OPERATIONSA R

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MANAGEMENT
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RESOURCE PLANNING
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 Resource Planning
• Resource planning lies at the heart of any organization, cutting across all of
its different functional areas.

• It takes sales and operations plans; processes information in the way of time

produced; and then plans the input requirements.

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standards, routings, and other information on how services or products are

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It also can create reports for managers of the firm’s major functional areas,
such as human resources, purchasing, sales and marketing, and finance and

•
accounting.

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Companies can also gain a competitive edge by using an effective information

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system to help with their resource planning. Companies must ensure that all
of the resources they need to produce finished services or products are

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available at the right time. If they are not, a firm risks losing business.

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For a manufacturer, this task can mean keeping track of thousands of
subassemblies, components, and raw materials as well as key equipment
capacities.

• For a service provider, this task can mean keeping track of numerous supplies
and carefully scheduling the time and capacity requirements of different
employees and types of equipment. 2
 Enterprise Resource Planning
• An enterprise process is a companywide process that cuts across functional areas,
business units, geographic regions, product lines, suppliers, and customers.

• Enterprise resource planning (ERP) systems are large, integrated information systems
that support many enterprise processes and data storage needs.

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By integrating the firm’s functional areas, ERP systems allow an organization to view its
operations as a whole rather than having to try to put together the different information
pieces produced by its various functions and divisions.

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Today, ERP systems are being used by traditional brick-and-mortar organizations such as

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manufacturers, restaurants, hospitals, and hotels, as well as by Internet companies that
rely extensively on Web connectivity to link their customers and suppliers.

ERP revolves around a single comprehensive database that can be made available across

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the entire organization (or enterprise). Having a single database for all of the firm’s

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information makes it much easier for managers to monitor all of the company’s products
at all locations and at all times.

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The database collects data and feeds them into the various modular applications (or

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suites) of the software system. As new information is entered as a transaction in one
application, related information is automatically updated in the other applications,
including the firm’s financial and accounting databases, its human resource and payroll
databases, sales, supplier and customer databases, and so forth.

• In this way, the ERP system streamlines the data flows throughout the organization and
supply chain and provides employees with direct access to a wealth of real-time operating
3
information scattered across different functions in the organization.
Back-Office Processes Front-Office Processes

Data Analysis
Human • Product costing

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Resources • Job costs

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• Benefits
Sales and Marketing
• Payroll
• Sales orders

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Manufacturing
• Material requirements
planning
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ERP System
• Scheduling

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Accounting and Finance
• Accounts payable
Customer Service
• Field service
• Quality

A and receivable
• General ledgers
• Asset management
Supply Chain
Management
• Forecasting
• Purchasing
• Distribution

4
 Material Requirements Planning
• Material requirements planning (MRP) is a computerized information
system developed specifically to help manufacturers manage dependent
demand inventory and schedule replenishment orders.

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The key inputs of an MRP system are a bill of materials database, a
master production schedule, and an inventory record database.

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Using this information, the MRP system identifies the actions planners

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must take to stay on schedule, such as releasing new production
orders, adjusting order quantities, and expediting late orders.

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An MRP system translates the master production schedule and other
sources of demand, such as independent demand for replacement parts

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and maintenance items, into the requirements for all subassemblies,
components, and raw materials needed to produce the required parent
items.
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This process is called an MRP explosion because it converts the
requirements of various final products into a material requirements plan
that specifies the replenishment schedules of all the subassemblies,
components, and raw materials needed
5
to produce final products.
 roducts into a material requirements plan that specifies the replenishment schedules of all th
ubassemblies, components, and raw materials needed to produce final products.
We first explore the nature of dependent demand and how it differs from independent d
mand, followed by a discussion of each of the key inputs to the MRP system shown in Figure 16.

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Authorized Other
master production sources
schedule

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of demand

A
Inventory
transactions
Inventory
records
MRP

S
explosionIN Bills of
materials
Engineering
and process
designs

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R J Material
requirements

A
plan

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 Dependent Demand
• To illustrate the concept of dependent demand, let us consider a Huffy bicycle
produced for retail outlets. Demand for a final product, such as a bicycle, is called
independent demand because it is influenced only by market conditions.

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• In contrast, the demand for spokes going into the bicycle “depends” on the
production planned for its wheels. Huffy also keeps many other items in inventory

A
—handlebars, pedals, frames, and wheel rims—used to make completed bicycles.
Each of these items has a dependent demand because the quantity required

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varies with the production plans for other items held in the firm’s inventory—

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finished bikes, in this case.

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For example, the demand for frames, pedals, and wheel rims is dependent on the
production of completed bicycles. Operations can calculate the demand for

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dependent demand items once the bicycle production levels are laid out in the
sales and operations plan.

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For example, every bicycle needs two wheel rims, so 1,000 completed bicycles
need 1,000(2) = 2,000 rims.

•
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The bicycle, or any other product that is manufactured from one or more
components, is called a parent. The wheel rim is an example of a component —
an item that goes through one or more operations to be transformed into or
become part of one or more parents. A wheel rim, for example, will have several
different parents if the rim is used to make more than one style of bicycle.
7
 directly to retail outlets. This practice places an independent demand on the inventory of wheel
rims. Materials requirements planning can be used in complex situations involving components
Suppose
• that may have that everydemand
independent time asinventory falls to
well as dependent 500inventories.
demand units (a reorder point),
an order for 1,000 more bicycles is placed. The assembly supervisor bi
then
Bill authorizes the withdrawal of 2,000 rims from inventory, along
of Materials
A
an
with other components for the finished product. So, even though
The replenishment schedule for a component is determined from the production schedules of re
itscustomer demand for accurate
the finished
informationbicycle is continuous and

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parents. Hence, the system needs on parent–component relationships. qu
Areasonably uniform,
bill of materials (BOM) is athe production
record demandof for
of all the components wheel
an item, rims is
the parent– “lumpy”;
component an
that is, it occurs sporadically, usually in relatively large quantities.
2,000

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2,000 A !

