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S.F.T. I nc.

A Preliminary Definition for M.R.P. III

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Table of Contents

Introduction

The Development of M.R.P.

From M.R.P. to M.R.P. II

Defining an M.R.P. III Process

How theDemand Planning Tool Helps to Implement M.R.P. III

Introduction

Material Requirements Planning, or M.R.P., has been officially around since the 1960's, with

the advent of the use of computers in the manufacturing environment, though the basic

principles involved in M.R.P. are an integral part of the manufacturing process itself.

However, by defining what 'M.R.P.' is, companies and software vendors are able to adapt a

standardized set of methods by which they can schedule delivery of raw materials against the

manfacturing schedule, thus keeping their assembly lines moving while at the same time

minimizing the amount of inventory on-hand.

The ideal adaptation of the M.R.P. process has, in the past, been considered to be a 'just in

time' scenario, when raw materials arrive just as they are required on the assembly line.

Obviously, a system like this has the potential of being thrown 'out of balance' by even the

slightest problems; therefore, manufacturers build in 'safety stock' or 'lead time' factors to

prevent material shortages from ever causing a 'line stop'. But safety stock and long lead

times increase on-hand inventory, requiring larger warehouses to store raw materials, or even

work in process, with no immediate benefit. Plus, it ties up the company's liquid capital in

non-liquid inventory, which typically depreciates, gets damaged, spoils, and/or becomes

obsolete within a relatively short period of time.

Obviously, there is a 'happy medium' somewhere in between a true 'just in time' system,where a single late or missing delivery can have drastic consequences, and a 'just in case'

system, where piece part inventories 'turn' slowly, and often become wasted as obsolete

inventory or spoilage. Somehow we must find the best inventory position, where the potential

for material shortages is well-balanced with the need to minimize on-hand inventories, and

minimize lead times. Finding this balance point, however, has never been a traditional

component in an M.R.P. system, or even an 'M.R.P. II' system.

UsingBandwidth Managementit is possible to establish such a balance, between a

minimum inventory on-hand and a consistently operating assembly line; therefore, we at

S.F.T., Inc. propose to define the requirements for an 'M.R.P. III' system, which (among otherthings) includes the principles ofBandwidth Managementas an integral component of the

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process, as well as a 'Whole Business Planning' feedback loop to minimize the impact of an

improper demand forecast on obsolete and excess inventory, plant capacity, and customer

lead times.

The Development of M.R.P.

M.R.P. began as a relatively simple, yet important analysis of manufacturing processes and

production schedules, combined with bills of material and/or resources, to predict what the

requirements would be for various components and/or manufacturing processes in order to

meet the current master schedule. In addition, M.R.P. applies component and process lead

times to these requirements, along with various other "modifiers" (economic order quantities,

safety stock, shrink factors, and so on) to generate recommended build schedules for non-

master scheduled assemblies, and recommended purchasing orders for components. Existing

schedules are not modified by a 'standard M.R.P.' process, though reports that makerecommendations to re-schedule or cancel existing build schedules or purchase orders may be

included in a 'standard M.R.P.' system. In essence, the 'M.R.P.' system merely performs an

analysis of existing conditions, and reports back to you what the requirements are, and

optionally recommends changes to existing purchase and production schedules to meet the

requirements of the master schedule.

It has been my experience that a 'standard M.R.P.' package, when properly implemented, will

meet the needs of most customers that have consistent production schedules, adequate

resources for the 'critical paths' in the manufacturing process, and adequate delivery

performance by vendors for the various component parts. However, in most cases, the M.R.P.

system doesn't seem to work so well. Either the component deliveries are consistently not ontime, or the master schedule is constantly being changed, resulting in wildly fluctuating

parameters. Typically, to make up for such conditions, safety stock limits will be increased

until the warehouses are full of 'just in case' inventory. Eventually, design changes in finished

product cause a lot of this inventory to become 'obsolete', or require some kind of retrofit in

order to be usable again. This costs money. Further, in the electronics manufacturing

industry, component prices typically go DOWN over time, such that a warehouse full of old

inventory will ultimately increase the cost of manufacturing a product above that of the

competition, since the actual cost of components will be higher when purchased several

weeks or months in advance.

