2/4/2019 MRP, JIT, OPT, FMS?

OPERATIONS MANAGEMENT

MRP, JIT, OPT, FMS?

by Sumer C. Aggarwal
FROM THE SEPTEMBER 1985 ISSUE

Managers of manufacturing companies are being suddenly confronted these days with an array of
new systems to improve production efficiency. Will it be materials requirements planning, kanban,
or optimized production technology? Or how about the latest approach—flexible manufacturing
systems? As in many areas of business, choosing the best operations management technique making
trade-offs. MRP allows for an extraordinary degree of advance planning for medium-inventory,
mass-production companies but at a cost in flexibility and informality. Kanban keeps inventory
costs down and involves employees but requires well-structured supply lines and cooperative
workers. Optimized production technology focuses on clearing up bottlenecks in the manufacturing
process but can adversely affect nonbottleneck areas and is a proprietary system. Flexible
manufacturing systems offer the hope of eliminating many of the weaknesses of the other three
approaches but possible at a cost of cutting out many jobs.

Choosing a system takes time and implementation can cost millions of dollars. The author offers an
assessment of each choice and information about the trade-offs.

A revolution is occurring in operations management. During the last 15 years, three

important approaches—materials requirements planning (MRP), kanban (JIT), and
optimized production technology (OPT)—have invaded operations planning and control
in quick succession, one after the other. Each new system has challenged old assumptions and ways
of doing things. These innovative methods are completely changing not only manufacturing
processes but also the operations management. Factory managers must decide which approach to
adopt to meet current and future needs. Installing any one requires several years to train company
personnel and millions of dollars of investment.
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As if these three choices aren’t enough, managers face a new alternative with the emergence of
flexible manufacturing systems (FMS). Current indications even suggest that FMS may totally do
away with existing operations planning and control systems.

Within this turbulent context, I seek in this article to provide plant managers with a comparative
general assessment of the three principal systems, along with the newcomer.

Materials Requirements Planning

MRP makes available purchased and company-manufactured components and subassemblies just
before they are needed by the next stage of production or for dispatch. This system enables
managers to track orders through the entire manufacturing process and helps purchasing and
production control departments to move the right amount of materials at the right time to
production-distribution stages.

MRP assumes uneven demand, attempts to achieve zero stockouts, and concentrates on setting
priorities. It requires that a precise demand forecast for each product is available and that each and
every product or subassembly’s bill of materials is accurate.

Managers using MRP can calculate the requirements of each and every part or subassembly week by
week and identify in advance possible delays or shortages. People in inventory control can then
reschedule the affected release dates for orders to try to meet the promised deliveries.

MRP requires that every employee—whether operator, analyst, quality inspector, salesman,
purchasing agent, or planner—be thoroughly and strictly disciplined about feeding updates into the
system. Without such adherence, the MRP system memory starts accumulating errors with regard to
stock on hand, quantities needed, and when items are needed for specific parts or assemblies.
Everyone interacting with MRP systems must make all their decisions using system data at each and
every step.

An MRP system appears to work best for companies with mass-production assembly lines. Some
managers report that MRP has helped them in reducing inventories, improving labor and space
utilization, and streamlining scheduling and receiving operations.

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Anywhere from 2,000 to 5,000 U.S. companies today—most with annual sales exceeding $20 million
—are using MRP. Businesses with a history of chaotic inventory situations seem to do best with this
approach. As an elaborate information system, MRP focuses management’s attention on accurate
record keeping, which leads to reduced inventories and improved customer service.

Black & Decker has achieved remarkable success using MRP. As the world’s largest manufacturer of
power tools, with yearly sales over $1 billion, it produces nearly 20,000 items. With MRP, the
company improved its materials planning and handling and record keeping. Further, it reduced
engineering change orders, surplus and obsolete materials and components, and past-due receipts
from suppliers.

But to give all the credit to MRP would be a mistake. Black & Decker managers and other employees
planned and accomplished a mission intelligently, and MRP helped by producing reasonably correct
and timely information.

An article in the March 1984 issue of International Management stated that some critics believe,
“MRP is a $100 billion mistake, and 90% of MRP users are unhappy.” The article quotes a study
conducted at Chalmers University in Sweden that claims, “Companies using MRP and other
computerized production planning systems have preserved high levels of inventories as usual.”1

MRP requires tremendous amounts of data inputs and is complex. It assumes unlimited capacity in
all work centers, whereas in reality some work centers always behave as bottlenecks. This
contradiction destroys the accuracy of MRP scheduling logic and makes it ineffective for capacity
planning and control.