1,500
Order
1,000 on
day 3
Order
1,000 on
day 8
S IN 1,500

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Bicycles

1,000

JU Rims
1,000

500

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Reorder point
500

0 0
1 5 10 1 5 10
Day Day
(a) Parent inventory 8 (b) Component demand
 Bill of Materials
• The replenishment schedule for a component is determined from
the production schedules of its parents. Hence, the system needs
accurate information on parent – component relationships.

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The first input into a MRP is BOM. A bill of materials (BOM) is a
record of all the components of an item, the parent–component

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relationships, and the usage quantities derived from engineering

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•
and process designs.

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In the following Figure, the BOM of a simple ladder-back chair

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shows that the chair is made from a ladder-back subassembly, a
seat subassembly, front legs, and leg supports. In turn, the

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ladder-back subassembly is made from back legs and back slats,
and the seat subassembly is made from a seat frame and a seat

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cushion. Finally, the seat frame is made from seat-frame boards.

• The BOM also specifies the usage quantity, or the number of

units of a component that are needed to make one unit of its
immediate parent.
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• Four terms frequently used to describe inventory items are end
items, intermediate items, sub-assemblies, and purchased items.

• An end item typically is the final product sold to the customer; it

back chair, is an end item.

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is a parent but not a component. Item A, the completed ladder-

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An intermediate item, such as item B, C, or H, has at least one

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parent and at least one component. Some products have several
levels of intermediate items; the parent of one intermediate item
can also be an intermediate item.

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A subassembly is an inter-mediate item that is assembled (as

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•
opposed to being transformed by other means) from more than

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one component. Items B and C are subassemblies.

A purchased item has no components because it comes from a

supplier, but it has one or more parents. Examples are items D, E,
F, G, I, and J.
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 mediate item that is assembled (as opposed to being transformed by other means) from more than

URE 16.4 !
for a Ladder-Back Chair

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Back slats Seat cushion

G
Leg supports Seat-frame A
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boards

Back
legs
Front
legs

S I A
Ladder-back
chair

U N B (1)
Ladder-back
C (1)
Seat
D (2) E (4)

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Front legs Leg supports
subassembly subassembly

A R F (2)
Back legs
G (4)
Back slats
H (1)
Seat frame
I (1)
Seat cushion

J (4)
Seat-frame
boards
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types—the number of each type as a percent of the total family’s quantity—is based on
historic demand and on marketing and promotional considerations. The planner must select
lot sizes for each chair type, taking into consideration economic factors such as production
setup costs and inventory carrying costs.

iPad total product costs iPad 2 total product costs

$270 $267
LCD display – 9.7-inch LCD display – 9.7-inch

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multi-touch screen multi-touch screen
$59 $50
Camera – None
$0
Memory – Samsung
$47
Camera – Front & Rear

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$4.50
Memory – Samsung/Toshiba
$30
A
Apple Processor – Apple A4
$17

Radio Components
Infineon/Broadcom

S IN
Apple Processor – Apple A5
$25
Radio Components
Infineon/Broadcom or
Qualcomm/Broadcom

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$26
$25
Sensors – STMicroelectronics Sensors – STMicroelectronics

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$1.00 $2.50

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Battery Battery
$23 $20 – $25

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Bill of Materials for Apple’s iPad and iPad2.

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 Master Production Scheduling
• The second input into a material requirements plan is the master production
schedule (MPS), which details how many end items will be produced within specified
periods of time. It breaks the sales and operations plan into specific product

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schedules.

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The following Figure shows how a sales and operations plan for a family of chairs
breaks down into the weekly MPS for each specific chair type (the time period can be

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hours, days, weeks, or months). The chair example demonstrates the following

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aspects of master scheduling:

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1. The sums of the quantities in the MPS must equal those in the sales and operations
plan.

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2. The production quantities must be allocated efficiently over time. The specific mix of
chair types—the number of each type as a percent of the total family’s quantity—is

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based on historic demand and on marketing and promotional considerations.

3. Capacity limitations and bottlenecks, such as machine or labor capacity, storage

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space, or working capital, may determine the timing and size of MPS quantities.

The process of developing a master production schedule includes (1) calculating the
projected on-hand inventory and (2) determining the timing and size of the
production quantities of specific products. 



13
• Operations must first create a prospective MPS to test whether it
meets the schedule with the resources (e.g., machine capacities,
workforce, overtime, and subcontractors) provided for in the sales
and operations plan.

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Operations then revises the MPS until a schedule that satisfies all of

no feasible schedule can be developed.

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the resource limitations is developed or until it is determined that

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In the latter event, the production plan must be revised to adjust
production requirements or increase authorized resources.

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Once a feasible prospective MPS has been accepted by the firm’s

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managers, operations uses the authorized MPS as input to material
requirements planning.

•
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Operations can then determine specific schedules for component
production and assembly.



14
 than others and setting the timing and size of the production quantities accordingly.
Figure 16.6 shows the master production April
scheduling process. Operations
May
must first create
a prospective MPS to test whether it meets the schedule with the resources (e.g., machine ca-
pacities, workforce, overtime, and 1 subcontractors)
2 3 provided
4 for
5 in the6 sales and
7 operations
8 plan.
Operations then revises the MPS until a schedule that satisfies all of the resource limitations is
developed Ladder-back chair
or until it is determined 150
150 that no feasible schedule can be developed. In the latter event,

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the production plan must be revised to adjust production requirements or increase authorized
120 120
resources.Kitchen
Oncechair
a feasible prospective MPS has been accepted by the firm’s managers, operations
uses the authorized
Desk chair MPS as input to material
200 requirements planning.
200

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200

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Operations can
mine specific schedules for component production and assembly. Actual performance data such
as inventory
Saleslevels
200then deter-

and and shortages are inputs to preparing the prospective MPS for the next period,

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and so theoperations
masterplanproduction scheduling 670 670 to the next.
process is repeated from one period
for chair family

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working capital,
acknowledgeproduction

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3. Capacity limitations and bottlenecks, such as machine or labor capacity, storage space, or
Authorizedmay determine the
Prospective
timing master
and size of MPS quantities. The planner
Are resources No must
production that some chair styles require more resources
these limitations by recognizing

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plan schedule available?
than others and setting the timing and size of the production quantities accordingly.

