requirements for lower level compoonents automatically
• In net change MRP, the system explodes and nets requirements only for the parts or items affected by the change
• In regeneration MRP, the following occurs:
• All current planned orders are removed
• The MPS is fully exploded down through all bills of material to establish valid priorities

Maintain order priorities

Pegging

What-if analysis and simulation

Revision of planning parameters

Maintaining the Material Plan

Pegging

unexpected events

• Unexpected events can cause components of an end item to arrive late.
• To assess and address the impact of such events, planners must be able to trace the gross requirements for an affected item to its immediate parent and upward to its parent in the MPS
• The planner can then use bottom-up planning to evaluate and implement alternative solutions such as
• Compressing lead time
• Cutting order quantity
• Substituting material
• Changing the MPS

Maintaining the Material Plan

Pegging single level...

Allows the MRP user to trace the gross requirement for a component to its parent one level up

Resolving imbalances at low levels of the product structure eliminates having to modify the MPS

Maintaining the Material Plan

 Full Pegging

Planner traces demand for a component to the level 0 or end-item source

Maintaining the Material Plan

Pegging comparison to Where-used list

• Another MRP implosion process produces the where-used list
• Pegging reports identify parent items that currently have gross requirements for a given component. In contrast, where-used lists provide information on every parent item that calls for a given component.
• Design engineers use where-used lists to determine which and how parent items will be affected by a component change

Maintaining the Material Plan

• The planner might need to create a firm planned order (FPO) to prevent MRP logic from changing quantities and/or times.
• MRP software cannot alter the due date, release date, or quantity of an order that has a firm designation

Maintaining the Material Plan

What-if analysis and simulation

• Planners can use what-if analysis and simulation to consider alternative material plan scenarios such as...
• Purchasing lead times
• Mfg lead times such as setup, run, and queue Lot sizes
• Safety stock and safety lead time
• Capacity constraints
• Demand profiles

Maintaining the Material Plan

What-if analysis and simulation

At least three advantages to using simulation to perform what-if analysis

• Once a desired result is achieved, it can be copied over to the live system and become the actual material schedule
• Planners can evaluate various alternatives
• Planners can test process improvements and manage risks

Maintaining the Material Plan

Revision of planning parameters

Lead time

Lot size

Safety stock and safety lead time

Scrap factor

Kanban quantity and cycle time

Closing the loop

Maintaining the Material Plan

Revision of planning parameters

Planning parameters play a key role in material planning

Changes in supply and demand conditions

Improvements in business planning processes and business strategy

Shorter product life cycles

Ongoing process improvements

Other factors such as a change in shrinkage Lead time

Maintaining the Material Plan

Revision of planning parameters

Lead time

Reasons...

• Reduce WIP and on-hand inventories
• Shorten planning horizons and lessen dependence on forecasts
• Other factors conducive to lead-time reduction include the following:
• Reduction in production batch size, which shortens wait and queue time
• Reduction in lead times by suppliers

Maintaining the Material Plan

Revision of planning parameters

Key component(s) of lead time

Queue- in general, is the longest

Set-up

Run

Wait

Move

Maintaining the Material Plan

Revision of planning parameters

Notable examples of lead time reduction

• Setup is the time between the production of the last good piece in one run and of the first good piece in the next run
• A best practice is to perform some setup activities for an operation while machines are still running during the preceding operation.
• This practice is called external setup, as opposed to internal setup, which occurs while a process or a machine is not running

Maintaining the Material Plan

 Revision of planning parameters

Lot size

• The quantity of an item that is ordered from the factory or a supplier
• Users choose lot sizes based on economies of scale
• Purchasing may favor quantity discounts and delivery efficiencies, but it costs more to store larger quantities
• Lot sizing is the trade-off between the costs of ordering and carrying
• Should be frequently reviewed

Maintaining the Material Plan

Revision of planning parameters

Safety stock and safety lead time

• SS is extra inv 
• Safety lead time, another inv buffer in MRP, involves establishing a planned order receipt date that is earlier than when an item is really needed and a planned order release date that is offset by the normal lead time

• Safety lead time is most often used as a buffer against uncertainty in the timing of supply

Maintaining the Material Plan

 Revision of planning parameters

Setting appropriate safety stock levels is important for planning inv levels in MRP because...

Maintaining the Material Plan

Revision of planning parameters

Scrap factor

Scrap factor can be applied to the planned order receipt and release, or can be accounted for in the SS

Planned order release = planned order receipt/(1-scrap factor)

Maintaining the Material Plan

Revision of planning parameters

Kanban quantity and cycle time...

