Evolution of Manufacturing Environment
The field of production planning and control has undergone tremendous change in the last 50 years. Prior to the 1960s, inventory was controlled by a manual system, utilizing various techniques: stock replenishment, reorder points, EOQ (economic order quantity), and ABC classifications, to name a few. By the mid-1970s, enough experience of material requirements planning (MRP) had been gained and the importance of the master production schedule (MPS) was realized.
In the 1950s, MRP was the first off-the-shelf business application to support the creation and maintenance of material master data and bill-of-materials across all products and parts in one or more plants. These early packages were able to process mass data but only with limited processing depth. From the 1940s to the early 1960s, material control consisted of basic ‘order point’ formulae used to maintain a level average inventory balance. In 1965, Joseph Orlicky of the J. I. Case Company devised a new approach to material management, called material requirement planning (MRP) to serve as a platform to answer four questions, known as the ‘Universal Manufacturing Equation’: What are we going to make, What does it take to make, What do we have and What do we have to get.
The respective answer to the first three questions lies in the blueprint of the production plan: the master production schedule (MPS), the bill of material (BOM), and the physical inventory records themselves. While MRP was certainly a vast improvement over simple manual methods, the potential to stretch its boundary even further was soon recognized. A company’s production is constrained by not only its inventory need but also by equipment and personnel capacity, a facet of the plant not considered in the Universal Manufacturing Equation. MRP at its core is a time-phased order release system that schedules and releases manufacturing work orders and purchase orders so that sub-assemblies and components arrive at the assembly station just as they are required. As competitive pressures increased and users became more sophisticated, MRP evolved and expanded to include more business functions such as product costing and marketing.
In 1975 the next generation system, Closed-Loop MRP, integrated capacity factors into the MRP structure and used feedback on production status to maintain the validity of planning decisions as requirements changed. One crucial link in the manufacturing decision chain was still missing- the financial point of view. With the advent of computer systems in the early 1980s, the development of effective shop-floor scheduling tools had at that time been dominated by the top-down approach of manufacturing resource planning known as MRP II for controlling production operations.
The introduction of MRP II five years later served to bridge the gap. The operational Closed-Loop MRP plan, presented in material units such as pieces and pounds, was translated into financial dollar terms, enabling the entire organization to work off a single set of data. Simulation capability was also developed to answer ‘what–if’ planning questions with action-oriented replies. A major purpose of MRP II is to integrate primary functions (i.e. production, marketing, and finance) and other functions such as personnel, engineering, and purchasing into the planning process to improve the efficiency of the manufacturing enterprise. MRP II has certain extensions like rough-cut capacity planning and capacity requirements planning for production scheduling on the shop floor as well as feedback from manufacturing shops on the progress of fabrication.
Since the 1980s, the number of MRP II installations has continued to increase, as MRP II applications became available on mini and microcomputers. Like MRP, MRP II focused on the manufacturing process. Then MRP II was extended towards the more technical areas that cover the product development and production processes. Computer Integrated Manufacturing (CIM) supplied the entire conceptual framework for the integration of all business administrative and technical functions of a company, such as finance, sales and distribution, and human resources. The next stage of MRP II evolution was the just-in-time (JIT) methodology that combined with the plummeting price of computing to create the islands of automation in the late 1980s.
Over the last 60 years, many PPC systems and philosophies have been developed. These include material requirements planning (MRP), manufacturing resource planning (MRP II), enterprise resource planning (ERP), just in time (JIT), optimized production technology (OPT), advanced production scheduling (APS), supply chain management (SCM) and customer relationship management (CRM), either used individually or jointly.
Material Requirement Planning (MRP)
The evolution of MRP, dividing it into three different worlds. In the first world, MPS items typically are finished end items made to stock; MPS is stated in terms of forecast item demand converted to a series of production lots via time-phased order points or other rules. In the second world, the MPS could conceivably be stated as end items built entirely to order. If response time were not an issue, this approach would work quite well. Competitive force, however, often requires shorter response times, and inevitably some stocking of at least the longest lead time items occur. A relatively large number of different components are assembled to complete an end product that may have many specific variants. The third world of MRP has all the complexity of the second world with the additional complication that relatively numerous end items are built from relatively few raw materials.
Within the MRP system, a number of rules need to be specified. They include: acceptable lot sizes, safety stocks, and reject allowances. There are three principles of MRP. They are: dependent on demand for the final product; netting of inventory with expected deliveries and open orders to give a balance on-hand; and time phasing by using the information on lead times and needs. Three basic MRP inputs to the system are the master production schedule (MPS); the structured BOM for the MPS; and information on inventories, open orders, and lead times.
The aim of MRP systems is to minimize the cost of inventories and maintain customer service levels. MRP benefits include the ability to rapidly re-plan and re-schedule in response to changes in a dynamic environment. It is flexible and responsive to customer needs. The difficulties encountered by firms in the implementation process of MRP may be traced back to a number of factors.