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Figure 16.6 shows the master production scheduling process. Operations Yes must first create
a prospective MPS to test whether it meets the schedule with the resources (e.g., machine ca-
pacities, workforce, overtime, and subcontractors) provided for in the sales and operations plan.
Operations then revises the MPS until a schedule that satisfies all of the resource limitations is
Material that no feasible
developed or until it is determined Authorized
schedule master
can be developed. In the latter event,
the production plan must requirements productionrequirements or increase authorized
be revised to adjust production
planning schedule
resources. Once a feasible prospective MPS has been accepted by the firm’s managers, operations
uses the authorized MPS as input to material requirements
15 planning. Operations can then deter-
 Yes

Developing a Master Production Schedule

• Step 1. Calculate Projected On-Hand Inventories: The first step is to
Material Authorized master
calculate the projected on-hand inventory, which is an estimate of the
requirements production
amount of inventory available each weekschedule
after demand has been satisfied.

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planning

• In some weeks, no MPS quantity for a product may be needed because

sufficient inventory already exists.
eloping a Master Production Schedule
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The process of developing a master produc
dule
size of
k chair
the production
recognizing
to illustratethat
— the
quantities forecast
of specific
the forecast
the process.
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• For the projected requirements for this week, the scheduler uses
includes (1) calculating the projected on-hand inventory and (2) determining the tim
whichever is larger or the We
products.
is subjectwe
For simplicity, toassume
customer orders booked
use the manufacturer —lad
of the
error. that the firm does not utilize sa

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ks for end items, even though many firms do. In addition, we use weeks as our planning
• If actual booked orders exceed the forecast, the projection will be more
even though hours, days, or months could be used.
accurate if the scheduler uses the booked orders because booked orders
1. Calculate
are a known
d inventory,
for a week,
d hasneeded
R
whichthe
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Projected
is an
On-Hand
quantity.
estimate
forecast
Inventories.
Conversely,
willofprovide
if The
the amount
the first step is
forecast
of inventory
a better
to calculate
exceeds
estimateavailable
for that week because some orders are yet to come in.

been satisfied:
the projected
booked orders
each week afte
of the requirements



A
Projected on@hand On@hand MPS quantity
° inventory at end ¢ = ° inventory at ¢ + ° due at start ¢ - ° requirements ¢
of this week end of last week of this week
Projected

this week
16
In some weeks, no MPS quantity for a product may be needed because sufficient inven
 eed the forecast, the projection will be more April
er orders if the scheduler uses the booked
ccurate Item: Ladder-back chair Quantity " FIGURE 16.7
recast is 55
Master Production
1 2Schedule
rders because booked orders are a known on Hand:
rders ex- Conversely, if the forecast exceeds
uantity. for Weeks 1 and 2
be more April
ooked orders for a week, the forecast will Forecast 30 30
booked Quantity
rovide a better estimate 55 of 1the require-
2
a known on Hand:

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ments needed for that week because some
exceeds Exp
rders are yet to come in. Customer

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cast will Forecast 30 30 Fore
require- orders 38 27
The manufacturer of the ladder-back proj
(booked)

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se some = 55
hair producesCustomer
the chair to stock and needs Explanation:

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o develop an MPS Forecast is less than booked orders in week 1;
ordersfor it. Marketing
38 has
27 fore- Projected

I
der-back projected on-hand inventory
on-hand 17 balance–13
asted a demand of 30 chairs for the first
(booked)
nd needs = 55 + 0 – 38 = 17.

S
eek of April, but actual customer orders inventory
has fore- Projected Exp
ooked are foron-hand
the first
38 chairs. The17current–13 on- Fore

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and inventoryinventory
r orders is 55 chairs. No MPS quantity MPS quantity 0 0 proj
dueon-
in week 1. Figure 16.7 shows an MPS Explanation:

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rent = 17
Forecast exceeds booked orders in week 2;
ecord with these
quantity quantities listed. Because a ne

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MPS quantity 0 0 projected on-hand inventory balance
ctual orders for week 1 are greater than the
an MPS = 17 + 0 – 30 = –13. The shortage signals com

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Because the scheduler uses that figure for
orecast, MPS start
a need to schedule an MPS quantity for
than the completion in week 2.

A
ctual orders to calculate the projected in-
gure for MPS start
entory balance at the end of week 1:
ected in-
:
55 chairs 38 chairs already
MPS quantity
Inventory = °38 currently ¢ + °
chairs already ¢ - ° promised
! FIGURE for
16.8 ¢ = 17 chairs
MPS quantity (0 for week 1
° ¢ - ° in stock for ¢ = 17 chairs
promised delivery inProduction
Master week 1 Schedule
(0 for week 1 17
for Weeks 1–8
• Step 2. Determine the Timing and Size of MPS
Quantities: The goal of determining the timing and size of
MPS quantities is to maintain a nonnegative projected
on-hand inventory balance.

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•
should be scheduled to cover them.
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As shortages in inventory are detected, MPS quantities

•
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The first MPS quantity should be scheduled for the week

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when the projected on-hand inventory reflects a
shortage, such as week 2 in the following figure.

•
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The scheduler adds the MPS quantity to the projected

A
on-hand inventory and searches for the next period when
a shortage occurs. This shortage signals a need for a
second MPS quantity, and so on. 


