What This Article Covers
- How Much Does MRP and BOM Explosion Help Companies that Use Contract Manufacturing?
- Do Companies that Outsource Need to Have a Manufacturing BOM in Their Supply Planning System?
- The Alternative Design 1: MRP at Finished Good Level at OEM
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 BOM explosion. A review of the research on the benefits of MRP is available in this article.
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:
- All companies must acquire and implement ERP systems. A good 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 simply reviewed the opinions of manufacturers, which favored the continued implementation of ERP.
- 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 common approach among high-tech OEMs.
So let us first review what MRP does.
- 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 system. All companies need to multiple the number of finished goods by the bill of material (production or procured items), and BOM explosion is how that is accomplished.
- Inventory Netting: Reduces the forecast + sales orders by the planned on hand from the planned inventory position.
- Inventory Planning: Calculates reorder points, safety stock, etc..
- Purchase Order Creation: In the quantities and the adjusted for the lead time required to meet the demand date.
- Production Order Creation: In the quantities and the adjusted for the lead time required to meet the demand date.
- 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:
- BOM Explosion: No (BOM explosion is sometimes performed by the OEM, but other times the BOM explosion is often carried out by the outsourced factory in their MRP or other supply planning system)
- Inventory Netting: Yes
- Inventory Planning: Yes
- Purchase Order Creation: Yes – but only at the good finished level.
- Production Order Creation: No
- 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 simpler 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 cause confusion.
- 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.
- 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 supplier’s 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 to 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 allow 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 cost across the market to ensure that each component is taking advantage of the purchase volume planned for the upcoming months.
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 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 actively plan their CM/subcontract suppliers, 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.
If one represents only a small fraction of the demand for a CM/subcontractor capacity, it makes little sense to model this plant – in fact; it is highly unlikely the CM/subcontractor would be willing to share capacity information – it’s simply not worth their time. Therefore this brings up the question of whether BOM explosion is actually necessary for companies that have outsourced manufacturing.
To learn about the history of MRP see this link.
Brightwork Explorer for ERP Parameters
How to Tune ERP Systems
ERP applications require MRP parameters to be optimized externally to the ERP system. Having analyzed many ERP systems, we developed the Brightwork MRP & S&OP Explorer. It is free to access until it sees “serious usage” and is free for students and academics. Click the image to find out more.
The Real Story on ERP
How This Book is Structured
This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.
ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.
Break the Bank for ERP?
Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.
By reading this book you will:
- Examine the high failure rates of ERP implementations.
- Demystify the convincing arguments ERP vendors use to sell ERP.
- See how ERP vendors take control of client accounts with ERP.
- Understand why single-instance ERP is not typically feasible.
- Calculate the total cost of ownership and return on investment for your ERP implementation.
- Understand the alternatives to ERP.
- Chapter 1: Introduction to ERP Software
- Chapter 2: The History of ERP
- Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
- Chapter 4: The Best Practice Logic for ERP
- Chapter 5: The Integration Benefits Logic for ERP
- Chapter 6: Analyzing The Logic Used to Sell ERP
- Chapter 7: The High TCO and Low ROI of ERP
- Chapter 8: ERP and the Problem with Institutional Decision Making
- Chapter 9: How ERP Creates Redundant Systems
- Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
- Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
- Chapter 12: Conclusion
MRP. Accessed October 18, 2013. https://en.wikipedia.org/wiki/Material_requirements_planning
Castenllina, Nick. To ERP or Not to ERP: In Manufacturing, It Isn’t Even a Question, Aberdeen. 2011 https://aberdeen.com/aberdeen-library/7116/RA-enterprise-resource-planning.aspx
I cover BOM explosion in MRP in the following book.
Repair MRP Book
What is the State of MRP?
MRP is in a sorry state in many companies. The author routinely goes into companies where many of the important master data parameters are simply not populated. This was not supposed to be the way it is over 40 years into the introduction of MRP systems.
Getting Serious About MRP Improvement
Improving MRP means both looking to systematic ways to manage the values that MRP needs, regardless of the MRP system used. It can also suggest evaluating what system is being used for MRP and how much it is or is not enabling MRP to be efficiently used. Most consulting companies are interested in implementing MRP systems but have shown little interest in tuning MRP systems to work to meet their potential.re
The Most Common Procedure for Supply and Production Planning?
While there are many alternatives to MRP, MRP, along with its outbound sister method DRP, is still the most popular method of performing supply, production planning, and deployment planning. In the experience of the author, almost every company can benefit from an MRP “tune up.” Many of the techniques that the author uses on real projects are explained in this book.
- Chapter 1: Introduction
- Chapter 2: The Opportunities to Improve MRP
- Chapter 3: Where Supply Planning Fits Within the Supply Chain
- Chapter 4: MRP Versus MRP II
- Chapter 5: MRP Explained
- Chapter 6: Net Requirements and Pegging in MRP
- Chapter 7: Where MRP is Applicable
- Chapter 8: Specific Steps for Improving MRP
- Chapter 9: Conclusion
- Appendix A: Calculating MRP