Chapter
11 Resource Planning
TEACHING TIP
This chapter begins by describing enterprise resource planning (ERP) systems, which have
become a valuable tool for resource planning. The chapter then examines a specific approach to
resource planning called materials requirements planning (MRP).
TEACHING TIP
As shown in the opener, adopting sophisticated materials planning and co-ordination practices
across its manufacturing plants and supply chains, Philips can keep pace with technological
changes and maintain its leadership position in a rapidly changing industry.
Emphasize that resource planning lies at the heart of any organization.
1. 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.
1. Dependent demand
a. Quantity required varies with the production plans of other items held in inventory as a
final product (independent demand).
b. Component
c. Parent
2. Master Production Scheduling
Details how many end items will be produced within specified periods of time.
• It breaks the sales and operations plan into specific product schedules.
• Operations must first create a prospective MPS to test whether it meets the schedule with
resources provided for in the sales and operations plan.
o The sums of the quantities in the MPS must equal those in the sales and
operations plan.
1. Developing a master production schedule
Step 1: calculate projected on-hand inventories.
Projected on-hand
inventory at end
of this week
=
On-hand
inventory at
end of last week
+
MPS quantity
due at start of
this week
–
where:
b. Available to promise (ATP) inventory
• The quantity of an end item that marketing can promise to deliver on specific dates.
• It is the difference between customer orders already booked and the quantity that
operations is planning to produce.
c. Developing a Master Production Schedule. Use Application 11.1:
Determine the MPS for Product A that has a 50-unit policy and 5 units on hand.
The demand forecast and booked orders are shown in the partially completed
plan given in the Student Notes. The lead time is one week. Here is the
completed plan. You might want to ask a question or two on how they would
respond to a customer request for a specific week and order quantity. (Students
complete highlighted cells)
Item: Product A
Order Policy: 50 units
Lead Time: 1 week
Quantity on Hand 55
1
2
3
4
5
6
7
8
9
10
Forecast
20
10
40
10
0
0
30
20
40
20
Customer orders
(booked)
30
20
5
8
0
2
0
0
0
0
Projected on-hand
inventory
25
5
15
5
5
3
23
3
13
43
Copyright © 2019 Pearson Education, Inc.
MPS quantity
50
50
50
50
MPS start
50
50
50
50
Available-to–promise
(ATP) inventory
5
35
50
50
50
You might want to ask a question or two on how they would respond to a
customer request for a specific week and order quantity.
d. Freezing the MPS
• Many firms, particularly those with a make–to-stock strategy and a focus on low-cost
operations, freeze, or disallow changes to, the near-term portion of the MPS.
e. Reconciling the MPS with sales and operations plans
3. MRP Explosion
1. Bill of Materials
a. A record of all components of an item.
b. Shows the parent-component relationship.
c. The usage quantities are derived from engineering and process design.
d. Four terms frequently used to describe inventory items:
e. Part commonality (sometimes called standardization of parts or modularity)
2. Inventory record
a. Inventory transactions are the basic building blocks of up-to-date records.
b. These transactions include releasing new orders, receiving scheduled receipts, adjusting
due dates for scheduled receipts, withdrawing inventory, canceling orders, correcting
inventory errors, rejecting shipments, and verifying losses and stock returns.
c. Inventory records divide the future into time periods called time buckets.
d. The purpose of the inventory file is to keep track of inventory levels and component
replenishment needs.
e. The time-phase information contained in the inventory record consists of:
Copyright © 2019 Pearson Education, Inc.
• Projected on-hand inventory is an estimate of the amount of inventory available each
week (or time bucket) after gross requirements have been satisfied.
Projected on-hand
inventory balance
at end of week t
=
Inventory on
hand at end of
week t-1
+
Scheduled
or planned
receipts in
week t
–
3. Planning factors
a. Planning lead time
• For purchased items, the planning lead time is the time allowed for receiving a
shipment from the supplier
b. Lot-sizing rules
• Fixed order quantity (FOQ) rule maintains the same order quantity each time an order
is issued.
