ENTERPRISE RESOURCE

PLANNING

ASSIGNMENT 1

FACULTY : Ms. S.A. Shanthi

Submitted By :
Surya Bakshi
DFT VII
NIFT Chennai
Q.1. Is MRP a material planning system, a production planning system,
both or neither? Explain.
Ans.
MRP is a material planning system as well as a production planning system.
Material requirements planning (MRP) is a computer-based, time-phased system
for planning and controlling the production and inventory function of a firm from
the purchase of materials to the shipment of finished goods. All MRP systems are
computer based since the detail involved and the inherent burden of computation
make manual use prohibitive. MRP is time phased because it not only
determines what and how much needs to be made or purchased, but also when.

Material requirements planning first appeared in the early 1970s and was
popularized by a book of the same name by Joseph Orlicky. Its use was quickly
heralded as the new manufacturing panacea, but enthusiasm slowed somewhat
when firms began to realize the difficulty inherent in its implementation.

The MRP system is composed of three primary modules, all of which function as
a form of input. These are the master production schedule, the bill-of-materials,
and the inventory status file. Each module serves a unique purpose that is inter-
related with the purpose of the other modules, and produces several forms of
usable output.

THE MRP PROCESS.

The MRP logic starts at the MPS, where it learns the schedule for finished goods
(how many and when). It takes this information to the BOM where it "explodes"
the gross requirements for all component parts. The MRP package then takes its
knowledge of the gross requirements for all components parts to the inventory
status file, where the on-hand balances are listed. It then subtracts the on-hand
balances and open orders from the gross requirements for components yielding
the net requirements for each component.
Of course, we now know not only how many components are needed but when
they are needed in order to complete the schedule for finished goods on time. By
subtracting the lead time from the due date for each part, we now see when an
order must be placed for each part so that it can be received in time to avoid a
delay in the MPS. A manual version of MRP for a part with requirements of 100 in
period 3 and 250 in period 6 and with a two-period lead time is shown in Figure 2.

Notice that in order for the firm to meet demand on time (the MPS), they must
place an order for 25 in Period 1 and an order for 200 in Period 4. The reader
should be aware that this is an overly simplified version of MRP, which does not
include such relevant factors as lot sizing and safety stock.

This flowchart below illusstrates the fit of MRP into the overall production
planning process.

Aggregate
Forecast & Production Resource
FirmOrders Planning Availability

Material Master
Requirements Production
Planning Scheduling
No, modify CRP, MRP, or MPS
Capacity Shop
Requirements Realistic? Floor
Planning Yes Schedules
Q.2. Read about MRP-II and discuss the similarities and differences
between the traditional MRP-I and MRP-II.
Ans.
Manufacturing resource planning, also known as MRP II, is a method for the
effective planning of a manufacturer's resources. MRP II is composed of several
linked functions, such as business planning, sales and operations planning,
capacity requirements planning, and all related support systems. The output from
these MRP II functions can be integrated into financial reports, such as the
business plan, purchase commitment report, shipping budget, and inventory
projections. It has the capability of specifically addressing operational planning
and financial planning, and has simulation capability that allows its users to
conduct sensitivity analyses (answering "what if" questions).

The earliest form of manufacturing resource planning was known as material

requirements planning (MRP). This system was vastly improved upon until it no
longer resembled the original version. The newer version was so fundamentally
different from MRP, that a new term seemed appropriate. Oliver Wight coined the
acronym MRP II for manufacturing resource planning.

With MRP generating the material and schedule requirements necessary for
meeting the appropriate sales and inventory demands, more than the obvious
manufacturing resources for supporting the MRP plan was found to be needed.
Financial resources would have to be generated in varying amounts and timing.
Also, the process would require varying degrees of marketing resource support.
Production, marketing, and finance would be operating without complete
knowledge or even regard for what the other functional areas of the firm were
doing.

Differences :

In the early 1980s MRP was expanded into a much broader approach. This new
approach, manufacturing resource planning (MRP II), was an effort to expand the
scope of production resource planning and to involve other functional areas of
the firm in the planning process, most notably marketing and finance, but also
engineering, personnel, and purchasing. Incorporation of other functional areas
allows all areas of the firm to focus on a common set of goals. It also provides a
means for generating a variety of reports to help managers in varying functions
monitor the process and make necessary adjustments as the work progresses.

