Materials Management Systems- MRP II & JIT | Inventory | Enterprise Resource Planning

Technological Educational Institute of Piraeus

MSc ADVANCED INDUSTRIAL AND MANUFACTURING SYSTEMS
Module: Industrial Systems and Management

Assignment 2: Materials Management Systems: MRP II & JIT

Module Leader : Dr Emilia Kondili

Student’s Name:

Georgios G. ROKOS

Student’s Signature :___________________________

Date: January 2011

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Table of Contents

Preface .................................................................................................................................. 2 Abstract ................................................................................................................................ 3 1. Introduction to MRP II and JIT ..................................................................................... 4 1.1 MRP, closed-loop MRP and MRP II ....................................................................... 4 1.2 Just In Time ............................................................................................................. 6 2. JIT Implementation ....................................................................................................... 9 2.1 JIT introduction in a company ............................................................................... 9 3. Materials Management Systems ............................................................................... 13 3.1 Materials Management Philosophies and Practices ...........................................13 3.2 Benefits and functionalities of Materials Managements Systems .....................15 3.3 Materials Management Systems: a brief market overview ...............................17 Annex I. MRP II: A Case Study .......................................................................................... 19 References ......................................................................................................................... 26

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Preface Preface
This paper has its origins in the Industrial Systems and Management Module of the MSc in Advanced Industrial and Management Systems, undertaken at the Technological Educational Institute of Piraeus, in cooperation with the Kingston University, under the aegis of Dr. Emilia Kondyli. This assignment revolves around Material Management Systems, focusing on JIT and MRP. It presents elaborately the principles, the philosophy and the differences between those two systems and proposes a plan for their integration based on former actual experiences and examples. It also records the advantages of their integration and co-existence. Moreover, this paper occupies with Material Management as an ensemble of techniques and practices. It identifies the functionalities that they include and the general advantages associated with their implementation. It also presents an overview of vendors’ market. Finally, a case study is included in Annex 1, to simulate how an MM system, in particular MRP II, can be smoothly implemented in a manufacturing company producing small fridges. The case study is written in the form of a report, written by a product manager who proposes the implementation of the system. Most data about the company are imaginary. However, they are taken from other referenced publications. Hopefully, this paper will be a pleasant experience for its readers.

Georgios Rokos

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Abstract:
“JIT and MRP II are two production systems based on different philosophies, the pull or Kanban philosophy, based on order-fulfillment, and the push, make-to-stock philosophy based on demand forecasts. In fact, MRP was American’s response to the Japanese JIT. Their optic angle differs. As a result, JIT and MRP II offer different benefits and carry different defects. The goal of combining each system’s benefits so as to cover their defects is a challenging task. History shows that it is possible to successfully implement JIT on top of MRP II and, subsequently, to benefit from both systems’ characteristics. (Krepchin, 1986)”

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Chapter 1.. Introduction to MRP II and JIT Chapter 1 Introduction to MRP II and JIT
In the 1980’s, US companies were forced to confront the productivity challenge. A series of articles in famed magazines, such as Newsweek, Business Week, Fortune and Time Inc., and journals, such as American Industry, were dealing with America’s hysteresis compared to the Japanese production model (Wight, Manufacturing Resource Planning: MRP II: Unlocking America's Productivity, 1984). American manufacturers were wondering what was going wrong. In the early 80’s most of them were accusing their labor-based system for their productive insufficiency. Nevertheless, at that time, some large companies such as Tennant, Twin Disc and Hewlett-Packard (Sheldon, 2005), were already unfolding their plans to conform to the teachings of one of the fathers of Production Management that all resources, including people, who are not a cost source but a production resource, will have to be managed in better way if greater productivity is to be attained (Drucker, 2010). Both MRP II and JIT are practices that highlight scheduling and capacity.

1.1

MRP, closed-loop MRP and MRP II

In the 60s, a new method of Material Planning was rising to replace the traditional Economic Order Quantity (EOQ) technique. This method, called Material Requirements Planning (MRP), depicts the finished good requirements as recorded in the Master Production Schedule (MPS) for a predefined product structure (stemming from Bill of Material or BOM) and turns them into a detailed plan of supplies and production orders, without neglecting the inventory on hand. MRP may sound easy to handle, however, its application is very time-consuming if carried out manually. Companies that implemented MRP saw their inventory, production costs and delivery lead times decrease as a result of coordinating supplies and production. Despite MRP’s success manufacturers were looking for a more extended Planning technique that would apply to more types of resources. In the 1970s, companies started incorporating Capacity Requirements Planning (CRP) into the MRP logic. Capacity was introduced to MPS, so that resources requirements such as labor would be also taken into account in the generation of a production plan. CRP’s incorporation in the MPS took MRP to the next level, identified as closed loop MRP (Altekar, 2005). In the early 1980s, the inclusion of financial resources signified the transition to the Manufacturing Resources Planning (MRP II) era. American Production and Inventory Control Society (APICS) defines MRP II as: “A method for effective planning of all resources of manufacturing company. Ideally

