Material Requirement Planning (MRP)

Chapter - 15

Independent vs. Dependent Demand

Independent demand

Influenced by market conditions, i.e., originates outside the system (say cars, bicycles, refrigerators) Uncertain

Dependent demand

Depends on demand of independent items, i.e., make up independent demand products Known Example: Subassemblies, components, tires, batteries, bearings

Independent vs. Dependent Demand

Key Differences: Dependent vs. Independent Demand

Attribute

Dependent Demand

Independent Demand

Nature of Demand
Goal

No uncertainty

Uncertainty

Service Level Demand occurrence Estimation of demand How much to order?

Meet requirements Meet demand for a exactly targeted service level 100% 100% difficult Often lumpy Often continuous By production planning Known with certainty By forecasting Estimate based on past consumption

Material Requirements Planning (MRP)

MRP is a computerized inventory system developed specifically to manage dependent demand items
MRP works backward from the due date using lead times to determine when and how much to order subassemblies, component parts, and raw materials

MRP

MRP begins with a schedule for finished goods that is converted into a schedule of requirements for subassemblies, component parts and raw materials needed to produce the finished items in the specified time frame

MRP designed to answer the following questions

What is needed ? How much is needed? When is it needed ?

MRP

MRP thus works with finished products, or end items, and their constituent parts, called lower level items

Inputs and Outputs of MRP

MRP
MPS Product Structure Tree MRP Inventory File

Planned Order Release

Work Order

Purchase order

Rescheduling Notices

Master Production Schedule

A time table that specifies what is to be made and when

Aggregate Production Plan and MPS -- Amplifiers

Aggregate Production Plan Cars

Hundai Motors:
Month # of Cars

Jan
Feb Mar April May

10,000
12,000 8,000 11,000 7,000

MASTER PRODUCTION SCHEDULE

Weeks of January

II

III

IV
700 250 50

Total
6,400 3,200 400

Santro 1,200 2,000 2,500 Accent Sonata

700 100

950 50

1,300 200

2,000 3,000 4,000 1,000 10,000

1. Master Production Schedule (MPS)

Master production schedule states which end items are to be produced, when these are needed, and in what quantities.

Example: A master schedule for end item X:

Come from: customer orders, forecasts and orders from warehouses to build up seasonal inventories

Assembly Diagram & Product Structure Tree

Product Structure Tree of Sub-Assembly

Product Structure Tree of Product X With Levels

Visual description of the requirements in a bill of materials, where all components are listed by levels

Problem

Product Structure Tree

2. Bill of Materials (BOM)

BOM: A document that lists the components, their description, and the quantity of each required to make one unit of a product
Thus

relationship between end items and lower level items is described by the BOM

Extremely important to have BOM correct to have accurate material estimates

3. Inventory Record

Third input in MRP It tells us about the status of inventory of an item at present, or in a given interval of time in the coming future
On

hand On Order (scheduled receipt) Lead time Lot size Low Level Code (LLC)

Outputs of MRP (Primary Reports)

Planned order report A schedule indicating the amount and timing of future orders
Order release report Authorizes the execution of planned orders (work order + purchase order) Order changes report Changes to planned order, including revisions for due dates or order quantities and cancellation of orders

Outputs of MRP (Secondary Reports)

Performance control report evaluate system performance, deviations from plans, missed deliveries, and stock outs Exception reports attention to major discrepancies such as late and overdue orders, requirements for non-existence parts, reporting errors

MRP Terminologies

Gross Requirements: Total expected demand for an item during each time period without regard to amount on hand. For end items, these quantities are shown in the master production schedule Scheduled Receipts: On order and scheduled to be received from vendors or elsewhere 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 (SR + Avl inv from last period)

MRP Terminologies

Net requirements: The actual amount needed in each time period

Planned Order Receipts: The quantity expected to be received at the beginning of 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 requirements. Any excess is added to available inventory in the next time period.

