Unit 5 Materials Planning and

Budgeting

Structure
5.1. Introduction:
5.1.1 Objective:

5.2 Manufacturing Planning and Control

5.2.1 Production planning system
5.2.2 Manufacturing planning and control system
5.2.3 The Strategic Business Plan:
5.2.4 The Production Plan
5.2.5 The Master Production Schedule:
5.2.6 The Material Requirements Plan:
5.2.7 Purchasing and Production Activity Control:
5.2.8 Capacity Management
5.2.9 Manufacturing Resource Planning:
5.2.10 Making the production plan:
5.2.11 Chase (demand matching) strategy
5.2.12 Production leveling:
5.2.13 Subcontracting:

5.2.14 Level production plan

5.3 Master scheduling

5.3.1 Relationship to Production Plan

5.4 Materials Requirements Planning

5.4.1 Objectives of MRP
5.4.2 Bills of Materials
5.4.3 Uses for Bills of Material
5.4.4 Material Requirements Planning Process

5.5 Planning and Budgeting

5.6 Concluding Remarks
5.7 Summary
5.8 References:

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Materials Management
5.1 Introduction
A country’s wealth can be measured in terms of its gross national product,
or the total value of all final goods and services produced inside its borders
over a certain period. In this context, “goods” refers to anything that may
be physically held, examined, or used. Services, such as banks, hospitals,
clinics, restaurants, shops, and social services, serve important roles in
society.
But the question remains: where does one obtain such a large sum of money?
The quantity of goods and services produced is a proxy for this, but its source
is less clear. Our economy’s mineral resources, farmland, and forestland are
simply potential generators of revenue. “A production function is needed to
transform our inputs into finished products”. Production includes activities
such as mining, farming, logging, and fishing, as well as the processing of
these raw materials into finished goods.
There are many processes involved between the gathering of raw materials
and the delivery of the final product to the customer. Throughout the process
of creating a final product, money is made because of the value contributed
at each step. If the ore is mined and sold, we can make some money, but
the real gain will go to those who keep refining the raw material. A prime
illustration would be Japan. Due to its limited natural resources, it imports
nearly all of its food and other necessities. However, the Japanese have
developed one of the world’s most prosperous economies by adding value
to the raw commodities they import through manufacturing.
Companies in the manufacturing sector create goods from raw materials
that have a far higher monetary and utilitarian value to consumers than the
original materials. The trees are transformed into furniture, the ore into steel,
and the steel into appliances like refrigerators and cars. The act of making
or producing anything is a form of economic and social transformation that
improves people’s lot in life by creating more money.
To maximise the return on investment of our limited resources, we need
to perfect manufacturing procedures that allow us to do so with minimal
waste. We need to manage the processes once they are in place so that they
produce goods at the lowest feasible cost. Managing a process is organising
and controlling the inputs (time, money, and stuff) used in it. Although all
of these factors are crucial, management primarily exercises control over
the materials flow. “Materials flow regulates the efficiency of the process.
If the required materials are not available in the right amounts at the right
time, the process will not produce the desired results”. “Inefficient use of
resources”(both human and material). The company’s bottom line may take
a hit, if not its very existence.
The idea of a single division overseeing production and distribution of a
product is a recent one. While a great number of companies have switched
to this format, some still have not. If businesses are serious about cutting
back on expenses in this sector while maintaining high standards of service,
they will act in this way. Materials management is the most popular term
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for this role. Logistics management and supply chain management are two Materials Planning and
aspects of materials management. Budgeting

Materials management is the process of organising the acquisition,

distribution, and consumption of materials. Specifically, it aims to do the
following:
•• Maximize the firm’s resource utilization.
•• Give the necessary level of customer service.
Materials management can significantly increase a company’s profit. A
manufacturing company’s income (profit and loss) statement might look
something like this:
Dollars Percent of Sales
“Revenue (sales)” $1,000,000 100
“Cost of Goods Sold”
“Direct Material” $500,000 50
“Direct Labor” $200,000 20
“Factory Overhead” $200,000 20
“Total Cost of Goods Sold” $900,000 90
“Gross Profit” $100,000 10

5.1.1 Objective:
In this lesson, we will discuss how to properly plan and allocate resources
to manufacture a finished product. To the uninitiated, the phrases
manufacturing and production may seem synonymous; however, we shall
emphasise the difference between the two because the nature of the final
products (of the two) as well as the processes involved in each industry are
separate. Afterwards, we’ll go on to discuss production and manufacturing
management, which will lay the groundwork for our discourse about
material planning and budgeting. Material planning and budgeting is the first
and most crucial step in the materials management process. If the need for
diverse material inputs is miscalculated or delayed in the planning process,
it can have a devastating effect on the functions of industrial planning and
control.
“In this course, we will examine the numerous facets of materials planning
and budgeting in the context of manufacturing and production”. “It is
important to analyse production and manufacturing management before
delving into the particulars of materials planning and budgeting in the
manufacturing and continuous process sectors that create bulk materials and
products”. “We must also determine the connections and points of contact
between materials planning and budgeting and purchasing and stores”.

