MRP is useful for dependent and discrete demand items, complex products, job shop production, and assemble-to-order environments. Managing component demand inventory is different from managing finished goods inventory.

Dependent Demand

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.

Discrete Demand

Another difference between finished products and component parts is the continuity of their demand. For the inventory control systems in Chapter 13, we assumed that 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, as shown in Figure 15.2, 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 economic order quantity (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.

Complex Products

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.

Figure 15.2. Demand Characteristics for Finished Products and Their Components

Erratic Orders

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.^[21] Although MRP is currently available for continuous and repetitive manufacturing, it was designed primarily for systems that produce goods in batches.

Assemble-to-Order

Finally, MRP systems are very useful in industries in which the customer is allowed to choose among different options. These products have many common components that 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 28 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 on receipt of the order. This type of operation is called assemble-to-order or build-to-order.

Figure 15.3 shows the inputs to and outputs from the MRP process. There are three major inputs:

• Assemble-to-order: a manufacturing environment in which previously completed subassemblies are configured to order.

The master production schedule (MPS), also called the master schedule, specifies which end items or a schedule of finished products finished products a firm is to produce, how many are needed, and when they are needed. Recall that drives the MRP process. that the sales and operations plan is 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 aggregate 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.

Figure 15.3. Material Requirements Planning

• Master production schedule: a schedule of finished products that drives the MRP process.

• Cumulative lead time: the total length of time needed to manufacture a product.

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. Table 15.1 shows a sample master production schedule consisting of four end items produced by a manufacturer of specialty writing accessories.

Several comments should be made concerning the quantities contained in the MPS:

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.

• Time fence: a management-specified date within which no changes in the master schedule are allowed.

• Product structure file: a file that contains a computerized bill of material for every item produced.

• Bill of material (BOM): a list of all the materials, parts, and assemblies that make up a product, including quantities, parent–component relationships, and order of assembly.

Figure 15.4. Levels of Master Production Scheduling (master schedule at the smallest part of the product structure)

When each item is needed can best be described in the form of a product structure diagram, shown in Figure 15.5 for a clipboard. An assembled item is sometimes referred to as a parent, and a component as a child. The number in parentheses with each item is the quantity of a given component needed to make one parent. Thus, one clip assembly, two rivets, and one pressboard 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, listed in Table 15.2, 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.

Figure 15.5. Product Structure Diagram for a Clipboard

Phantom Bills

Phantom bills are used for transient subassemblies that never see a stockroom because they are immediately consumed in the next stage of manufacture. These items have a lead time of zero and a special code so that no orders for them will be released. Phantom bills are becoming more common as companies adopt lean manufacturing concepts that speed products through the manufacturing and assembly process.

K-Bills

K-bills or kit numbers, group small, loose parts such as fasteners, nuts, and bolts together under one pseudo-item number. In this way, requirements for the items are processed only once (for the group), rather than for each individual item. K-bills reduce the paperwork, processing time, and file space required in generating orders for small, inexpensive items that are usually ordered infrequently in large quantities.

Modular Bills

Modular bills of material are appropriate when the product is manufactured in major subassemblies or modules that are later assembled into the final product with customer-designated options. With this approach, the end item in the master production schedule is not a finished product, but a major option or module. This reduces the number of bills of material that need to be input, maintained, and processed by the MRP system.

Consider the options available on the X10 automobile, partially diagrammed in Figure 15.6. The customer has a choice between three engine types, eight exterior colors, three interiors, eight interior colors, and four car bodies. Thus, there are 3 × 8 × 3 × 8 × 4 = 2304 possible model configurations—and the same number of bills of material—unless modular bills are used. By establishing a bill of material for each option rather than each combination of options, the entire range of options can be accounted for by 3 + 8 + 3 + 8 + 4 = 26 modular bills of material.

Modular bills of material also simplify forecasting and planning. The quantity per assembly for an option is given as a decimal figure, interpreted as a percentage of the requirements for the parent item. For example, from Figure 15.6, in preparation for an anticipated demand of 1000 X10 automobiles, 1000 engines are needed. Of those 1000 engines, the master production schedule would generate requirements for 400 four-cylinder engines, 500 six-cylinder engines, and 100 eight-cylinder engines.

