Material Requirements Planning (MRP), what is it and how do we perform it optimally?

MRP (material requirements planning) is a technique of assessing dependent demand by using a BOM (bill of material), inventory, expected receipts and a MPS (master production schedule) to determine the material requirements (Heizer & Render, 2009).

When we say “dependent” demand, we are referring to the production of an item that is dependent on certain parts. For example, the production of a motor car is dependent on parts like the engine, wheels, windows, body etc. Heizer and Render (2009) also note that, broadly speaking, “for any item for which a schedule can be established, dependent techniques should be used”.

In a paper by Anderson and Schroeder (1984) points out that MRP can and shouldn’t operate in isolation from the rest of the business (i.e. only in manufacturing). MRP Systems should expand to the other functional areas of a firm and information must flow freely between these areas.

The main functions included by Anderson and Schroeder (1994) include:

1)     Manufacturing
As we have discussed above the main focus behind MRP is on manufacturing. The MRP system is based on the type of product being manufactured, identified by using the Master Production Schedule and Bill of Materials (MPS and BOM). Manufacturing is the core process of developing the products.

2)     Engineering
The engineering function of the firm is where the BOM mentioned above comes from. Anderson and Schroeder use an example of a firm implementing MRP where the BOM from Engineering did not match up with the Manufacturing bills – It is important to make sure all data is correct and this is another reason why all areas of the firm should be involved in the system.

3)     Marketing
Marketing is important to MRP systems because this is where the main demand forecasts are coming from. As mentioned in Anderson and Schroeders (1994) example, marketing “provided the information on firm orders and a forecast for the system”.

4)     Finance
As we know the main point of just about any organisation is to maintain profitability and the MRP system is a tool used to optimise the materials required for production. Finance provides accurate reporting on the performance of the implemented MRP system.

5)     Personnel

At the heart of any organisation is its’ personnel. All personnel should be well educated in and understand the purpose of the MRP system.

Expanding on the last point, the study by Anderson and Schroeder (1994) outlined the implementation of an MRP system across two organisations; one successful and one not. The main reason for the unsuccessful implementation was the “degree of commitment to a system rather than to a concept” (Anderson & Schroeder, 1994).

Educating and training employees to understand the importance and exact steps and procedures involved in the MRP system is very important across the organisation as it affects all functions. 

References

Anderson, J. & Schroeder, R. (1994) ‘Getting Results from your MRP System’, Business Horizons, 27 (3), pp.57-64, ScienceDirect [Online]. DOI 10.1016/0007-6813(84)90028-4 (Accessed: 28 May 2011).

Heizer, J. & Render, B. (2009) Operations Management. Ninth Edition. Prentice Hall: New Jersey.

 

Integrating Finance with Operations Management

Heizer & Render (2009, p.33) explains an organisations strategy as its “action plan to achieve the mission”. The mission can be defined as “the purpose or rationale for an organisation’s existence” (Heizer & Render, 2009, p.32).  The mission of the operations management department of an organisation would be to make production consistent with keeping to the organisations overall mission statement, it is focused on the internal processes to do this so maintaining profits and cutting costs is of utmost importance to continue operations.

Production needs to therefore deliver their goods or service cheaper, better (or different) and more responsive (Heizer & Render, 2009, p.33).

Operations strategies are likely to be more successful when they are integrated with other areas of the organisation’s function, not only limited to accounting and finance but also HR, IT, marketing etc. (Heizer & Render, 2009, p.45)

Integration with accounting / finance is something that should be done to achieve the answers to almost all of the “Ten strategic OM Decisions” (Heizer & Render, 2009, p.37), the decisions I would say would require this are

1)     Goods/Service design: As described by Heizer & Render (2009), “design usually determine the lower limits of cost and the upper limits of quality”. Operations must know the financial capabilities of the organisation and the affordability ranges for the level of product they are able to produce. The design must be feasible.

2)     Process/Capacity design: Specific levels of production requires specific levels of labour, management, technology, human resources (qualified and/or unqualified) as well as maintenance; these all come at a cost and make up most of the organisations cost structures (Heizer & Render, 2009).

3)     Location selection: The size and the area of the desired location for the operations strategy to succeed can vary greatly in cost and affordability must be ascertained. If operations required a large plant in a high cost area this may not be feasible and should be consulted against the financial department. Coming to a decision to change areas or have a smaller plant may be required in this situation.

4)     Human resources: People are an integral part of an organisation and, as stated by Heizer & Render (2009), people are expensive. The amount of qualified and unqualified personnel will make up high costs for an organisation and integration with finance/accounting to decide on the affordability of the required personnel as well as salary levels would be required.

5)     Supply chain management: To get good terms and maintain trust with suppliers, keeping a good payment schedule and credit terms is highly important.

6)     Intentory: This ties in to all of the above, the inventory levels must be monitored and considered based on their costs, accounting can provide good reports on the costs behind the levels of inventories that are kept on hand (storage etc.).

7)     Scheduling: With an increase or decrease in schedule time will come additional/decreased costs.

8)     Maintenance: Maintenance can be an expensive or lucrative part of a business depending on which side of the table you are sitting on. Product reliability and  quality are to be considered with maintenance and both of these factors can and mostly are influenced by costs.

