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Inventory Management and Enterprise Planning Systems
Inventory, as we noted in Chapter 7, is an essential element of supply chains and a key strategic asset of many firms. Managing inventories to meet the demands of customers and the needs of operations further up the supply chain is one of the basic activities of operations management. Although inventory management systems have been around for quite a while, they have evolved into powerful, information-technology-driven planning systems that cut across all facets of organizations. Enterprise resource planning (ERP) is the result of over 40 years of evolution of traditional inventory management and manufacturing planning and execution systems that allow today’s firms to meet the global challenges of flexibly responding to customer needs through integrated information systems. ERP facilitates the identification and implementation of best practices designed to achieve operational excellence and maintain smooth operations of critical business processes. ERP represents a maturing of narrow manufacturing planning systems that were historically isolated from the broader scope of business planning. With today’s sophisticated information technology, ERP has become a feasible means for achieving a true systems perspective of business processes and their relationship with traditional operations. Although ERP has become very widespread, many smaller firms still rely on its predecessor technologies; thus, a solid understanding of these is important.
In this chapter we examine the evolution of ERP and the major approaches that comprise and support it. Specifically, we address: ° The evolution of ERP (Section 8.1). ° Traditional inventory management and aggregate planning (Section 8.2). ° Planning and scheduling techniques using material requirements planning (Section 8.3). ° Manufacturing resource planning systems and operations scheduling (Section 8.4). ° Characteristics of ERP systems and implementation issues (Section 8.5). Material on the CD-ROM discusses some useful tools and techniques for inventory management and ERP. 15. Quantitative Inventory Models 17. Scheduling and Sequencing 2. Linear Optimization
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8.1 EVOLUTION OF ENTERPRISE RESOURCE PLANNING
Achieving synchronization across any enterprise requires a systems perspective that links planning To achieve strategic and competitive objectives of with associated business processes. This was the delivery performance, short lead-times, and essence of the process view of operations manimproved efficiency and effectiveness, firms need agement that we presented back in Chapter 1 efficient planning and control systems that syn(Figure 1.1). Collaborating with customers and chronize all the key processes within the organisupply chain partners enables operations managezation. ment functions not only to achieve unprecedented levels of customer service but also to do it with fewer resources, such as inventory. One example of the importance of accurate planning and execution is the airline industry. Airline operations performance has long been a source of irritation for consumers (see the OM Practice box). Achieving an on-time flight requires careful coordination and synchronization among a variety of processes, such as crew planning and scheduling, food service delivery, fueling, gate assignment, and other airport operations.

OM PRINCIPLE

OM PRACTICE
“Truth in Scheduling” in the Airline Industry Operations requires real-time information and an ability to quickly adapt to any process upsets that might occur.
In the mid-1990s, the Transportation Department began requiring airlines to disclose the times that each flight left the runway and touched down. Its monthly consumer report began including information about how long airlines keep planes sitting on the runway and how many flights each airline cancels. Also added to the report was information about delays caused by mechanical problems, which had previously been excluded because the department feared that airlines might fly potentially unsafe planes to help preserve a good ontime record. The department also proposed raising the limit on compensation travelers could collect for lost or damaged baggage. At the time, these were the first major changes to the government’s on-time performance reports in seven years. Some airlines touted the reports prominently in their advertisements, but others called them misleading. The purpose of the monitoring was to spur airlines to better plan and execute their operations. “I think what they have done is give the airlines more incentive to engage in truthful scheduling,” said Cornish Hitchcock, an aviation specialist for Public Citizen. Many airlines, however, blamed weather and airport congestion for most flight delays, and some consumer advocates said the reports had less impact than the Transportation Department had hoped. Today, the numbers continue to vary widely depending on the route and time of day, and few travelers realize they can ask a reservation agent for the on-time performance of a particular flight.1

Modern planning systems began in manufacturing, as the craft method of production gave way to assembly lines that required a high level of coordination for smooth operations. The earliest forms of manufacturing planning used throughout the first half of the twentieth century were simple reorder point systems, such as the economic order quantity and safety stock determination, and basic tools such as Gantt charts, bills of materials (the product structure of an item), and work and purchase orders. Reorder point systems used historical data to forecast future demand and plan inventory levels. These were easy to implement manually, and were automated on commercial mainframe computers in the 1950s and early 1960s.As computer technology developed, aggregate planning approaches emerged, focused on minimizing costs associated with inventory and production decisions that fed into more detailed material planning systems.

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Reorder point approaches, though generally appropriate for managing finished products, were not appropriate for managing raw materials, components, and work-in-process. In the 1960s, IBM developed a more forward-looking and demand-based approach to materials planning that was aided greatly by advances in information technology (IT). Material Requirements Planning (MRP) systems began to replace reorder point systems.2 MRP was an approach for ensuring that materials and all the right parts and subassemblies were available in the right quantities at the right time so that finished products could be completed as scheduled to meet forecast demands. Though MRP proved to be a very good technique for managing materials, it did not take into account other manufacturing resources such as tools, operators, and machine capacity. In the 1970s, an extension of MRP, known as Manufacturing Resource Planning (MRP II), was developed that integrated capacity and financial planning and shop floor control along with the materials planning function. It employed a common database so that manufacturing data could be easily converted into financial data, and its simulation capabilities could be used to evaluate alternative policies and answer “What if ?” questions about alternative planning scenarios. Nonetheless, MRP II also had its limitations. For example, it assumed that lead-times were fixed and that capacity was infinite. Furthermore, MRP II did not integrate other new computer-driven systems such as computer-aided design (CAD), computer-aided manufacturing(CAM), or computer-integrated manufacturing (CIM). As the focus extended beyond the boundaries of manufacturing, planning and control systems clearly began to assume an “enterprise” perspective, which led to Enterprise Resource Planning (ERP). ERP considers all relevant enterprise resources beyond the manufacturing OM PRINCIPLE realm, such as distribution, warehousing, human resource functions, ERP provides the means to integrate and synchronize what are typically isolated functions like and financial management. Most order processing, purchasing, and production firms that adopted ERP systems also into streamlined business processes. saw them as a convenient way to redefine obsolete and ossified business processes. Using IT as a key enabler, these systems integrate disparate business information into a consolidated database, allowing for better access and decision making. Introducing ERP into an organization, however, requires significant reorganization and change in workers’ perceptions and behaviors, making implementation a significant challenge. The advent of the Internet has provided new capabilities for increasing flexibility and speed in dealing with customers and suppliers within the broader context of the supply chain. New initiatives such as Customer Relationship Management (CRM) and Supply Chain Management (SCM) are extending the capabilities of ERP. Figure 8.1 summarizes the evolution of ERP into Enterprise Resource Management (ERM).

8.2 PLANNING APPROACHES
Early planning tools developed at the beginning of the 20th century helped to foster the industrialization of many countries.These consisted of simple tools such as work-order boards and Gantt charts (described in Chapter 10), and evolved into more powerful approaches such as inventory management systems and aggregate planning.

Inventory Management Systems
There are two basic types of systems for managing inventory: continuous-review systems and periodic-review systems. In a continuous-review system, the inventory position is continuously monitored. Inventory position is defined as the amount on hand plus any

2 Planning Approaches 231 FIGURE 8. it signals that a purchase order should be initiated to .C08_228-257. Enterprise Resource Planning (ERP) 1990s Planning systems are becoming more externally focused with higher levels of integration of suppliers (supply chain management) and customers (customer relationship management) into the planning process. distributed architecture.qxd 12/29/03 3:04 PM Page 231 8. Whenever the inventory position falls to or below a level r. the computer automatically reduces the inventory position for that unit by one and checks to see if the reorder point has been reached. If so. If the reorder decision were based solely on the on-hand inventory level. etc.2). When the clerk enters or scans the item code number. graphical user interface. called the reorder point. Material Requirements Planning (MRP) 1960s MRP II transitioned MRP from a purely material planning system into resource management by “closing the loop” and attempting to make the plans resource feasible.1 | Evolution of Enterprise Resource Planning Systems Economic Order Quantity (EOQ) Safety Stock (SS) Bill of Material Processor (BOMP) Work and Purchase Orders (WOs/POs) 1950s MRP logic replaced replenishment-based thinking with requirements-based thinking using the bill of material to create work and purchase transactions. Most retail stores today have point-of-sale data entry systems that are linked to a continuous-review system. Manufacturing Resource Planning (MRP II) 1970s and 1980s The evolution of IT (relational database.) led to cross-functional process orientation in the development of the planning architecture for firms. Q) inventory system.The time until an order arrives is the lead-time. as illustrated in the figure. that is why inventory position is used to trigger orders. an order for Q units is placed (see Figure 8. This would clearly be incorrect. orders would be placed continuously as the stock fell below r. The result was ERP systems. such a system is often called an (r.Values for Q and r are determined in advance. It integrated other functions into the planning process. Enterprise Resource Management (ERM) 2000s amount on order but not yet received minus backorders.