it addresses operational planning in units, financial planning in dollars and has a simulation capability to answer “what-if” questions. It is made up of a variety of functions each linked together: Business Planning, Production Planning, Master Production Scheduling, Material Requirements Planning, Capacity Requirements
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Planning and the execution system for capacity and priority. Outputs from these systems would be integrated with financial reports, such as the business plan, the purchase commitment report, shipping, budget, inventory production, etc.” (APICS,
1985). At the beginnings of MRP and MRP II many Process Industries reacted to their correlation with Discrete Manufacturing Industries. Sheikh (2003) finds that there are only some minor differences between the two when it comes to MRP. Specifically, he recognizes that scheduling and Work In Progress Control as they are incorporated in the MRP logic are not so vital for Continuous Process Manufacturing Companies due to their easy-to-handle BOMs and court lead-times. Yet, the purchasing function associated with MRP remains a plus even in this kind or companies. In addition, MRP could facilitate quality and cost control processes as far as Batch Process Manufacturing companies are concerned, especially when the batch mode implies numerous BOM levels, extended lead-times and workcenterdependent lot-sizes. That is because their planning and scheduling processes are likely to look alike those of jobshop environments. Table 1 compares the MRP logic in Process and Discrete Manufacturing. Sr. No. 1. 2. 3. 4. Function MPS Constraint Planning Issues MRP I Differences Between MRP II Functionalities as Applied to Discrete and Process Manufacturing Discrete Manufacturing Unit driven Production Material availability Schedule attainment Primary tool for detailed planning Process Manufacturing Process driven family Capacity utilization Process continuity and yields Secondary tool, or not used for detailed planning Primary tool for detailed planning 1. Shallow and simple formulas 2. Bill shape could be ‘A’, ‘V’, ‘X’, or ‘I’. 3. BOM models the manufacturing process 4. Quality specifications are much wider (p.ex. acceptable water content between 2 and 7%) 5. Process outputs may vary due to variation in the input specifications, such as potency (a measurement of active material in a specific lot), concentration, or purity Additional specifications, such as unit of measurement, lot/batch number, sublot number, expiry and/or best-before date, container type and ID, potency, etc are required Fixed by process Fixed and dedicated Process focused 5

5. CRP 6. BOMs/ Formulas

8. Routings 9. Work Centers 10. Planners

7. Material Specifications

Secondary tool for detailed planning 1. Deep and complex BOMs 2. BOM shape is generally either ‘A’ or ‘X’ 3. BOM models the product breakdown 4. Quality specifications are tight (p.ex., acceptable dimensions 10±0,002mm). 5. Process outputs are accurately predictable

Item number, quantity and location are enough in most cases Many with alternatives Discrete and flexible Commodity and part focused

Table 1: MRP II-related differences between Process and Discrete Manufacturing Source: Scheich (2003)

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1.2 Just In Time
Just-In-Time or JIT is a management approach coined by Taiichi Ohno, an engineer at Toyota, who was inspired by the way American supermarkets were operating. Ohno observed that clerks replenish the shelves on a regular basis and figured out that a company would benefit from a plan that would minimize movement or transportation in a way that only the necessary material would be available at the necessary time and place. His theory’s backbone was “Eliminate Waste”, namely time, motion, unnecessary products, defective products and WIP inventories (Shaw & Mazur, 1997). T-Ohno started working on his theory in 1950 but managed to put into practice only 12 years later. JIT was the response of the Japanese to Americans’ superiority in terms of manufacturing productivity. Just-In-Time was not generated out of the blue. Japanese manufacturers were struggling to arrive to a competitive production practice for years, inviting experts to share their wisdom (Arora, 2004; Son, Tutschke, & Yang, 2004)

 Dr. W.E. Deming In 1950, Japan invited Dr. Edward Deming to give lectures on the topic of statistical quality control to manufacturers and opinion leaders. Deming highlighted the importance of statistics in the elimination of excessive inventory and production. In fact, he showed how to manufacture low cost, yet high quality products. Deming’s contribution to the Japanese manufacturing industry was so vital that its representatives named after him the most prestigious award for quality, the “Deming Prize”.

 Dr. J. M. Juron Four years later, Juron succeeded Deming by giving lectures on the Quality topic. Juron initiated the “Involve Everyone” management practice. At first, he encouraged Top Managers participate in practice on quality matters. Then, he introduced his Project to Project Quality Improvement Theory by asking administrators to constantly seek for improvement opportunities. Juron also theorized that senior managers should be allowed to make decisions by themselves and even set-up lower-level project teams if they foresaw a chance to improve the production process. 6

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He believed that companies make a habit of ignoring the low-quality products’ costs and that by following his Cost of Quality Principle, also known as “Gold in the Mine”, they would not only improve the quality of their products but also lower their manufacturing costs. His theories were immediately adopted by Japanese Industries.

