Inventory

Management
 Syllabi
INVENTORY CONTROL
 Inventory control-Purpose of holding stock-Effect
of demand on inventories-Ordering procedures.
Two bin system -Ordering cycle system-
Determination of Economic order quantity and
economic lot size- ABC analysis-Recorder
procedure
 RECENT TRENDS IN PPC
 Introduction to computer integrated production
planning systems -elements of JIT-Fundamentals
of MRP II and ERP
 Learning Objectives
 Define the term inventory and list the major
reasons for holding inventories; and list the main
requirements for effective inventory management.
 Discuss the nature and importance of production
inventories
 Discuss periodic and perpetual review systems.
 Discuss the objectives of inventory management.
 Describe the A-B-C approach and explain how it
is useful.
 Learning Objectives
 Describe the basic EOQ model and its
assumptions and solve typical problems.
 Describe the economic production quantity
model and solve typical problems.
 Describe reorder point models and solve
typical problems.
 Introduction to Computer Aided Production
Planning and Control
 Describe the basic conceptual models of
JIT, MRP-II and ERP
 Some industrial situation
(difficulties) you must know
 Inventory
Inventory: a stock or store of goods Independent Demand

A Dependent Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

Independent demand is uncertain.

Dependent demand is certain.
 Key Inventory Terms
 Lead time: time interval between
ordering and receiving the order
 Holding (carrying) costs: cost to carry
an item in inventory for a length of time,
usually a year
 Ordering costs: costs of ordering and
receiving inventory
 Shortage costs: costs when demand
exceeds supply
 Classification of Demand
 Independent demand – finished goods, items
that are ready to be sold
 E.g. a computer
 Dependent demand – components of
finished products
 E.g. parts that make up the computer
 HOLDING STOCK
 A stock is the material that is kept in the
inventory, which will make the quantity
available at the time of crises
 Demand fluctuates due to factors like
instability in production, sudden change in
demands, defective raw material, etc.
 PURPOSE OF HOLDING STOCK

1.Adequate supply to the customer

2.Time period of order placing
3.Deal with natural calamities
4.Sudden increase in demand
5.Alternative use for the damage material
 INFLUENCE OF DEMAND ON
INVENTORY

1.CUSTOMER DEMAND: The customer

sometimes expect larger quantity of
production, due to which load on inventory
may increase.
2.PRODUCT DEMAND: Due to increase in
product demand the number of product to
be produced increases.
 3.INCREASE IN SALES: This may cause due to
product demand. Due to this the planning department
increases the production of products per shift.

4.MARKET RESEARCH: The above report is sent

to the process planning team that decides the production to
be increased, affecting inventory requirements.
Effect of demand on inventory
Demand is higher or lower than forecast, it lead
to run out of stock.
 Types of Inventories
 Raw materials & purchased parts
 Partially completed goods called
work in progress
 Finished-goods inventories
 (manufacturing firms)
or merchandise
(retail stores)
Types of Inventories (Cont’d)
 Replacement parts, tools, & supplies
 Goods-in-transit to warehouses or
customers
 Objectives of Inventory

 To meet anticipated demand

 To smooth production requirements
 To decouple operations
 To protect against stock-outs
 Objectives of Inventory (Cont’d)

 To take advantage of order cycles

 To help hedge against price increases
 To permit operations
 To take advantage of quantity
discounts
Objective of Inventory Control
 To achieve satisfactory levels of
customer service while keeping
inventory costs within reasonable
bounds
 Level of customer service
 Costs of ordering and carrying inventory

Inventory turnover is the ratio of

average cost of goods sold to
average inventory investment.
Effective Inventory Management
 A system to keep track of inventory
 A reliable forecast of demand
 Knowledge of lead times
 Reasonable estimates of
 Holding costs
 Ordering costs
 Shortage costs
 A classification system
Chart Showing Ordering Procedure
Receiving New Materials
Purchase Requisition

Purchase Department
Purchase Order

Supplier Accounts Goods Receiving

Department Department (Stores)

Suppliers
Goods with Delivery Notes

Stores
Goods Received Notes

Purchase
Department
 Methods of ordering
 Two bin system
 Cyclic system
 Economic order level
 Two bin system
 New order is placed when stocks reach a predetermined
level for which following information is required

