Material Requirement Planning

Lecture-7Dr. Biswajit Sarkar

Dept. of Industrial & Management EngineeringHanyang University

South Korea

Books Reference

• 1. Analysis of Manufacturing Systems

by J. E. Rooda and J. Vervoort

• 2. Production/ Operations Management by William J. Stevenson, IRWIN publisher, ISBN 0-256-13900-8

Content

• Dependent versus Independent Demand

• MRP Inputs

• MRP Processing

• MRP Outputs

• Other Considerations

• Capacity Requirements Planning

• Benefits and Requirements of MRP

Dependent versus Independent Demand

When demand for items is derived from plans to make certain

products, it is with raw materials, parts, and subassemblies used in

producing a finished product, those items are said to have

dependent demand.

Independent demand is fairly stable once allowances are made for

seasonal variation; but dependent demand tends to be irregular or

"lumpy"; large quantities are used at specific points in time with

little or no usage at other times.

MRP Inputs• Material requirements planning (MRP) is a computer-based

information system designed to handle ordering and scheduling

of dependent-demand inventories (e.g. raw materials, component

parts, and subassemblies).

• A production plan for a specified number of finished products is

translated into requirements for component parts and raw

materials working backward, using lead time information to

determine when and how much to order.

• An MRP system has three major sources of information:

– a master schedule,

– a bill-of-materials file,

– an inventory record file

Master schedule

• The master schedule states which end items are to be

produced, when they are needed, and in what quantities.

Table illustrates a portion of a master schedule that shows

planned output for end item X for the planning horizon. The

schedule indicates that 100 units of X will be needed (e.g.,

for shipments to customers) at the start of week 4 and that

another 150 units will be needed at the start of week 8.

Table for a portion of master schedule

Item: X 1 2 3 4 5 6 7 8

Quantity 100 150

Although a master production schedule has no set time period

that it must cover, most managers like to plan enough into the

future so they have some general idea of probable upcoming

demands for the near term.

It is important, though, that the master schedule cover the

stacked or cumulative lead time necessary to produce the end

items. This amounts to the sum of lead times that sequential

phases of the production or assembly process require, as

illustrated in Figure, where the lead time is needed from

ordering parts and raw materials until final assembly is

completed.

Master schedule

Assembly

Subassembly

Fabrication

Procurement

1 2 3 4 5 6 7 8 9 10

Figure The planning horizon must cover the cumulative lead time

Master schedule

• A bill of materials (BOM) contains a listing of all of the

assemblies, subassemblies, and raw materials that are needed to

produce one unit of a finished product. Thus, each finished

product has its own bill of materials.

• A product structure tree is useful in illustrating how the bill of

materials is used to determine the quantities of each of the

ingredients (requirements) needed to obtain a desired number of

end items.

• Let's consider the product structure tree shown in Figure.

Bill-of-Materials (BOM) File

Chair

Leg Assembly

Legs Cross bar

Seat Back assembly

Side rails Cross bar Back support

Bill-of-Materials (BOM) File

Assembly diagram product structure tree for chair assembly

• The inventory records file is used to store information on

the status of each item by time period. This includes gross

requirements, scheduled receipts, and expected amount on

hand. It also includes other details for each item, such as

supplier, lead time, and lot size. Changes due to stock

receipts and withdrawals, canceled orders, and similar

events also are recorded in this file.

Inventory Records Files

• MRP processing takes the end-item requirements specified by the

master schedule ,: "explodes" them into time-phased requirements for

assemblies, parts, and raw materials using the bill of materials offset

by lead times.

• The quantities that are generated by exploding the bill of materials are

gross requirement. They do not take into account any inventory that is

currently on hand or due to the received.

• The materials that must actually be acquired to meet the demand

generated by the schedule are the net material requirements.

• Gross requirements: The total expected demand for an item or raw

material during each time period without regard to the amount on

hand. For end items, these quantities are shown in master schedule;

for components, these quantities are derived from the planned-order

releases of their immediate “parents”.

• Net requirements: The actual amount needed in each time period.

MRP Processing

• Scheduled receipts Open orders scheduled to arrive from

vendors in the pipeline by the beginning of a period.

• Projected on hand The expected amount of inventory that will

be on hand at the beginning of each time period: Scheduled

receipts plus available inventory from last period.

• Planned-order receipts The quantity expected to be received

by the beginning the period in which it is shown. Under lot-for-

lot ordering, this quantity will equal net requirements. Under lot

size ordering, this quantity may exceed net requirement. Any

excess is added to available inventory in the next time period.

