Ch03 PDF

Material Requirements Planning (MRP)
Unlike many other approaches and techniques, material

requirements planning “works” which is its best recommendation.
— Joseph Orlicky, 1974
1
© Wallace J. Hopp, Mark L. Spearman, 1996, 2000 http://factory-physics.com
History
• Begun around 1960 as computerized approach to purchasing and

production scheduling.
• Joseph Orlicky, Oliver Wight, and others.
• Prior to MRP, production of every part and end item was triggered by the
inventory falling below a given level (reorder point).
• APICS launched “MRP Crusade” in 1972 to promote MRP.
2
1
Key Insight
• Independent Demand — finished products
• Dependent Demand — components
It makes no sense to independently forecast dependent demands.
3
Assumptions
1. Known deterministic demands.
2. Fixed, known production leadtimes.
3. In actual practice, lead times are related to the level of WIP.
Flow Time = WIP / Throughput Rate (Little’s Law)
Idea is to “back out” demand for components by using leadtimes and bills of
material.
4
2
Capacity Requirements Planning
100
Capacity
(Hours or
Units)
1 2 3 4 5 6
Who in the organization actually does this?

5
MRP Procedure
1. Netting: net requirements against projected inventory
--Gross Requirements over time (e.g., weekly buckets)
--Scheduled Receipts and current inventory
--Net Requirements
2. Lot Sizing: planned order quantities
3. Time Phasing: planned orders backed out by leadtime
4. BOM Explosion: gross requirements for components
6
3
Inputs
• Master Production Schedule (MPS): due dates and quantities for all top
level items
Due dates assigned to orders into time buckets (week, day, hour, etc.)
• Bills of Material (BOM): for all parent items
• Inventory Status: (on hand plus scheduled receipts) for all items
• Planned Leadtimes: for all items

Components of leadtime
Move
Setup
Process time
Queue time (80-90% total time)
7
Example - Stool
Indented BOM Graphical BOM
Stool Stool Level 0

Base (1)
Legs (4)
Bolts (2) Base (1) Seat (1) Level 1
Seat (1)
Bolts (2)
Legs (4) Bolts (4) Bolts (2) Level 2
Note: bolts are treated at lowest level
in which they occur for MRP calcs.
Actually, they might be left off BOM
altogether in practice. 8
4
Example
Item: Stool (Leadtime = 1 week)
Week 0 1 2 3 4 5 6
Gross Reqs 120
Sched Receipts
Proj Inventory 20 20 20 20 20 -100 -100
Net Reqs 100
Planned Orders 100
Item: Base (Leadtime = 1 week)

Week 0 1 2 3 4 5 6
Gross Reqs 100
Sched Receipts
Proj Inventory 0 0 0 0 -100 -100 -100
Net Reqs 100
Planned Orders 100
9
Example (cont.)
BOM explosion
Item: Legs (Leadtime = 2 weeks)
Week 0 1 2 3 4 5 6
Gross Reqs 400
Sched Receipts 200
Proj Inventory 0 0 0 -200 -200 -200 -200
Net Reqs 200
Planned Orders 200
10
5
Terminology
Level Code: lowest level on any BOM on which part is found
Planning Horizon: should be longer than longest cumulative leadtime for any
product
Time Bucket: units planning horizon is divided into
Lot-for-Lot: batch sizes equal demands (other lot sizing techniques, e.g., EOQ or
Wagner-Whitin can be used)
Pegging: identify gross requirements with next level in BOM (single pegging) or
customer order (full pegging) that generated it. Single usually used because
full is difficult due to lot-sizing, yield loss, safety stocks, etc.
11
Pegging and Bottom up Planning

Table 3.7 MRP Calculations for Part 300
Part 300 1 2 3 4 5 6 7 8
Required from B 35 30 15
90 60
Required from 100
Gross Requirements 125 90 15
Scheduled Receipts 100