Lead time – the interval between placing order and receiving

supply, may vary from item to item

Buffer stock – stock maintained as insurance against variations

in consumption
In RCH, for very crucial items recommended buffer is 10% and 5% for
rest of the items

Reorder level – the level at which new order is placed, equals

the amount that will be consumed in the lead time plus buffer
stock
 Benefits of two bin system
 1. No Repacking in the Line
2. Materials fed directly to point of use
3. No Paper / Plastic / Card board waste in
Shop Floor
4. Operator focuses on Process
5. Visual Trigger for Material Feeder
6. No communication gaps
7. 100% Material Available, ready to use.

12-24
 Advantages
 The benefit of two bin system is prevent running out of stock. The empty working bin triggered for
replenishment. Hence, reserve bin can be replaced during the lead-time period to meet the
demand of the customers. Besides, minimize the risk is one of the advantage using two bin
system. When there are disaster such as fires, damage or theft occurred, the business will have
the reserve bin to replace the loss of working bin temporary. Hence, the business spreads the
inventory throughout the plant in other bin and the risk is pooled.
 Disadvantages
 The two bin system caused the inventory level is high. The business need to maintain a high level
of inventory to be placed on the two bin in order to prevent the stock running out. Hence, this can
caused the inventory levels rather high which is costly for business to spend extra cost to keep
the stock. For instance, extra insurance, warehouse rental may be needed to cover this two bin
system.

12-25
 Cyclic system
 Various items are checked with certain
periodicity called review period
 Find out consumption, balance in hand
 The period between orders is fixed
 The quantity ordered depends upon lead
time
 It the lead time is less than the review period, the
amount ordered will be the difference between
maximum stock and stock in hand
 The Inventory Cycle
Figure 12.2

Profile of Inventory Level Over Time

Q Usage
Quantity rate
on hand

Reorder
point

Time
Receive Place Receive Place Receive
order order order order order
Lead time
 Reorder Points

 The reorder point (ROP) tells when to

order

Demand Lead time for a

ROP = per day new order in days

=dxL
D
d= Number of working days in a year
 Reorder Point Curve

Q*
Inventory level (units)

Slope = units/day = d

ROP
(units)

Time (days)
Lead time = L
 Reorder Point Example

Demand = 8,000 tablets per year

250 working day year
Lead time for orders is 3 working days

D
d= Number of working days in a year

= 8,000/250 = 32 tablets

ROP = d x L

= 32 tablets per day x 3 days = 96 tablets

 Fixed period system

Target quantity (T)

Q4
Q2
On-hand inventory

Q1 P
Q3

Time
 Variable demand with reorder
point

Q
Inventory level

Reorder
point, R

0
LT LT
Time
Reorder point with safety
stock
 Economic order quantity
 It is the order quantity that minimizes total
inventory holding costs and ordering costs
 EOQ is fixed for each item taking into account
 Annual requirement
 Cost of carrying inventory
 Cost ordering
 We want to determine
 the optimal number of units to order
 so that we minimize the total cost associated with
the purchase, delivery and storage of the product
 Assumptions of EOQ Model

 Only one product is involved

 Annual demand requirements known
 Demand is even throughout the year
 Lead time does not vary
 Each order is received in a single
delivery
 There are no quantity discounts
Economic Order Quantity Models

 Economic order quantity (EOQ) model

 The order size that minimizes total annual
cost
 Economic production model
 Quantity discount model
 Economic order quantity
 Variables needed to calculate EOQ = optimal
order quantity
 Q = order quantity
 D = annual demand quantity
 S = fixed cost per order (typically cost of ordering and shipping and
handling. This is not the cost of goods)
 H = annual holding cost per unit (carrying cost) (warehouse space,
refrigeration, insurance, etc. usually not related to the unit cost)
 Total Cost

Annual Annual
Total cost = carrying + ordering
cost cost
Q + DS
TC = H
2 Q
 Cost Minimization Goal
Figure 12.4C

The Total-Cost Curve is U-Shaped

Q D
TC  H  S
Annual Cost

2 Q

Ordering Costs

Order Quantity
QO (optimal order quantity)
(Q)
 Deriving the EOQ

Using calculus, we take the derivative of

the total cost function and set the
derivative (slope) equal to zero and solve
for Q.
2
DS
2
(Annu
)
(
Ord
)
Q
= =
OPT
H Ann
 Minimum Total Cost

The total cost curve reaches its

minimum where the carrying and
ordering costs are equal.

