Operations Management

Dr. Inderdeep Singh

Department of Mechanical & Industrial Engineering
Indian Institute of Technology, Roorkee

Lecture – 58
Materials Requirement Planning (MRP)-I

Namaskar friends. Welcome to session 58 in our course on Operations Management.

And currently we are discussing the last week of our discussion as all of you know that it
is a 12 week course; and currently we are in the 12th week of discussion related to our
course on Operations Management. As you are aware in the last week of our focus is on
some advancements in the area of operations management and we are learning the
various tools and techniques which help us in better managing our operations or in better
management of our operations. We have already seen the concept of J I T that is JIT as
well as the concept of Kanban.

Today, we are going to start our discussion on materials requirement planning which is
an important part of operations management. And if you remember in our previous week,
our complete focus was on materials management only. And we have seen that, what is
the objective, scope, responsibilities of the materials management department. Then we
have seen the classification of materials based on ABC classification or VED
classification. We have seen that we can classify the materials in any organization based
on the value of these materials or components or parts or based on the usage of these
parts.

Then we have seen that how much we must order? When we must order? What must be
our ordering cycle? Then we have seen the production quantity model through which we
have seen that the material may not be arriving at our premises all at once, but we may
have a production run through which we are receiving the material every day. So that
was our basic summary of what we have already covered. But these days there are
software available, there are advanced methods available which help the organizations in
the better management of the materials.

So, as we see in today’s session, the materials requirement planning that is MRP, we are
going to plan our materials in a better manner, so that we are able to take advantage of
the computational methods that are available at our discretion these days. So, with the
help of integrated systems, we can manage all the materials in an organization at a single
place or in other words we can say that there can be a central management system which
can manage the complete supplies, the usage of the material within an organization.

So, instead of doing the things manually and doing the calculations of economic order
quantity using mathematical formula to calculate the economic order quantity, we can
use a system which will automatically trigger the orders that whenever the material or
the quantity level goes beyond the reorder point, it will automatically trigger an email or
an SMS to the supplier that we require this much quantity within a lead time of this much
this many days or this many weeks. So that type of automated material management
systems are these days available. And one of such systems is the materials requirement
planning system which we are trying to understand in today’s session.

So, our primary aim is to understand that what is materials requirement planning, what
will be the inputs to this system, what will be the output from this system, and how any
organization can make use of the MRP system. So, the complete discussion on MRP we
have divided into two sessions. So, we are going to cover the materials requirement
planning. The first part we are going to cover today and the next part we are going to
cover in the next session.

(Refer Slide Time: 04:39)

So, let us start our discussion and try to understand the very definition of the concept of
materials requirement planning. So, on your screen, you can see that materials
requirement planning is determining the number of parts, components and materials
needed to produce a product. For example, you can take maybe any simple product and
you can see that what are the materials that are required for making that product.

Simply we can take the example of a household wooden chair. So, if we take the
example of a chair we require certainly wood for making the chair of the carpenter will
require raw wood, for making the chair then he will require certain nails certain
adhesives, then he may require certain tools that will be required for making the chair.
So, here we will break down the complete product into the individual components and
these components will be planned by the system that when which component must be
available in order to ensure the timely manufacturing of the product that in our case can
be a wooden chair.

So, the example of a wooden chair can be used to explain the concept of MRP that you
need to have wood this much quantity of wood. So, if you want to give a back support or
maybe a cushion at the back you require the cushioning material also. If you want to
have a colored cloth, you require a colored cloth also on top of the cushion. So, whatever
are the materials that are going to go into the product that will be planned in a very, very
systematic manner, the orders will be placed automatically, the material will be received
before it is required in the assembly process. So, once again I am reading the definition
that I that is given the very first sentence that explains materials requirement planning.
So, the materials requirement planning is determining the number of parts, components,
materials needed to produce a product.

So, first thing is we need to know that what is required to manufacture the product. MRP
provides time scheduling information specifying when each of the materials parts and
components should be ordered or produced. So, we are going to use the time domain also
that if we require the product to be ready by 30th of September we need to do the
offsetting that when the individual components that are required to be assembled for
making the product must be ready. From there we will offset that when the materials that
are going to be used for making these components must be ordered. So, that they sub
components can be produced by a deadline and then finally, these sub components are
assembled together to make the product by September 30th 2017.
So, this will give us all the timeline that what must have must happen in order to ensure
the completion of the manufacturing process by the due date. So, here this will be
automatically triggering the different points or the different checkpoints in order to
ensure the timely delivery, before delivery I must say the timely order of the materials
and then ensure the timely delivery of the materials, then the timely conversion of these
materials into the final product.