Adjusted Scheduled Receipts 100
Projected on-hand 50 50 25 25 -65
Net Requirements 65 15
Planed order receipts 65 15
Planed order releases 65 15
On-hand = 40 Scheduled releases = none Lot-for-lot LT = 1 week
12
6
Bottom Up Planning
Reference Figure 3.7
Assume that the scheduled receipt for week 2 for 100 units is not
coming in!
Have 50 units of inventory, with requirements of 125.
Implications
I can fill 50 units of demand from part 100 or 50 units from part
B.
If I go with part 100, that will allow me to fill some of the demand
of part A (100 needed for part A). Can I ship 50 units to the
customer now and 50 units later? What if I cover the demand of
part B? Correct choice depends on the customers involved.
13
More Terminology
Firm Planned Orders (FPO’s): planned order that the MRP system does not
automatically change when conditions change --- can stabilize system
Service Parts: parts used in service and maintenance --- must be included in gross
requirements
Order Launching: process of releasing orders to shop or vendors --- may include
inflation factor to compensate for shrinkage
Exception Codes: codes to identify possible data inaccuracy (e.g., dates beyond
planning horizon, exceptionally large or small order quantities, invalid part
numbers, etc.) or system diagnostics (e.g., orders open past due, component
delays, etc.)
14
7
Conceptual Changes in Lotsizing Approaches
Before, EOQ represented a basic trade-off between inventory costs

and setup costs.
Goldratt: If I am not at capacity on an operation requiring a setup,

the time spent on a setup is a mirage.
Make setups occur as frequently as possible (smaller lot sizes) as long

as capacity is available
Produce only when inventory level reaches zero (Wagner Whitin) is

not optimal when capacity is a constraint
Authors know of no commercial MRP system that uses WW.

15
Important Questions About “Optimal” Lot-sizing
Setup costs
Very difficult to estimate in manufacturing systems
-May depend on schedule sequence
-True costs depends on capacity situation
Assumption of deterministic demand and deterministic production

-production schedules are always changing because of dynamic
conditions in the factory.
Assumption of independent products that do not use common

resources. Very seldom will see common resources not used.
16
8
Important Questions About “Optimal” Lot-sizing
WW leads us to the conclusion that we should produce either

nothing in a period or the demand of an integer num ber of
future periods.
-generates a production schedule that is very “lumpy.”
There are reasons for generating a level loaded production

schedule, one in which the same amount of products are
produced in every time period.
17
Problem Formulation
t= A time period, t = 1 to T, where T is the planning horizon.

Dt = Demand in time period t (in units).
Ct = Unit production costs ($/unit), excluding setup or inventory cost in
period t.
At = Setup (order) cost to produce (purchase) a lot in period t ($).
Ht = Holding costs to carry a unit of inventory from period t to
period t+1 ($/unit). e.g., if holding costs consists entirely of interest on
money tied up in inventory, where i is the annual interest rate and
periods correspond to weeks, then
I * Ct
h=
52
It =Inventory (units) left over at the end of period t.
Qt =The lot size (units) in period t; this is the decision variable
18
9
Problem Objective
Satisfy all demands at minimum cost (production, setup, and holding

costs)
All the demands must be filled, only the timing of production is open to
choice.
If the unit production cost does not vary with t, then production cost
will be the same regardless of timing and can be dropped from
consideration.
Look at an example: assume setup costs, production costs, and holding

costs are all constant over time. Thus, need only to consider setup
costs and holding costs.
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Lot Sizing in MRP
• Lot-for-lot — “chase” demand
• Fixed order quantity method — constant lot sizes
• EOQ — using average demand
• Fixed order period method — use constant lot intervals
• Part period balancing — try to make setup/ordering cost equal to holding

cost
• Wagner-Whitin — “optimal” method
20
10
Data For An Example Problem
Table 2.1
t 1 2 3 4 5 6 7 8 9 10
Dt 20 50 10 50 50 10 20 40 20 30
ct 10 10 10 10 10 10 10 10 10 10
At 100 100 100 100 100 100 100 100 100 100
ht 1 1 1 1 1 1 1 1 1 1
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Lot-for-lot
Simply produce in period t the net requirements for period t.
Minimizes inventory carrying costs and maxim izes total setup