Q = DS
H
2 Q
Economic Production Quantity (EPQ)
 Production done in batches or lots
 Capacity to produce a part exceeds the
part’s usage or demand rate
 Assumptions of EPQ are similar to EOQ
except orders are received
incrementally during production
 Inventory management
 It is method of maintaining stock of items
 At a level at which purchasing and stocking costs are
the lowest possible
 Without interference with supply

 There should be a balance in stocking

 If large quantities of drugs are purchased there will be no
problem of supply and out-of-stock situation
 But maintaining large amount of items is like storing money
which could have been used for other useful purpose
 A large stock will require space and staff to manage it
 Pilferage, loss, expiry, better and newer cheaper alternatives
 The yearly carrying cost of inventory is about 25%
 Inventory management
 Managing inventory in a systematic way avoiding over or
under stocking is a scientific process
 General principal
 Fast moving items which have large consumption must
be ordered frequently while maintaining a safety buffer
stock
 Items which have small consumption must be ordered
frequently with a large buffer stock

 Some techniques
 ABC analysis
 VED analysis
 SDE analysis
 FSN analysis
 ABC Analysis - 1

• Divides inventory into three classes based

on annual cost
 Class A - high annual cost
 Class B - medium annual cost
 Class C - low annual cost
• Category A parts should get high priority
because they account for bulk of
expenditure, their consumption, purchase
must be critically watched
 ABC Analysis - 2
Item Percent of Annual Percent of
Stock Number of Volume Unit Annual Annual
Number Items (units) x Cost = cost cost Class
Item1 20% 1,000 $ 90.00 $ 90,000 38.8% A
72%
Item2 500 154.00 77,000 33.2% A

Item3 1,550 17.00 26,350 11.3% B

Item4 30% 350 42.86 15,001 6.4% 23% B

Item5 1,000 12.50 12,500 5.4% B

Item6 600 $ 14.17 $ 8,502 3.7% C

Item7 2,000 .60 1,200 .5% C

Item8 50% 100 8.50 850 .4% 5% C

Item9 1,200 .42 504 .2% C

Item10 250 .60 150 .1% C

 ABC Analysis - 3

A Items
80 –
Percent of annual cost

70 –
60 –
50 –
40 –
30 –
20 – B Items
10 – C Items
0 – | | | | | | | | | |

10 20 30 40 50 60 70 80 90 100
Percent of inventory items
 ABC Analysis - 4

 Criteria other than annual cost may

also be used
 Delivery problems
 Quality problems
 High unit cost
 VED analysis
 Vital (10%) - life saving drugs, no
alternatives, can’t afford to have out-of-stock

 Essential (40%) - absence can be tolerated

for short stretches and alternatives are
available

 Desirable (50%) – absence can be tolerated

for longer periods
 Combined ABC and VED
V E D

A AV AE AD Category I – 15%

B BV BE BD Category II – 40%

C CV CE CD Category III – 45%

 Cat I – continuously monitored, keep minimum safety stock to

reduce carrying cost
 Cat II – mid level managers, low priority, moderate control
 Cat III – low level managers, high buffer stocks, lower priority
 SDE analysis
 Scarce – imported, frequently in short supply
 Difficult – difficult to obtain in quantity or quality
 Easy – easily available

FSN analysis
• Fast moving – large consumption
• Slow moving – small consumption
• Non-moving – obsolete drugs, lockup space and funds and
usually condemned due to expiry
Inventory recorder