18
ck delivery in week 1 for Weeks 1–8

ed quantity ex-
Item: Ladder-back chair Order Policy: 150 units
so the projected Lead Time: 1 week
end of week 2 is
hortage signals April May
be produced and Quantity
55 1 2 3 4 5 6 7 8
on Hand:

and Size of MPS

mining the tim-
es is to maintain
Forecast 30 30 30 30 35 35 35

A R 35

G
-hand inventory
Customer
ventory are de-
orders 38 27 24 8 0 0 0 0

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ld be scheduled

I
(booked)
quantity should

S
when the pro- Projected
lects a shortage, on-hand 17 137 107 77 42 7 122 87
.1 The scheduler inventory

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he projected on-
s for the next pe-

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MPS quantity 150 150
s. This shortage

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d MPS quantity,

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ster production MPS start 150 150
ck chair for the
cy requires pro-
A shortage of 13
nless the sched-
uantity for that
to show blanks
A
Explanation:
The time needed to assemble 150 chairs
is 1 week. The assembly department must
start assembling chairs in week 1
Explanation:
On-hand inventory balance
= 17 + 150 – 30 = 137. The MPS quantity
is needed to avoid a shortage of
which improves to have them ready by week 2. 30 – 17 = 13 chairs in week 2.
19
• Available-to-Promise Quantities: In addition to providing
manufacturing with the timing and size of production quantities,
the MPS provides marketing with information useful for negotiating
delivery dates with customers.

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The quantity of end items that marketing can promise to deliver on
specified dates is called available-to-promise (ATP) inventory.

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It is the difference between the customer orders already
booked (until the next MPS receipt) and the quantity that

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operations is planning to produce (MPS Quantity).

S
N
As new customer orders are accepted, the ATP inventory is reduced
•
to reflect the commitment of the firm to ship those quantities, but

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the actual inventory stays unchanged until the order is removed
from inventory and shipped to the customer.

•
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An available-to-promise inventory is associated with each
MPS quantity because the MPS quantity specifies the timing
and size of new stock that can be earmarked to meet future
bookings. 

20
MPS Record with an ATP Row to ship those quantities, but the actual inventory stays unchanged until the
inventory and shippe
available-to-promise
Item: Ladder-back chair Order Policy: 150 units with each MPS quan
Lead Time: 1 week
quantity specifies the
April May stock that can be earm
Quantity bookings.
55
on Hand: 1 2 3 4 5 6 7 8 Figure 16.9 show
an additional row f

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promise quantities.
Forecast 30 30 30 30 35 35 35 35
the MPS quantity mi

A
orders until the ne
Customer 150 - (27 + 24 + 8 +

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orders 38 27 24 8 0 0 0 0 The ATP indicates t
(booked) the 150 units schedu

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week 2, 91 units are u

I
Projected
tal new orders up to
on-hand 17 137 107 77 42 7 122 87
promised for delivery

S
inventory
week 7, the ATP is 15
are no booked orders

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MPS quantity 150 150 The procedure fo
to-promise informati

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for the first (current)
than for other weeks b

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MPS start 150 150
the inventory currentl
ventory for the first w

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Available-to- hand inventory plus
promise (ATP) 17 91 150 the first week, minus

A
inventory of booked orders up
the week in which th
arrives. So, in Figure
Explanation: Explanation:
first week is 55 + 0 -
The total of customer orders booked until The total of customer orders booked until the
the next MPS receipt is 38 units. The next MPS receipt is 27 + 24 + 8 = 59 units. mation indicates to
ATP = 55 (on-hand) + 0 (MPS quantity) – The ATP = 150 (MPS quantity) – 59 = that it can promise as
38 = 17. 91 units. week, 91 more units
21
 Inventory Record
• Inventory records are a third major input to MRP, and inventory transactions are the
basic building blocks of up-to-date records.

• These transactions include releasing new orders, receiving scheduled receipts, adjusting

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due dates for scheduled receipts, withdrawing inventory, canceling orders, correcting
inventory errors, rejecting shipments, and verifying scrap losses and stock returns.

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Recording the transactions accurately is essential if the firm’s on-hand inventory
balances are to be correct and its MRP system is to operate effectively.

S IN
The inventory record divides the future into time periods called time buckets. In our
discussion, we use weekly time buckets for consistency with our MPS example, although
other time periods could as easily be used.

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The inventory record shows an item’s lot-size policy, lead time, and various time-phased
data. The purpose of the inventory record is to keep track of inventory levels and

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component replenishment needs.

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The time-phased information contained in the inventory record consists of (1) gross
requirements, (2) scheduled receipts, (3) projected on-hand inventory, (4) planned
receipts, and (5) planned order releases.

We illustrate the discussion of inventory records with the seat subassembly, item C that
was shown in the BOM Figure. Suppose that it is used in two products: a ladder-back
chair and a kitchen chair. 



22
 transported to the purchaser, or being inspected by
• The gross requirements are the the purchaser’s
total demand derived
receiving from allIf the
department. parent
firm is
production plans. They also include demand
making not otherwise
the item accounted
in-house, the order couldfor,be
such
on the
as demand for replacement parts shopfor units
floor already sold.
being processed, waiting for components
waiting for a machine to become available, or wait
for the
• The scheduled receipts (sometimes ing to be movedopen
called to itsorders)
next operation. According
are orders that to
n Figure 16.11,
have been placed but not yet completed.
receipt could be in one of several week
stages:
planner
transported to the purchaser, or being
For aone
1. Given
beingthe
probablyby
inspected
230-unit order
purchased item, of
2-week lead
processed
released
the
by atime,

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item C is due in
scheduled
the inventory
supplier, being
the order 2receiving
the purchaser’s weeks ago
department. If the firm is making
the shop floor being processed,
Scheduled
the item
are waiting
receipts
unusual, for
Gdue inthe
in-house,

