Operations Management

Dr. Inderdeep Singh

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

Lecture - 59
Materials Requirement Planning (MRP)-II

Namaskar friends, welcome to last but one session in our course on Operations
Management. We are currently in the 12th week of discussion, in the course. And we are
focusing on some of the advanced tools, advanced methods techniques that are used for
managing the operations in the best possible manner. And in that context, we are
covering the materials requirement planning.

And in the previous session, we have seen the basic concept of materials requirement
planning, and how it can be used by the organizations for better management of their
operations. We have seen that the materials requirement planning system works on a set
of input, and then it utilizes the information that it derives from the inputs to convert it
into some tangible outputs, which help the organization in decision making related to
management of materials as well as the operations.

Now, we have seen in the previous session that materials requirement planning is usually
dependent upon three important inputs. The first important input is the master production
schedule; and in master production schedule, the input is the sales forecasting or the
customers demand. So, the first important input to our MRP system is the master
production schedule, the other input is the inventory status file. We need to know that
what is the inventory level in the organization, what is the current level of materials
available, what is the quantity of materials available, how many materials are being used,
how much material has been ordered to the vendors, so all that status file is required as
an input for the MRP system.

And the third input is the bill of materials that depends upon the final product structure.
Now, we have to manufacture a product which suppose has five different sub
components. So, bill of materials will give the number of sub components, which means
that what is required for making the end product, as well as give us the number of
individual components required for making the complete product.
So, if you remember in the previous session, we have seen that three inputs are going
into the MRP system, and the MRP system then works on this input and tries to produce
output, which is helpful for the decision making process in the organization. So, based on
these three inputs, how the system will work, and what type of outputs we will derive,
and what will be the advantages and limitations of the MRP system that we are going to
understand in today’s session.

So, let us begin our discussion with the concept of lead time, because it is the most
important factor that governs the working of the MRP system. Now, lead-time is the time
spent between ordering a particular component, or a batch of components from till the
time we receive the delivery at our organization or in our factory. So, the time gap
between placing an order and receiving an order is basically the lead-time, and that is
very very important, because the MRP system works on this lead time, because it
generates an auto trigger that the manufacturing must start on a specific date, and this
input comes from the master production schedule.

So, once we know that manufacturing of a particular component that has to be, fitted into
the final product must start on this particular date. The system must know that; what is
the lead-time for procurement of materials that are required to start the manufacturing of
this component. So, if we know that the lead-time is 10 days, so 10 days prior to the date
of manufacturing of this component a trigger must be sent to the vendor that product is
going to be manufactured, this much number of components are required by such and
such date.

So, once these components or parts arrive then the manufacturing can start on these
components, and then these components will further become a part of our final product.
So, lead-time is very very important in case of materials requirement planning. So, we
will start our discussion with materials requirement planning, specifically focusing on
the lead-time.
(Refer Slide Time: 05:14)

Now, lead-time first we need to understand what is lead time, it is the time needed for
completing the job from the initial stage to the final stage. Now, the job can be
procurement of materials, so suppose we are procuring the materials, so the lead-time
will be the time starting from the ordering of the material to the final receipt of the
material. So, the ordering lead-time you can see start of purchasing process to receipt
from the supplier those time gap between the ordering to the receipt is called as the lead-
time. Manufacturing lead-time is usually the processing of part through the machines,
specified on the route sheet.

So, we know that there are different sequences of operations to be done on a material to
convert it from a raw material into the final product. So, the manufacturing lead-time is
that the how much time is required to manufacture that part, following the sequence of
operations which have already been laid out. The most important part in MRP system is
that we must know both these lead times, the ordering lead-time, as well as the
manufacturing lead-time. Now, based on this lead-time how the MRP system will work,
so how MRP uses the lead-time data is explained with the help of this simple diagram.
(Refer Slide Time: 06:42)

Let us start from our final product, on x-axis we have time, final product is required on
maybe this seventh day. Now, we must know that when the sub-assembly 1 is needed,
we have to offset in this direction and then there has to be some time gap, because this
sub-assembly 1 needs to be assembled to some other part or a basic structure to get our
final product.

So, we know that when our sub-assembly 1 must be ready, so that the final assembly
operation may take place. Now, we must know that we have to place an order for the
sub-assembly 1, because for manufacturing the sub-assembly 1 or for processing the sub-
assembly 1, we may take some time or we may I must say, we will definitely require
some time to process this sub-assembly 1.

So, once we place the order for sub-assembly 1, we have a time gap here during which
the sub-assembly 1 will be manufactured, and for manufacturing of sub-assembly 1 or
for assembling of sub-assembly 1, we need the start of production which is given here.
And finally we have to order the raw material, which is required for sub-assembly 1. So,
the total overall start of production is here, sub-assembly 1 is another part that will go
into the final product, so this is just an example to explain how the lead-time data will be
used.