• Planned-order releases It indicates an expected amount to order

in each time period; equals planned-order receipts offset by lead

time. This amount makes gross supplies at the next level in the

production chain. When an order is executed, it is removed from

planned-order releases and entered under scheduled receipts.

MRP Processing

• MRP systems have the ability to provide management with a fairly

broad range of outputs. These are often classified as primary reports,

which are the main reports, and secondary reports, which are optional

outputs.

• Production, inventory planning, and control are part of primary

reports. These reports normally include the following:

• Planned orders a schedule indicating the amount and timing of

future orders.

• Order releases authorizing the execution of planned orders.

• Changes to planned orders, including revisions of due dates or order

quantities and cancellations of orders.

MRP Outputs

• Secondary Reports Performance control, planning, and exceptions

belong to secondary reports.

• Performance-control reports are used to evaluate system operation.

They aid managers by measuring deviations from plans, including

missed deliveries and stock-outs, and by providing information that

can be used to assess cost performance.

• Planning reports are useful in forecasting future inventory

requirements. They include purchase commitments and other data

that can be used to assess future material requirements.

• Exception reports call attention to major discrepancies such as late

and overdue orders, excessive scrap rates, reporting errors, and

requirements for nonexistent parts. The wide range of outputs

generally permits users to adapt MRP to their particular need.

MRP Outputs

Others Considerations Safety StockTheoretically, inventory systems with dependent demand should not

require safety stock below the end-item level. This is one of the main

advantages of an MRP approach.

Apparently, safety stock is not needed because usage quantities can be

projected once the schedule has been established.

Practically, however, there may be exceptions. For example, a bottleneck

process or one with varying scrap rates can cause shortages in

downstream operations. Furthermore, shortages may occur if orders are

late or fabrication or assembly times are longer than expected. On the

surface, these conditions advance themselves to the rule of safety stock

to maintain smooth operations, but the problem becomes more

complicated when dealing with multi-echelon items because a shortage

of allow component will prevent manufacture of the final assembly.

However, a major advantage of MRP is lost by holding safety stock for

all lower-level item.

MRP systems deal with different problems in several ways. Manager's

first step to identify activities or operations that are subject to variability

and to determine the extent of that variability.

When lead times are variable, the concept of safety little instead of safety

stock is often used. This results in scheduling orders for arrival or

completion sufficient ahead of the time they are needed in order to

eliminate or substantially reduce the element of chance in waiting for

those items.

When quantities tend to vary, some safety stock may be called for, but

the manager must carefully consider the need and cost of carrying extra

stock. Frequently, managers elect to carry safety stock for end items,

which are subject to random demand, and for selected lower level

operations when safety time is not feasible.

Others Considerations Safety Stock

Choosing a lot size to order or for production is an important issue in

inventory management for both independent and dependent-demand

items. This is called lot sizing. For independent-demand items, economic

order sizes and economic run sizes are often used. For dependent-

demand systems, however, a much wider variety of plans is used to

determine lot sizes, mainly because no single plan has a clear advantage

over the others. Some of the most popular plans for lot sizing are

described in this section.

A primary goal of inventory management for both independent- and

dependent-demand systems is to minimize the sum of ordering cost (or

setup cost) and holding cost. With independent demand, that demand is

frequently distributed uniformly throughout the planning horizon (six

months, year). Demand tends to be much more lumpy for dependent

demand, and the planning horizon shorter (e.g., three months), so that

economic lot sizes are usually much more difficult to identify.

Others Considerations Lot Sizing

• Managers can realize economies by grouping order or run sizes. This

would be the case if the additional cost incurred by holding the extra

units until they were used led to a savings in setup or ordering cost.

This determination can be very complex at times, for several reasons.

• First, combining period demands into a single order, particularly for

middle-level or end items, has a cascading effect down through the

product tree; that is, in order to achieve this grouping, items at lower

levels in the tree must also be grouped, and their setup and holding

costs must also be incorporated into the decision.

• Second, the irregular period demand and the relatively short planning

horizon require a continual recalculation and updating of lot sizes. The

methods used to handle lot sizing range from the complex, which

attempt to include all relevant costs, to the very simple, which are

easy to use and understand. In certain cases, the simple models seem

to approach cost minimization although generalizations are difficult.

Let's consider some of these models:

Others Considerations Lot Sizing

Some Models LOT-FOR-LOT• Lot-for-Lot Ordering perhaps the simplest of all the methods is lot-

for-lot ordering. The order or run size for each period is set equal to

demand for that period.

