How Poor Understanding of MRP2 Can Lead to the Degeneration of Your ERP?

Publié le 07 mai 2014

By Xavier Perrin (xperrin@xp-consulting.fr)

Introduction

Most manufacturing companies strive for enhancing their customer service level, reducing their lead times and reducing their inventories. Two approaches elaborated during the last decades have significantly improved these companies’ ability to take up these challenges:

The advent of information technology allowed computer-aided planning tools to surface. In that respect, J. Orlicky, creator of the first MRP (Materials Requirements Planning) algorithms during the 60s’, laid the foundations which allowed then O.Wight and G.Plossl to develop the framework of MRP2 (Manufacturing Resource Planning), taken over by our modern ERP. The continuous development of our computers’ power and programming techniques gave birth to increasingly efficient APS (Advanced Planning and Scheduling).
Simultaneously, Toyota’s Production System formalized by Taiichi Ohno, then popularized by researches of the MIT, and J.Womack, D. Jones and D.Roos’ famous book “The machine that changed the world”, provided manufacturers with a philosophy and tools allowing them to significantly increase their performance in terms of quality, costs and lead times.
And yet, the contrast between these techniques’ promises and what we can observe in a lot of companies is striking… Even though they spent an enormous amount of money to get the best ERP, teams in charge of the supply chain and production control mostly use… spreadsheets! No need to browse technical magazines to find out the number one ERP: it is powered by Microsoft and its name is Excel!
Do we have to conclude that our ERPs are inadequate? That they can’t answer our companies’ needs? A lot of criticism, if not sarcasms, is expressed towards these technologies. Often, people don’t hesitate to blame them for the bad performances of our companies. This accusation is also frequently pronounced by colleagues sometimes called lean manufacturing gurus… One should always be wary of gurus, may them be lean manufacturing experts…
After 30 years working in manufacturing companies, about 15 of which as a consultant, I can assure with confidence that ERP – of course, I mean regular ERPs, not fake ones – is never the cause of a company’s difficulties. When the ERP is blamed, the real cause of the problem needs to be searched in two directions:
1. The way the ERP system has been implemented, and thus the competency of the people who set it up (project team, integrator…)
2. The way the ERP system is used, and thus the competency of the people who use it and, above all, their managers’.

In this article, I am going to talk about this second point.

Reminder about MRP2

The point of this article isn’t to do yet another description of these concepts: there is already an enormous amount of literature on the subject. You just need to read the good books… favoring the ones written by CPIMs!
The framework of a planning system is described below. I would like to take some time to talk about the pointers (in red on the diagram) linking the boxes together and making up the very substance of the MRP2 planning system.

As seen on the diagram, the red pointers are double arrows: they link the boxes together in both ways.
Let us take the example of the arrows linking the S&OP and RRP boxes. They mean that when a production plan has been set up during the S&OP process (monthly production volume by product families over an at least 18 months horizon), resources requirements created by the production plan are calculated for aggregate resources. When the need in resources and the capacities are not balanced, two solutions are worth considering (most of the time, a mix of both is chosen):
Either capacity can be adjusted in the horizon, in which case the plan can be approved,
Either capacity can’t be adjusted in the horizon, and the plan needs to be re-examined before being approved.
The double arrow thus indicates that the S&OP box drives the RRP one (arrow towards the right) and that the RRP box constrains the S&OP one (arrow towards the left). Of course, these arrows mean much more than information transfer. Some even see the MRP2 system first and foremost as an information system, which is not only simplistic but also the cause of many disappointments. Pointers shows that decisions have to be made: the planning system is, first of all, a decision process, which of course have to be made by the right people. For instance, if it is needed to adjust some critical resources’ capacities, the decision involves the company’s highest level of responsibility. Likewise, if the production, sales or inventory plan must be reconsidered, it involves the concerned management boards, and of course, the CEO.
Now, if we consider the S&OP and MPS boxes, the descending arrow indicates that S&OP is driving MPS, which means that the production schedule (references, quantities, periods) must fit into the production plan of the whole product family. Sometimes, the MPS doesn’t fit in the framework of the production plan due to the reality of short-term customer orders and/or the actual product mix and/or capacity constraints exhibited in the RCCP box. In that case, the rising arrow from the MPS to S&OP constrains S&OP: the production plan must be revised.
This mechanism repeats itself at each level of the planning system. It represents the decision process which is the very essence of a planning system.
When the arrows don’t play their parts, which means when decisions aren’t made at the right time by the right people, the planning process is inadequate, whatever its supporting ERP might be.
In the rest of this article, I will spend some time on a planning system classic malfunction, which is especially disastrous for the company’s performance (service level, inventory) and for the effectiveness and efficiency of the teams in charge of procurement and scheduling. Therefore we will take a closer look to the arrows linking the MPS, MRP, and PAC boxes.