it is not economical to monitor be ordered from the same supplier. in some situatems are useful when a large number of items can tions. when checked. manual systems are often a source of errors. The choice is generally made to optimize overall inventory costs. An alternative to a continuous-review system is a periodic-review system. Since this requires substantial clerical effort and commitment by the users to fill out the proper forms when items are used. This is termed an (r. If the inventory position is at or below the reorder point. Periodic-review syssystems. some form of manual system is needed to monitor daily usage and see if the reorder point has been reached. in which the inventory position is checked only at fixed intervals. With such systems. r. and the reorder point. an order is placed for sufficient stock to bring the inventory position up to R. Q. however. that is. this is usually easy to do.qxd 12/29/03 3:04 PM Page 232 232 CHAPTER 8 Inventory Management and Enterprise Planning Systems FIGURE 8. Without computers. review systems are determining the best values for the reorder quantity.A tag on the shelf indicates the reorder point for each item. shipments can be consolidated. to balance the cost of ordering against the cost of holding inventory.C08_228-257. the reorder level. R) system. Thus. and the stock clerk needs only to compare it to the number of items remaining.2 | Continuous Review Inventory System r = Reorder Point Q = Order Quantity Inventory Position Q Units r 0 Order Here Lead-Time Arrive Here Order Here Lead-Time Arrive Here Time replenish the stock. The choice of which system to use depends OM PRINCIPLE on a variety of factors. With today’s computer of inventoried items because orders can be placed to minimize stockout risks. stock clerks usually make the rounds and physically check inventory levels. r. since individinventory continuously when manual records ual orders will be placed at the same time. Continuous-review systems require that accurate records of inventory Continuous-review systems offer tighter control positions be maintained. resulting in lower The fundamental decisions for continuousfreight rates. must be updated.The classic economic order quantity (EOQ) model can be used to make this deci- .

hours can be reduced during slow periods. while relying on inventory smoothing or demand shifting to enable production to meet demand. the firm may act as a subcontractor to other industries that may be working at capacity. patient bed-days. Level production strategy—produce the same in each period.000 filters.2 Planning Approaches and Techn es iqu 233 sion and is developed in the Tools and Techniques supplement on the CD-ROM. Aggregate-capacity measures—barrels per month. it is concerned with product groups as opposed to individual products. and so on—are used in specifying the plan. labor hours per month. If demand is relatively constant. Similar models have been developed for the (r.The required monthly or weekly production rates are then easily determined.qxd 12/29/03 3:04 PM Page 233 8. passenger seat miles (in the airline industry).This alternative would probably not be feasible for some companies. There are four major ways to respond to fluctuating demand by altering intermediaterange capacity in aggregate planning: production rate changes. practical limitations.The total production required is then 500. production must be planned more carefully lest shortages and/or high inventory levels result. inventory smoothing. but it is effective in industries that manufacture a large portion of their own parts. such as the machine-tool industry. and basketball shoes in developing an aggregate production plan. For example.167 (470.When business is brisk. Thus. colors. workforce changes. a stable workforce is maintained. Next. typically one year. and obtain a sales forecast over that period. or 470. and demand shifting. using production rate or workforce changes to respond to demand changes. we must determine a time horizon. cross-training shoes. a sport-shoe manufacturer might consider broad product lines such as tennis shoes. Generally. Tool s Aggregate Planning Aggregate planning focuses on overall capacity. First.000 divided by 12) filters per month. Subcontracting during periods of peak demand may also alter the production rate.The demand forecast calls for sales of 500. minimum inventory levels must be established to provide desired levels of customer service. Alternatively. When demand is seasonal or fluctuates significantly over the planning period. The choice of strategy depends on corporate policies.The desirable inventory levels at the beginning and end of the planning horizon must be determined. this requires wage premiums to be paid.000 over the next year. components can be subcontracted. and these models can be extended to address uncertainty in demand from a probabilistic perspective and identify appropriate safety stock levels.000 (the net change in inventory level). and sizes are not considered at this level. when business is slow. and 3. Individual styles. suppose an automotive parts company has a current inventory of air filters of 80. In that way.000 less 30. Chase demand strategy—produce the same amount as the demand forecast each month. units per month. developing a production plan is not difficult. . but the reduced pay can seriously affect employee morale. Mixed strategy—use a combination of the above two approaches. and cost and competitive factors.000 and wants to reduce the level to 50.The total production required over the planning horizon is the total sales forecast plus or minus any desired change in inventory. For instance. Producing a constant amount each month is an acceptable strategy provided that demand is also relatively constant. Production-Rate Changes One of the most common means of increasing the production rate without changing existing resources is through planned overtime. 2. the company needs to manufacture an average of about 39.C08_228-257.These can broadly be classified into three principal strategies: 1. R) system.000.

S.3 PLANNING AND SCHEDULING WITH MRP MRP requires five inputs to its planning process: 1. Postal Service hires extra mail carriers during the holiday season to increase its capacity. In general. Then they hire a large number of part-time workers in order to operate at maximum capacity. . 8. the U.This is the role of MRP.The toy industry is a good example. Companies that produce home-heating equipment are usually in the airconditioning business as well. Once an aggregate plan is formulated. But this may be unacceptable if profit margins are low and competition is high. such as perishable commodities. and increased advertising can be used to reduce inventories and increase demand during slack times (such as the winter months for lawn mowers and garden items). this alternative cannot be considered. In many industries.Toy companies maintain a minimal number of employees until production is increased for the holidays. seniority “bumping” practices can change the skills mix of the workforce and result in inefficient production.C08_228-257. Inventory Smoothing Inventory is often built up during slack periods and held for peak periods. though this increases inventory-carrying costs and necessitates increased warehouse space.Accurate forecasts for the winter holiday season cannot be made until wholesale buyers have placed orders. service facilities must meet demand through workforce changes. As another example. A time-phased plan is called a master schedule and usually specifies weekly requirements over a 6.to 12-month time horizon. This schedule is further broken down into demands and requirements for individual components and parts so that the entire production process can be smoothly controlled. A related strategy is to carry back orders or to tolerate lost sales during peak demand periods. coupons. Hiring additional labor usually results in higher costs for the human resources department and for training. it may be costeffective. OM PRINCIPLE MRP is a data-intensive backward-scheduling system. because other alternatives are simply not feasible. In firms that consist primarily of assembly operations with low skill requirements. marketing and product mix have a direct impact on the decisions involved in aggregate planning. Demand Shifting Various marketing strategies can be employed to influence demand.Also.qxd 12/29/03 3:05 PM Page 234 234 CHAPTER 8 Inventory Management and Enterprise Planning Systems Workforce Changes Changing the size of the workforce is usually accomplished through hiring and layoffs.A stable workforce may be obtained by staffing the plant for peak production levels. Layoffs result in severance pay and additional unemployment insurance costs.Thus. For some products. Commonly used in services. Both have disadvantages. Another typical strategy for smoothing inventory is to make products whose seasonal peaks are opposite. It is driven by due dates for final products or customer orders and schedules materials and resource plans by planning backwards in time from these dates. A BOM defines the number and type of components that are needed to make each product. however. as well as low employee morale. it must then be disaggregated into more detailed production requirements. usually around midyear. whereas low prices. The Experience OM exercise at the end of this chapter guides you through some of the modeling and quantitative solution issues related to aggregate planning. changing workforce levels is not a feasible alternative. A bill of material (BOM) for each end product. discussed next. higher prices can be charged to reduce peak demand. but then many workers may be idle during low-demand periods.