When finance knows which items will be purchased and when products will be
delivered, it can accurately project the firm's cash flows. In addition, personnel
can project hiring or layoff requirements, while marketing can keep track of up-to-
the-minute changes in delivery times, lead times, and so on. Cost accounting
information is gathered, engineering input is recorded, and distribution
requirements planning is performed.

An MRP II system also has a simulation capability that enables its users to
conduct sensitivity analyses or evaluate a variety of possible scenarios. The MRP
II system can simulate a certain decision's impact throughout the organization,
and predict its results in terms of customer orders, due dates, or other "what if"
outcomes. Being able to answer these "what if" questions provides a firmer grasp
of available options and their potential consequences.
Similarities:

Both MRP and MRP II systems are composed of three primary modules, all of
which function as a form of input. These are the master production schedule, the
bill-of-materials, and the inventory status file. Each module serves a unique
purpose that is inter-related with the purpose of the other modules, and produces
several forms of usable output.

As with MRP, MRP II requires a computer system for implementation because of

its complexity and relatively large scale. Pursuit of MRP or MRP II in a clerical
fashion would prove far too cumbersome to ever be useful.

In addition to its efficient performance of the data processing and file handling, a
computer also allows the system to run remarkably quick, providing near-
immediate results and reports when asked to simulate a decision.

Q.3. A vendor has quoted a lead time of 10 weeks for delivery of a part.
Your purchasing manager says that part can be delivered in 3 weeks if
necessary. Of course, the vendor disagrees. Who is correct? Explain.

The vendor has taken the correct decision because his forecasting demands the
product in 10 weeks of time and he can’t keep an inventory for seven weeks,
considering the space, money and the man power involved.

However, the purchase manager is ready to give a forward order because either
his forecasting team is not doing a good job or it doesn’t have the information
about the inventory. It means the system of communication in the organization is
a failure.
Q.4. Outline the purpose of MRP and explain how an MRP system can
achieve these purposes.
Ans.
The basic function of MRP system includes inventory control, bill of material
processing and elementary scheduling. MRP helps organizations to maintain low
inventory levels. It is used to plan manufacturing, purchasing and delivering
activities.

SOME IMPORTANT ELEMENTS OF MRP

• Master scheduling,
• Bill of Materials (BOM),
• Inventory records,
• Capacity planning and purchasing are few important elements in MRP
system.
"Manufacturing organizations, whatever their products, face the same daily
practical problem - that customers want products to be available in a shorter time
than it takes to make them. This means that some level of planning is required.“

MRP provides the following objectives:

Inventory reduction: MRP enables a manager to determine how many of a

component are needed and when, in order to meet the master schedule. It avoids
the costs of excessive inventory.
Reduction in production and delivery lead times: MRP identifies materials
and component quantities, timings, availability, and procurement and production
actions required to meet delivery dead lines. MRP help avoid delays in
production. It prioritizes production activities by putting due dates on customers
job orders.
Increased efficiencies: MRP provides close coordination among various works
centers as products progress through them. MRP focuses on having all
components available at appropriately scheduled times. The information provided
by MRP encourages production efficiencies.
Q.5. Explain the role of master production schedule and how it relates to
the other elements of an MRP system.

Ans.

Master Production Scheduling System considers all significant demands and

replenishments that are identified for production, and translates those demands
into a supply demand schedule for manufacturing.

The purpose is to specify the output of the operations function. Top managers
can not perform the master scheduling task by themselves, because there are
too many details. They can set master-scheduling policy, thereby controlling the
materials planning function.

Master Production Scheduling system is used in conjunction with Material

Requirements Planning (MRP) to schedule finished goods production and raw
materials requirements when and where they are required.

Master Production Scheduling system translates a business plan with forecasted

demand (sales orders) into a workable production plan (supply orders). A typical
production plan would consist of planned orders in a multi-level (Bill of Material -
BOM) scheduling environment.

Master Production Scheduling system quickly and accurately schedules all item
requirements for each manufacturing facility.

