Dr. M. Ahsan Akhtar Hasin, IPE, BUET.

Chapter 16
Inventory Systems for Dependent Demand
(MRP System)

Definition of MRP
While demands of independent items, i.e. the finished goods, are forecasted, demands of
dependent type of items are derived or computed using MRPII systems. MRPII stands for
Manufacturing Resource Planning and MRP stands for Material Requirements Planning.
MRP is a part of the whole MRPII system.

The evolution of the current system has taken long time, almost parallel to the history of
growing computational power of computers. The earliest materials planning system started
with simply preparing a list of components required to make the finished product, which is
currently known as Bill of Materials. The first such program was known as Bill of Materials
Processor (BOMP), developed by Gene Thomas and used at IBM in the 1960s. Afterwards
more detailed Material Requirements Planning (MRP) algorithm was developed along with
BOM. Since, MRP systems require huge computation on a large amount of data, with the
advent of powerful computers, this computation has become easier. Since then, MRP came a
long way, starting from humble computing of amount of materials only. MRP has grown
rapidly to become a fully integrated, interactive planning system capable of complete
company-wide planning system. This system (or, 2nd generation MRP system) is known as
Manufacturing Resource Planning (MRPII) system.

The facilities continued to grow. Now-a-days, electronic communication, web and internet
have made exchange of business documents, sourcing and ordering very fast and reliable.
When these electronic communication systems have been added to MRPII system, this is
known as Enterprise Resource Planning (ERP) system, a 3rd generation system making-
commerce viable. The current ERP system is capable of multi-site integrated planning.

A complete ERP system includes 20 or more modules controlling the entire system, from
order entry through scheduling, inventory control, finance, accounting, payroll, HRM, and so
on. In fact, now-a-days, this system is considered as a complementary information system to
organize, operate and control the complete Supply Chain of the organization. It has Supplier
Relationship Management (SRM) part to manage the backward linkage of the supply chain
and Customer Relationship Management (CRM) part to manage the forward linkage of the
supply chain.

Ultimate purposes of MRPII are:

To determine –
o What items to order
o How much to order
o When to order
o When to schedule delivery

Some commercially popular ERP/MRP systems are: SAP, BaaN, Oracle-based system,
MRP9000, Micro-Max, etc.

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Dr. M. Ahsan Akhtar Hasin, IPE, BUET.

Basic MRPII System

The basic computational part of MRPII is shown below. In fact, the whole MRPII system
contains more modules, such as HRM, Payroll, Design, Marketing, Sales, and many more.
The MRP II system integrates these modules together so that they use common data and
freely exchange information, in a model of how a manufacturing enterprise should and can
operate. The MRP II approach is therefore very different from the “point solution” approach,
where individual systems are deployed to help a company plan, control or manage a specific
activity. MRP II is by definition fully integrated or at least fully interfaced.

MRPII system is a hierarchical planning system. Depending upon capacity limitation or

availability, target production plan (Master Production Schedule-MPS) or Material
Requirements Plan (MRP) may be revised. This requires information feedback from lower
levels to upper levels. American Production and Inventory Control Society (APICS) have
named this Closed-Loop MRP.

Here, based on forecast or customer order, the combined aggregate plan is prepared. Then an
MPS is prepared which shows weekly demand for individual model. The MPS is then
expanded to produce detailed materials plan under MRP. At this stage, a capacity
requirement is verified against capacity available. If available capacity is less than required
capacity, then both MPS and MRP need to be revised. This requires information feedback.
Once the MRP is finalized, it generates two types of orders:

1. Production orders – for parts to be manufactured in-house, which are executed at the
Shop Floor
2. Purchasing orders – for materials requiring purchasing from outside supplier, which
are executed by the purchasing department.

Functions at this level (executing production and purchasing orders) are “Control”
levels/functions, and any level before these are “Production Planning” levels/functions.