Finished goods are called Level 0 items. it did not become feasible until the advent of computers with the capability of processing the immense number of calculations required. the Master Production Schedule (MPS) defines how much and when.4 shows an example of an eight-week MPS for the bicycle. and seats are Level 1 items. an airline.A bill of materials for an airline flight might include the type of plane.800 spokes. 50 rims and hoops. The airline can create a master schedule that shows the routes flown on a daily basis. which may be days. It is clear that independent demand models. in Figure 8. and front wheel assemblies and. Figure 8. for all lower-level items can be derived from the number of higher-level items that are scheduled to be produced.3 shows two examples of bills of material for a bicycle. then we know we need exactly 50 frames. A master production schedule (MPS) that specifies the firm’s requirements for final products by time period. purchase orders. and the components used in the front wheel assembly are Level 2 items. and improving the use of a firm’s resources. Accurate information relating to the status of all final product and component inventory on hand. the components that are used in them are called Level 1 items and so forth. brake kits. consequently. would not be appropriate for managing the lower-level components. .These time periods are called time buckets. MRP determines a detailed. For example. 50(36) = 1.C08_228-257. Planned lead-times for each process. The bills of material define what must be produced. handlebars. if we want to produce 50 bicycles. baggage handlers). or to transport a crew into the right city.3 Planning and Scheduling with MRP 235 2. number and type of crew members. 3. for example.This is essentially a multilevel outline describing the individual parts that are needed to make each of the components or subassemblies. 4. Examples of lead-times would be the time required to deliver and load food. rather. the bicycle frame. Inventory might represent physical items such as food and fuel. wheel assemblies. supplies). 5. Although the logic behind MRP is simple. The bill of material on the right is called an indented (or multilevel) bill of material. in this example. or weeks. spokes. Thus. as well as availability of crew members and flight attendants in different cities. or inventory requirements. production shifts. Figure 8. A single-level bill of material shows the basic components or subassemblies that go into making the product. seats.A planned lead-time is not the amount of time an operation will require. Consider. time-phased schedule of material requirements. It is a statement of the planned quantities of each item along with their scheduled order release times that are derived from demand forecasts. the bicycle is a Level 0 item. MRP was an astounding success in reducing inventory and production lead-times. Note that the demand for lower-level (higher-numbered) items depends on the demand for higher-level (lower-numbered or “parent”) items. and physical resources (gates. food. The planning horizon for an MPS consists of a fixed number of time buckets. check-in counters).3.Thus. such as the EOQ. consumables (fuel. other staffing resources (mechanics. it is the amount of time allowed to perform the task. we see that the front wheel assembly consists of a rim. and 50(10) = 500 inches of wire. demand. and production orders. making customer commitments more realistic.qxd 12/29/03 3:05 PM Page 235 8. hoop. and wire. The bill of material sets the stage for scheduling. In this way. A schedule that coordinates all the resources necessary to get a flight off the ground would be the output of the MRP process. MRP can be applied to a variety of service operations in addition to manufacturing. Based on this information. We typically call this a dependent demand situation. Accurate information on the status of all outstanding orders.

qxd 12/29/03 3:05 PM Page 236 236 CHAPTER 8 Inventory Management and Enterprise Planning Systems FIGURE 8.4 | Example of a Master Production Schedule for Bicycle Model A Gross Requirements 1 35 2 35 3 40 Time Period 4 5 50 50 6 50 7 50 8 40 Gross requirements must be adjusted by inventory that may already be available or planned.5.C08_228-257. and “scheduled receipts” refers to outstanding orders that are awaiting completion of delivery. Thus. “Gross requirements” refers to the amount of the product or component that is needed to meet demand. “on hand” refers to inventory that is currently available.3 | Sample Bills of Materials Single Level Bill of Material Bicycle Model A 1 Frame 1 Seat 1 Brake Kit 1 Front Wheel Assembly Indented Bill of Material Bicycle Model A 1 Frame 1 Seat 1 Brake Kit 1 Front Wheel Assembly 1 Rim 1 Hoop 36 Spokes 10-Inch Wire 1 Rear Wheel Assembly 1 Rear Wheel Assembly FIGURE 8.This process is called “netting. net requirements = gross requirements – on hand – scheduled receipts.” An example is shown in Figure 8. FIGURE 8.5 | Calculating Net Requirements in the MPS for Bicycle Model A with 50 Units on Hand Gross Requirements On Hand Scheduled Receipts Net Requirements 1 35 50 50 0 2 35 3 40 Time Period 4 5 50 50 50 6 50 7 40 8 0 10 50 50 50 50 40 .

A planned lead-time is the time interval allocated to performing a task. By applying this logic to each time bucket in the master production schedule. examine Figure 8.qxd 12/29/03 3:05 PM Page 237 8. however. they do not tell when the parts are needed. all components need not be available at this time. Prior to MRP.The person responsible for master scheduling serves as an information buffer between the demands of marketing to satisfy customer orders and the operations that process them.6 | The Master Production Scheduling Process Sales Forecast Inventory and Purchase Order Data Actual Orders Master Production Schedule AggregateCapacity Data Market Requirements Operational Constraints . due dates).To understand this. advantages. The disneeded in week 17 must be started in week 8 if advantage is that resource capacity constraints the assembly lead-time is 9 weeks. If we want to complete this order by the end of the ninth week. a bicycle customer or market requirements (that is.6 illustrates the market and operational considerations in creating an MPS. then it is the responsibility of the master production scheduler to either secure the additional resources or to scale back the obligations of the master schedule. Since all work is scheduled based on MRP schedules backward in time. which shows the planned lead-time for each task in the bicycle assembly.3 Planning and Scheduling with MRP 237 Of all the elements of MRP. MRP creates a time-phased schedule for production or purchase of each individual component. such as the final assembly.7. Although the bills of material and MPS will tell the total number of each part needed. machine capacity. Backward scheduling has its advantages and disGiven the due date for the final product.The procedure resulted in unnecessarily high inventory levels and holding costs.C08_228-257. Figure 8. we need to start making the wire stems at the start of the first week.Thus. the master scheduling process is the most important. responsive to customer demand. MRP reduces inventory requirements by scheduling lower-level requirements as needed by specifying planned lead-times. this backwardFIGURE 8. customer responsiveness is high. If inventory.Though highly are effectively ignored in the process.The MPS process seeks to achieve the best possible schedule by looking at the resources available before promising marketing when each order will be produced. it was not uncommon for firms to secure all parts needed to support a full quarter’s build schedule at the start of the quarter. You can now OM PRINCIPLE understand the need for a computer-based process for a large and complex assembly. or human resources are not available in sufficient quantities.

This. there may be capacity shortages as shown in Figure 8. ing costs. batches. An alternative is forward scheduling. suppose the requirements are as shown below: Period Requirement 1 30 2 40 3 45 4 40 5 50 6 30 7 45 8 40 A simple lot sizing algorithm. when the MPS is compared with actual resource availability. called the periodic order quantity. as shown below: Period Requirement Order Size 1 30 70 2 40 — 3 45 85 4 40 — 5 50 80 6 30 — 7 45 95 8 40 — .qxd 12/29/03 3:05 PM Page 238 238 CHAPTER 8 Inventory Management and Enterprise Planning Systems FIGURE 8. of course. lot sizing—grouping requirements different items or products are produced on cominto smaller production lots—is generally used to mon equipment and must be produced in discrete minimize total cost.7 | A Partial Gantt Chart of Bicycle Manufacturing Assemble Bicycle Front Wheel Assembly Purchase Brake Parts Assemble Brake Kit Rear Wheel Assembly Purchase Frame Parts Assemble Frame Purchase Seats 1 2 3 4 5 6 7 8 9 Time (week) scheduling process effectively ignores resource capacity constraints. which creates a feasible schedule that works within resource constraints but may not guarantee meeting customer due dates (see Figure 8. It is generally advantageous to group MRPspecified requirements into smaller production OM PRINCIPLE lots—called lot sizing—to minimize total cost by MRP-specified requirements for each time period better balancing setup costs with inventory-holddo not consider the economics of production. creates a problem for the master scheduler. Consequently. Because it assumes that infinite capacity is available. MRP is sometimes referred to as an infinite scheduling system.8b). Lot sizing is also necessary when several Consequently. who must now either provide the extra capacity to meet customer due dates or else delay and/or expedite some orders in order to work within the resource constraints. For example.C08_228-257.8a. groups requirements into regular time intervals such as two-week requirements.

