Anufacturing Resource Planning: Source: Corbis

Manufacturing Resource Planning
Source: Corbis
Slack, Chambers and Johnston, Operations Management 5 th Edition © Nigel Slack, Stuart Chambers, and Robert Johnston 2007
Learning Objectives
• Lumpy Demand
• Inputs to MRP
• Lot Sizing
Lumpy Demand
• Consider three examples
– First, consider a product, which costs £30, whose demand in the next ten weeks is
60. Assume also that the set-up cost for production of this product is £25 and that
the inventory carrying cost is 20% per annum.
– Assume the year is of 50 weeks, then find EOQ

– EOQ = 50.
– One assumption behind the EOQ is that the demand is constant, in this case 6 per
week.
– Now consider the demand pattern over the next 10 weeks is 20-0-20-0-0-0-0-0-0-
20, production of 50 units will lead to a 'remnant' of 10 units being carried for 7
weeks without any purpose, as production will be required in the 10th. week.
– Similarly, a demand pattern of 20-0-40-0-0-0-0-0-0-0 would imply that the EOQ
will fail to cover the third week's requirements.
Lumpy Demand
• Case 2
– consider the production of four tools from two forgings, which are both
made from a particular steel.
– Tool 1, with a smooth demand of one per week, Tool 2, with a smooth
demand of six per week, are both made from Forging A.
– Tools 3 and 4, with smooth demands of three and seven per week
respectively, are each produced from Forging B.
– If we suppose that the EOQ for the four tools are 5, 15, 10 and 25
respectively, then
• Tool 1 will be produced in weeks 1, 6, 11 etc.,
• Tool 2 will be produced in weeks 1, 3, 6, 8, 11 etc.,
• Tool 3 will be produced in weeks 1, 4, 7, 11 etc.
• Tool 4 will be produced in weeks 1, 4, 8, 11 etc.
– The implication for the production of the forgings, assuming lot sizes of 25
and 50 for Forgings A and B respectively, is that
• Forging A will be produced in weeks 1, 3, 6 etc. and
• Forging B in weeks 1, 4 etc.
– The demand for the steel will therefore be 75-0-25-50-0-25 in the first six
weeks, and the smooth constant demand of the four final products has
produced 'lumpy' demand for the raw material.
Lumpy Demand
• Case 3
– if the probability of having one item in stock when required (the service
level) is 90%,
– then two components, required simultaneously for the same end item, will
both be in stock with a service level of 81%.
– If ten components are required, the odds against all of them being available
has risen to 2:1 (34.8%).
– Even if the service level is set at 95%, the probability of simultaneous

availability of
• ten components is 60%, and
• for 14 components it drops below 50% (48.8%).
– Thus, when components are ordered, independently of each other, their
inventories will tend not to match assembly requirements, and the
cumulative service level will be significantly lower than the service levels
of the parts taken individually.
Material Requirement Planning
• The principle of MRP is that a time phased schedule of
requirements over the, pre-determined, planning
horizon, is generated for each component/sub-
assembly/raw material on the basis of independent
forecasts of demand for the end products.
• In a full requirements planning system, such schedules
of item demand will take account of consolidated
demand for common components existing physical
stock levels, production/purchasing lead times and
production batching policy.
Inputs to MRP
• Master Production Schedule

• Inventory Record
• Bill of Material File
The Master Production Schedule
• The overall plan of production during the planning
horizon is detailed in the master production
schedule. The planning horizon normally equals
or exceeds the cumulative purchasing and
production lead time for components of the items
in question. It will therefore include time to
assemble the product, time to manufacture the
components, time to purchase raw materials, and,
often, time to allow the purchasing department to
consolidate orders to take advantage of
opportunities for bulk purchasing.
Inputs to MRP …. Contd.
• Inventory Record File
• Bill of Material
End Product
Part A Part B Part C Part D

