Chapter 5
Enterprise Resource Planning
(ERP) Systems
1
Learning Objectives
◼ Material Requirements Planning (MRP) Systems
◼ Enterprise Resource Planning (ERP) Systems
◼ Enterprise Resource Planning Process
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Evolution of ERP Systems (cf. Chapter 2)
We will focus our discussion on MRP and ERP systems in this chapter.
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Independent vs. Dependent Demand Items
◼ Independent demand items
◼ Items for which demand is influenced by market conditions and is
not related to the inventory decisions for any other item held in
stock or produced.
◼ These items must be forecasted using various forecasting
techniques.
◼ Examples: wholesale and retail merchandise; maintenance, repair,
& operating (MRO) supplies; service support inventory, etc.
◼ Dependent demand items
◼ Items whose required quantity varies with the production plans for
other items held in the firm’s inventory.
◼ These items are required as components or inputs to a service or
product.
◼ Dependent demand should be calculated, not forecasted.
◼ Examples: raw materials and WIP (work-in-process) inventories.
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Material Requirements Planning (MRP) System
◼ MRP system is a computerized information system developed specifically to
help manufacturers manage dependent demand inventory and schedule
replenishment orders.
◼ The key inputs of an MRP system are a bill of materials (BOM) database,
a master production schedule (MPS), and an inventory record
database, as shown in the next slide.
◼ Using the above information, the MRP system identifies the actions planners
must take to stay on schedule, such as releasing new production orders,
adjusting order quantities, and expediting late orders.
◼ MPS is a part of the material requirements plan that details how many end
items will be produced within specified periods of time.
◼ An MRP system translates the MPS independent demand into the
requirements for all subassemblies, components, and raw materials needed
to produce the required parent items. 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 to produce
final products. 5
Material Requirements Plan (MRP) Inputs
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A Process View of an Enterprise within a Supply Chain
(cf. Chapter 1)
Source: Krajewski 7
A Process View of a Manufacturer within a Supply
Chain
New
service/
Customer
External customers
product
External suppliers
relationship
development
process
MPS process
Order
fulfillment
Supplier Bill of Orders Customer
process
Orders Supplier materials promises Orders
relationship
process MRP
Supplier schedules
Note: Bill of Materials (BOM) is a record of all the components of an item, the
parent-component relationships, and the usage quantities derived from engineering
and process designs.
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LRP = DRP + MRP (cf. Chapter 4)
Customers
Distribution centre A Distribution centre B Distribution centre C
Plant warehouse
DRP (independent)
Factory
MRP (dependent) (Final assembly)
Sub-assembly B Sub-assembly C
Part C
Part A Part B Part D Part E
Raw-material suppliers
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The DRP for Plant Warehouse (Recall Chapter 4 Q3)
Week
0 1 2 3 4 5 6 7
Distribution Centre A 300 300
Distribution Centre B 150
Distribution Centre C 150
Plant Warehouse 300 150 450
MPS Qty 300 150 450
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The Parent-Component Relationship of Final Assembly
Factory
Final Assembly
(1)
Sub-assembly B Part C Sub-assembly C
(1) (4)
(2)
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Inventory Record
The time-phase information contained in the inventory record
database consists of:
▪ Gross requirements
▪ Scheduled receipts
▪ Projected on-hand inventory
▪ Planned receipts
▪ Planned order releases
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Inventory Record
◼ The inventory record divides the future into time periods called
time buckets. It 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 component replenishment
needs.
◼ The gross requirements are the total demand derived from all
parent production plans.
◼ Scheduled receipts (or open orders) are orders that have been
placed but not yet completed.
◼ Projected on-hand inventory is an estimate of the amount of
inventory available each week after gross requirements have been
satisfied.
◼ Planned receipts – planning for the receipt of new orders will
keep the projected on-hand balance from dropping below zero.
◼ Planned order releases – indicates when an order for a specified
quantity for an item is to be issued.
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Planning Factors
◼ Planning Lead Time
◼ It is an estimate of the time between placing an order (either purchased order
or production or work order) for an item and receiving the item in inventory.
◼ Lot-Sizing Rules
◼ It determines the timing and size of order quantities. A lot-sizing rule must be
assigned to each item before planned receipts and planned order releases can be
computed. Three lot-sizing rules:
◼ Fixed Order Quantity (FOQ) – a rule that maintains the same order quantity
each time an order is issued (cf. Ch. 2).
◼ Periodic Order Quantity (POQ) – a rule that allows different order quantity for
each order issued but issues the order for predetermined time intervals (cf. Ch. 2).
