Operations Management

Course Teacher
Dr. Sricharan

Mechanical Engineering Department

S. R. K. R. Engineering College, Bhimavaram
III/IV 2 Semester 2022-2023

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 UNIT 5
Resource Requirement Planning
•MRP and CRP overview
•Objectives of MRP
•Inputs/Outputs to MRP System; MRP Logic
•Limitations and Advantages of MRP
•MRP II
•ERP
•Introduction to JIT manufacturing philosophy; Benefits

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 UNIT 5 – Resource Requirement Planning
Overview: MRP and CRP
Suppose you were in charge of production at one of General Motor’s automobile plants for the coming month. Your
aggregate plan and master schedule have spelled out what models and how many to produce. And your inventory
system can tell you what materials are on hand. So now comes the next step. Build the cars – just build the cars.
All of a sudden the pressure is on! A quick check reveals inventories of parts are purposely low. You have neither the
storage space nor the financial luxury for stocking inventory that “might” be needed in a few weeks. How will you
ever arrange to have the right amount of steel, windshields, and tyres available at the right time? Even if the steel
is available, how can you be sure your numerous machine shops can grind out the door panels, engine blocks, etc.
when you need them? One little shortage you are in trouble. Your mile long production shop could be shut down in
2 minutes – perhaps less.
What are MRP and CRP? Companies that produce end products from purchased and/or manufactured
components need a systematic method of planning for their material and capacity requirements.
Material requirements planning (MRP) is a technique for determining the quantity and timing for the acquisition of
dependent demand items needed to satisfy master schedule requirements.
Capacity requirements planning (CRP) is a technique for determining what personnel and equipment capacities are
needed to meet the production objectives embodied in the master schedule and the material requirements plan.
Together, MRP and CRP established specifically what materials and capacities are needed and when they are needed.
Every big and small manufacturing companies should take full advantage of these techniques. Otherwise they
simply could not survive in today’s market.

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Although MRP and CRP appear to be two different concepts, CRP activities are often assumed to be included
within the concept of “MRP System”. Beyond this MRP System, the term “MRP II” has been coined by
integrating financial, accounting, personnel, engineering, and marketing information – along with the
production planning and control activities of basic MRP systems. This broad based coordination of various
information systems within the context of the corporate business plan has been labelled manufacturing
resource planning (MRP II). For many manufacturing firms, MRP II is the “heart” of their Corporate
Management Information System.
What do MRP and CRP together accomplish? (OR) What are the objectives of MRP?
According to the president of a firm that supplies Caterpillar Tractor Company,
MRP has been revolutionary here at our firm. Not only has it brought about new ways of doing the things, it also nearly produced a
revolution! It is an incredibly simple idea and yet it is very difficult system to implement. The benefit to us has been significant in
many tangible ways; productivity increases, reduced purchases, greater customer service, and more. But the greatest benefit, in my
mind, is that MRP has brought us all together in a common effort. Because we involved everyone, it has become everyone’s system.
Because we educated everyone, employees in every area of the company understand our dependency on each other. And finally,
because we communicate continually about our goals, performances, weaknesses, and strengths, we have together improved our
product, our productivity, and our profitability.
But, MRP systems aren’t all roses. They can be difficult to implement – and they can be costly (from
thousands of dollars to over a million dollars for some firms). Nor are many systems wholly successful.
Nevertheless, the benefits of successful installations are often remarkable. Hence, the Operations Managers
adopt MRP to achieve these objectives:

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1. Inventory reduction. MRP determines how many of a component are needed and when, in order to meet
the master schedule. MRP enables the manager to procure that component as it is needed, thereby
avoiding costs of excessive inventory.
2. Reduction in production and delivery lead time. MRP identifies materials and components quantities,
timings, availabilities, and procurement and production actions required to meet delivery deadlines. By
coordinating inventories, procurement, and production decisions, MRP helps avoid delays in production.
3. Realistic commitments. Realistic delivery promises can enhance customer satisfaction. By using MRP,
production can give marketing timely information about likely delivery times to prospective customers.
4. Increased efficiency. MRP provides close coordination among various work centers as products progress
through them. Consequently, production can proceed with fewer indirect personnel, such as material
expeditors, and with fewer unplanned interruptions because MRP focuses on having all components
available at appropriately scheduled times. The information provided by MRP encourages production
efficiencies.
All of these benefits result mainly from the philosophy of MRP systems. Simply put, MRP systems are based
on the philosophy that each raw material, part, and assembly needed in production should arrive
simultaneously at the right time to produce the end items in the MPS. This philosophy results in expediting
the materials that are going to be late and slowing down the delivery of materials that are going to be early.
For example, if one material is going to be late and nothing can be done about it, the other materials needed
to assemble the end item will not be needed until the one late material arrives. The MRP system changes the
due dates of all the materials so that materials arrive simultaneously to assemble the end item.

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A chief benefit of this MRP systems philosophy is that production operations work on parts that are really
needed on their due dates so that production capacity is being used only to support the MPS. This avoids
unnecessary expediting of parts through the factory ahead of their due dates.
Elements/Components of MRP: Inputs, MRP Logic, and Outputs
The following Figure describes the operation of the MRP system. Three major sources of information inputs are
mandatory in the MRP system: a master production schedule, an inventory status file, and a bill of materials
file. The MPS drives the entire MRP system. It is accepted as given. The inventory status file and the bills of
materials file supply additional information about products included in MPS. These inputs are fed into the MRP
processing logic (computer program), which generates the outputs. The inventory transactions resulting from
the MRP actions are put back into the inventory status file so that current inventory records are maintained.
The planned order schedule and changes to planned orders are the primary outputs of MRP. Exception,
performance, and planning reports are also generated for management’s use, which are the secondary
outputs. Let’s examine each of these components in details.
INPUTS
Master Production Schedule (MPS). The MPS is initially developed from firm’s aggregate plan, customer orders
in hand or from forecasts of demand before the MRP system begins to operate. Designed to meet market
demand, the MPS identifies the quantity of each end item and when it needs to be produced during each
future period in the production planning horizon. The MPS is an input to the MRP system and is accepted as it
is. That is to say, MRP assumes that the MPS is produced within the production capacity constraints. Thus, the
MRP explodes the master schedule into material requirements.

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Bill of Materials/ Bills of Material (BOM) file
A bill of material is a list of the materials and their quantities required to produce one unit of an end item or
end product. Each product therefore has a bill of material. A bills of material file, or product structure file as it
is sometimes called, is a complete list of all finished products, the quantity of each material in each product,
and the structure (assemblies, subassemblies, parts, and raw materials and their relationships) of products.
The primary information to MRP from the BOM is the product structure, An example of which is shown in the
following figure. One unit of end product A requires one unit of each of components B and C. One unit of each
product D requires one unit of component E and one unit of component F, which in turn requires one unit of
component B and two units of components C.

In MRP terminology, A and D are upper-level end items; the

components are lower-level items. Each item in the product
structure is given a unique identification number. Subsequently,
by knowing the master schedule for end items, MRP can
schedule and time-phase the orders for the correct lower-level
component items in the product structure.

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Inventory Status File
The MRP system must retain an up-to-date file of the inventory status of each item in the product structure.
This is a computerized file with a complete record of each item held in the inventory and all the inventory
transactions, both actual and planned. This file contains the identification number, quantity on hand, safety
stock level, quantity disbursed (allocated), and procurement lead time of every item.
The MRP Processing Logic/Computer Program
The MRP computer program operates this way:
1. First, with the MPS it begins to determine the number of end items needed in each time period (typically a
week). Time periods are sometimes called buckets in MRP terminology.
2. Next, the numbers of service parts not included in the MPS but deduced from customer orders are
included as end items.
3. Next, the MPS and service parts are exploded into gross requirements for all materials by time period into
the future by consulting the bill of materials file.
4. Next, the gross materials requirements are modified by the amount of materials on hand and on order for
each period by consulting the inventory status file. The net requirements of each material for each bucket
are computed as follows:

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Net requirements = Gross Inventory on
Safety stock
Inventory allocated
requirements hand to other uses

If the net requirements are greater than zero, orders for the material must be placed.