Item: H10-A Lot Size: FOQ=80 units
Description: Chair seat assembly Lead Time: 4 weeks
Week
31
32
33
34
35
36
37
38
39
40
Gross requirements
60
35
45
60
Scheduled receipts
80
Projected on-hand inventory
20
40
40
40
40
5
5
40
40
60
Planned receipts
80
80
Planned order releases
80
80
c. Periodic order quantity (POQ) rule allows a different order quantity for each order issue
but tends to issue the order at predetermined time intervals.
POQ lot size
to arrive in
week t
=
Total gross requirements
for P week, including
week t
–
Projected on-hand
inventory balance at
end of week t-1
• MRP Record with POQ Rule. Use Application 11.3:
Now complete the H10-A record using a POQ rule. The P should give an average lot size of
80 units. Assume the average weekly requirements are 20 units
20
80 =
Item: H10-A Lot Size: POQ= 4
Description: Chair seat assembly Lead Time: 4 weeks
Week
31
32
33
34
35
36
37
38
39
40
Gross requirements
60
35
45
60
Scheduled receipts
80
Projected on-hand inventory
20
40
40
40
40
5
5
60
60
0
Planned receipts
100
Planned order releases
100
20
20
d. Lot-for-lot (L4L) rule which the lot size covers the gross requirements of a single week.
• MRP Record with L4L Rule. Use Application 11.4:
Revise the H10-A record using the lot-for-lot (L4L) Rule. (Students complete
highlighted section)
Item: H10-A Lot Size: L4L
Description: Chair seat assembly Lead Time: 4 weeks
Week
31
32
33
34
35
36
37
38
39
40
Gross requirements
60
35
45
60
Scheduled receipts
80
Projected on-hand inventory
20
40
40
40
40
5
5
0
0
0
Planned receipts
40
60
Planned order releases
40
60
e. Comparing lot-sizing rules
• Lot sizes affect inventory costs and setup and ordering costs.
• The FOQ rule generates a high level of average inventory because it creates
inventory remnants.
• The POQ rule reduces the amount of average on-hand inventory because it does a
better job of matching order quantity to requirements.
• The L4L rule minimizes inventory investment, but it also maximizes the number of
orders placed.
• Tutor 11.2 in MyLab Operations Management provides a new example to practice
lot-sizing decisions using FOQ, POQ, and L4L rules.
f. Safety stock
• Safety stock for dependent demand items with lumpy demand (gross requirements) is
helpful only when future gross requirements, the timing or size of scheduled receipts,
and the amount of scrap that will be produced are certain.
• The usual policy is to use safety stock for end items and purchased items to protect
against fluctuating customer orders and unreliable suppliers.
20
4. Outputs from MRP
a. Material Requirements
• Translates the MPS and other sources of demand into the requirements needed for all
of the subassemblies, components, and raw materials the firm needs to produce
parent items.
• An item’s gross requirements are derived from three sources.
The MPS for immediate parents that are end items.
The planned order releases for parents below the MPS level.
Any other requirements not originating in the MPS, such as the demand for
replacement parts.
Material Requirements Planning for Single Product Case. Use Application
11.5:
A firm makes a product (Item A) from three components (intermediate Items B and D,
and purchased item C). The latest MPS for product A calls for completion of a 250-unit
order in week 8, and its lead time is 2 weeks. The master schedule and bill of material for
Product A are given below.
Item: End Item A
Lead Time: 2 wks
Week
1
2
3
4
5
6
7
8
MPS quantity
250
MPS start
250
Develop a material requirements plan for items B, C, and D, given the following
inventory data. Blank MRP records are provided in the Student Notes, and the
completed records are shown below.
Data Category
Item
B
C
D
Lot-sizing rule
POQ (P = 5)
FOQ = 1000
L4L
Lead time
2 weeks
1 week
3 weeks
Scheduled receipts
None
1000 (week 1)
None
Beginning inventory
0
800
0
Hints: Be sure to note that item B has two immediate parents (A and D) and item C has
2 immediate parents (A and B). Item D has only end item A as an immediate parent,
which is an MPS item. Note also that the usage quantities are not always 1-for-1.
An item’s gross requirements cannot be derived until all of its immediate parents are
processed. Thus we must begin with Item D. Its only immediate parent is item A, and its
planned “production plan” is shown by the MPS start row. Note the 2-for-1 usage quantity
when deriving D’s gross requirements.
