Chapter 2

Material requirement planning (MRP)

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Materials requirements planning (MRP)
 Materials requirements planning (MRP) is the logic for
determining the number of parts, components, and materials
needed to produce a product.
 The MRP is designed to answer three questions:
 What is needed?
 How much is needed?
 When is it needed?
 MRP provides time scheduling information specifying when
each of the materials, parts, and components should be ordered
or produced.
 Dependent demand drives MRP. 2
What MRP does?

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Independent and Dependent Demand

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Independent demand:
..

 Demand unrelated to demand of other products(end

items and spare parts)
 Usually forecast

 EOQ is independent demand

 E.g. demand for car is independent demand

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Dependent demand:
Demand for items are directly related to demand of other
product(component, RW, subassemblies)
Requirements are derived from delivery schedules of end items
So MRP is appropriate to control inventories of


RW

components parts

Subassemblies

WIP
E.g. demand for a tyre is dependent demand
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CONT..
 Effective use of dependent demand inventory models
requires the following
1. Master production schedule
2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times

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Lead Times

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 MRP Inputs

 Master Production Schedule (MPS) – States:

 which end items are to be produced,
 when they are needed, and
 in what quantities
 Bill of Materials (BOM) – a listing of all of the raw materials,
parts, and sub-assemblies needed to produce one unit of a product
 Inventory Records – includes information on the status of an item
during the planning horizon, eg. quantity, supplier, order lead time,
lot size etc.
Cumulative lead time: The sum of the lead times that sequential
phases of a process require, from ordering of parts or raw materials
to completion of final assembly. 9
Common Items

 MPR collects common use items from different products

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Benefits of MRP
 Increased customer satisfaction due to meeting
delivery schedules
 Faster response to market changes
 Improved labor & equipment utilization
 Better inventory planning and scheduling
 Reduced inventory levels without reduced
customer service

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MPS
 MPS, which derived from aggregate production
plan, is a schedule for specific end items. But
MRP is a computational technique that converts
the MPS for end products into a detailed
schedule for the raw materials and components
used in the end products.
 MRP determine quantity and timing of
dependent demand items.
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Cont..

Production Marketing Finance

Capacity Customer Cash flow
Inventory demand

Procurement Human resources

Supplier Manpower
performance planning

Management Engineering
Return on Aggregate Design
investment production plan completion
Capital

Change
production
Master production plan?
schedule

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Types of Variables or Data:

Master production
schedule Change
master
Change production
requirements? Material requirements schedule?
plan
Change capacity?
Capacity requirements
plan

No Is execution
Realistic? meeting the
plan?
Yes
Execute capacity plans

Execute
material plans 14
 MPS Can be expressed in any of the following
terms:
 A customer order in a job shop (make-to-order)
company
 (assemble-to-order or forecast) company
 An end item in a continuous (stock-to-forecast)
company

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MPS

 Typical information in Mps:

 What end products are to be produced?
 How many of each products to be produced?
 When the products are to be ready for shipment?
 It exclude demand for end products
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Level demand, level production plan
Available = inventory position at end of week
= starting inventory + MPS – forecast

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Cont..

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 Bills of Material:
 a listing of all of the raw materials, parts, subassemblies,
and assemblies needed to produce one unit of a product.
 Each finished product has its own bill of materials.
 Provides product structure: Visual depiction of the
requirements in a bill of materials, where all
components are listed by levels.
 Items above given level are called parents
 Items below given level are called children

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Cont..

 Subassembly S1 is the PARENT of C1, C2 & C3

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Accurate Records File

 Accurate inventory records are absolutely required for MRP

(or any dependent demand system) to operate correctly
 Generally MRP systems require 99% accuracy by
computerizing
 Outstanding purchase orders must accurately reflect
quantities and scheduled receipts with LT establishment in
record file
 Order LT= purchasing record
 Manufacturing LT= process route sheets

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Lead Times
 The time required to purchase, produce, or assemble
an item is called LT.
 For production – the sum of the order, wait, move,
setup, store, and run times is TL
 For purchased items – the time between the
recognition of a need and the availability of the item
for production is also LT

