Supply Chain Management: Indian Institute of Management Lucknow

Supply Chain Management
Materials Requirement Planning
Indian Institute of Management

Lucknow
What is MRP?
Computerized inventory control &

production planning system
Schedules component items when they are

needed - neither earlier nor later
2/2/2016
Well Discuss...
Dependent Inventory Model Requirements
Material Requirements Planning structure
Lot Sizing Techniques
Extensions of MRP
Distribution Resource Planning
Enterprise Resource Planning
2/2/2016
Dependent Demand
The demand for one item is related to the
demand for another item
Given a quantity for the end item, the demand
for all parts and components can be calculated
In general, used whenever a schedule can be
established for an item
MRP is the common technique
2/2/2016
Dependent Inventory Model Requirements

Master Production Schedule
Bills of Material
Accurate Inventory Records
Purchase Orders Outstanding
Lead Times for Each Component
2/2/2016
Master Production Schedule (MPS)
Specifies what is to be made and when
Must be in accordance with the APP
Aggregate production plan sets the overall level of

output in broad terms
As the process moves from planning to execution,

each step must be tested for feasibility
MPS is the result of the production planning process
2/2/2016
Master Production Schedule (MPS)
MPS is established in terms of specific products
Schedule must be followed for a reasonable length of

time
The MPS is quite often fixed or frozen in the near

term part of the plan
The MPS is a rolling schedule
The MPS is a statement of what is to be produced, not

a forecast of demand
2/2/2016
MPS Examples
For Nancys Specialty Foods
Gross Requirements for Crabmeat Quiche

Day
Amount
6
50
8
100
9
47
10
60
11
12
110
13
75
14 and so on
Gross Requirements for Spinach Quiche

Day
Amount
7
8
9
100 200 150
10
11
12
60
13
75
14
15
100
16 and so on
Table 13
13..1
2/2/2016
The Planning Process

Master production
schedule
Change
requirements?
Change
master
production
schedule?
Material
requirements plan
Change capacity?
Capacity
requirements plan
No
Realistic?
Yes
Is capacity
plan being
met?
Is execution
meeting the
plan?
Execute capacity
plans
Execute
material plans
Figure 13.1
2/2/2016
The Planning Process

Production
Capacity
Inventory
Marketing
Customer
demand
Procurement
Supplier
performance
Management
Return on
investment
Capital
Finance
Cash flow
Human resources
Manpower
planning
Aggregate
production
plan
Master production
schedule
Engineering
Design
completion
Change
production
plan?
Figure 13
13..1
2/2/2016
10
Aggregate Production Plan

Months
Aggregate Production Plan
(shows the total
quantity of amplifiers)
Weeks
January
February
1,500
1,200
Master Production Schedule

(shows the specific type and
quantity of amplifier to be
produced
240 watt amplifier
150 watt amplifier
75 watt amplifier
100
100
500
100
500
300
100
450
450
100
Figure 13.2
2/2/2016
11
Expressing Master Production Schedule (MPS)
A customer order in a job shop (make(make-to

to--order)
company
Modules in a repetitive (assemble(assemble-to

to--stock)
company
An end item in a continuous (make(make-to

to--stock)
company
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12
Focus for Different Process Strategies

Make to Order
(Process Focus)
Assemble to Order or
Forecast
(Repetitive)
Number of
end items
Stock to Forecast
(Product Focus)
Schedule finished
product
Typical focus of the

master production
schedule
Schedule modules
Schedule orders
Number of
inputs
Examples:
Print shop
Machine shop
Fine-dining restaurant
Motorcycles
Autos, TVs
Fast-food restaurant
Steel, Beer, Bread