Maintaining the Material Plan

Revision of planning parameters

Kanban quantity

• Lot size must support the takt time of production specified for the run
• Takt time is determined by the available production time divided by customer order quantity and is measured in unit of output per unit of time, e.g., unit per minute
• Changes in customer demand and in available production time can affect takt time and kanban quantities in a pull-based production process

Maintaining the Material Plan

Revision of planning parameters

Cycle time

• Time between the completion of two discrete units of production
• In lean/JIT, cycle time must support takt time
• If cycle time is longer than the target takt time, buffer inv are used until process improvements are able to shorten cycle time
• In a lean/JIT environment in which planning is done by MRP, reducing cycle time leads to a reduction in MRP lead times as well

Maintaining the Material Plan

 Closing the Loop

Role of MRP- To be efficient and effective, MRP as a process must…

• Maintain valid planning parameters such as lead times, SS, lot sizing, and others
• Reschedule open orders in a timely manner
• Process transactions on time
• Meet the overall strategic plan of the organization by ensuring that material availability matches demand quantities, timing, and priorities
• Maintain key relationships with a number of other mfg planning and control processes and functions

Maintaining the Material Plan

Closing the Loop

MRP Relationship to master scheduling

• Changes to the master schedule have a major effect on MRP.
• The MPS should reflect changes initiated by customers, MRP, or capacity requirements planning (CRP)
• Conversely, the master scheduler needs feedback on any imbalances in the material plan coming from the MPS
• If demand forecasts or customer orders in the MPS are inaccurate, the material plan will be unrealistic.
• Customer orders will go unfulfilled, and unused in will accumulate

Maintaining the Material Plan

Closing the Loop

MRP Relationship to capacity planning

• When material is planned first, you can determine if you have enough capacity
• MRP feeds planned orders directly into the capacity planning system.
• Capacity planning validates the material plan, which will not work if capacity to execute the plan is not adequate
• When capacity imbalances necessitate revising the MPS, you must execute both MRP and CRP to see if the changes produced the desired result

Maintaining the Material Plan

Closing the Loop

MRP Relationship to engineering

• Requires accurate BOMs
• ECRs lead to product revised structures that need to be accounted for in the mat scheduling of planned order receipts and releases
• Ops and Mats managers need to coordinate product revisions with engineering
• Planners need to work to deplete old components and raw materials
• Government mandates and guidelines might cause material obsolescence

Maintaining the Material Plan

Closing the Loop

MRP Relationship to inv management

• Needs accurate inv records, otherwise the plan will be infeasible
• Provides inv mgt with the material plans, the foundation of the inv
• Cycle counting may change item on-hand balance
• Planning factors and inv status on the item master file need to be accurate

Maintaining the Material Plan

Closing the Loop

MRP Relationship to purchasing and production

• Produces planned orders for purchasing and production
• In return, MRP needs accurate and timely notices of any changes to scheduled receipts
• Feedback is needed:
• Supplier deliveries may be late; machine problems could delay production
• MRP, used effectively, ensures that purchased materials and parts will be available in the right amount and at the right time

Maintaining the Material Plan

Closing the Loop

MRP Relationship to marketing and sales

• MRP needs to be consistent with corporate goals
• The strategic plan incorporates the plans of marketing and finance, as well as production
• At an operational level, planners need to work with marketing and ops to adjust the material plan as needed, and customers must be informed of changes that affect order status of deliveries

MRP Integration of lean/JIT and ERP/MRP

Pull versus push systems

• In lean/JIT system, production is triggered by a pull created by customer demand and demand for materials from downstream workstations
• Much less WIP
• In contrast, in an MRP system environment, mats are pushed to and through work centers on the shop floor as a result of demand from forecasts, actual orders for end items, and derived demand for components
• Tend to build up inv on factory floor
• Lean/JIT and MRP both have complementary strengths

MRP Integration of lean/JIT and ERP/MRP

In lean/JIT system, production is triggered...

by a pull created by customer demand and demand for materials from downstream workstations 

Much less WIP

MRP Integration of lean/JIT and ERP/MRP

In an MRP system environment...

mats are pushed to and through work centers on the shop floor as a result of demand from forecasts, actual orders for end items, and derived demand for components