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Materials Management Activity 1:
a. “If the cost of direct material is 60%, direct labour is 10%, and
overhead is 25% of sales, what will be the improvement in profit if
direct material is reduced to 55%”?
b. “How much will sales have to increase to give the same increase in
profit”?
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2. Manufacturing Planning and Control
Control and planning in manufacturing manage the flow of raw materials
and finished goods. Mainly, it consists of the following things:
I. Preparing for Manufacturing: The marketplace’s demand must be met
via production. Production planning is responsible for determining the
most efficient method of doing so. It must determine proper priorities
(what is required and when), as well as ensure that sufficient capacity
is available to meet those needs. There will be:
a. “Forecasting”.
b. “Master planning”
c. “Material requirements planning”
d. “Capacity planning”.
II. Application and management: “These are responsible for carrying
out and ensuring the success of the plans developed by production
planning. These responsibilities are fulfilled by shop floor control (or
simply manufacturing activity control) and purchasing”.
II. Inventory management: Products and materials are stockpiled in
preparation for a sale or to aid in production; this is what we call
an inventory. When factored into plans, they act as a safety valve
between supply and demand.

5.2.1 Production planning system

This section delves into the topic of the manufacturing system’s planning
and control infrastructure. After establishing the framework, the book delves
into the nuts and bolts of production scheduling.
Production is a very intricate procedure. Some companies only make a
small number of products and others make hundreds. However, each uses
a different collection of procedures, tools, resources, and human expertise.
To maximise profits, businesses need to coordinate all of these elements
so they can efficiently manufacture the correct products at the right time
without sacrificing quality or cutting corners. Such a difficult issue calls for
careful strategy and management.
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A successful planning system must be able to respond to four questions. Materials Planning and
Budgeting
a. “What are we going to make”?
b. “What does it take to make it”?
c. “What do we have”?
d. “What do we need”
These are questions of priority and capacity
Priority refers to what things are required, in what quantities, and when they
are required. The priorities are set by the market. Manufacturing is in charge
of formulating plans to meet market demand, if at all possible.

Fig 5.1: Priority-capacity relationship

Production capability is the capacity of a business to produce goods or

services. It all boils down to the machinery, labour, financial resources, and
material availability of the organisation. Capacity, in the short term, is the
amount of work that can be accomplished by workers and equipment in
a certain amount of time. The ideal priority-capacity connection is shown
graphically in Figure 5.1. The manufacturing sector must create plans that
take into account the needs of the market in the long and short terms, as
well as the limits of the sector’s resources and capabilities. Decisions with
a protracted time horizon, such as the building of new factories or the
purchase of new machinery, necessitate careful and thorough preparation. In
the coming weeks, productivity planning horizons will span days or weeks.
The next part discusses the order of planning horizons from long to short.

5.2.2 Manufacturing planning and control system (MPC)

In the MPC system, there are five distinct stages:
a. Implementing a Business Strategy.
b. Production plan.
c. MPS.
d. MRP.
e. The management of all aspects of production and procurement
Every stage has a unique goal, playtime, and amount of intricacy. “With
the transition from long-term strategic planning to day-to-day production
activity control, the goal shifts from broad direction to particularly detailed
planning, the time frame decreases from years to days and the level of
detail increases from broad categories to individual components and
workstations”. These variations exist because each stage is customized to a
certain time frame and set of goals.
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Materials Management •• The goal of the strategy.
•• The planning horizon is the period that includes the present and a
specific date in the future.
•• The level of specificity in the information regarding the plan’s
necessary products
•• Planning cycle how frequently the plan is examined.
Three questions must be answered at each level:
a. “What are the priorities how much of what is to be produced and
when”?
b. “What is the available capacity what resources do we have”?
c. “How can differences between priorities and capacity be resolved”?
Figure 5.2 presents the planning hierarchy. The initial four stages are
known as the planning levels. Authorization to purchase or create the
necessary items is the result of the plans. The ultimate level of purchasing
and production activity control is where the plans are eventually put
into reality. Each planning level’s goals, time frame, level of detail, and
planning cycle will be dissected below.
5.2.3 The Strategic Business Plan:

Fig 5.2: “Manufacturing planning and control system”

Strategic business plans typically include time horizons of two to ten years.
A company’s business strategy describes the nature of the enterprise the
company will follow in the future in terms of product lines, markets, and
so on. The strategy explains the overarching path the company will take