N
caused
beyond thecould
order
by events such
components,
item’sbeleadontime
as a last-minute
waiting for a

Projected On-Hand Inventory

nventory
• Theavailable each week
projected
change in
machine to become available, or waiting

after gross
on-hand
tothe

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beMPS.
moved to its next operation.
The projected on-hand inventory is an estimate of the amount o
requirements
inventory is have been satisfied.
an estimate of The
the beginning
amount inven
of
ory, shown
ime the
inventory
The record

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as theavailable
first entry each
was computed.
beginning
(37) inweek
Figureafter
As with
inventory, shown
16.11,gross
scheduled
indicates
as the receipts,
the on-handhave
requirements
entries
first entry (37)are
inventory
inmade
beenavailable
for each actual
the following
at the
satisfied.
with
figure,

J
drawalindicates
and receiptthe
to update the MRP
on-hand database.available
inventory Then, whenatthethe MRPtime
systemthe
produces thewas
record revised
record,computed.
the correct inventory
As with will appear. receipts, entries are made for each actual
scheduled
Other
withdrawal
ory is system

A
calculated as
R
entries inand
the row
produces

 Projected on@hand
showto
receipt inventory
updateexpected
the MRP in future weeks.
database. Projected
Then,
the revised record, the correct inventory will appear.


Inventory on
Scheduled
when on-hand

Gross
the MRPinven


 ° inventory balance ¢ = ° hand at end of ¢ + ± or planned ≤ - ° requirements ¢

reeipts in
at end of week t week t - 1 in week t
week t
23
574 PART 3 DESIGNING AND MANAGING SUPPLY CHAINS

record also shows i

Item: C Lot Size: 230 units
Description: Seat subassembly Lead Time: 2 weeks next 8 weeks, which
schedule for the la
Week Figure 16.5). The M
are added to arrive
1 2 3 4 5 6 7 8 The seat subassem

Gross
requirements
150 0 0 120 0 150 120

A R 0
lumpy demand: Op
semblies from inve
The MRP syst

G
schedule producti
Scheduled
and subassemblies

N
230 0 0 0 0 0 0 0 removal of all mat

I
receipts
duction order from

S
Projected
parent item’s lead
on-hand 37 117 117 117 –3 –3 –153 –273 –273 leases the order to t
inventory

N
Scheduled Receip
(sometimes called

U
Planned been placed but no
receipts

J
item, the schedule
eral stages: being

R
Planned order transported to the
releases the purchaser’s re

A
Explanation:
Gross requirements are the total demand for the
two chairs. Projected on-hand inventory in
making the item in
shop floor being pr
waiting for a mach
ing to be moved to
Figure 16.11, one 2
week 1 is 37 + 230 – 150 = 117 units. week 1. Given the
24
planner probably
Scheduled receipts
• The projected on-hand calculation includes the consideration of
planned receipts, which are orders not yet released to the shop or
the supplier. Planned receipts should not be confused with scheduled
receipts. Planned receipts are still at the planning stage and can still

A R
change from one week to the next, whereas scheduled receipts are
actual orders that are being acted upon by the shop or supplier.

hand balance from dropping below zero.

N G
Planning for the receipt of new orders will keep the projected on-

S I
A planned order release indicates when an order for a specified
quantity of an item is to be issued. We must place the planned order

U N
release quantity in the proper time bucket. To do so, we must
assume that all inventory flows—scheduled receipts, planned

R J
receipts, and gross requirements—occur at the same point of time in
a time period. Some firms assume that all flows occur at the
beginning of a time period; other firms assume that they occur at

A
the end of a time period or at the middle of the time period.
Regardless of when the flows are assumed to occur, we find the
release date by subtracting the lead time from the receipt date. 





25
 rops to -3 units,
Item: C Lot Size: 230 units
ge of 3 units will Description: Seat subassembly Lead Time: 2 weeks
bassemblies are
s the need for a Week
week 4. In addi-
eived, the short- 1 2 3 4 5 6 7 8
weeks 7 and 8.2

R
Gross
g for the receipt 150 0 0 120 0 150 120 0
requirements

A
e projected on-
below zero. The
Scheduled

G
ped as follows: 230 0 0 0 0 0 0 0
receipts
ory is projected

N
. Completion of

I
Projected
ipt is scheduled on-hand 37 117 117 117 227 227 77 187 187

S
e shortage is pro- inventory
e newly planned
he projected on-

N
Planned
quals or exceeds 230 230
receipts
when the lot size
n the week it is
Planned order
releases

JU 230 230

R
hand inventory
shortage occurs.

A
he need for the
Explanation: Explanation:
Without a planned receipt in week 4, a The first planned receipt lasts until week 7,
ated until the shortage of 3 units will occur: 117 + 0 + 0 – when projected inventory would drop to
on by proceed- 120 = –3 units. Adding the planned receipt 77 + 0 + 0 – 120 = –43 units. Adding the
rough the MRP brings the balance to 117 + 0 + 230 – 120 = second planned receipt brings the balance to
227 units. Offsetting for a 2-week lead 77 + 0 + 230 – 120 = 187 units.
ed receipts as
time puts the corresponding planned order The corresponding planned order release is
e projected on- for week 5 (or week 7 minus 2 weeks).
release back to week 2. 26
re 16.12 shows
 Planning Factors
• The planning factors in a MRP inventory record play an important role in the overall
performance of the MRP system. By manipulating these factors, managers can fine-tune
inventory operations. In this section, we discuss planning lead time, lot-sizing rules,
and safety stock.

A R
Planning lead time is an estimate of the time between placing an order for an item and
receiving the item in inventory. Accuracy is important in planning lead time. If an item
arrives in inventory sooner than needed, inventory holding costs increase. If an item

G
arrives too late, stockouts, excessive expediting costs, or both may occur.

