MRP

DEPENDENT DEMAND

It is the degree to which the demand for some item is associated with the demand for
another item. In the dependent demand situation, if the demand for one item is
known, the demand for one or more related items can be deduced.

For Example: If the demand for the end product is known, we can calculate how many
sub-components are needed, because their demand is directly dependent on the end-item
demand.

MATERIALS REQUIREMENT PLANNING:

• It is a simple system of calculating arithmetically the requirement of the input

materials at different points of time, based on the plan or schedule of production of
the finished good.
• MRP is a computer-based information system for scheduling production and
purchases of dependent demand items.
• It uses information about end product demands, product structure and component
requirements, production and purchase lead times and current inventory levels to develop
cost-effective production and purchasing schedules.
• MRP is a system of planning and scheduling the item Phased materials requirement for
production operations.

GENESIS:
People have been calculating the requirement of materials prior to the advent of statistics.
As industry became more complex, models such as EOQ and the science of statistics
became available and offered relief from cumbersome and detailed calculation for
planning.

The trouble was that even in those situation where arithmetic computations would have
done a better job, people used statistical and averaging methods. But, with the advent
and proliferation of computers things changed. The cumbersome arithmetic computations
could be done in no time. So since the last decade, the MRP system is being considered.

ACROSS THE DISCIPLINES MRP IS IMPORTANT TO

ACCOUNTING, which co-ordinates the payments to suppliers and billings to customers

with the material requirement plan.
FINANCE, which plans for adequate working capital to support the schedules generated
in the material requirement plan.
HUMAN RESOURCES, which determines the implications of the materials plan on
personnel requirements.
MARKETING, which makes reliable delivery commitments to the customers.
MANAGEMENT INFORMATION SYSTEMS, which must identify the information
requirements of the managers and the information can be generated from the material
requirement plan.

MRP OBJECTIVES:

Inventory Reduction:
MRP determines how many units of a component are needed and when they are needed
to meet the master schedule.

Therefore it enables the manager to procure that component as it is needed, thereby

reducing the costs of excessive inventory.
Reduction In Production And Delivery Lead Times:
MRP identified materials and components quantities, timings, availabilities,
production & procurement actions required to meet delivery dead-lines. By coordinating
inventories, procurement & production decisions, MRP helps in avoiding delays in
production.It prioritizes production activities by putting due dates on customer job orders.

Realistic Commitments:
By using MRP, production can give marketing timely information about likely delivery
times to prospective customers

MRP SYSTEM COMPONENTS:(MRP INPUTS)

Three major sources of information are mandatory in the MRP system
 A Master Production Schedule
 An Inventory Status File
 A Bill Of Materials File

Using these three information sources, the MRP processing logic (computer program)
provides three kinds of information output for each product component

 Order Release Requirement

 Order Rescheduling
 Planned Orders

Master Production Schedule (MPS)

 The MPS is developed from firm’s customer orders or from forecasts of demand
before the MRP system begins to operate.
 The MPS is designed to meet market demand. So, it identifies the quantity of
each end product and when it is to be produced during each future period in the
production planning horizon.
 Service components for customers are also entered as end items in the MPS.
 The MPS provides the focal information for the MRP system.
 The MPS governs the MRP system’s recommended actions on the timing of pro-
curing materials and producing sub-components.

21.6.1 Bill Of Materials (BOM)

This is a document describing the details of an item’s product build up, including all
component items, their build up sequence, the quantity needed for each of the work
centers that perform the build up sequence.

The BOM identifi how each end product is manufactured, specifying all sub-
component items, their sequence, their quantity in each finished unit.

This information is obtained from product design documents, work-flow analysis

and other standard manufacturing and industrial engineering documentation.

The primary information to the MRP from the BOM is the product structure.
Product Structure:

The levels of components to produce an end product is called product structure.

 End products
A D
Components

B C F

One unit of end-product “A” requires one unit each of components “B”and “C”.
One unit of end product “D” requires one unit of component “E” and one unit of
component “F” which in turn requires one unit of component “B” and two units of
component “C”.

Inventory Status File:

It consists the complete documentation of the inventory status of each item in the
product structure, on-hand quantity, safety stock level, quantity allocated and lead-time.

The MRP system must retain the an up to date file of the inventory status of each
item in the product structure.

This file provides accurate information about of every item controlled by the MRP system,
which can then maintain an accurate accounting of all inventory transactions, both
actual and planned.

THE MRP PROCESSING LOGIC:

The MRP processing logic accepts the the Master schedule and determines the
components schedules for successively lower level items of the product structures.

It calculates for each item in each product structure and for each time period in the
planning horizon, how many of that item are needed i.e gross requirement, how many
units from the inventory are already available i.e available quantity, the net quantity
that must be planned on receiving in the new shipments (planned order receipts), and
when orders for the new shipments must be placed (planned order releases) so that all
materials arrive just when needed.