So, in these two sentences we have tried to highlight the overall picture of materials
requirement planning. That materials requirement planning is determining the number of
parts, components and materials needed to produce a product number one. And number
two provides time scheduling information specifying when each of the materials parts
and components must be ordered or produced. As per the APICS dictionary MRP
constitutes a set of techniques that use bill of material, inventory data and the master
production schedule to calculate the requirements for materials.

(Refer Slide Time: 08:54)

Now, some of you may be wondering that it is a very complicated definition or maybe
there are number of words that we do not know in this definition, yes, true, some of the
words may be new as for example, the bill of material. So, we are going to understand
what do we mean by bill of material. All of you know the inventory data in week 11, we
have used the one-word inventory; quite comprehensively you know that what is
inventory, what makes up the inventory and what do we mean by inventory data, what is
the service level, what is the safety stock, I think all this we have covered in week 11.

So, this inventory data is not new to you, but yes the master production schedule may be
new, maybe because we have covered this I think in week 9, we have seen that, what is a
master production schedule that also we have covered in one of the sessions. So, we need
these three inputs. We need master production schedule, we need the inventory data, we
need the bill of materials. So, all these three are the inputs to the materials requirement
planning MRP.

So, once we have these three data or these three inputs, the master production schedule
will give us certain outputs, outputs will be primary outputs as well as the secondary
outputs that we will cover in the course of our discussion today as well as in the next
session. So, but basically in order to use MRP we require three types of inputs, and all
these three types of inputs are given on your screen that is the bill of materials, the
inventory data as well as the master production schedule.

So, now you can yourself imagine why this is required. The master production schedule
will give us the time deadlines or the timeline of manufacturing of the individual
components which finally have to be assembled into the final product, which machine is
going to operate or who is going to be operating that particular machine all that will be
there in the master production schedule. In the inventory data, we will have what is our
inventory level available, what is the you can say q that is usually we call the order
quantity available with us, what is the demand rate, how we are using our inventory,
what is our safety stock, when is the next order going to arrive at our premises all that
will be the inventory data that is what is the current status of materials available with us
that will be our inventory data.

And the bill of materials is the first and the foremost thing that we must have. The bill of
materials will give us that what is required suppose I have taken an example of a wooden
chair, for a wooden chair how much wood is required, how many nails are required, how
much adhesive is required, how much cushion material is required, how much meter of
cloths is required, so all that will be the bill of materials data. So, we will try to
understand all these three inputs one by one that is what is bill of material, what is
inventory and what is the master production schedule and how these will influence the
overall materials requirement planning system.

(Refer Slide Time: 12:31)

Now, material requirement planning system we are going to discuss based on a master
production schedule. So, one thing already all of us know and we have already discussed
it in week 9. Based on the master production schedule a material requirement planning
system, what it will do? Master production schedule is already available with us.

So, what will MRP do? It creates schedules identifying the specific parts and materials
required to produce the end items. Now, end item is our final product. So, we have to use
certain specific parts and materials that will go into our final product. So, MRP will
create the schedules that once the final product has to be made, when the individual parts
must be ready, when the sub assemblies must be ready, so that by the deadline our final
product is ready.

So, MRP will create schedules identifying the specific parts and materials required to
produce the end item. Determines the exact unit numbers needed. Then determines the
dates when orders for those materials must be released based on the lead times. So, now,
once we input based on the forecasted demand, based on the orders by the customer, if
we input that this many number of products have to be produced by 31st of December
2017, the system will calculate that what is the requirement of the individual parts and
components that need to be assembled for making the final product. When they must be
ready, and in order to make these materials what is the raw material required, when an
order must be placed for this material, so that when we start the manufacturing of the
individual parts and component we have the raw material available with us.

So, offsetting will be done from the deadline. So, deadlines in this example that I have
taken is 31st December 2017. And prior to that all back calculations will be done, and
the system will automatically trigger the invoice or maybe an order to the suppliers that
you have to supply the material by this and this date, then the manufacturing of that
particular component will start. And finally, this component will be assembled by the
other component or assembled with the other component to finally, make our product or
consignment or our may be the overall package ready for delivery.

So, the MRP system, we can say will help us in creating or identifying the schedules for
material procurement, material usage then production, also it is going to help us as you
have seen that it determines the exact unit numbers needed, it will also determine that
day it will determine the dates when orders for those materials must be released based on
the lead time.

So, lead time is that today if we order for our material, it may arrive at our organization
after 10 days. So, the 10 day will be the lead time for that material. So, this also we will
try to understand that what is a lead time and what is a manufacturing lead time. So, it
will help us to automatically control our materials management system, so that we are at
ease controlling the other aspects, the materials management part will be taken care by
the MRP system.
(Refer Slide Time: 16:30)

Now, this is the MRP inputs on your screen you can see. From where will the system get
an idea that how many parts have to be produced. So, it will be from the sales forecast.
So, sales forecast is one important thing that is an important part. Then the customer
order, so we have two inputs for the master production schedule. So, master production
schedule will have the input that how many units have to be produced. And therefore, I
have addressed I have highlighted this point earlier also that all the things that we are
discussing in operations management are interrelated to each other.

