Requirement Generation to Material Requirement Planning - ERP Tools

Silently the need to order only what was really needed crept in on the horizon. No longer could a company afford to order some of everything and keep a little of everything on hand. Orders had to be based on what was being sold. What was already in inventory or committed to arrive on a purchase order offset this requirement. Forecasting these requirements was impossible and the tried and true reorder point system failed miserably to effectively manage those purchased parts. Excess and obsolete inventory became a real problem.

With the invention of the computer there was an epiphany in materials management. According to Dick Ling, CFPIM, in the 1950s at an IBM plant in Poughkeepsie, NY, the first requirement generation software was written. APICS - The Educational Society for Resource Management, was founded in 1957 as the American Production and Inventory Control Society in response to this epiphany. This professional organization was founded by a handful of visionaries who felt there was a need for education, training, and the formalization of the best methods used to manage the two most critical resources in an enterprise—inventory and direct labor. A dictionary of terms and their meaning was tangible evidence of this organization’s role in the new industry. This standard allowed systems to quickly evolve and improve functionality to the level that we know today.

The establishment of APICS was followed in the early 1960s by a bill of material processor written on a 1400 Disk Computer in Milwaukee. In 1967 IBM helped bring to market the first management operating systems (MOS), including PICK. IBM continued to bring field developed programs (FDP) to plan and manage inventory to the general market as a way to market the computers they built. By this time, the 360-model computer was on the scene and the first Material Requirements Planning (MRP) systems continued to develop in functionality.

By the early 1970s the name MRP was in common use. In 1975 Dr. Joseph Orlicky from IBM wrote the classic work, MRP: The New Way of Life in Production and Inventory Management. This work documented the state of the art at the time including Dr. Orlicky’s own experience developing and implementing MRP systems as a Director of Production Control for a major farm machinery manufacturer. APICS began the MRP crusade to bring the required body of knowledge to support and adequately utilize this new tool to the manufacturing enterprise. While this seems like ancient history, it is important to realize that many of these early pioneers are still around today to marvel at the progression of technology started not so long ago.

MRP, or little MRP, represented a huge step forward in the planning process. For the first time, based on a schedule of what was going to be produced and supported by a list of materials that were needed for that finished item, the computer could calculate the total need and compare it to what was already on hand or committed to arrive. This comparison could suggest an activity to place an order, cancel orders that were already placed, or simply move the timing of these existing orders.

As George Plossl, one of the fathers of MRP, says so eloquently, “MRP calculates what do I need, compares it to what do I have and calculates what do I need to go get and when.” This is the real significance of MRP. For the first time the material planning function could answer the question of when. Rather than being reactive and waiting until the shortage occurred, the planner could be proactive and time phase orders, including releasing orders with multiple deliveries. These larger orders with multiple delivery dates typically can provide a significant cost advantage for the company because of favorable vendor pricing.

Before MRP, only the very high dollar parts could have this much control because of the amount of time that it took to analyze activity and plan replenishment. All calculations before the advent of the computer were done by hand or on a rudimentary adding machine or slide rule. A small change caused the planner to recalculate the whole plan every time. Clearly there was not enough time in the day to accomplish this for every part used by the company. However, any production person knows the importance of every last part, no matter how small or inexpensive. Even those low dollar items that look so unimportant on the planner’s schedule can stop a very valuable and expensive shipment.

The Murphy’s Law of planning states that these shortages will always be identified at the last possible minute on the most critical shipment. Approved substitution lists were the norm to allow the product to still ship as scheduled when the right parts were not there. Tracking the real as-built condition of the final product was a paperwork blizzard. Even with only relatively few shortages, attempting to work around missing parts was a huge source of aggravation and inefficiency for production personnel. In addition, missing parts contributed to quality problems and decreased productivity.

The quality problems came from starting and stopping the manufacturing process. This problem lead to difficulty communicating the exact level of completion. Additional time was required to complete the product because the job must be put aside due to the shortage, found when the missing part arrives, and then taken to the next level of completion. Sufficient work in progress had to be staged on the shop floor to provide possible work for employees in the event that a shortage is discovered.

The ability of the planning system to schedule all the parts at the same time such that production could be started and run efficiently was a tremendous step forward for productivity and quality. Now orders could be completed from beginning to end without incurring all the inefficiencies and complications of repeated starting and stopping.

Some simplifying assumptions were needed to allow the computers of the day to make the required calculations. One of these assumptions was that orders should be started at the last possible date to provide for minimal inventory while still serving the customer’s need on time. This process is known as backward scheduling. All orders were scheduled backwards from the desired completion date to calculate the required start date.