12-53
12-54
CIM & Production Control System
Order control
 Shop floor control
 Shop floor control is concerned with monitoring the progress of
orders in the factory and reporting the status of each order to
management so that effective control can be exercised.
 FUNCTIONS OF SFC:
1. Scheduling ,
2. Dispatching, and
3. Follow-up or Expeditind
PHASES OF SFC:
4. Order release,
5. Order scheduling, and
6. Order progress
 Computer Aided Production
Management (CAPM) Systems
Information systems responsible for:
 Transaction processing - maintaining,
updating and making available specifications,
instructions and production records
 Management information - for exercising
judgements about the use of resources and
customer priorities
 Automated decision making - producing
production decisions using algorithms
 CAPM Systems & Modules
• Planning
• Control
• Performance measurement
 Planning Modules
 Master Production Scheduling (MPS) - high
level production plan in terms of quantity,
timing and priority of planned production
 Materials Requirements Planning (mrp) /
Manufacturing Resources Planning (MRP)
 Capacity Planning
 Control Modules
 Inventory control - keeping raw material,
work in process (WIP) and finished goods
stocks at desired levels
 Shop floor control (Production Activity
Control) - transforming planning decisions
into control commands for the production
process
 Vendor measurement - measuring vendors’
performance to contract, covering delivery,
quality and price
 Typical Control Parameters
 Safety stock
 Safety lead time
 Yield
 Order quantity category
 Min/max order levels
 Max. days supply
 Min. days between orders
 Lot sizing
 Lot-for-lot
 Economic Order Quantity (EOQ)
 Complex optimisation algorithms
 Just-in-Time Manufacturing
 “In the broad sense, an approach to
achieving excellence in a manufacturing
company based upon the continuing
elimination of waste (waste being considered
as those things which do not add value to the
product).
 In the narrow sense, JIT refers to the
movement of material at the necessary time.
The implication is that each operation is
closely synchronised with subsequent ones
to make that possible”
 JIT/Lean Production
 Just-in-time (JIT): A highly coordinated
processing system in which goods move
through the system, and services are
performed, just as they are needed,
 JIT   lean production
 JIT  pull (demand) system
 JIT operates with very little “fat”
 Goal of JIT
 “Zero” inventories
 “Zero” defects
 Traditional Western manufacturers considered Lot Tolerance
Per Cent Defective (LTPD) or Acceptable Quality Levels
(AQLs)
 “Zero” disturbances
 “Zero” set-up time
 “Zero” lead time
 “Zero” transactions
 Logistical transactions: ordering, execution and confirmation
of material movement
 Balancing transactions: associated with planning that
generates logistical transactions - production control,
purchasing, scheduling ..
 Quality transactions: specification, certification etc.
 Change transactions: engineering changes etc.
 Routine execution of schedule day in -day out
 Process
design

Human /
Product design JIT organisation

Planning &
control
Summary JIT Goals and Building Blocks
Ultimate A
Goal balanced
rapid flow

Supporting
Goals Eliminate disruptions
Make the system flexible Eliminate waste

Product Process Personnel Manufactur- Building

Design Design Elements ing Planning Blocks

Figure 14.1
 JIT Building Blocks
 Product design
 Process design
 Personnel/organizational
elements
 Manufacturing
planning and control
 Product Design
 Design for manufacture
 Design for assembly
 Design for automation
 Design to have flat product structure
 Design to suit cellular manufacturing
 Achievable and appropriate quality
 Standard parts
 Modular design
 Process Design
 Set-up / lot size reduction
 Include “surge” capacity to deal with variations in
product mix and demand
 Cellular manufacturing
 Concentrate on low throughput times
 Quality is part of the process, autonomation, machines
with built in capacity to check parts
 Continuous quality improvement
 No stock rooms - delivery to line/cell
 Flexible equipment
 Standard operations
Benefits of Small Lot Sizes

Reduces inventory
Less rework
Less storage space
Problems are more apparent
Increases product flexibility
Easier to balance operations
Personnel/Organizational Elements
 Workers as assets
 Cross-trained
workers
 Continuous
improvement
 Cost accounting
 Leadership/project
management
Manufacturing Planning and Control
 Level loading
 Pull systems
 Visual systems
 Close vendor
relationships
 Reduced transaction
processing
 Preventive maintenance
 Pull/Push Systems
 Pull system: System for moving work
where a workstation pulls output from
the preceding station as needed. (e.g.
Kanban)
 Push system: System for moving work
where output is pushed to the next
station as it is completed
Comparison of JIT and Traditional
Table 14.3

