- The Hands-On Group
- ERP & Lean

**How “Lean Manufacturing” Makes MRP / ERP Credible!**

Industry abounds with ERP installation disappointment. “We spent millions putting in the software, inputting our data, and training our people… I’m still looking for the benefits.” To quote a CEO of a large integrated steel mill.

The problem is often **not** the fault of the software.

An Enterprise Resource Planning (ERP) system can be an extremely powerful tool for management. The system plans future resource requirements through its’ scheduling algorithms. It then uses these schedules to predict the amount and timing for each of these resources. Manpower, materials, and cash flow are all readily predicted based upon the planning done within the system.

The value attained from ERP software derives from this ability to predict future requirements, and the consequences of taking the recommended actions.

**These recommendations, however, are generally in error when the data reflects “traditional” operating practices.**

- Excessive planned lead times bloat the company with too much inventory. They also force our customers to predict further into the unknown future, causing frequent changes.
- Large lot sizes add even more unnecessary inventory.
- Deep bills of material structures unnecessarily complicate operations, increase inventory, extend customer lead times, and add non-value-adding transactions.
- Just-In-Case “safety stocks and/or safety time” further dilute schedule reliability and add to the inventory burden.
- And all of the above add complexity and destroy the scheduling credibility; the very thing that ERP systems are employed to provide!

The remainder of this booklet will focus on why **Lean Manufacturing concepts are absolutely required** if ERP is to fulfill its promise of providing credible data.

We will also look at the tremendous impact attainable by combining the predicting capabilities of ERP with the streamlined productivity, and enhanced customer service, provided by adopting a lean operating philosophy.

Let’s take a moment to investigate how ERP systems work.

**ERP / MRP Is Simply A “Time-Phased” Shortage List**

The core scheduling algorithm of an enterprise system is the Material Requirements Planning (MRP) module. MRP does classical back-scheduling. It takes your lead times, lot size policies, and any safety stock reserves you’ve entered, and uses them to calculate all future operations needing to be performed. It then uses this information to compute the corresponding material, labor and cash flow requirements.

The primary questions MRP is designed to answer are:

**What do we really need?**

And,

**When do we really need it?**

Since MRP is simply a time-phased shortage list, let’s re-acquaint ourselves with the logic of the shortage list.

**How do you make a shortage list?**

Information RequiredWhat do we want to make? What does it take to make it? What do we have? What do we have to get? |
Information SourceSchedule Bill of material (BOM) On-Hand Inventory Calculate |

**Example:**

- The schedule calls for us to make 50 Mousetraps.
- The Bill Of Material (BOM) shows that each Mousetrap takes one Board, two Springs, one Clapper, and four Screws.

OK, Take a minute and fill in the above work sheet, i.e. calculate the shortage for each item.

Got it? Good.

The clapper is also made in-house. Use the information you computed, plus the information below, to calculate the amount of wire we need, i.e. its’ shortage amount.

- The Clapper Bill of Material (BOM) shows that each Clapper takes eight inches of Wire.
- Wire stock on hand: 200 inches.
- Calculate the shortage (net requirement) of Wire: _______________ inches.

You should have computed a wire shortage of 120 inches. This calculation is based on the “gross to net” algorithm of MRP. The system calculates **gross requirements** at the top level for each component part (50 mousetraps times the “quantity per” for each component, e.g. 1 clapper per mousetrap = 50 clappers required). It calculates **net requirements** by subtracting the quantity available (50 clappers required, minus the 10 clappers available = a net requirement of 40 clappers).

This now becomes the gross requirements for the next level. We need to produce **40** (not 50) more clappers. Each clapper requires 8 inches of wire, therefore we need 40 x 8 = 320 inches of wire (the gross requirement for wire). We then subtract the quantity on hand to determine the amount of wire we need to order. 320 inches required, minus 200 inches available = 120 inches net requirement (shortage).

MRP simply takes the logic of the shortage list and **time phases** it.

In the above example, if we need two days to assemble the mousetrap, the shortage materials would be required two days earlier than our mousetrap scheduled completion date.

**MRP Back-Scheduling Logic**

In MRP format, the example above shows the underlying “given” parameters in the first 3 columns: The lot size specified for the mousetrap is 1 (also referred to as lot-for-lot). The Lead-Time for this part number (mousetrap) is specified as 2 periods. There is no safety stock required on this part.

The next column shows the quantity currently on-hand.

Our Master Schedule calls for us to complete 70 mousetraps in period eight.

We can also see that 20 more mousetraps are expected to arrive into stock in period 3. This “scheduled receipt” is the quantity due to be received in the designated period, generally from an open Purchase Order (P.O.) or an open work order.

MRP calculates the numbers shown in red. We have 20 on hand. We will receive 0, and we will use 0 in period one. Therefore we’ll still have 20 at the end of period one.

We’ll receive 20 more mousetraps in period three, therefore we’ll have “projected on hand” our original 20 plus 20 new arrivals, for a total of 40 mousetraps at the end of period three.

In period eight, we need 70, but our projected balance is only 40, therefore we’ll have a “net requirement” (shortage) of 30.

Since there is no safety stock required, and no lot size issues, MRP “plans to receive” 30 mousetraps in period eight.

Since it takes two periods (the “lead time”) to produce mousetraps, MRP plans to release, i.e. have all of the required material on-hand to produce, 30 mousetraps in period six.

MRP then goes through a similar process for each of the components (derived from the bill of material).

Note that the planned receipt for wire is 100, even though the net requirement is only 20. What caused this? Your right! It was due to the lot size. In this case you can’t buy wire except in 100 inch increments, so MRP ordered 100 inches.

Note also, that MRP calculates that we’ll have 80 inches of wire left over after we make our scheduled 15 more clappers.

MRP is logical and straightforward. You tell the software what you want to produce and when, and you give it all the operating parameters you wish it to utilize, and it will plan accordingly.

**The problems arise when Just-In-Case “slop” is allowed to reside in the system, i.e. you are using a traditional, and not “Lean”, manufacturing philosophy.**

*** * * There Is More To This Article * * *** **For a printable PDF version of the entire booklet, or any of our other publications, please visit our Contact Page and complete our short request form.**

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