Faculty of Engineering MATERIAL REQUIREMENTS PLANNING (MRP) PRACTICES IN MELAKA MANUFACTURING COMPANIES. Chua Keng Yew

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1 Faculty of Engineering MATERIAL REQUIREMENTS PLANNING (MRP) PRACTICES IN MELAKA MANUFACTURING COMPANIES Chua Keng Yew Bachelor of Engineering with Honours (Mechanical Engineering and Manufacturing Systems) 2005

2 UNIVERSITI MALAYSIA SARAWAK R13a BORANG PENGESAHAN STATUS PROJEK TAHUN AKHIR Judul : Material Requirements Planning (MRP) Practices: Melaka Manufacturing Companies SESI PENGAJIAN: Saya CHUA KENG YEW mengaku membenarkan tesis * ini disimpan di Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dengan syarat-syarat kegunaan seperti berikut: 1. Tesis adalah hakmilik Universiti Malaysia Sarawak. 2. Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dibenarkan membuat salinan untuk tujuan pengajian sahaja. 3. Membuat pendigitan untuk membangunkan Pangkalan Data Kandungan Tempatan. 4. Pusat Khidmat Maklumat Akademik, Universiti Malaysia Sarawak dibenarkan membuat salinan tesis sebagai bahan pertukaran antara institusi pengajian tinggi. 5. ** Sila tandakan ( ) di kotak yang berkenaan SULIT TERHAD (Mengandungi maklumat yang berdarjah keselamatan atau kepentingan Malaysia seperti yang termaktub di dalam AKTA RAHSIA RASMI 1972) (Mengandungi maklumat TERHAD yang telah ditentukan oleh organisasi/badan di mana penyelidikan dijalankan) TIDAK TERHAD (TANDATANGAN PENULIS) Alamat tetap: 11, Jln MJ 15, 75350, Taman Merdeka Jaya, Batu Berendam, Melaka Tarikh: (TANDATANGAN PENYELIA) Pn. Magdalene Anak Andrew-Munot Nama Penyelia Tarikh: CATATAN * Tesis dimaksudkan sebagai tesis bagi Ijazah Doktor Falsafah, Sarjana dan Sarjana Muda. ** Jika tesis ini SULIT atau TERHAD, sila lampirkan surat pihak berkuasa/organisasi berkenaan dengan menyatakan sekali sebab dan tempoh tesis ini perlu dikelaskan sebagai sulirt dan terhad.

3 APPROVAL SHEET This project report entitled Material Requirements Planning (MRP) Practices in Melaka Manufacturing Companies was prepared by Mr. Chua Keng Yew as partial fulfillment of the requirement for the degree of Bachelor of Engineering with Honours (Mechanical Engineering and Manufacturing System) is hereby read and approved by: Madam Magdalene ak. Andrew Munot Date (Supervisor)

4 DECLARATION I hereby declare that the thesis is based on my original work except for quotations and citations, which have been duly acknowledged. I also declare that is has not been previously or concurrently submitted for any other degree at UNIMAS or other institutions. Signed Name: Chua Keng Yew Date:

5 MATERIAL REQUIREMENTS PLANNING (MRP) PRACTICES IN MELAKA MANUFACTURING COMPANIES CHUA KENG YEW This report is submitted in partial fulfillment of the requirement for Degree of Bachelor of Engineering with Honours (Mechanical Engineering and Manufacturing System) Faculty of Engineering UNIVERSITI MALAYSIA SARAWAK 2005

6 DEDICATION To My Beloved Mum and Family.. ii

7 ACKNOWLEDGEMENT The successful completion of this project is a cumulative contribution from many parties. The first, being my parents and family members, whom constant love and support I could not have done without. I, hereby, would like to express my gratitude and sincere appreciation for their unconditional love and understanding. Next, I would like to acknowledge my project supervisor, Madam Magdalene ak Andrew Munot for her guidance and unceasing patience. I would also take this opportunity to apologize for being an annoyance and for causing her extra stress throughout the course of this project. My deepest gratitude for the various manufacturing companies for allowing me to carry out this study. My sincere thanks also go to each and every one of my participants for sparing their time to participate in this study. Without them, this would never materialize. Lastly, my heartfelt gratitude for my friends and course mates for their friendship and support throughout my mechanical course in UNIMAS. I truly appreciate our friendship and I will treasure it forever. Thanks for making me feeling at home in a foreign land. Thank you. iii