shows an example. Figure 8.C08_228-257. which continues the bicycle example from earlier in the chapter.10 shows an example with a lead-time of three weeks. FIGURE 8. the firm has effectively specified the Planned Order Receipts which specify the planned quantities and time periods when orders must be received or completed. we can schedule Planned Order Releases.The Tools and Techniques supplement on the CD-ROM discusses various techniques for lot sizing. Figure 8.9.8 | Resource Implications of Backward and Forward Scheduling Backward Scheduling with MRP Forward Scheduling with Resource Constraints Resources Needed Capacity Shortages Resources Needed Available Available Time Time (a) (b) Tool s and Techn es iqu Under this scheme there is only an excess of supply for one week. Planned Order Receipts generate work orders for production or purchase orders for suppliers. and demand and supply balance at the end of the two weeks. By backing up from the receipt dates by the lead-time for processing these orders.qxd 12/29/03 3:05 PM Page 239 8.3 Planning and Scheduling with MRP 239 FIGURE 8. How does a firm decide on the proper lot sizes? Various algorithms exist to minimize the total cost associated with the lot sizes.9 | Adding Lot Sizing Results to the MPS for Bicycle Model A with 50 Units on Hand Using a Periodic Order Quality (POQ) Policy of Two Periods Gross Requirements On Hand 50 Scheduled Receipts Net Requirements Planned Order Receipts 1 35 50 0 2 35 3 40 Time Period 4 5 50 50 6 50 7 50 8 40 0 10 60 50 50 100 50 50 40 90 . After a lot sizing technique is applied to the net requirements.

10 | Determining Planned Order Releases for Bicycle Model A with 50 Units on Hand Using a POQ Policy of Two Periods and a Three-Week Lead-Time Gross Requirements On Hand 50 Scheduled Receipts Net Requirements Planned Order Receipts Planned Order Releases 1 35 50 0 60 2 35 3 40 Time Period 4 5 50 50 6 50 7 50 8 40 0 0 100 10 60 50 40 50 100 50 40 40 Having now established how many bicycles are needed and when we should start assembling them.” For example.This process is called “explosion. Moving down to the next level. Lead-Time = Two Weeks Front Wheel Assembly 1 Gross Requirements 60 On Hand 100 Scheduled Receipts 70 Net Requirements 0 Planned Order Receipts Planned Order Releases 2 3 100 Time Period 4 5 40 6 7 8 0 0 100 0 30 100 0 0 0 .600 spokes available in period 3.C08_228-257. only one lot of 100 front wheel assemblies needs to be scheduled and made available in period 5.11 shows the timephased requirements for this item. we would need 3. and these will appear in the next MRP computation as Scheduled Receipts. the schedule for spokes is as shown in Figure 8. FIGURE 8. and an order for a shipment of 5. The earliest ones will be released to become actual orders.The others remain in the system as planned or potential orders.12. Figure 8. we see that to support the Planned Order Release of 100 Front Wheel Assemblies in period 3.Thus. we turn our attention to the subassemblies and parts that must be made available before final assembly begins.11 | Time-Phased Requirements for Front Wheel Assembly with Lot Size = 100. the Gross Requirements for the Front Wheel Assembly result from the Planned Order Releases for the bicycle (its parent item). Note that because of the on-hand inventory and scheduled receipts.The next step in the MRP process is to translate Planned Order Releases for bicycles into requirements for the subassemblies and parts. We would continue cascading these calculations down through all levels of the bill of material to generate all of the potential work and purchase orders needed.qxd 12/29/03 3:05 PM Page 240 240 CHAPTER 8 Inventory Management and Enterprise Planning Systems FIGURE 8.000 spokes must be placed with the supplier in period 2.

Often this is done through the use of overtime and/or by subcontracting out some of the work. revenue growth. if an order is scheduled before week 1. higher productivity. this time fence is the manufacturing leadtime for the product since any changes within the lead-time are likely to cause changes to orders that have already been released or are to be released very soon. It may still be possible to execute the plan.200 5.400 Scheduled Receipts Net Requirements Planned Order Receipts Planned Order Releases 1 0 0 0 2 0 3 3. The best route to schedule stability is “freezing” the MPS. In this case. If lateness is severe in either time or quantity.000 1. Expediting refers to speeding up some downstream operation to perform a task in less than its planned lead-time.000 0 0 0 0 0 As work orders are completed or purchase orders are received. rework.600 Time Period 4 5 0 0 6 0 7 0 8 0 0 5. consider this question:Are effective MRP implementation will quickly return the initial financial investment and improve overyou more flexible with or without a personal digall cash flow.qxd 12/29/03 3:05 PM Page 241 8.12 | Time-Phased Requirements for Spokes (36 Needed per One Front Wheel Assembly) with Lot Size = 5. the master scheduling process may need to adjust the workload or increase the factory capacity temporarily.3 This means that no changes are made to the MPS within a preset time fence.C08_228-257. Creating the discipline of freezing the master schedule is difficult in many firms as the promise of a new customer order means more business and typically it is hard to ask the customer to wait. poor quality. and overtime costs as OM PRINCIPLE the factory is asked to deviate from existing plans on very short notice. One critical issue in creating an MRP schedule is creating a stable schedule. Benefits include improved customer ital assistant like a Palm Pilot? Are you more flexiservice. better on-time delivery. one must recognize that a lack of such discipline will oftentimes result in schedule disruptions.000.This is similar to the “bullwhip” effect in supply chains discussed in Chapter 7 and is referred to as system nervousness. Small changes in the master production schedule or inventory data can sometimes translate into large changes in the schedule for procured parts and subassemblies.3 Planning and Scheduling with MRP 241 FIGURE 8. reduced invenble when you adhere to strict rules when entering tory. but some activities may need to be expedited. Typically. it means that the order is late. insufficient inventory exists to assemble all items planned for in the master production schedule. ity is defined as your ability to respond to customer . on-hand inventory will be updated. When the calculations are completed. managers need respond only to exceptions and conditions outside the norm. Nonetheless. Lead-Time = One Week Spokes Gross Requirements On Hand 2. and data into your PDA or when you don’t? If flexibilimproved profit. Successful implementation of an MRP system For an interesting analogy to this link between costs money and requires discipline. an discipline and flexibility. Because MRP reports by exception. However.

such as Dell’s process of assembling computers in different configurations to specific customer orders. forecasting aggregate sales is statistically less error-prone than forecasting each item in the product mix. including warehouses full of materials and components. because the work and purchase order generation capabilities of MRP are not required. Managers began to expand the concept to include other manufacturing resources allocated to production. Because capacity was not explicitly considered in MRP. and controlof a manufacturing company became known as ling a company’s resources and operating invest4 It Manufacturing Resource Planning (MRP II). an item-level forecast drives the MPS.The use OM PRINCIPLE of an MRP-based system to plan all the resources As a tool for managing. In MTO environments. production. and master scheduling in addiplan. JIT organizes a continuous flow of incoming materials so the discrete orders of MRP are not needed. the main variable to satisfy is accurate order promise dates. MRP has been superseded by just-in-time. such as the assembly of recreational vehicles. however. and strategic financial planning.4 MANUFACTURING RESOURCE PLANNING After the development of formalized MRP systems. the master production schedule is created differently in make-to-stock (MTS). tion to inventory. allowing individuals throughout the organization to use the data. It uses a common database. It is a top-down system. The organization assumes that the product mix ratio used in the “phantom” bill of material is fairly constant over time. predicting. data-intensive. In MTS production. in essence. fewer stockouts. MRP is still a valuable technique in nonrepetitive industries. the result is much shorter lead-times and lower inventory levels. MRP II. numerous problems began to surface. and make-to-order (MTO) environments. .C08_228-257. In most MRP implementations. several features distinguish MRP II from a pure MRP system: 1. since production is often measured in terms of dollars. failure to produce orders to meet customer due dates. Similarly. MRP II systems accrue the benefits of ordinary MRP systems. or JIT (discussed in the next chapter). and improved delivery. Manufacturing data can be converted into financial data. translating strategic business plans into functional strategies.5 In addition.This implies that the organization should maintain a stable MPS by using time fencing and related methods discussed before. if flexibility of an organization is construed as a market construct—its ability to respond to customer requests—then a disciplined. In repetitive industries. it became evident that the MRP concept needed to look beyond the planning of materials. ments. assemble-to-order (ATO). and cash flow problems that even led to bankruptcies. high levels of overtime and subcontracting. particularly defense and pharmaceuticals where lot control is critical. Because of the competitive pressures to increase quality and shorten lead-times. such as soap and toothpaste. Sometimes. including reduced manufacturing inventories. it is important that the status of customer orders be visible throughout the production process. a “phantom” bill of material may be used to forecast the number of items required (such as total quantity of toothpaste) and ratios or percentages of aggregate forecasts used to assess how many individual units (such as tubes of toothpaste by different sizes) are needed. 8. 2. you will no doubt agree that a disciplined approach to a Palm Pilot creates maximum flexibility. MRP II became an important element of computer-integrated manufacturing. schedule-driven approach as provided by an MRP system provides the most effective response. particularly financial resources. converts a marketing involves the broader functions of purchasing. statement of demand into a workable production capacity planning. In an ATO environment.qxd 12/29/03 3:05 PM Page 242 242 CHAPTER 8 Inventory Management and Enterprise Planning Systems requests for your time.

