MATERIAL REQUIREMENT PLANNING

Hierarchical Nature of Planning

Copyright 2006 John Wiley & Sons, Inc. 13-2

Items

Product lines or families

Individual products

Components

Manufacturing operations

Resource Level

Plants

Individual machines

Critical work centers

Production Planning

Capacity Planning

Resource requirements

plan

Rough-cut capacity

plan

Capacity requirements plan

Input/ output control

Aggregate production

plan

Master production schedule

Material requirements

plan

Shop floor schedule

All work centers

Dealing with the Problem Complexity through Decomposition

Aggregate Planning

Master Production Scheduling

Materials Requirement Planning

Aggregate UnitDemand

End Item (SKU)Demand

Corporate Strategy

Capacity and Aggregate Production Plans

SKU-level Production Plans

Manufacturingand Procurementlead times

Component Production lots and due dates

Part processplans

(Plan. Hor.: 1 year, Time Unit: 1 month)

(Plan. Hor.: a few months, Time Unit: 1 week)

(Plan. Hor.: a few months, Time Unit: 1 week)

Shop floor-level Production Control

(Plan. Hor.: a day or a shift, Time Unit: real-time)

At the operational level . .

1. The MPS is developed to generate a sustainable Materials Requirement Planning (MRP) system and to provide the information for coordination with sales.

2. The MPS is a statement of planned future output.

MATERIAL MANAGEMENT/INVENTORY MANAGEMENT1. STATISTICAL INVENTORY CONTROL:

independent item 2. METERIAL REQUIREMENT PLANNING

(MRP II): dependent item

Definitions

• Inventory-A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

• Inventory System- A set of policies and controls that monitors levels of inventory and determines what levels should be maintained, when stock should be replenished, and how large orders should be

Inventory

• Def. - A physical resource that a firm holds in stock with the intent of selling it or transforming it into a more valuable state.

• Raw Materials• Works-in-Process • Finished Goods• Maintenance, Repair and Operating (MRO)

Expensive Stuff

• The average carrying cost of inventory across all mfg.. in the U.S. is 30-35% of its value.

• What does that mean?• Savings from reduced inventory result in

increased profit.

Zero Inventory?

• Reducing amounts of raw materials and purchased parts and subassemblies by having suppliers deliver them directly.

• Reducing the amount of works-in process by using just-in-time production.

• Reducing the amount of finished goods by shipping to markets as soon as possible.

Inventory Positions in the Supply Chain

RawMaterials

WorksinProcess

FinishedGoods

Finished Goodsin Field

Reasons for Inventories

• Improve customer service• Economies of purchasing• Economies of production• Transportation savings• Hedge against future• Unplanned shocks (labor strikes, natural disasters,

surges in demand, etc.)• To maintain independence of supply chain

Inventory and Value

• Remember this?– Quality– Speed– Flexibility– Cost

Nature of Inventory: Adding Value through Inventory

• Quality - inventory can be a “buffer” against poor quality; conversely, low inventory levels may force high quality

• Speed - location of inventory has gigantic effect on speed• Flexibility - location, level of anticipatory inventory both have

effects• Cost - direct: purchasing, delivery, manufacturing

indirect: holding, stockout.HR systems may promote this-3 year postings

Nature of Inventory:Functional Roles of Inventory

• Transit• Buffer• Seasonal• Decoupling• Speculative• Lot Sizing or Cycle• Mistakes

Design of Inventory Mgmt. Systems: Macro Issues

• Need for Finished Goods Inventories– Need to satisfy internal or external customers?– Can someone else in the value chain carry the inventory?

• Ownership of Inventories• Specific Contents of Inventories• Locations of Inventories• Tracking

How to Measure Inventory

• The Dilemma: closely monitor and control inventories to keep them as low as possible while providing acceptable customer service.

• Average Aggregate Inventory Value: how much of the company’s total assets are invested in inventory?

• Ford:6.825 billion• Sears: 4.039 billion

Inventory Measures

• Weeks of Supply– Ford: 3.51 weeks– Sears: 9.2 weeks

• Inventory Turnover (Turns)– Ford: 14.8 turns– Sears: 5.7 turns– GM: 8 turns– Toyota: 35 turns

Reasons Against Inventory

• Non-value added costs• Opportunity cost• Complacency• Inventory deteriorates, becomes obsolete,

lost, stolen, etc.

