Manufacturing Resource Planning Models under Uncertainty and Commonality for Multi-products Multi-period Multistage Production Environment
Chapter 3: Literature Review
In this chapter, the following areas of research are investigated to lay the foundation for the intended mathematical models: manufacturing resources planning – background, benefits and limitations; manufacturing resources planning models under different uncertainties; and commonality in manufacturing resources planning models.
3.1 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) (McGarrie, 1998), and ABC classifications, to name a few (Ptak, 1991). Gilbert and Schonberger (1983) provide a history of production control, while Lee (1993) comments that 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 1950’s, MRP were the first off-the-shelf business applications to support the creation and maintenance of material master data and bill-of-materials (demand-based 14 planning) 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 (Klaus et al., 2000). 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’ (Towers et al., 2005): 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 of the first three questions lie in the blueprint of 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 method, 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, 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 advent of computer system 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 (Towers et al., 2005).
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 (Chen, 2001, Chung and Snyder, 2000, Mabert et al., 2001). 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 micro computers (Siriginidi, 2000). 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 (Klaus et al., 2000). The next stage of MRP II evolution was just-in-time (JIT) methodology that combined with the plummeting price of computing to create the islands of automation in 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 (Koh, 2004).
3.1.1 Material requirement planning (MRP)
Kulonda (2000) descried the evolution of MRP, dividing it in 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 require 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. This can be visualized in part level count charts shown in 3.1.
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 information on lead times and needs. Three basic MRP inputs to the system are: 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 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 the customer needs (Hines, 2004). The successes and disappointments of MRP as well as the key shortcomings of MRP (material requirement planning) are studied by Plenert (1999). He investigates consequences of the deficiencies means if they are not corrected. 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 (Wortmann, 1998, Wilson et al., 1994, Luscombe, 1994). 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 under-estimate the extent to which they have to change in order to accommodate their purchase. The effective management of technological change requires transformational leadership (Brown, 1994).
- 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. To this regard, several authors have underlined the importance of a sound involvement of shop-floor workers (Sommer, 1998, Weill et al., 1991).
- 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 successful implementation of MRP systems (Duchessi et al., 1998).
Material Requirements Planning (MRP) has fallen into disfavor in 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 (Berger, 1987). 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 other (Plenert, 1999). 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 (Plenert, 1990b, Ritzman et al., 1984, Chase and Aquilano, 1995, Lee and Schniederjans, 1994, Nahmias, 1997, Schroder et al., 1981). 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) (Plenert, 1999). 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.
3.1.2 Manufacturing Resource Planning (MRP II)
The theory of MRPII has been well discussed in the literature and focuses are normally put on concept, methodology, application and future development (Ip and Yam, 1998). MRP II (Manufacturing Resource Planning) is a hierarchically structured information system which 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 (Zapfel, 1996):
- Business Planning including Resource Requirements Planning (RRP) and
- Master Production Scheduling (MPS) including Rough-cut Capacity Planning (RCCP).
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 which 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 (Yusuf and Little, 1998); production operations-inventory production control, purchasing with production planning, Capacity Planning and Master Scheduling (Turbide, 1990); sales, logistics, production, engineering and supporting functions, the broad ingredients of almost all Manufacturing organization (Ip and Yam, 1998). It may also include costumer 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 the mutual benefit (Turbide, 1990). 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.
Ip and Yam (1998) 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 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 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 a Material Resource Planning (MRP) (Higgins et al., 1998).
22.214.171.124 MRP II definitions:
‘If I had to sum up MRP II in one word, the word I would choose is discipline. Allowed three words, they would be discipline/performance measurement’ – Sheldon (1991). He detailed the total implementation process, from inception to completion and divided the process into six steps, namely, education, common goal, fitness for use, accountability, performance measurement and systems/tools. In Table 3.1, the definition of MRP II is summarized.
Table 3.1: Definition of MRP II
MRP II is a well-defined process or set of calculations that is 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.
(Dougherty and Wallace, 1992)
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 which 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.
(Higgins et al., 1998)
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.
(Ip and Yam, 1998)
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.