So, start off production to the final product, this is the manufacturing lead-time. And here
we can see that order of material and maybe the final delivery of material this is the
ordering lead-time. So, we need to understand that we have ordered the material here, it
will take some time to arrive and then our production may start, so from sub-assembly 1
needed and place order for sub-assembly 1, this is showing us the manufacturing lead-
time. And ordering of the raw material and receipt of the raw material for starting the
production is giving us an example of the ordering lead- time. So, we will make use of
both the manufacturing lead-time also, as well as the ordering lead-time also, and we
offset from the final delivery schedule.

So, we have final product required on this day, so we will calculate the offset, when what
must happen in order to ensure, the final delivery of the product. Now, there can be
different types of demand based on which we will produce our master production
schedule, so there can be dependent demand, and there can be independent demand, so
that we need to understand. Because based on that only our further inputs to the master
production, sorry first is the master production schedule, inputs to the master production
schedule and also our input to the materials requirement planning system will depend
upon the type of demand.

(Refer Slide Time: 10:24)

So, the demand basically in case of our materials requirement planning, can be of two
types dependent demand, product demand related to other items and as item is
component of the other products. So, the product demand related to other items, as item
is a component of the other product. So, I think the language is slightly complicated, but
maybe I can try to explain it with the help of an example, suppose our end product or our
final product is a car. So, the number of cars that are required that will be our
independent demand. Independent demand means, because we will use any given
method of sales forecasting or demand forecasting to find out, that how many number of
cars are going to be sold in the next year or in the financial year 2018-19.

So, for a particular period of time what is going to be that demand that is our
independent demand, but once we have finalized that independent demand, our
dependent demand will be that how many steering systems are required, how many
wheels are required, how many chassis are required, how many seats are required. So,
our independent demand is the demand of the car, but all other things that are going to go
into that product will be our dependent demand, that we are going to understand with the
help of a diagram also. And then the other type of demand can be the lumpy demand, the
demand is sudden or a large quantity increment, so as to make a batch of final product.

So, lumpy demand can be that it has suddenly been generated, so we have to
immediately respond to that kind of demand. And our MRP system should be flexible
enough to absorb that demand do the calculations, order the materials and finally, able to
satisfy that demand that is lumpy in nature that has just reason, because of maybe some
exigency or some emergency. But in most of the cases, we will see that there will be a
independent demand; and there will be a dependent demand. And our MRP system will
be easily able to absorb that demand, and sort out the materials as well as the operational
issues related with the demand.
(Refer Slide Time: 12:43)

So, let us take an example, on your screen that is independent and dependent demand, in
the previous slide we have seen dependent demand. Here we can see the difference
between the independent and the dependent demand.

So, independent demand is the final product as I have taken an example of a car, so A is
representing our car. This is independent demand from where we will get, we will get
this number from sales forecasting we may use any method, we may use qualitative or
any quantitative method of forecasting, we can use averaging method or time series
forecasting model. So, any method we can use to get this number A, once we have this
number A, now all other things that are required that will go into the manufacturing or
assembly of A will represent our dependent demand. Because once we know that so
many number of cars have to be assembled, we will definitely be able to calculate that
what are the other sub part, sub assemblies that will be required to meet this demand.

So, the dependent demand into component parts is given. So, B may be in 4 numbers is
required C, as 2 numbers are required for B, further we require D and E the numbers are
also given. So, basically the summary is as is given on your screen, the independent
demand is uncertain. So, always in forecasting we have seen that many times we may not
be able to forecast accurately; we may be over forecasting or under forecasting. So, the
independent demand is uncertain that is for A, whenever we are forecasting we may not
be able to forecast accurately, but the dependent demand is certain, if we know how
much or how many number of A products we have to make, we can certainly calculate
how many B will be required, how many C will be required or what will be the sub
components required to make the final product.

So, the independent demand is uncertain there is a may be kind of probability required or
maybe there will be some probability of focusing on the exact number. But the
dependent demand, we will be certain in nature, because it is being calculated from the
independent demand.

(Refer Slide Time: 15:16)

Now, this is a continuous versus lumpy demand. Our MRP system will work perfectly in
case of a stable demand, but will have to be adjusted in case of a lumpy demand.
(Refer Slide Time: 15:27)

Now, how the MRP works, there are a few terms that are we are that we must know.
First term is the bucketing, now what is bucketing, at what time and in what quantity of
product is needed, so that is the answers that we try to look at. MRP starts with
consolidating period requirements for different end products, these time periods are
called the buckets. Add service spare parts, which are not included in the MPS that is a
master production schedule. So, first is the buckets that are the time periods, as in the
first sentence we have written, at what time, and in what quantity a product is needed.

