PRODUCTION

&
OPERATIONS MANAGEMENT
SESSION 15-16
 MATERIAL REQUIREMENTS PLANNING (MRP)
• Material Requirements Planning (MRP)
• Is a computerized information system that aids in the planning of materials in
organization
• MRP systems exploit certain unique characteristics of the production items
• Utilize information on lead time, inventory status and master production schedule to
make material available exactly at the time of requirement
• The logic applied to plan materials could be extended to other resources
required in any operations system. Therefore, these planning methodologies
can be broadly defined as resources planning
 PLANNING FOR MATERIALS: TYPES OF INVENTORIES
• Two types of inventories exist in any operations system
• Operating Inventory:
• Denotes all the resources (broadly of material and capacity) that are available for the
operating system to consume in the production process
• Example: Number of steering wheels required for a day’s production of 5,000 cars in Maruti Plant
• Exhibit Dependant demand attributes
• Distribution Inventory:
• Meant for market consumption
• Exhibit Independent demand attributes
• Example: Number of Alto’s to be stocked to meet a day’s demand
• They differ in their demand attributes & therefore require alternative planning
methodologies
 PLANNING FOR MATERIALS: TYPES OF INVENTORIES
• Demand Attributes
 PLANNING FOR MATERIALS: TYPES OF INVENTORIES
• Demand Attributes
Attribute Dependant Demand Independent Demand
Nature of Demand No uncertainty; Dependant; Parent - Considerable Uncertainty,
Child relationships cause dependency Independent

Goal Make availability meet requirements Make availability meet estimated

exactly demand for a targeted service level

Service Level 100% a necessity, Feasible to achieve 100% is not feasible

Demand Occurrence Often lumpy Often continuous

Estimation of demand By Production Planning By Forecasting
How much to order? (Quantity) Known with certainty Estimated based on past consumption

When to order? (Timing) Very critical, can be estimated Cannot be answered directly
 DEVELOPING MRP LOGIC BASIC BUILDING BLOCKS
• Existence of multiple levels of dependency
• Product Structure – Bill of Materials (BOM)
• Time phasing the requirement
• Determining Lot Size
• Incorporating lead time information
• Establishing the planning premises
 DEVELOPING MRP LOGIC BASIC BUILDING BLOCKS
• Existence of multiple levels of dependency
Basic Telephone

Hand Set

Cover Plate

A fastener secures a
Handset pair of the cover plates Basic
in the handset Telephone
 DEVELOPING MRP LOGIC BASIC
• Existence of multiple levels of dependency
BUILDING BLOCKS
• Level-by-Level computation
Method A Method B
Basic Telephone Basic Telephone
Required :100 Required :100
On hand Inventory : 30 On hand Inventory : 30
Planned Quantity : 70 Planned Quantity : 70
Handset Hand set
Required :100 Required : 70
On hand Inventory : 27 On hand Inventory : 27
Planned Quantity : 73 Planned Quantity : 43
Cover plate* Cover plate*
Required :200 Required : 86
On hand Inventory : 16 On hand Inventory : 16
Planned Quantity :184 Planned Quantity : 70
* (Each handset requires 2 cover plates) *(Each handset requires 2 cover plates)
 MRP INPUTS & OUTPUTS
Master Production Schedule

Product Material Inventory

Structure Requirements Master
File Planning File

Planned Order Releases

Work Orders Purchase Orders Rescheduling Notices

 MRP LOGIC: TERMINOLOGIES
• The iterative process of computing all requirements at a level and then moving
down the level is known as explosion in MRP
• Product Structure graphically depicts the dependency relationships among
various items that make up the final product
• A Bill of Material (BOM) is a list of all materials needed to assemble or put
together one unit of the final product
• BOM exists in various formats
• Single level BOM
• Indented BOM
• Modular BOM
 MRP LOGIC: INPUTS
• Bill of Materials (BOM)
• A listing of all of the assemblies, subassemblies, parts, and raw materials needed to
produce one unit of a product
• Product structure tree
• A visual depiction of the requirements in a bill of materials, where all components are listed by levels
 PRODUCT STRUCTURE

Source: http://www.penhero.com/PenGallery/MabieTodd/MabieToddVisofilSystem.htm
PRODUCT STRUCTURE
 PRODUCT STRUCTURE
Telephone Level 0

Base Unit Connecting Connecting Hand Set Level 1

(1) Cable (1) Jack (2) (1)

Operating Panel B. Cover Lug Speaker Mic. H. Cover

Level 2
Unit (1) Board (1) Plate (2) (4) (1) (1) Plate (2)