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From M.R.P. to M.R.P. II

To assist planners in tracking some of the problems associated with inventory control, some

kind of 'feedback loop' is needed in the M.R.P. process, not only to automatically re-schedule

certain items (when possible), and avoid excessive manual effort in controlling the process,

but to detect and report performance that is 'out of spec' (such as a vendor performance report

to track on-time delivery performance). This 'feedback loop' is the defining factor for an

'M.R.P. II' system. Though many systems CLAIMto be an 'M.R.P. II' system, few actually

fit the mold exactly. Still, with automatic rescheduling capabilities for work orders and/or

repetitive build schedules, and 'reschedule action' reports for purchase orders and outsidecontracting, the amount of actual analysis is reduced significantly. Other information, such as

vender performance reports and process utilization reports, also help to measure the

'performance to plan' capability of the manufacturing plant.

Even when the production plan is running at optimum performance, companies still often

have serious problems with the manufacturing process. 'Hidden Cost' issues associated with

manufacturing increase the total cost of manufacturing, but are extremely hard to track. Some

of these 'Hidden Costs' can be caused by excessive P.O. rescheduling or excessive 'crash buy'

programs, excess and/or obsolete inventory, or planning problems that cause incorrectly

stocked finished goods (too much of one, not enough of the other) that result in shortages.

Another 'hidden cost' issue might be frequent line stops related to a 'limiting process' (such asa wave solder machine or component inserter), as well as material shortages and excessive

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'kitting' of common components. In addition, potential revenue losses from excessively long

customer order lead times, or poor on-time customer delivery performance, are real problems,

but very difficult to track and measure. As such, none of these problems are tracked nor

reported by any 'standard M.R.P.' or 'M.R.P. II' system. To help solve these problems, and

improve the company's competiveness and profitability, beyond existing capabilities, the

M.R.P. system must go beyond the standard definition of 'M.R.P. II', into what we at S.F.T.Inc. refer to as 'M.R.P. III'.

Defining an M.R.P. III Process

We at S.F.T. Inc. therefore propose to define a 'whole business' M.R.P. process that goes

beyond simple component/assembly relationships, that goes beyond resource requirements,

that goes beyond vendor performance and component shrink factors and safety stocks. The

'M.R.P. III' process begins with anAccurate Demand Forecast,for it is this Demand

Forecast that drives the remainder of the business. Using the best possible demand forecast, aMaster Scheduleis developed. Ideally the total number of master scheduled items will be

minimized, so that the M.R.P. system can appropriately generate build schedules for

components and 'accessories' automatically, and will be derived directly from the Demand

Forecast with little or no changes.

From theMaster Schedule, the 'M.R.P. III' system derives the individual component and

assembly requirements, and recommends new purchase orders, just like a 'standard M.R.P.'

system, and also generates recommended purchase order reschedules, and automatically

reschedules non-master scheduled assemblies based on the availability of

components/resources and material requirements, just like an 'M.R.P. II' system. The M.R.P.

III system also monitors and reports vendor performance and 'performance to plan' by theassembly line, similar to an 'M.R.P. II' system. However, to minimize the total amount of

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'detail information', the 'M.R.P. III' system concentrates on only reporting those items that fall

outside of the allowed tolerances, thus minimizing the number of reported items.