Recent ERP systems are highly flexible too, allowing for customization to suit the varied and
specific requirements of individual companies.

Forecast

Aggregate planning

MPS

Inventory status Capacity Planning

MRP
BOM

Production Order Purchasing Order

Shop Floor Purchasing Dept.

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Dr. M. Ahsan Akhtar Hasin, IPE, BUET.

Bill of Materials (BOM)

A Bill of Material (BOM) is a hierarchical structure of components required to make the
finished good. This shows the sequence of components that go into the final product. A BOM
is also called a Product Structure tree. Although this file is mainly required by MRP (Material
Requirements Planning) module while generating detailed materials plan, this is required by
many other modules, such as „Purchasing module‟ for determining what materials or
components to be purchased, „Inventory module‟ for inventory counting and stock
accounting, etc. The huge database, containing detailed information of BOM, is maintained in
a separate file, named “Item Master file”. In fact, Item Master file provides information to
MRP and inventory modules of the complete software.

Computer Level 0

Monitor (1) Keyboard (1) Mouse (1) CPU (1) Accessories (1) Level 1

Level 2
Level 3

Here, numbers in bracket indicate number of pieces required to make one piece of higher sub-
assembly.

Aggregate Planning and Master Production Scheduling (MPS)

Aggregate planning process deals with longer-range plan for production of group of products.
It involves translating quarterly and annual business plans into broad capacity and output
plans for the intermediate term (6 to 18 months). It does not address any specific product,
rather groups of products as a whole. The main purpose of the aggregate plan is to specify the
optimal combination of production rate, the workforce level, and other production resources.

The next step to aggregate planning is Master Production Scheduling (MPS), which prepares
weekly production plan for individual models/types of items. It is a plan for end items, or
finished goods. If some major and important sub-assemblies or component modules are also
sold independently, such as a hard disk or mouse of a computer, or a bell of bicycle, then
separate MPSs may also be created for those subassemblies.

Aggregate production plan specifies product groups. It does not specify individual product or
item. It is also a longer-term plan. The next level down in the planning process is the master
production schedule (MPS). It is a time-phased plan specifying requirements and more
specific timings of each individual product or item. It is also a shorter plan than aggregate
plan. An MPS, which is generally a weekly plan, may be prepared for a period of three
months to one year, depending upon stability of demand. The MPS is also called
“Disaggregated plan”.

The question of flexibility within an MPS depends on several factors: production lead time,
stability or uncertainty of demand, excess capacity and planning skill. If demand changes
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Dr. M. Ahsan Akhtar Hasin, IPE, BUET.

frequently because of high level of uncertainty, it may not be possible to change plans (MPS)
so frequently. That is why plans (MPS) are “Frozen” from time zero up to a certain time
period. The length of “Frozen” period depends on product type and level of stability. After
that changes may take place depending upon market behavior.

Still further down is detailed materials plan (MRP) for an end product.

An example of aggregate plan and corresponding MPS is given below, which can explain the
relationship between Aggregate Plan (AP) and Master Production Schedule (MPS). While the
AP specifies the requirements for all models of bicycles together on monthly (or sometimes
longer than a month, such as quarterly, half yearly, etc.) basis, the MPS disaggregates the
plan into shorter weekly plans for individual models of bicycles. Sometimes, MPS can be
prepared on daily basis too, if sufficient stability of demand exists.

Aggregate plan:
Months
1 2
No. of bicycles 900 950

MPS :
Weeks
Model/type 1 2 3 4 5 6 7 8
Model M-327 250 250 200 150
Model W-340 200 100 200 150
Model C-140 100 100 150

Advantages and Disadvantages of MRP/ERP

Advantages:
1. Reduced inventory, because of on-time procurement
2. Less inventory cost
3. Better customer service through on time delivery
4. Integrated planning makes all functional plans better
5. Creates a platform for integrating Supplier and Customers using SRM and CRM
modules
6. This works as the major enabler of Supply Chain Management
7. Better data management through networked computers and databases, where suppliers
and customers can share important data.
8. Etc.