MPS INPUTS: MPS OUTPUT (production plan):

Forecast Demand Amounts to be Produced
Production Costs Staffing Levels
Inventory Costs Quantity Available to Promise
Customer Orders Projected Available Balance
Inventory Levels
Supply
Lot Size
Production Lead Time
Capacity

Some of the benefits of using Master Production Schedule module are it helps
last minute scheduling, shortage avoidance, efficient allocations of resources and
cost control. It gives the customer timely information on what they need and
when they need MPS module organizes what the customer need to do and when
efficiently. The schedule can be re-calculated easily when a process fails, for
example, the situations like a material shortage or manpower absence.

Q.6. It is claimed that MRP produces several cost- savings. What is the
source of these cost – savings?

Ans.

The basic function of MRP system includes inventory control, bill of material
processing and elementary scheduling. MRP helps organizations to maintain low
inventory levels. It is used to plan manufacturing, purchasing and delivering
activities.

"Manufacturing organizations, whatever their products, face the same daily

practical problem - that customers want products to be available in a shorter time
than it takes to make them. This means that some level of planning is required.“

Companies need to control the types and quantities of materials they purchase,
plan which products are to be produced and in what quantities and ensure that
they are able to meet current and future customer demand, all at the lowest
possible cost. Making a bad decision in any of these areas will make the
company lose money. A few examples are given below:
 • If a company purchases insufficient quantities of an item used in
manufacturing, or the wrong item, they may be unable to meet contracts to
supply products by the agreed date.

• If a company purchases excessive quantities of an item, money is being

wasted - the excess quantity ties up cash while it remains as stock and
may never even be used at all. However, some purchased items will have
a minimum quantity that must be met, therefore, purchasing excess is
necessary.

• Beginning production of an order at the wrong time can cause customer

deadlines to be missed.

Q.7. Can the good points of MRP and of JIT be combined in a production
system? If so, explain how?
Ans.
Associated with Japanese management techniques, just-in-time production (JIT)
is a set of principles and practices based on the philosophy that firms should hold
little or no inventory beyond that required for immediate production or distribution.
That is, a manufacturer should receive raw materials or parts from its suppliers
perhaps just hours before they will be used in production, and the firm's output
should be shipped to its customers as soon after completion as possible—without
holding onto a stock of either raw goods or finished products.

JIT has often been expressed as a holistic management system aimed at

reducing waste, maximizing cost efficiency, and securing a competitive
advantage. Thus, a number of additional conditions are considered necessary for
the successful implementation of JIT. These include small lot sizes, short setup
and changeover times, efficient and effective quality controls, and perhaps most
of all, designing the whole production process to minimize backups and maximize
the efficiency of human and machine labor.
MANUFACTURING

The idea behind lean/JIT is a concept called ideal production. Simply produce
and deliver finished goods just in time to be sold, subassemblies just in time to go
into subassemblies, and purchased materials just in time to be transformed into
fabricated parts. The goal of lean/JIT is to find practical ways to create the effect
of an automated industry that will come as close as possible to this concept of
ideal production.

While the prevailing view of lean/JIT is that of an inventory control system,

lean/JIT goes much further. It is an operational philosophy that incorporates an
improved inventory control system in conjunction with other systems. These
systems include:

• A setup improvement system

• A maintenance improvement system
• A quality improvement system
• A productivity improvement system

IMPLEMENTING MRP IN JIT MANUFACTURING SYSTEM

The basic function of MRP system includes inventory control, bill of material
processing and elementary scheduling. MRP helps organizations to maintain low
inventory levels. It is used to plan manufacturing, purchasing and delivering
activities.

When larger quantities are ordered or produced, average inventory obviously is

larger. This larger inventory results in increased inventory-carrying charges. If a
reduction in carrying costs is desired, smaller quantities should be ordered and
orders should be placed more often. However, the practice of ordering smaller
quantities can have the side effect of increasing ordering costs. To balance these
two costs, the concept of economic order quantity (EOQ) was developed. The
EOQ formula derives the point, or order quantity, where inventory carrying costs
and ordering or setup costs are the same. An order of this quantity will minimize
the sum of the two costs.

The lean/JIT philosophy suggests that a firm should eliminate any reliance upon
the EOQ formula and seek the ideal production quantity of one. Of course, a lot
size of one is not always feasible, but it is a goal used to focus attention on the
concept of rapid adjustments and flexibility.

Naturally, a reduction in inventory levels means an increase in setups or orders,

so the responsibility rests with production to make every effort to reduce setup
time and setup costs. It should be noted that this assumes setup time and cost
are positively related. This is not always true because the cost to reduce setup
time could be very high if retooling or equipment redesign were involved.

