MRP

Question: how do firms actually organize things

to turn materials into finished products?

Master Production Schedule (MPS)

Time-phased plan specifying how many and
when the firm plans to build each end item
Aggregate
AggregatePlan
Plan
(Product
(ProductGroups)
Groups)

MPS
(Specific End Items)

MPS Example Maine Woods Toy Co.

One possible MPS

Products are combinations of parts

Example: Bicycle
Handle bars (1)

Metal Frame (1)

Wheels (2)

Dependent vs Independent Demand

Independent Demand
Dependent Demand
Demand for an item is
Demand for a
independent of the demand
component (raw
for other items. These
material, part, subdemands are typically
assembly) is dependent
determined by outside
on the demand for the
customers and are end-item
end-item into which the
demands
component goes.
demand often occurs in
batches

Bill of Materials (BOM)

Shows all the assemblies, subassemblies, components,
and raw materials required to produce an item
Shows way a finished product or parent item is put
together from individual components
Parent item shown at highest level or level zero
Parts that go into parent item are called level 1
components and so on
Production planners explode BOM for level zero item
to determine the number, due dates, and order dates of
subcomponents

Lets look at an example BOM...

A
Question:
How many Ds we need in
order to produce 50 As?
B(2)

D(3)

C(1)

E(3)

D(1)

Schematic of MRP System

Material Requirements Planning (MRP)

Computer-based information system that
schedules and orders dependent-demand
inventory components;
Uses the master production schedule, bills of
materials, and inventory records as inputs;
Outputs recommendations:
When to release new orders
When to reschedule open orders.

Lets look at an example BOM...

A

B(2)

D(3)

C(1)

E(3)

D(1)

How do we manage order release?

We need information on delivery times!

Parts-Product
A
B
C
D
E

Process Lead Time

10
15
10
15
10

Lets look at an example BOM...

A

(10)
Question:

B(2)

(15)

C(1)

(10)

When do we start
producing/ordering each
part?

(15)
D(3)

E(3)

(10)

D(1)

(15)

Lets assume that we need 50 units of A

5 days
Parts-Products
A
B
C
D
E

Delivery date
for final
product

Lets assume that we need 50 units of A

Start
assembly for
50 units of A

Parts-Products
A
B
C
D
E

Lets assume that we need 50 units of A

Start
assembly for
100 units of B

Parts-Products
A
B
C
D
E

Lets assume that we need 50 units of A

Start
assembly for
50 units of C

Parts-Products
A
B
C
D
E

Lets assume that we need 50 units of A

Order 300
units of D for
Bs process

Parts-Products
A
B
C
D
E

Lets assume that we need 50 units of A

Order 50
units of D for
Cs assembly

Parts-Products
A
B
C
D
E

Lets assume that we need 50 units of A

Order 50
units of E for
Cs assembly

Parts-Products
A
B
C
D
E

Summary: How does MRP work?

Material Requirements Planning
Production
Assembly
Customer

Production
Assembly
Production

Units are PUSHED forward according to the plan!

What about JIT/Lean Production?

Production
Assembly
Production

Customer
Assembly

Production

Units are PULLED forward only when needed!

Push/Pull Decoupling Point

Material Requirements Planning
Cheeseburger
Hamburger
Patties
Forecast

Hamburger
Chicken
Patties

Chicken
Sandwich

Units are PUSHED forward to a certain point. Final

configuration (PULL) occurs only when the actual
customer demand occurs.

Lot Sizing in MRP Systems

MRP generates material orders
Order sizes/lots can be chosen according to various objectives

Lot-for-lot (L4L):
Produce to cover next period

EOQ:
Apply the EOQ approximation for yearly demand

Least Unit Cost:

Minimize total cost (order + carry) per unit
These are all approximate methods, none is guaranteed to be
optimal. We can apply all of them and find the least-cost one
to implement.

Example
Cost per item:
Order/setup cost:
Inventory carrying cost/month
Starting inventory:
Production lead time
Monthly requirements
1
2
3
4
5
100
50
80
120
70

$10
$47
2%
50
1 month
6
80

For the solution, see file mrp_methods.pdf

MRP Evolution
MRP

Schedule Materials

Closed Loop
MRP

Schedule Materials
Incorporate Feedback

MRP II

Schedule & Purchase Materials

Coordinate w/ Mfg Resources

ERP

Closed-Loop MRP
Production Planning
Master Production Scheduling
Material Requirements Planning
Capacity Requirements Planning

No
Feedback

Realistic?

Yes
Execute:
Capacity Plans
Material Plans

Feedback

Manufacturing Resource Planning

(MRP II)

Goal: Plan and monitor all resources of a

manufacturing firm (closed loop):
manufacturing
marketing
finance
engineering

Simulate the manufacturing system

ERP Systems

Enterprise Resource Planning Systems is a

computer system that integrates application
programs in accounting, sales,
manufacturing, and other functions in the
firm
This integration is accomplished through a
database shared by all the application
programs

Typical ERP System

Video: ERP at Hillerich & Bradsby

Notes:

Major ERP Providers

Firm

HQ

Acquisitions

2004 Share
of $23.6B
Market

SAP

Germany

Oracle

US

Sage Group

UK

7%

Microsoft

US

3%

Infor

US

40%
People Soft
JD Edwards

22%

SSA
Baan
Source: AMR Research

Reasons to Implement ERP

Desire

to standardize and improve

processes
To improve the level of systems
integration
To improve information quality

ERP Drawbacks
Cost

$250M+ for a Fortune 100 company

Transition

pain

Implementation

resources

Training
Resistance

to change

Summary and Conclusions

Master Production Schedule (MPS) converts
aggregate plan to a detailed schedule
Primary inputs to MRP are MPS, BOMs (for
part relationships) and Inventory Records (for
lead times and inventory position)
MRP is a push system but can be used in
conjunction with pull systems
MRP grew and evolved to include closed-loop,
Manufacturing Resource Planning (MRP II),
and eventually ERP