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to get there. It incorporates marketing, finance, production, and design, Materials Planning and
and is grounded in the future. In turn, the plan guides and coordinates the Budgeting
business’s marketing, manufacturing, financing, and design efforts.
Marketing is in charge of studying the market and determining how the
company will respond: the markets to be served, the items to be supplied,
desired levels of customer service, price, advertising techniques, and so on.
Finance is in charge of determining the firm’s sources and uses of finances,
as well as cash flows, earnings, return on investment, and budgets.
The marketplace’s needs must be met by production. It accomplishes this
by maximizing the efficiency of its plants, machinery, equipment, people,
and materials.
The demands of consumers must be met, and that can only happen if
manufacturers keep up. To achieve this goal, it optimises the use of its
resources (including its physical infrastructure, machinery, equipment,
personnel, and raw materials). The discipline of engineering focuses on the
creation, design, and improvement of products both new and old. Designing
products that are both commercially viable and efficiently built requires close
coordination between engineering, marketing, and production. The strategic
business plan is a top-down effort led by upper management. Utilizing
data gathered from marketing, finance, engineering, and production, the
strategic business plan creates a foundation for future planning. To achieve
the strategic business plan’s goals, each division develops its plan of action.
The strategic company plan and these tactics will complement one another.
Figure 5.3 shows this connecting piece.

Fig 5.3: Business plan.

The corporate strategic plan is vague. Instead of focusing on the sales of

individual products, it analyses the market as a whole to determine what
kind of manufacturing and distribution infrastructure is needed. A common
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Materials Management practice is to use dollars rather than units to represent it. Every six months
to a year, a company should evaluate its strategic plan.

5.2.4 The Production Plan

“Given the goals of the strategic business strategy, production management
must consider the following”.
• The period-by-period requirements for output of several product
categories.
• Preferable stock levels.
• What tools, workers, and supplies will be required at what times?
• How easily accessible the necessary materials are?
There is not a lot of depth to it. If a company makes children’s bicycles,
tricycles, and scooters in a wide variety of styles and configurations, the
production plan will reflect this by highlighting the three primary product
families (bicycles, tricycles, and scooters) that make up the company’s
output. Planners in this department are tasked with coming up with a way
to meet customer demands while staying within budgetary limits. The
first step is to calculate what’s needed to satisfy customer demand, next
to evaluate that number against what’s already on hand, and finally devise
a strategy that strikes a good balance between the two. The difficulty of
capacity management comes from the need to assess available resources
against projected demands at various stages of planning. Good planning
requires striking a balance between priorities and available resources. The
production plan, like the market plan and the financial plan, is focused on
executing the business strategy. Sixteen to twenty-four-month planning
horizons are common, with quarterly or monthly reviews.

5.2.5 The Master Production Schedule

“The MPS is the overarching plan for how components will be assembled
into finished goods. It breaks down the production plan to show how many
of each final product will be made during a given time frame”. For instance,
it may state that 200 Model A23 scooters will be produced weekly. The MPS
takes into account a wide range of factors, including the production schedule,
sales predictions, purchase orders, inventory levels, and available capacity.
Compared to the production plan, the MPS provides more specifics. Whereas
the production plan was developed around product categories (tricycles),
the master production schedule is tailored to individual products. As a rule
of thumb, the planning horizon is anything from three to eighteen months.
This topic is discussed in further depth in Chapter 3’s master scheduling
section. Master scheduling refers to the method by which a comprehensive
production schedule is developed. A master production schedule is the end
outcome of this procedure. Weekly or monthly meetings are used to assess
progress and make adjustments to the plans.

5.2.6 The Material Requirements Plan

Producing and acquiring the raw materials and other supplies needed to
manufacture the finished items specified in the master production schedule
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is the goal of the material requirements plan (MRP). It shows the required Materials Planning and
quantities and when production or consumption is scheduled. The MRP is Budgeting
used in the control of purchasing and production processes to determine
whether or not to stock an item. Exceptional care was taken with every
aspect. The schedule for when raw materials and other parts are needed
to make finished goods is laid out in detail. The time frame for planning
must be greater than the sum of the lead periods for sourcing materials and
completing a product. Timeframes of three to eighteen months are typical,
mirroring those of the whole production schedule.

5.2.7 Purchasing and Production Activity Control

Purchasing and production activity control are examples of the implementation
and control phase of a production planning and control system (PAC).
Purchasing sets up and regulates the supply of inputs into production. The
PAC’s primary function is to organise and oversee production within the
factory. The time frame for making plans is short, typically between one day
and one month. There is a great deal of specificity required due to the number
of parts, stations, and orders that must be tracked. The process of planning is
continuous and always evolving. Figure 5.4 shows the connection between
the various planning instruments, planning timeframes, and level of detail.

Fig 5.4: Level of detail versus planning horizon.