MRP Terminologies

Planned Order Release: Indicates a planned amount to order in each time period; equals planned-order receipts offset by lead time. When an order is executed, it is removed from planned order release and entered under scheduled receipts

Format of MRP
Week Number

Item:
Gross requirements Scheduled receipts Projected on hand Net requirements Planned-order receipts Planned-order releases

Lot Sizing in MRP Systems

Lot-for-lot (L4L)

Sets planned orders to exactly match the net requirements. Eliminates holding costs Balances setup and holding costs Irrespective of the nature of demand, orders are always placed for a fixed order quantity

Economic order quantity (EOQ)

Fixed Order Quantity (FOQ)

Fixed Period Ordering (FPO)

Provides a coverage for some predetermined number of periods (e.g. two or three)

Lot Sizing in MRP Systems

Least total cost (LTC)

Balances

carrying cost and setup cost for various lot sizes, and selects the one where they are most nearly equal ordering and inventory for each trial lot size and divides by number of units in each lot size

Least unit cost (LUC)

Adds

Lot-for-Lot

Basic Data

Cost per item: Rs 10 Order cost: Rs 47

Inventory carrying cost/week: 0.5%

Weekly net requirements: 1 2 3 4 5 6 7 8 50 60 70 60 95 75 60

L4L

Rs 376

Lot Size: EOQ

Rs171.05

Least Total Cost

Rs140.50

Least Unit Cost

Rs153.50

Lot Size Cost Comparisons

L4L: Rs 376 EOQ: Rs 171.05 Least Total Cost: Rs 140.50 Least Unit Cost: Rs 153.50

Preferred method: Least Total Cost If period > 8 weeks: lowest cost could differ

Workload for a Work Center

Capacity
Work center Capacity/week (2 machines): (#m/cs)(# shifts) (# of hours/shift) (#days/week) (utilization)(efficiency)

Utilization: Time working / Time available Efficiency: Actual output / standard output

Scheduled Workload for a Work Center

190.3 161.5

137.8

128.8

Capacity Levelling
Work Overtime Selecting an alternative work center Subcontract Scheduling part of work of week 11 into week 10 Renegotiate due date

Freezing the Master Schedule

Time Fences in MPS

Period

frozen (firm or fixed)

slushy somewhat firm

liquid (open)

Time Fences divide a scheduling time horizon into three sections or phases, referred as frozen, slushy, and liquid.
Strict adherence to time fence policies and rules.

MRP Benefits
Reduction in inventory Increased customer satisfaction due to meeting delivery schedules Faster response to market changes Improved labor & equipment utilization Better inventory planning & scheduling

Benefits of MRP

Ability to easily determine inventory usage by backflushing

Back flushing: Exploding an end items bill of materials to determine the quantities of the components that were used to make the item.

MRP Problems Encountered

Data integrity is low Not frequent updates of databases when changes takes place Uncertainties related to lead time and quantity delivered

Updating MRP Schedules

Updating MRP schedule is required because

Customers

may cancel or amend order Suppliers could default on supply Unexpected disruptions in manufacturing

Two techniques of updating

Regeneration

(run MRP from scratch) Net change (change the relevant portion)

Regeneration or net change depends on # of changes

Requirements of MRP
Computer and necessary software Accurate and up-to-date

Master Bills

schedules

of materials

Inventory

records

Integrity of data

Manufacturing Resource Planning (MRP II)

Evolved from MRP in 1980s Didnt replace or improve MRP. Rather expanded the scope to include capacity requirements planning and to involve other functional areas of the organization: Purchasing Manufacturing Marketing Finance Engineering Adds software applications

An Overview of MRP II
Finance Marketing Production plan MRP Market Demand Manufacturing
Master production schedule

Rough-cut capacity planning

Capacity planning

Adjust production plan Yes Problems? No

Requirements schedules

No Problems?

Yes

Adjust master schedule