Lightbulbs
Paper
Figure 13
13..3
2/2/2016
13
Bills of Material
List of components, ingredients, and materials
needed to make a product
Provides product structure
Items above given level are called parents
Items below given level are called children
2/2/2016
14
BOM Example
Level
0
Awesome
(A)(2)(50) =
Part B:Product
2 xstructure
numberfor
of As
=
Part C:
3 x number of As =
B(2) Std. 12
12 Speaker kit
Part D:
E(2)
D(2)
Part F:
(3)(50) =
C(3)
2 x number of Bs
+ 2 x number of Fs =
Part E:
+ 2 x number of Cs =
150
Std. 12
12 Speaker kit w/
amp--booster
amp
(2)(100) + (2)(300) =
E(2)
2 x number of Bs
Packing box and installation

kit of wire, bolts, and screws
2 x number of Cs =
100
F ( 2)
800
Std. 12 Speaker
booster assembly
G(1)
(2)(100)
+ (2)(150)D=(2) 500
(2)(150) =
300
Amp--booster
Amp
Part
G:
1 x number of Fs =
12
12 Speaker
2/2/2016
(1)(300) =
12300
Speaker
15
BOM Example
A
Ladder--back
Ladder
chair
Back slats
Back slats
B (1)
Ladder-back
subassembly
C (1)
Seat
subassembly
Seat cushion
Seat cushion
D (2)
Front
legs
LegLeg
supports
supports
F (2)
Back
legs
G (4)
Back
slats
Back
Front
Back
Front
legs
legs
legs
legs
H (1)
Seat
frame
I (1)
Seat
cushion
E (4)
Leg
supports
Seat-frame
Seat-frame
boards
boards
A
A
Ladder-back
Ladder-back
chair
chair
J (4)
Seat-frame
boards
2/2/2016
16
Product Structure of a Cellphone

Level
Product structure for a Cellphone

A
0
1
2/2/2016
Speaker
PCB
Camera
LCD
Battery
Fixer
Body
Case
17
Bills of Material - Modular Bills

Modules are not final products but
components that can be assembled into
multiple end items
Can significantly simplify planning and
scheduling
2/2/2016
18
Bills of Material - Planning Bills
Created to assign an artificial parent to the BOM

Used to group subassemblies to reduce the
number of items planned and scheduled
Used to create standard kits for production
2/2/2016
19
Bills of Material - Phantom Bills

Describe subassemblies that exist only
temporarily
Are part of another assembly and never go into
inventory
BOMs are processed one level at a time

Low
Low--Level Coding
Item is coded at the lowest level at which it occurs
2/2/2016
20
Importance of Accurate Records

Accurate inventory records are absolutely
required for MRP (or any dependent demand
system) to operate correctly
Generally MRP systems require 99%
99% accuracy
Outstanding purchase orders must accurately
reflect quantities and schedule receipts
2/2/2016
21
Lead Times
The time required to purchase, produce, or
assemble an item
For purchased items the time between the
recognition of a need and the availability of the
item for production
For production the sum of the order, wait, move,
setup, store, and run times
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22
Time-Phased Product Structure

Must have D and E
completed here so
production can begin on
B
Start production of D
1 week
2 weeks to
produce
B
2 weeks
E
A
2 weeks
1 week
2 weeks
1 week
C
3 weeks
1 week
D
|
2/2/2016
Figure 13.4
|
4
5
Time in weeks
23
MRP Structure
Data Files
BOM
Output Reports
Master
production schedule
MRP by period
report
MRP by date
report
Lead times
Planned order
report
(Item master file)
Inventory data
Purchasing data
Material
requirement
planning programs
(computer and
software)
Purchase advice
Exception reports
Order early or late or
not needed
Order quantity too
small or too large
2/2/2016
Figure 13.5
24
Benefits of MRP
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and labour
4. Reduced inventory levels
2/2/2016
25
Determining Gross Requirements
Starts with a production schedule for the end item

