Success factors for MRP2 implementation

This article describes how MRP2 typically works, and what stops it working well. It should be read in conjunction with the two companion articles "MRP1" and "Capacity Management".

Links on the left to related training and (for topics highlighted in red) further reading

MRP 2 which is the acronym for Manufacturing Resources Planning is sometimes denoted as MRPII or MRP II. It is the underlying principle for most materials planning & scheduling systems contained in Enterprise Resources Planning (ERP) software. It is basically an MRP1 system plus detailed process scheduling; costing (product costing and inventory costing). In addition some definitions include the management of the purchase "on order" situation.

Operation of MRP2

Scheduling ("Capacity Requirements Planning") (CRP)

One key operational objective of an MRP2 system is to produce a "work-to list", (a scheduled, prioritised, detailed list of work to do, by individual resource (work centre)), which is achievable in terms of both materials available and capacity available. (More information on scheduling and an explanation of scheduling jargon is available in our archive article: Previous Techniques T020: Close scheduling techniques, reducing throughput time.)

Scheduling systems, as implemented in MRP2 software, vary considerably in sophistication, but generally work by calculating the total load generated on each resource in each time period by the Master Production Schedule, in one of several ways, based on two themes, both of which assume infinite capacity:

MRP1 will have calculated start end end dates for each work order using standard lead-times held by it. Working backward from the MRP1 due date for each work order, or forward from the MRP1 planned start date for each work order, the start and end schedule for individual resources is calculated. Working backward from the due date will identify any work that may be already late starting. With "infinite capacity planning systems" that is the end of the story, a loading report is produced for you to re-schedule work to make the plan "do-able" by changing MRP due dates or lead-times. A characteristic of a "backward scheduled" process being delinquent is if many dates are in the past! A similarly delinquent forward scheduled system will produce schedules which do not meet the many job due dates!
The second type of system actually starts at the due date for a product and, using backward scheduling, calculates the start date for each process stage by scheduling each resource in detail, (in effect calculating lead-time). It then uses the resultant start date for the end product Bill of Materials level as the required due date for its constituents in the next Bill of Materials level and so on at each Bill of Materials level until it gets to scheduling raw materials. (We cover this subject in more detail in M09 Manufacturing Resources Planning (MRP2).)

Recognition by a number of software suppliers that this process was in their view weak, spawned the resurgence of more sophisticated capacity planning processes such as "Advanced Planning & Scheduling Systems".

In these finite capacity planning systems the load is compared to the capacity available in each period and work is forward scheduled using available capacity from the work order planned start date. A "work-to" list is produced which in theory tells you when the work will be complete, if you do what the work-to list tells you to do. Of course using forward scheduling this may be later than when the work order is required (the MRP due date). (Further information on capacity planning is contained in the article Capacity Management.)

In total we have identified 11 degrees of sophistication, implemented in various software, which can be applied to scheduling. (We cover this subject in more detail in M23 Capacity Management.)

Purchase Scheduling

This takes the MRP1 purchase requests and converts them into purchase orders or refreshed schedules. Then it records receipts against those orders. In ERP systems this data is then made available to the purchase ledger accounting systems to pay suppliers.

Product Costing

Most MRP2 systems contain some form of standard and / or actual costing system. Again these vary in sophistication but in principle the cost of each operation above is accumulated to give a cost of the complete process for an item and then via the Bills of Materials to give a total product cost (adding materials costs at each level) to produce a "rolled up cost". We cover this subject in more detail in M13 Manufacturing Accounting for Beginners.

In ERP systems stock balances can be valued to provide inventory values.

Additional Data Required

In additional to those parameters mentioned in MRP1, essential data which needs maintenance are:

Standard / actual item materials and sub contract costs
Routes (routings / methods of manufacture)
- A list of operation stages by resource
  - Operation times for each operation
Work centres (resources)
- Capacities
- Standard / actual cost rates

Routes (Routings / Methods of Manufacture)

The method of manufacture must be specified and maintained as a series of operation stages. A process planning manager once said to me "We document and tell them how we think they should make it. But they know better!" This is not a problem to an MRP2 system provided they tell us how they make it. That company was ISO accredited! Clearly the New Product Introduction must define the method of manufacture and there must be an effective specification change procedure for the Process method as well as the Bill of Material. (This will be covered by a future article.)

Operation times

For each operation in a route an operation time should be specified. If we are to do effective capacity planning and shop loading, the times in the routes must be reasonable (+/- 10%). The best way of achieving this is to feedback the actual time taken. However even this has some difficulties:

If the operator tells you how long it took, you may use it as a stick to beat them. If you do, they will not tell you the truth again.
Some operators are better than others.
With individual incentive schemes comes the need to maintain earnings. This gives rise to the phenomenon called "Back of the book" where the operator saves some bookings for a rainy day. You will never know how long the job took! This scheme is also known to exist at various levels in the organisation, where if they are having a bad week the works director will often empty all the cupboards, drain WIP and despatch everything he can to maintain the monthly output figure, and cover up the real problems (and leave nothing to do on Monday morning because all the work is in the wrong places). (See Previous Malpractice M006: "Hitting the Numbers, the worst way to run operations").
Some software allows for standard costing, but this implies a standard time, as well as an actual time, which can create maintenance problems.