 Professor Kaoru Ishikawa Ishikawa was a Japanese Professor who approved Juron’s theories and proposed that they should be applied to even lower scales, down to workforce. He based his proposal on the conclusion that operational controllable problems are generally very likely to creep for more time than needed because Top Management tends to underestimate them. He also accused Taylorism of abalienating workers and devaluing supervisors. Ishikawa believed that should teams of workers of a certain department receive some training, they would be capable of taking actions to ameliorate their working field, of making targeted proposals and of detecting gaps. Schniederjans and Olson (1999) argue that JIT principles have expanded with the pass of time. At first, they only applied to Inventory Management but they soon extended to production management and quality management.

zero inventory uniform daily production scheduling reliable suppliers production scheduling flexibility reduced buffer inventory a mixed model scheduling system reduced lot sizes and increased frequency of a synchronized pull system and eliminate waste orders improved inventory handling improved flexibility in providing product changeovers continuous identification and correction of all improved communication and visualization inventory problems production lot sizes reduced production setup costs to allow workers determine production flow unitary production to schedule work at less than full capacity increased standardization of product processing continuous identification and correction of all production management problems Seek… Table 2: JIT principles in Inventory and Production Management Source: Schniederjans and Olson (1999) 7

Inventory Management

Production Management

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Long-term commitment to quality control efforts High level of visibility management on quality To use fail safe methods to help ensure quality conformity Self-correction of worker-generated defects Process control maintenance and strict production quality compliance To utilize statistical quality control methods to monitor and motivate product quality To empower workers by sharing authority in the control of product quality To persuade workers perform routine maintenance and cleaning duties To make quality everybody’s responsibility To maintain 100% quality inspection of products through WIP efforts

Quality Management

Seek…

Certification in quality of items purchased Improved quality Reduced costs Single-source suppliers Ordering flexibility

Supplier Relationship

Timely communication and responsiveness Smaller lots with more frequent delivery Long-term relationships with suppliers

Table 3: JIT principles in Quality and Procurement Management.

To reduce inventory delivery lead time To continuously identify and correct all supplier relation problems Source: Schniederjans and Olson

In the 1980s, JIT incorporated human resource management principles, taking into account the physical working environment. In the 1990s, JIT philosophy entered the fields of services and administration.

To provide continuous and extensive training Long-term or lifetime commitment to employees A highly flexible workforce To maintain a substantial part-time workforce Employee team approach to production cells and problem solving To establish a family atmosphere to build trust in employees To establish compensation plans that reward individual and team efforts To utilize peer pressure to motivate employee performance

To use automation where practical A focused factory To identify and eliminate production bottlenecks to schedule work at less than full capacity To reduce distance between all production activities To reallocate reduced physical space under JIT to other productive activities To minimize material handling by using reusable containers and unity packaging To minimize material flow congestion by designing replenishment systems closer to the point of use To build pride in workmanship and mutual Continuous redesign efforts to improve facility respect of employees layout and facility structure To continuously identify and correct all human To use group technology cells in production resource problems layouts increased standardization of product processing continuous identification and correction of all production management problems Seek… Table 4: JIT principles in HR Management and Facility Design Source: Schniederjans and Olson (1999) 8

Human Resource Management

Facility Design

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Chapter 2. JIT Implementation
JIT and MRP II are two production systems based on different philosophies, the pull or Kanban philosophy, based on order-fulfillment, and the push, make-to-stock philosophy based on demand forecasts. In fact, MRP was American’s response to the Japanese JIT. Their optic angle differs. As a result, JIT and MRP II offer different benefits and carry different defects. The goal of combining each system’s benefits so as to cover their defects is a challenging task. History shows that it is possible to successfully implement JIT on top of MRP II and, subsequently, to benefit from both systems’ characteristics. Krepchin, (1986) describes how DuPont de Nemours & Co, a science-based manufacturing company, implemented JIT on top of MRP II and achieved a surge of productivity by 25% and a drop of cycle times from 6 weeks to 2 days (!). After the implementation, their assembly plant ran with lot sizes of one. Tucker & Davis (1993) identify numerous cases of JIT implementations on top of MRP. Nothern telecoms, a small US-based computer and telephone manufacturer was using an MRP system and decided to procceed with a JIT system in 1972. The reason was that the company wanted to reduce the inventory levels. Nothern Telecom accomplished the reduction of manufacturing cycle time by half, of inventory transactions by 30%, while the storage and production space was diminished by 62%. Benton & Shin (1998) identify the integrated JIT – MRP systems as Synchro-MRP, Rate-based-MRP, and JIT/MRP, systems.

2.1 JIT introduction in a company
According to Sillince and Sykes can work together. JIT can be complementary of MRP, so that the benefits of the first cover up the gaps of the second. Sillince & Sykes (1992), Cheng, Podolsky, & Jarvis (1996), relocate the following fields in which MRP II and JIT can complement each other: 1. MRP II can not operate with repetitive processes, while JIT can. 2. JIT can not operate in companies that produce a great number of codes while MRP II can.