Button Control
Assy. (1) Panel (1) Level 3

Button Screw Dial Screw Screw Screw

Level 4
(12) (12) (3) (3) (4) (2)
PRODUCT STRUCTURE: SINGLE LEVEL BOM
Qty. per
Item Code Item Description UOM
product
1000 Basic Telephone Each 1
1010 Base unit Assembly Each 1
1020 Handset Assembly Each 1
1030 Connecting Cable Metre 1
1040 Connecting Jack Each 2
1050 Speaker Each 1
1060 Microphone Each 1
1070 Receiver cover plate Each 2
1080 Panel Board Assembly Each 1
1090 Operating Unit Each 1
1100 Lug Each 4
1110 Base Cover Plate Each 2
1120 Button Assembly Each 1
1130 Control Panel Assembly Each 1
1140 Buttons Each 12
1150 Control Dials Each 3
1160 Screw Each 21
PRODUCT STRUCTURE: INDENTED BOM
Qty. per
Level Item Code Item Description UOM
product
0---- 1000 Basic Telephone Each 1
-1--- 1010 Base unit Assembly Each 1
--2-- 1080 Panel Board Assembly Each 1
---3- 1120 Button Assembly Each 1
----4 1140 Buttons Each 12
----4 1160 Screw Each 12
---3- 1130 Control Panel Assembly Each 1
----4 1150 Control Dials Each 3
----4 1160 Screw Each 3
--2-- 1090 Operating Unit Each 1
--2-- 1100 Lug Each 4
--2-- 1110 Base Cover Plate Each 2
--2-- 1160 Screw Each 4
-1--- 1020 Handset Assembly Each 1
--2-- 1050 Speaker Each 1
--2-- 1060 Microphone Each 1
--2-- 1070 Receiver cover plate Each 2
--2-- 1160 Screw Each 2
-1--- 1030 Connecting Cable Metre 1
-1--- 1040 Connecting Jack Each 2
PRODUCT STRUCTURE: MODULAR BOM Qty. per
Item Code Item Description UOM
product
1000 Basic Telephone Each 1
1010 Base unit Assembly Each 1
1020 Handset Assembly Each 1
1030 Connecting Cable Metre 1
1040 Connecting Jack Each 2
1050 Speaker Each 1
1060 Microphone Each 1
107X Receiver cover plate
1071 Receiver cover plate - Grey Each 2
1072 Receiver cover plate - Blue Each 2
1073 Receiver cover plate - Black Each 2
1074 Receiver cover plate - Beige Each 2
1080 Panel Board Assembly Each 1
109X Operating Unit
1091 Operating Unit - 20 calls
1092 Operating Unit - 50 calls
1093 Operating Unit - 100 calls
1094 Operating Unit - 200 calls
1100 Lug Each 4
111X Base cover plate
1111 Base cover plate - Grey Each 2
1112 Base cover plate - Blue Each 2
1113 Base cover plate - Black Each 2
1114 Base cover plate - Beige Each 2
1120 Button Assembly Each 1
113X Control Panel Assembly
1131 Control Panel Assy. - Simple Each 1
1132 Control Panel Assy. - Deluxe Each 1
1133 Control Panel Assy. - Elegant Each 1
1140 Buttons Each 12
1150 Control Dials Each 3
1160 Screw Each 21
 MRP LOGIC: INPUTS
• Inventory records
• Includes information on the status of each item by time period, called time buckets
• Information about
• Gross requirements
• Scheduled receipts
• Expected amount on hand
• Other details for each item such as
• Supplier
• Lead time
• Lot size policy
• Changes due to stock receipts and withdrawals
• Canceled orders and similar events
 MRP LOGIC: INPUTS
• Inventory records
 TIME PHASING OF REQUIREMENT
A: On hand = 50
Computation without B: On order = 300
Time phasing of data C: Required = 470 (200 + 120 + 150)
X: Net Qty. = -120

Period (Week)
1 2 3 4 5 6 7 8
On hand 50
On order 300
Required 200 120 150
Net Quantity 50 50 -150 -150 30 30 30 -120

• Pending order is “out of phase” with the requirement

• Order of 120 need to arrive at the manufacturing system only
at the beginning of week 8
 MRP LOGIC: LOT SIZING RULES
• Lot for Lot
Item: Operating Unit Period (Week)
Lot size rule: Lot for Lot 1 2 3 4 5 6 7 8
Gross requirements 200 120 130 150
On hand* 50 50 50
Net Requirements 150 120 130 150
Lot size 150 120 130 150

* On hand data pertains to the inventory at the end of the period

• Fixed Order Quantity

Item: Operating Unit Period (Week)
Lot size rule: Fixed Order Qty. 1 2 3 4 5 6 7 8
Gross requirements 200 120 130 150
On hand* 50 50 50
Net Requirements 150 120 130 150
Lot size 300 300