So, this time MRP starts with consolidating period requirements for different and
products, and these time periods are called buckets. So, first is the time domain that we
need to fix up, because then only we will be able to order our materials, we need to
check the level of inventory available within the organization.

So, first thing is the time frame has to be fixed for end products as we have seen, in the
previous to previous slide, we have tried to see the concept of lead-time. Our end day has
to be fixed and then we offset, all the other operations we try to make use of the
manufacturing lead-time, we try to take use make use of the ordering lead-time. But first
and foremost is we need to have the time interval, and the time domain fixed for each
and every operation that is required to deliver the product or to manufacture the product,
and these time periods are called the buckets.
Then the part explosion each item exploded into constituent materials, if you remember
the previous slide, we have seen there is a product A, which requires certain number of
parts B, part C then part B also further require another parts, so that is the parts
explosion, we must know that in order to make the final product. What are the different
types of sub components, sub-assemblies required within the sub-assemblies, what are
the other nuts, bolts, screws and what are the other things required in making that sub-
assembly, what are the individual parts required? So, we explode the complete product
into its individual sub-assemblies and further into components and parts. So, each item is
exploded that is divided into the constituent materials parts, components, etcetera.

Then offsetting, so we know now, by now how the MRP will work, time domain is fixed,
the number of parts that are going to, go into the final product is also fixed.

(Refer Slide Time: 18:27)

Now, the concept of offsetting, displacing requirement by a period equal to the lead-time
of the product and therefore, I have explained this concept in the very beginning of
today’s session, that once the date final date is fixed. We know how many parts are
required using the parts explosion, now we will offset that this is a final delivery date,
before this sub assembling is required by this date, final assembly will take this much
time, then for sub-assembly to be ready this is the manufacturing lead-time. Today we
order the material 10 days lead-time for the receipt of the material. We will offset our
ordering cycle accordingly. So, we will offset our different operations in time domain, so
that we are able to meet our deadline of supplying our consignment or the batch of
products to our customer.

Aggregation finding cross requirement for each component or raw material. So, MRP
will calculate it will find out that what is the gross requirements of material. May be
same component may be required in five different product lines, so it will aggregate, it
will make the complete requirement, because we if you remember we have seen in our
materials management, there is a concept of quantity discounts. So, instead of ordering
the material for each product, their company may like to aggregate, the material
requirement across the product lines and take advantage of the quantity discounts that are
available with the vendor. So, that is the aggregation it will do finding gross
requirements for each component or raw material; then netting, so netting means that
currently there will be some inventory stock available with the organization.

So, it will see that the gross requirement and the inventory level available, what is the net
requirement, because some parts already we have in our inventory gross requirement also
we know through the system, so what is the net requirement, net requirements will be
whatever is a gross requirement minus, what is the inventory on hand that is whatever is
available minus, some we want to keep as the safety stock and some inventory available
with us might have been allocated to some other product lines or to some user.

So, we will see that what we have in hand, how much if we want to keep as a safety
stock, how much we have committed to some other product lines, so whatever is already
committed, say safety plus whatever is available, this is one summation and what is
required is another summation, what is the difference is finally, that we would like to
have or that we would like to order. So, this is the way the system will do the
calculations, and then will give output which will be useful for the company.
(Refer Slide Time: 21:36)

Now, it will work out of procurement schedule, the requirement is now advanced by a
lead-time for final assembly. Lot sizing is done, this is used to consolidate the
requirements in pre-specified lot sizes, so that the economic order quantity may be
ordered. So, we can see that once we know the gross requirement, we can see, we will
make it in lot sizes, so that we can take advantage of the economic order quantity.

Now, this is the way the system will do certain maybe calculations or maybe functional
decision making and finally, it will generate a output. So, lot sizing and then aggregation,
and gross requirements, and then offsetting and all the bucketing all this will be done.
And finally, our output will come in the form of primary outputs, as well as the
secondary outputs.

In primary outputs, we will get a planned order schedule, which will be the final output,
output in the terms of that we will have an idea that how much material have to be
ordered and on which date, so that our final product delivery schedule is fixed, it is met
and we are able to honour the commitment that we have done to the customer. So, that
planned order schedule will be one output of our MRP system, another output will be
changes to the planned order sometimes the things may not go as per our planning.

So, whatever minor major modifications have been done in the planned schedule that
will also be our primary output, but apart from the primary output, we will definitely get
a secondary output also which will be the planning reports, the performance reports may
include that what was planned, what was actually executed, what was the difference,
whether the difference is acceptable or if it is not acceptable, what are the reasons for
those differences, so all that will be coming in the performance report.

(Refer Slide Time: 23:22)

And then the exception report may be there, that if there is certain exceptions that have
been done, in the planned order schedule, why they have been done, so those reports will
also be the output.