8 ABSTRACT This paper explores the combinations of quantitative and qualitative aspect of the effects of Material Requirements Planning (MRP) practices in Melaka industries. The objectives of this study are to determine the actual practices of MRP, the failure factors of MRP system, and methods used to cope with MRP failure. This study is based on the data obtained from mail survey and personal interview of manufacturing companies in Melaka. The participating companies were personally approached through telephone before sending the questionnaire or performing the interview. A total of 24 mail survey questionnaires were received throughout the study and these data were analyzed using the Statistical Package for Social Science (SPSS) version Data obtained from the 6 interview sessions were transcribed verbatim manually and used as the qualitative approach to support the quantitative results for the study. The result of this study shows that most company who adopts the MRP system modified the system according to their needs. In addition, the result also shows that human factors, data accuracy, demand uncertainty and supplier did actually affects the performance of MRP system. Methods for solving the materials shortage such as rescheduling, multi-supplier, renegotiating date lines and others are utilized in order to achieve on-time delivery. On the whole, this study found that MRP system can be used as a tool to help a company to be competitive in global, but improvements and proper modifications should be done in order to achieve better performance. Furthermore, the involvement of an experienced worker is strongly recommended to reduce the failure rate as well as increase the efficiency of MRP system. This study is limited to manufacturing companies in Melaka only. Therefore, iv

9 the results obtained from this study are not suitable to be used as a guideline for other manufacturing companies in Malaysia. v

10 ABSTRAK Kajian ini dijalankan dengan tujuan untuk mengenalpasti akan amalan yang diamalkan oleh kilang-kilang pembuatan di negeri Melaka dalam penggunaan sistem Material Requirements Planning (MRP). Selain itu, factor-faktor yang mempengaruhi kegagalan MRP dan cara-cara untuk mengatasinya juga dikaji dengan teliti. Data untuk dalam kajian ini diperolehi daripada 24 buah kilang yang mengembalikan borang soal-selidik, dan 6 buah kilang yang terlibat dalam sesi temuduga. Kilang-kilang tersebut dihubungi terlebih dahulu untuk meminta kebenaran mereka untuk menjalankan kajian ini. Data daripada borang soal-selidik dianalisis dengan menggunakan Statistical Package for Social Science (SPSS) versi 11.5, dan carta pie telah dihasilkan untuk menggambarkan keputusan data analisis. Data daripada sesi temuduga pula dianalisis dan dicatat dengan menggunakan kaedah kualitatif untuk menyokong keputusan survei pos kajian ini. Berdasarkan data yang diperolehi dari kajian, kebanyakkan kilang yang menggunakan sistem MRP ini telah mengubahsuaikan sistem asalnya untuk disesuaikan dengan keperluan kilang tersebut. Hasil daripada kajian ini juga menunjukkan bahawa MRP memang mementingkan ketepatan data. Tambahan juga, pengaruh kepakaran dalam bidang pembelian bahan adalah amat penting untuk menentukan ketepatan sistem MRP. Cara untuk menyelesai masalah yang dihadapi ketika kekurangan bahan seperti kaedah mengubah jadual waktu pembuatan, membincang semula tarikh penghantaran produk, mencari pembekal yang lain dan sebagainya juga dibincangkan. Secara keseluruhannya, sistem MRP berupaya membantu kilang-kilang untuk menangani cabaran globalisasi, tapi ia hanya menjadi kenyataan sekiranya pengubahan yang betul dilakukan dan perkembangan vi

11 sistem tersebut sentiasa diikuti. Sehubungan dengan itu, pengaruh pekerja berpengalaman adalah amat penting untuk mengurangkan risiko kegagalan sistem MRP. Kajian ini hanya dilakukan di kilang-kilang pembuatan di Melaka sahaja. Oleh yang demikian, keputusan daripada kajian ini tidak boleh digunakan untuk mewakili amalan MRP semua kilang pembuatan yang terdapat di Malaysia. vii

12 TABLE OF CONTENTS DEDICATION ACKNOWLEDGEMENT ABSTRACT ABSTRAK TABLE OF CONTENTS LIST OF TABLES LIST OF FIGURES LIST OF ABBREVIATIONS ii iii iv vi viii xi xii xiii CHAPTER 1 INTRODUCTION Manufacturing in Global Competition Material Requirements Planning (MRP) Practices Problem Statements Objectives of the Study 13 CHAPTER 2 LITERATURE REVIEWS Introduction Manufacturing in Global Competition Material Requirements Planning (MRP) Practices Material Requirements Planning (MRP) system Constituents of MRP system Issues Regarding MRP Practices Method for overcoming material shortage in 27 viii