Disadvantages:
1. Failure rate of this system is very high, because of lack of knowledge and top
management commitment, data inaccuracy, etc. Remember that on-time data updating
is a must for the system to run accurately.
2. High capital investment required,
3. Etc.

Sometimes, companies become too ambitious to buy an expensive full ERP package what
they may not require. It is essential that they first justify the modules they require.

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Dr. M. Ahsan Akhtar Hasin, IPE, BUET.

Role of ERP in Supply Chain

An integrated Supply Chain of a company includes the activities of not only the company
itself, but also interactions with many suppliers, distributors and customers. Without IT
solutions, it is completely impossible to bring all players under the same umbrella and
increase visibility of each others‟ activities. Real-time supply chain management (SCM) has
always been considered the Integrator of all organizations in the same chain, and all functions
inside the organization. Advances in enterprise resource planning (ERP), however, have
made real-time SCM not only possible but achievable. It has given the supply chain
integration as well as visibility of each others‟ activities. Thus, ERP is considered as the main
enabler of Supply Chain.

MRP Computation
The following section describes how quantities are calculated, lead times are off-set
backward, gross requirements are identified, and orders are planned and released. This
complete procedure is called “MRP Explosion”. Since the lead times are off-set backward,
the time-phased calculation procedure is called “Backward Scheduling” algorithm.

A hypothetical BOM/Product structure is taken into account to demonstrate the MRP system.
The lead times for manufacturing or procurement are shown by the sides of the text boxes.
Number of components required to make one higher level subassembly is shown in the
bracket.

T 1 week Lead Time

U (2) 2 weeks V (3) 2 weeks

W(1) 3 weeks X(2) 1 week W(1) 3 weeks Y(2) 1 week

A simplified MRP Table:

Weeks
1 2 3 4 5 6 7
T Required date 100 LT =1 week
Order release 100
U Required date 200 LT =2 weeks
Order release 200
V Required date 300 LT =2 weeks
Order release 300
W Required date 500 LT =3 week
Order release 500
X Required date 400 LT =1 week
Order release 400
Y Required date 600 LT =1 week
Order release 600

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Dr. M. Ahsan Akhtar Hasin, IPE, BUET.

SAP at a glance
SAP (“Systems, Applications and Products in Data Processing”) is an ERP software,
developed by the German company SAP SE. This is a very versatile package, having the
capability of high degree of flexible customization. The software is highly modular in nature.
Thus, a company can buy only selected modules of SAP, not always the whole package.

SAP ERP was built from modules comprising the former version of popular SAP R/3,
produced by the German corporation SAP AG. The older SAP AG (incorporated in
Germany) changed its legal form from a German stock corporation (Aktiengesellschaft, AG)
into a European Company (SE).

As a result of marketing changes and changes in the industry, new versions of SAP have been
released years after years. However, basic SAP ERP consists of several modules, including
utilities for marketing and sales, field service, product design and development, production
and inventory control, human resources, finance and accounting.

SAP R/3 was the most successful product in SAP‟s history, dominating the market for ERP-
software during the 1990s and establishing the basis for SAP‟s current success in the ERP-
market today. In its basic structure, SAP R/3 is an integrated standard software covering
almost all business purposes that might exist in a company. The basic modules of SAP are
given below, although each module is further divided into sub-modules:

Basic core modules and their functions are as follows:

 Sales and distribution (SD) – Order entry, delivery-shipment, invoicing, etc.
 Materials Management (MM) – Purchase requisition (PR), Purchase order (PO),
inventory, etc.
 Production planning (PP) – SOP, Demand Management, MRP, Capacity planning,
Production control, etc.
 Quality Management (QM) – Quality planning and control, Quality inspection, etc.
 Plant Maintenance (PM) – Preventive and corrective maintenance planning, reliability
analysis, etc.
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