◼ Lot for Lot – A rule under which the lot size ordered covers the gross
requirements of a single week. It is a special case of POQ rule, under which the
lot size ordered covers the gross requirements of a single week, i.e. P = 1, and the
goal is to minimize inventory levels. 14
Inventory Record for Final Assembly
Item: Final assembly
Lot size: 200 units
Week
Lead
time: 1 week 0 1 2 3 4 5 6 7
Gross
requirements 0 300 0 150 450 0 0 0
Scheduled
receipts 0 0 0 0 0 0 0 0
Projected
on-hand 350 50 50 100 50 50 50 50
inventory
Planned
200 400
receipts
Planned order
200 400
releases
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Inventory Record for Sub-assembly B
Item: Sub-assembly B
Lot size: 300 units
Week
Lead
time: 1 week 0 1 2 3 4 5 6 7
Gross
requirements 0 0 200 400 0 0 0 0
Scheduled
receipts 0 0 0 0 0 0 0 0
Projected
on-hand 50 50 150 50 50 50 50 50
inventory
Planned
300 300
receipts
Planned order
300 300
releases
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Q1. Complete the Inventory Record for Part C.
Item: Part C
Lot size: 300 units
Week
Lead
time: 1 week 0 1 2 3 4 5 6 7
Gross
requirements
Scheduled
receipts 0 100 0 0 0 0 0 0
Projected
on-hand 50
inventory
Planned
receipts
Planned order
releases
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Q2. Complete the Inventory Record for Sub-assembly C.
Item: Sub-assembly C
Lot size: 500 units
Week
Lead
time: 1 week 0 1 2 3 4 5 6 7
Gross
requirements
Scheduled
receipts 0 100 0 0 0 0 0 0
Projected
on-hand 100
inventory
Planned
receipts
Planned order
releases
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Material Requirements Plan (MRP) Outputs
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Tutorial Exercise 5a
Material Requirements Planning
◼ Answer all the questions
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Enterprise Resource Planning (ERP) Systems
◼ An enterprise process is a companywide process that cuts across
functional areas, business units, geographic regions, product lines,
suppliers, and customers. ERP systems are large, integrated
information systems that support many enterprise processes (both core
and support processes - cf. Ch.1) and data storage needs.
◼ By integrating the firm’s functional areas, ERP systems allow an
enterprise to view business operations as a whole rather than having to
try to put together the different information pieces produced by its
various functions and divisions.
◼ Today, ERP systems are being used by traditional brick-and-mortar
organizations such as 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 the entire enterprise. Having a single database
for all of the firm’s 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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Enterprise Resource Planning (ERP) Systems
Source: Scalle & Cotteleer
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ERP Application Modules
◼ The database collects data and feeds them into the various modular
applications (or 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 resources and payroll
databases, sales, supplier and customer databases, and so forth.
◼ In this way, the ERP system streamlines the data flows throughout the
enterprise and supply chain and provides employees with direct access
to a wealth of real-time operating information scattered across
different functions in the enterprise.
◼ The manufacturing and supply chain modules specifically deal with
resource planning. In fact, MRP evolved into manufacturing
resource planning (MRP II), and then ultimately evolved into ERP.
◼ However, not all applications need to be integrated into an ERP
system. Module software design divides the ERP system into a set of
modules that can be used independently or combined with other
modules, so enterprises purchase only the required modules for
increased business flexibility. 23
Enterprise Resource Planning Process
1. A business plan is a projected statement of income, costs, profits. It
usually is accompanied by budgets, a projected balance sheet and cash
flow statement, showing sources and allocation of funds.
2. This plan provides the framework for developing the sales and
operations plan (S&OP), a process of balancing supply with demand
at an aggregate level. Just as it is needed to manage the demand side,
consensus is needed among the firm’s departments when decisions for
the supply side are made. Such coordination helps synchronize the flow
of services, materials, and information through the supply chain to best
balance supply with customer demand.
3. Based on the sales and operations plan, the next planning level is
resource planning. For a service provider, it is to determine the firm’s
workforce schedules and other resource requirements, such as materials,
facilities, on a more detailed level. For a manufacturer, the master
production schedule (MPS) specifies the timing and size of production
quantities for each product and the material requirements planning
(MRP) process then derives plans for components, purchased materials,
and workstations.
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Managerial Inputs from Functional Areas to S&OP
Source: Krajewski
This diagram lists inputs from each functional area. They must be accounted for to
make sure that the plan is a good one and also doable.
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Aggregation
The sales and operation plan is useful because it focuses on a general
course of action, consistent with company’s strategic goals and objectives,
without getting down in details. In general, enterprises perform
aggregation along 3 dimensions: services or products, workforce, and
time.
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The Relationship of S&OP and Schedules to Other Plans
Source: Krajewski
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Tutorial Exercise 5b
ERP Systems of McDonald’s
◼ Read the mini case
◼ Answer all the multiple choice questions
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Chapter 5 Highlights
◼ MRP is a computerized information system to manage
dependent demand inventory and schedule orders. It
translates the master production schedule (MPS) into
requirements for all subassemblies, components, and
raw materials through the MRP explosion.
◼ ERP systems are large, integrated information systems
that support many enterprise processes (both core and
support processes) and data storage needs.
◼ Enterprise resource planning is the process of balancing
supply with demand, from the aggregate level (i.e.
Sales and Operations Planning) down to the short-term
scheduling level (i.e. resource planning and scheduling).
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