This procedure results in inventory transactions data (orders released, changes in orders, and so on),
which are used to update the inventory status file, the primary output reports and secondary output reports.
Outputs of MRP
The outputs of MRP systems dynamically provide the schedule of materials for the future – amount of each
material required in each time period to support the MPS. Two primary outputs result:
1. Planned order schedule – a plan of the quantity of each material to be ordered in each time period. This
schedule is used by purchasing to place orders with suppliers and by production to order parts,
subassemblies, or assemblies from upstream production departments. The planned orders becomes guide
for future production at suppliers and for in-house production schedules.
2. Change in planned orders – modification of previous planned orders. Quantities of orders can be changed,
order can be cancelled, or the orders can be delayed or advanced to different time periods through the
updating process.

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The secondary MRP outputs provide this information:
1. Exception reports – reports that flag items requiring management attention in order to provide the right quantity
of materials in each time period. Typical exceptions noted are late orders, and excessive scrap.
2. Performance reports – reports that indicate how well the system is operating. Examples of performance
measures utilized are inventory turns (how many times a company’s inventory is replaced over a period of time),
percentage of delivery promises kept, and stock out incidences.
3. Planning reports – reports to be used in future inventory planning activities. Examples of such planning
information are inventory forecasts, purchase commitment reports, traces to demand sources, and long range
material requirements planning.
Limitations and Advantages of MRP
The limitations of MRP system stem from the conditions that must be met in giving accurate inputs to the MRP logic.
First, the bill of materials and inventory status information must be computerized; and a valid master schedule must
be prepared. Another limitation has to do with data integrity. Unreliable inventory and transactions data from the
shop floor can ruin a well-planned MRP system. Training personnel to keep accurate records is not an easy task, but it
is critical to successful MRP implementation.
The dynamic nature of the MRP system is a vital advantage. It reacts well to changing conditions. Changes in the
master schedule can affect not only the end item but also hundreds, even thousands, of components. Because the
MRP system is computerized, management can make a new MRP computer run to revise production and
procurement plans that react quickly to changes in customer demands as reflected in the master schedule.

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Manufacturing Resource Planning (MRP II)
Historically, MRP systems typically were developed on a segregated basis, rather than as part of a highly
integrated information system. However, companies are beginning to logically relate many of their information
subsystems to the MRP system. Bills of material data, for example, can be shared with an engineering
information system data base; order release and order receipts data can be shared by the order billing and
accounts payable information systems; and inventory status data from MRP can be part of marketing or
purchasing information systems. This type of information integration, in fact, is exactly the impetus for a new
generation of manufacturing planning and control systems.
Manufacturing resource planning (MRP II, or “closed loop” MRP) is an integrated information system that steps
beyond first-generation MRP to synchronize all aspects (not just manufacturing) of the business. The MRP II
system (as shown in the below figure) coordinates sales, purchasing, manufacturing, finance, and engineering
by adopting a focal production plan and by using one unified data base to plan and update the activities in all
the systems.
One use of the MRP II system is to evaluate various business proposals. If, for example, the output of product X
increases by 20% in weeks 15 to 20 and that of Y decreases by 15% in weeks 10 to 15, how would operations
and profitability be affected? The system can simulate how purchases and, hence, accounts payable are
affected, when deliveries to customers and accounts receivable occur, what capacity revisions are needed and,
so on. The company-wide implications of the proposed change can be evaluated, and various departments can
be coordinated according to a common purpose.