Successfully implementing MRP entails developing new communication lines and detailed auditing
procedures, which mean extra efforts—and possibly resentment—from employees. Also, MRP is
based on the premise that top management will always use it for planning and control decisions; in
reality, managers often feel hampered by it. MRP cannot tolerate “informal systems” for getting the
job done, and foremen and workers who like less formality can resent it. Consequently, inaccuracies
tend to find their way into important MRP files. The bill of materials may not accurately represent

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the product components or assembly stages, or ongoing inventory transactions may not be correctly
entered in the inventory records, or the master production schedule may not be updated to reflect
the latest actual demands and delivery dates.

Kanban: Just-in-time
To Japanese managers, kanban or the just-in-time system is an approach for providing smoother
production flows and making continual improvements in processes and products. Kanban attempts
to reduce work in progress to an absolute minimum. In addition, the system constantly attempts to
reduce lead times, work-in-process inventories, and setup times.

Kanban’s core objective is to obtain low-cost, high-quality, on-time production. To achieve this, the
system attempts to eliminate stock between the successive processes and to minimize any idle
equipment, facilities, or workers.

Kanban assumes that the production rate at the final assembly line is even. Revisions in the monthly
master production schedule needed to meet market condition changes must be small. It cannot
tolerate load fluctuations of more than ±10%, and it starts breaking down under larger deviations
from average conditions. It also requires that the daily schedule for each part or assembly remain
nearly the same every day.

Kanban has its roots in employee motivation and assumes that workers will perform at their best
when they are entrusted with increasing responsibility and authority. Each kanban worker has the
right to stop the assembly line when he or she is falling behind or discovers a defective part or
subassembly. The approach also assumes that employees will help other people when they fall
behind and that each person is capable of doing different types of jobs.

The kanban approach keeps the setup times and costs at negligible levels. In addition, the
company’s suppliers are supposed to act like extended storage facilities of the company itself.

The just-in-time system requires strict discipline and cooperation on the part of management,
supervisors, and workers, along with new methods and procedures for manufacturing planning and
control.

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Up to now, kanban has been used for mass-produced items in Japan, Europe, and more recently in
North America. The kanban move ticket replaces the job orders and routing sheets of the past. It
emphasizes small lot sizes. The system requires short lead times, which translate into small
inventories at every stage. Because a chain of move tickets connects all stages from suppliers to
retailers, companies never need additional paperwork for planning and control.

Kanban is a pull system; the user department pulls the part or subassemblies from the supplier
departments. No extra production or inventories are permitted.

Workers experience the satisfaction of being in charge of the system and of making useful
improvements in the company’s operations. Most companies that use kanban also have quality
circles that work to cut down on lot sizes, reduce lead and setup times, help solve vendor problems,
and minimize scrap losses. Workers are highly motivated to implement their own suggestions with
kanban.

Japanese companies that have used kanban for five or more years are reporting close to a 30%
increase in labor productivity, a 60% reduction in inventories, a 90% reduction in quality rejection
rates, and a 15% reduction in necessary plant space.

General Motors has used the approach since 1980 and has slashed its annual inventory-related costs
from $8 to $2 billion.2 Alfa-Laval, a Swedish company that uses kanban, has reduced its throughput
time from 40 to 8 weeks. One American Motors Corporation plant has cut its inventories to less than
one day’s supply compared to the six-day reserve of two years ago. A Chrysler plant in Canada that
has used kanban reports great reductions in its inventory levels.

Appliance makers like General Electric, Westinghouse, RCA, and others are also experimenting with
kanban in some of their plants. None has achieved an ideal system on a par with Toyota’s, but most
are reporting some success in reducing inventories and production lead times.

Not every application of kanban is a success story. U.S. users are also encountering many problems
in implementing the approach; for example, faraway suppliers, poor quality of parts, unreliable
freight systems, and resistance from workers.

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The experience of GM’s Pontiac, Michigan plant is typical. The factory receives its plastic body
panels five times each day from the Budd Company, located 131 miles away in Ohio. Despite
Pontiac’s 1 1/2 day buffer supply, a snowstorm during the winter of 1984 slowed daily production
from 20 hours to just 8.

GM assembly division increased its inventory turns from 22 in 1982 to 28 in 1984 and is now
shooting for 100 turns per year. One impressive side benefit for GM has been a 60% reduction in its
obsolescence costs. GM has modified kanban and other procedures of its own to accommodate the
extended geographic range of its suppliers. It is also bringing suppliers in at the design stages of
components and subassemblies. Such a close relationship zeroes suppliers in on a product’s cost and
quality rather than simply the price they plan to charge. GM suppliers are now pressing for long-
term contracts, so the company is trying to reduce the number of suppliers from the 3,500 it now
uses. The assembly division is also emphasizing statistical quality control competence with every
supplier. It hopes to soon totally eliminate receiving inspection in its plants. Finally, GM has recently
begun to commission truckers with smaller, more maneuverable trucks.

