Should OEMs with CMS use MRP and BOM Explosion?

ByShaun Snapp

Executive Summary

  • There is sometimes the question asked of whether MRP and BOM explosion is required for companies that rely upon contract manufacturers.
  • We cover whether the BOM is required in the supply planning system.

How Much Does MRP and BOM Explosion Help Companies?

There is little doubt that the introduction of MRP took a great deal of the effort out of the supply and production planning process and by automating the process of supply and (initial) production planning and of the BOM explosion. A review of the research on the benefits of MRP is available in this article.

See our references for this article and related articles at this link.

An Approach That Becomes Dominant

For the past several decades, MRP/DRP and ERP have become dominant concepts. The general thinking has been the following:

  1. All companies must acquire and implement ERP systems. An excellent example of this mindset is found in a white paper written by Aberdeen titled — To ERP or Not to ERP: In Manufacturing, It Isn’t Even a Question. This paper did not analyze any of the previous research on ERP but reviewed the opinions of manufacturers, which favored the continued implementation of ERP.
  2. All companies much maintain a full BOM and explode this BOM using MRP or using other supply planning/production planning methods to accomplish the same objective.

However, is this always the case?

For companies that perform their production, some supply and production planning system – be it MRP or MRP substitute is a necessity.

In the last few decades have shown the rise of companies that design, but do not manufacture their products. This is, in fact, the standard approach among high-tech OEMs.

So let us first review what MRP does.

  1. BOM Explosion: Automates the calculation of input products (raw material and components), which are necessary for a particular quantity of desired output products (finished goods). BOM explosion is one of the foundational functionalities within all supply planning systems. All companies need to multiply the number of finished goods by the bill of material (production or procured items), and BOM explosion is how that is accomplished.
  2. Inventory Netting: Reduces the forecast + sales orders by the planned on hand from the intended inventory position.
  3. Inventory Planning: Calculates reorder points, safety stock, etc..
  4. Purchase Order Creation: In the quantities and the adjusted for the lead time required to meet the demand date.
  5. Production Order Creation: In the quantities and the adjusted for the lead time required to meet the demand date.
  6. Create Stock Transfers: This is technically not part of MRP but is the output of DRP — however, when people refer to “MRP systems” they are referring to both MRP/DRP, as they work in conjunction. A system with only an MRP procedure would have no way of creating stock transfers and moving stock through the supply network.

Now let us review how these MRP/DRP functions are used or not used by companies which outsource their manufacturing:

  1. BOM Explosion: No (the OEM sometimes performs BOM explosion, but other times the BOM explosion is often carried out by the outsourced factory in their MRP or other supply planning system)
  2. Inventory Netting: Yes
  3. Inventory Planning: Yes
  4. Purchase Order Creation: Yes – but only at the good finished level.
  5. Production Order Creation: No
  6. Create Stock Transfers: Yes

Therefore, even companies that outsource all of their manufacturing still need to use an MRP or other supply planning system.

There are other ways to perform these same activities — and all the more advanced supply planning/initial production planning methods provide the same categories of output. This article is about sticking to the more straightforward side of the supply and production planning continuum, and so MRP/DRP is still useful.

Do Companies that Outsource Need to Have a Manufacturing BOM in Their Supply Planning System?

I want to be careful to be specific here so as not to confuse.

  1. Design BOM or Manufacturing BOM?: There are many different types of BOMs, however for our purposes here, we only need to be concerned with the design BOM and the manufacturing BOM (or MBOM). The design BOM is as the name implies the BOM that is produced by the engineering and design side of the business.
  2. Must the OEM Instantiate and Maintain an MBOM in their MRP (or other supply planning/production planning) System?: There is no doubt the OEM will have a design BOM. It is their design, after all. However, the question is – if they do not perform any manufacturing, do they need to maintain the MBOM? The answers are no because the OEM does not need to explode the BOM because they are not communicating with their suppliers’ detail below the finished good. This is because the CM is delivering the finished good to the OEM.