Item: D Lot Size: L4L
Description: Lead Time: 3 weeks
Week
1
2
3
4
5
6
7
8
Gross requirements
500
Scheduled receipts
Projected on-hand inventory 0
0
0
0
0
0
0
0
0
Planned receipts
500
Planned order releases
500
We can do item B next, because the planned “production quantities” for its two immediate parents
(A and D) are known. Item C cannot be done yet, because one of its parents is item B, and its
PORs are still unknown.
Item: B Lot Size: POQ = 5
Description: Lead Time: 3 weeks
Week
1
2
3
4
5
6
7
8
Gross requirements
500
250
Scheduled receipts
Projected on-hand inventory 0
0
0
250
250
250
0
0
0
Planned receipts
750
Planned order releases
750
Finally, we can do Item C, because we now know the planned “production quantities” of both of
its immediate parents (A and B). Note that the usage quantity for its parent B is 2–for-1.
Item: C Lot Size: 1000 units
Description: Lead Time: 1 week
Week
1
2
3
4
5
6
7
8
Gross requirements
1500
250
Scheduled receipts
1000
Projected on-hand inventory 800
300
300
300
300
300
50
50
50
Planned receipts
Planned order releases
• In practice a company can have thousands of dependent demand items with an
average of six bills of materials levels. Time horizons often stretch out for 30 or more
time periods into the future. Doing a MRP explosion by hand is impractical.
b. Action notices: inventory planners use a computer-generated memo called an action
notice to make decisions about releasing new orders and adjusting the due dates of
scheduled receipts.
c. Resource requirements reports
d. Performance reports
Priority reports on orders already placed to the shop or with suppliers.
Manufacturing resource planning (MRP II)
5. MRP and the environment
6. MRP, Core Processes, and Supply Chain Linkages
a. It all begins with customer orders, which consist of orders for end items as well as
replacement parts.
b. Execution of MRP-based plans using the information flows between core processes is
shown in Figure 11.19
4. Enterprise Resource Planning
• Enterprise process: a companywide process that cuts across functional areas, business units,
geographic regions, product lines, suppliers, and customers.
• Enterprise resource planning (ERP) systems: large, integrated information systems that
support many enterprise processes and data storage needs.
1. How ERP systems are designed
a. ERP revolves around a single comprehensive database that can be made available across
the entire organization (or enterprise).
Copyright © 2019 Pearson Education, Inc.
accounting databases, its human resource and payroll databases, sales and customer
databases, and so forth.
d. The ERP system streamlines the data flows throughout the organization and provides the
employees with direct access to a wealth of real-time operating information.
TEACHING TIP
The students of today are most likely to be familiar with Amazon.com (and other similar on-line
shopping sites). But what they may not know is how they use an ERP system to link their
customers’ orders to the warehouse that ship the orders, and ultimately link to suppliers who
replenish orders to the warehouse. You may want to also ask the students how they think the
transfer of payments is processed with this system.
Managerial Practice 11.1 illustrates how the implementation of an ERP system by SAP benefited
Valle del Lili Foundation.
e. Designing an ERP system requires that a company carefully analyze it major processes so
that appropriate decisions about coordination of legacy systems and new software can be
made.
f. ERP systems have undergone significant changes over the past few years
• Interoperability
• The goal is to automate, in almost real-time, the sharing of information across
enterprise boundaries.
5. Resource Planning for Service Providers
1. Dependent demand for services
a. Restaurants
• Every time you order from the menu, you initiate the restaurant’s need for certain
types of goods, staff, and equipment.
• Using forecast of demand for each type of meal, the manager of the restaurant can
estimate the need for resources.
b. Airlines
• Whenever an airline schedules a flight, certain supporting goods are needed, labor,
and equipment.
c. Hospitals
• With exception of the emergency room service, hospitals can use their admission
appointments to create a master schedule.
• The master schedule could then be exploded to determine the resources needed
during a certain period.
d. Hotels
• Reservations at a hotel generate demand for facilitating goods, staff, and equipment.
2. Bill of resources is a record of a firm’s parent-component relationships and all of the
materials, equipment time, staff, and other resources.
Comprehensive Example: Regional hospital that performs aneurysm treatment at its state-of-the-
art facility.
a. Use Solved Problem 4 to illustrate Resource Planning for services