2
PRODUCTION & OPERATIONS MANAGEMENT
IM3013
Chapter 8
MATERIAL REQUIREMENTS
PLANNING
3 4
▶The demand for one item is related to
the demand for another item
▶Given a quantity for the end item, the
Dependent demand for all parts and components
can be calculated
demand
▶The dependent technique used in a
production environment is called
material requirements planning (MRP)
LEARNING OUTCOMES/ CHUẨN ĐẦU RA
L.O.3.7 Explain material requirements planning
and its components.
L.O.3.8 Produce a net requirements plan.
L.O.3.9. Select the lot sizes
 Used for dependent demand
 MRP = transforms demand of
finished goods into WIP & material
demand
 MRP uses a bill-of-material,
inventory, expected receipts, and a
master production schedule to
MRP determine material requirements.
when component items are
needed and scheduling them to
be ready Just-in-time
 5 6

Master production schedule

 Master production schedule
▶Specifies what is to be made and when
(what is to be made and when)
 Specifications or bill of material ▶Must be in accordance with the
(materials and parts required to aggregate production plan
make the product) ▶MPS is established in terms of specific
 Inventory availability products, it disaggregates the aggregate
MRP system (what is in stock) MRP system plan
 Purchase orders outstanding
(what is on order, also called ▶The MPS is quite often fixed or frozen in
expected receipts) the near-term part of the plan
 Lead times ▶The MPS is a rolling schedule
(how long it takes to get various
components) ▶The MPS is a statement of what is to be
produced, not a forecast of demand

7 Product 8

Structure
Diagram
Specifications or bill of material
▶List of components, ingredients, and
materials needed to make product
▶Provides product structure
oItems above given level are called
MRP system parents
Multilevel Intended Bill of Material
oItems below given level are called
components or children
Source: Roberta S.
Level 0 A Russell, Bernard W.
Taylor III, (2017),
Operations
management –
Level 1 B (1) C (3) Creating Value
Along the Supply
Chain, 7th edition,
Instructor: Huynh Thi Phuong Lan Instructor: Huynh Thi Phuong Lan
Level 2 D (2) E (3) D (2) Wiley.
 9 10

Specifications or bill of material

Level 0 A
Purchase orders outstanding
Level 1 B (1) C (3) ▶A by-product of well-managed
purchasing and inventory control
Level 2 D (2) E (3) D (2)
department
MRP system MRP system ▶Outstanding purchase orders
How many B, C, D, E need to produce
100 units of A? must accurately reflect quantities
B = 100 and scheduled receipts
C = 300
D = 100 (1x1x2 + 1x3x2) = 800
E = 100x1x1x3= 300

11 12
MRP SYSTEM

MASTER
Lead times Specifications or PRODUCTION
Bill of Material SCHEDULE
▶The time required to purchase, produce, or
assemble an item
▶For production – the sum of the move, When/
Lead times how
MRP system setup, and assembly or run times
many/
▶For purchased items – the time between which
the recognition of a need and when it's
MRP item
Inventory
available for production availability programs should be
ordered?

Purchase orders
outstanding
 MRP SYSTEM 13 14

Data Files Output Reports

Master MRP by
BOM production schedule period report

MRP by
date report

Lead times
(Item master file) Planned order
report

Product structure To produce 1T, the needed

Inventory data
Material Purchase advice
components:
requirement
planning U: 2 *1 = 2
programs
Purchasing data
(computer and Exception reports V: 3*1 = 3
software)
Order early or late
or not needed X: 2*2*1 = 4
Order quantity too Y: 2*3*1 = 6
small or too large
W = 1*2*1 + 2*3*1 = 8
**Low-level coding rule
Source: Heizer, J., Render, B. & Munson, C. (2020). Operations Management: Sustainability and Supply Chain management
(13th ed.). Pearson Education, Inc.

15 16

 The logic of net requirements:  Low level code (LLC) rule: An MRP
matrix is completed for each item starting
with level zero items, the lowest level at
The MPR Process which the item appears in the product
Gross + Allocations
requirements structure.
Exploding the BOM

Net Total requirements

requirements Netting out inventory
plan – On + Scheduled Net
= requirements
hand receipts
Lot-sizing
Available inventory

Time-phrasing requirements
 Week
17 18
1 2 3 4 5 6 7 Lead time
18
T Gross req. 100 T= 1 week
Planned ord. rel. 100