This data processing continues until it has determined the requirements for all the items
used to meet the MPS.

TERMINOLOGY OF THE MRP COMPONENT RECORDS

The inventory record consists of
Allocated Quantity:
The quantity of an item in inventory that has been committed for use and is not
available to meet future requirements.
Gross Requirement:
The overall quantity of an item needed at the end of the period to meet planned output
levels. Planned output for end items is obtained from the MPS.
Item Level:
It is the relative position of an item in the product structure. End items are upper-level
items and preliminary items in the product structure are lower level items.
Scheduled Receipts:
The quantity of an item that will be received at the beginning of a time period from
the suppliers as a result of orders that have already been placed.

Available Quantity:

The quantity of an item expected to be available at the end of a time period for meeting
requirements in the succeeding periods. It is calculated as

Scheduled receipts + Planned order receipts + Amounts available from previous period
– Gross requirements.

Net Requirement:

The net quantity of an item that must be acquired to meet the scheduledoutput for the
period. It is calculated as

Gross requirements – Scheduled receipts for the period – amonts available from the
previous period.

Planned Order Receipts:

The quantity of an item that is planned to be ordered so that it will be received at the
beginning of the the period to meet net requirements for the period.

Planned Order Release:

The quantity of an item that is planed to be ordered and the planned time period for
releasing this order will result in the order being received when needed.

MRP OUTPUTS:
The primary outputs of an MRP system are material requirements plan for each item
and master material requirement plan i.e aggregate requirements for all the products.

These would be used to generate the following other reports and documents.

Order And Production Release Schedules:

These specify the amount and timing of future orders and production runs for each item.

Order Releases:
These authorize the purchases or production of items.

Change Reports:
These highlight changes to the previous production and purchase plans.

Load Reports:
These indicate the amount of each major production resource or department capacity
that is to be utilized with the plan.

DETAILED CAPACITY PLANNING or CAPACITY REQUIREMENT PLANNING:

So far, we have assumed that the company can produce or order any number of units
of an item in any time period. But, in practice, this is not the case. Capacity limitations
exist throughout the production system.

An important benefit of the MRP is that it can identify potential bottlenecks and
Capacity problems far enough in advance to adapt the schedule to them.
 Developing material requirements plan is an iterative process as shown below. Using the
available data, a tentative production schedule and a corresponding material plan for
each item is derived (without imposing production or procurement limitations.
The MRP uses these to generate load reports for each production department. The load
reports convert the material requirements into resource i.e., either personnel or
machinery requirements. If the loads are within the capacity limitations, the material
requirement plans are feasible and can be used.

BENEFITS OF MRP
 As the MRP system is of dynamic nature, it reacts well to the changing conditions.
 As the production-inventory data is computerized, management can make a new
MRP computer run to revise production and procurement plans that react quickly to
the changes in the customer demand as reflected in the master schedule.

LIMITATIONS OF MRP
 A computer is necessary.
 The product- structure must be assembly oriented.
 Bill of materials and inventory status information must be assembled and
computerized.
 A valid master schedule has to be prepared.
 Unreliable inventory and transactions data from the shop floor can ruin a well
planned MRP system.
 Training personnel to keep accurate records is a critical task.

MANUFACTURING RESOURCES PLANNING

The MRP systems were developed on a segregated basis. MRP-II is an integrated

information system that shares data among and synchronizes the activities of production
and other functional areas of the business.

The MRP-II is a step ahead of the first generation MRP. It synchronizes all aspects of the
business. The MRP-II system co-ordinates sales, purchasing, manufacturing, finance
and engineering by adopting a focal production plan and by using one unified database
to plan and update the activities in all the system. The rationale for having these
functional areas work together is the increased likelihood of these developing a plan
that works. Moreover, because each of these functional areas has been involved in
formulating the plan, they will have good knowledge of the plan and reason to work
towards achieving it. Once these have been decided, the master production schedule can
be firmed up.
At this point, material requirement planning comes into play, generating material
and schedule requirements.
Next, the management must make detailed capacity requirement planning to
determine whether these specific capacity requirements can be met.Adjustments in the
master production schedule can be done if required.
When the actual work begins, a variety of reports help the managers to monitor
the process and to make any necessary adjustments to keep the operations on track.
This is a continuing process, where the MPS is updated and revised as necessary
to achieve corporate goals.

SUMMARY

Materials requirement planning is an information system used to handle ordering of

dependent demand items.
The planning process begins with customer orders that are used to develop a master
production schedule.
MRP-II is a second generation approach to planning that adds a broader scope MRP
because it links business planning, production planning, and the master production
schedule.