Master schedules and MRP plans need to be operationalized on the factory floor. setup. Capacity is frequently expressed in a unit that is common to all work centers—standard hours. managers and supervisors must mation from the factory floor. Finite Capacity Scheduling (FCS) is a forward-scheduling technique that tries to match the work content of orders and the capacity of competing resources (discussed in the next section) ° ° Operations Scheduling Any plan is only as good as its execution. As we noted. actual output. resource availability. One of the key elements of MRP II is a focus on capacity requirements. Thus. Capacity Requirements Planning (CRP) is the process of determining the amount of labor and machine resources required to accomplish all the tasks of production on a more detailed level.4 Manufacturing Resource Planning 243 3. utilization and productivity—to enable them to ensure that materials and tools are available when needed. track progress against planned requirements. taking into account all component parts and end items in the materials plan. CRP requires detailed inputs for all components and subassemblies. routing data. The result is a schedule that never exceeds available capacity and is always feasible to implement on OM PRINCIPLE the factory floor. Several techniques are used: ° Rough Cut Capacity Planning converts the master production schedule into capacity needs for key resources and then determines whether the MPS is feasible with respect to capacity limitations. Once the schedule is impleScheduling approaches depend on precise informented. then the master scheduler must revise the MPS to stay within capacity constraints. and make short-term adjustments when necessary. on-hand quantities.qxd 12/29/03 3:05 PM Page 243 8. processing. and time standards. manufacturing-order status. Finite capacity scheduling (FCS) matches the work to be done against the available resources. . It is user-transparent. and downtime and planned maintenance. current status of shop orders. This process is often iterative and may require several trials before a feasible master schedule is constructed. accurate data control progress and may need to make adjustare vital to success. What-if simulation capabilities are routinely used to evaluate alternative plans. such as the number of shifts. If not. Users at all levels are able to understand the system because of its integration with other facets of the business. work-in-process. The complexity of FCS generally requires sophisticated computer software to integrate and process the variety of data needed to produce a useful schedule. including MRP-planned order releases. 4. thus.C08_228-257. specific process routings. a capacity reconciliation scheme is needed to ensure that the plan is realistic. A schedule specifies the timing and sequence of production and the amount of work to be completed at any work center during any time period. of course. Scheduling serves the important function of ensuring that the plan is executed effectively. and changeover times. Scheduling refers to the assignment of priorities to customers and/or manufacturing orders and the allocation of work to specific work centers and/or resources. Production (operations) control provides data and information to supervisors—customers in queue. MRP ignores capacity in creating its schedule. and measures of efficiency. ments for machine breakdowns or other problems. due dates or shipping dates. Key inputs into any scheduling system include the types of jobs that can be processed by different resources.

the time out of the shop quickly. and automated scheduling. At the highest level of sophistication—automated scheduling—the computer can generate a schedule. In contrast to shop-performance criteria. these measures focus externally on customer satisfaction. and simulation-driven approaches. the schedules are generated manually and then assessed by the computer to determine feasibility and to estimate performance measures. the difference between the completion time and the due date (either positive or negative). Cost-based criteria might seem to be the most obvious criteria. Due-date criteria pertain to customers’ required due dates or internally determined shipping dates. due-date. costs are considered implicitly in shop-performance and due-date criteria.C08_228-257. Many optimization approaches are based on complex linear or integer programming models.1 summarizes shop-performance and due-date criteria. dispatching rules. time. Optimization approaches seek to develop an “optimal” schedule to minimize or maximize some scheduling criterion. Several approaches can be used for FCS. the computer produces the schedules.1 | Common Scheduling Criteria Criterion Makespan Flow time Tardiness Definition The time to process a set of jobs The time a job spends in the shop The amount by which completion time exceeds the job’s due date The difference between completion time and due date Objective Minimize makespan Minimize average flow time Minimize number of tardy jobs or the maximum tardiness Minimize average lateness or the maximum lateness Lateness . The applicability of the various criteria depends on the availability of data. An advantage of these approaches is that the scheduling criteria and resource capacity can be considered TABLE 8. the amount of time by which the completion time exceeds the due date (tardiness is defined as zero if the job is completed before the due date). Another common measure is the number of tardy or late jobs. In selecting a specific approach for FCS. and lateness. and flow WIP inventory. Two common measures are tardiness. In most cases. but it is often difficult to identify the relevant cost components and obtain accurate estimates of their values.qxd 12/29/03 3:05 PM Page 244 244 CHAPTER 8 Inventory Management and Enterprise Planning Systems Many computer-based scheduling systems perform schedule evaluation. In schedule evaluation. schedule generation.Table 8.They include optimization-based approaches. which are then reviewed manually. ment utilization and resources by getting all jobs Two common measures are makespan.The human scheduler uses his or her judgment and experience to improve the schedule. and create new schedules. In schedule generation. Shop-performance criteria pertain only to information about the start and end times of jobs OM PRINCIPLE and focus on shop performance such as machine A short makespan aims to achieve high equiputilization and work-in-process (WIP) inventory. These criteria are often classified into three categories: shop-performance. and cost-based criteria. Low flow times reduce needed to process a given set of jobs. a manager must first consider the criteria for evaluating schedules. the amount of time a job spends in the shop. identify problems.

scheduling is dynamic—jobs are continually being created. higher quality. such as forecasting. when n = 5 and m = 4. Work in next queue 8. Least work remaining 6. Over 100 different finite scheduling packages are available to companies. Simulation modeling enables a manager to experiment with a model of the production system to choose the best dispatching rule for a particular set of criteria and shop conditions. and heuristic methods must be used. and raw material planning. Many practitioners. feel that scheduling software needs better interfaces with other plant systems. there are more than 200 million schedules! These problems are too difficult to solve optimally.2 | Common Dispatching Rules Rule Static Priorities 1. Hence. and changed. One of the major difficulties of optimization-based approaches is that many real-life problems are too large and complex for them to handle effectively. Examples of typical dispatching rules are given in Table 8.C08_228-257. Fewest operations remaining Dynamic Priorities 7. scheduling decisions must be made over time. and unforeseen events such as machine breakdowns occur that invalidate previously developed schedules. Slack time 9. In real manufacturing environments. order entry. Earliest release date 2. Slack/remaining operations 10. we must sequence n jobs on m machines. The Tools and Techniques supplement on the CD-ROM describes several simple optimization approaches used in scheduling.2. Critical ratio Description Time job is released to the shop Processing time of operation for which job is waiting Sum of all processing times Due date of job Sum of processing times for all operations not yet performed Number of operations yet to be performed Amount of work awaiting the next machine in a job’s processing sequence Time remaining until due date minus remaining processing time Slack time divided by the number of operations remaining Time remaining until due date divided by days required to complete job . there are up to (n!)m possible schedules.4 Manufacturing Resource Planning 245 Tool s and Techn es iqu explicitly in the optimization model. Simulation-based approaches apply one or more dispatching rules to rank the order of jobs waiting to be processed at a machine in order to use available capacity effectively. however. and faster response.The benefits that most companies find in using such software include on-time delivery. Shortest processing time 3. Total work 4. For example. If so. more realistic schedules.qxd 12/29/03 3:05 PM Page 245 8. Disadvantages are that objectives must be precisely quantified and a considerable amount of computer processing may be necessary to find a solution. better customer relations. Earliest due date 5. In the most general job shop situation.6 TABLE 8. and each job may have a unique routing. eliminated. Another problem with optimization-based approaches is that they assume a static situation in which all jobs are available at the same time and no new jobs are created during processing.