Tend to build up inv on factory floor

MRP Integration of lean/JIT and ERP/MRP

Advantages and disadvantages of lean/JIT

• Great contribution is ability to reduce lead time, improve quality, and minimize inv…smooth production flow
• Weakness…works best when products are not complex and demand is stable…works best if the coefficient of demand variation does not exceed 30 percent
• More variety of products at smaller quantities means that the variation in demand by SKU must advance relentlessly
• The idea of a replenishment pull system falls apart when you use a part only every three months

Integration of lean/JIT and ERP/MRP

Repurposing ERP

ERP can explode and determine net requirements

ERP systems have repurposed MRP functionality to respond to pull signals from the shop floor

MRP Integration of lean/JIT and ERP/MRP

ERP Additional attributes

• Order point logic that responds to downstream demand signals to release mat
• Lot size calculator that determines kanban quantities based on processing variable such as scrap and setup and run time per unit
• Shop floor data collection based on bar coding of mat into and out of work stations to determine WIP, and electronic reporting of the “up” status of workstations and demand for materials to the ERP system
• Portals that enable suppliers to upload planning parameter data, such as lead time, scrap, and production status data

• A temporary endeavor undertaken to create a unique product or service
• Every project has a definite beginning and end
• Designed to accomplish targeted results using predetermined methods and techniques
• Phases – planning, organizing, implementing, controlling, and closeout
• Has clearly defined objectives and scope, and usually a budget

Project planning

Once approved to begin the project, the first step is to create a project plan to define...

Goals

Responsibilities of the team

Timing

Resources

Budget

Project planning

Key elements

Statement of work

Work breakdown structure (WBS)

Project schedule

Responsibility matrix

Resource requirements

Budget

Project Planning

Work breakdown structure (WBS)

• Primary planning tool for organizing work
• Defines the work that needs to be done in a hierarchical format
• Structuring the work into major components and subcomponents
• Verifying conformance with all objectives
• Implementing a system of project responsibility commitments
• Developing a system of reporting and summarization
• Aids in sequencing activities and estimating resources

Project Planning

Project schedule conversion

Project Planning

Common scheduling methods

Gantt chart

Critical path method (CPM)

Program evaluation and review technique (PERT)

Project schedule

note

Project Planning

Gantt chart

Form of a bar chart Horizontal axis is the time scale

Drawback – does not explicitly show the relationships between activities

Simple, easy, useful for reporting

Project Planning

Critical path method (CPM)

• A network planning technique for the analysis of a project’s completion time used for planning and controlling the activities in a project.
• By showing each of these activities and their associated times, the critical path, which identifies those elements that actually constrain the total time for the project, can be determined
• Useful for prioritizing activities

Project Planning

Program evaluation and review technique (PERT)

• Based on probabilistic time estimates
• Extension of CPM
• Can locate and calculate available slack time, and re-estimate completion date
• Many government organizations use this for complex projects

Project Planning

Responsibility matrix

• A tool to ensure that each component of work in a project is assigned to a responsible person 
• Can be used to build team commitment, and hold members accountable
• Ties work to people, and shows level

Project Planning

Resource requirements

Resource loading

Resource leveling

Constrained resource scheduling

Critical chain method

Resource requirements

Constrained resource scheduling

Heuristic

• Heuristic method – Employs general rules that have worked well in similar situations...past experience
• Most use PERT/CPM schedule and analyze resource usage.
• When resource use is exceeded, the project manager allocates according to common priority rules.
• Optimization method – Optimization seeks the best solution, typically through mathematical programming and enumeration.  This method is best used for large, complex projects.

Resource requirements

Critical chain method

• A network planning technique for the analysis of a project’s completion time, used for planning and controlling project activities.
• The critical chain, which determines project duration, is based on technological and resource constraints
• CPM and PERT methods of project scheduling assume that the required resources will be available when needed.
• A project is composed of critical and non-critical chains that feed into it.
• With the critical chain method, delays can be reduced or eliminated by scheduling project tasks based on resource availability

Project Planning

The budgeting relationship is based on the following points:

• With very little time, the budget may be based on a wild guess
• If more time or experience is available, a preliminary budget can be developed
• The most detailed project budget can be developed if time and extensive financial info are available and experience in developing budgets is high
• The budget involves two types of cost estimates:
• Preliminary cost estimates – used to support decisions on the viability of a project
• Final (detailed) cost estimates – used to support project planning and implementation

Project Planning

Key cost components of the budget

• Labor (wages, benefits, training, overhead)
• Materials (freight, taxes, storage and handling)
• Equipment (operating costs, method of acquisition: buy, rent, lease)
• Vendor and/or consultant costs

Project Planning

When the project budget has been established...