Quantity 1 Quantity 1 Quantity 2 Quantity 1
Calculation of Requirement
• Gross Requirement
Period 1 2 3 4 5 6 7 8 Total
Gross requirements 15 10 22 13 12 72
• Net Requirement
Period 1 2 3 4 5 6 7 8 Total
Gross requirements 15 10 22 13 12 72
Scheduled receipts 24 24
On hand 18
Net requirements 7 11 12 30
Lot Sizing
• Simple Approaches
• Period Order Quantity
• Least Unit Cost & Least Total Cost
• Incremental Heuristics
• Silver Meal Heuristics
Simple approaches
Month 1 2 3 4 5 6 7 8 9 Total
Net requirements 35 10 40 20 5 10 30 150
Fixed batch quantity 60 60 60 180
Economic batch quantity 58 58 58 174
Lot-for-lot 35 10 40 20 5 10 30 150
Fixed period requirements 45 40 25 40 150
Period order quantity (POQ)
• Let D = 200 and Q* = 58 then
– number of orders per year is 3.4
– ordering interval is 3.5 months.
– The effect of this policy, (assuming the interval alternates
between 3 and 4 periods), is shown in following Figure.
Month 1 2 3 4 5 6 7 8 9 Total
Period Order Quantity 85 35 30 150
Least Unit Cost
• Consider Setup cost = 100, and carrying cost is 1
per month
Month 1 2 3 4 5 6 7 8 9 Total
LUC 45 60 45 150
Least Total Cost
• (EPP) factor, which is defined as that quantity of the item which, if carried in
stock for one period, would result in a carrying cost equal to the cost of set-up.
It is computed simply by dividing the inventory carrying charge per unit per
period (IPC) into set-up cost. In our example:
• EPP = A/IPC = 100
• The order quantity selected by the LTC approach is that for which the part
period cost most nearly equals the EPP. The calculation for the first lot in the
example is
• Month Net Requirements Part-periods(Cumulative)

• 1 35 0
• 2 10 10
• 4 40 130
• So the quantity chosen for the first lot would be 85, because the 130 part-
periods that it would cost most nearly approximate the EPP of 100. The
second order, 65, would cover the requirements of months 6-9.
Incremental Heuristics
• This heuristic simply sequentially increases the lot size by
the requirements of successive periods until the
incremental cost of carrying the next period's requirements
in inventory exceeds the cost of set-up.
• Month Net requirements Inventory cost
• 1 35 -
• 2 10 10
• 4 40 120>100
• so set-up in period 4
• The use of this heuristic indicates that lots be produced in
periods 1,4 and 9.
Silver Meal Heuristics
• The objective of this algorithm is to minimise the total relevant costs per unit
time. The approach is similar to the least unit cost calculation, but this time
the total relevant costs are divided by the number of time periods, rather than
the lot size. The lot size is the sum of the requirements in all periods up to
and including that period for which the total cost per unit time is a minimum.
•
• The calculation of the first lot in the example is as follows:
• Month Net requirements Inventory cost Total cost

Total cost/No of periods
• 1 35 0 100 100
• 2 10 10 110 55
• 4 40 120 230 57.5
• Thus the first lot will be for the demand in periods 1 and 2, and is of size 45.
The use of this heuristic indicates that lots will be produced in periods 1,4 and
8.

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Manufacturing Resource Planning

– Assume the year is of 50 weeks, then find EOQ

– Even if the service level is set at 95%, the probability of simultaneous

• Master Production Schedule

Part A Part B Part C Part D

Net requirements 35 10 40 20 5 10 30 150

Fixed batch quantity 60 60 60 180

Economic batch quantity 58 58 58 174

Fixed period requirements 45 40 25 40 150

Net requirements 35 10 40 20 5 10 30 150

Period Order Quantity 85 35 30 150

Net requirements 35 10 40 20 5 10 30 150

• Month Net Requirements Part-periods(Cumulative)

• Month Net requirements Inventory cost Total cost

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