A material requirements planning (MRP) worksheet a company can judge how

much they will need to produce to meet their forecasted sales demand without
relying on safety stock. However, a common strategy is to try and reduce the
level of safety stock to help keep inventory costs low once the product demand
becomes more predictable. This can be extremely important for companies with a
smaller financial cushion or those trying to run on lean manufacturing, which is
aimed towards eliminating waste throughout the production process.

The amount of safety stock an organization chooses to keep on hand can dramatically
affect their business. Too much safety stock can result in high holding costs of inventory.
In addition, products which are stored for too long a time can spoil, expire, or break
during the warehousing process. Too little safety stock can result in lost sales and, thus, a
higher rate of customer turnover. As a result, finding the right balance between too much
and too little safety stock is essential.

Q.8. What is 1. Pull system 2. Push system?

Ans.
Push System: In a push system, releases are scheduled. So, throughput is
determined by a exogenously set release rate (given by the Master Production
Schedule). Since the releases are linked to orders (or forecasts), a push system
is controlled by upstream information and is inherently make-to-order. In terms of
our nomenclature, open lines are push systems because they have no
endogenous restriction on releases to the line.

Pull System: In a pull system, releases are authorized. That is, there is an
endogenous signal based on system status that determines whether a release is
allowed or not. In particular, the system status that triggers releases is based on
stock voids, which means that a pull system is controlled
by downstream information and is inherently make-to-stock. In our
nomenclature, closed lines are pull systems, because buffer spaces act as stock
voids to trigger releases.

Push system is based on Customer Orders (Demand) and the forecast. Based on
the demand, both material and capacity planning is done. Shop floor control is
based on the demand and orders. Here both the material flow and the
information flow are in the same direction. This is generally suitable for Make to
stock situation. MRP is a Push system.

A Pull system on the contrast is based on Made to Order situation. The material
is flow is in the reverse direction of document flow. The shop flow control is
based on the actual requirements and is close to Just in Time. Pull systems
utilize the real demand (Customer Orders received), where as the Push systems
are based on the Forecast and build for expected Orders.

So when it comes to which system is suitable for a given organization? In general

the manufacturing units combine both Made to Order and also made to stock
situations. There will be forecast errors and there will be Demand variations.
Which system is more effective?
A Hybrid system which combines both Push and Pull systems. Careful analysis
and planning is required prior to implementing this. In a push system the
emphasis is on Material planning and procurement. In a pull system the
emphasis is on scheduling. The hybrid system thus makes best use of both
material planning and scheduling.

Factors that influence the Hybrid approach and implementation methodology:

Forecast/ Demand variations: Forecast variations determine the extent to

which the Push system needs to be in place and the fluctuation on daily demand
affects the pull system.

Capacity Constraints: The capacity constraints or bottle necks determine the

success of pull systems. Generally, pull systems demand for a modular
approach. Otherwise the manufacturing lead time will increase.

Bill of Material (product structure): In most of the organizations I have visited,

the BOM is built based on costing requirements. Though there are planning bills,
they are practically not used.

To use a hybrid system, it is very essential to identify the boundary of Push

against Pull and de couple the Pull system from MRP. In other words, the
planning bill should be restricted to plan the critical material requirements and
use the pull system for the balance. MRP does well to plan for the material where
the forecast variance is significant and also the purchase lead times/Mfg lead
times are higher than the delivery lead times. Pull systems will ensure that the
products are finished only based on the real orders.
As a thumb rule the low cost and high volume items can be pushed, High cost,
low volume parts can be pulled.
Depending on the complexity of products and variety of products, Hybrid
approach needs to be defined. Boundary between Push and Pull need to be well
defined. As the organization matures, the boundary keeps changing from Push
systems to pull systems. The planner plays a key role in determining the
boundaries. Shop floor control and the feedback mechanism determine the
effectiveness of this approach.

Q.9. Explain the concepts of safety stock, safety times acid safety capacity.
Are these relevant to MRP? If so, how? Would these be relevant to JIT? If
so , how?