• Not only is the order size obvious, but it also virtually eliminates

holding costs for parts carried over to other periods. Hence, lot-for-lot

ordering minimizes investment in inventory. Its two chief drawbacks

are that it usually involves many different order sizes and thus cannot

take advantage of the economies of fixed order size (e.g., standard

containers and other standardized procedures), and it involves a new

setup for each run. If setup costs can be significantly reduced, this

method may approximate a minimum-cost lot size.

Some Models EOQ• Sometimes economic order quantity models (EOQ) are used. They

can lead to minimum costs if usage is fairly uniform, This is

sometimes the case for lower-level items that are common to different

parents and for raw materials. However, the more lumpy demand is,

the less appropriate such an approach is. As demand

tends to be most lumpy at the end-item level, EOQ models tend to be

less useful for end items than for items and materials at the lowest

levels.

Some Models Fixed-Period Ordering • This type of ordering provides coverage for some predetermined

number of periods (e.g., two or three). In some instances, the span is

simply arbitrary; in other cases, a review of historical demand patterns

may lead to a more rational designation of a fixed period length. A

simple rule is: Order to cover a two-period interval. The rule can be

modified when common sense suggests a better way.

Some Models Part-Period Model • Another attempt to balance setup and holding costs is represented by

the part-period model. The term part period refers to holding a part or

parts over a number of periods.

• For instance, if 10 parts were held for two periods, this would be 10 X

2 = 20 part periods. The economic part period (EPP) can be computed

as the ratio of setup costs to the cost to hold a unit for one period.

• Thus, the formula for computing the EPP is

• EPP=Setup cost/Unit holding cost per period.

• In order to determine an order size that is consistent with the EPP,

various order sizes are examined for a planning horizon, and each

one's number of part periods is determined. The one that comes

closest to the EPP is selected as the best lot size. The order sizes that

are examined are based on cumulative demand.

Capacity Requirement Planning

• Capacity requirements planning is the process of determining short-

range capacity requirements. The necessary inputs include planned-

order releases for MRP, the current shop load, routing information,

and job times. Outputs include load reports for each work

center. When variances (underloads or overloads) are projected,

managers might consider remedies such as alternative routings,

changing or eliminating lot sizing or safety stock requirements, and lot

splitting. Moving production forward or backward can be extremely

challenging because of precedence requirements and the availability

of components.

Benefit and Requirement of MRP• 1. Low levels of in-process inventories.

• 2. The ability to keep track of material requirements.

• 3. The ability to evaluate capacity requirements generated by a given

master schedule.

• 4. A means of allocating production time.

• Production planners are obvious users of MRP Production managers,

who must balance work loads across departments and make decisions

about scheduling work, and plant foremen, who are responsible for

issuing work orders and maintaining production schedules, also rely

heavily on MRP output. Other users include customer service

representatives, who must be able to supply customers with projected

delivery dates, purchasing managers, and inventory managers. The

benefits of MRP depend in large measure on the use of a computer to

maintain up-to-date information on material requirements.

Benefit and Requirement of MRP• A computer and the necessary software programs to handle

computations and maintain records.

• Accurate and up-to-date:

• Master schedules

• Bills of materials

• Inventory records

• Integrity of file data

Benefit and Requirement of MRP• Accuracy is absolutely essential for a successful MRP system.

Inaccuracies in inventory record files or bills-of-material files can lead

to unpleasant surprises, ranging from missing parts, ordering many

of some items and too few of others, and failure to stay on schedule,

all of which contribute to inefficient use of resources, missed delivery

dates, and poor customer service. Moreover, implementing MRP can

be difficult and costly. Consequently, it is important for companies

considering an MRP system to be aware of this and to carefully

consider these factors against the benefits of MRP.

Benefit and Requirement of MRP• Unfortunately, some firms that have attempted to install an MRP

system have seriously underestimated the importance of these items.

In many cases, bills of materials are outdated because design changes

were not incorporated into the records, leading to parts lists that

did not correspond to actual requirements for assembly of the finished

product. It is not unusual for a firm to discover that the same part is

carried under different part numbers, making it difficult to develop

meaningful records.

• On the whole, the introduction of MRP has led to major improvements

in scheduling and inventory management, but it has not proved to be

the cure-all that many hoped. Consequently, manufacturers are

beginning to take a much broader approach to resource planning.

• One such approach is referred to as MRP II.

Q & A

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