With kanban, managers can incorporate only 60% to 70% of all the parts and subassemblies
regularly used in large-volume products. Big units or complex subassemblies need to be scheduled
separately under routine planning and control procedures. Products that need to be run in small lots
or those needed infrequently also have to be scheduled under routine procedures.

A kanban system can be operating in two years but normally doesn’t achieve optimum results for
five to ten years. Kanban cannot tolerate a constantly changing master production schedule and
starts breaking down if there are frequent revisions in volumes or models.

Optimized Production Technology

The OPT system calculates the near-optimum schedule and sequence of operations for all a
manufacturing company’s work centers, taking into account priorities and capacities. Advocates
claim it can simultaneously maximize the use of critical resources and the plant output and
minimize work-in-process inventories and manufacturing lead times or throughput times.

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This approach determines priorities for each operation using a weighted function of a number of
important criteria, like advantageous product mix, due dates, necessary safety stocks, and use of
bottleneck machines. Actually, OPT uses a set of “management coefficients,” which help determine
the duration of the fixed interval and the optimal batch sizes for each subassembly or component
being processed at each machine or resource. These factors must be carefully established and fine-
tuned right at the start.

OPT is a proprietary computer software package, which accepts data regarding production
requirements and manufacturing facilities normally available from the plant records. The system
then tests the existing work load and spotlights capacity bottlenecks. OPT uses its algorithm to
schedule individual jobs efficiently, while taking care of the existing bottlenecks.

Developers of this system claim that their process breaks down a total production plan into separate
stages and searches for the best possible detailed schedule. Since production data are rarely
accurate, no schedule can be perfect. Further, OPT originators stress that managers must change
their old ways of running things—staggering lunch hours so that bottleneck machines are operating
constantly, revamping the company’s cost-accounting system to reflect realistic operational and
inventory costs, and allowing some workers to stand idle at times when no demand exists for certain
components.

The system’s creators claim that OPT uses limited amounts of data, most of which are readily
available. They also stress that it makes use of an ideal batch size for each product at every
production stage.

OPT does require, however, detailed information about inventory levels, product structures,
routings, and setup and operation timings for each and every procedure of each product. The
developers claim that only the bottleneck stages need to be planned in detail; the other phases can
be planned in very general terms. They also assert that the system takes into account scores of
factors that control production efficiency, plant capacity, work in progress, setup times,
substitutions, overlapping among process batches, subcontracts, and safety stocks. The program
plots these factors on a nine-dimensional graph and determines a near-optimum combination.

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The OPT originators are aggressive sellers. Buyers must agree to pay a fee of at least $2 million, the
final price based on an estimated proportion of the savings OPT will generate. The developers’
claims for the system have been questioned by academics, competing consultants, and a few users.

In companies employing about 500 people, OPT can be implemented within two or three months.
For minor disruptions, OPT schedules don’t have to be rerun. (Theoretically, MRP requires
rerunning after each disruption.)

OPT is quite fast; it can produce one day’s schedule for several hundred workers in minutes. It can
provide 1,000 work instructions within 30 seconds. Creators boast that OPT is 100 times faster than
MRP in developing detailed schedules. Users report, however, that the system works best for
situations that involve a few fundamental products with large batch sizes but each with only a few
operations. Fewer procedures mean smaller product networks and hence a system that may be easy
to work with.

About 100 companies worldwide have bought OPT packages. Most were facing serious capacity or
production lead-time problems. Each had a very large variety of products that required processing in
anywhere from 5 to 40 process centers.

M&M/Mars candy company was one of the first OPT users. It reports a 5% increase in its overall
output and up to a 15% increase in the output of a few of its process centers.

GE’s engine plant in North Carolina has successfully used OPT to generate efficient production
schedules. In three months, it made the system operational and reduced its work in progress by
30%. This plant has nearly halved its inventories, from a 140-day supply to an 80-day supply.

Austenal Laporte in Indiana, a division of Howmet Turbine Components Corporation, has used OPT
to streamline the production of gas turbine engine components. The production process involves 15
stages with 120 tasks for each of its average products. A product based on a casting may need an
additional 25 operations to correct defects. The critical problems are varying reject rates, fluctuating
setup times, and a changing product mix. Effectively using factory capacity is the key to the
company’s customer service.

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Austenal Laporte’s OPT schedulers found that operators were spending too much time trimming
injection models after each operation. Division analysts used OPT modeling creatively to highlight
other problem areas and then to eliminate them. Output increased by nearly 25%.