- The complexity of MRP systems, which, of course, is a relative concept varying according to the level of knowledge and experience available inside the firm prior to implementation. There are usually several parameters to be initiated when implementing standard software.
- A considerable amount of intensive training is required. In fact, even though end-users are usually trained on a limited amount of functionality, key users need to acquire considerable technical competence.
- The organizations simply underestimate the extent to which they have to change in order to accommodate their purchase. The effective management of technological change requires transformational leadership.
- One of the issues largely felt as critical concerns the resistance of managers and personnel to the organizational change that is induced by the adoption of new technologies. In this regard, several authors have underlined the importance of a sound involvement of shop-floor workers.
- Valuable relevance has also been placed in the referring literature to technological problems, such as the unsuitability of MRP systems to optimize the internal workflow. In fact, frequent changes in schedules, a problem referred to as production nervousness, is an obstacle to the successful implementation of MRP systems.
Material Requirements Planning (MRP) has fallen into disfavor in the 1980s, as demonstrated by the extensive literature and conference material coming out of organizations like the American Production and Inventory Control Society (APICS) which discuss its shortcomings. MRP has received strong challenges of its effectiveness from Japan. It is believed that the only thing which is still keeping so many manufacturers with MRP is the difficulty in converting to others. Looking at MRP’s basic philosophy, we should be able to focus our scheduling only on what materials are needed, and when they are needed. MRP allows greater flexibility in product customization.
The most obvious shortcoming in MRP usage is its focus on labor efficiency. Labor is not the resource that we need to be efficient at, especially since it causes inefficiencies in our most critical resource, materials. We need to minimize our routings, shortening lead times as much as possible. We need to do our buffering using safety capacity (labor and machine capacity buffers), not safety stock (materials capacity buffers). We should minimize the non-value-added steps to make them as efficient as possible. The other big builders of inventory are time and the large batch size.
Manufacturing Resource Planning (MRP II)
The theory of MRPII has been well discussed in the literature and focuses are normally put on the concept, methodology, application, and future development. MRP II (Manufacturing Resource Planning) is a hierarchically structured information system that is based on the idea of controlling all flows of materials and goods by integrating the plans of sales, finance, and operations. The levels in an MRP II concept as outlined are applied to two plans in particular:
- Business Planning including Resource Requirements Planning (RRP) and
- Master Production Scheduling (MPS) including Rough-cut Capacity Planning (RCCP).
The business planning level of a company identifies its objectives. The business plan integrates the plans from sales, finance, and operations. The planned aggregate sales income, the planned cost of sales and operations, and all other expenses per planning period provide a basis for calculating the planned net income of the firm. The planning horizon is often a year or longer and a planning period a month or longer. To be feasible, the production plan is examined by the so-called resource requirements planning (RRP); that is, the resources required by a given aggregate production plan can be calculated. MRP II offers simulation capabilities and marries the operating system with the financial system so that what-if questions can be answered using the software system. If the business plan leads to resource requirements that are not feasible or which are unsatisfactory, the user can change the plan and a new simulation run is started to calculate the modified resource requirements. These steps can be repeated until a feasible and satisfactory business plan is achieved. The aggregate production plan, accepted by the user, forms an important basis for master production scheduling.
MRP II tends to link manufacturing, engineering, marketing, finance, and management; production operations-inventory production control, purchasing with production planning, Capacity Planning, and Master Scheduling; sales, logistics, production, engineering, and supporting functions, the broad ingredients of almost all Manufacturing organization. It may also include customer service- order entry, sales analysis, forecasting- with financial applications. The total is a single information control system that shares data among the various applications for mutual benefit. MRP II operates in a “pull” manner at the planning level. It is used for high-level planning of demand and inventory functions and preliminary capacity evaluations. Afford a master plan which integrates the technology and management of the strategic elements, problem definition, MRP II solutions, technical and procedural design, and implementation management in order to minimize the frustration and conflicts universally found in the MRP II implementation process as well as to reduce disconnection amongst different stages of the implementation process.
Ideally, MRP II addresses operational planning in units; financial planning in money terms and has a simulation capability to answer “what-if” questions. It is made up of a variety of functions, each linked together: business planning, production planning, master production scheduling, material requirements planning, capacity requirements planning, and the execution systems for capacity and priority. Outputs from these systems would be integrated with financial reports, such as the business plan, purchase commitment report, chipping budget, inventory production in money terms, etc. Manufacturing Resource Planning is a direct outgrowth and extension of Material Resource Planning (MRP).
MRP II definitions:
- MRP II is a well-defined process or set of calculations that are used to develop plans for the acquisition of the materials needed for production.
- MRP II is an information control philosophy that is often translated into software products containing, among other capabilities the MRP calculation function.
- MRP II is a system designed for managing all the resources of a manufacturing company. It consists of a comprehensive set of planning tools and techniques which integrate all functional areas of an organization
- MRP II is a method for the effective planning of all resources of a manufacturing company.
- Manufacturing resource planning (MRP II) is a long promising method that simplifies all the complex tasks of manufacturing management.
