Not getting the return on investment for your ERP/MRP application?

Most organizations have a certain degree of optimism when starting an implementation of an Enterprise Resource Planning application. They have been assured by the vendor that after an implementation period of 3 to 4 months they will begin to see the improvements in visibility and the savings in resources that would bring the Return on Investment (ROI).

They then may have success in implementing the General Ledger part of the system and also the basics such as Accounts Payable, Accounts Receivable, and Inventory, but then are usually disappointed when implementing the guts of the Supply Chain system to find out that greater visibility is not forthcoming any more than the savings of resources.

Why is it then the Material Requirements Planning (MRP) system does not give the expected return?

An MRP is very simple in concept. There are 5 inputs to an MRP system and 2 outputs. The 5 inputs are Sales/Forecasting, Inventory, Bills of Material, Open Orders (PO’s and work orders), and Planning data. If these are as accurate as possible, then the 2 outputs, Planned PO’s and Work Orders, and the MRP Action Messages will be accurate and give you the visibility and information that will lead to saving your organization’s resources.

What then, goes wrong?

The issue is not in the concept but in the details of how these inputs affect MRP. Let us look at the inputs in detail:

Sales/Forecasting

Most organizations have a method of processing customer purchase orders and converting them to the sales orders and the work orders/PO’s necessary to get the work done. However it is on the forecasting side that the data accuracy is badly affected.

However accurate or otherwise the forecasts are, is usually dependent on the industry, these are the functions that are usually not done well:

• Forecasts are not backed up with information
  • Unusual activity in one period
  • Information relating to future customer promotions or other activities
• Forecasts are not done by the Sales department
  • Leave it to Planners who can only extrapolate historical data
• Forecasts are not monitored and measured for accuracy
  • No input for future forecasts
  • No increase in accuracy as there is no feedback for problem-solving
• Forecasting is done outside of the ERP/MRP system
  • Spreadsheets are passed around without an audit trail or any version control
• Forecasting data is not set up correctly in the implementation
  • Forecasting time fence
  • Are differences between sales and forecasts to be carried on to future months or should they be taken that if it didn’t happen it won’t happen

Inventory

Most organizations have a handle on shelf accuracy (and if they have not they will not get get any visibility from their MRP system), but the issues again are in the details.

• There must be an understanding of inventory status
  • Available and non-available
  • Nettable (MRP plans for it) and non-nettable (MRP does not plan for it
• How inventory statuses are set up
  • MRB (Material Review Board) is usually set as non-available and non-nettable
  • Incoming inspection is usually set as non-available and nettable

Bills of Material (BOM’s)

If you were to ask most organizations about their BOM’s they would say that they would have a high degree of accuracy, and by that they mean that the “quantity pers”, which is the number of units of a component that are needed to make the parent. However, there are two issues relating to BOM’s that are usually not done well.

• Yield losses or scrap factors. If it takes 20 units of B to make 1 A, but there is a yield loss of 10%, then the BOM should be set up as 22 units (actually 20/(1-0.1) which is 22.22, but 22 is sufficient). If this is not done planning will be affected.
  • Sufficient component material will not be available
  • Purchasing then orders more than necessary and there is a build-up of inventory
• The Engineering Change Control (or Engineering Change Notification, ECN) process lacks discipline.
  • This usually occurs because there are many changes needed because of market-driven forces or because of lack of quality in the original product.
  • There is not sufficient discipline in the process that keeps the Engineering BOMS separate from the Production BOM’s and this causes problems in Planning and Purchasing, and causes reworks.

Planned PO’s and Work Orders

This is probably the weakest area of control in the inputs to MRP. There is little understanding of how open orders affect MRP.

• The accuracy of WIP inventory can be as low as 50%. Finance normally does not do a WIP count but relies on the open work orders.
• Work orders are often left open for a variety of reasons:
  • There is a problem with the material and it is waiting action from Quality Control. MRP still sees these as material due to arrive soon, and if this is not the case the material needs to be moved into a location defined as non-nettable.
  • Because of a shortage or an overage the work order has not been closed because the people responsible are not certain how to close these.
• It should be understood that any open work orders are expected to be available on the order due date, and any open work orders with due dates in the past will be expected by MRP to be arriving immediately.

Planning Data

This is another area that is not well understood. The main Planning data elements that MRP uses are lead times (and the elements making up lead time such as manufacturing lead time, shipping lead time, and safety time), safety stock, order minimums, and order multiples.

• Depending on the type of ERP system MRP uses Planning data to plan the due dates for the planned orders, but uses the Routing information to calculate the due date of a work order when it is firm-planned or released.
  • Routing information for a particular part number when the manufacturing elements of lead time (Queue, Set-up, Run, Wait, and Move)are cumulated should agree with the lead time set up in the Planning Data file.
• MRP will expect the material on the due date of the order. This applies to both PO’s and work orders. It is this aspect that is least understood by those people involves in planning.
  • If a vendor or a manufacturing process has indicated that the material will be available later that the due date, then the due date needs to be changed. If it is not MRP will assume that the material will be available on that published due date and plan accordingly.
  • If a due date is in the past then MRP will assume that the material will be available immediately and also plan accordingly.
• MRP will always plan to cover net requirements (gross requirements less that which is already in inventory). Therefore it will plan to have zero inventory once the requirements have been satisfied.
  • Zero inventory is a satisfactory situation for MRP if all requirements have been met.
  • If safety stock is in place, MRP will plan to have that amount in inventory.
  • Safety stock is considered by MRP to be immediate demand, so action messages will be generated immediately if a new safety stock level is set.
  • Fixed order quantities, such as minimums and multiples, will be used by MRP and result in larger quantities planned that may be necessary. These minimums and multiples should be kept as low as possible to avoid excessive inventory.

If these 5 inputs to MRP are understood by everyone involved, and the details and the MRP mechanisms used also understood, then a working MRP system will be in place and the organization can expect the returns on investment that it had hoped for when the MRP/ERP investment was made in the first place.