N
•

S I
For purchased items, the planning lead time is the time allowed for receiving a shipment
from the supplier after the order has been sent, including the normal time to place the
order. Often, the purchasing contract stipulates the delivery date. For items manufactured
in-house, a rough-cut estimate of the planning lead time can be obtained by keeping track

U N
of the actual lead times for recent orders and computing an average. A more extensive
estimating process consists of breaking down each of the following factors:

Waiting time

R J
(i) Setup time (ii) Processing time (iii) Materials handling time between operations (iv)

A
Each of these times must be estimated for every operation along the item’s route.
Estimating setup, processing, and materials handling times can be relatively easy, but
estimating the waiting time for materials handling equipment or for a workstation to
perform a particular operation can be more difficult. Therefore, being able to accurately
estimate the waiting time is especially important when it comes to estimating the
planning lead time. 


 27
 ning lead times.
A lot-sizing rule determines the= 1120
timing + 0and + 150 2 -of117 = 153 units
• Lot-Sizing Rules A lot-sizing rule determines thesize
timing order
and sizequantities. A lot-sizing
of order quantities. rule must
A lot-sizing
beruleassigned
must beto
The second each
assigned
order must item
to each before
item
arrive planned
in before
week planned
7 with areceipts
lot receipts
size of 1120andand+planned
planned
02 - 0 = order
order releases
releases
120 units. This can can
sec-be be
computed.
ond orderThe
computed. Thechoice
reflects only of
choice oflot-sizing
two lot-sizing
weeks’ worth rules
rules isisimportant
of gross important because
because
requirements—to they
the they
end ofdetermine
determine the the
the planning number number
horizon. of of
setups
setupsrequired
required and and the theinventory
inventory holding
holding costs costs
for eachfor item.
each We item.presentWe present three rules:
three lot-sizing lot-sizing
rules: (1)
Periods
(1) fixed fixedquantity,
order order quantity, 8 periodic
(2) (2)orderperiodic
quantity, order and quantity, and (3) lot-for-lot.
(3) lot-for-lot. ! FIG
Item Seat Assembly Period (P) for POQ 3 Lot Size (FOQ) The
Fixed OrderorderQuantity 2

R
1. The Description
fixed quantityThe fixed (FOQ)orderrule quantity (FOQ) rule
maintains the maintains
same order LeadtheTimequantity
same ordereach quantitytime an Sea
e eachisPOQ
order Rule
issued.
time an order is issued. 3 For example, the lot size might be the size dictated by equip-

A
1 2 3 4 5 6 7 8
rder ment capacity limits, such as when a full lot must be loaded into a furnace at one time. For
2. The purchased items,
Gross requirements
periodic order thequantity
FOQ could(POQ) be150determined
rule allows by the a quantity
120
different discount
order level,
150quantity120truckload
for each ca-order
pacity,
issued
amount
economic
or minimum
but issues
Scheduled
of order
the item
purchase quantity.
receiptsthe order for predetermined
quantityneeded (EOQ)during
2302
formula the(see
2

G
Alternatively, time
predetermined
2
the
Chapter 9, “Managing

N
lot size 2could
intervals.
2 The order
time between
be
2
determined
Inventories”).
quantity
orders
2
by the
2equals the
and 16.12
Figure must be

I
large Projected
enough
illustrated theon-hand
to
FOQ inventory
prevent 37
shortages.
rule. However, 117
if 2anThis 1172 amount
item’s 1172 requirement
gross 1502
exactly 1502withinP2a weeks’
covers week 2is particularly
worth 2 of gross
requirements.
large,Planned
the FOQ That
might is,bethe projected
insufficient 2toon-hand inventory
avoid2 a shortage. In2 should 2 equal
such unusual zero1202at
2 cases, thethe 2end of the
inventory

S
receipts 2 153
Pth week.must increase the lot size beyond the FOQ, typically to a size large enough to avoid a
planner
Planned
shortage. order releases
Another option is to make the order 153 quantity an integer120 multiple of the FOQ. This op-

N
3.A special case of thewhen
tion is appropriate POQcapacity
rule is the lot-for-lot
constraints limit(L4L)
production rule,tounder
FOQ sizes which (atthe lot size ordered
most).
covers the The POQgross rule does not meanofthat
requirements a the
single plannerweek. must issue Pa new
Thus, = 1,order andeverythe Pgoalweeks.is Rather,
to minimize

U
inventory Periodic
when an Order
orderQuantity
levels. is
Thisplanned,
ruleThe its periodic
lot sizethat
ensures must
orderthe bequantity
enough
planned(POQ) toorder
cover P successive
rule
is allows
just weeks.
a different
large enough One
ordertoway
quan-to
prevent a
Q) select
tity ainP value
for each order is issued
to divide butthe itaverage
issues the lot
ordersizefor desired, suchon-hand
predetermined as the EOQ
time or some such
intervals, other applicable
as everywith two the

J
shortage the single week covers. The projected inventory combined
new lotorder
weeks.size,
The bywill
the equal
order average
quantity weekly
zero atdemand.
equals the amount
the endThatofis, express
ofweek
the item t.the target during
needed
Following lot size asfirst
thethe the desired
predetermined
planned weeks of
time
order, an

R
supply (P)
between and round
orders and to the
must be nearest
large integer.
enough to prevent shortages. Specifically,
additional planned order will be used to match each subsequent gross the POQ is
requirement. 



r Lot for Lot POQ

A
A special case of the POQ rule is the lot-for-lot (L4L) rule, under which the lot size lot-for

 lot size Total gross requirements Projected on@hand

 ordered covers the gross requirements of a single week. Thus, P = 1, and the goal is to minimize A rule

 ° to arrive in ¢ = ° for P weeks, including ¢ -
inventory levels. This rule ensures that the planned order is just large enough to prevent a short- ° inventory balance at ¢


ordered
week t
age in the single week it covers. The L4L lot size is week t end of week t -1

 ments
This amount L4L lot size
exactly covers P weeks’ worth of gross requirements.
Gross requirements
Projected on@handThat is, the projected on-
hand inventory should ° to arrive equalin ¢zero= °at the end of the Pth¢week. - ° inventory balance at ¢
for week t
week t end of week t - 1
28
• An important managerial decision is the quantity of safety stock to carry.
It is more complex for dependent demand items than for independent
demand items.