Ans.
Safety stock defines the minimum level of inventory that the MRP system will
seek to maintain. In the absence of other requirements (or after other
requirements are fulfilled), if inventory falls below the safety stock level, the
MRP system should generate orders sufficient to maintain safety stock at the
specified level.
The role of safety stock in MRP system is very significant. Safety stock buffers
uncertainties in the quantities. These uncertainties are caused because of
quality. For offsetting any uncertainties in timing, safety lead time is used.
Increase in safety stock, means more inventory is being carried. This reduces the
overall performance of Material Requirements Planning or MRP. The best thing
which the company can do to decrease the safety stock is to eliminate the
uncertainties in the quantities.

Q.10. Discuss the relevance of MRP in Indian context. What are the
challenges to be experienced in the implementation of MRP in the Indian
situation?
Ans.
Relevance of MRP in Indian context:
In the post liberalization and opening up of the economy business era, ease in
international trade barriers, economic liberalization, globalization, privatization,
disinvestments and deregulation have thrown several challenges to Small and
Medium-Sized Enterprises (SMEs) in the fast developing economies like India.

Compressed product development cycles, cut throat domestic and global

competition, economic downturns, rapidly changing customer demands and
volatile financial markets have all increased the pressure on SMEs to come up
with effective and competitive capabilities to survive and succeed.

Material Resource Planning is often considered as one of the solutions for their
survival.
Up to mid-1990s, SMEs sector in India had operated under a much-protected
economic regime characterised by limited competition and a highly regulated
business environment. This business atmosphere had resulted in limited focus on
process efficiencies, centralized control structures, highly formalized business
settings and lack of professional business practices. However, following the
economic liberalization and opening up of the economy to foreign Multi- National
Companies (MNCs), Indian SMEs have been forced to adopt modern business
practices and strategies, which in turn can provide SMEs a cutting edge over its
competitors.

The benefits of MRP in any organization are beyond doubt. Some of the key
benefits are listed below :
Reduced Planning cycle time
Reduced manufacturing cycle time
Reduced inventory
Reduced error in ordering
 Reduced requirement of manpower
Enables faster response to changing market situations
Better utilization of resources
Increased customer satisfaction
Enables global outreach
Implementation

MRP systems affect both the internal and external operations of an organization.
Hence successful implementation and use are critical to organizational
performance and survival. This is on account of the best practice business
processes that MRP systems are based on. This calls for MRP implementations
to be looked at from strategic, organizational and technical dimensions. The
implementation thus involves a mix of business process change and software
configuration to align the software and the business processes.

There are two strategic approaches to MRP system implementation. The first
approach is where a company goes for the plain vanilla version of MRP. Here the
organization has to reengineer the business process to fit the functionality of the
MRP system which brings with it major changes in the working of the
organization. This approach will take advantage of future upgrades, and allow
organizations to benefit from best business processes.

The second approach is where the MRP system is customized to fit the business
processes of the organization. This will not only slow down the implementation
but also will introduce new bugs into the system and make upgrades difficult and
costly. MRP vendors’ advice organizations to take the first approach and focus
on process changes.

One third of MRP implementations worldwide fail owing to various factors. One
major factor for failure is considering MRP implementation to be a mere
automation project instead of a project involving change management. It is a
business solution rather than an IT solution, as is perceived by most
organizations. Yet another reason for failure is over customization of the MRP
system. Therefore, organizations need to very carefully go about their MRP
implementations, if they are to be successful. Most large companies have either
implemented MRP or are in the process of doing so. Several large companies in
India, both in the public and private sectors, have successfully implemented MRP
and are reaping the benefits. Some of them are Godrej, HLL, Mahindra &
Mahindra and IOC. With the near saturation in the large enterprise market, MRP
vendors are looking to tap the potential in the SME segment.

The spending on MRP systems worldwide increased. Some of the reasons for
this are :

Vendors are continuously increasing the capabilities of their MRP system

by adding additional functionality like Business Intelligence, Supply Chain,
and CRM, etc.

Vendors have shifted to web-based MRP.

The demand for web-based MRP will increase due to the perceived
benefits of e-commerce.

There are several markets that are yet unexplored

SMEs and MRP

While many new SMEs start each year, nearly 50% cease to exist in the first 3
years of business itself. Though it is assumed that all SMEs desire growth, only
40% survive beyond 10 years. Majority of the firms do not think of long-term
business strategy but focus only on survival. They think of change only when the
business begins to fail as a result of not keeping track of the changing market
scenario. The firms who survive and grow are the ones who have the ability to
take risks and respond to the changing circumstances.

