The Traditional Manufacturing Environment

The conversion cycle consists of both physical and information activities related to manufacturing products for sale. The context-level data flow
diagram (DFD) in Figure 7-1 illustrates the central role of the conversion cycle and its interactions with other business cycles. Production is
triggered by customer orders from the revenue cycle and/or by sales forecasts from marketing. These inputs are used to set a production target
and prepare a production plan, which drives production activities. Purchase requisitions for the raw materials needed to meet production
objectives are sent to the purchases procedures (expenditure cycle), which prepares purchase orders for vendors. Labor used in production is
transmitted to the payroll system (expenditure cycle) for payroll processing. Manufacturing costs associated with intermediate work-in-process
and finished goods (FG) are sent to the general ledger (GL) and financial reporting system.

Depending on the type of product being manufactured, a company will employ one of the following production methods:

1. Continuous processing creates a homogeneous product through a continuous series of standard pro- cedures. Cement and petrochemicals
are produced by this manufacturing method. Typically, under this approach firms attempt to maintain finished-goods inventory at levels
needed to meet expected sales demand. The sales forecast in conjunction with information on current inventory levels triggers this process.

2. Make-to-order processing involves the fabrication of discrete products in accordance with customer specifications. This process is initiated by
sales orders rather than depleted inventory levels.

3. Batch processing produces discrete groups (batches) of product. Each item in the batch is similar and requires the same raw materials and
operations. To justify the cost of setting up and retooling for

each batch run, the number of items in the batch tends to be large. This is the most common method of production and is used to manufacture
products such as automobiles, household appliances, canned goods, automotive tires, and textbooks. The discussion in this chapter is based on
a batch processing environment.

BATCH PROCESSING SYSTEM

The DFD in Figure 7-2 provides a conceptual overview of the batch processing system, which consists of four basic processes: plan and control
production, perform production operations, maintain inventory control, and perform cost accounting. As in previous chapters, the conceptual
system discussion is intended to be technology-neutral. The tasks described in this section may be performed manually or by computer. The
figure also depicts the primary information flows (documents) that integrate these activities and link them to other cycles and systems. Again,
system documents are technology-neutral and may be hard copy or digital. We begin our study of batch processing with a review of the
purpose and content of these documents.

Documents in the Batch Processing System

A manufacturing process such as that shown in Figure 7-2 could be triggered by either individual sales orders from the revenue cycle or by a
sales forecast the marketing system provides. For discussion purposes, we will assume the latter. The sales forecast shows the expected
demand for a firm’s FG for a given period. For some firms, marketing may produce a forecast of annual demand by product. For firms with
seasonal swings in sales, the forecast will be for a shorter period (quarterly or monthly) that can be revised in accordance with economic
conditions.

• The production schedule is the formal plan and authorization to begin production. This document describes the specific products to be made,
the quantities to be produced in each batch, and the manufacturing timetable for starting and completing production. Figure 7-3 contains an
example of a production schedule.

• The bill of materials (BOM), an example of which is illustrated in Figure 7-4, specifies the types and quantities of the raw material (RM) and
subassemblies used in producing a single unit of finished product. The RM requirements for an entire batch are determined by multiplying the
BOM by the number of items in the batch.

• A route sheet, illustrated in Figure 7-5, shows the production path that a particular batch of product follows during manufacturing. It is similar
conceptually to a BOM. Whereas the BOM specifies material requirements, the route sheet specifies the sequence of operations (machining or
assembly) and the standard time allocated to each task.

• The work order (or production order) draws from BOMs and route sheets to specify the materials and production (machining, assembly, and
so on) for each batch. These, together with move tickets (described next), initiate the manufacturing process in the production departments.
Figure 7-6 presents a work order.

• A move ticket, shown in Figure 7-7, records work done in each work center and authorizes the movement of the job or batch from one work
center to the next.

• A materials requisition authorizes the storekeeper to release materials (and subassemblies) to individuals or work centers in the production
process. This document usually specifies only standard quantities. Materials needed in excess of standard amounts require separate
requisitions that may be identified explicitly as excess materials requisitions. This allows for closer control over the production process by
highlighting excess material usage. In some cases, less than the standard amount of material is used in production. When this happens, the
work centers return the unused materials to the storeroom accompanied by a materials return ticket. Figure 7-8 presents a format that could
serve all three purposes.

