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, sub-
demands 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...

Question:
How many Ds we need in
order to produce 50 As?
B(2) C(1)

D(3) 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...

B(2) C(1)

D(3) E(3) D(1)

How do we manage order release?

We need information on delivery times!

Parts-Product Process Lead Time

A 10
B 15
C 10
D 15
E 10
Lets look at an example BOM...

A (10)

Question:
When do we start
producing/ordering each
B(2) (15) C(1) (10) part?

(15)
D(3) E(3) (10) D(1) (15)
Lets assume that we need 50 units of A

Delivery date
for final
product
5 days

Parts-Products
A
B
C
D
E
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: $10

Order/setup cost: $47
Inventory carrying cost/month 2%
Starting inventory: 50
Production lead time 1 month
Monthly requirements
1 2 3 4 5 6
100 50 80 120 70 80

For the solution, see file mrp_methods.pdf

MRP Evolution
MRP Schedule Materials

Closed Loop Schedule Materials

MRP Incorporate Feedback

Schedule & Purchase Materials

MRP II Coordinate w/ Mfg Resources

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

No
Realistic? Feedback
Feedback
Yes
Execute:
Capacity Plans
Material Plans
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
2004 Share
Firm HQ Acquisitions of $23.6B
Market
SAP Germany 40%
Oracle US People Soft
22%
JD Edwards
Sage Group UK 7%
Microsoft US 3%
Infor US 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