U Gross req. 200 U = 2 weeks

Item Q’ty Lead times (week) Planned ord. rel. 200

V Gross req. 300 V = 2 weeks

Net T 100 1
Planned ord. rel. 300
requirements U 200 2
plan V 300 2
Gross req. W =3 weeks
W 800 3 W 800
Planned ord. rel. 800
X 400 1
Y 600 1 X Gross req. 400 X = 1 week
Planned ord. rel. 400
Develop the net requirements plan for T, the
delivery date of T is 7th week Y Gross req. 600 Y = 1 week
Planned ord. rel. 600

19 20

Lot-for-lot
Cần lô nào cấp lô đó

Item Q’ty Lead times On hand

(week) Economic Order
Net T 100 1 10
Lot-sizing Quantity (EOQ)
requirements U 200 2 25
Techniques Lượng đặt hàng kinh tế
plan V 300 2 10
W 800 3 120
X 400 1 100
Y 600 1 300 Periodic Order Quantity
Develop the net requirements plan for T, the Đặt hàng theo thời đoạn
delivery date of T is 7th week
 21 22

▶Lot-for-lot technique orders ▶Economic order quantity

just what is required for (EOQ)
production based on net ▶EOQ expects a known
requirements constant demand and MRP
Lot-sizing Lot-sizing
Techniques ▶May not always be feasible Techniques systems often deal with
▶If setup costs are high, lot- unknown and variable
for-lot can be expensive demand

23 Speaker Kits has determined that, for component B, setup cost is $10024and
holding cost is $1 per period. The production schedule, as reflected in gross
requirements for assemblies, is as follows:
▶Periodic order quantity (POQ)
Week
orders quantity needed for a
1 2 3 4 5 6 7 8 9 10
predetermined time period Q’ty 35 30 40 0 10 40 30 0 30 55
▶Interval = EOQ / average
• gross requirements average per week = 27
demand per period • lead time = 1 week.
Lot-sizing • Inventory at the beginning of week 1 is 35 units
Techniques ▶Order quantity set to cover the
interval Week
1 2 3 4 5 6 7 8 9 10
▶Order quantity recalculated at Gross requirements 35 30 40 0 10 40 30 0 30 55
the time of the order release Projected on hand 35
Scheduled receipts
▶No extra inventory Net requirements 0 30 40 0 10 40 30 0 30 55
Planned order receipts
Planned order released
Lot-for-lot technique 25
Lot-for-lot technique 26

Week Week
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Gross requirements (1) 35 30 40 0 10 40 30 0 30 55 Gross requirements (1) 35 30 40 0 10 40 30 0 30 55
Inventory(2) 35 0 0 Inventory(2) 35 0 0 0 0 0 0 0 0 0 0
Projected on hand (3) 35 0 Projected on hand (3) 35 0 0 0 0 0 0 0 0 0
Scheduled receipts (4) 0 0 0 0 0 0 0 0 0 0 Scheduled receipts (4) 0 0 0 0 0 0 0 0 0 0
Net requirements (5) 0 30 Net requirements (5) 0 30 40 0 10 40 30 0 30 55
Planned order receipts (6) 30 Planned order receipts (6) 30 40 0 10 40 30 0 30 55
Planned order released 30 Planned order released 30 40 10 40 30 30 55
(3) = last-period value of (2); (5) = (1) – (3) – (4) (if <0, (5) set as 0); (3) = last-period value of (2); (5) = (1) – (3) – (4) (if <0, (5) set as 0);
(6) depends on technique, but only appears if (5) >0; (6) depends on technique, but only appears if (5) >0;
(2) = (6) – (5) if (6) is identified, otherwise (2) = (3) – (1); (2) = (6) – (5) if (6) is identified, otherwise (2) = (3) – (1);
Ordering cost = Ordering cost = 7 x $100 = $700
Holding cost = 0 x $1
Holding cost = Total cost = $700
What is the impact on total cost if holding cost is $2 per period rather than $1? What is the impact on total cost if holding cost is $2 per period rather than $1?