CONTROLS IN THE TRADITIONAL ENVIRONMENT

Recall from previous chapters the six general classes of internal control activities: transaction authorization, segregation of duties, supervision,
access control, accounting records, and independent verification. Specific controls as they apply to the conversion cycle are summarized in
Table 7-1 and further explained in the following section.

Transaction Authorization

The following describes the transaction authorization procedure in the conversion cycle.

1. In the traditional manufacturing environment, production planning and control authorize the production activity via a formal work order.
This document reflects production requirements, which are the difference between the expected demand for products (based on the sales
forecast) and the FG inventory on hand.

2. Move tickets signed by the supervisor in each work center authorize activities for each batch and for the movement of products through the
various work centers.

3. Materials requisitions and excess materials requisitions authorize the storekeeper to release materials to the work centers.

Segregation of Duties

One objective of this control procedure is to separate the tasks of transaction authorization and transaction processing. As a result, the
production planning and control department is organizationally segregated from the work centers.

Another control objective is to segregate record keeping from asset custody. The following separations apply:
1. Inventory control maintains accounting records for RM and FG inventories. This activity is kept separate from the materials storeroom and
from the FG warehouse functions, which have custody of these assets.

2. Similarly, the cost accounting function accounts for WIP and should be separate from the work cen- ters in the production process.

Finally, to maintain the independence of the GL function as a verification step, the GL department must be separate from departments keeping
subsidiary accounts. Therefore, the GL department is organizationally segregated from inventory control and cost accounting.

Supervision

The following supervision procedures apply to the conversion cycle:

1. The supervisors in the work centers oversee the usage of RM in the production process. This helps to ensure that all materials released from
stores are used in production and that waste is minimized. Employee time cards and job tickets must also be checked for accuracy.

2. Supervisors also observe and review timekeeping activities. This promotes accurate employee time cards and job tickets.

Access Control

The conversion cycle allows both direct and indirect access to assets.

DIRECT ACCESS TO ASSETS. The nature of the physical product and the production process influences the type of access controls needed.

1. Firms often limit access to sensitive areas, such as storerooms, production work centers, and FG warehouses. Control methods used include
identification badges, security guards, observation devices, and various electronic sensors and alarms.

2. The use of standard costs provides a type of access control. By specifying the quantities of material and labor authorized for each product,
the firm limits unauthorized access to those resources. To obtain excess quantities requires special authorization and formal documentation.

INDIRECT ACCESS TO ASSETS. Assets, such as cash and inventories, can be manipulated through access to the source documents that control
them. In the conversion cycle, critical documents include materials requisitions, excess materials requisitions, and employee time cards. A
method of control that also supports an audit trail is the use of prenumbered documents.

Accounting Records

As we have seen in preceding chapters, the objective of this control technique is to establish an audit trail for each transaction. In the
conversion cycle this is accomplished through the use of work orders, cost sheets, move tickets, job tickets, materials requisitions, the WIP file,
and the FG inventory file. By pre- numbering source documents and referencing these in the WIP records, a company can trace every item of FG
inventory back through the production process to its source. This is essential in detecting errors in production and record keeping, locating
batches lost in production, and performing periodic audits.

Independent Verification

Verification steps in the conversion cycle are performed as follows:

1. Cost accounting reconciles the materials and labor usage taken from materials requisitions and job tickets with the prescribed standards.
Cost accounting personnel may then identify departures from prescribed standards, which are formally reported as variances. In the traditional
manufacturing envi- ronment, calculated variances are an important source of data for the management reporting system.

2. The GL department also fulfills an important verification function by checking the total movement of products from WIP to FG. This is done
by reconciling journal vouchers from cost accounting and summaries of the inventory subsidiary ledger from inventory control.

3. Finally, internal and external auditors periodically verify the RM and FG inventories on hand through a physical count. They compare actual
quantities against the inventory records and make adjustments to the records when necessary.

World Class Manufacturing

Introduction

Manufacturing has evolved considerably since the advent of industrial revolution. In current global and competitive age, it is very important for
organization to have manufacturing practice which is lean, efficient, cost-effective and flexible.

World class manufacturing is a collection of concepts, which set standard for production and manufacturing for another organization to follow.
Japanese manufacturing is credited with pioneer in concept of world-class manufacturing. World class manufacturing was introduced in the
automobile, electronic and steel industry.

World class manufacturing is a process driven approach where various techniques and philosophy are used in one combination or other.