A R
Safety stock for dependent demand items with lumpy demand (gross
requirements) is helpful only when future gross requirements, the timing

G
or size of scheduled receipts, and the amount of scrap that will be
produced are uncertain. As these uncertainties are resolved, safety stock

S IN
should be reduced and ultimately eliminated.

The usual policy is to use safety stock for end items and purchased items
to protect against fluctuating customer orders and unreliable suppliers of

items.

U N
components but to avoid using it as much as possible for intermediate

R J
Safety stocks can be incorporated in the MRP logic by using the following
rule: Schedule a planned receipt whenever the projected on-hand

A
inventory balance drops below the desired safety stock level (rather than
zero, as before). The objective is to keep a minimum level of planned
inventories equal to the safety stock quantity. 





29
 Outputs from MRP
• The MRP systems provide many reports, schedules, and notices to help planners
control dependent demand inventories.

MRP translates, or explodes, the MPS and other sources of demand into the

R
•
requirements needed for all of the subassemblies, components, and raw materials

requirements plan for each component item.

G A
the firm needs to produce parent items. This process generates the material

N
• An item’s gross requirements are derived from three sources:

S
1. The MPS for immediate parents that are end items 

I
U N
2. The planned order releases (not the gross requirements, scheduled receipts, or
planned receipts) for immediate parents below the MPS level 


R J
3. Any other requirements not originating in the MPS, such as the demand for

A
replacement parts

• The key to the explosion process is to determine the proper timing and size of the
gross requirements for each component. After we make those determinations, we
can derive the planned order release schedule for each component. 






 30
 Manufacturing resources plan
• Consider the seat subassembly
Performance reports
Cost and and its inventory record. The seat subassembly
price data
requires a seat cushion and a seat frame, which in turn needs four seat-frame
boards. Its BOM is shown in the following figure. How many seat cushions should
we order from the supplier? How many seat frames should we produce to support
the
the MPS andseat
other subassembly
sources of demand schedule?
into the How many seat-frame boards do we need to
make? and
es, components,
s the material
Therawanswers
theserequirements
materials the
items andplan
tofirmthese
theforreplenishment
each compo-

A R
needs questions depend on the existing inventories of
orders already in progress.

G
om three sources:
• MRP
d items can help answer these questions through the explosion process. 

s requirements, scheduled receipts, or


low the MPS level


he MPS, such as the demand for replace-


C (1)
Seat
subassembly

S IN
N


ntory record shown in Figure 16.12. The
a seat frame, which in turn needs four

U
16.17 (see also Figure 16.4, which shows

J
oduct as a whole). How many seat cush-
H (1) I (1)
many seat frames should we produce to Seat Seat

R
many seat-frame boards do we need to frame cushion
on the existing inventories of these items

A
ss. MRP can help answer these questions

e seat subassembly and its components.

cord for the seat subassembly. We now
nents. The lot-size rules are an FOQ of
shion, and an FOQ of 1,500 for the seat-
J (4)
Seat-frame
boards
week lead time. The key to the explosion
size of the gross requirements for each 31
performance reports.

MRP
explosion

Material requirements plan

A R
Action notices
G
Priority reports

N
Capacity reports

I
• Releasing new orders • Dispatch lists • Capacity requirements planning
• Adjusting due dates • Supplier schedules • Finite capacity scheduling

Routings
S • Input–output control

N
and time
standards

JU
A R Manufacturing resources plan

Performance reports
Cost and
price data

MRP Explosion 32 MPS and other sources of demand into the

MRP translates, or explodes, the
D MANAGING SUPPLY CHAINS
MRP Records for the Seat Subassembly and its Components

Item: Seat subassembly

Lot size: 230 units

Lead
time: 2 weeks 1 2 3 4
Week

5 6
A
7 R 8

Gross

N G
I
150 0 0 120 0 150 120 0
requirements
Scheduled
230 0 0
S0 0 0 0 0

N
receipts
Projected
inventory 37

JU 117 117 117 227 227 77 187 187

Planned

A
receipts R
Planned order
230 230

230 230
releases
33
 inventory 37 117 117 117 227 227 77 187 187

Planned
230 230
receipts
Planned order
230 230
releases

Usage quantity: 1 Usage quantity: 1

Item: Seat frames

Lot size: 300 units
Item: Seat cushion
Lot size: L4L

A R
Lead
time: 1 week 1 2 3 4
Week

5 6 7 8
Lead

N G
time: 1 week 1 2 3 4
Week
5 6 7 8

Gross
requirements
Scheduled
0 230 0 0 230 0 0 0

S I
Gross
requirements
Scheduled
0 230 0 0 230 0 0 0

N
0 300 0 0 0 0 0 0 receipts 0 0 0 0 0 0 0 0
receipts
Projected Projected

U
40 40 110 110 110 180 180 180 180 inventory 0 0 0 0 0 0 0 0 0
inventory
Planned
receipts
Planned order

R J 300
Planned
receipts
Planned order
230 230

A
300 230 230
releases releases

Usage quantity: 4

Item: Seat-frame boards

Lot size: 1,500 units

Week 34
 Usage quantity: 4

Item: Seat-frame boards

Lot size: 1,500 units

Lead
Week

A R
G
time: 1 week 1 2 3 4 5 6 7 8

Gross
requirements
Scheduled
receipts
0

0
0

0
0

0
S IN
1,200

0
0

0
0

0
0

0
0

N
Projected

U
inventory 200 200 200 200 500 500 500 500 500

R J
Planned
receipts
1,500

APlanned order
releases
1,500

FIGURE 16.18 !
MRP Explosion of Seat Assembly
35 Components
MRP, Core Processes, and Supply Chain Linkages
• Among the four core processes of an organization that link activities within and
across firms in a supply chain, the MRP system interacts with all of them either
through its inputs or its outputs. It all begins with customer orders, which

•
consist of orders for end items as well as replacement parts.