The Alternative Design 1: MRP at Finished Good Level at OEM

The OEM can move directly from the forecast for the finished good and then sending the finished goods forecast. This is the same as the OEM procurement plan for their contract manufacturer.

The steps in this process look like the following:

This design can be used with a product called Arena Demand. Arena Solutions, a PLM/PDS vendor, has a soon to be released product called Arena Demand that can allow the OEM supply plan to be aggregated and then exported to a file to be sent to the CM. It would enable the following to be performed.

  • The demand report is intended for general quoting.
  • From a top-level demand plan, the OEM probably would use a spreadsheet and type in the fields themselves.
  • As the CM already has the BOM in their MRP system, they would be able to derive the component demand themselves.
  • The OEM can’t see the component demand (if they don’t run MRP), and therefore Arena Demand enables them to see the component demand based on the supply plan.
  • The OEM can use this information to quote component costs across the market to ensure that each component is taking advantage of the purchase volume planned for the upcoming months.

Arena Demand-2-1

Notice the quarterly supply plan shown above for the two GPS units. This is a finished goods supply plan, and because there is no BOM, there is no necessity for the Arena application to calculate lead times.

That calculating is performed by MRP when the CM has provided feedback to the OEM on the feasibility of the OEM supply plan, and when POs have been sent from the OEM to the CM. Notice that in the upper right corner, there is an export button, which is used to export the supply plan to a file.

Also, notice that this is just one possible planning bucket – one can also choose the monthly planning bucket rather than quarterly. Arena refers to this as the “Interval.”

The Benefits of the Alternative Design

The OEM gets a much easier and lower cost to maintain the system, and the complexity manufacturing is moved to where it should reside at the CM as they are planning the production.

Some companies attempt to plan their CM/subcontract suppliers actively; however, while this may work when the OEM is a sizable part of the demand of the CM/subcontractor. And there are still complications in this – a detailed explanation of the type of software that can relatively easily handle this requirement is covered in my book SuperPlant: Creating a Nimble Manufacturing Enterprise with Adaptive Planning Software.

Alternate Designs to Exploding the BOM with MRP

  1. The Alternative Design 1: MRP at Finished Good Level at OEM

The Benefits of the Alternative Design

The OEM gets a much easier and lower cost to maintain the system, and the complexity manufacturing is moved to where it should reside at the CM as they are planning the production. Some companies attempt to prepare their CM/subcontract suppliers actively. This can work when the OEM is a sizable part of the demand of the CM/subcontractor. And there are still complications in this – a detailed explanation of the type of software that can relatively easily handle this requirement is covered in the book  SuperPlant: Creating a Nimble Manufacturing Enterprise with Adaptive Planning Software. If one represents only a small fraction of the demand for a CM/subcontractor capacity, it makes little sense to model this plant. It is highly unlikely the CM/contractor would be willing to share capacity information – it is simply not worth their time.

If MRP is Required, Must it Come From an ERP System?

In Alternative Design 1 above, MRP is still performed for the well-finished level. Wouldn’t an ERP system be required to run MRP? Actually no. MRP functionality can be purchased at low cost compared to a full ERP system. Demand Works Smoothie runs MRP and does so with overall functionality and usability, which is superior to any ERP system that Brightwork Research & Analysis has tested – which includes all Tier 1, and several Tier 2 as well as multiple clouds based ERP systems. More on this topic is covered in detail in the article Why Not All MRP Systems Are Created Equal.

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Conclusion

If one represents only a small fraction of the demand for a CM/subcontractor capacity, it makes little sense to model this plant. It is highly unlikely the CM/subcontractor would be willing to share capacity information – it’s’ only not worth their time. Therefore this brings up the question of whether the BOM explosion is necessary for companies that have outsourced manufacturing.

To learn about the history of MRP see this link.