MRP Structure (Cont’d)

Example 2
 The Firm in Example 1 produces all
items in Product A.
 Using Lead times and MPS, we
construct the Gross Material
Requirements Plan as follows:
Example 2
Example 2
 So far we assumed there is no
Inventory on hand.
 If there is inventory on hand for a
Parent item, The requirements for the
parent item and all its components will
decrease.
Example 3

 Given the
following on-hand
inventory, We
construct a Net
Requirements
Plan:
Example 3
 Net Requirements plan includes
following:
 1) Gross Requirements, 2) On hand
inventory, 3) Net requirements, 4)
Planned Order Receipt, and 5) Planned
Order Release for each item.
Example 3
 We now begin with A and work
backward through the components:
Example 3
 A: We need 80 units of B at week 7
because we need 40 units of A at this
week, and one unit of A requires 2 units
of B. Therefore 2 times 40 = 80.
Example 3
Example 3
 Scheduled receipts are empty because
it is the products that we get from
Outside.
 In this example, we assume that we do
not buy any of the parts.
Example 3
Example 3
Example 3
Example 3
Example 3
 This example considered only product A.
 Normally, there is demand for many products.
 Scheduled program of each product
contributes to the Master Schedule AND
ultimately to the Net Material Requirements
Plan (which includes all components for all
products).
Example
 Lets combine several products into a
single plan.
 Assume that product B is used in
making products of A and S.
 It is also sold directly to the market.
Example
 Now we will prepare a Gross
Requirements Plan for B,
 by combining the master schedules of
A,S, and B
 Master schedules for A, S, and B are as
follows:
Example
Example
 Now we will combine all three schedules AND
create Gross Requirements for B:
 At period 1: we sell 10 units of B directly,
therefore we should produce 10 units B.
 At period 2: we sell 10 units of B directly.
Plus, We also need 40 units of B for
producing A at period 6. Because lead time
for A is 4 periods.
Example
 At period 3: we need 40 units of B
because we will use them to produce 40
units of S at period 9.
 …
 Therefore:
 Gross Requirements for B is as follows:
Example
 Period 1 2 3 4 5 6
7 8

 Gross Req. 10 50 40 50 20
45
Example
 In this example, we calculated only the
gross requirements for B.
 However, Remember that:

Net Requirements = (Gross Req.) -

[(On hand) + (Scheduled Receipts)]
Example
 Therefore, we should also consider the
Inventory on hand for B AND also
Scheduled Receipts for B (if we buy
some of B from other suppliers).
 Remember that, Scheduled receipts are
the ones we do not produce and buy
from Outside.
Example
 Scrapped components, Missed receiving
dates, and Machine breakdowns
 May Cause changes in the Material
Requirements Plan.
 Similarly, changes occur in MRP When
MPS changes.
Example
 Computerized programs perform all the
calculations and such changes.

 So far we assumed that we produce

exactly What we Need. No more or No
less.
Example
 The objective in an MRP system is to
produce units only as needed, With no
safety stock AND no anticipation of
further orders.
 Such a procedure is consistent with
small lot sizes, frequent orders, low
inventory, and dependent demand.
Example
 However, when independent demand
exists, A lot sizing technique called
“Economic Order Quantity” is
preferable.
 EOQ technique provides a formula that
averages (or smooths) demand over an
extended time horizon.
Example
 Now we will compare the traditional
MRP technique (produce as needed)
with EOQ technique in the following
example:
Example 4
 Suppose that for product B, lead time is
1 week, and inventory on hand is 35
units.
 We will first apply the “produce as
needed” approach. (traditional MRP)
Example 4
Example 4
 Now we will apply the EOQ formula:
 Economic Order Quantity (Q*) = [(2 D
S) / H] ½
Example 4
 Here, D is annual demand for B = 1404
units
 S is annual Setup cost = $100
 H is annual inventory Holding cost =
$52
Example 4
 Therefore: Q* = [(2 (1404) (100)) /
52] ½ = 73 units per order.
 This means that, every time we give a
production order, it should be 73 units.
 In this case, Order releases for product
B will be as follows:
Example 4
Closed-Loop MRP
 This implies an MRP system that
provides Feedback to scheduling from
the Inventory Control System.
 All new and sophisticated computerized
MRP systems are now closed-loop
systems.
Closed-Loop MRP
 A closed-loop MRP system also provides
feedback to the 1) Capacity Plan, 2)
Master Production Schedule, and
ultimately 3) to the Production Plan.
 In the Capacity Planning, For each work
center, Load reports are required.
Closed-Loop MRP
 Load reports show the Resource
Requirements (in hours) in a work
center For all work currently assigned to
that work center.
 For example, suppose that initial load of
a work center exceeds the capacity of
that work center (say 150
hours/period).
Closed-Loop MRP
 Here, closed loop MRP systems allow
production planners to Move the work
to other periods IN ORDER TO smooth
the work load in each period.
Closed-Loop MRP
Closed-Loop MRP
 Some tactics for Smoothing the work
load are as follows:
 1) Sending a lot to two different
machines for the same operation. This
is called “splitting the lot.” This process
involves additional setup for the
machines, but results in a shorter time.
Closed-Loop MRP
 2) Moving the entire lot to another
period which is near to the current
period.
 Today, the most sophisticated version
of Material Requirements Planning
(which is called MRP II) has substantial
applications beyond Scheduling and
Inventory Management.
Closed-Loop MRP
 Once a firm has MRP system, Inventory
data can be changed by Labor Hours,
by Material Costs, by Capital Cost, or by
any Resource Variable.
 When MRP is used in this manner, It is
usually referred as Material RESOURCE
Planning.
Closed-Loop MRP
 MRP II computer programs are
generally tied into other computer
programs.
 It receives such data as Order Entry,
Inventory, Billing, Purchasing,
Scheduling, Capacity Planning,
Accounting, Warehouse Management,
etc.