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3. MRP II can handle fluctuating demand because it provides the company with a production plan for average demand, based on forecasts, whereas JIT is more flexible at low levels of WIP. 4. MRP II does not allow changes in its production plan. That is why its alternative, Distribution Requirements Planning (DRP), is often preferred by companies that face high customer changeability. JIT is a pull system, thus it expects orders first to set up production. 5. Shall a company want to apply changes in routeings or design, it will be restricted by its MRP II system. A joint MRPII/JIT system implies manual stock controls on the shop-floor, thus such changes are possible. 6. When it comes to continuous improvement, MRP II is a hesitant system whereas JIT favors any changes for the shake of production improvement. 7. MRP II can cope with fluctuating demand but once implemented, it can no longer lead to cost and lead times reductions. That is because “it is

based on traditional order point and economic batch quantities to process the goods” and fixed batch sizes signify standard lead times and standard
production duration. 8. MRP II delimits each employees range and dictates that specific training should be offered to specific posts. JIT on the other hand proposes a broadened range of activities and, hence, training no matter the post of the employee. This postulates greater versatility. 9. JIT is not a forethoughtful system, as it does not look into demand forecasts. Thus, it is likely to breed shortages. In addition, it can not handle complex flows or equipment breakdowns. Some companies have added to their joint MRPII/JIT system OPT or other own-designed systems to deal with lookahead risks. 10. MRP/JIT makes stock control manual on the shop floor thus changes are more possible.

Huq & Huq (1994) suggest that the features of JIT are of secondary importance. They state their belief that should a company attempt to implement Just In Time, it must first provide the system with an operating environment, namely:      Group Technology Preventive Maintenance Uniform Plant Load Low Set up Times Supplier Participation.

The adjustment of the company to the above dictations constitutes the major strike, even before the implementation takes place.

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According to (Benton & Shin, 1998), companies that implement JIT should expect an increase in unit cost, which will be leveled by the reduction in inventory and manufacturing costs in the long run.

Gupta & Brennan (1993) simulate how the two systems work together in an electronics company, like in our case. A general overview is given below.

Description of manufacturing model

MRP

CRP

Master Schedule JIT logic

Shop floor logic

Knowledge database

Output

Figure 1: Hybrid MRP II/JIT architecture Source: Gupta & Brennan (1993) According to the proposed model, MRP is responsible for the production planning and JIT for the production control. MRP will address to the planned order releases for the finished products while JIT will control the production of the component parts required for the planned order releases. MRP will occupy with the Capacity Requirements Planning (CRP) so as to provide a MPS adjusted to the organization’s particularities. The MPS will constitute an input to the JIT model, which comprises JIT, the Shop Floor Logic and, of course, a database that will serve as the link between JIT’s rules and the CRP module, the knowledge database. 11

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The latter will also contain information about the products, the processes and the resources. It will include the structure of the operations and a dynamic timestructure that will upgrade constantly, every time the production process makes a step. The JIT module will serve as a “pulling mechanism” of the lower lever component parts into the production system. The SFL will make sure that the WIP operations are properly assigned and delivered, so that the flow of materials and the level of resources are synchronized. According to Cheng, Podolsky & Jarvis (1996), to avoid a breakdown during the JIT implementation, companies should follow seven steps. 1. Educations and leadership. Educate all the concerned parties. Develop a leadership plan. 2. Company assessment. Especially top management must be committed to the plan. 3. Implementation plan. Develop an accurately-stated plan. 4. Pilot implementation. Implement the system for specific products. See how it works. 5. Small group improvement organization and quality circles. Determine small activity groups. 6. Performance evaluation. Record the results and compare them with the former situation. 7. Company-wide transition and internalization.

Sillince and Sykes (2003) believe that some products can be treated under the JIT philosophy while other products can be treated under the MPR II philosophy. The latter is preferable in the case of small, low-value and difficult to acquire items.

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Chapter 3. Material Management Systems
Corke (1977, p.245, cited in Lind 1991, p.76) defines Material Management as…

“a technique that comprises all the functions associated with the flow of material, from identifying the need to place orders on outside suppliers, through buying, receipt of goods, ordering of manufactured items and control of manufacture, to dispatch.”
Datta (1998) suggests that Materials Management objectives can be classified into to levels: the Primary and the secondary objectives. The primary objectives deal with provisioning, storage and reduction of inventories whereas the secondary objectives are related to the detection of new sources of supply, the development of labor’s skills, the coordination of functions and activities, the standardization of processes and materials, variety diminishment, value analysis and reengineering. The accomplishment of the above implies (a) the uniform flow of supplies, (b) the reduction of materials costs, (c) the appropriate value-for-money proposal, (d) the establishment of good external relations, (e) the provision for lower departmental costs and better customer service without disrupting the ambience, and finally (f) the effective inventory control. He recognizes the following major objectives: 1) 2) 3) 4) 5) Profit increase for survival and growth Customer service increase. Technological innovations Good internal human relations Other social objectives