Some of the techniques are as follows:

Make to order

Streamlined Flow

Smaller lot sizes

Collection of parts

Doing it right first time

Cellular or group manufacturing

Total preventive maintenance

Quick replacement

Zero Defects

Just in Time

Increased consistency

Higher employee involvement

Cross Functional Teams

Multi-Skilled employees

Visual Signaling

Statistical process control

Idea of using above techniques is to focus on operational efficiency, reducing wastage and creating cost efficient organization. This leads to
creation of high-productivity organization, which used concurrent production techniques rather than sequential production method.
World Class Manufacturers

World class manufacturers tend to implement best practices and also invent new practices as to stay above the rest in the manufacturing
sector. The main parameters which determine world-class manufacturers are quality, cost effective, flexibility and innovation.

World class manufacturers implement robust control techniques but there are five steps, which will make the system efficient. These five steps
are as follows:

Reduction of set up time and in tuning of machinery: It is important that organizations are able to cut back time in setting up machinery and
also tune machinery before production.

Cellular Manufacturing: It is important that production processes are divided into according to its nature, with similar nature combined
together.

Reduce WIP material: It is normal tendency of manufacturing organization to maintain high levels of WIP material. Increased WIP leads to more
cost and decreased WIP induces more focus on production and fast movement of goods.

Postpone product mutation: For to achieve a higher degree of customization many changes are made to final product. However, it is important
that mutation conceived for the design stage implement only after final operation.

Removal the trivial many and focus on vital few: It is important for organization to focus on production of products which are lined with
forecast demand as to match customer expectation.

Principles of World Class Manufacturing

There are three main principles, which drive world-class manufacturing.

Implementation of just in time and lean management leads to reduction in wastage thereby reduction in cost.

Implementation of total quality management leads to reduction of defects and encourages zero tolerance towards defects.

Implementation of total preventive maintenance leads to any stoppage of production through mechanical failure.

Aspects of World Class Manufacturing

The main aspects of the world-class manufacturing are as follows:

Industrial culture area

Market/client area

Product development area

Operations area

E-Performance area

The Principles Of Lean Manufacturing

In order to gain a competitive edge, many companies have adopted lean manufacturing (or lean thinking) as a keystone for success in today’s
global market. Lean manufacturing has enabled businesses to increase production, reduce costs, improve quality, and increase profits by
following five key principles: identify value, map the value stream, create flow, establish pull and seek perfection.

Where Were Lean Manufacturing Principles Formed?

The lean manufacturing principles were formed in Japan. In an effort to improve sales and increase profit, Eiji Toyoda embarked on a journey to
improve Toyota’s manufacturing processes. Inspired by his visit to the Ford facility in Michigan, he collaborated with Taiichi Ōno to develop a
series of lean manufacturing tools. Collectively known as the Toyota Production System, these tools gained prominence in James Womack’s and
Daniel Jones’ book, Lean Solutions, where the authors identified the five principles.
The Five Lean Manufacturing Principles

The five lean manufacturing principles are the foundation of Toyota’s success and can help businesses create products centered on what
customers want.

Identify Value

The first lean principle, identifying value, is also the first step in the journey to become lean. This step requires businesses to define what
customers value and how their products or services meet those values. In this case, value requires:

 Designing products to meet the needs of customers

 Removing features that do not specifically meet those needs
By designing products to meet specific needs, businesses will eliminate wasteful steps that may have been required for unwanted features.
Design for Six Sigma (DFSS) is one method that can help businesses identify value. Using DFSS, companies can systematically define, measure,
and analyze what their customers want. Companies can then design products tailored for their customers.

Map the Value Steam

The second lean manufacturing principle is mapping the value stream. A value stream is the complete life-cycle of a product, which includes the
product’s design, the customers’ use of the product and the disposal of the product.

This step requires companies to identify and map the product’s value stream. Lean tools like Value Stream Mapping (VSM) can be used to
visually map out the entire product flow. Once the value stream is mapped, it will be easier to find and minimize steps that do not add value.

Create Flow

The third lean principle is creating flow. Efficient product flow requires items to move from production to shipping without interruption and can
be achieved by strategically organizing the work floor. Every factor, from people and equipment to materials and shipping, must be taken into
account to ensure products seamlessly move through the production process.

A well-organized work floor will result in reduced production time, inventory size and material handling.

Establish Pull

Closely related to creating flow, the fourth lean principle requires businesses to use a pull-based production system. Traditional production
systems use a push system, which starts with purchasing supplies and proceeds by pushing material through the manufacturing process, even
when there isn't an order. While push systems are easy to create, they often result in large inventories and a significant amount of work-in-
progress (WIP).