5.2.8 Capacity Management

“Calculating needed capacity, comparing it to available capacity, and
making modifications are all necessary steps in the factory’s planning and
control system”. Production infrastructure like machines and factories can
be modified or even retired over time. “It is not possible to make such
modifications during the phases of production planning and production
activity control. Changes can be made at this point, such as adjusting the
number of shifts, putting in more hours, outsourcing some tasks, and so on”.

5.2.9 Manufacturing Resource Planning

“Since there is so much information to store and calculations to be made,
the factory planning and control system will almost probably need to be
implemented on a computer”. Manually performing computations takes a
lot of time and manpower, which could force a business to make sacrifices
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Materials Management
if they don’t have access to a computer. As a result of delays in determining
what will be needed and when the corporation may have to lengthen lead
times and stockpile goods instead of using the planning system to do so.
Top-down planning and control with bottom-up feedback is the goal of
this system’s design. Strategic business planning is the process by which
a company’s marketing, financial, and production strategies are all brought
together to work toward a common goal. There will be repercussions for MRP,
production activity, and master production schedule as a result. Achieving
the production targets is the primary focus of the control and purchasing
processes. strategic business plans, and, in the end, the company Changes
can be made at any stage of planning if there is a need to adjust priorities
due to capacity constraints. Accordingly, it’s crucial to offer continuous
feedback to ensure that your efforts are being properly represented at higher
tiers.

Fig 5.5: Manufacturing resource planning (MRP II).

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Plans for advertising, financing and manufacturing are all a part of the Materials Planning and
strategic business plan. Every member of marketing needs to believe in Budgeting
the success of the company’s plans. Production and finance need to come
to an agreement that they can supply the demand, and that the plans are
financially desirable. All of the company’s departments can benefit from the
manufacturing planning and control system, which is outlined in this article.
MRP II, or Manufacturing Resource Planning, is a comprehensive system
for planning and managing manufacturing operations. The “manufacturing
resource plan” (MRP II) is different from the “materials requirement plan,”
hence the “MRP II” moniker (MRP).
“MRP II facilitates collaboration between the marketing and production
departments. The production schedule reflects the consensus of the
marketing, finance, and production departments on the overall strategy”.
Adapting the plan requires weekly and daily communication between
marketing and production. Changes may be required to the initial order
total, the order itself, or the delivery schedule. Adjustments of this nature
are made through the master production schedule. As a result of shifts
in demand forecasts, marketing and production managers may make
adjustments to master production schedules. The production schedule is
subject to change at the discretion of upper management in response to
fluctuations in supply and demand. Nonetheless, they can all be used with
the MRP II system. Its primary function is to coordinate the activities of the
business’s various departments, including marketing, finance, production,
and others. MRP II, or Material Requirements Planning, is a technique for
optimising a manufacturing firm’s use of all of its available resources. To
better understand an MRP II system, refer to the schematic in Figure 5.5.
EXAMPLE PROBLEM
“A company wants to produce 10,000 units of an item over the next three
months at a level rate. The first month has 20 working days; the second has
21 working days, and the third has 12 working days because of an annual
shutdown. On average, how much should the company produce each day to
level production”?
Answer:
“Total production = 10,000 units”
“Total working days = 20 + 21 + 12 = 53 days”
“Average daily production = 10,000/ 53 = 188.7 units”

5.2.10 Subcontracting
“As a pure strategy, subcontracting includes always producing at the bare
minimum level of demand and fulfilling any additional need through
subcontractors”. Either buying the additional quantities required or declining
the additional demand are options when subcontracting. For the latter, you
can either increase prices during peak demand or lengthen delivery times.
Such a tactic is shown in Figure 5.6. The relatively low cost of this method
is its main benefit. By maintaining a steady output, you may avoid paying
to store excess capacity and absorb any fluctuations in output with ease.
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Materials Management The main drawback is that the whole cost of acquisition (including the
price of the item itself, as well as the fees associated with its acquisition,
transport, and quality control) may be more than it would be if the product
were produced on-site. Only a select few businesses can meet 100% of their
needs through internal production or external supplies. There are several
aspects to think about besides price when deciding what to buy and what to
make. In-house production can help companies protect their trade secrets,
keep quality high, and retain employees.
So that the company may concentrate on its core competencies, or so that it
can offer stable, competitive pricing, it may decide to source a component
from a third party that has proven experience in its design and production.
“For many things, such as nuts and bolts or components that the company
does not typically produce, the choice is quite clear”. It is up to management
to decide whether or not to outsource tasks that fall within the company’s
area of expertise.

Fig 5.6: Subcontracting.