3.1 Materials Management Philosophies and Practices

There are various practices to implement a MM plan. Howerer, the philophic approaches that these practices imply are limited to two; the Pull and the Push systems. Material Management Systems can be divided into three major categories (Lakshmi, 2010):

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1. Pull Systems Pull systems are a group of methods that aim at the immediate replenishment when stock is used in the productions process. Most of the "pull" systems are based on visual controls instead of computer controls. This is why they are aligned to "lean manufacturing". Pull systems are “zero-inventory” oriented. • • • • Replacement. The manufacturer instantly replaces the stock entering the production process. Vendor-managed inventory. In this case, suppliers check by themselves their client’s inventory status through simple top-up to predetermined levels. Top up point of use. Suppliers deliver their products directly in their point of use, to avoid unneeded proceedings. Input /Output control. It controls what is input and what out the manufacturing process. This is also known as a "Conwip" (Constant WIP) Kanban system. 2 bin systems. There are two bins in the process. Bin 1 is in use and Bin 2 is close, waiting to replace bin 1 when it is worn off. Bin 1 is then refilled, waiting for the replacement of Bin. 3 bin systems. In this case, safety stock is stored in the third bin. If the third Bin is required, the company must detect the flaw in the process. Kanban systems are an extension of the 2 and 3 bin systems. There is a standard number of containers in the system that are spread throughout the system. Reorder point systems. This is also a replenishment method, taking into account the variability of supply and demand and lead-times mediating to replenish. A reorder-point is set prior to the need for the safety stock usage.

• •

2. Push Systems Push systems are a group of methods that deal with demand forecast and are inventory - compatible. • • • MRP systems – logic (See Annex 1). It may be integrated in an MRP II or an ERP system. All time buy. This is used for items difficult to acquire in the future and of low value. It is applied mainly in the aerospace and electronics industries. Project manufacturing. It is different than MRP systems. This system schedules both parts and processes. Different BOMs are created for different projects, including engineering resource planning.

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3. Other Complementary techniques • Consignment stocks. Manufacturers who do not want to keep stocked inventory pre-buy their material resources but suppliers keep them in their warehouses until their client needs them. 3rd party kitting. This system is usually combined with 2 bin systems. While one kit is being delivered, a second one is being prepared. In this case the manufacturing company does not have a direct transaction with the kitting supplier. They deal with an intermediate who acts as the supplier. Milk-round. In this case the manufacturer delivers products and receives supplies on a predefined basis that can be weekly, monthly etc. This method is particularly used by companies that only deal with big clients. Economy of scale is its greater advantage. Visual control systems. These systems are aligned with the JIT systems and lean manufacturing processes. The goal is to have 100% accurate BOMs. These systems can determine the suppliers payment.

Today, no matter which material management technique is put forward, it is integrated in a broadened system called ERP, or Enterprise Resource Planning. A company may use various techniques, depending on the code. One component part may call for MRP treatment and another for a JIT treatment.

3.2 Benefits and functionalities of Material Management Systems
Numerous advantages can be attributed to the use of Material Management Systems. The most important of them is the generalized organization of the company. Specific benefits identified in the adoption of an MM system are listed below: 1) Inventory cuts. Inventory is a holding cost (Kondyli, 2010). 2) Productivity increase. The organization of the company will bring an increase in productivity, both at the front office and at the shop floor (Entrup, 2005) 3) Data Standardization. This will help the Production department, which will know what it will, when it will need it, the Sales Department, which will be able to coordinate its practices with the production, the Procurement Department, which will be enabled to build strong relationships with the proven-to-be most responsible suppliers, and the Marketing Department, which will be able to build a strong Brand Name for the final products and the company itself. 4) Increased rate of on time order fulfillments. Clients will be more satisfied with the company and the risk of losing a specific customer will decrease significantly.

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ERP’s MM functionalities: 1. Inventory Management. This module offers accurate visibility and effective contol over inventory. Thus a customer-by-customer pricing can be achieved while operating costs will drop and the customers will be satisfied by the timely order deliveries. 2. Extended Pricing enables a company to develop standard price schemas (such as reductions, value off and net pricing, and other customized pricing options), to apply a successful sales and promotions plan, and to possess and an easygoing pricing index. 3. Bill of Materials allows a company to:  organize supplies  include electronic notes to bills to assess the precise component use  identify the actual cost of assembled items  plan future shifts, and manage current and past products  plan transactions without keeping stock. 4. Cradle-to-Grave Serial or Lot Tracking allows a company to:  recognize more effectively lot number lifecycles.  easily research and track an item using its serial or lot number.  search in all transactions, including BOM and customer orders. 5. Shelf Life Controls and automated alerts is a module used to make sure that expired lots will not be selected for production or distribution. 6. Item Classing. It allows a company to organize and track its items more easily. 7. Inventory Ranking. This module allows a company to prioritize the allocation of stock based on the value of the items, the expiration date, etc. 8. Quality Controls. This module helps the company to keep close control over the inventory with quantity tracking at the bin level, cycle counting, stock count calendars, and inventory snapshots. 9. Bin Lookups allows the company to decide which bin to use based on bin priorities and maximum capacities and accept or turn down the system’s suggestions. 10. Multi-bin Tracking allows a company to detect a single item across multiple bins inside the warehouse. 11. Real-time Moving Average Cost can be calculated every time a transaction takes place purchase, generating simultaneous general accounting adjustments for inventory. 12. Instant Access to Transaction Information. This can be particularly useful in case of retarded payments. 13. Document Transfer allows the users to transfer information for one item from one document to another. 14. Comprehensive Reporting Tools. These tools permit the analysis of all facets of the inventory status, with comprehensive standardized reports. 15. Stock Count and Discrepancy Alerts. This module permits the company to possess an up-to-date stock count schedule and look into stock disparities 16