- MRP II is a hierarchically structured information system that is based on the idea of controlling all flows of materials and goods by integrating the plans of sales, finance, and operations.
- Manufacturing Resource Planning (MRP II) is a structured approach to optimize a company’s internal Supply Chain.
- MRP II is a method for the effective planning of all resources of the manufacturing company.
- MRP II is an effective management system that has excellent planning and scheduling capability which can offer dramatic increases in customer service, significant gains in productivity, much higher inventory turns, and greater reduction in material costs.
- MRP II system is a proactive materials strategy. It is a dynamic system and can adapt to change as it reflects upon the latest information in its planned order releases.
MRP II Benefits
The potential benefits those may receive from the MRP II are summarized below:
- Companies that are able to implement MRP II successfully report enhanced competitive positions, improved customer service levels, a better financial position, increased plant efficiency, heightened morale in production, more effective co-ordination with marketing and finance, more efficient production scheduling and reduced inventory levels, fewer component shortages, reduced manufacturing costs and lead times and improvements in inventory turnover.
- When customers and suppliers (internal or external) request information that has been fully integrated throughout the Supply Chain or when executives require integrated strategies and tactics in areas such as manufacturing, inventory, procurement, and accounting, MRP II systems collate the data for analysis and transform the data into useful information that companies can use to support business decision-making.
- MRP II systems, if implemented successfully, enhance and redesign business processes to eliminate non-value-added activities and allow companies to focus on core and truly value-added activities.
- The focus of MRP II computer systems is on the efficiency and effectiveness of the internal processes. It offers a way to streamline and align business processes, increase operational and manufacturing efficiencies and bring order out of chaos.
- MRP II systems minimize the time and effort required to process business data and maximize the application of that information. By facilitating data exchange throughout the organization, an MRP II system enables coordination of such crucial activities as production planning, material planning, capacity planning, and shop floor control.
- MRP II is concerned mainly with the scheduling of activities and the management of inventories. It is particularly useful where there is a need to produce components, items, or sub-assemblies, which themselves are later used in the production of a final product. Organizations can improve their overall customer service through consistently meeting delivery promises, shortening delivery times, and having products on hand when customer orders are received. MRP II can provide the necessary management information to ensure delivery promises can be kept. Where there is volatility in demand with unpredictable customer requirements and complex product structures, the information management capability of MRP II is particularly relevant.
- A well-implemented MRP II system can: provide an organization with reliable lead times; meet its service delivery performance requirements; contribute to stable and consistent lead times and well-informed decision-making; maintain a lower level of safety stock; reduce the average inventory level and reduce inventory investments to a minimum.
- The uncertainty of demand can be minimized due to the fact that MRP II can provide an organization with a clear picture of the demand for a particular item and when organizations know their future needs they can negotiate their purchase agreements with suppliers and receive quantity discounts improving their financial position.
- Successful MRP II users have typically reported as much as 15 percent gain in manufacturing productivity, 50 percent reduction in overtime, 33 percent reduction in inventory investment, and 80 percent reduction in inventory shortages. MRP II provides better control over the quantity and timing of deliveries of raw materials, parts, sub-assemblies, and assemblies to production operations.
Pitfalls of MRP II
The main pitfalls of MRP II are listed below:
- Implementation of the MRP II system requires major managerial innovations and organizational changes in addition to the installation of computer hardware and software.
- The heart of an MRP II system is MRP. MRP II does consider resource capacity level when generating the POR schedule. If an overload is identified, it will flag and recommend the user to reschedule. The question is how frequently should the user reschedule?. Rescheduling induces system nervousness, which leads to further underperformance.
- MRP II has been criticized on the grounds that few benefits accrue for high implementation costs. Unsuccessful MRP II implementation not only deprives companies of potentially huge benefits but also results in financial losses and disruptions in operations.
- MRP II concept is only partially suited to production planning in the case of uncertain demand. There is little help with the necessary aggregation and disaggregation process, especially when demand uncertainty exists. It is difficult for the user of MRP II to find a robust aggregate plan for the master production schedule.
Critics of MRP II points to the rigidity of the process: the logic that demands batches and multiple; the fixed lead time which takes no account of current capacity; the standard queue concept in front of a work center etc. Increasing competitive pressure, manifested by reduced lead times, smaller batch sizes, lower stocks, and ever more demanding customers have pushed MRP II to its limits.
Reasons for Failure
One of the principal reasons for the failure of MRP II and other large technologically sophisticated systems is that organizations simply underestimate the extent to which they have to change in order to assimilate what is in reality a new way of running the company.
MRP II failure has embraced technical problems; the difficulties involved in selecting and evaluating cost-effective MRP II packages and a host of historical, cultural, structural, and managerial issues; expertise needed to implement and use effective MRP II systems; lead times management; design of the production environment, routing, and quality information; Infinite capacity availability; batch and lot sizing.
An accurate demand forecast is an essential foundation for the successful operation of an MRP II system. Poor sales forecasting had been identified by senior management as one of the main reasons for the MRP II implementation failure.