13 MRP Criteria for MRP Success 28 CHAPTER 3 METHODOLOGY Literature Reviews Companies Selection Data Collection Methods Data Collection Instruments Interviews Mail Survey Types of Questions Data Analysis Verbatim Transcription Statistical Package for Social Science (SPSS) 43 CHAPTER 4 RESULTS AND DISCUSSIONS Responses to the Study Missing Responses Company Profiles Respondents to Mail Survey Respondents to Interview Session Material Requirements Planning (MRP) Practices The applications of MRP system in industries Failure factors of MRP system Methods used to cope with MRP failures 63 ix

14 CHAPTER 5 CONCLUSIONS & RECOMMENDATIONS Conclusions The applications of MRP system in industries Failure factors of MRP practices Methods used to cope with MRP failures Recommendations The applications of MRP system in industries Failure factors of MRP practices Methods used to cope with MRP failures Limitations 81 REFERENCES 82 APPENDICES Appendix A: Guarantee Letter 91 Appendix B: Participant Information Sheet 92 Appendix C: Questions to Guide/Probe Interview 95 Appendix D: Questionnaire 96 Appendix E: Company List 100 x

15 LIST OF TABLES Table Page 1. Response Rate for the Study 46 xi

16 LIST OF FIGURES Figure Page 1 Competitive Priorities 3 2 Structure of an MRP system 6 3 The input and output of an MRP system Methodology of the Study Company profile according to industrial categories Percentage of company adopting the MRP system Failure Fraction of MRP system The methods used to overcome MRP failure. 63 xii

17 LIST OF ABBREVIATIONS 1. MRP: Material Requirements Planning 2. BOM: Bill of Material 3. MPS: Master Production Schedule 4. MPC: Material and Production Control 5. ATO: Assemble-to-Order xiii

18 CHAPTER 1 INTRODUCTION 1.1 Manufacturing in Global Competition Hayes and Gary (1994), claim that the competition in business environment today changes much faster than twenty years ago due to the advance growing of global economy. Anderson (1994) states that during the 1990s, the manufacturing companies all over the world face stiffer competition than ever before. He also points out that the national boundaries are becoming less and less of a constraint on competition and in many industries, a single global market is now a reality. Cooper (1989) believes that, there is increasing pressure upon manufacturing firms to make their processes more efficient and effective due to the globalisation issues. According to Manthou et al. (1996), the global competition is forcing management to conduct new methods for improving business and manufacturing operations. Gaither and Frazier (1999), also state that the (manufacturing) competition has become more intense and is increasing. In addition, they mention that to succeed in global competition, companies must make a commitment to customers responsiveness and continuous improvement toward the goal of quickly developing innovative products that have the best combination of exceptional quality, fast and on time delivery, low prices and cost. 1

19 Research by Ching (2004) suggests that the manufacturing industry in Malaysia is replete with dynamic challenges. The competition is no longer limited to other manufacturers within the same country, but open to global competition including neighbouring Asean countries and China, many whom are able to produce similar products at more competitive costs. Lee (2001) says that the regime gravitated from (Malaysia) manufacturing licensing toward a more liberalized investment environment. Hence, sustaining competitiveness in Malaysia s economy is vital (Mustapha, 2001). According to Victor (2001), now Malaysia stands at a crossroad, facing challenges from both and domestic front. Besides that, Fong (2002) also mentions that Malaysia must get ready to face the new challenges of globalization and liberalization. According to him again, the Eight Malaysia Plan has embarked on a new phase in industrial development with overriding objective of strengthening the resilience and growth of the manufacturing sector. Krajewski and Ritztman (2002) point out that manufacturing company need to develop the competitive priorities, which are the operating advantages that the firm s processes must possess to outperform its competitors. They suggest that there are eight possible competitive priorities for processes which fall into four main groups (see figure 1.1). Cooper (1989) also claims that productions and inventory management are the most critical factor to be improved to achieve the higher effectiveness and efficiency of the manufacturing processes. 2

20 Flexibility Customization Volume flexibility Quality High-performance design Consistent Quality Competitive Priorities Time Fast delivery on On-time delivery Development speed Cost Low-cost operations Figure 1.1: Competitive Priorities (Krajewski & Ritzman, 2003) According to Agarwal (1995), with the world of economy developing fast and productivity norms being the focal point in the industries, the role of management to use the resources effectively becomes more and more crucial. This is because traditionally materials were thought of as a cheap, readily available and plentiful. But with the changing concept the realization of cost effectiveness of products in global market and their proper management becomes an important feature. In addition by Agarwal, he also stated that materials management has tremendous influences on the ultimate cost of a product because it handles the total flow if materials in an organization. This statement is strongly supported by Arnold (1991), by stating that proper material management can reduce costs by being sure that the right materials are in the right place at the right time and the resources of the company are properly used. 3