* On hand data pertains to the inventory at the end of the period

 MRP LOGIC: LOT SIZING RULES
• Periodic Order Quantity
Economic Order Quantity
Number of periods (P) =
Average Demand during the planning period
Item: Operating Unit Period (Week)
Lot size rule: Periodic Order Qty. 1 2 3 4 5 6 7 8
Gross requirements 200 120 130 160
On hand* 50 50 50
Net Requirements 150 120 130 160
Lot size (Planned Receipt) 270 290

* On hand data pertains to the inventory at the end of the period

• The total net requirement for the 8-week period is 560 (150 + 120 + 130 + 160 = 560).
• Let us suppose that the economic order quantity is 210.
• Therefore, using the above expression, we obtain P to be 3 periods.
• The table shows implementation of POQ rule for P = 3.
• An order is scheduled to arrive at the beginning of week 3 and the quantity ordered is
sufficient to cover the net requirements during weeks 3 – 5.
 MRP LOGIC: IMPACT OF LEAD TIME
• Planned Order Release Time = Planned Receipt Time – Lead Time
Manufacture 200
Operating Units

Assemble
200 base units
LT for manufacture of Operating Unit
Assemble
Offset Offset 200 telephones

Weeks 5 - 6 Week 7 Week 8

Manufacture of Assembly of Assembled

Operating units begin Base units begin Base units arrive
 MRP LOGIC: IMPACT OF LEAD TIME
• Planned Order Release Time = Planned Receipt Time – Lead Time
Item: Operating Unit; LT = 2 Wks. Period (Week)
Lot size rule: Lot for Lot 1 2 3 4 5 6 7 8
Gross requirements 200 120 130 160
On hand* 50 50 50
Net Requirements 150 120 130 160
Planned receipts 150 120 130 160
Planned Order releases 150 120 130 160

* On hand data pertains to the inventory at the end of the period

MASTER PRODUCTION SCHEDULE (MPS)
• Drives MRP process with a schedule of finished products
• Quantities represent production not demand
• Quantities may consist of a combination of customer
orders & demand forecasts
• Quantities represent what needs to be produced, not
what can be produced

Planned order release of the parent = PORt

Quantity required to assemble one unit of the parent = BOMQt
Independent demand of the component as spares = IDt
Gross requirements of a component = GRt
GRt = (PORt*BOMQt)+ IDt
 MASTER PRODUCTION SCHEDULE (MPS)
Master Production Schedule Period
Item 1 2 3 4 5 6 7 8
Aggregate Production Plan
Basic Telephone 1200 1400
Phone - Basic 80 190 110 100 100 100 100
Phone - Deluxe 0 50 0 50 0 50 0 50
Phone - Home Office 75 120 40 20 70 60 0 0
Phone - Enterprise 90 125 125 125 125 245 200 200

MPS for Telephone Manufacturer Period (Week)

1 2 3 4 5 6 7 8
Basic Telephone 80 90 110 100 100 100 100 100
Operating Unit 60 40 40

Item: Base Unit Assembly Period (Week)

1 2 3 4 5 6 7 8
Planned Order releases 140 80 130 120

Item: Operating Unit Period (Week)

1 2 3 4 5 6 7 8
Gross Requirements 200 120 130 160
 MRP OUTPUTS
• Primary Outputs
• Planned orders
• A schedule indicating the amount and timing of future orders
• Order releases
• Authorizing the execution of planned orders
• Changes
• Revisions of the dates or quantities, or the cancellation of orders
• Secondary Outputs
• Performance-control reports
• Evaluation of system operation, including deviations from plans and cost information
• e.g., missed deliveries and stockouts
• Planning reports
• Data useful for assessing future material requirements
• e.g., purchase commitments
• Exception reports
• Data on any major discrepancies encountered
• E.g., late and overdue orders, excessive scrap rates, requirements for nonexistent parts
 MRP PROCESSING
• MRP processing takes the end item requirements specified by the master
schedule and “explodes” them into time-phased requirements for assemblies,
parts, and raw materials offset by lead times
 MRP: TERMINOLOGIES
• Gross requirements
• Total expected demand
• Scheduled receipts
• Open orders scheduled to arrive
• Projected Available
• Expected inventory on hand at the beginning of each time period
• Net requirements
• Actual amount needed in each time period
• Planned-order receipts
• Quantity expected to received at the beginning of the period offset by lead time
• Planned-order releases
• Planned amount to order in each time period
 MRP CONSIDERATIONS: SAFETY STOCK
• Safety Stock
• Theoretically, MRP systems should not require safety stock
• Variability may necessitate the strategic use of safety stock
• A bottleneck process or one with varying scrap rates may cause shortages in
downstream operations
• Shortages may occur if orders are late or fabrication or assembly times are longer
than expected
• When lead times are variable, the concept of safety time is often used
• Safety time
• Scheduling orders for arrival or completions sufficiently ahead of their need so that the
probability of shortage is eliminated or significantly reduced
 MRP CONSIDERATIONS: LOT SIZING RULES
• Lot-for-Lot (L4L) ordering
• The order or run size is set equal to the demand for that period
• Minimizes investment in inventory
• It results in variable order quantities
• A new setup is required for each run
• Economic Order Quantity (EOQ)
• Can lead to minimum costs if usage of item is fairly uniform
• This may be the case for some lower-level items that are common to different ‘parents’
• Less appropriate for ‘lumpy demand’ items because inventory remnants often result
• Fixed Period Ordering
• Provides coverage for some predetermined number of periods
 MRP: CORE LOGIC
Inventory
MPS Net Status

