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Supply Chain Management

Materials Requirement Planning

Indian Institute of Management
Lucknow

What is MRP?

Computerized inventory control &
production planning system

Schedules component items when they are
needed - neither earlier nor later

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We’ll Discuss...

Dependent Inventory Model Requirements

Material Requirements Planning structure

Lot Sizing Techniques

Extensions of MRP

Distribution Resource Planning

Enterprise Resource Planning

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Dependent Demand
• The demand for one item is related to the
demand for another item
• Given a quantity for the end item, the demand
for all parts and components can be calculated
• In general, used whenever a schedule can be
established for an item
• MRP is the common technique
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Dependent Inventory Model Requirements
• Master Production Schedule
• Bills of Material
• Accurate Inventory Records
• Purchase Orders Outstanding
• Lead Times for Each Component

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Master Production Schedule (MPS)

Specifies what is to be made and when

Must be in accordance with the APP

Aggregate production plan sets the overall level of
output in broad terms

As the process moves from planning to execution,
each step must be tested for feasibility

MPS is the result of the production planning process

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Master Production Schedule (MPS)

MPS is established in terms of specific products

Schedule must be followed for a reasonable length of
time

The MPS is quite often fixed or frozen in the near
term part of the plan

The MPS is a rolling schedule

The MPS is a statement of what is to be produced, not
a forecast of demand
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MPS Examples
For Nancy’s Specialty Foods

Gross Requirements for Crabmeat Quiche
Day
Amount

6
50

7

8
100

9
47

10
60

11

12
110

13
75

14 and so on

Gross Requirements for Spinach Quiche
Day
Amount

7
8
9
100 200 150

10

11

12
60

13
75

14

15
100

16 and so on

Table 13
13..1

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The Planning Process
Master production
schedule
Change
requirements?

Change
master
production
schedule?

Material
requirements plan

Change capacity?
Capacity
requirements plan
No
Realistic?
Yes

Is capacity
plan being
met?

Is execution
meeting the
plan?

Execute capacity
plans
Execute
material plans

Figure 13.1
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The Planning Process
Production
Capacity
Inventory

Marketing
Customer
demand

Procurement
Supplier
performance

Management
Return on
investment
Capital

Finance
Cash flow

Human resources
Manpower
planning

Aggregate
production
plan

Master production
schedule

Engineering
Design
completion

Change
production
plan?

Figure 13
13..1
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Aggregate Production Plan
Months
Aggregate Production Plan
(shows the total
quantity of amplifiers)
Weeks

1

January

February

1,500

1,200

2

3

4

5

6

7

8

Master Production Schedule
(shows the specific type and
quantity of amplifier to be
produced
240 watt amplifier
150 watt amplifier
75 watt amplifier

100

100
500

100
500

300

100
450

450
100

Figure 13.2
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Expressing Master Production Schedule (MPS)

A customer order in a job shop (make(make-to
to--order)
company

Modules in a repetitive (assemble(assemble-to
to--stock)
company

An end item in a continuous (make(make-to
to--stock)
company

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Focus for Different Process Strategies
Make to Order
(Process Focus)

Assemble to Order or
Forecast
(Repetitive)

Number of
end items

Stock to Forecast
(Product Focus)
Schedule finished
product

Typical focus of the
master production
schedule

Schedule modules

Schedule orders

Number of
inputs
Examples:

Print shop
Machine shop
Fine-dining restaurant

Motorcycles
Autos, TVs
Fast-food restaurant

Steel, Beer, Bread
Lightbulbs
Paper

Figure 13
13..3
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Bills of Material
• List of components, ingredients, and materials
needed to make a product
• Provides product structure
• Items above given level are called parents
• Items below given level are called children

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BOM Example
Level
0

“Awesome”
(A)(2)(50) =
Part B:Product
2 xstructure
numberfor
of As
=

Part C:

A

3 x number of As =

B(2) Std. 12
12”” Speaker kit

1

Part D:

E(2)

2

3

D(2)

Part F:

(3)(50) =
C(3)

2 x number of Bs

+ 2 x number of Fs =
Part E:

+ 2 x number of Cs =

150
Std. 12
12”” Speaker kit w/
amp--booster
amp

(2)(100) + (2)(300) =
E(2)

2 x number of Bs

Packing box and installation
kit of wire, bolts, and screws

2 x number of Cs =

100

F ( 2)

800

Std. 12” Speaker
booster assembly

G(1)
(2)(100)
+ (2)(150)D=(2) 500

(2)(150) =

300

Amp--booster
Amp

Part
G:
1 x number of Fs =
12
12”” Speaker
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(1)(300) =

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12”300
Speaker

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BOM Example
A
Ladder--back
Ladder
chair

Back slats
Back slats
B (1)
Ladder-back
subassembly

C (1)
Seat
subassembly

Seat cushion
Seat cushion
D (2)
Front
legs

LegLeg
supports
supports
F (2)
Back
legs

G (4)
Back
slats

Back
Front
Back
Front
legs
legs
legs
legs

H (1)
Seat
frame

I (1)
Seat
cushion

E (4)
Leg
supports

Seat-frame
Seat-frame
boards
boards

A
A
Ladder-back
Ladder-back
chair
chair

J (4)
Seat-frame
boards

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Product Structure of a Cellphone
Level

Product structure for a Cellphone
A

0
1

2

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Speaker

PCB

Camera

LCD

Battery

Fixer

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Body

Case

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Bills of Material - Modular Bills
• Modules are not final products but
components that can be assembled into
multiple end items
• Can significantly simplify planning and
scheduling

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Bills of Material - Planning Bills

• Created to assign an artificial parent to the BOM
• Used to group subassemblies to reduce the
number of items planned and scheduled
• Used to create standard “kits” for production

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Bills of Material - Phantom Bills
• Describe subassemblies that exist only
temporarily
• Are part of another assembly and never go into
inventory

• BOMs are processed one level at a time
• Low
Low--Level Coding
• Item is coded at the lowest level at which it occurs
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Importance of Accurate Records
• Accurate inventory records are absolutely
required for MRP (or any dependent demand
system) to operate correctly
• Generally MRP systems require 99%
99% accuracy
• Outstanding purchase orders must accurately
reflect quantities and schedule receipts
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Lead Times
• The time required to purchase, produce, or
assemble an item
• For purchased items – the time between the
recognition of a need and the availability of the
item for production
• For production – the sum of the order, wait, move,
setup, store, and run times
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Time-Phased Product Structure
Must have D and E
completed here so
production can begin on
B

Start production of D

1 week

D

2 weeks to
produce

B
2 weeks

E
A
2 weeks

1 week

E

2 weeks

1 week

G

C
3 weeks

F

1 week

D
|

|

|

1

2

3

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Figure 13.4
|

|

|

|

|

4
5
Time in weeks

6

7

8

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MRP Structure
Data Files
BOM

Output Reports
Master
production schedule

MRP by period
report

MRP by date
report

Lead times
Planned order
report

(Item master file)

Inventory data

Purchasing data

Material
requirement
planning programs
(computer and
software)

Purchase advice

Exception reports
Order early or late or
not needed
Order quantity too
small or too large

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Figure 13.5
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Benefits of MRP
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and labour
4. Reduced inventory levels

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Determining Gross Requirements

Starts with a production schedule for the end item –
50 units of Item A in week 8

Using the lead time for the item, determine the week
in which the order should be released – a 1 week lead
time means the order for 50 units should be released
in week 7

This step is often called “lead time offset” or “time
phasing”
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Determining Gross Requirements

From the BOM, every Item A requires 2 Item Bs – 100
Item Bs are required in week 7 to satisfy the order
release for Item A

The lead time for the Item B is 2 weeks – release an
order for 100 units of Item B in week 5