A pull system, however, pulls a customer's order from the shipping department, which then prompts new items to be manufactured and signals
that additional supplies need to be purchased. Lean manufacturing tools like Kanban can help businesses establish a pull system to control the
flow of materials in a production system.

Using a pull system, businesses will:

 Increase output
 Maximize usable workspace
 Reduce inventories
 Eliminate overproduction and underproduction
 Eliminate errors caused by having too much
WIP
Seek Perfection

The final lean manufacturing principle requires companies

to seek perfection. While seeking perfection may seem
straightforward, it is often one of the most difficult
principles to successfully apply in the workplace. Seeking
perfection requires companies to continuously improve their practices and often requires a shift in the workplace culture.

Kaizen, a philosophy of continuous improvement, can help businesses with this shift by creating a culture where workers seek perfection.
Kaizen focuses on making small, incremental changes and requires every worker, from the corner office to the production floor, to help
improve business practices.

Over time, Kaizen will result in increased efficiency, lower costs, greater productivity, and better quality products.

Integrated Accounting vs. Traditional Accounting: 5 Traditional Troubles

Traditional accounting systems are isolated from operations, and that causes some problems:

1. Traditional accounting information is dated. With manual accounting, accounting information is never up-to-date except for the instant that

someone manually closes a period. But integrated cloud accounting is automatically and continuously updated by operations for a complete,

accurate, real-time picture of where business stands.

2. Traditional accounting takes too long. It requires a

lot of time and labor to manually take all of the information from operations and re-key it into an accounting system. With integrated
accounting, the information flows automatically from operations to accounting to eliminate rote tasks.

3. Traditional accounting invites errors. Manual data entry is always an error opportunity. So re-keying information from order management to

accounting for every order is bound to lead to mistakes. Integrated accounting removes error opportunities by removing manual re-keying.

4. Traditional accounting requires manual sorting. Not only do professionals have to re-key accounting data in traditional systems, they first

have to identify what it is and sort it into cumbersome batches. Integrated accounting systems know what A/R is, what A/P is, and what belongs

where so information is automatically posted to the right place.

5. Traditional accounting means missed opportunities. You can’t take traditional accounting with you. Integrated cloud accounting opens a

world of opportunities. Accounting is tied back to orders, so it’s easy to invoice and receive payment right on the spot – even if that spot is

miles from the office.

Introduction to Activity Based Costing

Activity based costing (ABC) assigns manufacturing overhead costs to products in a more logical manner than the traditional approach of simply
allocating costs on the basis of machine hours. Activity based costing first assigns costs to the activities that are the real cause of the overhead.
It then assigns the cost of those activities only to the products that are actually demanding the activities.

Let's discuss activity based costing by looking at two products manufactured by the same company. Product 124 is a low volume item which
requires certain activities such as special engineering, additional testing, and many machine setups because it is ordered in small quantities. A
similar product, Product 366, is a high volume product—running continuously—and requires little attention and no special activities. If this
company used traditional costing, it might allocate or "spread" all of its overhead to products based on the number of machine hours. This will
result in little overhead cost allocated to Product 124, because it did not have many machine hours. However, it did demand lots of
engineering, testing, and setup activities. In contrast, Product 366 will be allocated an enormous amount of overhead (due to all those machine
hours), but it demanded little overhead activity. The result will be a miscalculation of each product's true cost of manufacturing overhead.
Activity based costing will overcome this shortcoming by assigning overhead on more than the one activity, running the machine.
Activity based costing recognizes that the special engineering, special testing, machine setups, and others are activities that cause costs—they
cause the company to consume resources. Under ABC, the company will calculate the cost of the resources used in each of these activities.
Next, the cost of each of these activities will be assigned only to the products that demanded the activities. In our example, Product 124 will be
assigned some of the company's costs of special engineering, special testing, and machine setup. Other products that use any of these activities
will also be assigned some of their costs. Product 366 will not be assigned any cost of special engineering or special testing, and it will be
assigned only a small amount of machine setup.

Activity based costing has grown in importance in recent decades because (1) manufacturing overhead costs have increased significantly, (2)
the manufacturing overhead costs no longer correlate with the productive machine hours or direct labor hours, (3) the diversity of products and
the diversity in customers' demands have grown, and (4) some products are produced in large batches, while others are produced in small
batches.