ERP is being implemented in all types of industries and organizations. such as an advertising campaign. Order information needs tions. and at multiple locations to provide more timely analysis and reporting of sales. insurance. customer. optimize their resources. no one in the company can determine the true status of the order at any given point in time.qxd 12/29/03 3:05 PM Page 246 246 CHAPTER 8 Inventory Management and Enterprise Planning Systems 8. chemicals. ERP systems integrate all aspects of a business—accounting. is typically unable to access the warehouse’s computer system to see whether an order has been shipped. and new market opporlevels. tions of a business. product mix. but this had to be done manually. often being keyed and rekeyed into different departments’ computer systems along the way. telecommunications. consumer goods. supply chain management. electronics. an order begins a mostly paper-based journey from in-basket to in-basket around the company. ERP takes a process orientation. As a result. competition. even though MRP II integrated some porwith availability. its focus was primarily on manufacturing planning. and other business variables information to complete the order (the customer’s more rapidly and to respond quickly to changes credit rating and order history. ways that the department did its work.A sales representative. which is built on the premise that the whole is greater than the sum of its parts. for example. Automation of the flow of information from one department to another in any organization became the vehicle for improving effectiveness of plans—this has been the marketing mantra of ERP vendors in the last decade. for multiple purposes. customers get their orders faster and with fewer errors. manufacturing. the order is automatically routed to the next department via the ERP system. manufacturing. higher-quality decisions can be made. When one department finracy. for example. customer relationship management. and so on. ERP removed the possibility of human error (such as the operations group not being aware of a marketing promotion and not adjusting their schedule accordingly) by improving the flow of information. and control them on a real-time basis. represents the next level of integration from MRP II. sales. pharmaceuticals. banking.C08_228-257. and utilities.7 Consider a customer order. ishes its processing activities. and billing are OM PRINCIPLE treated as one process. inventory. Meanwhile. Traditional management systems had generally OM PRINCIPLE treated each transaction separately and were built around the strong boundaries of specific funcDifferent business functions need to communicate with one another. public administration. shipping. current inventory in demand. defense. ERP systems help organizations to streamline their processes. health care. heavy construction. and accounting data. sales ple. Each department typically had its own comto be integrated with production.5 ENTERPRISE RESOURCE PLANNING ERP. Some examples include aerospace. Such a process causes delays and lost orders and is prone to data entry errors. production puter system that was optimized for the particular schedules with human resource requirements.This allows a firm to better coordinate supply and demand and to identify critical business issues and address them quickly. Order processing. a customer serERP provides the basis to change product feavice representative has access to all the necessary tures. So does everyone tunities. For exampurchasing with production scheduling. education. and shipping schedules). As business information is distributed throughout a firm quickly and with greater accuelse in the company. manufacturing. human resources—into a unified information system that can be used by multiple users.A key feature of an ERP system is its flexibility: it can respond to the changing needs of a business by adding or subtracting whatever modules the business needs (see the modules list under Implementing ERP Systems below). Such plans could be coordinated with marketing initiatives. human resource. Whatever the reasons.With ERP. automotive. Typically. .

the server stores the data.The three-tier architecture adds a middle echelon. Most ERP systems exploit the power of three-tier client server architecture. For example. deferring the more sophisticated applications until after those modules are in place and are providing effective information transactions. they all provide the same major modules. online data transfer is important. and present them in the appropriate form whenever requested by the user. Implementing ERP Systems The three most prominent vendors for ERP software are SAP. but with the advent of the personal computer.qxd 12/29/03 3:05 PM Page 247 8. the Internet. and PeopleSoft. Although their products have slightly different features. making it easier to transition to a full ERP implementation. It is said that ERP is the finest expression of the inseparability of business and IT. other enabling technologies including various IT systems.To facilitate these transactions. The modular approach also allows the software . which is the market leader. SAP’s R/3 system.5 Enterprise Resource Planning 247 ERP Architecture Most business planning systems are nothing more than data manipulation tools that store data. Early ERP systems were built to work only with large mainframe computers. embodying all application logic and the business rules that are not part of the application and enforcing appropriate validation checks.The incremental improvement in IT and the drastic reduction in the prices of computers have made it possible for even a small organization to think about ERP systems. the key enabler of ERP is a sophisticated information technology infrastructure. Because many organizations that use ERP have multiple locations. client server technology. are used with ERP systems. Oracle. electronic data interchange (EDI). and scalable relational database management systems (RDBMS). offers the following modules: ° ° ° ° ° ° ° ° ° ° ° ° ° Financial Accounting Treasury Controlling Enterprise Controlling Investment Management Production Planning Materials Management Plant Maintenance & Service Management Quality Management Project System Sales & Distribution Human Resources Management Business Information Warehouse The modular approach allows firms to add information processing capability incrementally. ERP systems have become widely available. such as GroupWare. process them. maintaining its integrity and consistency. and data warehousing. a firm may choose to implement what it perceives are the more important modules for its business first. In a client server environment. intranet. and processes the requests of the user from the client desktops. Thus.C08_228-257.

which may slow down the project. Many firms chose this method in the early 1990s. firms require data conversion. integration testing. They can dard ERP software package before selecting a change their business processes to accommodate vendor and trying to implement it. Discarding systems that have been fine-tuned to match the ways people are accustomed to work can be traumatic. but few attempt it anymore because it calls for the entire company to mobilize and change dramatically. Functionality refers to the specific planning routines chosen as a part of an ERP system.000 to $300 million. quality management practices in pharmaceuticals require lot tracking—a firm must be able to trace back and establish exactly when a particular tablet was produced in case there is a problem. the software. consulting. and make software upgrades difficult. SAP is able to design software that meets the need of its customers more precisely without having to deliver a completely customized solution to each organization. Some software modules are developed to address the unique requirements of an organization. Once the pilot system is up and run- . The most common reason that companies cancel multimillion-dollar ERP projects is that OM PRINCIPLE they discover that the software does not support It is critical for companies to determine if their one of their important business processes. Matching the functionality of the system to the process and planning requirements of the organization is a major challenge. Needless to say. When business processes are compatible with a stanthis happens. implementing an ERP project is costly and time-consuming. the average cost was $15 million. which might mean significant changes in long-established ways of doing business (that often provide competitive advantage) and shake up people’s roles and responsibilities (something that few companies are willing to do). but rather to understand the benefits and how ERP can improve an organization’s operations. Other vendors also provide similar functionality in their bundle of products. Other firms may not need such sophisticated functionality. SAP’s R/3 system also allows mobile and distantly located users to connect through it to the Internet and the business. Pilot Site Approach.or sixmonth average implementation time in an attempt to sell their products. For example. they can modify the software to fit the process using bolts-ons.Thus. including hardware. and many other expenses. Alternatively.8 Besides direct software costs. such as financial bookkeeping. Install independent ERP systems in each key operation. although ERP vendors often suggest a three. The Meta Group conducted a study of 63 companies of various sizes and found that the total cost of ownership of ERP.9 Time can also be a major roadblock to ERP implementation. Nonetheless. and are referred to as “boltons. Cast off all existing legacy systems at once and implement a new ERP system across the entire company.C08_228-257. by using a modular design for the information architecture. across the enterprise. professional services. while linking common processes. they have two choices. and the effort involved is often not worth the risk of failure. ERP efforts usually take between one to three years. Usually. software. this begins with a pilot installation in one unit where the core business of the firm will not be disrupted if something goes wrong. on average. introduce errors into the system. Transformation Approach. ranged from $400.The important thing is not to focus on how long the process will take. This is the most ambitious and difficult approach to ERP implementation. 2. this approach can be effective when the scope of the ERP system is limited to one plant or one department. The following are the most common approaches to implementing ERP: 1.qxd 12/29/03 3:05 PM Page 248 248 CHAPTER 8 Inventory Management and Enterprise Planning Systems vendors such as SAP to focus on best practices for specific processes in specific industries.” One example is an optimization package for finite scheduling. and internal staff costs. employee training.