Work centres (Resources)

Capacity Data

These need to define each separate resource or process that is significant from a capacity viewpoint. It can be a group of similar machines, a group of people, a skill, or a subcontractor. The important consideration is which resources are interchangeable and which are not, i.e. which can be treated as a single unit of capacity. Often these can carry default operation times (which can be overridden by specifying an operation time for an item). For each of these there will need to be specified its capacity for finite scheduling or defaults operational times, (see optional extras below.)

Cost Data

The work centre usually holds cost rates (usually at least fixed and variable overhead rates for standard and / or actual costing). However in some software, work centres can be allocated to a cost centre, for which default rates can be held. The provision for different rates varies considerably between different software, but in principle the time on the routing is multiplied by these rates to calculate an operation cost for the item at this work centre.

Optional Extras

In some more sophisticated (some might say complex) MRP2 systems and Advanced Planning & Scheduling Systems in order to improve the precision of scheduling, there are other parameters such as:

Queue time (A time assumed to be queuing before set up / make ready at this process)
Set time (The setting / make-ready time for this process)
Wait time (A time assumed to be required to be necessary before movement can take place, e.g. drying / maturation time), (sometimes also used to represent fixed soak times e.g. heat treatment where the product is undergoing a fixed cycle time, rather than a unit time x batch quantity = cycle time.)
Move time (The time to move to the next operation)

Often these can be set as defaults for a work centre rather than specified on each individual routing (and it is our preference to use these defaults). They can also be used in combination to calculate &/or override the default fixed lead-time for the item held on the Bills of Materials. These additional parameters can be used to further refine the scheduling of each operation. This topic is covered in more detail in Previous Technique T020: Close Scheduling (Reducing Throughput Time).

The Problems

Maybe it is because we do really good business rescuing them, but the problems we find are so common as to suggest that the general success rate of MRP 2 implementation is appalling. Typical problems we encounter include:

Because MRP2 is attempting to schedule at both aggregate / long term and detailed / short term levels, it is very difficult to make work at both levels. It can be simpler to split these functions and implement low level systems as appropriate in each separate area, co-ordinated by a high-level master production schedule and material plan. Master Production Scheduling takes on even more importance in setting a do-able plan. (See Capacity Management.)
The "work-to" list is an imposition and is often overloaded in the short term.
A "feast and famine" (unsmooth) schedule
The system becomes degenerate in operation over time (See the " Botzmann Effect")
There is often very little evidence of delivery of bottom line benefits. (See Achievable Benchmarks)
- A significant shortage list still exists and on time delivery to customers is poor
- Excess or unbalanced stock with poor stock turns
A "nervous" schedule (each subsequent schedule contains significant short term changes)

Also:

It takes a long time to implement.
It requires a very high level of administration (cost).
It requires a big computer (cost).

The Forrester Effect

(See Lean Supply Chains)

To alleviate the Forrester Effect:

Keep batch sizes small especially at high levels in the BOM. (Assembly / finishing operations). (See " Participative Master Production Scheduling")
Keep safety stocks small
Be strict on data accuracy
Keep the BOM shallow (See Previous Best Practice B014: Effective Bill of Material Design")
Maintain close links with real end user demand. (Not your immediate customer). (See "Demand Management")

End of the month

Wily old production managers know that if they build WIP, they can pull despatches out of the hat at the end of the month to meet the month end figures. Unfortunately having done it once they have to keep doing it, which completely destroys the flow of work. There are two solutions to this problem:

Make them responsible for WIP levels.
Replace "end of the month" with "end of the week" measurement and when that is still causing problems make it "end of the day".

(See "Demand Management", but this problem is discussed in detail in Previous Malpractice M006: Hitting the Numbers (The worst way to run Operations)

Key Success Factors

The single most beneficial method of avoiding degeneracy in MRP / ERP systems, (and we are not saying this just because we provide this), is to ensure that education and training is refreshed periodically. If people understand why they are doing things they will generally help, or at least avoid hindering.

Other factors include:

Creating a do-able Master Production Schedule
Ownership of the data and procedures
Measuring the variables, and data accuracy and act on problems

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Whilst great care has been taken to provide relevant, accurate, practical, advice based on our considerable process design and development experience, this will almost certainly require interpretation into the context of your unique business. Please be careful in doing so and if in doubt seek expert advice. We would welcome your feedback!

SM Thacker & Associates

Independent Best Practice Training & Consultancy

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Manufacturing Resource Planning (MRP 2)