21 Humphreys et al., (2004), observe that, many companies have come to recognize the crucial role that purchasing and materials management activities play in determining overall corporate performance. Hence, Groover (2001) states that all the purchased raw materials and parts must be ordered from suppliers and all of these items must be planned to ensure its accessibility when needed. A study by Sum et al., (1995) found that in responds to regional and international competition, many manufacturing companies have adopted Material Requirements Planning (MRP) systems to improve their manufacturing operations. 1.2 Materials Requirements Planning (MRP) Practices According to Starr (1989), MRP is an inventory management information system. It uses forecasts of uneven, sporadic, lumpy demand as inputs to the planning process for inventory levels. It is constructed with a principal goal which is to reduce stock levels with consequent savings in capital, resources, and space (Frenk and Kleijn 1998). Frenk and Kleijin also claim that the MRP was designed as an inventory control system for manufacturing industries. As an inventory control system, Groover (2001) added that the details MRP schedule identifies the quantities of each raw materials and component item. It also indicates when each item must be ordered and delivered to meet the master schedule for final product. Lopez (2004) agrees with Groover by stating that the main function of MRP is to guarantee material availability, that is, it is used to procure or produce the requirement quantities on time both for internal purposes and for sales and distribution. 4

22 Jensen (2004) stated that, with given information describing the production requirements of the several finished goods of the system, the structure of the production system, the current inventories for each operation and the lot sizing procedure for each operation, MRP determines a schedule for the operations and raw material purchases. Plossl (1994) found that MRP is a highly effective tool of manufacturing inventory management with the following benefits; i. Inventory investment can be held minimum. ii. iii. iv. Planning is change sensitive and reactive. It provides future data on an item by-item basis. Inventory control is proactive, not reactive. v. Order quantities are related to requirements. vi. It focuses on timing of requirements order actions. With all possible benefits mentioned above from the MRP system, it is undeniable that Bott and Ritzman (1983), claims that the MRP systems have been widely applied in industry to better manage multi-product, multistage production environments. Krajewski and Ritztman (2002) also point out that MRP systems have proven to be beneficial to many companies. Stevenson (1990) points out that there are three major sources of information in a MRP system. They are the master schedule, the bill-of materials, and the inventory records (See figure 1.2). He also states that all these information is known as inputs to MRP system. Krajewski and Ritztman (2002), using the three 5

23 information (MPS, BOM and inventory records), the MRP system identifies actions that operation must take to stay on schedule, such as releasing new production orders, adjusting order quantities, and expediting late orders. Master Production Schedule Inventory Record File Material Requirements Planning Capacity Planning Bill of Materials Planned order releases form 1. Purchasing 2. Manufacturing and other output Figure 1.2: Structure of an MRP system. (Groover, 2001) Arnold (1991) suggests that the master production schedule (MPS) is a statement of which end items are to be produced, the quantity of each, and the dates they are to be completed. It drives the MRP system by providing the initial input as to what components are required so the MRP system can produce orders for manufactured and purchased parts. Groover (2001) also claims that the MPS lists the types of product to be manufactured and the quantity to be produced and the time that the product needs to be completed for delivery. According to Groover (2001), a manufacturing firm generally works toward monthly delivery schedule. 6

24 Stevenson (1990) suggests that the bill of materials (BOM) contains a listing of all the assemblies, sub-assemblies, parts, and raw materials that are needed to produce one unit of a finished product. Thus, each finish product has its own BOM. Groover (2001) points out that the BOM file is used to compute the raw material and component requirements for end product listed in the MPS. It provides information on the product structure by listing the component parts and subassemblies that make up each product. Stevenson (1990) points out that inventory records file is used store information on the status of each item by time periods. Arnold (1991) believes that inventory is the major input to the MRP system. In his view, when a calculation is made to find out how many (material) are needed, the quantities on hand must be taken into account. Krajewski and Ritztman (2002) also say that the purpose of the inventory records is to keep track of inventory level and component replenishment needs. Arnold (1991) claims that there are two kinds of information needed in the inventory records. The first is known as planning factors, which includes information such as order quantities, lead times, safety stock, and scrap. All of these factors do not change often but it is needed in the planning for on time delivery purpose. The second kind of information needed is on the status of each item. The MRP system needs to know how much (item) is on hand, is allocated, and is available for future demand. According to Arnold, this type of information is dynamic and changes with every transaction that takes place. 7

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