Inventory Costs

• Setup costs/Procurement costs;

• Holding costs/ carrying cost;

• Shortage costs/Out-of-stock costs

Set up/Procurement Costs

• Order processing• Shipping• Handling• Purchasing cost: c(x)= $100 + $5x• Mfg. cost: c(x)=$1,000 + $10x

Holding/Carrying Costs

• Capital (opportunity) costs• Inventory risk costs• Space costs• Inventory service costs

Shortage/Out-of-Stock Costs

• Lost sales cost• Back-order cost

Independent Demand

• Independent demand items are finished products or parts that are shipped as end items to customers.

• Forecasting plays a critical role• Due to uncertainty- extra units must be

carried in inventory

Dependent Demand

• Dependent demand items are raw materials, component parts, or subassemblies that are used to produce a finished product.

• MRP systems-

Design of Inventory Mgmt. Systems: Micro Issues

• Order Quantity/Lot size/ Q methodEconomic Order Quantity

• Order Timing/periodic Review/P method• Reorder Point

Objectives of Inventory Control

• 1) Maximize the level of customer service by avoiding understocking.

• 2) Promote efficiency in production and purchasing by minimizing the cost of providing an adequate level of customer service.

Balance in Inventory Levels

• When should the company replenish its inventory, or when should the company place an order or manufacture a new lot?

• How much should the company order or produce?

• Next: Economic Order Quantity

Models for Inventory Management:EOQ

• EOQ minimizes the sum of holding and setup costs• Q = 2DCo/Ch

D = annual demandCo = ordering/setup costs

Ch = cost of holding one unit of inventory

Seatide

• EOQ = 2DCo/Ch

D = annual demand = 6,000Co = ordering/setup costs = $60

Ch = cost of holding one unit of inventory

$3.00 x 24% = .72

2 x 6,000 x 60 .72

720,000.72 1,000

HoldingCosts

OrderingCosts

Marginal Analysis

Units

$

Reorder Point

• Quantity to which inventory is allowed to drop before replenishment order is made

• Need to order EOQ at the Reorder Point:

ROP = D X LTD = Demand rate per periodLT = lead time in periods

level of inventory average inventory

units Q

t time

Sawtooth Model

Q - System Inventory Control

• based on reorder point - When inventory is depleted to ROP, order replenishment of quantity EOQ.

Order Quantities

• when demand is smooth and continuous, can operate response-based system by determining – best quantity to replenish periodic demand (EOQ)– frequency of replenishment (ROP)

• Reorder Point

Planning for Uncertainty

• changing lead times• changing demand• Uncertainty creeps in:

– Plug in safety stockSafety stock - allows manager to determine the

probability of stock levels - based on desired customer service levels

Inventory Model Under Uncertainty

reorder Qm

point

safety stock time

Models for Inventory Management:Quantity Discount

• Basically EOQ with quantity discounts• To solve:

1. Write out the total cost equation2. Solve EOQ at highest price and no discounts3. If Qmin falls in a range with a lower price, recalculate EOQ

assuming holding cost for that range. Call this Q2.4. Evaluate the total cost equation at Q2 at the next highest

price break point.OR Use a spreadsheet

P-SystemPeriodic Review Method

• an alternative to ROP/Q-system control is periodic review method

• Q-system - each stock item reordered at different times - complex, no economies of scope or common prod./transport runs

• P-system - inventory levels for multiple stock items reviewed at same time - can be reordered together

• higher carrying costs - not optimum, but more practical

Using P-System

• audit inventory level at interval (T)• quantity to place on order is difference

between max. quantity (M) and amount on hand at time of review

• management task - set optimal T and M to balance stock availability and cost

• In ABC analysis, which items would use P-system???

Types of Inventory Systems

• By Degree of Control required– often use grouping method, such as ABC

ABC Analysis

• Which items are C items? B items?• Which item should we order ahead furthest?• Which should we spend the most time on?• Spend time and effort on A + B items

– carry small quantities– review frequently

ABC Analysis

• Manage C items by:– carrying inventories– concentrating with a few suppliers– stockless buying– review infrequently

Manufacturing Resource Planning&

Scheduling

MRP II:

Materials Management

• A plant organizing function that assures a predictable flow of components and other inputs through a transformation process.