The timing and quantity for component requirements
are determined by the order release of the parent(s)
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Determining Gross Requirements

The process continues through the entire BOM one
level at a time – often called “explosion”

By processing the BOM by level, items with multiple
parents are only processed once, saving time and
resources and reducing confusion

Low--level coding ensures that each item appears at
Low
only one level in the BOM
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Gross Requirements Plan
1

2

3

Week
4
5

6

7

A. Required date
Order release date

50
1 week

50

B. Required date
Order release date

100
100

C. Required date
Order release date

2 weeks
150
150

E. Required date
Order release date

1 week
200

200

F. Required date
Order release date

300

300

1 week
300

300

D. Required date
Order release date
G.
Order release date

8 Lead Time

3 weeks
600

600

200

200

Required date
300

1 week
300
1 week

Table 13.3
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Net Requirements Plan

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Net Requirements Plan

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Determining Net Requirements

Starts with a production schedule for the end item – 50
units of Item A in week 8

Because there are 10 Item As on hand, only 40 are
actually required – (net requirement) = (gross
requirement - onon- hand inventory)

The planned order receipt for Item A in week 8 is 40
units – 40 = 50 – 10

Following the lead time offset procedure, the planned
order release for Item A is now 40 units in week 7

The gross requirement for Item B is now 80 units in
week 7
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Determining Net Requirements

There are 15 units of Item B on hand, so the net
requirement is 65 units in week 7

A planned order receipt of 65 units in week 7
generates a planned order release of 65 units in week 5

A planned order receipt of 65 units in week 7
generates a planned order release of 65 units in week 5

The onon-hand inventory record for Item B is updated to
reflect the use of the 15 items in inventory and shows
no onon-hand inventory in week 8

This is referred to as the GrossGross-to
to--Net calculation and
is the third basic function of the MRP process
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Gross Requirements Schedule
Figure 13
13..6

S

A

B

B

C

Lead time = 4 for A
Master schedule for A
Periods

5

6
40

Periods
Gross requirements: B

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Lead time = 6 for S
Master schedule for S

8

9 10 11

50

15

1

2

10

40+10

3

=50

C

40

8

9 10 11 12 13
40

4
50

5
20

20

6

7
15+30

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=45

30

Master schedule
for B
sold directly
1

2

3

10 10

8
Therefore, these are
the gross requirements
for B
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MRP Planning Sheet

Figure 13.7

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Net Requirements Plan
The logic of net requirements
gross
allocations
+
requirements
total requirements

on
scheduled
hand + receipts

net
= requirements

available inventory
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MRP Management

MRP is a dynamic system

Facilitates replanning when changes occur

System nervousness can result from too many changes

Time fences put limits on replanning

Pegging links each item to its parent allowing effective
analysis of changes
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Finite Capacity Scheduling
• MRP systems do not consider capacity during
normal planning cycles
• Finite capacity scheduling (FCS) recognizes
actual capacity limits
• By merging MRP and FCS, a finite schedule
is created with feasible capacities which
facilitates rapid material movement
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Small Bucket Approach
• MRP “buckets” are reduced to daily or hourly
• The most common planning period (time bucket)
for MRP systems is weekly
• Planned receipts are used internally to sequence
production
• Inventory is moved through the plant on a JIT basis
• Completed products are moved to finished goods
inventory which reduces required quantities for
subsequent planned orders
• Back flushing based on the BOM is used to deduct
inventory that was used in production
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Balanced Flow
• Used in repetitive operations
• MRP plans are executed using JIT techniques
based on “pull” principles
• Flows are carefully balanced with small lot
sizes
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Lot-Sizing Techniques
• Lot
Lot--forfor-lot techniques order just what is
required for production based on net reqmts
• May not always be feasible
• If setup costs are high, costs may be high as well

• Economic order quantity (EOQ)
• EOQ expects a known constant demand and MRP
systems often deal with unknown and variable
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demands