How these are interrelated? If you remember we have already discussed the concept of
sales forecasting. What are the different methods of sales forecasting? If you remember
we have seen that there are qualitative methods of sale for sales forecasting, there are
quantitative methods of sales forecasting. So, those forecasting methods will be helpful
here. Once we identify that what is the exact amount of product or exact number of
products that we have to produce, based on that the master production schedule will
create a schedule that when the manufacturing must start in order to achieve the deadline
of manufacturing a particular product. So, we always work with deadlines in the
company. So, or in the organization here the MPS will take the input from sales forecast
or it may also get the input from the direct customers, based on that the master
production schedule will create a schedule.
So, you can see the sales forecast is something where we are not directly interacting with
the customers, but there can be companies which directly book orders from the customer.
So, that is I think a better method of our forecasting. So, if we know what we have to
produced based on that we have our MPS system that is a planning or a system or a
schedule that will plan the manufacturing of our product or the timeline will be fixed by
the master production schedule as we have seen in our previous discussion during week
9. So, first input is the master production schedule.

Second input is as you can see the inventory status file. So, if you remember as per the
APICS dictionary we have seen that there are three inputs to the materials requirement
planning. First one is as per our diagram here we can see the one is the master production
schedule, the input to the MRP system. Then inventory status file is another input to the
MRP system. And the bill of materials is another input to the MRP system.

So, in our APICS dictionary, the definition we have seen that three inputs are there.
Another as per that definition the inputs were the master production schedule, the
inventory data as well as the bill of materials. So, here again these three inputs have been
depicted graphically that master production schedule is one input, but master production
schedule has further inputs that is a sales forecast and the customer’s order.

Based on that we have the master production schedule which is an input to the MRP
system. Then inventory status file will give us the exact amount of materials available,
what is a safety stock all that data will be available in the inventory status file. And bill
of materials will be that what exactly are the materials required. So, MRP system then
will give us the timeline the order when the order must be placed, how much must be the
order, so all that thing that we calculated in the previous week using the EOQ model,
using the production quantity model, those things will be automated in the MRP system,
things will be automatically triggered depending upon the level of inventory available in
the organization.

So, bill of material we will try to understand this with the help of a diagram in our
subsequent slides today. We will see that what is a bill of material. So, for any product
whatever is the individual requirement of parts and components will comprise the bill of
material or will be a part of the bill of material. And once we have these three inputs,
MRP system will generate output. And that output would be very helpful for the
organizations to manage their operations. So, inputs we have tried to understand.

Now, let us see the individual inputs, because I have explained in abstract manner that
what is bill of materials, what is inventory data, what is master production schedule. But
now let us see them one by one that what individual input to the MRP system is and
better we better understand the concept that if we know that we have to implement an
MRP system we must know that what type of information we must have as an input, so
that to take advantage of the versatility, take advantage of the maybe the system that will
help us in the better management of our operation.

(Refer Slide Time: 22:12)

So, let us take the first input as we have seen the master production schedule. So, it is a
list of items, indicating end products to be produced. This contains item name, quantity
to be produced and the timings of completing the production. So, you can see that master
production schedule will give us the following information which will be used by the
master which will be used by the materials requirement planning system. So, it is a list of
items, indicating end products.

So, what we have to produce that will be in the master production schedule. This
contains the item name that is maybe the company name or the code. Quantity to be
produced, if you remember in the previous diagram we have seen that sales forecasting is
an input to the master production schedule, so that quantity the number of products to be
produced can come from the sales forecast or directly from the customer orders. Quantity
to be produced and the timing for completing the production as I have taken an example
that December 31st 2017 may be the due date for completing the production of a
particular item, so that completion date must be known and how much we have to
produce that must be known.

Based on the estimations of product demand that is sales forecast, so that we have
already seen in the previous diagram that master production schedule will take its input
from sales forecasting or from the customer’s order. So, two things are important here in
this slide. One thing is that we need to know the number or the quantity that is going to
be produced. And the other thing that is when that product has to be delivered or when
that quantity has to be shipped or has to be delivered to our customer.

(Refer Slide Time: 24:05)

So, here we can see just one example of master production schedule for products P6 and
P8. So, there are two products this is a code for the product that is P6, another product is
P8. So, we can see in the rows we have product 6, product 8 and then September, this is a
week’s 1, 2, 3 and 4 weeks where we can see. In week 1 product 8 is required in the
quantity 40; and in week 2, product 6 is required in the quantity 70. And in last week of
September, both are required in 100 and 60 quantities each; 100 for product 6, and 60 for
product 8. So, this is maybe a kind of master production schedule weekly demand or
weekly production requirement is mentioned here that what is the exact requirement for
the product 6 and product 8 in the weekly basis for the month of September.