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Enterprise Resource Planning (ERP)
In the continuing evolutionary process of resource requirements planning systems, ERP is a next evolution from
MRP II, which is even more comprehensive than MRP II is. ERP systems are the latest comprehensive software
packages that companies are using to help automate a variety of business processes. These sophisticated
software systems integrate most of the business functions in an organization. ERP systems automate
manufacturing processes, organize accountant’s books, streamline corporate departments like human
resources, and even made the reengineering possible. The ERP software’s such as SAP, PeopleSoft, and Oracle
allows operations managers to obtain real time information about inventory levels, customer orders, current
workloads, orders to vendors, and so on. This improved information allows for more timely, better, and much
quicker decisions than ever before.
ERP systems consists of many software modules that can be separately purchased to help manage many
different activities in different functional areas of a business. For example, SAP’s R/3 software, the largest
selling ERP software, offers modules for sales and distribution, financial accounting, work flow, industry
solutions, materials management, production planning (including MRP and CRP), quality management, plant
maintenance, and project systems. ERP systems require a major commitment and investment, often require
companies to modify some of their processes to accommodate the software, and can take many years to
implement.

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The Just-In-Time (JIT) Manufacturing Philosophy
It is no longer good enough for firms to be high-quality and low-cost producers. To succeed today, they must
also be first in getting products and services to customers fast. Quick response to market demands provides a
powerful, sustainable competitive advantage. Indeed, time has emerged as a dominant dimension of global
competition, fundamentally changing the way organizations compete. Firms like, Xerox, HP, Motorola, Honda,
GE, Toyota, Sony, and Boeing are using JIT as a weapon in speeding market responsiveness. To compete in this
new environment, the order-to-delivery cycle (the elapsed time between the moment that a customer places
an order until the customer receives the order) must be drastically reduced. The following figure illustrates this
important concept. JIT is the weapon of choice today in reducing the elapsed time of this cycle.

Figure: The time from Order-to-delivery cycle

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In the traditional view of manufacturing, a key objective was to fully utilize production capacity so that more
products were produced with fewer workers and machines. This kind of thinking led to large queues of in-
process inventory waiting at work centers in manufacturing. Large queues meant that machines and workers
never had to wait on partially finished products to come to them; therefore, capacity utilization was very high
and production costs were low. Unfortunately, large queues of in-process inventory also meant that products
spent most of their time in manufacturing just waiting. With this arrangement, companies would be ill
equipped to compete in today’s time based competition.
The following figure illustrates that this kind of traditional thinking can be deadly to companies that want to
use speed as a weapon. In this figure, let us say that a firm is operating at point A, with a 96 percent capacity
utilization and a 50 day manufacturing lead time. But if it is operating at point B, the capacity utilization is 60
percent and the manufacturing lead time is only 10 days. To shorten production lead times, 100 percent
capacity utilization must not be the predominant objective. In JIT manufacturing, drastically reducing the
elapsed time of the order-to-delivery cycle has displaced the objective of 100 percent production capacity
utilization in traditional manufacturing.

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There are many opportunities to speed up every step
in the order-to-delivery cycle. An important way to
reduce manufacturing lead times is to reduce queue
lengths and waiting times of partially completed products
at work centers in manufacturing by using queueing theory
and queueing software. Another more often used way
to reduce manufacturing lead times and work-in-process
(WIP) inventory is by slightly increasing the production
capacity.