50 units of Item A in week 8
Using the lead time for the item, determine the week
in which the order should be released a 1 week lead
time means the order for 50 units should be released
in week 7
This step is often called lead time offset or time

phasing
2/2/2016
26
From the BOM, every Item A requires 2 Item Bs 100

Item Bs are required in week 7 to satisfy the order
release for Item A
The lead time for the Item B is 2 weeks release an

order for 100 units of Item B in week 5
The timing and quantity for component requirements

are determined by the order release of the parent(s)
2/2/2016
27
The process continues through the entire BOM one

level at a time often called explosion
By processing the BOM by level, items with multiple

parents are only processed once, saving time and
resources and reducing confusion
Low--level coding ensures that each item appears at

Low
only one level in the BOM
2/2/2016
28
Gross Requirements Plan

1
Week
4
5
A. Required date
Order release date
50
1 week
50
B. Required date
Order release date
100
100
C. Required date
Order release date
2 weeks
150
150
E. Required date
Order release date
1 week
200
200
F. Required date
Order release date
300
300
1 week
300
300
D. Required date
Order release date
G.
Order release date
8 Lead Time
3 weeks
600
600
200
200
Required date
300
1 week
300
1 week
Table 13.3
2/2/2016
29
Net Requirements Plan
2/2/2016
30
2/2/2016
31
Determining Net Requirements
Starts with a production schedule for the end item 50

units of Item A in week 8
Because there are 10 Item As on hand, only 40 are

actually required (net requirement) = (gross
requirement - onon- hand inventory)
The planned order receipt for Item A in week 8 is 40

units 40 = 50 10
Following the lead time offset procedure, the planned

order release for Item A is now 40 units in week 7
The gross requirement for Item B is now 80 units in

week 7
2/2/2016
32
Determining Net Requirements
There are 15 units of Item B on hand, so the net

requirement is 65 units in week 7
A planned order receipt of 65 units in week 7

generates a planned order release of 65 units in week 5
A planned order receipt of 65 units in week 7

generates a planned order release of 65 units in week 5
The onon-hand inventory record for Item B is updated to

reflect the use of the 15 items in inventory and shows
no onon-hand inventory in week 8
This is referred to as the GrossGross-to

to--Net calculation and
is the third basic function of the MRP process
2/2/2016
33
Gross Requirements Schedule

Figure 13
13..6
Lead time = 4 for A

Master schedule for A
Periods
6
40
Periods
Gross requirements: B
2/2/2016
Lead time = 6 for S

Master schedule for S
9 10 11
50
15
10
40+10
=50
40
9 10 11 12 13
40
4
50
5
20
20
7
15+30
=45
30
Master schedule
for B
sold directly
1
10 10
8
Therefore, these are
the gross requirements
for B
34
MRP Planning Sheet
Figure 13.7
2/2/2016
35

The logic of net requirements
gross
allocations
+
requirements
total requirements
on
scheduled
hand + receipts
net
= requirements
available inventory
2/2/2016
36
MRP Management
MRP is a dynamic system
Facilitates replanning when changes occur
System nervousness can result from too many changes
Time fences put limits on replanning
Pegging links each item to its parent allowing effective

analysis of changes
2/2/2016
37
Finite Capacity Scheduling

MRP systems do not consider capacity during
normal planning cycles
Finite capacity scheduling (FCS) recognizes
actual capacity limits
By merging MRP and FCS, a finite schedule
is created with feasible capacities which
facilitates rapid material movement
2/2/2016
38
Small Bucket Approach

MRP buckets are reduced to daily or hourly
The most common planning period (time bucket)
for MRP systems is weekly
Planned receipts are used internally to sequence
production
Inventory is moved through the plant on a JIT basis
Completed products are moved to finished goods
inventory which reduces required quantities for
subsequent planned orders
Back flushing based on the BOM is used to deduct
inventory that was used in production
2/2/2016
39
Balanced Flow
Used in repetitive operations
MRP plans are executed using JIT techniques
based on pull principles
Flows are carefully balanced with small lot
sizes
2/2/2016
40
Lot-Sizing Techniques
Lot
Lot--forfor-lot techniques order just what is
required for production based on net reqmts
May not always be feasible
If setup costs are high, costs may be high as well
Economic order quantity (EOQ)