A recently evolved management accounting model, Value Stream Accounting (VSA), has potential for providing valuable information in a format

that encompasses costs as they relate to value streams within an organization. This approach has the advantage of tying accounting

information to lean management concepts and has proven effective in for-profit environments. Before we get into Value Stream Accounting,

let’s explore a little history.

VSA evolved from cost accounting and lean manufacturing principles. The objective of cost or management accounting is to produce

information that can be used to support strategic planning and decision-making to achieve organizational objectives. That is, management

accounting is not about being a watchdog, but is meant to become an integral part of the continuous improvement process. Traditional

accounting based on generally accepted accounting principles (GAAP) provides information that is of little value for lean management and

continuous process improvement as it major focus is accurate financial reporting of net income and the balance sheet. Governmental

accounting is based on fund accounting that was developed with the objective of providing budget control, not as a tool to become more

effective and efficient.

In contrast, management accounting has evolved conceptually to meet the needs of Total Quality Management (TQM), continuous

improvement, and lean management concepts. All of these concepts require information on processes and activities within the processes in

order to seek improvement strategies. Managerial accounting was the popular flavor for the 70s and 80s.

Through managerial accounting, organizations identified cost centers based on departments, lines, groups of machines, cells, etc., on which

they initially charged the direct workforce dedicated to those centers, the amortization of machines, the raw materials and the semi-finished

goods. The problem with this approach is that overhead and indirect costs were left out and allocated later based on some form of allocation

method. These costs can be significant and consist of such things as design and development, marketing, maintenance, materials handling,

quality, supplier’s management, etc.

Activity-Based-Costing (ABC)

Activity-based-costing became very popular with companies in the 1990s, and was widely adopted by many industries including governments

and not-for-profit organizations. Activity-based-costing is a method for determining accurate costs. Activity Based Costing (ABC) provides

management with insightful information about their activities and the amount of resources they consume. Under ABC, a direct link of cause

and effect between activities and costs is identified and costs are allocated to the product or service on the basis of the activities generating the
costs. With accounting information in this format, management is able to effect better control over costs because costs are associated with

tangible activities, rather than stand-alone numbers.

The ABC approach to costing has been employed in many industries with favorable results produced by better management and improved

resource allocations. ABC can be used as a means of management control to also control administrative and support costs. While the benefits

from ABC are touted, a significant practical disadvantage is the time involved to establish and maintain an ABC database. Less onerous in terms

of cost to maintain and implement is Time-Based ABC, but the cost to establish and maintain this information is still significant, although

mitigated.

ABC integrates well with Activity Based Management (ABM), which seeks to manage activities in a way that will decrease costs and increase

value. A further extension of ABM includes Value Based Management (VBM), where value is included in the equation. Both of these

approaches are used in industrial settings, but are not common in service, government or higher education environments. VBM can provide

beneficial results with respect to the potential for improving management processes by making managers more aware of total costs to run their

departments, as well as providing more transparency with respect to spending levels and enables better analysis and linkages to strategies.

Value Stream Accounting

We are now beginning to see the emergence of Value Stream Accounting (VSA). Value Stream Accounting is based on Value Stream Mapping,

using the principles of Lean to discover the real cause and cost of waste. The steps for preparing a value stream map include mapping the

product/service through the classical Value Stream; mapping the process going into details of the activities; measuring the current state of the

activities (Cycle Time, Changeover Time, distance, etc.); dividing the activities into value activities and non value activitiesand measuring with

Value Stream Accounting; and establishing the cost driver for each activity.

There is a set of activities or processes that form a value stream in the production of a product or service. An organization may have several

different values streams that represent a single product or service, or a value stream may be made up of a family of products or services that

have similar characteristics in their design, production and use. Each value stream includes the support activities that relate to the creation of

the product or service. A value stream, therefore, represents all activities required to create value for the end user or customer.

Lean organizations focus on links between activities and customer needs with the objective of continuously improving customer satisfaction

while simultaneously reducing non-value added activities. Value stream measurements, derived from value stream accounting, can be devised

that highlight this lean management focus and objective. Communicating value stream measures and their use as evaluation tools for the

organization will naturally motivate and focus employees at all levels on the improvement of these measures, thereby engendering a lean

mentality throughout the organization.