• It coordinates the activities of both the internal and external factory

• What is needed When• i.e. Inventory micro issues

Development of MRP

• After WWII - D>>S– Companies use quarterly ordering systems based on confirmed

orders• WWII boom settles down D = S

– backlog of orders decreases– quarterly systems become more based on forecasts– In move from confirmed orders to forecasts, quarterly systems

become less and less accurate• Wight, others develop MRP

– takes forecasts, breaks them down via dependent demand into weekly schedules

• Up to 1970s, extensive use of Q and P models– why? Simple to use, limited information

requirements, “optional”• Why move to MRP?

– problems with Q and P models• high levels of inventory• high stockouts• poor customer services

– “Order launch & Expedite”

Prior to MRP

• Major changes– high cost of inventory– increased availability of more powerful computers– decreasing cost of computers

• MRP now supported by extensive body of software

Other Factors

Dependent Demand

• Demand for components driven by the production schedule

• It is derived - not forecasted• Consists of WIP and raw materials• Lumpy- discrete, irregular quantities• Concept of Parent/Component• Time Bucket

MRP and Dependent Demand

• Independent Demand– Finished Goods– independent demand in MPS

• Problem with Dependent Demand – information generated– challenge - generating 100% CSL– past approach – Q, P– new approach - MRP

Remember This?? MPS Principles

• The MPS must be in concert with the production plan

• The MPS must drive the entire materials management system

• Include all known requirements in the preparation of the MPS and the FAS

• Minimize the number of items needed to adequately express the MPS and the FAS

• Plan showing availability• Build schedule• Stated in BoM terms

What is the MPS?

• A complete, current and accurate database– one set of records– high emphasis on data accuracy– quick correction of error in db– accessible to all who need data

Remember this?

Keys to MPC

• Capacity– Maximum– Effective– Demonstrated

• Demand management• Capacity management

– level– chase– mixed

• Requires coordination with marketing

Issues Considered

Nature of MRP

• Use forecast to predict required amount of level 0 (end product)• Use this number to determine number of lower level components needed

(dependent demand)

F ra m e S e at B ra ke K it

H o op

R im

W ire

S p okes

F ro n t W h e e l R e a r W h e e l

B ike Level 0

Level 1

Level 2

Level 3

Implementation of MRP

• Forecast becomes gross requirements for MRP system• Break down gross requirements into time buckets• Calculate net requirements - difference between units

required (i.e. gross requirements or derivation plus orders for that period) and units expected to be available in inventory

Key inputs to MRP

• MPS - merges forecasts and production capacity• BOM - gives components needed for each end product

in terms of part numbers• Inventory Records - must be accurate, as MRP uses this

information as the basis of its calculations; should design inventory system to ensure accuracy

• Order Status - use scheduled receipts to distinguish those orders that have actually been released

• Planned Lead Times - gives the when information

MRP Elements

• Gross Requirements• On-Hand Inventory

– Allocations• Scheduled Receipts• Net Requirements• Planned Order Releases• Time-phasing• Parent/Component

MRP Elements

• Planning factors• System nervousness• Firm planning• Explosion• Time buckets

– Action bucket• Rolling the Schedule• Net Change vs. Regenerative MRP

Advantages of MRP

• Forward looking when planning (visibility)• Useful simulator• Provides valid, credible priorities

– priorities reflect actual needs, not implied needs.

• Provides mangers with control over the execution system

• Forms basis for building credible, valid formal system

MRP Works Best When...

• End Products are Standardized• Batch Production• End product is moderately complex• The end product is assembled from a set of

components and raw materials

Limitations of MRP

• only looks at materials, ignores capacity, shop floor conditions

• requires user discipline• requires accurate information/data• requires valid MPS• not appropriate for all areas

– high volume production– projects

Capacity Requirements Planning

• Wait a second - just because MRP says produce X, are we able to produce X?– Need to evaluate the capacity to see if it can meet

plan• Need all of MRP information plus:

1. How much capacity a process requires to make 1 unit of a product

2. When does the process need the hours (time) of capacity

• MRP• Closed Loop MRP• MRP II• Distribution Requirements Planning• DRP II• Enterprise Requirement Planning

Types of MRP Systems

Reports

• Master Schedule• Indented Bill of Materials• BOM - Item Requirements• Scheduled Receipts• Planned Orders