A R
MRP and resource planning typically reside inside the order fulfillment process.

G
Master Production Scheduling is an integral part of MRP. As shown schematically
in the following figure, the MPS drives the feedback between the order fulfillment

•
receipts and promised due dates.

S IN
process and the customer relationship process through confirmation of order

MPS also provides guidance to the sales group within the customer relationship

N
process with respect to when future orders can be promised, and whether the
due dates for existing orders can be adjusted in the time frame requested.

U
•

R J
The new service and product development process provides an updated bill of
materials to the MRP system, and makes sure that every component and
assembly needed for manufacturing of end items is properly recognized.

•
A
In a similar vein on the inbound side, orders to external suppliers are based on
the planned order releases, which come directly from the output of MRP reports.







36
 • The power of MRP, however, becomes evident when changes to an existing schedule
are needed. These changes can be generated, for example, by changes to the MPS
because a customer wants to change the timing or size of future orders, by some
internal failure such as material shortages or unexpected machine downtime, or by
supplier failure.

R
• In a supply chain, schedule changes have implications for customers as well as
suppliers. Some firms, in partnership with their suppliers, have ERP/MRP systems
that can actually “see” into their suppliers’ inventory to determine if a particular item
is in stock or, if not, when it can be expected.

G A
N
•This is an advantage when contemplating a change to the original schedule of order
releases. While systems such as this are powerful tools for making changes, care
ESIGNING AND MANAGING SUPPLY CHAINS
must be taken to avoid unnecessary fluctuations in the timing and size of PORs
because of the choice of lot sizing policy. 

S I
N



 New

 service/

JU product
development
process Bill of

External customers
R
MPS
materials Order
Customer

A
Order promises Customer
relationship
External suppliers

fulfillment and due process orders

• Supplier schedules
Supplier process dates
Supplier (planned order releases)
relationship
Orders process • Adjustments to due dates MRP
of scheduled releases

37
 Resource Planning for Service Providers
• We have seen how manufacturing companies can disaggregate an MPS of
finished products, which in turn must be translated into the needs for

R
resources, such as staff, equipment, components, and financial assets. The
driver for these resource requirements is a material requirements plan.

G A
Service providers, of course, must plan their resources just as manufacturers
do. However, unlike finished goods, services cannot be inventoried. They
must be provided on demand. In terms of resource planning then, service

IN
organizations must focus on maintaining the capacity to serve their
customers. In this section, we will discuss how service providers use the

S
concept of dependent demand and a bill of resources in managing capacity.

N
Dependent Demand for Services

U
J
• When we discussed planning and control systems for manufacturers earlier in
this chapter, we introduced the concept of dependent demand, which is

R
demand for an item that is a function of the production plans for some other

A
item the company produces. For service resource planning, it is useful to
define the concept of dependent demand to include demands for resources
that are driven by forecasts of customer requests for services or by plans for
various activities in support of the services the company provides. 






 38
Bill of Resources

• The service analogy to the bill of materials in a manufacturing company is the bill
of resources (BOR), which is a record of a service firm’s parent–component
relationships and all of the materials, equipment time, staff, and other resources
associated with them, including usage quantities.

A R
Once the service firm has completed its master schedule, the BOR can be used to
determine what resources the firm will need, how much of them it will need, and
when.

N G
•

S I
A BOR for a service provider can be as complex as a BOM for a manufacturer.
Consider a hospital that just scheduled treatment of a patient with an aneurysm. As
shown in the following figure, the BOR for treatment of an aneurysm has seven
levels, starting at the top (end item): (1) discharge, (2) intermediate care, (3)

U N
postoperative care (step down), (4) postoperative care (intensive), (5) surgery, (6)
preoperative care (angiogram), and (7) preoperative care (testing).

R J
Each level of the BOR has a set of material and resource requirements and an
associated lead time. For example, at level 6, shown in the following figure, the

A
patient needs 6 hours of nurses’ time, 1 hour of the primary MD’s time, 1 hour of
the respiratory therapist’s time, 24 hours of bed time, 3 different lab tests, 1 meal,
and 10 different medicines from the pharmacy. The lead time for this level is 1 day.
The lead time for the entire stay for treatment of the aneurysm is 12.2 days. A
master schedule of patient admissions and the BORs for each illness enable the
hospital to manage its critical resources. 



39


 (Intensive)
Surgery
Level 1
Level 5
Discharge
Level 6
Preoperative care Surgery
(Angiogram)

R
Level 2

A
Intermediate care Level 6
Preoperative care
Level 7

Level 3
Preoperative care
(Testing)

N G (Angiogram)

Postoperative care
(Step down) (a)

S I Level 7
Preoperative care
(Testing)

N
Level 4

U
Postoperative care
Level 6
Preoperative care
(a)

R J
(Intensive)
(Angiogram)

Level 6

Nurse
(6 hr)
A Level 5

Surgery
MD
(1 hr)
Therapy
(1 hr)
Bed
(24 hr)
Lab
Preoperative care

(3 tests)
(Angiogram)
Kitchen
(1 meal)
Pharmacy
(10
medicines)
Level 6
Preoperative care Nurse MD (b)
40 Therapy Bed Lab Kitch