Figure: High capacity utilization: The

enemy of time based competition

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Prerequisites for JIT manufacturing
The main objective of JIT manufacturing is to reduce manufacturing lead times, and this is primarily achieved
by drastic reductions in WIP. The result is a smooth, uninterrupted flow of products throughout production.
Most successful JIT applications have been in repetitive manufacturing, operations where batches of standard
products are produced at high speeds and high volumes with materials moving in a continuous flow. The Toyota
automobile factories where JIT have started, are perhaps the best example of the use of JIT in repetitive
manufacturing. In these factories, the continuous flow of products makes planning and control rather simple,
and JIT works best in these shop-floor situations. Successful use of JIT is rare in large, highly complex job shops
where production planning and control is extremely complicated. Smaller, less complex job shops have used JIT,
but these companies have taken many steps to change operations so that they behave somewhat like
repetitive manufacturing. Hence, JIT does not come free – certain changes to the factory and the way it is
managed must occur before the benefits can be realized. Among these changes are:
1. Stabilize production schedules
2. Increase production capacities of manufacturing work centers.
3. Improve product quality.
4. Cross-train workers so that they are multi-skilled and competent in several jobs.
5. Reduce equipment breakdowns through preventive maintenance.
6. Develop long-term supplier relations that avoid interruptions to material flows.

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At Toyota, for instance, there are both stable and level production schedules. The production schedule is
exactly the same for each day of the month. This means that the same products are produced in the same
quantities in the same sequence every day of the month. This approach to the MPS simplifies parts explosions,
material flows, and worker job assignments. If JIT is to work, stable and level production schedules are
necessary.
A fundamental requirement for JIT is to increase the production capacity of manufacturing work centers.
Production capacities are usually increased in two ways, increasing production rates and reducing setup times
at work centers. (Setup time is the time it takes to adjust the machine settings, replace materials, change tools,
and do everything it takes to change over from producing one product to a different one at a work center).
By improving product quality, cross-training workers, reducing equipment breakdown through preventive
maintenance, and establishing reliable workflows from suppliers, interruptions to production are minimized.
Because workers are trained on several jobs, they can be moved about to other jobs as needed to work off any
imbalance in work flows that may be caused by either quality problems or machine breakdowns.
With these factors present in manufacturing, the ultimate success of JIT is vastly increased.

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Elements of JIT manufacturing/production:
The JIT can be discussed by examining its important components or elements: the underlying assumptions, its
approach, its method of planning and controlling production, and several of its ongoing activities.
Eliminating Waste
Eliminating waste of all kinds is the deep-seated ideology behind JIT. Shigeo Shingo, a JIT authority at Toyota,
Identified seven wastes in production that should be eliminated, which are described as follows:
1. Over production. Make only what is needed now.
2. Waiting. Coordinate flows between operations, and balance load imbalances by flexible workers and
equipment.
3. Transportation. Design facility layouts that reduce or eliminate materials handling and shipping.
4. Unneeded production. Eliminate all unneeded production steps.
5. WIP Inventories. Eliminate by reducing setup times, increasing production rates, and better coordination of
production rates between work centers.
6. Motion and effort. Improving productivity and quality by eliminating unnecessary human motions, make
necessary human motions more efficient, mechanize, then automate.
7. Defective products. Eliminate defects and inspection. Make better products.

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Enforced problem solving and Continuous improvement.
In traditional manufacturing, in-process inventories allow production to continue even if production problems
occur; thus high machine and worker utilization is achieved. If defective products are discovered, machines
malfunction, or material stock outs occur, in-process inventory can be used to feed what would otherwise be
idle workers and machines. The following figure illustrates how in-process inventory covers up production
problems in traditional manufacturing. But, behind JIT is the continuous drive to improve production processes
and methods. Towards that end, JIT strives to reduce inventories because high inventory levels are thought to
cover up production problems. By drastically reducing in-process inventories, production problems are
uncovered and production stops until the causes of the production problems are solved. Only when the
machine is fixed, or the cause behind the stock out is found and corrected – only than can the production
begin again. Thus, JIT is really a system of enforced problem solving. In other words, the continuous
improvement system of JIT enforces the managers to continuously study the potential problem areas and solve
them. Hence, continuous improvement is central to the philosophy of JIT and is a key reason for its success.

Figure: Uncovering production

problems by reducing inventories.