Unlike MRP and kanban, with OPT, management doesn’t have to worry about involving managers or
changing employee attitudes. Several OPT users, however, emphasize that implementers must be
creative in modeling the materials flows and must conduct multifaceted analysis to identify minor
practices that slow movements of parts and components through the plant.

Because no U.S. company has used it for more than four years, OPT’s long-term effects are unclear.
The program certainly takes care of established minimum stock levels, but it can create work-in-
progress levels that may be nearly 20 times higher than normal. Further, the system requires that
machines where bottlenecks don’t occur go through many more setups and it requires batches being
processed to be split a great deal. In addition, the program does not consider costs.3

So far, most of OPT’s success stories come from its developers or from a few enthusiasts. To be
objective and confident about any evaluations, we must wait several years for limitations to surface.
As time passes, more and more user companies will certainly report them.

Flexible Manufacturing Systems

Several machine builders in Japan, the United States, and Europe are trying to develop flexible
manufacturing systems.4 These systems are supposed to incorporate planning and control of their
machinery operations within their computerized integrated-control data systems. These data
systems have built-in production planning routines; FMS parts-programming routines; and
materials-handling routines for parts, tools, and accessories; and stock control in the form of
separate modules. Parts programming and scheduling may, in turn, include subroutines like
alternative routing of batches, statistical quality monitoring and control, and balancing of assembly
tasks among individual FMS stations.

The systems integrate such functions as loading, unloading, storing parts, changing tools
automatically, machining, and the data processing activities of the manufacturing processes into
coordinated production centers. Basically, these systems can be viewed as small- or medium-size,
totally automated production lines.
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The FMSs are designed to provide much diversification of parts or assemblies in batches. They are
supposed to obtain greater productivity from machines. Production utilization of most general
purpose machines is between 6% and 30%; these systems are expected to enhance machinery
utilization to an 80% or even a 90% level.

Despite all the computerization in FMS, the manager still plays an important role in defining
company objectives for the systems, which may include maximization of production output,
minimization of unit production costs, and maximization of quarterly profits.

In actuality, it would be almost impossible to achieve these objectives simultaneously. Once

managers have selected their performance criteria and defined limitations and work rules for their
FMS installations, the computerized integrated-control systems take over and can prioritize and
schedule individual orders (production batches) in a near-optimum manner. Thus FMS integrated-
control systems not only regulate the times when machines operate but also the flow of parts. An
FMS, therefore, does not need any of the other operations planning and control systems discussed
in this article; it has planning and control built into its machinery controls themselves. Conceptually,
FMS installations are as close to an automatic factory as one can imagine. They are supposed to be
able to provide unprecedented levels of customer service, lower unit costs, reduced production lead
times, and more flexibility and product variety than other systems.

Estimates of FMS applications throughout the world vary widely from 40 to 300. Some of the well-
known applications are at John Deere Waterloo Tractor Works, Cummins Engine plant, Chrysler, J.I.
Case Company, Massey-Ferguson, Xerox, AllisChalmers, Caterpillar’s Peoria plant, International
Harvester, and Rockwell in the United States; Brothers Industries Mizho, Hitachi, Toyoda Machine
Works, Birardi, Nippon Yusoki, Yamazaki, Hitachi-Seiki, Fuji Electric Shaft Line, and Toyota Motors
in Japan; Renault Vehicle Industries, Citroën Line Wotan, and Peugeot S. A. in France; and Fiat body
work assembly in Italy, along with a few others in Sweden, Russia, East Germany, and
Czechoslovakia.

Each of these installations is at most only a few years old. The companies have invested millions of
dollars in each FMS and are supporting them enthusiastically. Most users’ reports are positive.

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Of course, each new installation will always have some bugs that need to be flushed out. Some users
have reported that, so far, FMS has offered much flexibility but at a slight cost in terms of relatively
low productivity and higher unit costs.

Because the FMS approach will eventually increase tremendously the variety and productivity of
manufacturing operations, marketing people must sell more. This puts pressure on top managers to
understand and direct closely the interactions among the production, marketing, and finance
functions. Some senior managers may be tempted to reject FMS just to avoid the additional burden.

In addition, the managers responsible for FMS must establish a fine balance among demand,
product, machine technology, and capacity usage flexibilities. Few managers understand all these
flexibilities or the interrelationships among them, or what is entailed in managing them. Those
executives with little technical background are most likely to shy away from FMS. Today several
technology-oriented U.S. companies—AT&T, IBM, GE, and others—are urging all their managers to
acquire a reasonable level of technological know-how about their products and processes.