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 6000 extra part numbers from its database and dispose of thousands of dollars of obsolete inventory that had not previously been identified as such.

Phantom bills, K-bills, and modular bills simplify planning.

• Modular bills of material: bills used to plan the production of products with many optional features.

Figure 15.6. Modular Bills of Material

A time-phased bill of material, also known as a time-phased assembly chart, is basically a horizontal product structure diagram that graphically shows the lead time required to purchase or manufacture an item. Assuming the lead time for each item in the bill of material for a clipboard is one week, Figure 15.7 shows how long it will take to assemble a clipboard from scratch. An MRP system can forward schedule or backward schedule production. Forward scheduling starts at today's date and schedules forward to determine the earliest date a job can be finished. In Figure 15.7, the clipboard can be finished by period 3. Backward scheduling starts at the due date and schedules backwards to determine when to begin work. In our example, if an order for clipboards is due by period 3, production should begin now.

• Time-phased bill of material: an assembly chart shown against a time scale.

• Forward scheduling: schedules forward from today's date.

• Backward scheduling: schedules backwards from the due date.

Figure 15.7. Time-Phased Assembly Chart

MRP systems can be used for services, too. In renovating hotel rooms, Marriot develops a bill of material and a bill of labor for each room type and then "explodes" the bill throughout the facility to summarize its furniture and decorating needs. Menus in restaurants can be thought of as master schedules. Demand for menu items is forecasted and then multiplied by a bill of ingredients to ensure sufficient "material" is on hand for the chef to prepare what the customer orders. The bill of ingredients can also be used to accurately price menu items.

The item master file, or inventory 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. Table 15.3 displays the item master file of the pressboard component from the clipboard example. It provides a detailed description of the item, specifies the inventory policy, updates the physical inventory count, summarizes the item's year-to-date or month-to-date usage, and provides internal codes to linkthis file with other related information in the MRP database.

• Item master file: a database of information on every item produced, ordered, or inventoried.

The item 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% 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) establishing and enforcing procedures for inventory withdrawal; (3) ensuring prompt and accurate entry of inventory transactions; (4) taking physical inventory count on a regular basis; and (5) reconciling inventory discrepancies in a timely manner.

VIGNESH RAMACHANDRN,

Systems Auditor for a Big Four Accounting Firm

In today's regulatory environment, audits go far beyond the scope of traditional financial and regulatory compliance. With the Sarbanes-Oxley Act, PATRIOT Act, and revised Financial Modernization Act, it has become a requirement for all public corporations to document their business processes and verify them by external auditors. As a financial auditor and now a systems auditor, I interview various personnel at different stages of the production or service process, compare their activities with those documented, and point out inconsistencies, as well as inefficiencies. It takes about two months to thoroughly understand a process and about two weeks to audit it.

Corporations nowadays have complicated ERP and MRP systems whose methods of operation are not always evident to the people using the systems. These systems, though technologically advanced, rely on basic concepts in operations management. As an auditor, a complete understanding of the various processes and methodologies is very important, and my study of operations management has provided the groundwork for such knowledge.

If you have ever 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 involves taking physical count 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 discussed in Chapter 13. A items would be counted more often than B items, perhaps weekly. B items would be counted monthly, and 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.

• Cycle counting: taking physical count of inventory at various cycles during the year.

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.

• Netting: the process of subtracting on-hand quantities and scheduled receipts from gross requirements to produce net requirements.

The MRP process consists of four basic steps: (1) exploding the bill of material, (2) netting out inventory, (3) lot sizing, and (4) time-phasing requirements. The process is performed again and again, moving down the product structure until all items have been scheduled. An MRP matrix, as shown in Table 15.4, is completed for each item starting with level zero items. Identifying information at the top of the matrix includes the item name or number, the lowest level at which the item appears in the product structure (called low level code or LLC), the time required to make or purchase an item (called lead time or LT), and the quantities in which an item is usually made or purchased (called lot size).

