Operations Management BUS 3 – 140 Materials Management and MRP November, 2012

1. Operations ManagementBUS 3 – 140Materials Management and MRPNovember, 2012

2. Background

3. Practical Definitions

4. Saw tooth Logic 1. Demand / Consumption INVENTORY 2. Signal & Response to Signal 4. Replenishment Re- Order Point TIME 3. Demand during Lead Time lead time (L)

5. Receiving Stockroom Warehouse Distribution Center Retail display Work In Process (WIP Locations) Work In Process (Work Orders) WIP Staging Consignment (Customer and/or Supplier) Shipping Transit Inventory Locations

6. Elements of Lead Time Production Transit Receipt Planning Ordering Materials Set up Production Packaging

7. Key relationships between Lead Time and Inventory • Longer Lead Time = More Inventory (Flow Rate & Inventory levels) • Longer Lead Time creates a greater reliance on Forecasted demand, leading to increased “wrong guesses” and increased excess inventory • There are fixed and variable factors to Lead Time • First unit, then subsequent units (“priming the pump”) • Span time (i.e. clock time) is greater than processing time • Volume Ranges (time for a few is shorter than time for thousands / millions)

8. Lot Sizing: The Economic Order Quantity (EOQ) CTmin total cost Annual Cost ($) carrying costs ordering costs EOQ Quantity Ordered A conceptual model that balances Carrying Costs and Ordering Costs. Somewhat limited, but often useful for C Items * From Leenders, Johnson, Flynn, and Fearon, Purchasing and Supply Management, Thirteenth Edition, McGraw Hill Irwin

9. Lot Sizing: Order Quantities

10. Materials Requirements Planning (MRP)

11. Highest Level MRP Logic Product Planning Demand Planning Master Production Scheduling Material Planning Production Delivery & Service

12. Independent & Dependent Demand • Independent Demand • The demand for an item is not dependent on the demand for another item. • Finished Goods items, which are ordered by External Customers or manufactured for stock and sale, are called independent demand items. • Independent demands for inventories are based on confirmed Customer orders, forecasts, estimates and past historical data. • Dependent Demand • The demand for inventory of an item depends on another item. • Raw materials and component inventories depend on demand for Finished Goods http://www.managementstudyguide.com/types-of-inventories.htm

13. Independent & Dependent Demand Independent Demand Chocolate Cake Finished Goods Dependent Demand Cake Icing Subassembly (WIP) Raw Material Water Egg Mix MRO Raw

14. Bill Of Material Chocolate Cake Cake Icing Water Egg Mix

15. MRP Logic is Constantly Balancing Supply & Demand What you NEED (Demand) What you HAVE (Supply) • Final Assemblies • Sales Orders • Forecast • Components and Subassemblies: • Higher level Starts • Higher level Work Order Shortages • Stockroom Inventory • WIP Stores Inventory • Open Work Orders • Open Purchase Orders What you NEED TO GET and WHEN you need to get it (MRP output) • Planned Purchase Orders • Planned Work Orders • Rescheduled Work Orders • Rescheduled Purchase Orders

16. MRP Inputs MRP Processing MRP Outputs Changes Order releases Master schedule Planned-order schedules Primary reports Exception reports Bill of materials Planning reports MRP computer programs Secondary reports Performance- control reports Inventory records Inventory transaction MRP Overview * From Stevenson, Operations Management, Ninth Edition, McGraw Hill Irwin

17. Item/Descr. Where Used QPA OH LT Past Due 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb SJSU141 MB1234 1 0 1 Gross Requirement 0 50 50 70 100 40 Mother Board On Order 0 70 100 10 0 0 Projected Available 0 20 70 10 -90 -130 Planned Order Complete 0 0 0 0 90 40 Planned Order Starts 0 0 0 90 40 0 Cum Planned Order 0 0 0 0 90 130 MRP “Nets” Inventory Balance On Hand just like a Checkbook is Equivalent to:

18. Item/Descr. Where Used QPA OH LT Past Due 31-Jan 7-Feb 14-Feb 21-Feb 28-Feb SJSU141 MB1234 1 0 1 Gross Requirement 0 50 50 70 100 40 Mother Board On Order 0 70 100 10 0 0 Projected Available 0 20 70 10 -90 -130 Planned Order Complete 0 0 0 0 90 40 Planned Order Starts 0 0 0 90 40 0 Cum Planned Order 0 0 0 0 90 130 MRP Netting Logic Illustration Lead Time Quantity Per Assembly Quantity On Hand

19. Forward Scheduling and Back Scheduling Backward Scheduling answers, “When should I start to finish on time?” Complete Final Draft Write First Draft Compare Book to Course Read Book 25-Oct 01-Nov 08-Nov 15-Novt 22-Novt 29-Nov In this example, you would know that you should start reading by Oct 25 to complete the assignment by Nov 29

20. MRP Logic is similar to a GANNT Chart Complete 29-Nov Final Draft Write 22-Novt First Draft Compare 15-Novt Book to Course 08-Nov 01-Nov Read Book 25-Oct

21. Additional Points

22. MRP is EXTREMELY DEPENDENT on ACCURATE DATA The system MUST see ALL inventory in ALL of these categories at ALL times In WIP Open Work Orders Open Purchase Orders In Receiving In the Stockroom In a higher Assemblies In Finished Goods Shipped In a WIP Location EVERY time inventory is moved, a TRANSACTION must be executed

23. A physical count of items in inventory Cycle counting management How much accuracy is needed? When should cycle counting be performed? Who should do it? Cycle Counting

24. Triggers for Cycle Counting • Out-Of-Stock report • Zero balance • Discrepancy • ABC report