(Refer Slide Time: 24:05)

Now, let us see one by one the outputs that the MRP system will generate. So, primary
outputs you can see, planned order schedule this is used to determine the future
production and supply at supplier’s end along with guide for in- house production
schedule.

So, we will be able to get a planned order schedule, as we have seen and used to
determine the future production and supply at supplier’s end. So, we will be able to tell
the supplier that at what duration of time, what will be required, when we are going to
order, so all that things will be available at hand on our system as an output of the MRP
system. And as well as within our organization also, we will be able to fine tune or
maybe decide on our production schedule. Changes in the planned order modifications in
previously planned order. As I have already told that we have a planned order, but
because of certain changes or certain modifications there may be certain changes in the
planned order that will also be covered as a MRP output.

(Refer Slide Time: 25:10)

Now, secondary outputs are exception reports I have already explained, I just read it out
for you, used to point out serious discrepancies such as late or overdue orders.
Performance report will give you use to determine, agreement between the actual and the
programmed usage and cost.

So, what is the difference or whether it is in agreement. Planning report used for future
planning of inventory. So, once we use the MRP system we will get these outputs.
(Refer Slide Time: 25:46)

Now, what are the benefits let us quickly see, read the benefits all of them are self-
explanatory, understanding the effect of changes in future periods, improved customer
service, reduction in leadtime, increase in productivity, reduced purchasing cost, because
if you remember we have seen that gross, we will do the gross aggregation of the
requirement, and then we will may be able to take advantage of the quantity discounts.
Reduced purchasing cost can be achieved, improve production and supply schedules,
because now it is automatic, so it is not human intervention is minimum.

So, as soon as the inventory level goes beyond a particular point, auto order or may be a
triggering point will be there, which will bring the order into effect, so our production
and supply schedules will improve. It will reduce the manufacturing cost, because
stoppages because of the stock out of materials will be less, because the material
procurement is now being handled automatically, less scrap and rework higher
production quality.

So, we can see that if we implement the MRP system directly or indirectly there are
going to be many advantages, and these advantages will lead to overall effective and
efficient management of our operations. So, we can explain each one of these with the
help of an example, but maybe I will leave it for readers to just look for case studies,
where the use of MRP system has let to improvements in the operations management of
the organization.
(Refer Slide Time: 27:32)

But there are certain drawbacks of the MRP system also, so this we can see that if there
is inaccuracy in supplier’s lead-time, maybe we know that today we have placed the
order, after 10 days we will get our receipt of order, but if we are not getting it in 10
days, it will certainly affect our further operations, because we have done all the
offsetting calculations based on our due date of delivery to our customer.

So, if our supplier is not giving us the material, in the agreed lead-time we will be at loss,
so that can one drawback. MRP depends heavily, on correctness of lead-time data and
therefore, we started our discussion today with the lead-time only. Then sometimes our
inventory data or inventory status file may not be up to mark and therefore, if we have
wrong data from the inventory status file, MRP system will be not be able to work
efficiently, and may give us erroneous results, and similarly inaccuracy in manufacturing
lead-time. We know that the route sheet is available with us; this particular product has
to undergo five different operations. And this must require 7 days in as a manufacturing
lead-time, but if it takes 10 days our MRP system, whatever system we are following you
may not be able to give us the desired result.

So, the change in the customer’s demand, change in workload of factory may lead to
inaccuracy in the manufacturing lead-time. So, there are certain drawbacks associated
with MRP system also.
(Refer Slide Time: 29:09)

Then the inaccuracies in the bill of material structure, sometimes there can be change in
design, components substitution without recording. So, our bill of materials file is
changing is not changing, but the product has changed, again it will lead to
malfunctioning of the MRP system. Because any change in the bill of materials file must
definitely be accounted in the MRP system, in order to get the accurate results or
accurate order scheduled or the planned order schedule, which is the output of the MRP
system.

(Refer Slide Time: 29:51)

So, finally, we can conclude our discussion on MRP, as that MRP is a computerized
inventory control, as well as production planning system. That scheduled component
items as needed, which will track inventory and help a company in many other aspects of
business. So, it is computerized materials management system as well as helps us in the
production planning also, and it will help us minimize the human intervention in the
material management function of operations management.

(Refer Slide Time: 30:23)

Now, the conclusion can be advancements further like MRP II and ERP have been able
to link the manufacturing with other areas of business such as finance and marketing. So,
materials requirement planning focus much on the materials aspect or materials
management aspect of operations management. But there are advanced systems, which
integrate the complete operations of the organization, including the finance and
marketing aspects also, and such systems enterprise wide systems or centralized control
systems are also available.

And in the next session, that is the last session of the course, we will be discussing one
such system that is the enterprise resource planning or ERP system.

Thank you.