Entries in the matrix include gross requirements, scheduled receipts, projected on hand, net requirements, planned order receipts, and planned order releases. Gross requirements begin the MRP process. They are given in the master production schedule (MPS) for end items and derived from the parent for component items. Scheduled receipts are items on order that are scheduled to arrive in future time periods. Projected on hand is inventory currently on hand or projected to be on hand at the end of each time period as a result of the MRP schedule. Net requirements are what actually needs to be produced after on-hand and on-order quantities have been taken into account. Planned order receipts represent the quantities that will be ordered and when they must be received. These quantities differ from net requirements by lot sizing rules when production or purchasing is made in predetermined batches or lots. Common lot sizing rules include ordering in minimum or multiple quantities, using an EOQ or periodic order quantity, or ordering the exact quantities needed (called lot-for-lot or L4L). We discuss these techniques later in the chapter.

The last row of the matrix, planned order releases, determines when orders should be placed (i.e., released) so that they are received when needed. This involves offsetting or time phasing the planned order receipts by the item's lead time. Planned order releases at one level of a product structure generate gross requirements at the next lower level. When the MRP process is complete, the planned order releases are compiled in a planned order report.

• Lot sizing: determining the quantities in which items are usually made or purchased.

• Time phasing: subtracting an item's lead time from its due date to determine when to order an item.

School Mate Products

School Mate offers a number of standard products to encourage writing outside of the classroom, including clipboards, lapdesks, lapboards, and pencil boxes. Rising costs and inventory levels have prompted the company to install a computerized planning and control system called MRP. The MPS and bill of material modules are up and running. Sample output follows. Before going live with the MRP module, School Mate has asked for a manual demonstration. Since manual calculations can be quite tedious, you have decided to prepare MRP matrices for only three items—the clipboard and lapdesk, and a common component, pressboard. The master production schedule, abbreviated product structure diagrams, and inventory information are given below.

Master Production Schedule

	1	2	3	4	5
Clipboard	85	95	120	100	100
Lapdesk	0	60	0	60	0

Item Master File

	Clipboard	Lapdesk	Pressboard
On hand	25	20	150
On order (sch receipt)	175 (period 1)	0	0
LLC	0	0	1
Lot size	L4L	Mult 50	Min 100
Lead time	1	1	1

Solution

We begin with the level 0 items, the clipboard and lapdesk. Since these are finished products, the gross requirements row is simply copied from the master production schedule for those items. We'll begin with the clipboard.

In period 1 we have 25 units on hand and 175 scheduled to be received. That gives us (25 + 175) = 200 units available. We use 85 of them to satisfy demand, leaving (200 – 85) = 115 units in inventory at the end of period 1. In period 2, we can meet demand from stock, leaving (115 – 95) = 20 units in inventory at the end of the period. In period 3, the 20 units on hand is not enough to cover our demand of 120 units. We need to make 100 more. Thus, our net requirements are 100 units. Since our lot sizing rule is lot-for-lot, we order exactly what we need, 100 units. Recall that our lead time is one week. If we wish to receive our order for 100 units in period 3, we must place the order one week in advance, in period 2. To meet demand in periods 4 and 5, we order 100 units in weeks 3 and 4, one week in advance of when we need them.

The MRP matrix for lapdesks appears below. To meet our demand for 60 units in period 2, we'll use the 20 units in stock and make 40 more. Before we release our work order for production, we check our lot sizing rule. It says we should make 50 lapdesks at a time. If the 50 desks are to be ready by week 2, we need to start production in week 1. When the desks are completed, we'll use 40 of them to meet demand and place 10 back in inventory. Those 10 remain in inventory until period 4 when we use them to partially satisfy the demand for 60 desks. We'll need to make 50 more, and since 50 is our lot size quantity, that's what we make. If the desks are to be completed by week 4, we need to start production in week 3.

Pressboard is a purchased component cut to size and used in both the clipboard and the lapdesk. As shown below, its gross requirements are calculated by multiplying the planned order releases of each parent times the quantity per assembly contained in the bill of material. This process is called explosion. Since one pressboard is needed for every clipboard and two for every lapdesk, period 1 gross requirements are (50 × 2) = 100; period 2, (100 × 1 = 100); period 3, (100 × 1) + (50 × 2) = 200; and period 4, (100 × 1) = 100.

• Explosion: the process of determining requirements for lower-level items.