In project management language, all operations were placed on the critical path. This meant that the earliest date the operation could start was the same as the latest date the operation could start. There was no slack time in the schedule. The downside of this assumption was that if there were any hiccup in the execution of the plan, the customer’s order would most likely arrive late since there was no recovery time in the schedule. If one part needed for the finished part was going to be late, there was no automatic way to know the impact on the other needed parts.

Getting an expedite list by customer order was a manual implosion/explosion process worthy of Sherlock Holmes. Slack was built into the schedule through conservative lead times. Even with these simplifying assumptions and other problems, the benefits far outweighed the costs and more companies began to embrace the tools and techniques of MRP.

During the 1960s and 1970s, MRP and the accompanying tools and techniques began to be well understood and show benefits for the manufacturing operations that implemented them well. The MRP crusade was born! Companies were able to gain control over their material purchases and order only what was needed and when. Productivity and quality significantly improved in the companies that effectively implemented these tools. The inventory asset was significantly reduced and cash flow dramatically improved as a result. This provided a tremendous competitive advantage to those companies effectively using these new tools. As more companies were attracted toMRP, the level of sophistication in the use of the tools also increased.

As more people learned how to utilize this material planning methodology they quickly realized something very important was missing. Not only did you need all the parts to get the job done, but you also must have sufficient capacity to get the job done. The idea of closing the loop with a capacity plan was introduced and closed loop MRP, or big MRP, was born.

During this same time the computers were increasing in power and decreasing in price. The computing capacity to do the extra mathematical computations was affordable and available. Some may question which came first, the computer power or the recognized need? This pattern will continue to repeat itself many times right up to the current times. The fact remained that the recognition of the need was there and the computational power was available to accomplish the calculations.

Now, not only could the materials be calculated, but also, based on those material plan priorities, a capacity plan could be calculated. Defined paths for the production process were required in addition to the list of materials needed for each of the finished parts.

These paths defined upon which machines the parts would be built so that capacity and load could be planned and scheduled. Many options existed in how to set up capacity planning. If there were a desire to manage capacity at a single machine,then this single machine had to be an individual work center. If the level of visibility were only at a group level, then this group of machines could be planned as a capacity center. Even with all these decisions and set up, the potential of having a feasible production plan led many companies down this path.

Another critical assumption needed to complete the computations on the computers of the day was that infinite capacity existed at each of these work centers to satisfy this calculated demand when it was required. This is still a very common drawback for using these tools today. Every practitioner knew that infinite capacity was not an accurate reflection of reality. However,for the first time,reports were available where the overload conditions could be identified and proactively resolved for each work center.

The problem was visible on a proactive basis planned into the future. This allowed the preparation of plans and options to address the overload situation rather than only react when the problems arose. In reality, lead times were typically long enough and contained enough slack time to allow work centers to smooth out unbalanced workloads in the short term and still support the overall required completion of the work order. Closed loop MRP represented an enormous step forward in the material and capacity planning process.The practitioners of the day continued to get more sophisticated in the use of these computer tools.

Once again the technology improved simultaneously with the identification of the need that as every piece of inventory moved, finances moved as well. If a part were received at the factory, not only should the inventory on hand balance increase, but there should also be a corresponding increase in the raw material inventory asset on the financial books.

This is balanced by an increase in the liability level in the accounts payable account. As a group of parts moves to the shop floor to build the finished product, the raw material asset should decrease and the work in progress asset should increase. The labor and overhead charges from the shop floor personnel are also added to the work in progress asset account with an offset to the accounts payable account. When the finished part completes its path through the shop, the work in progress asset account goes down and the finished goods asset account increases.

As the finished product is sold, the finished good asset account decreases and the accounts receivable asset account increases. At every step of the way, as the inventory moves, financial accounting moves with it—in duplicate—with balanced credits and debits. The power and affordability of available technology were now able to track this inventory movement and financial activity. Having these items linked provided rich insights and analysis of the impact of manufacturing on the financial results of the company. Oliver Wight, one of the key thought leaders during this time, named this integrated system Manufacturing Resource Planning (MRPII).

MRPII does not mean that MRP was not done correctly the first time or that it is the second part in a series of sequels. It means that it is a second significant evolution of this critical planning tool. MRPII closed the loop not only with the financial accounting system,but also with the financial management system. Now all the resources of a manufacturing company could be visible,planned,and controlled.