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MRP Processing
Processes the following for each time period:
Gross requirements: Total expected demand
Scheduled receipts: Open orders scheduled to arrive
Projected on hand: Expected inventory on hand at the
beginning of each time period
Net requirements: Actual amount needed in each time period
 Planned-order releases: Planned amount to be ordered in
each time period
Planned-order receipts: Quantity expected to be received at
the beginning of the period
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Basic MRP logic
 Input MPS, BOM, inventory status, LT
 Do parts explosion
 Offset requirements by LT
 Netting of requirements from gross by
considering availabilities.
 Lot sizing of net requirements for procurement of
production

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Example

 Suppose we need to produce product T, which is

made up of two parts U and three parts V. Part U is
made up of one part W and two parts X. Part V is
made up of two parts W and two parts of Y.
Calculate the amounts for each if 100 units of T are
required.
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solution
END ITEM T 100
PART U 2*100 200
PART V 3*100 300
PART W For u and 1*200 800
v 2*300
PART X 2*200 400
PART Y 2*300 600

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EXAMPLES

a) Determine the quantities of B, C, D, E, and F needed to

assemble one X. X is made of 2B and 1C. B is made of 3D
and 1E while C is 2E and 2F. D is made of 4E.
 Determine the quantities of B, C, D, E, and F needed to
assemble ten X's, if you have the following in inventory:

Component On hand
B 4
C 10
D 8
E 60
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Cont..

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Cont..

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Format of MRP

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e.g.
 Consider the two product structure trees shown below:

 A. Develop a MRP for item D. Given that the master schedule calls for 80
units of A in week 4 and 50 units of C in week 5.
 B. There’s a beg. inv. of 110 units on hand and all items have lead times of
one week.

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Solution

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Cont..

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Have =110

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If a shutter has 100 at week 4 and 150 at week 8 is
needed, develop MRP with LT 1Weeks for shutter and 2
weeks for frames and 1 week for wood
70 scheduled receipt at week 1 of wood
Shutter

Wood
Frames (2)
sections (4)
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solution

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 E.g.
Lead Times
A A 1 day
B 2 days
C 1 day
2 1
B(4) C(2) D 3 days
E 4 days
F 1 day
3 4 3 1
D(2) E(1) D(3) F(2) Demand
Day 10 50 A
Day 8 20 B (Spares)
Day 6 15 D (Spares)

Create a schedule to satisfy demand.

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 Day
1 2 3 4 5 6 7 8 9 10
A Required 50
Order placement 50

Demand : When Required

LT = 1 day

Lead Time Offset

Manufacturing Order (MO)

Purchase Order (PO)
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Cont..

39
Cont..

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 e.g.
X
Item On-Hand Lead Time (Weeks)
X 50 2
A(2) B(1) A 75 3
B 25 1
C 10 2
C(3) C(2) D(5) D 20 2

Requirements
Requirementsinclude
include95
95units
units(80
(80firm
firmorders
ordersand
and15
15forecast)
forecast)of
ofXX
in
inweek
week10
10

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 Day: 1 2 3 4 5 6 7 8 9 10
X Gross requirements 95
X LT=2 Scheduled receipts
Proj. avail. balance 50 50 50 50 50 50 50 50 50 50
On- Net requirements 45
hand Planned order receipt 45
50 Planner order release 45
A Gross requirements 90
A(2) LT=3 Scheduled receipts
Proj. avail. balance 75 75 75 75 75 75 75 75
On- Net requirements 15
hand Planned order receipt 15
75 Planner order release 15
B Gross requirements 45
ItIttakes
takes22 LT=1 Scheduled receipts
Proj. avail. balance 25 25 25 25 25 25 25 25
A’s
A’sforfor On- Net requirements 20
hand Planned order receipt 20
each
eachXX 25
C
Planner order release
Gross requirements 45
20
40
LT=2 Scheduled receipts
Proj. avail. balance 10 10 10 10 10
On- Net requirements 35 40
hand Planned order receipt 35 40
10 Planner order release 35 40
D Gross requirements 100
LT=2 Scheduled receipts
Proj. avail. balance 20 20 20 20 20 20 20
On- Net requirements 80
hand Planned order receipt 80
20 Planner order release 80 42
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44
45
46
Exercise

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Lot-Sizing Techniques

 Lot-for-lot techniques order adjust what is

required for production based on net requirements
 May not always be feasible
 If setup costs are high, lot-for-lot can be advisable
 Economic order quantity (EOQ)
 EOQ expects a known constant demand and MRP
systems often deal with unknown and variable
demand

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e.g.
 If beginning inventory of an item is =35
 LT= 1 , Co= $ 100/yr, Cc=$1/week determine
MRP of the following.