With 150 units on hand, we can satisfy the demand in period 1 with 50 units left over. For period 2, we use the 50 in inventory and need 50 more. Because our lot sizing rule says we must order at least 100 units and it takes 1 week to process an order, we place an order for 100 pressboards in week 1. When the 100 boards come in, we use 50 of them and put 50 back in stock. To meet our demand in period 3, we use the 50 boards in stock and order 150 more. The order is placed in week 2 to arrive in week 3. To meet period 4's demand, we order 100 boards in week 3, one week in advance of delivery.

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:

Planned Order Report

Example 15.1 illustrated the use of minimum order quantities, multiple order quantities, and lot-for-lot sizing rules. Although the L4L approach is most consistent with the objectives of MRP, in some circumstances it is useful to order an amount different from what is needed. For example, minimum order quantities are typically used to take advantage of purchasing or shipping discounts, or to conform to vendor requirements, maximum order quantities are used for large or expensive items when space or funds are limited, and multiple order quantities accommodate packaging restrictions (such as a set number in a box, gallon containers, bundles, or pallet loads). Several additional lot sizing techniques are available with most MRP systems. These include economic order quantity (EOQ) and periodic order quantity (POQ).

Economic Order Quantity

We discussed the economic order quantity for independent demand items in Chapter 13. The EOQ can be adapted for use with MRP if it is treated as a minimum order quantity. In addition, annual demand, D, is replaced with average demand per period, d, and carrying cost, C_c, is converted to a per-period amount. The EOQ is used only sparingly, usually at the finished product or raw material level, and does not perform well when demand is highly variable.

Periodic Order Quantity

The periodic order quantity (POQ) was created as a variation of the EOQ more suited to variable demand. POQ is calculated by dividing the EOQ by average demand. It represents the number of demand periods covered by each order. Thus, if the POQ were three, an order would be placed for three weeks worth of demand.

Example 15.2 compares the L4L, EOQ, and POQ, lot sizing techniques.

• Periodic order quantity (POQ): a lot sizing technique that orders at set time intervals.

Advanced Lot Sizing Rules

The Lifetime Sports Company has been using MRP to manufacture sports equipment for a number of years. Recently, Bob Sage, the operations manager, decided to investigate the use of lot sizing for MRP-generated orders. As a test case, Bob selected a typical product in their line of fishing rods and gathered weekly data over a month's time. Ordering costs are $60 per order, and carrying costs are $1 per unit per week. The beginning inventory is 30 units, and lead time is one week. Help Bob determine whether the L4L, EOQ or POQ lot sizing technique is more appropriate.

With L4L, orders are placed for the exact amount needed. Total cost is calculated as (number of orders × ordering cost) + (total projected on hand × carrying cost).

The outputs of the MRP process are planned orders from the planned order release row of the MRP matrix. As shown in Figure 15.4, 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 change in one part of the production process on the rest of the system. It simulates the ordering, receiving, and use of raw materials, components, and assemblies into future time periods and issues warnings to the MRP planner of impending stockouts or missed due dates.

Table 15.5 shows 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.

Table 15.5. Planned Order Report

Table 15.6 shows 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 normal 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.

• Expedite: to speed up an order so it is completed in less than its normal lead time.

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 is the maximum capability to produce. It can be measured as units of output, dollars of output, hours of work, or number of customers processed over a specified period of time. Capacity is affected by the mix of products and services, the choice of technology, the size of a facility, and the resources allocated.

Rated capacity is the theoretical output that could be attained if a process were operating at full speed without interruption, exceptions, or downtime. Effective capacity takes into account the efficiency with which a particular product or customer can be processed, and the utilization of the scheduled hours or work. Effective capacity expressed in hours per day is calculated as:

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 discussed in Chapter 8. An efficiency of 100% is considered normal or standard performance, 125% is above normal, and 90% 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% will not be able to complete the scheduled work without some adjustment in capacity or reduction in load.

Determining Loads and Capacities

Copy Courier (CC) is a fledgling 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 90%.

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 and load percent.