5.2.11 Level production plan

“Following is the general procedure for developing a plan for level
production”.
a. “Total the forecast demand for the planning horizon”.
b. “Determine the opening inventory and the desired ending inventory”.
c. “Calculate the total production required as follows”:
“Total Production = total forecast + back orders + ending inventory -
opening inventory”
EXAMPLE PROBLEM
“Amalgamated Fish Sinkers makes a product group of fresh fish sinkers
and wants to develop a production plan for them. The expected opening
inventory is 100 cases, and the company wants to reduce that to 80 cases by
the end of the planning period. The number of working days is the same for
each period. There are no backorders”.
The expected demand for the fish sinkers is as follows:

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 Materials Planning and
Budgeting

a. “How much should be produced in each period”?

b. “What is the ending inventory for each period”?
c. “If the cost of carrying inventory is $5 per case per period based on
ending inventory, what is the total cost of carrying inventory”?
d. “What will be the total cost of the plan”?
Answer:

Activity 2:
a. “What are the four questions a good planning system must answer”?
b. “Define capacity and priority. Why are they important in production
planning”?
c. “ What is MRP II”?
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5.3 Master scheduling

The development of a MPS follows production planning in the sequence of
activities that constitute manufacturing planning and control (MPS). In this
chapter, we will examine some of the most essential aspects of developing
and administering an MPS. It’s the backbone of sales and production
collaboration and a crucial part of any planning process.
The production plan focuses on groups of products, while the MPS looks
at individual outputs. “It breaks down the production schedule into the date
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Materials Management and quantity requirements for each family’s worth of final products”. In
this case, the MPS is limited by the manufacturing timetable. Therefore,
the sum of the MPS items must equal the sum displayed on the production
plan. If the manufacturing schedule calls for 1000 tricycles to be made in
a week, then the MPS should account for 1000 unique models. To achieve
equilibrium, it must work within this constraint. Supply and demand in the
market for manufactured goods, as well as the resources (people, machines,
etc.) that go into their production (capacity). Finished products are put
together from component and subcomponent pieces. “These have to be
on hand in adequate quantities and at the right time to sustain the master
production schedule. The material requirements planning system generates
a schedule for these parts based on the prerequisites of the MPS. Therefore,
the MRP follows the guidelines set forth by the MPS”.
As a manufacturing strategy, the MPS is a method used in production. It is
a forecasting tool that takes into account both current and projected demand
in the market and existing production capacity to determine a manufacturing
priority schedule.
“The MPS forms a vital link between sales and production as follows”:
•• “It makes possible valid order promises. The MPS is a plan of what
is to be produced and when. As such, it tells sales and manufacturing
when goods will be available for delivery”.
•• “It is a contract between marketing and manufacturing. It is an
agreed-upon plan”.
The MPS is used to identify what will be manufactured by sales and
production. It’s not supposed to be stiff. It’s a means of communication as
well as a foundation for making modifications that are in line with market
demands and manufacturing capacity.
‘The information needed to develop an MPS is provided by”:
• “The production plans”.
• “Forecasts for individual end items”.
• “Actual orders received from customers and for stock replenishment”.
• “Inventory levels for individual end items”.
• “Capacity restraints”
3.1 Relationship to Production Plan
“Suppose the following production plan is developed for a family of three
items”:

“Master Scheduling”
“Opening inventories (units) are”:
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“Product A 350” Materials Planning and
Budgeting
“Product B 100”
“Product C 50”
“Total 500”
“The next step is to forecast demand for each item in the product family”.

“With these data, the master scheduler must now devise a plan to fit the
constraints. The following illustrates a possible solution”.
Master Schedule

Inventory

“This schedule is satisfactory for the following reasons”:

•• “It tells the plant when to start and stop production of individual
items”.
•• “Capacity is consistent with the production plan. It is unsatisfactory
for the following reasons”:
•• “It has a poor inventory balance compared to the total inventory”.
•• “It results in a stockout for product C in periods 2 and 3”.
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Materials Management Activity 3:
“What four functions does the master production schedule (MPS) perform
in the production planning system”?
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5.4 Materials Requirements Planning

“In Section 3, we addressed the importance of the master production schedule
(MPS) in showcasing the finished products or significant components that
manufacturing wishes to produce”. This stuff is made or put together from
parts that have to be in the right place at the right time if it’s going to pass
the MPS tests. If there is a missing piece, we won’t be able to assemble and
ship the product on time. To avoid missing components, businesses might
implement material requirements planning (MRP). An assembly schedule
(priority plan) is generated that details when specific parts are needed
at various points in the process. In this section, we will discuss bills of
materials, the MRP technique, and the proper implementation of a material
requirements plan. But first, a little primer on MRP’s ecosystem.