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Lot-for-Lot Example

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52
53
EXAMPLES
beg. Inv. 25 data's are per week

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 MRP Output
Primary Reports
 Planned Orders – schedule indicating the amount and timing of future
orders
 Order Releases – Authorization for the execution of planned orders
 Changes – revisions of due dates or order quantities, or cancellation of
orders
Secondary Reports
 Performance-control reports – Evaluation of system operation, including
deviations from plans and cost information
 Planning reports – Data useful for assessing future material requirements
 Exception Reports – Data on major discrepancies encountered

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Capacity planning
 Capacity is the ability of resources (such as people,
machine, etc.) to serve customers, process information or
make products with the expression of ‘how much’ and ‘how
well’ the machine or the people produces.

 Unit of measurement
 For line and continuous processing (such as oil refinery)
since the machine makes the product and people support the
machine, the unit of measurement is the quantity per hours.

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Types of capacity
1. Design capacity
Maximum obtainable output
2.Effective capacity, expected variations
 Maximum capacity subject to planned and expected variations
such as maintenance, coffee breaks, scheduling conflicts.
3.Actual output
Rate of output actually achieved cannot exceed effective capacity.
 It is subject to random disruptions: machine break down,
absenteeism, material shortages and most importantly the
demand.

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 Material Requirements Planning II
 Initiates the idea of extending the value stream through
manufacturing and shipping process. That extension brings
production planning, machine capacity scheduling, demand
forecasting.
 Labor hours
 Material costs
 Capital costs
 Virtually any
resource
 System is generally called MRP II or Material Resource
Planning

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Cont..

 Goal: Plan and monitor all resources of a

manufacturing firm (closed loop):
 manufacturing
 marketing
 finance
 engineering
 Simulate the manufacturing system

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MRP II

Market Master
Finance Manufacturing
Demand production schedule

Adjust master schedule

Marketing
Production
plan MRP

Rough-cut Capacity
capacity planning planning
Adjust
production plan
Yes No Requirements No Yes
Problems? schedules Problems?
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MRP in Services

 Some services or service items are directly

linked to demand for other services
 These can be treated as dependent demand
services or items
 Restaurants
 Hospitals
 Hotels

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Enterprise Resource Planning (ERP)

 A computer system that integrates application

programs in accounting, sales, manufacturing, and
other functions in the firm
 This integration is accomplished through a common
database shared by all the application programs
 ERP provides a system to capture and make data
available in real time do decision makers and other
users in the organization

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Cont…

 An extension of the MRP system to tie in

customers and suppliers
1. Allows automation/computerization/ mechanization
and integration of many business processes
2. Shares common data bases and business practices
3. Produces information in real time
 Coordinates business from supplier evaluation to
customer invoicing
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 ERP systems have the potential to
 Reduce transaction costs: Training, Testing and
Integration, Database Conversion
 Increase the speed and accuracy of information
 Facilitates a strategic emphasis on JIT systems and integration
ERP in the Service Sector
 ERP systems have been developed for health care,
government, retail stores, hotels, and financial services
 Also called efficient consumer response (ECR) systems
 Objective is to tie sales to buying, inventory, logistics, and
production

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Typical ERP System

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Advantages of ERP Systems

1. Provides integration of the supply chain,

production, and administration
2. Higher productivity and efficiency
3. improved and accurate processes
4. Increases communication and collaboration
between business units
5. Has a standard software database
6. Improved customer service
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Disadvantages of ERP Systems

1. High initial cost: Is very expensive to purchase and

even more so to customize
2. High cost to maintain: Implementation may require
major changes in the company and its processes
3. Future upgrades: Involves an ongoing, possibly
never completed, process for implementation
4. Training: Expertise is limited with ongoing staffing
problems

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End of Chapter Two

Thanks a lot !!
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