You should be able to:

LO 13.1 Describe the conditions under which MRP is most appropriate

LO 13.2 Describe the inputs, outputs, and nature of MRP processing
LO 13.3 Explain how requirements in a master production schedule are
MRP and ERP translated into material requirements for lower-level items
LO 13.4 Discuss the benefits and requirements of MRP
LO 13.5 Describe some of the difficulties users have encountered with MRP
LO 13.6 Describe MRP II and its benefits
LO 13.7 Explain how an MRP system is useful in capacity requirements
planning
LO 13.8 Describe ERP, what it provides, and its hidden costs

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education. 12-1 Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
McGraw-Hill Education.
13-2

 Material requirements planning (MRP):

 A computer-based information system that translates
master schedule requirements for end items into time-
phased requirements for subassemblies, components,
and raw materials
 The MRP is designed to answer three questions:
1. What is needed?
2. How much is needed?
3. When is it needed?

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.2 McGraw-Hill Education.
LO 13.2 McGraw-Hill Education.
13-3 13-4

 Master schedule:
 One of three primary inputs in MRP; states which end items are to
be produced, when these are needed, and in what quantities
 Managers like to plan far enough into the future so they have
reasonable estimates of upcoming demands
 The master schedule should cover a period that is at least equivalent
to the cumulative lead time
 Cumulative lead time
 The sum of the lead times that sequential phases of a process
require, from ordering of parts or raw materials to completion of
the final assembly

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.2 McGraw-Hill Education.
LO 13.2 McGraw-Hill Education.
13-5 13-6
  Bill of Materials (BOM)
 A listing of all of the assemblies, subassemblies, parts,
and raw materials needed to produce one unit of a
product
 Product structure tree
 A visual depiction of the requirements in a bill of materials,
where all components are listed by levels

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.2 McGraw-Hill Education.
LO 13.2 McGraw-Hill Education.
13-7 13-8

 Low-level coding
 Restructuring the bill of materials so that multiple  Inventory records
occurrences of a component all coincide with the lowest  Includes information on the status of each item by time period,
level at which the component occurs called time buckets
 Information about
 Gross requirements
Level 0 X  Scheduled receipts
 Expected amount on hand
 Other details for each item such as
Level 1 B(2) C
 Supplier
 Lead time
Level 2 D(3) F(2)  Lot size policy
 Changes due to stock receipts and withdrawals
Level 3 E(4) E E(2)  Canceled orders and similar events

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.2 McGraw-Hill Education.
LO 13.2 McGraw-Hill Education.
13-9 13-10

 Primary Outputs
 Planned orders
 A schedule indicating the amount and timing of future
orders
 Order releases
 Authorizing the execution of planned orders
 Changes
 Revisions of the dates or quantities, or the cancellation of
orders

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.2 McGraw-Hill Education.
LO 13.2 McGraw-Hill Education.
13-11 13-12
  Secondary Outputs  MRP processing takes the end item requirements
 Performance-control reports specified by the master schedule and “explodes” them
 Evaluation of system operation, including deviations from plans
into time-phased requirements for assemblies, parts,
and cost information
 e.g., missed deliveries and stockouts
and raw materials offset by lead times
 Planning reports
 Data useful for assessing future material requirements
 e.g., purchase commitments
 Exception reports
 Data on any major discrepancies encountered
 e.g., late and overdue orders, excessive scrap rates, requirements for
nonexistent parts

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.2 McGraw-Hill Education.
LO 13.3 McGraw-Hill Education.
13-13 13-14

Week Number 1 2 3 4 5 6 Week Number 1 2 3 4 5 6

Gross Requirements Gross Requirements
Scheduled Receipts Scheduled Receipts
Projected on hand Projected on hand
Net requirements Net requirements
Planned-order-receipt Planned-order-receipt
Planned-order release Planned-order release

Gross requirements Net requirements

• Total expected demand • Actual amount needed in each time period
Scheduled receipts Planned-order receipts
• Open orders scheduled to arrive • Quantity expected to received at the beginning of the period
Projected Available offset by lead time
• Expected inventory on hand at the beginning of each time Planned-order releases
period • Planned amount to order in each time period

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.3 McGraw-Hill Education.
LO 13.3 McGraw-Hill Education.
13-15 13-16

 The MRP is based on the product structure tree diagram

 Requirements are determined level by level, beginning
with the end item and working down the tree Shutter
 The timing and quantity of each “parent” becomes the basis for
determining the timing and quantity of the “children” items directly
below it
 The “children” items then become the “parent” items for the next
level, and so on
Wood
Frames (2)
sections (4)

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.3 McGraw-Hill Education.
LO 13.3 McGraw-Hill Education.
13-17 13-18
  Pegging
 The process of identifying the parent items that have
generated a given set of material requirements for an
item

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.3 McGraw-Hill Education.
LO 13.3 McGraw-Hill Education.
13-19 13-20

 An MRP is not a static document  Two basic systems

 As time passes  Regenerative system
 Some orders get completed  Approach that updates MRP records periodically
 Other orders are nearing completion  Essentially a batch system that compiles all changes that occur
 New orders will have been entered within the time interval and periodically updates the system
 A revised production plan is developed in the same way the
 Existing orders will have been altered
original plan was developed
 Quantity changes
 Delays
 Net-change system
 Missed deliveries  Approach that updates MRP records continuously
 The production plan is modified to reflect changes as they occur
 Only the changes are exploded through the system

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.3 McGraw-Hill Education.
LO 13.3 McGraw-Hill Education.
13-21 13-22

