SMU Classification: Restricted

MGMT 611 Operations Management

Materials Requirements Planning (MRP) &

Enterprise Resource Planning (ERP)

Shantanu Bhattacharya
Aug-Oct 2023

S I N G A P O R E M A N A G E M E N T U N I V E R S I T Y
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Learning Objective

• MRP Introduction
• MRP Setup
• ERP Benefits & Pitfalls
• ERP Latest Trends

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Forecasting ® Inventory Policy ® Production Plan

• Apple forecasts the demand for ipad mini.

(Forecasting)

• Based on the forecast, Apple decides on how many

Ipad mini to produce/order. (Newsvendor or EOQ)

• Based on order information from Apple, Foxconn

decides on the production plan of components
needed. (MRP & ERP)

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Forecasting data analytics

Ø Firms need to be able to forecast well.

What are the most popular forecasting techniques?

o Time-series analysis
o Statistical regression
o Expert analysis (Delphi method)

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Time-series analytics

Sales

10-11 11-12 12-13 13-14 14-15 15-16 Time

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Statistical Regression: Using past data and

relationships

Sales

Real estate sales

GDP
Interest rate

Time

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What is Asia’s share of the earth’s landmass?

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Data analytics: Aggregating information in an

adaptive learning fashion

Value of prediction markets

ØAsia has 29.6% of the earth’s landmass.

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Boeing 737 Has Almost 6 Million Parts

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MRP in Services
• Imagine that you are the manager of Starwood
Hotels and Resorts Worldwide.
– How would you determine the amount of
soap, towel, food, and beverage?
– How many staff (receptionist, concierge,
house-keeping)?
– How many equipment (fax, TV, gym exercise
machines)?

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Motivating example
Suppose you are an assembly plant manager for Huffy mountain bicycles. Weekly
demand for men and women mountain bicycles are given as follows:

Week 1 2 3 4 5 6 7 8 Total

Men 20 40 30 0 80 20 0 60 250

Women 60 25 40 50 80 20 90 35 400

On-hand inventory: 200 units of men mountain bicycles; 100

units of women mountain bicycles; 100 bicycle wheels;

§ How many bicycle frames do you need for Week 5?

men
§ How many bicycle wheels do you need for Week 5?
§ Can you produce as much as you need?
§ When do you start production?

women
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Material Requirement Planning (MRP)

§ Computer-based information system that translates Master Production Schedule

(MPS - derived from aggregate planning) requirements for end items into time-
phased requirements for subassemblies, components, and raw materials. It has
evolved into what is now more commonly known as Enterprise Resource Planning
(ERP).
• Place orders and plan production & inventories for “components” (whose demand is
certain once MPS of end items are confirmed), taking into account
- Forecasts for end-item demand
- Procurement/Production lead times
- Demand and supply variability
- Batch sizing/lot sizing (due to setup costs)
• Good Demand Forecasts for “components”

- What?
- How much?
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- When?
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Overview of MRP Week

Mountain Bicycle
1
80
2
65
3
70
4
50

Week 1 2 3 4
Men 20 40 30 0
60 25 40 50
Aggregate Plan Women
80 65 70 50

disaggregate
Firm Orders Forecasts

Master Production Schedule (MPS)

MRP
Processing

Aggregate Plan: Production plan (or staffing plan) made at an aggregate level (or
product family), not Stock Keeping Unit (SKU) level (or individual product)
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Lot Sizing
§ Lot-sizing (rules used to determine how to meet
requirement)
• Lot for lot (L4L): Order as needed to meet demand
for the period.
• Fixed Order Quantity (FOQ): Order a fixed quantity.
If the FOQ value is 50 and (net) demand is 35, you
would still order 50 units. If demand exceeds 50,
then order multiples of 50.
- Why FOQ?