5.4.1 Objectives of MRP

Material requirements planning has two major objectives: determine
requirements and keep priorities current.
Determine requirements. When it comes to meeting customer demand,
nothing is more important than having an efficient production planning
and control system in place. Using the master production schedule as a
guide, the material needs plan identifies which components are needed and
determines the time frames in which they must be available based on lead
time. It must deduce:
• “What to order”?
• “How much to order”?
• “When to order”?
• “When to schedule delivery”?
Keep priorities current. The demand for, and supply of, components are
dynamic. The order process is flexible and open to customer input. Machines
break down, parts wear out, supplies arrive late, scrap is generated, and
orders are processed. To adapt to the ever-evolving world, a material
requirements plan must be flexible enough to reorder priorities. The system
needs to be able to modify, add to, and delete orders as needed.
Linkages to Other Manufacturing Planning and Control (MPC)
Functions
The MPS is the basis for the MRP. The MRP serves as an order of importance
for the materials needed to produce MPS products. Capacity must be
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available when the components are needed for the plan to be valid, and the Materials Planning and
plan must be evaluated against the capacity. Material requirements planning Budgeting
either directly or indirectly influences production activity control (PAC) and
purchasing. Using MRP, you can plan when to ship and receive orders. For
the delivery dates to be met, PAC and purchasing need to coordinate and
manage the execution of the orders. Inputs and outputs of the production
planning and control system are shown in Figure 5.7.

Fig 5.7: Manufacturing planning and control system.

5.4.2 Bills of Materials

The first step in building anything is identifying the materials needed for the
job. Baking a cake is an activity that calls for a recipe. Mixing chemicals
requires a specific formula. Assembling a wheelbarrow calls for a list of
necessary components. Different terms may be used, but ultimately, we can
get the same information from a recipe, a formula, or a parts list. Bills of
materials, each and every one. According to APICS, a “bill of material” is
“a listing of all the subassemblies, intermediates, parts, and raw materials
that go into making the parent assembly, coupled with the amounts of each.”
Figure 5.8 depicts a basic bill of materials.The bill of materials lists all of the
materials that go into creating the parent. It doesn’t reveal the procedures or
processes involved in creating the parent or its components. A routing file is
used to keep track of this information.

5.4.3 Uses for Bills of Material

“The bill of material is one of a manufacturing company’s most widely used
documents. Some major uses are as follows”:
•• “Product definition. The bill specifies the components needed to make
the product”.
•• “Engineering change control. Product design engineers sometimes
change the design of a product and the components used. These
changes must be recorded and controlled. The bill provides the
method for doing so”.
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Materials Management •• “Service parts. Replacement parts needed to repair a broken component
are determined from the bill of material”.

Fig 5.8: Pegged requirements.

•• “Planning. Bills of material define what materials have to be scheduled

to make the end product. They define what components have to be
purchased or made to satisfy the master production schedule”.
•• “Order entry. When a product has a very large number of options (e.g.,
cars), the order-entry system very often configures the end product
bill of materials. The bill can also be used to price the product”.
•• “Manufacturing. The bill provides a list of the parts needed to make
or assemble a product”.
•• “Costing. Product cost is usually broken down into direct material,
direct labour, and overhead. The bill provides not only a method of
determining direct material but also a structure for recording direct
labour and distributing overhead”
The breadth of application of the bill of material in manufacturing is
illustrated by this list, which is by no means exhaustive. Nobody in the
company will be able to avoid using the bill at some point. Constantly
checking and updating bills of materials for accuracy is essential. Once
again, the computer is a great tool for centralised invoicing and billing
record keeping.

5.4.4 Material Requirements Planning Process

The bill of material details the MRP system’s intended course of action for
each individual part. For the sake of clarity, let’s assume that a full inventory
has been taken of everything. Whether or not the parts are physically
counted makes no impact. Nonetheless, it is essential to keep in mind that
the various parts of the bill are managed independently. “There may be
many assembly activities between components and the parent, or there
may be several processes performed on raw material before it is processed
and suitable for assembly. Planning and management of these processes
fall under production activity control rather than material requirements
planning”.
“The goal of material needs planning is to figure out what components are
needed, how many they are, and when they are due so that items on the
master production schedule may be completed on time”. The basic MRP
approaches for doing so are presented in this section. Under the following
headings, these strategies are discussed:

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•• “Exploding and Offsetting” Materials Planning and
Budgeting
•• “Gross and Net Requirements”
•• “Releasing Orders”
•• “Capacity Requirements Planning”
•• “Low-Level Coding and Netting”
•• “Multiple Bills of Material”

Fig.5.9: Product tree with lead time.

