By Mike Hart
Why do most small manufacturers get poor results with ERP systems? It’s because of the MRP Catch 22:
You invest in ERP to boost manufacturing efficiency.
Traditional MRP is unusable, so you revert to legacy planning methods.
Legacy planning methods cannot boost manufacturing efficiency.
The MRP Catch-22 traps small businesses in a costly ERP system that cannot boost manufacturing efficiency.
What is manufacturing efficiency?
Manufacturing efficiency is the ability to reduce time to shipment with efficient utilization of inventory. The only way to boost manufacturing efficiency is with better planning.
Traditional MRP is a planning system developed in the mid 1960’s that still works the same way today. Planning is based on BOM structures applied to fixed future time buckets that are populated with a blend of forecast and actual demand from sales orders and a master production schedule. Work order and purchase order dates are backward scheduled from demand dates by fixed lead times. Orders are firmed as future demand transforms into current demand.
Virtually every “Traditional ERP” and “Hybrid ERP” system listed in my Manufacturing Software Directory is designed for traditional MRP planning.
Why is traditional MRP unusable for small business?
Traditional MRP can be made to work with a great deal of effort and expertise, but it is not a viable solution for most small businesses because it is over-complicated and inherently flawed due to its forecast-driven architecture.
Forecasting was somewhat easier in the 1960’s when products were highly standardized and relatively simple. Today, forecasting is far more challenging because products have many variations and are often customized with unpredictable specifications. The fundamental problem with forecasting in any era is that forecast demand always differs from actual demand. Forecast errors increase the farther out projections are made, and errors at top levels amplify with greater magnitude at each lower level in the BOM structures, a phenomenon known as the “bullwhip” effect.
The master production schedule is generated from error-prone forecasts and is therefore tentative by nature and must be constantly adjusted and firmed as forecast demand stabilizes and becomes current. Because backward scheduling is used, work orders and purchase orders are often scheduled in the past and must be moved forward, which delays work orders for higher-level items. Lower-level work order delays accumulate and magnify against higher-level work orders.
Traditional MRP takes a great deal of time to maintain item settings, forecasts, sales order dates, and production schedules and to coordinate purchase order adjustments with suppliers. Planners often run MRP once a week to confine all the effort involved into one big planning session instead of repeating the process every day.
The bottom line is – most small manufacturers either try traditional MRP and then abandon it out of frustration or never give it a chance because they are intimidated by its complexity.
Legacy planning is a dead end
It’s a shame when legacy planning methods are applied to an ERP system, because they cannot boost manufacturing efficiency, no matter how beneficial the other aspects of the ERP software may be.
Manual planning from static shortage reports is counter-productive because it lacks time-phasing and uses ad hoc instead of strategic stocking. BOM explosions are counter-productive because it is inefficient to isolate jobs and POs to one product structure at a time and customers will not tolerate long lead times when everything is made to order. Future jobs and blanket purchase orders are forecasts by another name and have all the same problems with shortages and over-stocking from forecast errors.
Avoid the MRP Catch-22 with alternative ERP
If you are a small business looking for an ERP solution, you can avoid getting snared in the MRP Catch-22 trap by disqualifying any ERP system that is designed for traditional MRP. If your goal is to boost manufacturing efficiency, you should give strong consideration to DBA Manufacturing, which is an ERP alternative designed for demand-driven MRP and just in time manufacturing.
Demand-driven MRP is closely aligned with lean and just in time manufacturing methods in that all activities are “pulled” into the system by actual demand without any forecasts or long-term production schedules. It goes a step further with time to shipment planning with strategic stocking to reduce lead time contribution. It is far easier to use than traditional MRP or legacy planning and can be run daily to respond immediately to new demand.
This video explains how DBA’s version of demand-driven MRP works:
Mike Hart is the co-founder of DBA Software Inc., a leading provider of manufacturing software for small businesses.
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