 Safety Stock  Lot-for-Lot (L4L) ordering

 Theoretically, MRP systems should not require safety stock  The order or run size is set equal to the demand for that period
 Variability may necessitate the strategic use of safety stock  Minimizes investment in inventory
 A bottleneck process or one with varying scrap rates may cause  Results in variable order quantities
shortages in downstream operations  A new setup is required for each run
 Shortages may occur if orders are late or fabrication or assembly  Economic Order Quantity (EOQ)
times are longer than expected  Can lead to minimum costs if usage of item is fairly uniform
 When lead times are variable, the concept of safety time is often  This may be the case for some lower-level items that are common to different
used ‘parents’
 Less appropriate for ‘lumpy demand’ items because inventory remnants often
 Safety time
result
 Scheduling orders for arrival or completion sufficiently ahead of
their need so that the probability of shortage is eliminated or  Fixed Period Ordering
significantly reduced  Provides coverage for some predetermined number of periods

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.3 McGraw-Hill Education.
LO 13.3 McGraw-Hill Education.
13-23 13-24
  Material goods that form a part of  Enables managers to easily
 Determine the quantities of each component for a given order size
product - service
 Know when to release orders for each component
 Food catering service
 Be alerted when items need attention
 Estimating quantities of ingredients
 Additional benefits
 Estimating delivery times
 Low levels of in-process inventories
 The ability to track material requirements
 The ability to evaluate capacity requirements
 A means of allocating production time
 The ability to easily determine inventory usage via backflushing
 Exploding an end item’s BOM to determine the quantities of the components
that were used to make the item

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
consent of McGraw-Hill Education. LO 13.4 McGraw-Hill Education.
13-25 13-26

 To implement an effective MRP system requires:  Consequence of inaccurate data

 A computer and the necessary software to handle computations and  Missing parts
maintain records
 Ordering incorrect numbers of items
 Accurate and up-to-date
 Master schedules  Inability to stay on schedule
 Bills of materials  Other problems
 Inventory records  Assumptions of constant lead times
 Integrity of data files
 Products being produced differently from the BOM
 Failure to alter a BOM when customizing a product
 Inaccurate forecasts

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.4 McGraw-Hill Education.
LO 13.5 McGraw-Hill Education.
13-27 13-28

 Manufacturing resources planning (MRP II)

 Expanded approach to production resource planning, involving
other areas of the firm in the planning process and enabling
capacity requirements planning
 Most MRP II systems have the capability of performing simulations to
answer a variety of “what if” questions so they can gain a better
appreciation of available options and their consequences

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.6 McGraw-Hill Education.
LO 13.6 McGraw-Hill Education.
13-29 13-30
  When MRP II systems began to include feedback loops,  Capacity requirements planning (CRP)
they were referred to as Closed Loop MRP  The process of determining short-range capacity requirements.
 Inputs to capacity requirement planning
 Closed Loop MRP
 Planned-order releases for the MRP
 Systems evaluate a proposed material plan relative to available
capacity  Current shop loading
 If a proposed plan is not feasible, it must be revised  Routing information
 This evaluation is referred to as capacity requirements planning  Job time
 Key outputs
 Load reports for each work center

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.6 McGraw-Hill Education.
LO 13.7 McGraw-Hill Education.
13-31 13-32

 Load reports
 Department or work center reports that compare known  Enterprise resource planning (ERP)
and expected future capacity requirements with  ERP was the next step in an evolution that began with MRP and
projected capacity availability evolved into MRPII
 ERP, like MRP II, typically has an MRP core

 ERP provides a system to capture and make data available in real

time to decision makers and other users throughout an
organization
 ERP systems are composed of a collection of integrated modules

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.7 McGraw-Hill Education.
LO 13.8 McGraw-Hill Education.
13-33 13-34

Module Brief Description

Accounting/Finance A central component of most ERP systems. It provides a range of financial reports,  The ‘big bang’
including general ledger, accounts payable, accounts receivable, payroll, income  Companies cast off all of their legacy systems at once and implement a
statements, ad balance sheets
Marketing Supports lead generation, target marketing, direct mail, and sales
single ERP system across the entire company
 The most ambitious and difficult implementation approach
Human Resources Maintains a complete data base of employee information such as date of hire,
salary, contact information, performance evaluations, and other pertinent  Franchising strategy
information
 Independent ERP systems are installed in each business unit of the
Purchasing Facilitates vendor selection, price negotiation, making purchasing decisions, and
bill payment enterprise while linking common processes across the enterprise
Production Planning Integrates information on forecasts, orders, production capacity, on-hand  Suits large or diverse companies that do not share many common processes
inventory quantities, bills of material, work in process, schedules, and production
lead times
across business units
Inventory Management Identifies inventory requirements, inventory availability, replenishment rules, and  Slam dunk
inventory tracking
 ERP dictates the process design where the focus is on a few key processes
Distribution Contains information on third-party shippers, shipping and delivery schedules,
delivery tracking  More appropriate for smaller companies expecting to grow into ERP
Sales Information on orders, invoices, order tracking, and shipping

Supply Chain Management Facilitates supplier and customer management, supply chain visibility, and event
management

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.8 McGraw-Hill Education.
LO 13.8 McGraw-Hill Education.
13-35 13-36
  How can ERP improve a company’s business performance?
 How long will an ERP implementation project take?
 How will ERP affect current business processes?
 What is the ERP total cost of ownership?
 What are the hidden costs of ERP ownership?

Copyright © 2021 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of
LO 13.8 McGraw-Hill Education.
13-37