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Lot-Sizing Techniques
• Part Period Balancing (PPB) looks at future
orders to determine most economic lot size
• The WagnerWagner-Whitin algorithm is a complex
dynamic programming technique
• Assumes a finite time horizon
• Effective, but computationally burdensome
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Lot-for-Lot Example
1

2

3

4

5

6

7

8

9

10

35

30

40

0

10

40

30

0

30

55

No on-hand inventory is carried through the system
Gross
requirements
Scheduled
receipts

Total holding cost = $0

Projected on
hand
Net
requirements

35

35

0

0

0

0

0

0

0

0

0

0

30

40

0

10

40

30

0

30

55

30

55

Planned order There are seven setups for this item in this plan
30
40
10
40
30
receipts
Planned order
releases

30 setup
40 cost = 710
40= $700
30
Total
x $100

30

55

Holding cost = $1/week; Setup cost = $100
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EOQ Lot Size Example
1
Gross
requirements

35

Scheduled
receipts

2

3

4

5

Annual demand = 1,404
30

40

0

10

6

7

8

9

10

40

30

0

30

55

26

69

69

39

0

16

Total cost = setup cost + holding cost

Projected on
hand

35

35

0

43

3

3

66

Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)

Net
requirements
Planned order
receipts

0

30

0

0

7

Total cost = $3,798
73

73

0

4

0

73

Planned order
73
73
73
releases Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730

73
73

Holding cost = $1/week; Setup cost = $100;
Average weekly gross requirements = 27; EOQ = 73 units
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PPB Example
Gross
requirements

1

2

3

4

5

6

7

8

9

10

35

30

40

0

10

40

30

0

30

55

Scheduled
receipts
Projected on
hand

35

Net
requirements
Planned order
receipts
Planned order
releases

Holding cost = $1/week; Setup cost = $100;
EPP = 100 units
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...PPB Example
Periods
Combined

Trial Lot Size
(cumulative net
requirements)

2
2, 3
2, 3, 4
2, 3, 4, 5
2, 3, 4, 5, 6

30
70
70
80
120

Part Periods

0
40 = 40 x 1
40
70 = 40 x 1 + 10 x 3
230 = 40 x 1 + 10 x 3
+ 40 x 4

Costs
Holding

Setup

Total

100 + 70 = 170

Combine periods 2 - 5 as this results in the Part Period closest to the EPP
6
6, 7
6, 7, 8
6, 7, 8, 9

40
70
70
100

0
30 = 30 x 1
30 = 30 x 1 + 0 x 2
120 = 30 x 1 + 30 x 3

100

+

120

=

220

Combine periods 6 - 9 as this results in the Part Period closest to the EPP
10
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0
Total cost
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100 + 0 = 100
300 + 190 = 490
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Lot-Sizing Summary
For these three examples
Lot-for
Lotfor--lot
EOQ
PPB

$700
$730
$490

Wagner-Whitin would have yielded a plan with a
Wagnertotal cost of $455 for this example
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Lot-Sizing Summary

In theory, lot sizes should be recomputed whenever
there is a lot size or order quantity change

In practice, this results in system nervousness and
instability

Lot--for
Lot
for--lot should be used when economical

Lot sizes can be modified to allow for scrap, process
constraints, and purchase lots
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Lot-Sizing Summary

Use lotlot-sizing with care as it can cause considerable
distortion of requirements at lower levels of the BOM

When setup costs are significant and demand is
reasonably smooth, PPB, WagnerWagner-Whitin, or EOQ
should give reasonable results

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Extensions of MRP

Closed--Loop MRP
Closed

MRP system provides input to the capacity plan, MPS, and
production planning process

Capacity Planning

MRP system generates a load report which details capacity
requirements

This is used to drive the capacity planning process

Changes pass back through the MRP system for rescheduling

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Closed-Loop MRP System
Production plan

No

Priority Planning

Capacity Planning

Detailed
master production
schedule
Realistic?

