Chapter 12 – MRP and ERP
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Education.
CHAPTER 12
MRP AND ERP
Teaching Notes
When covering the material in this chapter, the following points should be emphasized:
Dependent demand item needs are generated from higher level item needs of which they are a part.
Dependent demand tends to be lumpy and not dispersed uniformly.
MRP creates schedules identifying the parts and materials required to be purchased or manufactured,
time of the order release, and the size of the order or production quantity.
MRP keeps track of inventory levels and serves as a link between inventory, purchasing, and
production.
MRP inputs are:
a. Master Production Schedule
b. Bill of Materials
c. Inventory Records
and explodes requirements level-by-level.
MRP provides feedback about delayed or cancelled orders, and changes in quantities and due dates of
open and future orders.
MRP nervousness occurs as a result of the high frequency of updating the MRP system and due to the
amount and timing of changes, cancellations, additions, and delays in order/manufacturing quantities
production schedule.
I have found the following approach to work quite well in terms of developing student understanding of
MRP:
1. Emphasize the difference between independent and dependent demand.
2. Present an overview of MRP. Students find visual aids very helpful. Walk them through Figures
2, 3, 4, 5, 6, 8, and 9.
3. Go back through the chapter in more detail, covering low-level coding and lot-for-lot ordering,
and working through a product structure tree and developing a material requirements plan.
Chapter 12 – MRP and ERP
Education.
Master
Schedule for:
Week
1
2
3
4
5
6
7
8
Quantity
Week
Item: LT =
Lot size :
Beg.
Inv.
1
2
3
4
5
6
7
8
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned-order receipts
Planned-order releases
Week
Item: LT =
Lot size:
Beg.
Inv.
1
2
3
4
5
6
7
8
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned-order receipts
Planned-order releases
Week
Item: LT =
Lot size:
Beg.
Inv.
1
2
3
4
5
6
7
8
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned-order receipts
Planned-order releases
Chapter 12 – MRP and ERP
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Week
Item: LT =
Lot size:
Beg.
Inv.
1
2
3
4
5
6
7
8
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned-order receipts
Planned-order releases
Reading: ABCs of ERP
1. ERP (Enterprise Resource Planning) is an integrated information system that is used to plan the
resources and processes needed to produce, ship, and account for all customer orders in both
manufacturing and service organizations. Integration of databases permits standardization of
2. Three main reasons that firms adopt ERP are:
1. To integrate financial data: ERP creates a single version of the financial statements using a
single database that incorporates financial information from different departments within the
company.
2. To standardize manufacturing processes: ERP standardizes processes that produce the same
information with each other.
3. The hidden costs of ERP are:
1. Training: Workers must learn a new set of processes.
2. Integration and testing: Testing the links between ERP packages and other corporate
applications.
3. Data conversion: Cleaning and moving data.
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Education.
is carried for all dependent demand items, one of the main advantages of MRP (low levels of
inventories) will be lost.
5. The need for safety stock arises when variability exists in usage and/or lead time. With
6. For items subject to lead time variability, safety lead time results in scheduling orders for arrival
7. A net change system is one that is updated as changes occur, while a regenerative system is
updated periodically. The regenerative system is best suited for systems that are fairly stable. It
8. Successful MRP requires accurate inputs: master schedules, bills of materials, and inventory
9. The advantages of MRP are low levels of in-process inventories, the ability to keep track of
material requirements, the ability to evaluate capacity requirements generated by a given master
10. MRP can contribute to productivity by providing management with the kinds of information it
11. MRP II is an acronym for manufacturing resources planning, which expanded the scope of MRP
to include planning for financial and marketing resources to support the material requirements
12. The term lot sizing refers to selecting a quantity to order. The primary goal of lot sizing is to
minimize the sum of ordering cost (or setup cost) and holding cost. In the case of uniform
13. Planned-order receipts refer to the quantity expected to be received by the beginning of the
14. In the 1970s, manufacturers began to recognize the importance of the difference between
independent demand, which is relatively stable, and dependent demand which is rather “lumpy”
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Copyright © 2015 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill
Education.
by nature. Earlier EOQ models, which worked well for independent demand items, did not work
very well for the more “lumpy” dependent demand items. Hence, MRP was developed to handle
the more “lumpy” dependent demand items. Adjustments still have to be made under MRP, but it
was developed to handle seasonal variations better than the older EOQ models could handle.
15. MRP II (Manufacturing Resource Planning) involves an effort to expand the scope of production
resource planning to include other functional areas of the firm in the planning process such as
marketing, finance, and purchasing. The integration of these areas in the formulation of the
16. The unforeseen costs of MRP include the following:
a. Training: Workers have to be trained to learn and become proficient with a new system and
its processes.
b. Integration and testing: Integrating the computer systems associated with different areas of
the firm and testing the links between various corporate areas and systems.
c. Data conversion and data analysis.