Modern systems have evolved over the years from simple reorder point inventory management approaches to comprehensive business enterprise resource planning systems. the system can be rolled out to other units. new modules can be added gradually. For example. Inventory management systems consist of continuous-review and periodic-review systems. It is not a true “enterprise” solution and will not effect much change in employees’ behavior. and many firms have realized substantial benefits. Although this approach is simpler than the other strategies. 3. Modern ERP systems have significantly expanded what they have to offer. the payback will be much smaller. Continuous-review systems offer tighter control of inventoried items because orders can be placed to minimize stockout risks.3 | Benefits and Challenges Associated with ERP Benefits Multidatabase and multiplatform support E-commerce/e-business solutions (online queries) Wide range of functional business solutions Internal (supplier) and external (customer) integration User defined work flow Stable databases Consistent source code development and soft coding (easier to change deliverables) Distributed computing Advanced security functions Easier data sorting and sequencing Graphical user interface and intuitive report writer generators Challenges Long implementation times Massive cost overruns Stressed relations with software vendor Lack of product support Unresolved technical issues High failure rates (in terms of business benefit) Lack of documentation Upgrade problems Massive hardware resources Organizational acceptance Extensive setup and testing Summary of Key Points ° Efficient planning and control systems are necessary in any organization to synchronize key processes and support the achievement of strategic and competitive objectives. This has emerged as the most common way of implementing ERP. TABLE 8.10 Many others have not yet witnessed the expected results. and get the ERP system up and running quickly across the organization. Incremental Approach. expanding the implementation over time. Periodic-review systems are useful when a large number of items can be ordered from the same supplier. ° . such as finance.C08_228-257.qxd 12/29/03 3:05 PM Page 249 Summary of Key Points 249 ning and all the bugs are worked out. although it does take more time to complete. however.This approach suits large or diverse companies that do not share many common processes across business units. After users have some experience. Focus on only a few key modules.Table 8. since individual orders will be placed at the same time. Smaller companies often use this approach.Timken Steel Company gained 15 percent more output from its current capacity without investing in new plant and equipment.3 summarizes the business benefits and challenges associated with ERP systems.

and flow time. and strategic financial planning. and at multiple locations to provide more timely analysis and reporting of sales. and accounting data. however.C08_228-257. Common measures for evaluating the merits of a schedule are makespan. Why is MRP often referred to as an “infinite scheduling system”? 5. Other criteria that relate to customer due dates are tardiness (the amount of time by which the completion time exceeds the due date) and lateness (the difference between the completion time and the due date). Explain the concept of lot sizing. Manufacturing resource planning (MRP II) involves the broader functions of purchasing. Lot sizing is the process of grouping requirements into smaller production lots to better balance changeover costs with inventory-holding costs. on-hand inventory. The output of the process is a schedule for obtaining resources needed to produce the end items. sales. Questions for Review and Discussion 1. material requirements planning. human resource.This can be addressed by capacity requirements planning techniques.qxd 12/29/03 3:05 PM Page 250 250 CHAPTER 8 Inventory Management and Enterprise Planning Systems ° ° ° ° ° ° ° ° ° Aggregate planning focuses on developing production plans that balance cost against overall capacity. manufacturing. human resources—into a unified information system that can be used by multiple users. planned lead-times. The complexity of ERP systems requires costly and time-consuming implementation. and focusing on only a few key modules. workforce changes.Why is it necessary after MRP calculations have been completed? . Material requirements planning (MRP) is a technique used to plan for and control manufacturing inventories in a dependent demand environment. Explain the concept of dependent demand. What are the key inputs to MRP? How are they used to create a plan? 3. Scheduling refers to the assignment of priorities to customers and/or manufacturing orders and the allocation of work to specific work centers and/or resources. ERP systems integrate all aspects of a business—accounting. installing independent ERP systems in each key operation. such as finance. which is the time needed to process a set of jobs. for multiple purposes. inventory smoothing. Enterprise resource planning (ERP) grew out of narrow manufacturing planning and control systems—reorder point systems. manufacturing. customer relationship management. customer. capacity planning. A major disadvantage of MRP is its inability to include capacity constraints in the calculations. across the enterprise. How does it relate to MRP versus reorder point systems? 4. inventory. It provides simulation capabilities and a better link to functional strategies. Approaches for implementation include casting off all existing legacy systems at once and implementing ERP across the entire company. supply chain management. which is the amount of time a job spends in the shop. production.The key inputs are the bill of materials. and outstanding orders. A schedule specifies the timing and sequence of production and the amount of work to be completed at any work center during any time period. Trace the evolution of manufacturing planning systems into organization-wide enterprise systems. while linking common processes. and master scheduling in addition to inventory.What were the characteristics of each major phase of development? 2. Four major types of aggregate planning strategies are production-rate changes. and demand shifting. such as financial bookkeeping. and getting the ERP system up and running quickly across the organization. it is concerned with product groups as opposed to individual products. and manufacturing resource planning—to integrate and synchronize business functions across the organization. master production schedule.

this is the stock on hand: Item A G B C D E F Stock on hand 50 25 50 20 350 0 175 Calculate the requirements for all components and subassemblies. one unit of E.13 | Bill of Material for Question 12 Yo-Yo Wooden peg (1) String (1) Sides (2) Carton (1) .13. Subassembly D consists of one unit of E and one unit of F. consists of three units of D and four units of F. b. Current inventory levels and lead-times are shown below.qxd 12/29/03 3:05 PM Page 251 Questions for Review and Discussion 251 6. C. it takes one week to assemble 1. How does MRP II differ from MRP? 7. compute the requirements for all components and subassemblies. Part Wooden peg String Sides Cartons Inventory (units) 100 500 200 — Lead-Time (weeks) 1 1 5 3 It is known that 200 sides have already been ordered and will arrive at week 6.000 yo-yos. Use time phasing to determine an overall schedule. Draw the bill of material for products A and G. 12. c. One unit of A consists of two units of B. Subassembly B consists of two units of D. consists of three major subassemblies: B. b. and how do they differ from scheduling? 11. An electrical appliance. and three units of D.C08_228-257. G. and one unit of F. One thousand yoyos are needed by week 10. If 50 units of A and 25 units of G are required for the month of May.When all the parts are available. a. Why are scheduling and production control approaches important? Describe the different scheduling criteria that are used to evaluate schedule performance. 9. and discuss their advantages and disadvantages. and D. one unit of C. The parts used in manufacturing a yo-yo are shown in Figure 8. What issues do firms face when implementing ERP? Identify the principal strategies that have been used to implement ERP. Subassembly C consists of two units of E. a. FIGURE 8. How does ERP differ from its predecessor technologies? What advantages does ERP offer that MRP II could not provide? 8. Determine the net requirements for all components. What are dispatching rules. A second major appliance. 10. Suppose that 100 units of A and 50 units of G are required for the month of June and that at the end of May.A.

000 Lead-Time (weeks) 1 2 3 3 1 1 2 1 . Assume that 500 pairs of skates are needed by week 10. b.14 | Bill of Material for Question 13 Toy Car Body Assembly (1) Wheels (4) Hood (1) Top (1) Base (1) Sides (2) Trunk (1) 13.15. determine net requirements for all components and an ordering schedule. Item Pairs of skates Wheel assembly Outer shell Inner liner Wheels Bearings Wheel frame Buckles Inventory (units) 50 100 25 pairs 0 pairs 1. Given the information below.000 600 5.14. Use time phasing to determine an overall schedule. Item Toy car Body assembly Hood Top Base Sides Trunk Wheels Inventory (units) 100 125 — 100 175 200 300 800 Lead-Time (weeks) 2 5 3 2 4 3 2 3 a. 14. The bill of material for a pair of in-line skates is shown in Figure 8. The parts used in manufacturing a toy car are shown in Figure 8. Current inventory levels and lead-times are given below.500 3. Five hundred toy cars are needed by week 12. Determine the net requirements for all components.qxd 12/29/03 3:05 PM Page 252 252 CHAPTER 8 Inventory Management and Enterprise Planning Systems FIGURE 8.C08_228-257.