In 1985,Dick Ling and others brought Sales and Operations Planning(S&OP)to the management toolbox.Ling recognized the critical importance of connecting the financial plan, the operations plan,and the sales plan. Significant financial assumptions are made in the budget process about the level of production,sales,and inventory.

The S&OP approach was the eagle's eye over the performance of the business.S&OP used information from the detailed planning and control system to manage demand at the operational level.Because of the difficulty of linking to the detailed data, this process was accomplished off-line in a manual process and reviewed on a monthly basis. The "what if' analysis was difficult to accurately perform. The key operating word in S&OP was that it was better to be roughly right than exactly wrong. The demand management process continues to be a challenge today.Only recently,with the advances in middleware and other technology,does the promise of S&OP appear to be able to achieve reality.

Within the commercially available systems of the day, production activity control data collection systems collected time and material from the shop floor to compare these actual costs against the expected costs. The APICS dictionary defines MRPII as, “a method for the effective planning of all resources of a manufacturing company.” For the first time a company could have an integrated business system that provided visibility of the requirements of material and capacity driven from a desired operations plan, allowed input of detailed activities,translated all this activity to a financial statement, and suggested actions to address those items that were not in balance with the desired plan.

MRPII was in reality a closed loop communication system within the four walls of the company. Companies quickly realized that to be competitive,there was a requirement for this centralized real-time communication system.

As every good manager knows, good information leads to good decisions. The advances in computer technology allowed these decisions to be made more quickly as the information became more accessible in real-time. The integration of these information systems provided the potential for competitive advantage. Industry best practices were developed and standardized so that the target and process for successful implementations was well known.

The early pioneers of MRPII,including Oliver Wight and many others developed the “proven path.” These lessons were learned the hard way by the early pioneers.They now could be shared so that others could be spared the pain and agony of their discovery.A checklist was developed to assess the quality of an implementation based on best practices of successful companies. This document,The Oliver Wight ABCD Checklist for Operational Excellence, is still published by the Oliver Wight International.

This little book describes in detail the behaviors and expected business practices required to accomplish the best return on investment from an MRPII implementation.This checklist is a succinct summary of the journey to success.

The next major shift during the late 1980s and early 1990s was that the time to market was getting increasingly shorter. The first to market with a product made the most long term profit.Lead-times expected by the market continued to shorten and customers were no longer satisfied with the service level that was considered world class only a few years earlier.

Customers were demanding to have their products delivered when, where,and how they wanted them.Companies began to develop and embrace the philosophies of Just in Time (JIT) and supplier partnerships as a way to remain competitive. It was no longer possible to remain competitive by focusing only within the four walls. The JIT crusade brought the importance of reliable suppliers to focus.During the same time frame the cost of goods sold was shifting drastically from labor to purchased materials. The Association for Manufacturing Excellence(AME)was formed to address the need for the development of new tools and techniques. APICS shifted from the MRP crusade to the zero inventory crusade.

To bring some perspective to this shift,during the 1940s and 1950s it was not uncommon for a company to have 40 to 60% of the cost of goods sold contributed by labor costs.Given this fact,it was no wonder companies automated and focused on the productivity of labor.Labor was the driving force for profitability.This was the major focus of the planning systems—get the material to the operation and never allow that operation to run out of work.It was better to have extra inventory than allow the operation to run out of work.

Beginning in the 1990s the focus shifted to material becoming the driving force for profitability.Many companies found that material had grown to 60 to 70% of their cost of goods sold while the labor cost declined to 10 to 20%.Major improvement in labor productivity only yielded small improvement in the overall company’s profits.To improve the overall financial performance of the enterprise,the focus of the planning system logically shifted to effectively planning material and optimizing material utilization. Investment in improvements in material utilization could result in big returns. Carrying extra inventory was no longer a competitive business practice.

At the same time,the response lead-times expected by the market continued to shorten and customers were no longer satisfied with the service level that was considered world class only a few years earlier.As previously stated, customers were making more demands on their ordered products.Companies began to develop and embrace the JIT and supplier partnerships as a way to remain competitive.

JIT evolved to Lean Manufacturing and combined the concepts of JIT with quality concepts like Total Quality Management, Six Sigma, and 5S. Competitiveness and profitability was now something that not only the production department focused upon, but the whole enterprise had to focus on this goal. Bringing sharp focus to this holistic approach was the first book by Dr.Eli Goldratt, The Goal.Rather than focusing on those things that traditionally were thought to have value,Dr.Goldratt brought attention to the fact that everything has to be focused on the goal of the company,making money now and into the future. All enterprise resources had to be aligned to those goals and integrated in their approach to reach the corporate objectives. No longer could departments launch things over the wall to the next department.Integrated resource management was the focus for a competitive company.