EOQ expects a known constant demand and MRP
systems often deal with unknown and variable
2/2/2016
demands
41
Lot-Sizing Techniques
Part Period Balancing (PPB) looks at future
orders to determine most economic lot size
The WagnerWagner-Whitin algorithm is a complex
dynamic programming technique
Assumes a finite time horizon
Effective, but computationally burdensome
2/2/2016
42
Lot-for-Lot Example
1
10
35
30
40
10
40
30
30
55
No on-hand inventory is carried through the system

Gross
requirements
Scheduled
receipts
Total holding cost = $0
Projected on
hand
Net
requirements
35
35
30
40
10
40
30
30
55
30
55
Planned order There are seven setups for this item in this plan
30
40
10
40
30
receipts
Planned order
releases
30 setup
40 cost = 710
40= $700
30
Total
x $100
30
55
Holding cost = $1/week; Setup cost = $100

2/2/2016
43
EOQ Lot Size Example

1
Gross
requirements
35
Scheduled
receipts
Annual demand = 1,404

30
40
10
10
40
30
30
55
26
69
69
39
16
Total cost = setup cost + holding cost
Projected on
hand
35
35
43
66
Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)
Net
requirements
Planned order
receipts
30
Total cost = $3,798

73
73
73
Planned order
73
73
73
releases Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730
73
73
Holding cost = $1/week; Setup cost = $100;

Average weekly gross requirements = 27; EOQ = 73 units
2/2/2016
44
PPB Example
Gross
requirements
10
35
30
40
10
40
30
30
55
Scheduled
receipts
Projected on
hand
35
Net
requirements
Planned order
receipts
Planned order
releases
Holding cost = $1/week; Setup cost = $100;

EPP = 100 units
2/2/2016
45
...PPB Example
Periods
Combined
Trial Lot Size

(cumulative net
requirements)
2
2, 3
2, 3, 4
2, 3, 4, 5
2, 3, 4, 5, 6
30
70
70
80
120
Part Periods
0
40 = 40 x 1
40
70 = 40 x 1 + 10 x 3
230 = 40 x 1 + 10 x 3
+ 40 x 4
Costs
Holding
Setup
Total
100 + 70 = 170
Combine periods 2 - 5 as this results in the Part Period closest to the EPP
6
6, 7
6, 7, 8
6, 7, 8, 9
40
70
70
100
0
30 = 30 x 1
30 = 30 x 1 + 0 x 2
120 = 30 x 1 + 30 x 3
100
120
220
Combine periods 6 - 9 as this results in the Part Period closest to the EPP
10
2/2/2016
55
0
Total cost
100 + 0 = 100
300 + 190 = 490
46
Lot-Sizing Summary
For these three examples
Lot-for
Lotfor--lot
EOQ
PPB
$700
$730
$490
Wagner-Whitin would have yielded a plan with a

Wagnertotal cost of $455 for this example
2/2/2016
47
Lot-Sizing Summary
In theory, lot sizes should be recomputed whenever

there is a lot size or order quantity change
In practice, this results in system nervousness and

instability
Lot--for
Lot
for--lot should be used when economical
Lot sizes can be modified to allow for scrap, process

constraints, and purchase lots
2/2/2016
48
Lot-Sizing Summary
Use lotlot-sizing with care as it can cause considerable

distortion of requirements at lower levels of the BOM
When setup costs are significant and demand is

reasonably smooth, PPB, WagnerWagner-Whitin, or EOQ
should give reasonable results
2/2/2016
49
Extensions of MRP
Closed--Loop MRP
Closed
MRP system provides input to the capacity plan, MPS, and

production planning process
Capacity Planning
MRP system generates a load report which details capacity

requirements
This is used to drive the capacity planning process
Changes pass back through the MRP system for rescheduling
2/2/2016
50
Closed-Loop MRP System