Forming the project team

Scheduling work

Managing team relationships

Evolution and team development

Project implementation

 Factors to consider when forming teams

Goals

• Stakeholders to be included
• Technical work required
• Expertise required to direct and perform the required work
• Availability of project personnel

Project implementation

Factors to consider when forming teams

Project implementation

Managing team relationships

• Cooperation between team members, PMs, and other personnel is paramount
• Conflicts are unavoidable, but not insurmountable
• Effective communication and leadership skills are essential

Project implementation

 Evolution and team development

New groups go through defined stages

1. Forming stage – team members start to build relationships
2. Storming stage – conflict is natural and inevitable
3. Norming stage – acceptable unwritten rules and codes of conduct and behavior are developed and shared
4. Performing stage – the working team is ready to perform
5. Reforming stage – the team celebrates and disassembles

Project implementation

Final activity

Maintaining the project schedule and budget

The final activity that takes place during the implementation phase is maintaining the project schedule and budget

Key requirement is to get status reports that are truthful and timely enough that future problems can be identified and prevented

Project implementation

Tracking progress

Should be a periodic reporting system

Should summarize current period and entire project PM’s responsibility

Project implementation

Detecting variances

Variance reports provide a current status (snap-shot)

Shows favorable or unfavorable variances

Project

The closeout phase

• Major tasks
• Post implementation audit
• Final project report
• The closeout meeting

The closeout phase

The closeout meeting

• Should include the stakeholders
• Typical agenda
• Review project statement of work
• Review actual deliverables and show how the project met its measurable success indicators
• Summarize what was done well
• Identify areas for improvement
• Document recommendations or “lessons learned” to aid future projects
• Determine if any further tasks need to be completed

The closeout phase

Final project report

lessons learned = Final report:

• Overall success and performance of the project
• Organization and administration of the project
• Techniques used to accomplish project results
• Assessment of project strengths and weaknesses
• Recommendations from PM and team for continuation or extinction of project

The closeout phase

Post implementation audit

• Includes debriefing and preparing data for the final report
• Consider using the statement of work as a checklist to measure project success
• Purpose
• Deliverables
• Measurable success indicators

The closeout phase

Major tasks

• Documenting the project
• Conducting a post-implementation audit
• Issuing a final report
• Closing operations
• Obtaining client approval

Detailed Capacity Planning is...

It is the most detailed level in the capacity planning process

It determines capacity requirements when material is planned first

It determines resource utilization when capacity is planned first

It prepares the operating plan for execution

Detailed Capacity Planning

Major influences

Flexibility of capacity and scheduling

Planning material or capacity first

Mfg environment

Capacity-related terminology and concepts

Detailed Capacity Planning

Capacity needs to be flexible for two reasons:

To accommodate time-phased load requirements imposed on work centers

To ensure due dates can be met

Detailed Capacity Planning

 Flexibility of capacity but not scheduling

Note

Detailed Capacity Planning

Flexibility in scheduling but not capacity

Mfg process is...

• Capital intensive
• Capacity is expensive and inflexible
• Capacity is planned first, as in processor-dominated scheduling
• Production will generally precede demand for the product

Detailed Capacity Planning

Flexibility in scheduling but not capacity

Special note

Detailed Capacity Planning

 Flexibility in scheduling but not capacity

Due dates...

Due dates are set to meet internally established priorities based on the following:

• Forecasts of customer demand
• Decisions on how much inv to carry to meet customer demand

Detailed Capacity Planning

 Planning material or capacity first

Relationship between capacity and priority planning

The hierarchy within priority planning and capacity planning is an essential element of the MPS

Note – planning material first is not always the most logical option

Detailed Capacity Planning

Types of Mfg environments and processes

Evaluated in diff ways

Detailed Capacity Planning

Types of Mfg environments and processes

Project mfg

Large unique items (plane, ship)

Process is highly flexible

Routings have networks of activities instead of simple ops sequences

Activities on the critical path are much less flexible

Detailed Capacity Planning

Types of Mfg environments and processes

Intermittent (job shop)

• Must provide a basis for deploying workers, managing queues, and producing dispatch lists at the various work centers
• Bottleneck work centers must be identified and managed
• Detailed capacity planning, beginning with infinite loading, is the most applicable technique, CRP

Detailed Capacity Planning

Types of Mfg environments and processes

Batch production