EOQ technique 27
EOQ technique 28

Ten-week usage equals a gross requirement of 270 units; therefore, weekly usage Ten-week usage equals a gross requirement of 270 units; therefore, weekly usage
equals 27, and 52 weeks (annual usage) equals 1,404 units. equals 27, and 52 weeks (annual usage) equals 1,404 units.
D = annual demand = 1,404; S = setup cost = $100 D = annual usage = 1,404; S = setup cost = $100
H = holding (carrying) cost, on an annual basis per unit = $1 * 52 weeks = $52  H = holding (carrying) cost, on an annual basis per unit = $1 * 52 weeks = $52 
EOQ* = 73 units Q* = 73 units
(3) = last-period value of (2); (5) = (1) – (3) – (4) (if <0, (5) set as 0); (3) = last-period value of (2); (5) = (1) – (3) – (4) (if <0, (5) set as 0);
(6) depends on technique, but only appears if (5) >0; (6) depends on technique, but only appears if (5) >0;
(2) = (6) – (5) if (6) is identified, otherwise (2) = (3) – (1); (2) = (6) – (5) if (6) is identified, otherwise (2) = (3) – (1);
Week Week
1 2 3 4 5 6 7 8 9 10 1 2 3 4 5 6 7 8 9 10
Gross requirements (1) 35 30 40 0 10 40 30 0 30 55 Gross requirements (1) 35 30 40 0 10 40 30 0 30 55
Inventory(2) 35 Inventory(2) 35 0 43 3 3 66 26 69 69 39 57
Projected on hand (3) Projected on hand (3) 35 0 43 3 3 66 26 69 69 39
Scheduled receipts (4) 0 0 0 0 0 0 0 0 0 0 Scheduled receipts (4) 0 0 0 0 0 0 0 0 0 0
Net requirements (5) Net requirements (5) 0 30 0 0 7 0 4 0 0 16
Planned order receipts (6) Planned order receipts (6) 73 73 73 73
Planned order released Planned order released 73 73 73 73
Ordering cost = Ordering cost = 4 x $100
Holding cost = Holding cost = 375 x$1 Total cost = $775
Periodic Order quantity (POQ) technique Periodic Order quantity (POQ) technique
EOQ = 73 units 29 EOQ = 73 units 30

POQ interval = EOQ/Average weekly usage = 73/27 = 2.7, or 3 weeks. POQ interval = EOQ/Average weekly usage = 73/27 = 2.7, or 3 weeks.
The POQ order size will vary by the quantities required in the respective weeks, as The POQ order size will vary by the quantities required in the respective weeks, as
shown in the following table, with first planned order release in week 1. shown in the following table, with first planned order release in week 1.
Note : Orders are postponed if no demand exists, which is why week 7’s order is Note : Orders are postponed if no demand exists, which is why week 7’s order is
postponed until week 8. postponed until week 8.
(3) = last-period value of (2); (5) = (1) – (3) – (4) (if <0, (5) set as 0); (3) = last-period value of (2); (5) = (1) – (3) – (4) (if <0, (5) set as 0);
(6) depends on technique, but only appears if (5) >0; (6) depends on technique, but only appears if (5) >0;
(2) = (6) – (5) if (6) is identified, otherwise (2) = (3) – (1); (2) = (6) – (5) if (6) is identified, otherwise (2) = (3) – (1);
Week
Week
1 2 3 4 5 6 7 8 9 10
1 2 3 4 5 6 7 8 9 10
Gross requirements (1) 35 30 40 0 10 40 30 0 30 55
Gross requirements (1) 35 30 40 0 10 40 30 0 30 55
Inventory(2) 35 0 40 0 0 70 30 0 0 55 0
Inventory(2) 35
Projected on hand (3) 35 0 40 0 0 70 30 0 0 55
Projected on hand (3)
Scheduled receipts (4) 0 0 0 0 0 0 0 0 0 0
Scheduled receipts (4) 0 0 0 0 0 0 0 0 0 0
Net requirements (5) 0 30 0 0 10 0 0 0 30 0
Net requirements (5)
Planned order receipts (6) 0 70 80 85
Planned order receipts (6)
Planned order released 70 80 85
Planned order released

Ordering cost = Ordering cost = 3 x $100

Holding cost = Holding cost = 195 x $1 Total cost = 495$

Exercise
1 Alpha needs 1 B and 1 C. To produce 1 B, it needs for 2 D and 2 C. For 1 C, we 31 32
need 1 E and 1 F. See the table for the lead times and on hand inventory:
Customers need 100 Alpha in week 8. For B, we set EOQ = 80. For other parts, we Reference/ TLTK
use lot for lot.
Lead time On hand 1. Heizer, J., Render, B. & Munson, C. (2020). Operations
Use the following table for MRP to meet the need of customers? (week) inventory
Management: Sustainability and Supply Chain management
Alpha 1 10
B 2 20 (13th ed.). Pearson Education, Inc.
Week 1 2 3 4 5 6 7 8 C 3 0
Alpha Gross demand D 1 100 2. Roberta S. Russell, Bernard W. Taylor III, (2017), Operations
Inventory E 1 10 management – Creating Value Along the Supply Chain, 7th
Net demand F 1 50
Planned order
edition, Wiley.
B Gross demand
Inventory
Net demand
Planned order
C Gross demand
Inventory
Net demand
Planned order
D Gross demand
Inventory
Net demand
Planned order
E Gross demand
Inventory
Net demand
Planned order
F Gross demand
Inventory
Net demand
Planned order