Empowering employees was needed for providing the agility that was required to compete in the market.How can the employees make good decisions without good information? Companies needed a single management system that would be the repository of data and provide valuable information on demand. No longer was it tolerable to submit a request to the information technology(IT) department (or management information systems [MIS] department)and wait 9 man-months of programming time to get this critical information. Information was quickly needed at the decision makers’ fingertips,which then could be used to make good business decisions.

The cost of technology continued to plummet and the advent of the personal computer revolutionized once again the face of business management systems.Quickly the large inflexible mainframes were being replaced by new client-server technology.

The personal computer allowed users to gain access directly to their data for the purposes of analysis using spreadsheets and other tools.The power of these small personal computers soon exceeded the power of the large mainframes that were routine only a few years earlier.It was now possible to run a fully integrated MRPII system on a small personal computer.

The cost of systems now made this integrated solution available to even the smallest companies.Not only did small companies utilize this novel approach to computing, but the largest companies also began to move quickly from the centralized mainframe system to these more agile client-server systems. A whole new breed of software companies came to the forefront to handle this next stage of evolution and ERP; Enterprise ResourceManagement (ERP) was now on the scene.

The changing pace of technology had once again leveraged forward the planning and control systems in recognition of a real business need. In addition, unlike previous evolutions, the ERP software companies opened the door for these critical business systems to be implemented in companies that were not manufacturing companies.

ERP is far more than just MRPII running on client-server architecture.ERP includes in its breadth all the resource planning for an enterprise; this includes product design, information warehousing,material planning,capacity planning,and communications system to just name a few. These critical business issues affect both manufacturing companies and companies that desire to achieve competitiveness by best utilizing its assets including information. The introduction of human resource software as a standalone solution by PeopleSoft in 1989 and the rapid sales growth of ERP systems to nonmanufacturing companies reinforces this point.

Understanding the history and evolution of ERP is essential to understanding its current application and its future.ERP is not just MRPII with a new name.It is the next logical sophistication level in an evolutionary series of computer tools that began in the 1950s.The functionality has grown very similar to rings on a tree.Each layer has built on the fundamentals and principles developed in the previous layer.

As the power and sophistication of the computer continues to grow,the continued development of tools and techniques to collect data,provide information and to better manage the enterprise also grew.However,a disruptive technology now challenges this orderly evolution—the Internet.

Early adopters had begun to use the Internet to capture customer orders and provide order status visibility back to customers. The real power of the Internet is not selling books to customers but rather sharing information without borders and restrictions. The Internet grew at unprecedented rates as people desired direct contact for information without restriction or interference.Not surprisingly,this new technology also brought significant business opportunities

.In the late 1990s,the whole Internet rage birthed the advent of the dot coms—companies that were totally dependent on the use of the Internet to deliver a product or service. While the dot coms evaporated by the first couple of years into the new millennium,their impact will be forever felt on those businesses that survived. The Internet changed how people interacted with computers. Instead of cryptic command and transaction codes,people were able to ask questions in regular language.Using sophisticated search engines,they could get an answer that fit— from anywhere in the world—with just a few clicks.

Not surprisingly,this new technology also has had a substantial impact on enterprise systems.In the same way customers asked if the software were client/server enabled as they desired to move off the mainframe,today’s customers now want software that is Internet compatible. Almost all of the existing ERP companies raced to put a web front end onto their software to remain competitive and hopefully survive.Only one,People- Soft,actually rewrote its entire application specifically for the Internet because it recognized the significant importance of this new technology. The Internet changes how transactions are fundamentally done and how communication with suppliers and customers can be accomplished.Other startup companies also raced to the enterprise application market with pure web applications in the hopes of capitalizing on this new technology.The Internet promises to be as significant a change for business as the invention of the computer was so many years ago.

Another important thing to remember is that under the covers of the most sophisticated enterprise planning system today is the same elegantly simple mathematical model introduced in the first MRP system.This model of “what do I need, what do I have,what do I need to get, and when” is the backbone of the integrated supply chain.

Requirements are taken from the customer or internally developed forecasts. These requirements are compared to what is on hand A calculation of what is needed is then completed, including an offset of the estimated lead-time to determine when that item is required from the supplier. This process of “what is needed, what is available, what is required and when” is accomplished by each link of the supply chain. New advances in technology allow these calculations to be completed very quickly and instantly communicated electronically along the entire supply chain.

A big conflict occurs between the historical assumptions,current technology and customer expectations.Figure illustrates an inventory-centric model.

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