Though SMEs are risk averse, they are keen on adopting MRP systems for
several reasons. Some of them are:

Pressure From Larger Counterparts: Due to globalization, SMEs today operate

in a wider arena. Majority of them have MNCs as their clients. These MNCs
require SMEs to implement the same MRP system as them to allow for tighter
integration in their supply chain, which permits them to design and plan the
production and delivery so as to reduce the turnaround time.

Peer Pressure: Considering the growth in MRP implementation in the SME

segment, several SMEs are adopting MRP systems as their peers have done so.

To Gain Competitive Advantage And Respond Quickly To The Dynamic

Market Scenario
An MRP system would allow SMEs to integrate their business functions. It would
provide for a transactional system, which provides for a disciplined way of doing
business. Thus SMEs would be able to increase their efficiency and productivity
by implementing a suitable MRP system. Over the next five years, the MRP
market in India is expected to reach Rs. 1,550 crore ($341 million), according to
International Data Corporation (IDC), a market research and analysis firm. Of
this, the SME potential in India for the enterprise class is projected to be Rs. 728
crore ($160 million) 47% of the overall market (Munjal, 2006). MRP vendors like
SAP, Oracle, Microsoft, QAD etc. are all trying to increase their customer base in
the SME segment and have products specifically designed to cater to the needs
of SMEs.

E-Commerce Benefits: This benefit will accrue from the close integration
between large enterprises and SMEs.
Cheaper And Faster Internet: Easier access to Internet reduces the costs
further.

Cheaper Hardware And Software: With the advances in technology, the costs
of both hardware in the form of servers, cables, switches etc. and software like
databases have come down

Issues And Challenges

Though the market for MRP seems to be growing, there are several issues and
challenges one has to contend with when implementing an MRP system in the
SME segment. Some of these are:
Awareness: There is a low level of awareness amongst SMEs for MRP
vendors, applications etc. Most of the time they do not even know what MRP
systems are and what they can do. They consider MRP systems to be a magic
wand, which will help solve all their business problems, be it in terms of quality,
or process defects. MRP brings in a more disciplined execution of business
process giving more transparency and visibility to the working of the organization.

Perception: SMEs have the perception that MRP is meant only for large firms
mainly owing to the high costs of acquisition, implementation and maintenance
as also the complexity. Some of the SMEs even feel they do not need MRP.

Earlier Implementations: SMEs have heard of the much-publicized failures in

MRP Critical Thinking in E-Governance implementation, which have led firms to
bankruptcy. Some SMEs who have implemented MRP earlier have failed. This
has led SMEs to believe that MRP implementations are a waste of time and effort
and can even lead to the demise of company.

Approach to implementation: MRP vendors’ advice SMEs to mould the

business to MRP’s way of working, considering that MRP systems bring with it
best business practices. This is the plain vanilla approach that was mentioned
earlier, which would bring down the cost of implementation. But most SMEs have
processes that they have evolved over time and hold very dear to their hearts. As
a result, SMEs are having the entire MRP system customized to meet their
requirements. This would increase the overall cost of implementation. A good
approach would be to keep the customization to a minimum.

Cost: SMEs have less of capital than their larger counterparts.

Change management: One of the major reasons why MRP implementations

nationwide have been known to fail is due to the implementation being
considered as an automation project instead of one that involves change
management. This results in the system being put in place but not being used
effectively due to people not ready to accept the change.

Limited resources: Most SMEs do not have an in-house IT team. Due to this
they have to rely on external agencies to help them and this adds to the
implementation costs. Before embarking on an MRP system journey,
organizations have to ask themselves whether they are MRP ready. Some of the
factors to be considered before starting an MRP system implementation are:

Infrastructure resource planning

Education about MRP
Human resource planning
Top management commitment
Training facilities
Commitment to release the right people for the implementation
These factors help organizations to understand their level of preparedness for an
MRP implementation.
BIBLIOGRAPHY
1. http://it.toolbox.com/blogs/mrp-practices/
2. http://www.toolingu.com/
3. http://www2.isye.gatech.edu/
4. http://www.eresourceerp.com/Master-Production-
Schedule.html
5. http://www.referenceforbusiness.com/
6. http://www.docstoc.com/