Factor Traditional JIT

Inventory Much to offset forecast Minimal necessary to operate
errors, late deliveries
Deliveries Few, large Many, small

Lot sizes Large Small

Setup; runs Few, long runs Many, short runs

Vendors Long-term relationships Partners

are unusual
Workers Necessary to do the Assets
work
Transitioning to a JIT System
 Get top management commitment
 Decide which parts need most effort
 Obtain support of workers
 Start by trying to reduce setup times
 Gradually convert operations
 Convert suppliers to JIT
 Prepare for obstacles
 Benefits of JIT Systems
 Reduced costs
 Waste elimination
 Inventory reduction
 Increased flexibility
 Raw materials / parts reduction
 Increased quality
 Increased productivity
 Reduced space requirements
 Lower overheads
Benefits of JIT Systems (cont’d)
 Increased equipment utilization
 Reduced scrap and rework
 Reduced space requirements
 Pressure for good vendor relationships
 Reduced need for indirect labor
Fundamentals of MRP-II &
ERP
 Manufacturing Operations Control

• Manufacturing processes are at the centre of all

value addition activities.

MATERIAL A
MANUFACTURING FINISHED
MATERIAL B MATERIALS
PROCESS GOODS
MATERIAL C
MRP
• In 1962, in response to Toyota Manufacturing
Program, Joseph Orlicky developed Material
Requirements Planning (MRP).
 Material Requirements Planning

• Black & Decker was first the company to use MRP in

1964.
• MRP systems help to better manage material
procurement for supporting manufacturing operations
• MRP translates the master production schedule into
component level demand using a bill of materials and
direct the purchasing group when to procure based
on the component lead times loaded into the MRP
system and the current inventory levels.
MRP Process Flow
 Problems With MRP

• The user has to specify how long it takes a

factory to make a product from its component
parts.
• The system design assumes that manufacturing
lead time will be constant every time.
• It takes no account of capacity in its calculations.
Thus it will give results that are impossible to
implement due to manpower or machine or
supplier capacity constraints.
 Opportunities Beyond MRP

• Once an MRP system is in place, inventory data

can be augmented by other useful information
• Labor hours
• Material costs
• Capital costs
• Virtually any resource
 Expanded Scope of Operational
Control
OPERATOR MAN
A HOURS
OPERATORS
OPERATOR
B

MATERIAL A
MANUFACTURING FINISHED
MATERIAL B MATERIALS
PROCESS GOODS
MATERIAL C
MRP
EQUIPMENT
A
EQUIPMENT MRP
EQUIPMENTS II
MACHINE
B HOURS
 Introducing MRP II

• In 1983 Oliver Wight along with Walter Goddard

developed Manufacturing Resource Planning (MRP
II) from MRP and also led the evolution of
Production Planning into Operations Planning.
• MRP II systems deal with resource capacities and
consist of the basic MRP I modules plus the RCCP
(Rough Cut Capacity Planning), CRP (Capacity
Requirement Planning) and SFC (Shop Floor
Control) modules.
 Why MRP II?

• While MRP stops at the receiving dock, MRP II

incorporates the value stream all the way through
the manufacturing unit up to the shipping dock.
• The value stream includes demand forecasting ,
machine capacity scheduling, labor planning and
quality tracking.
• MRP II extends the Just in Time concept beyond
inventory and expands it into labor availability, raw
material arrival, machine availability and so on.
 Definition of MRP II

• Manufacturing Resource Planning (MRP II) is

defined by APICS (American Production and
Inventory Control Society, estd. 1957) as a method
for the effective planning of all resources of a
manufacturing company.
• It addresses operational planning in units, financial
planning in dollars, and has a simulation capability
to answer "what-if" questions and extension of
closed-loop MRP.
 Definition of MRP II

• MRP II is an incremental information integration

business process strategy implemented using
hardware and modular software applications linked
to a central database that stores and delivers
business data and information.
• The goal of MRP II is to provide consistent data to
all players in the manufacturing process as the
product moves through the production line.
 Features of MRP II