(Towers et al., 2005)
126.96.36.199 MRP II benefits:
The potential benefits those may receive from the MRP II are summarized below:
- Empirical research suggests that companies 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 (Humphreys et al., 2001, Brown and Roberts, 1992, Roberts and Barrar, 1992).
- When customers and suppliers (internal or external) request information that have 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 (Broatch, 2001).
- 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 (Broatch, 2001).
- 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 (Nah, 2002).
- MRP II systems minimize the time and effort required to process business data and maximizes the application of that information. By facilitating data exchange throughout the organization, a MRP II system enables to coordinate such crucial activities as production planning, material planning, capacity planning and shop floor control (Plenert, 1999).
- MRP II is concerned mainly with 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 (Towers et al., 2005).
- 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 lower level of safety stock; reduce the average inventory level and reduce inventory investments to a minimum (Towers et al., 2005).
- 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 (Towers et al., 2005).
- 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 (Towers et al., 2005). MRP II provides better control over the quantity and timing of deliveries of raw materials, parts, sub-assemblies and assemblies to production operations.
188.8.131.52 Pitfalls of MRP II:
The main pitfalls of MRP II from various authenticated literature are listed below:
- Impressive though the benefits are, there is evidence suggesting that, as with so many similar technologies, few companies are able to maximize them. White et al. (1982) consider that 50 per cent of organizations do not achieve their objectives. Archer (1991) has said that 70 per cent of systems may be regarded as failures. Ho et al. (1992) has stated that ‘few firms have been able to realize the full potential offered by MRP II’. While relative percentages of successful and unsuccessful implementations differ from study to study, each demonstrates a surprisingly high failure rate.
- Implementation of MRP II system requires major managerial innovations and organizational changes in addition to the installation of computer hardware and software (Lau et al., 2002).
- 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 frequent should the user reschedule? Both Ho et al. (1995) and Sridharan and LaForge (1989) showed that rescheduling induces system nervousness, which leads to further underperformance.
- MRP II has been criticized by a number of authors on the grounds that few benefits accrue for high implementation costs (Burns et al., 1991, Sum and Yang, 1993). Unsuccessful MRP II implementation not only deprives companies of potentially huge benefits but also results in financial losses and disruptions in operations (Towers et al., 2005).
- 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 master production schedule (Zapfel, 1996).
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 (Porter et al., 1996).
184.108.40.206 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 (Humphreys et al., 2001).
MRP II failure have 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 (White, 1980, Kinnie et al., 1992, Wight, 1990, Wilson et al., 1994); 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 (Higgins et al., 1998).
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 (Humphreys et al., 2001).
3.1.3 Enterprise Resource Planning (ERP)
The Gartner Group of Stamford, CT, USA, coined the term ERP in the early 1970s to describe the business software system. The name ERP was derived from the terms material requirements planning (MRP) and manufacturing resource planning (MRP II). The maturity stage of ERP occurred in the mid-1990s. ERP is the third generation of planning software. Material requirements planning (MRP) was the first generation, manufacturing resource planning (MRP II) the second and ERP the third. The primary purpose of ERP is to create a seamless integration of interrelated information throughout the business organization. A system of software programs is used to develop the necessary links between the various business functions so that needed information is readily available. There are 8 (eight) major functions and 33 (thirty three) sub-functions, as well as 22 (twenty two) primary modules and several sub-modules (Umble et al., 2001). A typical ERP implementation takes anywhere from one to five years (Mabert et al., 2003). ERP system is not just a pure software package to be tailored to an organization but an organizational infrastructure that affects how people work and that it “imposes its own logic on a company’s strategy, organization, and culture” (Shehab et al., 2004, Davenport, 1998, Lee and Lee, 2000).
220.127.116.11 Definition of ERP
When customers and suppliers request information that have been fully integrated throughout the value chain or when executives require integrated strategies and tactics in areas such as manufacturing, inventory, procurement and accounting, ERP systems collect the data for analysis and transform the data into useful information that companies can use to support business decision-making. They allow companies to focus on core and truly value-added activities (Nah, 2002). These activities cover accounting and financial management, human resources management, manufacturing and logistics, sales and marketing, and customer relationship management. Table 3.2 shows definitions of ERP, cited in different literatures.