Observations

Let’s imagine a company that would manufacture its own products, assembling components and sub-assemblies made in its own workshops and supplied from its suppliers. This company has a good ERP: it covers aptly the whole planning system. Admittedly, it isn’t exactly the latest generation, and its ergonomics is a bit outdated…

People in charge of procurement and their colleagues in charge of production activity control became Microsoft Excel experts: it is a necessity because dispatch-lists, missing-parts lists with updated delivery dates and load profiles are all made on Excel sheets from queries in the ERP data base. Why don’t those people use the reports and documents created from the ERP? Are they so badly displayed, so unreadable that they become impracticable? No, ERP reports are not used because they are WRONG! How are they wrong? Answers:

  • The missing-parts lists communicated to the planners so that they can schedule end-item assembly mainly displays delivery dates in the past,
  • The dispatch-lists transmitted to the shop-floor don’t show the real state of priorities. “True” priorities are defined by a “strategic list” which isn’t issued from the ERP…
  • The load-profiles generated by the ERP are unusable because they show that most of the workload is in the past.

MPS adherence isn’t measured, but everybody knows very well that it is extremely poor. Actually, when the situation is getting out of control, even with Excel, a huge cleaning up is undertaken in order to reset the MPS: work orders are rescheduled with realistic priorities so the unmanageable delays disappear. Thus, two “clean ups” are made every year on average. Everybody likes the weeks following these: finally, they can work with “real” information! But the calm doesn’t last: the gangrene of delays is soon coming back, spoiling all the documents, even the ones created by Excel. This is the fault of:

  • Production people who don’t respect priorities,
  • Suppliers that never deliver on time,
  • And of this damned outdated ERP…

The material manager was desperate because of his teams’ inability to schedule properly and to stand by their commitments when they were asked: “When will you be able to provide the components that we need?” He was desperate because of the constant blames of the salespeople who couldn’t understand that his team can’t deliver on time… Finally, he asked me if I knew an ERP that would be appropriate to that situation and that could solve all of these problems…

Analysis

The company we are talking about needs an ERP that works with a MRP2 planning system for solving its problems. Yet, the company has had this tool for 20 years… of course, it is not that new anymore, and it is a bit old-fashioned with its “AS400-styled » screens and interface. But all MRP2 functionalities exist and they are aptly built.

Of course, the first condition for our company to correctly operate its ERP is using accurate data. It is the good old GIGO (Garbage In Garbage Out) principle… The processes guarantying the accuracy of static and dynamic data must be in place and operating. I won’t develop that point in that article, as many have written about it already. Moreover, it is not our company’s main weakness. Its problem lies in the “red arrows” seen above. Here, the arrows work in only one way. The MRP2 system is here operated as an “open-loop” system.

The S&OP process is inadequate: short-term goals are the first focus, and the problems raised by the supply / demand balancing process are avoided.

The MPS is seen as a goal that should never be questioned by the reality of procurement and manufacturing: the suppliers and shop floor people have to manage to achieve the schedule, which is not “negotiable”. Besides, the RCCP process at the MPS level is considered only for allowing supervisors to adapt. It is out of question that it leads to the questioning of the schedule.

A « basic rule » stated by the Supply Chain Manager is: « it is forbidden to reschedule neither shop orders nor purchase orders ». If so, it would mean that we « accept » delays and this is unacceptable. Moreover, the relative priority of requirements would be lost. And, of course, the priority of orders which are delayed two weeks is higher than the priority of those which are only one week late. Anyway, the “strategic list” established by the planners and approved by top management must be the ultimate reference.

This rule is the death of the planning system. It eliminates the rising arrow going from execution to MPR, and the one going from MRP to MPS. MRP2 becomes “Open-loop MRP”. The ERP is set degenerating, and still it is seen as the cause of all problems…

Indeed, the basic MRP logic is to create planned orders from:

  • Gross requirements
  • Scheduled receipts
  • Inventory on-hand

If scheduled receipts aren’t recorded in the correct period, especially when they are in the past, MRP is not able to give any relevant indication for the coming periods.