Job No.	No. of Copies	Setup Time (min)	Run Time (min/unit)
10	500	5.2	0.08
20	1000	10.6	0.10
30	5000	3.4	0.12
40	4500	11.2	0.14
50	2000	15.3	0.10

Solution

The machines and 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%. Daily copy shop capacity is:

2 machines × 2 shifts × 8 hours shift × 90% efficiency

× 87.5% utilization = 25.2 hours or 1512 minutes

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

Copy Courier is overloaded 6.8%. Several options are available to alleviate the overload. If each worker extends his or her working day by approximately 36 minutes, the load percent will reduce to 99%. The same effect can be achieved by increasing efficiency to 97%. This may involve limiting the orders accepted to those that can be processed more efficiently, or grouping jobs by similar processing requirements so that setup time is reduced.

Load profiles are a graphical comparison of load versus capacity. As shown in Figure 15.9, the normal capacity of Department A 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:

• Load profile: a graphical comparison of load versus capacity.

Figure 15.9. Initial Load Profile for Department A

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 processes 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:

Some capacity problems are generated from an MRP plan that includes lot sizes, safety stock and 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 assigned to 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 by one machine or operator. 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.

Normal capacity can be increased by adding extra hours to the work day, extra days to the work week, 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 during 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 customers have the lowest priority and whether their orders should be postponed or canceled.

There are cost consequences associated with each of these alternatives, but there is usually no attempt to derive an optimal 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.

Figure 15.10 shows one possible remedy for the overloads shown in Figure 15.9. 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. This process of balancing underloads and overloads is called load leveling.

Reduce overloads by increasing normal capacity, improving efficiency, or postponing work.

• Load leveling: the process of balancing underloads and overloads.

Figure 15.10. Adjusted Load Profile for Department A

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., sales and operations 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 the sales and operations 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. Normally, the ERP system automatically releases the orders. Work orders sent to the shop enter a shop floor control system, where daily scheduling and monitoring take place. When received, purchase orders are logged through the inventory system electronically before moving to manufacturing. Refer back to Figure 15.1. The figure shows the entire MRP process from the sales and operations plan to manufacture as a closed-loop system. The term is used to describe the numerous feedback loops between plans for production and available capacity.

The MRP process described in the previous sections and depicted in Figure 15.1 makes certain assumptions about production resources and how they should be allocated. Today's ERP technology allows us to relax some of the more restrictive assumptions of MRP. For example, we have learned the following:

ERP systems consist 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—corporate headquarters, manufacturing plants, suppliers, sales offices, and subsidiaries.

Although ERP modules differ by vendor, they are typically grouped into four main categories: (1) finance and accounting, (2) sales and marketing, (3) production and materials management, and (4) human resources. Figure 15.11 shows the type of information that flows between customers, suppliers, and these various functional areas.

Finance/Accounting

The finance and accounting 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 finance module provides consistent financial data that is updated in real time and that links operational results with the financial effects of those results. For every physical transaction, the financial result is shown.

Figure 15.11. Organizational Data Flows: Source: Adapted from Joseph Brady, Ellen Monk, and Bret Wagner, Concepts in Enterprise Resource Planning (Boston: Course Technology, 2001), pp. 7–12.: Note: The flow between HR and Production is similar to that between HR and Sales. It was eliminated from the figure to simplify the diagram.

Sales/Marketing

The sales and marketing 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. The sales module allows for profitability analyses based on different pricing designs with discounts and rebates, and the projection of accurate delivery dates. It can also look into the company's finished goods and work-in-process inventories as well as material availability to determine how quickly an order can be filled. Managers can reserve inventory for specific customers, request certain supplier options, and customize orders. 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. Distribution is coordinated more closely with manufacturing and sales in order to maintain customer delivery schedules.

Production/Materials Management

The production and materials management module is set up to handle all types of manufacturing processes—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. It links sales and distribution to materials management, production planning, and financial effects in real time. Inventory is adjusted instantly and resource planning is done on a daily basis. Materials management refers to supply chain related activities such as purchasing, inventory and warehouse functions, supplier evaluations, just-in-time (JIT) deliveries, and invoice verification.

Human Resources

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 workflow analysis. It provides a database of personnel, maintains salary and benefits structures, and does payroll accounting as well.