The FMS approach can easily reduce a labor force to between 10% and 15% of that which
conventional facilities require. Questions concerning job elimination or the fate of displaced skilled
workers that these reductions raise, however, are not ones that business leaders can easily answer.

Technically and operationally, flexible manufacturing systems are still in their adolescence. Still
being developed or newly introduced are: precise automatic measuring gauges; computerized
feeding systems; headchanger systems; laser machining; traveling carts mounted with
microcomputers; self-propelled vehicles guided by light beams or radios; and algorithmic controls
based on realistic time estimates for flow of parts. Research efforts are also developing automatic
methods for generating parts and designing adaptive control mechanisms that will compensate for
unavoidable tool wear and tear and unexpected human errors.

Most of the new studies are being funded by the governments of various countries. Their ultimate
aim is to derive an FMS system that will need no work force whatever, will be extremely flexible in
terms of product and volume mix, and will provide high-quality, low-cost outputs with very short
lead times.

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Even if executives can ignore the complex design, huge input requirements, and multimillion-dollar
investments each of these systems needs, most cannot overlook the real constraints in terms of the
working habits of employees who must operate them. Some executives have, however, tried to relay
to their employees:

The perpetual need for updating the system in accordance with actual happenings.

The importance of precise record keeping for receipts, issues, returns, rejects, and so forth.

The strict discipline required for the movement of materials; physical inventory and storage control;
and placement and disbursement of parts, components, and subassemblies.

Successful companies have developed in-house competence in working with these systems.
Initially, they have used experts to train employees, after which each company has struggled on its
own to solve the problems that surface constantly. Managers realize that too much dependence on
outsiders invites failure and frustration. In short, involvement by a company’s competent and
motivated personnel has always been a key to success, along with, of course, top management’s
support.

During the last 25 years, companies and countries have spent billions of dollars on smarter softwares
and faster computers for automating the flow of materials through manufacturing stages. Each new
system’s developers initially exhibited great enthusiasm, but as users encountered serious
operational difficulties and could not achieve promised results, proponents began to lose their zeal.

If a common obstacle exists to successful implementation of computerized production systems, it’s

getting employees to perform appropriately. Among the hurdles are:

How can managers keep employees who interact with these systems disciplined and motivated?
How can companies be sure that employees are constantly feeding the system with updated
information that results from hundreds of unplanned disturbances in the field?

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How can management get workers to accept changes in procedures, organizational structures,
paperwork, cost accounting, and so forth?

Indirectly, the kanban system addresses these problems, which is probably why most of its users are
reporting successful results. Kanban is a simple and transparent system. Employees are responsible
for making it work, and results indicate that they are willing to accept such a challenge.

MRP offers no challenge to employees but requires that they be extremely disciplined and
committed at all levels—which helps explain why 90% of users are unhappy with results. OPT
tolerates minor disturbances and requires moderate discipline and limited data accuracy. The
contract rules its consultants impose force top executives to make procedural, cost-accounting, and
work-method changes, which may explain why problems with employees get resolved indirectly
and the limited number (to date) of OPT users seems to be reasonably happy with the system.

The evidence so far indicates that the designs and applications of FMS are headed toward resolving
the other systems’ problems; when perfected, it should be ideal for providing the efficiency and
flexibility essential for survival and growth in today’s extremely competitive marketplace. FMS
installations are expressly built to eliminate most employees’ operational problems and, therefore,
may someday replace all the other operations planning and control systems as well as most existing
general purpose and semiautomatic machines.

In summary, I must note that theoretically and technically, each system discussed is sound in its
own way and should be able to accomplish low-cost, high-quality, on-time production. During the
remainder of this century and perhaps during the early part of the next, managers are likely to be
faced with the question of which one to choose to run their factories.

1. David Whiteside and Jules Arbose, “Unsnarling Industrial Production: Why Top Management Is
Starting to Care,” International Management, March 1984, p. 20.

2. Ibid.

3. F. Robert Jacobs, “The OPT Scheduling System: A Review of a New Scheduling System,”
Production and Inventory Management. Third Quarter 1983, p. 47.
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4. Paul Ranky, The Design and Operation of Flexible Manufacturing Systems (New York: Elsevier,
1983).

A version of this article appeared in the September 1985 issue of Harvard Business Review.

Mr. Aggarwal recently was named associate dean of the College of Management at the University of Massachusetts in
Boston. Prior to assuming that position, he was professor of industrial management at Pennsylvania State University, where
he specialized in operations management and management science. His article, “Prepare for Continual Materials
Shortages,” appeared in the May–June 1982 issue of HBR.

This article is about OPERATIONS MANAGEMENT

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