Resource
planning
First cut
capacity

Planning

Yes
Material
requirements
(detailed)

Capacity
requirements
(detailed)
Figure 13.8

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Closed-Loop MRP System
Priority Control
(detailed scheduling)

Capacity Control
(throughput)

Dispatch list

Input/output
report

No

Is
specific capacity
adequate
?

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Execution

No

Yes
Execute
the plan
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Is
average
capacity
adequate
?
Figure 13.8
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Smoothing Tactics
• Overlapping

Sends part of the work to following operations before the
entire lot is complete

Reduces lead time

• Operations splitting

Sends the lot to two different machines for the same
operation

Shorter throughput time but increased setup costs

• Lot splitting

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Breaking up the order into smaller lots and running part
ahead of schedule
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Resource Requirements Profile
Capacity exceeded in
periods 4 & 6

150 –

Lot
11

Lot
6

100 –
Lot
1

Lot
2

50 –


1

Lot
7

Lot
9

Available
capacity
Lot
15

Lot
12

Lot
4

Lot
3

Lot
5

2

3

Lot
8

Lot
10

Lot
13

Lot
14

Standard labor hours

Standard labor hours

200 –

200 –

Lot 6 “split”
Lot 11 moved

150 –

Available
capacity

Lot
6

100 –
Lot
1

50 –

Lot
16


4 5
Period
(a)

6

7

Lot
2

8

1

Lot
7

Lot
9

Lot
11
Lot
12

Lot
15

Lot
4

Lot
3

Lot
5

2

3

Lot
8

Lot
10

4 5
Period
(b)

Lot
13

6

Lot
14

7

Lot
16

8

Figure 13.9
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Material Requirements Planning II

Once an MRP system is in place, inventory data can be
augmented by other useful information
• Labour hours
• Material costs
• Capital costs
• Virtually any resource

Such system is generally called MRP II or Material Resource
Planning
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Material Resource Planning

5
A.

Units (lead time 1 week)
Labour:: 10 hours each
Labour
Machine: 2 hours each
Payable: $0 each
B. Units (lead time 2 weeks,
2 each required)
Labour:: 10 hours each
Labour
Machine: 2 hours each
Payable: Raw material at $5 each
C. Units (lead time 4 weeks,
3 each required)
Labour:: 2 hours each
Labour
Machine: 1 hour each
Payable: Raw material at $10 each

Week
7

6

8
100
1,000
200
0

200
2,000
400
1,000
300
600
300
3,000
Table 13.4

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MRP in Services
• Some services or service items are directly
linked to demand for other services
• These can be treated as dependent demand
services or items
• Restaurants
• Hospitals
• Hotels
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MRP in Services
PRODUCT STRUCTURE TREE
Veal
picante
#10001

Helper one;
Work
Center #2

Cooked
linguini
#200002

Uncooked
linguini
#30004

Chef;
Work
Center #1

Prepared veal and
sauce #20003

Spinach
#20004

Asst. Chef;
Work
Center #3

Sauce
#30006

Veal
#30005

Figure 13.10
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MRP in Services
BILL OF MATERIALS

Part
Number

Description

Quantity

Unit of
Measure

Unit
cost

10001

Veal picante

1

Serving

20002

Cooked linguini

1

Serving

20003

Prepared veal and sauce

1

Serving

20004

Spinach

0.1

Bag

30004

Uncooked linguini

0.5

Pound

30005

Veal

1

Serving

2.15

30006

Sauce

1

Serving

0.80

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0.94

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MRP in Services
BILL OF LABOUR FOR VEAL PICANTE

Labor Hours
Work Center

Operation

Labor Type

Setup Time

Run Time

1

Assemble dish Chef

.0069

.0041

2

Cook linguini

Helper one

.0005

.0022

3

Cook veal
and sauce

Assistant Chef
.0125

.0500

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