Production plan
No
Priority Planning
Capacity Planning
Detailed
master production
schedule
Realistic?
Resource
planning
First cut
capacity
Planning
Yes
Material
requirements
(detailed)
Capacity
requirements
(detailed)
Figure 13.8
2/2/2016
51
Closed-Loop MRP System

Priority Control
(detailed scheduling)
Capacity Control
(throughput)
Dispatch list
Input/output
report
No
Is
specific capacity
adequate
?
2/2/2016
Execution
No
Yes
Execute
the plan
Is
average
capacity
adequate
?
Figure 13.8
52
Smoothing Tactics
Overlapping
Sends part of the work to following operations before the

entire lot is complete
Reduces lead time
Operations splitting
Sends the lot to two different machines for the same

operation
Shorter throughput time but increased setup costs
Lot splitting
2/2/2016
Breaking up the order into smaller lots and running part

ahead of schedule
53
Resource Requirements Profile

Capacity exceeded in
periods 4 & 6
150
Lot
11
Lot
6
100
Lot
1
Lot
2
50
Lot
7
Lot
9
Available
capacity
Lot
15
Lot
12
Lot
4
Lot
3
Lot
5
Lot
8
Lot
10
Lot
13
Lot
14
Standard labor hours
Standard labor hours
200
200
Lot 6 split
Lot 11 moved
150
Available
capacity
Lot
6
100
Lot
1
50
Lot
16
4 5
Period
(a)
Lot
2
Lot
7
Lot
9
Lot
11
Lot
12
Lot
15
Lot
4
Lot
3
Lot
5
Lot
8
Lot
10
4 5
Period
(b)
Lot
13
Lot
14
Lot
16
Figure 13.9
2/2/2016
54
Material Requirements Planning II
Once an MRP system is in place, inventory data can be

augmented by other useful information
Labour hours
Material costs
Capital costs
Virtually any resource
Such system is generally called MRP II or Material Resource

Planning
2/2/2016
55
Material Resource Planning
5
A.
Units (lead time 1 week)

Labour:: 10 hours each
Labour
Machine: 2 hours each
Payable: $0 each
B. Units (lead time 2 weeks,
2 each required)
Labour
Machine: 2 hours each
Payable: Raw material at $5 each
C. Units (lead time 4 weeks,
3 each required)
Labour
Machine: 1 hour each
Payable: Raw material at $10 each
Week
7
8
100
1,000
200
0
200
2,000
400
1,000
300
600
300
3,000
Table 13.4
2/2/2016
56
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
2/2/2016
57
MRP in Services
PRODUCT STRUCTURE TREE
Veal
picante
#10001
Helper one;
Work
Center #2
Cooked
linguini
#200002
Uncooked
linguini
#30004
Chef;
Work
Center #1
Prepared veal and

sauce #20003
Spinach
#20004
Asst. Chef;
Work
Center #3
Sauce
#30006
Veal
#30005
Figure 13.10
2/2/2016
58
MRP in Services
BILL OF MATERIALS
Part
Number
Description
Quantity
Unit of
Measure
Unit
cost
10001
Veal picante
Serving
20002
Cooked linguini
Serving
20003
Prepared veal and sauce
Serving
20004
Spinach
0.1
Bag
30004
Uncooked linguini
0.5
Pound
30005
Veal
Serving
2.15
30006
Sauce
Serving
0.80
2/2/2016
0.94
59
MRP in Services
BILL OF LABOUR FOR VEAL PICANTE
Labor Hours
Work Center
Operation
Labor Type
Setup Time
Run Time
Assemble dish Chef
.0069
.0041
Cook linguini
Helper one
.0005
.0022
Cook veal
and sauce
Assistant Chef
.0125
.0500
2/2/2016
60

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Supply Chain Management

Materials Requirement Planning

Indian Institute of Management

Computerized inventory control &

Schedules component items when they are