costs.
It is simple and it is consistent with just in time.
Tends to generate a more smooth production schedule.
In situations where setup costs are minim al (assembly lines), it

is probably the best policy to use.
22
11
Lot Sizing Example
t 1 2 3 4 5 6 7 8 9 10
Dt 20 50 10 50 50 10 20 40 20 30
LL 20 50 10 50 50 10 20 40 20 30
A = 100
h =1
300
D= = 30
10
Lot-for-Lot: $1000 No carrying cost, ten setups @$100 each
23
Lot Sizing Example (cont.)
EOQ: Note: EOQ is a

2 AD 2 x100 x 30
Q= = = 77 special case of
h 1
fixed order quantity.
t 1 2 3 4 5 6 7 8 9 10 Total
Dt 20 50 10 50 50 10 20 40 20 30 300
Qt 77 77 77 77 308
Setup 100 100 100 100 $400
Holding 57 7 74 24 51 41 21 58 38 $371
Total $771
24
12
Fixed Order Period From EOQ
Calculate EOQ using formula presented earlier.
Then Fixed Order Period, P = Q/D
Calculating P in this manner has all the limitations noted

earlier in Chapter .
25
Fixed Order Period

Example--Further Comments
Example
Period 1 2 3 4 5 6 7 8 9
Net Requirements 15 45 25 15 20 15
Planned Order Recpts 60 60 15
Let P = 3. Skip first period, no demand. Sixty units covers demand

for periods 2, 3, and 4. Period 5 is skipped because there is no
demand. Sixty units covers demand in periods 6, 7, 8. Fifteen units
covers demand in period 9, which is the last period in the planning
Horizon.
26
13
Part-Period Balancing
Combines the assumptions of WW with the mechanics of the EOQ.
One of the assumptions of the EOQ is that it sets the average setup
costs equal to the average inventory carrying costs.
Part-period. The number of parts in a lot times the number of

periods they are carried in inventory.
Part-period balancing tries to make the setup costs as close to the

carrying costs as possible.
27
Part-Period Balancing Example (Cont.)
Period 1 2 3 4 5 6 7 8 9
Net Requirements 15 45 25 15 20 15
Planned Order Receipts
Quantity Inventory
Period 6 Setup Costs Part-periods Carrying Costs
25 $150 0 $0
40 $150 $30
15 x 1 = 15
60 $150 15 + 20 x 2 = 55 $110
75 $150 55 + 15 x 3 = 100 $200
Fixed order quantity method (without modifications) tends to

work better than WW when dealing with multi-level production
systems with capacity limitations.
28
14
Nervousness
Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)

Week 0 1 2 3 4 5 6 7 8
Gross Reqs 2 24 3 5 1 3 4 50
Sched Receipts
Proj Inventory 28 26 2 -1 -6 -7 -10 -14 -64
Net Reqs 1 5 1 3 4 50
Planned Orders 14 50
Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)

Week 0 1 2 3 4 5 6 7 8
Gross Reqs 14 50
Sched Receipts 14
Proj Inventory 2 2 2 2 2 2 -48
Net Reqs 48
Planned Orders 48
Note: we are using FOP lot-sizing rule.

29
Nervousness Example (cont.)

Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)
Week 0 1 2 3 4 5 6 7 8
Gross Reqs 2 23 3 5 1 3 4 50
Sched Receipts
Proj Inventory 28 26 3 0 -5 -6 -9 -13 -63
Net Reqs 5 1 3 4 50
Planned Orders 63
Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)
Week 0 1 2 3 4 5 6 7 8
Gross Reqs 63
Sched Receipts 14
Proj Inventory 2 16 -47
Net Reqs 47
Planned Orders 47*
* Past Due
Note: Small reduction in requirements caused large change in orders and
made schedule infeasible.
30
15
Reducing Nervousness
Reduce Causes of Plan Changes:

• Stabilize MPS (e.g., frozen zones and time fences)
• Reduce unplanned demands by incorporating spare parts forecasts into
gross requirements
• Use discipline in following MRP plan for releases
• Control changes in safety stocks or leadtimes
Alter Lot-Sizing Procedures:
• Fixed order quantities at top level
• Lot for lot at intermediate levels
• Fixed order intervals at bottom level
Use Firm Planned Orders:
• Planned orders that do not automatically change when conditions change
• Managerial action required to change a FPO
31
Handling Change
• New order in MPS

• Order completed late
• Scrap loss
• Engineering changes in BOM
Regenerative MRP: completely re-do MRP calculations starting with MPS and
exploding through BOMs.
Net Change MRP: store material requirements plan and alter only those parts
affected by change (continuously on-line or batched daily).
Comparison:
– Regenerative fixes errors.
– Net change responds faster to changes (but must be regenerated
occasionally for accuracy.
32
16
Rescheduling
Top Down Planning: use MRP system with changes (e.g., altered MPS or
scheduled receipts) to recompute plan
• can lead to infeasibilities (exception codes)
• Orlicky suggested using minimum leadtimes
• bottom line is that MPS may be infeasible
Bottom Up Replanning: use pegging and firm planned orders to guide

rescheduling process
• pegging allows tracing of release to sources in MPS
• FPO’s allow fixing of releases necessary for firm customer orders
• compressed leadtimes (expediting) are often used to justify using FPO’s to
override system leadtimes
33
Safety Stocks and Safety Leadtimes
Safety Stocks:
– generate net requirements to ensure min level of inventory at all times
– used as hedge against quantity uncertainties (e.g., yield loss)
Safety Leadtimes:
– inflate production leadtimes in part record
– used as hedge against time uncertainty (e.g., delivery delays)
34
17
Safety Stock Example
Item: Screws (Leadtime = 1 week)
Week 1 2 3 4 5 6
Gross Reqs 400 200 800
Sched Receipts 500
Proj Inventory 100 100 -100 -900 -
Net Reqs 120 800
Planned Orders 120 800
Note: safety stock level is 20.
35
Safety Stock vs. Safety Leadtime
Item: A (Leadtime = 2 weeks, Order Quantity =50)

Week 0 1 2 3 4 5
Gross Reqs 20 40 20 0 30
Sched Receipts 50
Proj Inventory 40 20 30 10 10 -20
Net Reqs 20
Planned Orders 50
Safety Stock = 20 units

Week 0 1 2 3 4 5
Gross Reqs 20 40 20 0 30
Sched Receipts 50
Proj Inventory 40 20 30 10 10 -20
Net Reqs 10 30
Planned Orders 50
36
18
Safety Stock vs. Safety Leadtime (cont.)
Safety Leadtime = 1 week

Week 0 1 2 3 4 5
Gross Reqs 20 40 20 0 30
Sched Receipts 50
Proj Inventory 40 20 30 10 10 -20
Net Reqs 20
Planned Orders 50
37
Manufacturing Resource Planning (MRP II)
• Sometime called MRP, in contrast with mrp (“little” mrp); more recent
implementations are called ERP (Enterprise Resource Planning).
• Extended MRP into:

– Master Production Scheduling (MPS)
– Rough Cut Capacity Planning (RCCP)
– Capacity Requirements Planning (CRP)
– Production Activity Control (PAC)
38
19
MRP II Planning Hierarchy
Demand
Forecast
Resource Ag gregate Production

Planning Planning
Rough-cut Capacity Master Production

Planning Scheduling
Bills of
Material
Material Requirements
Planning
Inventory
Status
Job Capacity Requirements
Pool Planning
Job Routing
Release Data
Job
Dispatching
39
Master Production Scheduling (MPS)
• MPS drives MRP
• Should be accurate in near term (firm orders)
• May be inaccurate in long term (forecasts)
• Software supports
– forecasting
– order entry
– netting against inventory
• Frequently establishes a “frozen zone” in MPS
40
20
Rough Cut Capacity Planning (RCCP)
• Quick check on capacity of key resources
• Use Bill of Resource (BOR) for each item in MPS
• Generates usage of resources by exploding MPS against BOR (offset by

leadtimes)
• Infeasibilities addressed by altering MPS or adding capacity (e.g.,

overtime)
41
Capacity Requirements Planning (CRP)
• Uses routing data (work centers and times) for all items
• Explodes orders against routing information
• Generates usage profile of all work centers
• Identifies overload conditions
• More detailed than RCCP
• No provision for fixing problems
• Leadtimes remain fixed despite queueing