Another negative effect of not rescheduling past-due orders is the loss of essential information given by the MRP logic: horizontal dependency. Horizontal dependency of two parts which are components of the same parent means that the due-dates of orders for these components are linked. For instance, if you’re assembling mowers, the requirements for the wheels depend of the requirement for the motor. Indeed, if the due-date of the motor is rescheduled forward or backward, then the due-date for the wheels is affected, even if the wheels aren’t required for assembling the motor. Yet, the wheels and the motor are both required for the assembly of the mower. Therefore, they are linked. This feature of the bill-of-material / MRP logic is essential for handling actual priorities on the shop floor and at suppliers. When this feature is lacking, you rely on Excel sheets for managing « actual » priorities, which is something they cannot do… unless by programming all of MRP’s algorithms with Excel!

Of course, when an order is late, the point is not to acknowledge the postponement and to systematically reschedule the MPS. But, when a delay is noticed, it won’t be solved by giving an order like « Get it sorted out! »(I’ll keep it courteous here, but it probably doesn’t reflect the shop floor!). Such an injunction never solved a delay problem. I know only two possibilities:

  • Either the cause of the delay is identified and we know how to solve it. (they must be documented and followed to have a chance to succeed),
  • Either the cause of the delay is identified, but the delay can’t be solved: the due-dates must be reported and updated, and the consequences on upper planning levels must be estimated and taken into account (rising arrow).

When this method is rigorously followed, the ERP can indeed be used… even if it is old! On the contrary, if you are using a recent ERP without applying the rising arrows, it won’t be any more efficient than the old one…

Solutions

This example I just described, no matter how fictional it is, is common enough that I could extract its root cause.

Let’s use the 5 whys method that is so often evoked with the lean approach:

We understood that the dysfunction doesn’t come from the ERP, but from the way it is used.

The question is then: why (1) aren’t we able to use our ERP as we should?

The first answer that comes to mind is: because people don’t know how to use it.

Why (2) then there re so many employees that can’t use their ERP properly? This sure is surprising considering the budget given for training to ERP setting-up projects… But if we take a closer look, which is the part of these training programs dedicated to MRP2 planning system and to the importance of red arrows?

Why (3), despite all the training efforts coming with ERP projects, so little time (if any) is dedicated to explain the MRP2 planning system?

I will give a double answer to that question (with two more whys!):

First, because the integrators, who should perfectly know how the ERP they’re setting up works, sometimes do not really understand the decision system associated to MRP2. Why (4)? Because most of the time, they never experienced themselves the decision making associated to the planning system, and because it is very difficult to talk about it when you haven’t experienced it in the first place…

Then, because managers, in charge of supply chain management or operations management, themselves don’t always understand the principles presented in this article. Hence they aren’t able to be sure they are properly set up by their employees. Why (5) don’t these managers have this expertise? Firstly, because we probably don’t insist enough on these qualities when we hire for these positions. On the other hand, because too often, these managers consider they don’t have to deeply understand the tools used by their collaborators. How many times did I hear such manager’s answer: “Figure it out, you are the expert” to the questions of an employee well aware of the fact the ERP wasn’t properly used…

One of the essential principles of the lean approach about managing employees is: managers must understand in details their employees’ work. Of course, managers can’t (mustn’t) be experts like all their employees, but they have to spend enough time on the spot with them in order to understand the implications of all of their tasks, and to understand how they interact with the whole company. This is a crucial principle; if it isn’t put into practice, it leads to situations such as the ones described above.

Conclusion

We just came to understand how the lack of understanding of the MRP2 planning system by company’s managers necessarily leads to the “degeneration” of the best ERPs. But since the highest levels of management are involved in the planning system, these principles must be mastered at the highest level. My colleague and friend Jean-Pierre Fauverghe, Oliver Wight associate consultant, likes to use the image of Newton’s apple to describe a very damaging consequence of gravity: when decisions aren’t made where they should be, they “fall” in lower levels, where people don’t have the relevant information nor the power to take appropriate decisions. It is noteworthy to observe that people in charge of the MRP and PAC levels waste a huge amount of energy to solve problems that should have been treated at the master planning level (S&OP and MPS). Along with the huge amount of energy and the many wastes (non-added value) generated by such situations, the most damaging consequences affect the customers who are, most of the time, the less well-treated and the first victims of these dysfunctions.


1 réaction sur How Poor Understanding of MRP2 Can Lead to the Degeneration of Your ERP?

  • Hervé Galon dit :

    Xavier,
    Once again, a great analysis!
    One comment on Excel AND ERPs.
    One of the primary benefits of ERPs is the quality and the consistency / homogeneity of the data in large organisations. As, rightly, it is recommended to mimimise customisation of ERPs, it lays the foundation for Excel-based queries or add-ons aiming at going one step beyond and also allowing to create ad-hoc synthesis for management (who may change their mind often…)
    Hervé

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