Without integration with accounting/finance I would go far as to say that operations would not be able to function effectively.  Finance is what keeps the organisation going and poor operational strategies and decisions without considering finance will cause problems and may even end up in bankruptcy.

References
Heizer, J. & Render, B. (2009) Operations Management. Ninth Edition. Prentice Hall: New Jersey.

Marking, Finance and Operations

The three basic functions of a firm, as Heizer and Render (2009, p.4) have outlined, are applicable to all firms and organisations; whether private, government, non-profit or any other type of organisation. These basic functions can be outlined as follows

1)     MARKETING

Marketing is the part of the firm that is concentrating on generating client demand for the product or service that the firm is producing or providing.

Heizer & Render (2009, p.5) provide some good examples of marketing departments in different businesses, some examples can be:

  1. Commercial Bank – Marketing of loans (mortgage, personal, commercial etc.) which brings in the demand for which the latter two points of this discussion are involved in (mainly 3 – Productions/Ops.).
  2. Internet Service Provider – Marketing of Internet connectivity, shared website hosting, dedicated website hosting, backup services.
  3. Food Store Chain – Marketing opening of new branches, weekly/monthly specials on food products etc.

2)     FINANCE / ACCOUNTING

As I have covered in previous posts, accounting is a vitally important function of a business. Accounting measures the performance of the organisation as well as makes sure the income is collected and the debts are paid (Heizer & Render, 2009, p.4).

Thomas (n.d.) sums the importance of accounting as a function in business as

  1. Allowing business owners to see where profit and losses are being made (Profit and Loss)
  2. Allows business owners to see where and how cash is being spent (Cash Flow)
  3. Shows whether profits are large enough to cover expenses (Balance Sheet)
  4. Helps aid financial decisions.
  5. Required to adhere to tax legislations

All of these areas of accounting apply to all types of businesses.

3)     PRODUCTION / OPERATIONS

This is where operations management comes in to play. Whether the organisation provides manufactured goods or intangible services, or a combination of both the processes are part of the production/operation function.  As Heizer & Render put it (2009, p.4), this function “creates the product”.

There are some notable differences between services and goods but as Heizer & Render show (2009, p.11); even organisations which seem very much “goods” (eg: automobiles), they still require a level of service (vehicle finance, vehicle delivery). The same goes with service heavy organisations (eg: consulting), which mostly have an element of goods as well (eg: printed reports). Heizer & Render  (2009, p.11) point out that one of the only “pure service” providers are those that provide counselling.

Some examples of operations in different organisations are:

  1. Commercial Bank – Tellers, transaction processing, cheque clearing, facility design and layout, vault operation, maintenance and security (Heizer & Render, 2009).
  2. Software Development – facility design and layout (placement of personnel), communications, training, client liaison, quality assurance and control, product development, product design and maintenance.

All of the above 3 functions are imperative to the operation and success of an organisation.

References

Heizer, J. & Render, B. (2009) Operations Management. Ninth Edition. Prentice Hall: New Jersey.

Thomas, C. (n.d.) Why is accounting important in business? [Online] eHow. Available from: http://www.ehow.com/facts_5003375_why-accounting-important-business.html (Accessed: 7 May 2011).

Finance, Financial Accounting and Management Accounting

Finance

Atrill & McLaney (2008) describe Finance (also referred to as financial management) as being something likened to accounting rather than accounting itself. Atrill & McLaney (2008) go on to describe finance as existing to aid decision makers on how to plan a business, by assessing the needs of the business and organising the finances to suit these needs (being simply to make investments for good returns, or additionally numerous other arenas where financial needs must be assessed).

Financial Accounting

Atrill and McLaney (2008) outline Financial Accounting quite thoroughly and it can be summarised as the following: Financial Accounting is predominantly produced to summarise the overall financial standing of a business in a formal, regulatory defined format for public view (eg: investors/potential investors, governments, general employees, suppliers, competitors etc.). Financial accounts are usually prepared out of necessity once (in some cases twice) per year and are often a requirement by many countries tax laws.

Management Accounting

Atrill and McLaney (2008) describe how, as the name suggests, this form of accounting is used by management in a company and are often used to aid in specific decision making requirements (such as new purchases, new investments, etc.). Management accounts are mostly tailor-made both in format and in financial area to best suit the requirements of the specific manager and specific task at hand.

Similarities and Differences

Finance itself is a broader outline of the processes involving finance in a business, which is arguably the most important aspect of a business. Finance itself would encapsulate the latter two of the above definitions.

As described above, Financial Accounting provides predefined forecast on how a business has been running, financially, in the past period; which, as Atrill & McLaney (2008) point out, can also be used to forecast future performance. Management Accounting is predominantly used for projections or forecasts on new ventures or current ventures that a business is partaking in and are generated if and when they are required by management, rather than at predefined times as required by regulatory bodies.

To conclude, “management accounting seeks to meet the needs of the business managers and financial accounting seeks to meet the needs of the other user groups” (Atrill & McLaney, 2008).

References

Atrill, P. & McLaney, E. (2008) Accounting and Finance for Non-Specialists. 6th Edition. Financial Times Press.