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Bicycles: Lead time =3 periods; multiplicity m

=4
Assume OH inventory to begin = 360

Period2 1 2 3 4 5 6 7 8 9 10

Qty. Needed 20 40 30 0 80 20 0 0 50 70
Production 0 320 80 0 0 200 280 0 0 0
schedule

Assume capacity per day = 200

Period2 1 2 3 4 5 6 7 8 9 10

Qty. Needed 20 40 30 0 80 20 0 0 50 70
Production 120 200 80 0 80 200 200 0 0 0
schedule

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Exercise – Impact of Lot Sizing, lead time = 0

Period 1 2 3 4 5 6 7 8 9 10

Qty. Needed 20 40 30 0 80 20 0 0 50 70

L4L 20 40 30 0 80 20 0 0 50 70

FOQ Production 50 50 0 0 100 0 0 0 50 100

50 Ending Inv. 30 40 10 10 30 10 10 10 10 40

40 = 30+50-40

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ERP Evolution
§ MRP
• Materials only
§ MRP II
• Includes Capacity Requirements Planning (CRP)
• Expands to accounting, marketing, etc.
• Consider accounts payable, accounts receivable, payroll, financial
analysis, sales analysis, inventory management, etc.
§ ERP
• Allows more open exchange of data
• Include cost accounting & management, budgeting, HR activities
(training, payroll, retirement & pension plan), project management,
Customer Relationship Management (CRM)
• Consider multiple sites, global customers, languages, currency rates,
etc
• Naively put, ERP = MRP II + CRM (Customer Relationship
Management)
• ERP incorporates the principles of global supply chain management

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ERP System Modules

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ERP as cloud computing implementation

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Benefits of ERP as cloud computing platform

Asset
ownership
transfer

Use of Solutions
technology provider
Successful
XaaS
offering

Continuous
Nanoization
innovation
of utility
culture

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Pricing example (15 minutes)

• 4 customers: Andrew (A), Bonnie (B), Charles (C) and Daisy (D)
• Pay-per-use pricing or subscription (flat fee pricing)
• Andrew and Charles have an expected utility per use of 40$
• Bonnie and Daisy have an expected utility per use of 60$
• Andrew and Bonnie expect to use the service 5 times in a
month
• Charles and Daisy expect to use the service 10 times in a
month
• Find the profits from the pay-per-use mode and subscription
mode for the provider on a monthly basis.

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Pricing analysis: Pay-per-use

Pay per use Customers Profits

Price adopting
$40 A, B, C, D 40 (2 X 5 + 2 X 10) =
1200
$60 B, D 60 (5 + 10) = 900

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Pricing analysis: Subscription

Subscription Customers Profits

Price adopting
$200 A, B, C, D 200 X 4 = 800
$300 B, C, D 300 X 3 = 900
$400 C, D 400 X 2 = 800
$600 D 600

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Pricing : Customer surplus

Mode Customer Customer’s Surplus

Pay-per-use Andrew (40 – 40) X 5 = 0
(price-per-use = 40) Bonnie (60 – 40) X 5 = 100
Charles (40 – 40) X 10 = 0
Daisy (60 – 40) X 10 = 200
Subscription Andrew Does not adopt
(price = 300) Bonnie 300 – 300 = 0
Charles 400 – 300 = 100
Daisy 600 – 300 = 300

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XaaS: Serves a larger market

• Andrew (A): SMEs (low utility-per-use, low frequency of usage)
• Bonnie (B): Large organization, non-core service (high utility-
per-use, low frequency of usage)
• Charles (C): Medium sized enterprise with core offering (low
utility-per-use, high frequency of usage)
• Daisy (D): Large key accounts (high utility-per-use and
frequency of usage)

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ERP in practice
§ ERP systems can boost your bottom line. But an ineffective ERP
implementation can bring a company to its knees.
§ Vodafone was fined £4,6 million in 2016 by British telecom regulator (Ofcom)
for failing to credit customers’ accounts after they paid to ‘top-up’ their mobile
phone credit (caused by ERP system failure).

Regulator Ofcom has fined Vodafone

£4.6m for "serious" breaches of
consumer protection rules, its largest fine
to date for a telecoms operator.
~ www.bbc.com, 26 Oct.
2016

https://www.cio.com/article/2429865/enterprise-resource-
planning/enterprise-resource-planning-10-famous-erp-disasters-dustups-
and-disappointments.html

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ERP Trends

• Cloud ERP
– Lower upfront costs
- computing resources leased versus purchased outright and maintained on
premises; ideal for SME
– Real-time accessibility with backup and disaster recovery plans
– Ability to adjust amount of cloud service according to need
- access to state-of-the-art ERP technology
– Challenges: Loss of control; reliance on provider's security
• Mobile ERP
– Improved data quality & greater visibility (of activities & demand) via mobile
devices
– System agility & scalability
- simplifies tiring, long implementations, making process more efficient and
more cost effective

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