Together, these modules form an integrated information technology strategy for effectively managing the entire enterprise. ERP connects processes that belong together, giving every employee fast, convenient access to the information required for their jobs. As shown in Figure 15.12, ERP creates a central depository for the company's data, which enables the company to perform various business analyses. A company can quickly access data in real time related to forecasting and planning, purchasing and materials management, product distribution, and accounting and financial management, so that it can deploy its resources quickly and efficiently. It can help schedule its production capacity to meet demand and reduce inventory levels. By consolidating information from sales the company can better negotiate contracts and product prices, and determine their effect on the company's financial position. These types of decisions often require advanced analytical capabilities collectively called business intelligence.

Figure 15.12. ERP's Central Database

Both the scope and detail of ERP systems are impressive. In addition to the four major mod-ules in an ERP system, there are hundreds of functional support modules. Many of the systems are table-driven, with over 8000 tables to configure. As might be expected, these systems require considerable time and skill to implement. In the next section, we discuss issues in implementation.

Business intelligence sifts through data to find patterns and predict behavior.

ERP implementation has a checkered history of mammoth projects over budget and out of control. Dow Chemical spent half a billion dollars and seven years implementing an ERP system that it is now overhauling. FoxMeyer Drug claims that ERP implementation sent it into bankruptcy.

ALONG THE SUPPLY CHAIN

Under Armour at the Top of Their Game with ERP

Under Armour (UA) is a sports apparel company launched by a University of Maryland football player to market a new type of athletic shirt that fits tightly and wicks away moisture. The innovative new product was a hit with teammates and other athletes, and quickly found its way onto the shelves of Dick's Sporting Goods, creating an entirely new market for what has come to be known as "performance sports apparel." Today, Under Armour sells its products via the Internet, catalogs, and 17,000 sporting goods stores worldwide. In direct competition with giants Nike, Adidas, and Columbia Sportswear, it holds a 74% market share and boasts an average annual growth rate of 40% over the past 12 years.

Having a great product is only one avenue to success. Keeping costs down, suppliers reliable, and customers satisfied is equally important. For Under Armour, that means investing in IT for its business. CEO and founder Kevin Plank says, "We run this company much like a team. Sales and marketing is like offense. Manufacturing and distribution is like defense. Finance and IT are like our special teams." (The Today Show, NBC, 4/15/09)

For its ERP system, Under Armour chose an out-of-thebox product with SAP'S Apparel and Footwear Solution for Consumer Products. Because the software had widespread use in the apparel industry (including Nike, Adidas, and Columbia Sportswear), UA proceeded with confidence to implement the system without modification. Eight months later with the help of a 20-person implementation team and implementation partner, Metamor, Under Armour had finished the implementation process. The company was careful to schedule three mock "go-lives" to accelerate personnel training and anticipate any problems with the changeover by testing in a safe environment without affecting ongoing operations.

The apparel industry is marked by rapid product introductions, seasonal demand, and lengthy supply chains. To meet customer due dates, increase inventory turns, and minimize markdowns, the supply chain must be both fluid and tightly controlled. SAP brought ATP (available-to-promise) functionality to Under Armour's supply chain and enabled the company to allocate inventory across customers and suppliers worldwide. UA can now close its books faster, bring new operations or countries online more readily, and make faster, more knowledgeable decisions with real-time data.

For those activities not covered in SAP'S basic software, UA chose outside vendors Dassault Systemes for PLM (product lifecycle) software and Oracle for ED1 (electronic data interchange) to electronically exchange key documents with suppliers. Both systems were implemented quickly and efficiently. Together these systems help Under Armour stay at the top of its game.

1. Think about the types of products offered and customers served by UA. What information and functionality would be needed for different market segments and customers?

2. Under Armour is not a patented product. How can UA retain its dominance in performance apparel against competitors who now offer similar products?

Sources: Adapted from Trey Palmisano, "From Rags to Microfiber: Inside the Rapid Rise of Under Armour," Sports Illustrated, April 2009; Merrill Douglas, "Jim Calo: Under Armour's Over Achiever," Inbound Logistics, September 2007; Beth Stackpole, "PLM's Vertical Challenge," Managing Automation, February 2008; and Maroushka Kanywani "Why Under Armour Selected SAP," Dashboard Insight, January 2009.