Value stream accounting can assist in better understanding the effects of strategic decisions. The vast majority of strategic decisions are driven

by overarching objectives of becoming more effective and efficient. Through VSA, the effects of strategic decisions are more transparent in

terms of the impact of decisions on effectiveness and efficiency of each value stream.
One reason that value stream accounting enables better analysis and decision making is that value stream accounting attempts to reduce the

use of indirect cost allocations, which are often made on more or less arbitrary bases. Direct costs are those costs directly traceable to the

product or service.

Other recent accounting innovations such as ABC and RBB allocate indirect costs in determining a particular academic unit’s contribution.

However, indirect cost (overhead) allocations often create friction as one business unit may feel disadvantaged due to the allocation

methodology chosen. VSA overcomes much of the problem by viewing the production process as a value stream and assigning all costs

associated with the value stream as direct costs. This has the added benefit of forcing management to view the entity differently and often

supports an organizational change related to value streams, rather than traditional functional lines. A value stream perspective views all

support functions necessary to produce the product or family of products as an integral part of the value stream. Thus support costs become

direct to the value stream and not part of overhead, which results in a more precise cost determination because no indirect cost allocation is

necessary.

Lean management thinking requires viewing the value stream as a sequence of activities that produce the ultimate value for the customer,

which does include many support functions that interact directly with the customer. However, viewing the value stream as crossing functional

(departmental) lines naturally creates the possibility of a nontraditional organizational hierarchy. The management adage that responsibility

and authority should be equal is borne out in the necessity to view the organizational hierarchy differently. That is, only one person should be

responsible for the value stream and should have authority to manage the value stream equal to that responsibility.

Since the value stream crosses functional lines, the manager of the value stream should have the authority to direct all employees within the

value stream, regardless of their function. In this case, the academic dean would be responsible to manage not only the academic part of the

value stream but also the support functions dedicated to the college value stream. The decentralization of decisions, however, would have to

be made within the broad parameters of university policies and strategies. All of the traditional costs direct costs, as well as all other support

costs would now be considered as direct costs to the value stream and under the authority of the value stream manager.

Such a change in organizational hierarchy is consistent with lean management concepts as it empowers the value stream manager to make

decisions that affect the value stream regardless of the functions affected within the value stream. The change in hierarchy can also reduce the

size of the hierarchy and simplify the operation.

Adapting VSA can be complicated and will probably require changes to various business processes and systems. In moving forward,

organizations will need a good business analysis solution such as Enfocus Requirements Suite™ to document impacts and define requirements

which specify various changes to systems and processes.

Material requirements planning (MRP) is a system for calculating the materials and components

needed to manufacture a product. It consists of three primary steps: taking inventory of the materials and
components on hand, identifying which additional ones are needed and then scheduling their production

or purchase.

MRP is one of the most widely used systems for harnessing computer power to automate the

manufacturing process.

IBM engineer Joseph Orlicky developed MRP in 1964 after he studied the Toyota Production System,

which was the model for the lean productionmethodology. Power tool maker Black & Decker built the
first computerized MRP system that same year, according to several sources.

It's important to note, however, that MRP and lean production are not the same and are considered by

some practitioners to be antithetical, though some say MRP can help with lean production. MRP is

considered a "push" system -- inventory needs are determined in advance, and goods produced to meet

the forecasted need -- while lean is a "pull" system in which nothing is made or purchased without

evidence of actual -- not forecasted -- demand.

Orlicky's ideas spread rapidly throughout the manufacturing sector after the 1975 publication of his

book, Material Requirements Planning: The New Way of Life in Production and Inventory Management,

and by the early 1980s, there were hundreds of commercial and homegrown MRP software programs.

Orlicky died in 1986. A second edition of the book, updated by George Plossl, was released in 1994.The

current version, Orlicky's Material Requirements Planning, Third Edition is a 2011 update by consultants

Carol Ptak and Chad Smith. It adds advice on how to use MRP to run a "demand-driven" planning

process that uses actual sales orders, rather than the typical MRP method of a sales forecast, to

calculate material requirements. Called DDMRP, this newer "pull" approach is controversial and viewed

by some as a violation of important principles established by Orlicky.

MRP basics

MRP uses information from the bill of materials (a list of all the materials, subassemblies and other components
needed to make a product, along with their quantities), inventory data and the master production schedule to

calculate the required materials and when they will be needed during the manufacturing process.
MRP is useful in both discrete manufacturing, in which the final products are distinct items that can be counted
-- such as bolts, subassemblies or automobiles -- and process manufacturing, which results in bulk products --
such as chemicals, soft drinks and detergent -- that can't be separately counted or broken down into their constituent

parts.