Exploding and Offsetting

Figure 5.9 provides a visual representation of a product tree. It’s the same
as the others, but it also provides an extremely important detail: a lead time.
Lead time.
“Lead time is the time it takes to carry out an operation. Preparation, waiting
in line, processing, transport, receiving, and inspection time, as well as any
expected delays in production, are all factored in. In Figure 13, if parts B
and C are readily available, assembly of A will take one week. This means
that A has a one-week head start. Similarly, it will take two weeks to create
B if D and E are both readily available. The lead time for ordering options
D, E, and C is one week. In this family tree, every parent and child product
shares the same number of components and the same number of uses. It
takes two Bs and a C to make an A, and two Ds and an E to make a B”.
Exploding the requirements
The term “exploding” refers to a method of growing needs based on usage
volume and documenting these requirements wherever they are applicable
in the product tree.
Offsetting.
When a project’s needs grow, offsetting is used to distribute those new
demands across the available time slots. “For example, if 50 units of A are
required in week 5, the order for the as must be released in week 4 and 50
units of B and 50 units of C must be ready in week 4”.
Planned orders.
“If 50 parts A are expected in week 5 and the lead time to assemble an A is
one week, the order must be released and manufacturing must begin no later
than week 4”. 81
Materials Management “As a result, a planned order reception for 50 should be received in week
5 and a planned order release for that number should be released in week
4. If an order for 50 As is to be shipped in week 4, 50 Bs and 50 Cs must
also be available. As a result, order receipts for those components must be
scheduled for week 4”. “Because assembling a B takes two weeks, there
must be a planned order release for Bs in week two. Because a C takes one
week to make, there must be a planned order release for 50 in week three”.
“For the Ds and Es, the scheduled order receipts and planned order releases
are determined in the same way”.
EXAMPLE PROBLEM
“Using the product tree and lead times shown in Figure 5.10, complete the
following table to determine the planned order receipts and releases. There
are 50 As required in week 5 and 100 in week 6”.
Answer

Fig.5.10 Exploding and offsetting.

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Gross and Net Requirements Materials Planning and
Budgeting
“The previous section assumed that no inventory was available for the As or
any of the components. Often inventory is available and must be included
when calculating quantities to be produced. If, for instance, there are 20 As
in stock, only 30 need to be made. The requirements for component parts
would be reduced accordingly”. The calculation is as follows:
“Gross requirement” = 50
“Inventory available” = 20
“Net requirements” = “gross requirements - available inventor”
“Net requirements” = “50 – 20” = “30 units”
“Since only 30 As the need to be made, the gross requirement for Bs and Cs
is only 30”.
The planned order release of the parent becomes the gross requirement of
the component.
The time-phased inventory record shown in Figure 5.10 can now be modified
to consider any inventory available. For example, suppose there are 10 Bs
available as

Fig. 5.11: Gross and net requirements.

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Materials Management “Well as the 20 As. The requirements for components D and E would
change. Figure 5.11 shows the change in the MRP record”.
Activity 4: “What is a material requirements plan”?
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5.5 Planning and Budgeting

The above summary of the MRP method should lead the reader to the
conclusion that it is most useful in the production of discrete commodities
like automobiles, home electronics, power tools, and industrial machinery.
“Given that demand, raw material and component requirements are
dependent on the manufacturing schedule (as specified in the MPS), and
MRP is best suited to this dependent demand condition, MRP is especially
useful in the manufacturing industry, where the final product is subject to
the independent demand of the marketplace”. Readers with experience in
continuous process industries will understand that this is also the case there,
where outputs like steel plates and sheets, angles and channels, sulphuric
acid, and urea are subject to market demand while input needs are set by the
output production schedule. Thus, the reasoning behind MRP can be used
in any setting. However, MRP is utilised somewhat differently for materials
planning and budgeting in continuous process enterprises that create bulk
materials and products due to environmental differences between the
continuous process industry and the manufacturing industry. Compared
to other types of manufacturing, the continuous process sector operates
differently. First, we’ll figure out what our very minimum needs are. Most
process businesses have an incorrectly organised bill of materials. Thus,
they must be filled out for all finished goods, with each item listed alongside
its required quantity of inputs (in kilogrammes or grammes) per metric tonne
or kilogramme of finished good. When done, they should be compiled into
a BOM file. “Determining the relative quantities of constituents (inputs) per
unit of the parent item can be challenging in process industries, therefore
continuing efforts are required to maintain the BOM file up to date (end
product)”. “This is because losses and wastages differ from product to
product, and within a product, they differ from day to day based on the
operating conditions, i.e. the actual values of the process parameters”. “The
second and perhaps more crucial distinction has to do with how staffing
levels influence output”. Some units’ output is proportional to the number
of people working there, therefore the number of people needed to produce
a given amount of output also determines how many people will be needed
to produce each particular input. For these types of businesses, determining
the necessary inputs entails calculating ratios that represent consumption
rates in relation to workforce sizes across different processing facilities.
In addition, these proportions need to be periodically compared to actual
consumption and revised to account for new information. “In process
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industries, where some inputs may be stored in stockyards, some in railway Materials Planning and
waggons and hopper trucks, and yet others in bags placed on pallets in Budgeting
shop storage areas, the net requirements are then computed by subtracting
the on-hand and on-order inventories”. For example, in Plossl’s case (see
footnote for reference), the planner took an inventory of the raw supplies
every morning. used a kardex-like system to record transactions related to
stock on hand, including issuing and receiving items, checking balances,
and placing orders. Computers allow for the automation of such a system,
which eliminates the need for as much manual labour. ‘It is also necessary
to keep track of the material specification number/grade, vendor number
(and name), purchase order number, railway/truck way bill number, and to
check the status of the material en route with the railways and truckers on a
daily basis if the order is still open”.