When the M.R.P. system has been fully integrated with the Order Management system, it

becomes possible to calculate 'Available to Promise' inventory, based on a combination of

existing order backlog, the current inventory, and the projected availability of a product overtime as it is built from the current production schedule. In this way, if a customer orders a

product within lead time, and delivery is already promised to another customer, order

management personnel can use this information to negotiate a realistic delivery schedule with

the customer. Also, delivery re-schedules would become easier to manage, since order

management personnel can view the current 'available to promise' inventory, and use this

information to determine when partial or full shipments could be re-scheduled. In all

likelihood, there will be available inventory to ship ahead of schedule, should the customer

need to perform a 'crash buy'. An 'M.R.P. III' system must therefore include the ability to

view the 'available to promise' inventory, based on current inventory, current backlog, and the

current production plan.

Finally, the 'M.R.P. III' system bases its operating parameters on the principles ofBandwidth

Management,dynamically adjusting parameters such as lead times and 'ideal inventory'

according to the historic data (when needed), and measuring performance to a set of

statistically derived 'control bands', rather than fixed parameters. The 'M.R.P. III' system then

generates exception reports for those items that fall outside of the control bands, and

automatically maintains as much of the manufacturing planning process as possible, with

little or no human intervention.

A process such as 'M.R.P. III' would help to eliminate certain kinds of errors that currently

plague manufacturing businesses on a nearly universal level. By far, the greatest single factor

in ruining a perfectly good manufacturing plan is the tendency for the Demand Forecast to

change on a regular basis, typically inside planning lead time. Or, the Demand Forecast may

be completely useless for manufacturing purposes, forcing the person responsible for the

master schedule to literally generate his own forecast in an attempt to predict what the

demand actually will be. Often times, a combination of both of these conditions exists, where

the marketing forecast is so inaccurate as to make it useless, forcing the master scheduler to

perform this task of generating a forecast. And, without some kind of forecast, there is no

master schedule. And, without a master schedule, there is no 'M.R.P.'. Any 'M.R.P.' system

without a demand forecast analysis capability is thus severely limited in its ability to help

reduce overall inventory and simultaneously meet the requirements of the production plan.

After all, "Garbage In, Garbage Out."

Still, with all of the potential for automating the manufacturing planning process, people still

need to use their skills and judgement within critical points in the planning process. Using

'exception planning' will minimize the amount of items that people need to look at. This

'exception planning' process is derived directly fromBandwidth Management, so that only

those items that need attention will be addressed. It is still the planner's responsibility to

implement purchase order re-scheduling or 'crash buy' programs, outside contracting, and so

forth, and (potentially) any manufacturing schedules oriented around a process or piece of

equipment that is considered a 'critical path' in the manufacturing process. The 'M.R.P. III'

system must therefore supply as much useful information to the planner as possible, to help

him make informed decisions, yet also limit this information to only those items that mayactually require his attention.

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How the Demand Planni ng ToolHelps to Implement M.R.P. III

TheDemand Planning Tool,a product of S.F.T., Inc., is a combined effort of over 5 years of

development work, and is designed primarily to allow the user to quickly generate a more

accurate forecast, maintain this forecast along with a long-term business plan, and perform

daily or weeklyDemand Analysisto measure current performance (actual data) to theforecast. It contains a number of screens, graphs, and reports to make this process as easy and

fast as possible. TheDemand Planning Toolemploys the principles ofBandwidth

Managementto measure exceptions to the plan on a daily basis. By usingBandwidth

Management, the number of exceptions to the plan are minimized, and therefore the plan

becomes stable. A stable plan minimizes the negative impact of forecast changes inside of

lead time on the manufacturing process, and allows the master scheduler to more effectively

use the M.R.P. system, with much fewer problems. TheDemand Planning Toolforms a

major part of the total 'M.R.P. III' system, as outlined above, by analyzing the DEMAND

SIDEof the equation. The resultingDemand Forecastforms the input to the entire

manufacturing process. TheDemand Planning Toolcan also track on-time delivery

performance for customer orders, thereby measuring the overall system performance of the

manufacturing environment, by comparing the actual shipment date to the customer's

requested ship date.

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1996 by Stewart~Frazier Tools, Inc. - all rights reserved

Last Update: 5/22/96

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