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quickly with system alerts that notify us when inventory should be counted or when differences exist between an item's reported status and its actual presence.

3.4 Materials Management Systems: a brief market overview
As aforementioned, Materials Management is today a module of the expanded ERP. For manufacturing industries, this part of ERP systems is the most important one. Through the SaaS versions, a company may acquire solely the Materials Management Module and implement it in the existing system. The cost of Materials Management Systems varies depending on the number of users, the consulting services and their duration, the vendor and their expansions. According to Barrar (1995), the quality of an MM system depends on the largeness of vendor. Panorama Consulting Group (2010) showed that price depends on it as well. The latter conducted a research on the general ERP Market. PCG identifies SAP as the market’s leader of today. SAP is believed to gather 30% of the total ERP implementations globally. Oracle comes second, with a rate of 25%. Microsoft is third-classed, with a rate of 15%. The remaining 30% is shared among the rest of vendors.

30%

31%

15%

25%

Figure 5: 2010 ERP Market Share SAP Oracle
Source: Panorama Microsoft Consulting Group (2010) Tier II

Tier I SAP Oracle Oracle e-Business Suite Oracle Peoplesoft Microsoft Dynamics

Tier II Epicor Sage Infor IFS QAD Lawson CDC Software

Tier III ABAS Activant Solutions Inc. Bowen and Groves Compiere Exact NetsSuite Visibility CGS Exact HansaWord Consona Syspro

PCG also divides ERP vendors into 3 categories, depending on their size. Table 5 depicts which vendors are classed in which category. Table 5: 2008 Overall Comparison of Tier I and Tier II ERP solutions
Source: Panorama Consulting Group (2010)

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The average implementation costs varies between $2,6 m and $16,8 m.

SAP Duration (Months) Cost of Implementation Overall Satisfaction Business Risk Factor 20,0 $16,8 m 73% 50%

Oracle 18,6 $12,6 m 62% 56,9%

Microsoft 18,0 $2,6 m 69% 57,7%

Tier II 17,8 $3,5 m 70% 61,8%

Average 19,8 $8,5 m 67% 54%

It should be underlined that the above costs concern a full ERP implementation. The Table 6: Classification of products in Tiers
Source: Panorama Consulting Group (2010)

MM module by itself will cost a lot less. Unfortunately, a pricelist for the MM module only, is not available.

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Annex I. Materials Management: A Case Study
Storyline: My name is Georgios Rokos. I am a Production Manager at Refr-, an EU-based manufacturing company making small fridges for the domestic market. The company’s production volume is currently 300 units on a monthly basis. The company is not equipped with any kind of Materials Management System. I am writing a report to the company’s CEO to recommend the implementation of an MRP II system, aiming to improve the company’s overall productivity. Although MRP II would work better if accompanied with a JIT system in a repetitive manufacturing company, Refr- had better enter CAM with a simple system. After all, JIT is usually implemented after and on top of MRP II. Refr- currently occupies 50 people.

TRANSMITTAL LETTER

January 17, 2011 Mr. Antony Jenkins CEO Refr- S.A. Dear Mr. Jenkins: I am submitting to you a report to let you know the benefits and the procedure of a Materials Management system implementation. The report is entitled Implementing MRP in Refr- company. The content of this report concentrates on a plan to implement an MRP system in Refr-. If you should have any questions concerning my project and paper, please feel free to contact me at 6945454544. Sincerely, Georgios Rokos Production Manager

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A) Introduction to Manufacturing Resource Planning (MRP)

Manufacturing Resource Planning is a scientific computerized method for planning the ordering and usage of materials at various levels of the production process and for tracking the inventories and the capacity resources at any given moment of the production flow. MRP II is an Inventory Control, Capacity Control and Scheduling computer system. It coordinates actions so as to achieve greater productivity. Manufacturing Resource Planning’s main activities are summarized below (Sheikh, Manufacturing resource planning (MRP II): with introduction to ERP, SCM and CRM): 1. Master Scheduling (Strategic Planning). MRP II sets a company’s management plan in manufacturing terms. It plans the manufactured output of a company. or MPR II must comply with the directions of other departments. That is why it develops the company’s overall plans. 2. Detailed Planning of Material Flows and Capacity (Tactical Planning). MRP II develops a plan of material and capacity requirements. 3. Plan Execution (Operations Planning). MRP II deals with the execution of the tactical planning in terms of detailed shop scheduling and purchasing. A shop floor control system makes sure that the incoming orders will be delivered on time. A purchasing system develops detailed plan of supplies schedule.