ERP vendors and their customers have learned from these debacles, and the second-generation ERP systems are substantially different from the first generation.

New ERP offerings sport stand-alone modules and open architecture. Companies can pick and choose the modules they want to install and can even choose a collection of modules from different vendors—the best-of-breed approach. While single-source ERP systems are easier to integrate, best-of-breed systems may provide a better match with organizational needs. Table 15.7 lists several enterprise software vendors and their area of expertise.

ERP implementation involves: (1) analyzing business processes, (2) choosing the modules to implement, (3) aligning the level of sophistication, (4) finalizing delivery and access, and (5) linking with external partners.

• Best-of-breed: refers to the selection of ERP modules from different vendors.

Analyze Business Processes

Analyzing business processes is the first step in implementation. Since ERP is an integrated technology that pervades and connects all parts of a company, it usually alters the way a company makes decisions; thus, its implementation typically requires major changes in a company's organizational structure and business processes. Companies that have had success with ERP have taken the time to think about how their processes work and how they can best be integrated before "automating" them. To guide companies in this massive project, ERP vendors have designed their software around best practices for specific industries. Solution maps and stories of successful implementations are available for such industries as 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. Companies can either use the software as a blueprint for how their processes should operate and adjust their processes, or they can map out their own business processes and customize the software accordingly. Most companies try a combination of these approaches.

Choose Modules to Implement

Determining which ERP modules to implement and how they should be configured is a process-oriented (rather than technology-oriented) decision. The decision should be guided by questions such as: (1) Which processes have the biggest impact on customer relations? (2) Which processes would benefit the most from cross-functional or interorganizational integration? (3) Which processes should be standardized throughout the organization and which should be allowed to vary?

Small-market and midsize-market companies with time and budget constraints have an especially hard time implementing ERP. In response, software vendors like SAP have created a fast-track approach to ERP implementation. Based on the processes and applications that have proved most successful in the past, SAP has created 11 industry-specific best-practices templates designed to maximize efficiency and minimize customization. Plain vanilla, template-based modules chosen by the client are provided at a fixed price and implemented over a fixed timetable. The results are impressive. eCompany installed fully functional ERP modules for materials management, function planning, finance, and online retailing in three weeks for less than $200,000. Interactive Apparel implemented SAP's materials management, sales and distribution, warehouse management, and financial modules in nine weeks for less than $150,000.

Align Level of Sophistication

Knowing the level of sophistication needed for your business is also key to effective ERP implementation. QAD, a midmarket ERP vendor, offers industry specific software to manufacturing companies and international clients. QAD software can be directed with instructions much simpler than those of larger ERP vendors. Instead of deploying a single system to manage all of a company's plants, QAD tailors its software to individual plants, then links them with corporate financial, distribution, and support functions. Since 65% of QAD's customers are international, its software incorporates different countries' methods for invoicing, accounting, and amortization. For example, QAD uses a model to decide how an incoming order from a trading partner should be handled, automatically processing transactions across enterprises, languages, and customs. QAD is known for both its ease of implementation and ease of use.

Finalize Delivery and Access

The Internet provides another aid to implementation. ERP vendors, including Oracle, and SAP, now offer their products through portals. The vendor hosts the application, which the customer accesses over the Internet with their browser. Portals are less expensive, so they give midsize market and smaller clients access to the same services as larger corporations. ERP services can also be accessed through third-party application service providers (ASPs). Redback Networks, for example, uses Qwest CyberSolutions to access Oracle's suite of enterprise solutions, including finance, order management, human resources, manufacturing, shipping, and inventory systems.

Link with External Partners

The value of e-business relies on a company's ability to integrate its internal processes with external suppliers, customers, and companies. First-generation ERP systems lacked the ability to interact outside the organization with other ERP systems, with e-businesses, or directly with customers. By the second generation of ERP, vendors had learned to create Web-centric systems by consolidating data and allowing dynamic access from various clients. Software vendors have developed powerful new analytic tools and applications that capitalize on ERP's infrastructure. Examples of such software systems are customer relationship management, supply chain management, and product lifecycle management.