(Refer Slide Time: 25:13)

Now, this is a first input that is master production schedule which will go into the MRP
system. The second input is the bill of materials file. What is the third input, I think very
quickly I have asked so all of you must know that there are three inputs basically for a
MRP system, first one is master production schedule, second one is the bill of materials
and third one is the inventory status file. So, bill of materials file you can see it provides
a list of materials and their quantities required to produce the end items.

Again referring back to our example of production of a chair or manufacturing of a

wooden chair, what are the individual components or parts required to manufacture the
wooden chair will comprise of the bill of material along with their quantities. So, it
provides a list of materials and their quantity is required to produce the end items. It
contains the list of finished products, material needed for each finished products in units,
assembly structure sub-assemblies parts and material.

So, bill of material will give us maybe everything, for example, for making a table we
require suppose four screws and four nuts, everything four screws, four nut everything
will be mentioned in the bill of material. What will be the tabletop, how many legs the
table will have, what will be the material of the leg, all that will be mentioned suppose
we are manufacturing a table. So, all individual parts and component along with their
quantity will be mentioned in the bill of material file.

Bill of material file is revised every time there is a change in the product design or
specification. So, as soon as we changed the design, for example, we are initially
manufacturing a table with three legs or a three legged wooden table we are
manufacturing as soon as we change the design to four legs, our bill of material file has
to change because now we have four legs a tabletop maybe the dimensions of the
tabletop may change, and therefore, the material requirement for the tabletop as well as
an additional leg will change. So, therefore, the bill of material file has to be revised
whenever there is a design modification. So, by now we know that what is the master
production schedule, how it looks like, what is the bill of materials file that we can try to
understand with the help of this example.

(Refer Slide Time: 27:45)

Here, you can see suppose we have to produce or manufacture product A. So, we have
sub-assembly 1, sub-assembly 2, sub-assembly 3. And these sub assemblies are further
made up of component X and Y, again X and Z, Y and Z, and there is one component Y
that directly goes into product A.

So, here we know that there are three sub assemblies, each sub-assembly what is the
material requirement or what type of material is required, and in what quantity it is
required. So, here we can see for each product A, X is required in two numbers; Y is
required in three numbers and Z is required in two numbers. So, this way we can see that
we have to always keep our bill of materials file ready in order to ensure that our master
or our materials requirement planning system functions properly.

Then the third input is the inventory status file. So, three inputs are there for any
materials requirement planning system to work efficiently; two inputs already we have
seen the master production schedule and the bill of materials file, the last one is the
inventory status file.

(Refer Slide Time: 29:02)

It provides a computerized record of each material, physically held in the system. So, it
is a computerized inventory management file that gives an idea about the inventory level
available within the organization. There will be only one inventory status for individual
material, even if it is used at different levels of production or in different end products.
So, every material will have single status only. This material may be required in two or
three different products but the level of material required that is the quantity of material
available in the factory or in the premises will be same, and it will be managed centrally.
So, again I am reading I think there may be some confusion; there will only be one
inventory status for every material.

So status is suppose, 525 components of part B are available. So, that 525 accounts for
525 parts irrespective of that whether this part is being used in three different products or
five different products, 525 is the central number available within the organization, even
if it is used at different levels of production or in different end products. So, that in the
level has to be centrally the same.

(Refer Slide Time: 30:43)

Now, the inventory status file usually indicates the material code, it indicates the material
name, inventory on-hand that is physically available with us, inventory on-order that is
ordered but yet to arrive at our premises, and customer order for the items. So, suppose
there is a demand for a particular item within the organization that data also the
inventory status file must be able to update and that will be used by our materials
requirement planning system for performing the planning operation of the materials that
what is the current status of the materials that are physically available, how much have
been ordered all this will be the input to the MRP system to plan for the future that how
and when based on the master production schedule, what materials will be required,
when they will be required so that the production runs continuously.

So, basically we will have three inputs to any materials requirement planning system and
three inputs we have discussed I think in detail. We know that we must have the master
production schedule as an input, we must have the bill of materials as an input, and we
must have the inventory status file as an input to the MRP system. And if we are able to
accurately provide the information required by the MRP system, our system will be able
to help us to better manage our procurement process, better manage our usage process,
better manage our manufacturing or operations within the organization which will lead to
an improvement in the overall productivity as well as the operations will be managed
more efficiently and effectively without any stoppages or undue breakages in the overall
process, because of the lack of materials or the stock out of materials.

So, with this we come to the close of today’s session. In our next session, we will start
our discussion from what where we are leaving today. We will try to understand that
what are the outputs of the MRP system and we will also try to see that how the MRP
system works, and what are the advantages and limitations of the MRP system.

Thank you.