MRP II consists of the following modules: • The Master Production Schedule. MPS is a plan for the anticipated demand orders. It contains information about both the quantity and the timing of forthcoming orders. The Bill of Materials. BOM provides the system with the formulas – composition of each final or semi-product manufactured within the plant. It records the component part needs of our production process. The Inventory Status Record. ISR depicts what resources are on hand, the scheduled receipts and what is allocated. It also contains information about the lot sizes of each one of the component parts or subassemblies.

The three above elements constitute what was MRP II’s ancestor, the Material Requirements Planning. The integration of MPS, BOM and ISR may provide the company with a Purchasing Schedule and a proper Inventory Control System. MRP II also contains: • • The Routing, which demonstrates the capacity -labor or equipment- resources needed so as to meet MPS’ requirements. The planned or current capacities (manpower and equipment). 20

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Demand Management. This module consolidates the company’s requirements for one item from all the directions involved, such as the sales forecast, based on statistical data, eventual delayed order receipts and equipment or machinery maintenance requirements.

B) The benefits of MRP II
Companies that implement an MRP II system usually experience the following benefits (Entrup, 2005): • • • • • At least 95% on-time completion of orders. Reduced Inventories, normally by between 20 and 35%. Greater labor productivity, from 5 to 10% in fabrication, 25 to 40% in assembly and 50 to 90% overtime cuts. Greater productivity of support staff, as a result of labor’s greater productivity. Data standardization.

MRP II is a trial & error system. If a sudden order comes along, the company may meet its material requirements to respond to the demand but the system will inform us if it does not meet the capacity requirements. Thus, it will be known if an order can not be completed on time and the retarded order fulfillments will be significantly reduced. In addition, the management will be aware of eventual labor-related delays. Productivity will inevitably increase. Through its implementation, the company will be able to keep accurate data concerning both sales and the production flow. It is a system that will coordinate the sales department and the shop floor.

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C) The Implementation Plan

Prior to the implementation, Refr- should select the appropriate vendor. MRP II vendors can be classified depending on (Barrar, 1995): • The consultancy services offered. The extent of the services offer varies. Some vendors emphasize this procedure, while others undermine it. Since Refr- does not have any experience in the field of Computer Aided Manufacturing, it would be wiser to prefer a vendor who offers a wide consultancy-services package. Their manufacturing expertise. MRP II works better in discrete manufacturing companies. The selected vendor should be an expert in repetitive manufacturing, as in our case. Their target users. Some vendors target larger enterprises, while others target smaller manufacturing units. Although this should not be a criterion in the selection process, Refr- should bear in mind that small companies like ours are usually receive big client treatment by smaller vendors. Their turnover. Larger vendors are more likely to provide a wide range of services. In addition, they possess the specialists needed to offer quality services. Their rate of growth. Fast growing vendors are likely to provide more qualitative services.

The selection process will be made in two steps. First the company should pick out the most interesting written proposals. Four or five vendors should be discriminated. Then, those vendors should be invited to discuss the possibility of co-operation. It is important to identify whether the vendor’s philosophy matches Refr-’s. The company should select the vendor based on the content of his plan and not on the cost that it implies. The selected vendor should then be equipped with elaborate data that are related to the project. These data include:  Financial Information. What the company pays and what it receives. What is the cost for each item delivered to the company. What is the pricing strategy. What are the incentives that suppliers offer for mass orders. Production Information. Who does what in the shop floor. What are the procedures for a possible machinery breakdown. How often does such a breakdown occur. The BOM. The Inventory Status Report. Sales Information. What is the ratio of Big to Small orders. What is the forecast for future demand.

This information will be detected by a member of our staff who will schedule personal meetings with the directors of the above departments. Additionally, information can be tracked in the balance sheet and in invoices. 22

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Figure 3: Architecture and Information Resources for MRP II
Source: Moustakis (2000)

Phases of Implementation (Wight, 1984;1995a) 1. Initial training/education. Prior to the justification process, top and middle management should receive an introductive training to be able to judge the system. 2. Commitment. The administration must commit to the project. Top management must communicate to the employees the commitment with the vision. A vision statement should be signed at this point. 3. Project Leader. The project leader should stem from the company. It should not be the consultant or a newcomer. The project leader should be a person who knows deeply the company and its employees. Perhaps the CIO or even the CEO himself. The project leader should be 100% dedicated to the implementation. 4. Professional Guidance. At this point the company must assign a consultant to facilitate the implementation process. 5. Project Plan – with cost/benefit analysis. A financial plan should be developed at this point, setting up the goals of the whole project. The steering committee, on behalf of the management, and the project team should be set up. 6. Training. A more elaborate training takes place at this point. This time everyone involved in the process participate. 7. Right after training, goals should be identified and stated. Also, Performance evaluation measures should be taken. 23