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People Make JIT Work
Businesses ultimately succeed or fail because of their people. JIT is no exception to this rule. Because JIT is a
system of enforced problem solving, having a dedicated workforce committed to working together to solve
production problems is essential. JIT manufacturing, therefore, has a strong element of training and
involvement of workers in all phases of manufacturing.
First, and foremost, a culture of mutual trust and teamwork must be developed in an organization. Managers
and workers must see each other as coworkers committed to the company’s success. Work teams are
encouraged to meet together to search for long-term solutions to the causes of production problems. Workers
are also encouraged to suggest better ways of doing things from small suggestions to strategic issues. Along
with an open and trusting culture, an attitude of loyalty to the team and self-discipline must also be
developed. Workers are not free to go off on their own and try any method of doing their work according to
any standard that they choose; rather, methods and standards agreed to by the team prevail.
Another important factor that is crucial to the success of JIT is the empowerment of workers. This means that
workers are given the authority to take the initiative in solving production problems. Rather than waiting for
guidance from above, workers have the authority to stop production at any time for such things as quality
problems, machine malfunctions, or safety concerns. Groups of workers are then encouraged to work together
to quickly get production going again. Having workers actively involved in problem solving is the objective of
worker empowerment.
People, suppliers, workers, managers, and customers must all be motivated and committed to teamwork for JIT
manufacturing to be effective.

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Total Quality Management (TQM)
JIT manufacturing depends on a system of TQM being in place. Successful JIT manufacturing goes hand-in-hand with
an organization-wide TQM culture. Just as everyone has to be involved in JIT, so also must everyone be involved in
TQM. Total commitment to producing products of perfect quality every time and total commitment to producing
products for fast delivery to customers have one essential thing in common: both are finely focused on the overall
goal of satisfied customers.
Parallel Processing
An important part of JIT manufacturing is to exploit parallel processing wherever possible. Wherever possible, if the
operations are performed in parallel (simultaneously) than performing in series (one after the other), manufacturing
lead time can be reduced to a great degree. This concept is similar to simultaneous engineering, i.e. by doing product
design and process design simultaneously, the time to bring new products to market is reduced. The same approach is
taken in companies that want to engage inn time-based competition through JIT. Many operations can be made
parallel simply through scheduling. If not possible, layout redesign and product redesign may be needed to achieve
parallel processing. However, the additional costs in doing so can usually be more than offset by significant reductions
in manufacturing lead times.
JIT Purchasing
JIT purchasing differs from the traditional perspective on purchasing. In JIT purchasing, companies tend to adopt long-
term relationships with fewer suppliers. In exchange for long-term contracts, suppliers sometimes agree to special
conditions such as locating the supplier plant within a certain radius of the JIT company, adopting total quality control
techniques, and submitting to frequent inspections by company executives and quality specialists.

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Benefits of JIT manufacturing
Some of the benefits claimed for JIT systems are:
1. Inventory levels are drastically reduced.
2. The time it takes for products to get through the factory is greatly reduced, thus enabling factories to
engage in time-based competition, using speed as a weapon to capture market share.
3. Product quality is improved, and the cost of scrap is reduced. Product quality improves because of worker
involvement in solving the causes of production problems.
4. With less in-process inventory, less space is taken up with inventory and materials handling equipment.
Workers are close together so that they can see each other, communicate more easily, work out problems
more efficiently, learn each others jobs, and switch jobs as needed. This promotes teamwork among
workers and flexibility in work assignments.
5. Because of the focus in JIT manufacturing is on finding and correcting the causes of production problems,
manufacturing operations are streamlined and problem free.
To obtain the benefits from JIT, however, companies have had to invest heavily in engineering studies and
equipment modifications to achieve drastically reduced setup times, establish training programs that train
workers for several jobs, and develop different business strategies to come up with stable and level production
schedules. Unless the manufacturers are willing to commit to these new investments, they cannot expect to
reap the benefits of JIT.

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