5.6 CONCLUDING REMARKS

“The manufacturing sector (of industry) is a crucial driver of economic
development in the country, and both industry and industrialization generate
wealth and the tools for the economic upliftment of the population”. “Since
materials are essential to the manufacturing and production processes, a
manufacturing company’s ability to efficiently move those materials from
their suppliers to their production processes and finally to their customers
and markets is essential to satisfying those customers and generating
profits”. The first and most fundamental task of materials management
is the creation of a strategy and budget for the acquisition of materials.
Material Requirements Planning, often known as MRP I or mini MRP, is
an approach to predicting and meeting supply needs (MRP). “From the
master production schedule’s (MPS) desired output, it extracts the product
structure information (of end products) in the bill of materials (BOM) file
and the inventory status information in the inventory status file to generate
a detailed schedule of timing and quantities for each item”. Getting the
appropriate supplies to the right people at the right time is the objective.

5.7 SUMMARY
Producing anything by hand increases its worth, which in turn boosts the
economy. Establishing productive and profitable production processes is a
prerequisite for any company looking to expand its operations and boost
its bottom line. The organisation must then oversee these mechanisms to
ensure the most effective allocation of resources including time, money, and
raw materials. One efficient method of achieving this goal is by carefully
planning and managing the movement of materials into, within, and out of
the manufacturing process. The supply side, manufacturing planning and
control, and the distribution side make up the material flow system. They all
depend on one another, and changes in one will affect the others. As a rule, the
objectives of the company’s marketing, finance, and production departments
conflict with those of the organisation as a whole. Materials management
is responsible for coordinating the flow of materials to ensure that both
customer service and the efficient use of company resources are prioritised.
“Production planning is the first stage of a manufacturing planning and
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Materials Management control system. For most projects, a year is the standard planning horizon”.
Materials procurement and production time frame are the bare minimum.
The level of specificity is rather low. The strategy is usually developed for
product families that share a common manufacturing process or unit. “The
Sales and Operations Planning process, of which the production plan is a
subset, is conducted at the executive level and necessitates the making of
tradeoffs between various parts of the business”.
“The master production schedule (MPS) is a plan for making a specific
result”. Overall product demand must be met, but this is not a demand
projection. Truthfulness is essential for the MPS. It ought to be workable
and demonstrate a fair distribution of capacity between needs and resources.
It’s important to note that the MPS is not just a manufacturing facility but
also a place where products are sold. It provides the structure necessary to
guarantee timely delivery to clients. The MPS is used for all delivery and
order booking adjustments. The objective of the MRP is to keep the MPS
running smoothly by coordinating the timely production of all required
parts. To do its job, the MRP need precise information about stock and bills
of materials. Different approaches exist for creating bills of material, but
all of them should be coordinated by the same team (or individual). “The
MRP is only as accurate as the data it uses, which is why accurate inventory
records are essential to its success”. “Most of the MRP explosion and
offsetting processes detailed in this book are executed by a computer”. “The
logic is repetitive and prone to human error but can be executed quickly and
accurately by a computer”. “Good MRP requires system adaptability on the
part of planners. Based on the bill of materials, which details the materials
and labour required to produce a product, the MRP process determines a
schedule of planned order releases to procure or produce the necessary
components to satisfy projected demand”.

References:
1. Introduction to Materials Management SIXTH EDITION J. R. Tony
Arnold, P.E., CFPIM, CIRM Fleming College, Emeritus Stephen N.
Chapman, PhD, CFPIM North Carolina State University Lloyd M.
Clive, P.E., CFPIM Fleming College
2. Vollmann, Thomas E., Berry, William L., and Whybark, D. Clay,
Manufacturing Planning and Control Systems, Galgotia Publications
(P) Ltd., Delhi, 1998 (originally published by Richard D. Irwin Inc.
and reproduced and sold in India by Galgotia), Chapters 1 and 2.
3. Narasimhan, S.L., McLeavey, D.W., and Billington, P.J., Production
Planning and Inventory Control, Prentice-Hall of India, New Delhi,
1997, Second Edition (1995 by Prentice-Hall, Inc) Chapters 1, 2, 10
and 11.

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