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8. Data insertion commences. This is the most crucial step of the implementation process. If inaccurate data is mitigated, the system is very likely to collapse when going live. 9. Process Improvement. The manufacturing flows should be reviewed at this point. MPR II philosophy must impact the processes. 10. Regular Management Review. The system starts operating. For 8 months, the operation will be considered pilot. Any gaps or mistakes will be detected during this period.

The overall implementation time is estimated to be between 15 and 18 months. At least 3 months are needed to develop an accurate report, based on statistics and actual past operations, which will represent the company in figures. This report will be an input to MRP II.

D) Cost and Benefit Analysis
There are three types of Costs (Wight, 1984). 4. The computer costs (Hardware, Software and Systems Work) 5. The data integrity costs (BOM, routings, ISR, work centers, MPS) 6. People (Education, Professional Guidance) We may also discriminate the costs as one-time and on-going costs. 50 people are working at Refr-. An MRP system should have about 7% of the total labor trained on it. Thence, the MRP II system should not be operated by more than 4 users plus the CEO. A 5-user MRP II system should cost no more than 300000€, all computer costs included. As for the training, it costs about 2000€/ person. For 5 trainees the cost will climb at 10000€. An additional 20% of the purchasing cost is normally the vendor’s compensation yearly for his support services, thus 60000€ should be budgeted on annual basis. About 7% of the employees should receive training. Training costs are about 2000€ per person. In Refr-, there are 50 employees, thus 4 should receive training for total cost of 8000€. An MRP installation one-time cost is about 300000 and a 20% yearly to maintain it. Normally, 2 employees must take live courses every year, either to continue their training or because they are newcomers Given that Refr-‘s monthly revenues are 300 items x 200€ = 60000€ and the company’s profits are 20000€ per month (assuming that 30% of the turnover is the labour cost, another 30% of the turnover covers up the procurement and the

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rest of production costs and 10% constitute the inventory related expenses) or 240000€. According to the worst scenario, financial benefits related to MRP II will begin to appear 18 months after the implementation started. • • • Inventory-related benefits: Drop of Inventory Costs by 30%, namely 21000€ yearly. Drop of the salaries, due to the diminishment of overtimes, by 10%, namely 24000€ yearly. Increase in overall productivity by 15%, two thirds of which is profit and one third procurement and other production costs. Namely 48000€.

It appears that Refr-‘s profits will increase by 93000€ annually. This means that the company will achieve Return on Investment in approximately 4,5 years.

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References
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Mahapatra, P. B. (2010). Operations Management: a quantitative approach . New Delhi: PHI Learning, p. 420. Moustakis, V. (2000, January). http://www.adi.pt/docs/innoregio_MRP-en.pdf. Material Requirements Planning: MRP, accessed in 1/16, 2011. Qinghua, Z., Guoquan, C., Zhuan, W., & Bo, H. (2009). Proceedings of the 2009 IEEE IEEM., (pp. 1106-1107). Panorama Consulting Group (2010), ERP Vendor Analysis, pp. 2-8 Schniederjans, M. J., & Olson, J. R. (1999). Advanced topics in just-in-time management. Westport: Greenwood Publishing Group, pp. 3-7. Shaw, R., & Mazur, L. (1997). Marketing Accountability: Improving Business Performance. London: Financial Times, p.242. Sheikh, K. (2003). Manufacturing Resource Planning (MRP II): With an introduction to ERP, SCM, and CRM (2nd Edition). New York: McGraw-Hill. Sheldon, D. H. (2005). Class A ERP: Integrating Lean and Six Sigma. Florida: J. Ross, pp. 63-68, 201-202. Sillince, J.A.A. , & Sykes, G.M.H. (1992), Integrating MRP II and JIT: A management rather than a technical challenge, International Journal of Operations and Production Management, 13 (4), pp.18-21. Son, L. H., Tutschke, W., & Yang, C.-C. (2004). Finite and Infinite Dimensional Complex Analysis and Applications. Dordrecht: Kluwer Academic Publishers, p. 53-56. Tucker, M. W., & Davis, D. A. (1993, May-June). BNet. Accessed in 01/ 16, 2011, available online from Business Horizons: http://findarticles.com/p/articles/mi_m1038/is_n3_v36/ai_13183245/pg_2/?tag=content;c ol1 Wight, O. (1984). Manufacturing Planning: MRP II: Unlocking America's Productivity. John Wiley & Sons, Inc ., pp. 3-19, 338-351. Wight, O. (1995). The Executive's Guide to Successful MRP II (4th εκδ.). John Willey and Sons, pp. 49-85.

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