• MRP II concentrates on the resources, i.e. material, man

and machine for detailed production scheduling.
• Loading by resource means that capacity is taken into
account , which offers tighter control over the plant.
• The Rough Cut Capacity Planning attempts to match the
order load to the capacity available, by identifying
resource overloads and moving orders to achieve a
balance (knocking the mountains into the valleys).
 Features of MRP II

• It builds on closed-loop MRP by adopting the

feedback principle and extending it to additional
areas of the enterprise such as purchasing,
marketing and finance.
• It integrates all aspects of the manufacturing
process, including materials, finance and human
relations, for planning and control purposes.
• This integration extends from strategic to
operational levels and encompasses long term
planning up to short term control.
 Features of MRP II

• Fluctuations in forecast data are taken into account

by including simulation of the master production
schedule, thus creating a long-term control.
• MRP II is a total company management concept for
using human resources more productively.
• The MRP II process is carried out by a synergistic
combination of computer and human resources. 
 Working of an MRP II System
• MRP II systems begin with MRP, which inputs the sales
forecasts from sales and marketing and determines the
demand of raw materials by analyzing the forecasts.
• The company’s strategic plans for the future are translated
into a Master Production Schedule (MPS).
• MRP II assures that the production facility is capable of
accomplishing the MPS otherwise all these plans will result
in inability to meet the promised delivery dates.
 Working of an MRP II System
• This is performed in an iterative manner.
• MRP schedules are constructed to support this MPS.
• Then Capacity Requirements Planning (CRP) is performed
which tells what equipment, personnel, and materials would
be needed to meet the MRP schedules.
• If this capacity is not available, then the MPS and possibly
the strategic plans must be revised until the MRP schedules
are consistent with the plant capacity.
 Working of an MRP II System
• This revision process facilitates the development of a
detailed production schedule that accounts for labor and
machine capacity.
• The schedules are released to the departments which
perform production and/or purchasing operations.
• The MRP II system draws on the revised MPS and
provides output in the form of a final labor and machine
schedule and schedules the production runs according to
the arrival of materials.
 Working of an MRP II System

• The MRP II systems continuously provide

production data to accounting and finance about the
production costs in terms of machine time, labor
time and materials, as well as the final production
numbers.
• The feed back of this information to the MRP/MPS
elements allow plans to be updated thereby creating
a closed loop planning and execution system.
MRP II Process Flow
 A Typical Resource Planning
Problem

Problem:
To schedule the resources for enabling uninterrupted
production of 100 units of product P 9 weeks from now.

Resource
Bill Of Materials Requirement
Matl A Matl B Matl C
MATL – Lead time
P (Wks)
1 2 4
I UNIT
Raw Matl
Cost (Rs)
2 5 5
MATL - MATL -
MATL - A Labor Reqd
1 UNIT
B C
(Hrs)
10 10 2
2 UNITS 3 UNITS
Machine
Reqd (Hrs)
2 2 1
 Resource Estimation

Week
5 6 7 8
A. Units (lead time 1 week) 100
Labor: 10 hours each 1,000
Machine: 2 hours each 200
Payable: Rs 2 each 200
B. Units (lead time 2 weeks,
2 each required) 200
Labor: 10 hours each 2,000
Machine: 2 hours each 400
Payable: Raw material at Rs 5 each 1,000
C. Units (lead time 4 weeks,
3 each required) 300
Labor: 2 hours each 600
Machine: 1 hour each 300
Payable: Raw material at Rs 10 each 3,000
 Softwares for MRP II

• A typical  MRP II software system employs a

modular construction.
• The modules keep track of and regulate specific
characteristics and functions of the entire
organization.
• The MRP II differs fundamentally from point
contact planning, in which individual characteristics
and functions have their own dedicated systems.
 Primary Modules in an MRP II
Software
• Master Production Scheduling (MPS)
• Item Master Data (Technical Data)
• Bill of Materials (BOM) (Technical Data)
• Production Resources Data (Manufacturing Technical Data)
• Inventories & Orders (Inventory Control)
• Purchasing Management
• Material Requirements Planning (MRP)
• Shop Floor Control (SFC)
• Capacity planning or Capacity Requirements Planning (CRP)
• Standard Costing (Cost Control)
• Cost Reporting / Management (Cost Control)
 Ancillary Modules in a MRP II
Software
• Business Planning
• Lot Traceability
• Contract Management
• Tool Management
• Engineering Change Control
• Configuration Management
• Shop Floor Data Collection
• Sales Analysis and Forecasting
• Finite Capacity Scheduling (FCS)
• General Ledger
• Accounts Payable (Purchase
Ledger)
• Accounts Receivable (Sales
Ledger)
• Sales Order Management
• Distribution Requirements Planning
• Distribution Resource Planning
(DRP)
• [Automated] Warehouse
Management
• Project Management
• Employee attendance
• Labour productivity
• Quality tracking tools
• Technical Records
• Estimating
• Computer-aided design/Computer-
aided manufacturing (CAD/CAM)
• Computer Aided Process Planning
(CAPP)
 Software(s) for MRP II