Explode Lot

Lot sizing
BOM rule
Offset

Lead
Shop Procurement Time
Orders Notices
MRP
A manufacturing organization needs to plan the materials required for the next six weeks for the
manufacture of its end-product (Product A), as per a master production schedule. In addition to the end
product, there is an independent requirement of Component C, as it is sold as a spare in the market. The
MPS for both the end product and the spares are given in Table. In order to assemble one unit of Product
A, Components B to G are required. Figure shows the product structure. The number alongside each
component denotes the number of each component required to assemble its immediate parent. An
extract of the inventory status (Table) reveals the inventory on hand. There are no pending orders for
delivery. Different lot-sizing rules are used for the components of Product A. Moreover, the components
have different lead times. All this information is available in Table. Perform an MRP exercise to estimate
the quantity and timing of the components required for the manufacture of Product A as per the MPS.
Master Production Schedule for the next six periods

1 2 3 4 5 6
Product A 100 150 200 100 0 200
Component C 50 60 70

A Component On hand Lead time Lot size

A 150
B 1000
B 3 C 1 C 300
D 750
E 1700
E 2 D 1 D 1 F 1 F 200
G 500
1 LFL
2 LFL
1 LFL
2 3 periods
6 3 periods
1 400
3 500

Product Structure
G 1
MRP
MRP
MRP
MRP
MRP: SAFETY STOCK
MRP: SAFETY STOCK
 MPS – MRP – CRP
Begin

Modify MPS Modify MPS

Master Production
Scheduling (MPS)

No
Modify MRP
Material Requirements
Feasible?
Planning (MRP)
Yes No

Capacity Requirements
Feasible?
Planning (CRP)
Yes
Finalise
Plan
 MRP: ISSUES & CHALLENGES
• Problems MRP systems potentially face:
• Bad data integrity
• Lack of discipline in updating the required data bases as and when changes
take place elsewhere in the organisation
• Uncertainties associated with issues that lie outside the control of people
and the system
• How often MRP must be updated and rerun?
• Regenerative Method
• Net Change Method
• Handling uncertainties affecting the system by incorporating:
• Safety Stock
• Safety Lead times
 UPDATING THE SYSTEM
• An MRP is not a static document
• As time passes
• Some orders get completed
• Other orders are nearing completion
• New orders will have been entered
• Existing orders will have been altered
• Quantity changes
• Delays
• Missed deliveries
 UPDATING THE SYSTEM
• Two basic systems
• Regenerative system
• Approach that updates MRP records periodically
• Essentially a batch system that compiles all changes that occur within the time interval and periodically
updates the system
• A revised production plan is developed in the same way the original plan was developed
• Net-change system
• Approach that updates MRP records continuously
• The production plan is modified to reflect changes as they occur
• Only the changes are exploded through the system
 MRP BENEFITS
• Enables managers to easily
• determine the quantities of each component for a given order size
• To know when to release orders for each component
• To be alerted when items need attention
• Additional benefits
• Low levels of in-process inventories
• The ability to track material requirements
• The ability to evaluate capacity requirements
• A means of allocating production time
• The ability to easily determine inventory usage via backflushing
• Exploding an end item’s BOM to determine the quantities of the components that were used to
make the item
 MRP REQUIREMENTS
• To implement an effective MRP system requires:
• A computer and the necessary software to handle computations and maintain records
• Accurate and up-to-date
• Master schedules
• Bills of materials
• Inventory records
• Integrity of data files
 MRP DIFFICULTIES
• Consequence of Inaccurate Data
• Missing parts
• Ordering incorrect numbers of items
• Inability to stay on schedule
• Other problems
• Assumptions of constant lead times
• Products being produced differently from the BOM
• Failure to alter a BOM when customizing a product
• Inaccurate forecasts