42
21
Production Activity Control (PAC)
• Sometimes called “shop floor control”
• Provides routing/standard time information
• Sets planned start times
• Can be used for prioritizing/expediting
• Can perform input-output control (compare planned with actual

throughput)
• Modern term is MES (Manufacturing Execution System), which

represents functions between Planning and Control.
43
Conclusions
Insight: distinction between independent and dependent demands
Advantages:
• General approach
• Supports planning hierarchy (MRP II)
Problems:
• Assumptions --- especially infinite capacity
• Cultural factors --- e.g., data accuracy, training, etc.
• Focus --- authority delegated to computer
44
22

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Material Requirements Planning (MRP)

Unlike many other approaches and techniques, material

— Joseph Orlicky, 1974

• Begun around 1960 as computerized approach to purchasing and

• Joseph Orlicky, Oliver Wight, and others.

• APICS launched “MRP Crusade” in 1972 to promote MRP.

• Independent Demand — finished products

• Dependent Demand — components

It makes no sense to independently forecast dependent demands.

1. Known deterministic demands.

2. Fixed, known production leadtimes.

3. In actual practice, lead times are related to the level of WIP.

Flow Time = WIP / Throughput Rate (Little’s Law)

Who in the organization actually does this?

1. Netting: net requirements against projected inventory

--Gross Requirements over time (e.g., weekly buckets)

--Scheduled Receipts and current inventory

2. Lot Sizing: planned order quantities

3. Time Phasing: planned orders backed out by leadtime

4. BOM Explosion: gross requirements for components

• Bills of Material (BOM): for all parent items

• Planned Leadtimes: for all items

Indented BOM Graphical BOM

Stool Stool Level 0

Item: Base (Leadtime = 1 week)

Level Code: lowest level on any BOM on which part is found

Time Bucket: units planning horizon is divided into

Pegging and Bottom up Planning

Scheduled Receipts 100

Reference Figure 3.7

Before, EOQ represented a basic trade-off between inventory costs

Goldratt: If I am not at capacity on an operation requiring a setup,

Make setups occur as frequently as possible (smaller lot sizes) as long

Produce only when inventory level reaches zero (Wagner Whitin) is

Authors know of no commercial MRP system that uses WW.

Important Questions About “Optimal” Lot-sizing

Assumption of deterministic demand and deterministic production

Assumption of independent products that do not use common

WW leads us to the conclusion that we should produce either

There are reasons for generating a level loaded production

t= A time period, t = 1 to T, where T is the planning horizon.

Satisfy all demands at minimum cost (production, setup, and holding

Look at an example: assume setup costs, production costs, and holding

Lot Sizing in MRP

• Lot-for-lot — “chase” demand

• Fixed order quantity method — constant lot sizes

• EOQ — using average demand

• Fixed order period method — use constant lot intervals

• Part period balancing — try to make setup/ordering cost equal to holding

• Wagner-Whitin — “optimal” method

Simply produce in period t the net requirements for period t.

Minimizes inventory carrying costs and maxim izes total setup

It is simple and it is consistent with just in time.

Tends to generate a more smooth production schedule.

In situations where setup costs are minim al (assembly lines), it

Lot-for-Lot: $1000 No carrying cost, ten setups @$100 each

Lot Sizing Example (cont.)

EOQ: Note: EOQ is a

Calculate EOQ using formula presented earlier.

Then Fixed Order Period, P = Q/D

Calculating P in this manner has all the limitations noted

Fixed Order Period

Let P = 3. Skip first period, no demand. Sixty units covers demand