• The MRP II system integrates these modules

together so that they use common data and freely
exchange information, in a model of how a
manufacturing enterprise should and can operate.
• MRP II is not exclusively a software function, but a
marriage of people skills, dedication to data base
accuracy, and computer resources.
 Benefits From MRP II
• Increased direct labor productivity
• High accuracy of inventory and manufacturing capacity
• Effective interaction between different functions due to
common databases and improved information flow
• Quicker implementation of engineering changes
• Simulation capability to test what-if scenarios in a risk free
environment
• Company focus shifts from crisis management to process
control
 Benefits of MRP II to Business
Functions
• For Manufacturing Functions:
• Better control of inventories
• Improved scheduling
• Productive relationships with suppliers
• For Financial and Costing Functions :
• Reduced working capital for inventory
• Improved cash flow through quicker deliveries
• Accurate inventory records
• Timely and valid cost and profitability information
• For Design / Engineering Functions :
• Improved design control
• Better quality and quality control
 Limitations of MRP II

• Capacity can be considered only after the MRP schedule

has been prepared.
• It may happen that insufficient time was allowed within the
MRP schedule for the individual operations to be
completed, thus leading to erroneous data.
• All the planning, if done on the basis of misleading data,
will slow down the production process.
• If unexpected input changes occur, the planning process
has to be recalculated from start.
 Limitations of MRP II

• Inefficiencies will be built up in the system if feedback about

problems is not supplied on a timely, regular basis.
• MRP II is mostly run in batch environments, as it enables
rapid lot to lot course corrections to meet real world
conditions. In long production runs, corrections take time.
• MRP II softwares are costly and have a learning curve.
• MRP II does not integrate all aspects of development,
finance, marketing, human resources and information
technology operations .
 Enterprise Resource Planning

• ERP is the next evolution of the MRP system.

• It attempts to integrate the information flow from all
departments of the company: finance, marketing,
production, logistics and human resources.
• A properly set up ERP system allows all
departments to intercommunicate and monitor a
customer order at any point in time.
Enterprise Resource Planning
 Module   Function  
This module records sales orders and scheduled deliveries. Information
Sales and
about the customer including pricing, address and shipping instructions,
Distribution (SD)
billing details, etc., is maintained and accessed from this module.
This module manages the purchasing of raw materials from suppliers and the
Materials
subsequent handling of raw materials inventory, from storage to work-in-
Management (MM)
progress goods to shipping of finished goods to the customer.
This module maintains production information. This module facilitates to
Production
create production plans and schedule productions, and record information on
Planning (PP)
actual production activities.
This module helps to manage maintenance resources and facilitates planning
Plant Maintenance
for preventive maintenance of plant machinery in order to minimize
(PM)
equipment breakdowns.
Asset Management This module helps the company to manage fixed-assets including plant and
(AM) machinery and their related depreciation.
Human Resources This module facilitates employee recruiting, hiring, and training. This
(HR) module also includes payroll and benefits of employees.
This module facilitates the planning and control of research and
Project System (PS)
development, construction, and marketing projects.
Financial This module records transactions in the general ledger accounts. This module
Accounting (FI) generates financial statements for external reporting purposes.
This module includes set of tools that can be used to automate any of the
Workflow (WF)
activities in ERP system
This module serves internal management purposes, assigning manufacturing
costs to products and to cost centers so the profitability of the company’s
Controlling (CO)
activities can be analyzed. The CO module supports managerial decision
making.
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