Taking Stock
1. The tradeoffs involved in the decision to purchase an ERP software package are the costs vs. the
benefits. The costs of implementation include actual cost of the software, training and
implementation costs, cost of getting every department to cooperate, cost of integration and
2. The executives of the organization, with input from different functional departments (marketing,
operations, and finance) and from support functions such as human resources, engineering, and
3. The technology of ERP software has allowed many companies to integrate their databases, which
in turn has allowed easier tracking of orders, faster response to customers’ inquiries, integration
of financial data, and standardization of the manufacturing processes.
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Education.
the formal ERP system has let them down too many times. Most businesses cannot function
without the ERP system working properly; therefore, reliability is critical.
Critical Thinking Exercises
1. An end item, such as the chair, is considered to be an independent demand item with uniform
demand. It is appropriate to use EOQ/ROP for the independent demand items because the
assumption of continuous (uniform) usage and continuous monitoring is met.
The components and parts that go into end items are considered to be dependent demand items.
Their demand is dependent on the demand for the respective end items. Demand for parts and
components tends to be lumpy and not continuous. Therefore, instead of continuous stocking and
monitoring levels of inventory, these parts need to be stocked just prior to the time they will be
needed for manufacturing. This policy of stocking just prior to the need on the shop floor will in
turn assist in reducing inventory investment.
In addition, while demand for independent demand items, such as the chair, is forecasted, demand
for the parts, such as the legs, side rails, back support, etc., is calculated based on the demand for
the chair. If EOQ/ROP approach is used for the dependent demand parts, too much unnecessary
time could be spent to forecast each and every individual part. Because each forecast would be
independent, there could be great amount of discrepancy and disagreement between the forecast
for the end item and the forecast for the various parts.
Therefore, it would be very inefficient to use the EOQ/ROP approach for the dependent demand
items. Using an EOQ/ROP system for controlling component inventory will lead to problems
such as too little inventory for some items, too much inventory for other items, and late orders for
end items. For these items, instead of using EOQ/ROP approach, the company should consider
installing an MRP system.
2. Student answers will vary. Some possible answers are listed below.
MRP: If anyone lied about information that they input to the MRP system, this action would
violate the Virtue Principle.
ERP: If a project manager in charge of an ERP implementation rewarded project team members
with different amounts of time off, this action would violate the Fairness Principle. If the project
team carelessly rushed through an ERP implementation so that team members could return to
their primary functional roles, this action would violate the Utilitarian Principle. If a project
manager intentionally over-stated the benefits and under-stated the costs of an ERP
implementation, this action would violate the Virtue Principle.
Chapter 12 – MRP and ERP
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Education.
Solutions
1. a. Each E requires 2 F + 1 G + 1 H.
Each F requires 2 J + 4 D.
Each G requires 2 L + 2 J.
Each H requires 4 A + 2 D.
J = 6, D = 10, L = 2, A = 4.
b. Product structure tree (tree diagram) for stapler:
Slide Assembly
Stapler
Top Assembly
Base Assembly
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Education.
2. Given:
We have the following information:
Item
End
B
C
D
E
F
G
H
LT (wk)
1
2
3
3
1
2
1
2
Amount
on hand
0
10
10
25
12
30
5
0
a. If 20 units of the end item are to be assembled, how many additional units of E are
needed?
Step 1:
Determine the gross requirements and the net requirements for the End Item:
Item
Gross Requirements – On Hand =
Net Requirements
End Item
20 – 0 =
20
Step 2:
Determine the gross requirements and the net requirements for B, C, & D.
Multiply the net requirements for the end item by the usage quantities of B, C, & D to
determine the gross requirements for B, C, & D.
Item
Gross Requirements – On Hand =
Net Requirements
B
(20 * 2) = 40 – 10 =
30
C
(20 * 1) = 20 – 10 =
10
D
(20 * 3) = 60 – 25 =
35
Step 3:
Determine the gross requirements and net requirements for E.
Multiply the net requirements for B, C, & D by the usage quantities of E to determine gross
requirements for E.
Item
Gross Requirements – On Hand =
Net Requirements
E
[(30 B * 2) + (10 C * 2) + (35 D * 2)] = 150 – 12 =
138
End Item
E(2) F(3) G(2) E(2) H(4) E(2)
B(2)
C
D(3)
Chapter 12 – MRP and ERP
in bold to the left of each item in the product structure tree shown below.
3. Given:
We have the following information:
End Item
B(2) J(3) G(2) B(2) H(4) B(2)
Item
End
L
C
K
B
J
G
H
LT (wk)
1
2
3
3
2
3
3
2
End Item
E(2) F(3) G(2) E(2) H(4) E(2)
B(2)
C
D(3)
1 wk
2 wk
1 wk
1 wk
3 wk
3 wk
1 wk
1 wk
1 wk
2 wk
1 wk
1 wk
1 wk
2 wk
1 wk