Table 3.2: Definition of ERP
ERP systems are enterprise-wide on-line interactive systems that support cross-functional processes using a common database. ERP systems are designed to provide, at least in theory, seamless integration of processes across functional areas with improved workflow, standardization of various business practices, and access to real-time up-to-date data.
ERP systems are complex and implementing one can be a challenging, time consuming and expensive project for any company.
ERP is not only an IT solution, but also a strategic business solution. As an IT solution, ERP system, if implemented fully across an entire enterprise, connects various components of the enterprise through a logical transmission and sharing of data.
(Norris et al., 2000)
ERP is a commodity, a product in the form of computer software.
(Klaus et al., 2000)
ERP is a development objective of mapping all processes and data of an enterprise into a comprehensive integrative structure.
ERP is a key element of an infrastructure that delivers a solution to business.
ERP a method for the effective planning and controlling of all the resources needed to take, make, ship and account for customer orders in a manufacturing, distribution or service company.
ERP system is a packaged business software system that allows a company to automate and integrate the majority of its business processes, and share common data and practices across the entire enterprise.
(Seddon et al., 2003)
ERP is a “do it all” system that performs everything from entry of sales orders to customer service. It attempts to integrate the suppliers and customers with the manufacturing environment of the organization.
(Shehab et al., 2004)
18.104.22.168 Benefits of ERP
ERP systems have certain advantages such as low operating cost and improving customer service (Shehab et al., 2004). In implementing an ERP solution, an organization can quickly upgrade its business processes to industry standards, taking advantage of the many years of business systems reengineering and integration experience of the major ERP vendors (Myerson, 2002). The practical benefits of ERP are divided into five aspects by Seddon et al. (2003): operational, managerial, strategic, IT infrastructure, and organizational (Table 3.3).
Table 3.3: Benefits of ERP
By automating business processes and enabling process changes, they can offer benefits in terms of cost reduction, cycle term reduction, productivity improvement, quality improvement, and improved customer service.
With centralized database and built-in data analysis capabilities, they can help an organization achieve better resource management, improved decision making and planning, and performance improvement.
With large-scale business involvement and internal/external integration capabilities, they can assist in business growth, alliance, innovation, cost, differentiation, and external linkages.
IT infrastructure benefits:
With integrated and standard application architecture, they support business flexibility, reduced IT cost and marginal cost of business units’ IT, and increased capability for quick implementation of new applications.
They affect the growth of organizational capabilities by supporting organization structure change, facilitating employee learning, empowering workers, and building common visions.
22.214.171.124 Disadvantages of ERP:
ERP systems have some disadvantages due to the tight integration of application modules and data. Huge storage needs, networking requirements and training overheads are frequently mentioned ERP problems. However, the scale of business process re-engineering (BPR) and customizations tasks involved in the software implementation process are the major reasons for ERP dissatisfaction. ERP projects are large, costly and difficult and that they require large investment in capital and staff and management time (Adam and O’Doherty, 2000). Yen et al. (2002) identified the following disadvantages of ERP:
- Its high cost prevents small businesses from setting up an ERP system
- The privacy concern within an ERP system
- Lack of trained people may affect ERP’s efficiency
- Implementation of an ERP project is painful
- Customization is costly and time-consuming.
Some of these shortcomings have been discussed by O’Connor and Dodd (2000). Implementation of an ERP system is an extensive, lengthy and costly process, typically measured in millions of dollars. An ERP implementation can take many years to be completed and cost tens of millions of dollars for a moderate size firm and upwards of $100 million for large international organizations (Mabert et al., 2000). Even with significant investments in time and resources, there is no guarantee of a successful outcome (Mabert et al., 2003). According to Shehab et al. (2004), the ERP systems are complex and implementing one can be difficult, time-consuming and expensive project for a company. It costs tens of millions of dollar for a medium sized company and $300-500 million for large international corporations. There are also some possible hidden costs that may include losing some very intelligent employees after the initial implementation is done, continual imp
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