ERP vendors continue to upgrade their software packages. It has been estimated that ERP customers should plan on spending 15 percent of the project’s original implementation cost every year to keep their ERP systems up to date. PeopleSoft c. 2. Oracle 4.qxd 12/29/03 3:05 PM Page 253 Internet Projects 253 FIGURE 8. Baan d. AMRResearch. ERPCentral provides the latest news for ERP vendors and markets from various sources.swlearning. Review the information at the link on the text Web site.That means keeping up with current releases of the software as well as moving along with changing business conditions.com c. SAP b. ComputerWorld d.What are some models for assessing the compatibility of ERP software with an organization? What are some attributes that a firm should look for in selecting an ERP package? How should it choose between two competing packages? 3. and the public sector. utilities. CIO Magazine .com b. 1. Review and summarize one article from its list. Many ERP vendors have moved into nonmanufacturing areas such as retail.C08_228-257. InformationWeek. go to the text’s Web site at http://raturi_evans.com. a. Outline the release history of one of the following ERP systems by gathering information from each of these vendor’s Web sites: a.15 | Bill of Material for Question 14 Pair of Skates Wheel Assembly (2) Outer Shell (1 pair) Inner Liner (1 pair) Wheels (4) Bearings (4) Wheel Frame (1) Buckles (3) Internet Projects To find Web links to carry out each of the following projects. health care. Many services for assessing the functionality of ERP systems are now available through the Web. Can you find any evidence of this? Use the Web sites for the following organizations or publications. Datamation e.

and is shown in Figure 8. Not meeting demand cent of its production cost or 0. it incurs a cost of $6. The cost structure for beer production allows Golden to change the production level anytime for $5 per bbl change from the previous month irrespective of whether the level is increased or decreased. Golden wants to explore several possibilities for setting up the production schedule.500 1.The spreadsheet is designed to allow you to enter values for production in each month and calculate the cost of the resulting production plan. Any inventory left over at the end of the month is charged a fixed rate (2 per$70 = $1. Golden’s cost structure is summarized below.C08_228-257.800 2. not utilizing this capacity costs the company $3 per bbl (undertime cost).00 $5.To calculate the ending inventory level each month in column F.800 3.200 bbl per month. With such a spreadsheet.200 3.200 At the beginning of January.40 $90.16.200 Bo s Mater nu A spreadsheet for modeling this scenario is available in the Excel files.This has been assessed as the margin lost on the product not sold as well as goodwill losses for displeasing the customer. Once Golden establishes the level of production.00 2. Golden Breweris.40) for that month. 1.600 2. it is easy to perform what-if analyses of alternative aggregate planning strategies.000 2. note that s ial .50 $3.100 3.00 $1.50 per bbl.00 $6.000 1.02 results in an opportunity loss of $90 per bbl.qxd 12/29/03 3:05 PM Page 254 254 CHAPTER 8 Inventory Management and Enterprise Planning Systems EXPERIENCE OM Aggregate Planning Using Spreadsheets The marketing and sales group has forecast the demand for beer in the forthcoming year at Golden Breweries. Operating currently at a rate of 2. Golden faces a seasonal demand that has the following pattern: Month January February March April May June July August September October November December Demand 1.000 1.900 2.xls on the CD-ROM.000 1. Production cost ($/bbl) Inventory-holding cost ($/bbl) Lost sales cost ($/bbl) Overtime cost ($/bbl) Undertime cost ($/bbl) Rate change cost ($/bbl) Normal production rate $70. If Golden sets the production level lower than what it wants to produce in a given month.000 barrels (bbl) are in inventory.

Thus. the inventory level cannot become negative.C08_228-257. If lost sales occur. in Figure 8.16 | Aggregate Planning Spreadsheet Beginning inventory + production – demand = ending inventory The formula for Cumulative Product Availability is adjusted for lost sales.16 for September. we must add them to the cumulative production to maintain the correct relationship: Cumulative production – cumulative demand = current inventory level . Because there are no backorders.qxd 12/29/03 3:05 PM Page 255 Experience OM 255 FIGURE 8. we essentially begin anew with zero inventory.

While inventories will be reduced and lost sales will be . that is. July.16 change significantly if 100 bbl of initial inventory are dubbed low quality and thrown away (that is. Golden Breweries will build up an inventory of 3. one of the peak demand months for beer. Does your solution change significantly if a 100 bbl consignment on the way to the customer is returned (that is. July. The controller suggests that working capital requirements would be reduced if Golden followed a two-level production strategy: use a high production level until the end of peak months (August) and then cut back production to a level that satisfies the remaining demand. How would you rate the performance of such an approach? 6. produce the same amount as the demand forecast each month. production is the same in each period.000 = 2.700 + 2.They also agree that any “lost sales”—such as those that you incurred with the level strategy—are bad for business. working capital and line of credit requirements are excessive. your starting inventory is 900 bbl)? Comment on the changes as well as the role of accurate inventory information in creating production plans. So they suggest that production levels at Golden should be anchored to levels that avoid all stockouts. August) and a low level in the other months. What changes do you see in your schedule? Does this plan satisfy the warehouse manager’s concern? Do you save any money by doing this? 4. resulting in excessive costs.16 because all other breweries are also ordering more during those periods. and they also create unnecessary inventories in low demand periods. your starting inventory is 1. and we would not have to make any adjustments.16 is not feasible. In addition.900 At this constant production rate. Does the solution (in terms of how much you produce each month) to the level production strategy in Figure 8. Level strategies don’t satisfy this intuition. can result in excessive inventories and possibly lost sales. The sales manager argues that using level production strategies is counterintuitive to her thinking since a firm must respond to the demand from the market on a “when needed” basis. The production manager believes that better two-level strategies are possible such as operating at a high level in the peak months ( June. An alternative to a level production strategy is a chase-demand strategy—that is. then inventory values could be negative (representing units backordered).200 barrels in March and suffer lost sales of 500 barrels in August. Incurring shortages and carrying high inventories may not be a good business policy. 2.200 – 1. Such a strategy avoids rate changes but. and August using the level strategy in Figure 8. The production plan in Figure 8.qxd 12/29/03 3:05 PM Page 256 256 CHAPTER 8 Inventory Management and Enterprise Planning Systems If backorders were allowed.C08_228-257. 1.You decide to recalculate the level production rate by setting the monthly production level as (total demand – initial inventory)/12. in February we have 1. The solution that the purchasing managers suggested in question 4 results in excessive inventories for which there is no space. the level production plan in Figure 8. The purchasing managers argue that suppliers have a very difficult time meeting Golden’s needs during the peak months of June. For example. How does this “mixed” strategy perform? 7. as is evident. How much would Golden Breweries have to produce with a level production strategy to avoid all lost sales? How much more would this cost than the current plan? 5.16 is an example of a level production strategy.000 bbl. 3.100 bbl)? Discuss the counterintuitive result that it is optimal to incur a lost sale when you start with more inventory (as here) as opposed to less inventory. The warehouse manager alerts you that since the current maximum capacity of the warehouse is 3.

You might begin with a level production strategy and then.qxd 12/29/03 3:05 PM Page 257 Experience OM 257 eliminated. and many large corporations use it for similar types of planning problems. Also. (Hint: This can be a tricky formulation. and document your experimental process. try to improve the solution. one might be interested in finding the solution that results in a minimum total cost. if examination of costs indicates that inventory cost is relatively high and backorder cost is relatively low. one might search for periods where the ending inventory is high and adjust the production level for those periods. Ignoring issues of capacity or lost sales. it is not likely to find the minimum-cost solution. through trial and error. Use the spreadsheet to find the lowest-cost solution you possibly can. Develop a linear programming model to minimize the total cost while ensuring that material balances are maintained.C08_228-257. How does this approach compare with the level strategy? 8. Although a trial-and-error approach will probably find a relatively low-cost solution. Linear programming can be used for finding the minimum-cost solution. For example. examining individual cost categories can highlight areas where costs can be reduced.The spreadsheet can be used to seek an optimal solution. 9.) . you need constraints to ensure the correct calculations of overtime and undertime and production rate changes so that these variables can be used in the objective function. Graphs of the cumulative demand and product availability often assist in identifying improved solutions. many rate changes will generally occur.

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