SEC- C

Third topic

RESOURCE PLANNING

Aggregate Planning MRP (Bills of Materials and product structure)

What is Aggregate Planning?

Aggregate planning is the process of developing, analyzing, and maintaining a preliminary, approximate
schedule of the overall operations of an organization. The aggregate plan generally contains targeted
sales forecasts, production levels, inventory levels, and customer backlogs. This schedule is intended to
satisfy the demand forecast at a minimum cost. In simple terms, aggregate planning is an attempt to
balance capacity and demand in such a way that costs are minimized. The term "aggregate" is used
because planning at this level includes all resources "in the aggregate;" for example, as a product line or
family. Aggregate resources could be total number of workers, hours of machine time, or tons of raw
materials. Aggregate units of output could include gallons, feet, pounds of output, as well as aggregate
units appearing in service industries such as hours of service delivered, number of patients seen, etc.

Aggregate planning is considered to be intermediate-term (as opposed to long- or short-term) in nature.

Hence, most aggregate plans cover a period of three to 18 months.

Materials Requirement Planning (MRP)

Material Requirement Planning is a special technique to plan the requirements of materials for
production. For the manufacturing company to produce the end items to meet demands the availability
of sufficient production capacity must be coordinated with the availability of all raw materials and
purchased items from which, the end items are to be produced.

In other words, there is a need to manage the availability of dependent demand items from which the
products are made. Dependent demand items are the components, i.e., materials or purchased items,
fabricated parts or sub-assemblies that make up the end product.

MRP is a computer-based system in which the given MPS is exploded into the required amounts of raw
materials, parts and sub-assemblies needed to produce the end items in each time period (week or
month) of the planning horizon. The gross requirement of these materials is reduced to net
requirements by taking into account the materials that are in inventory or on order.

“Materials Requirement Planning (MRP) is a technique for determining the quantity and timing for the
acquisition of dependent demand items needed to satisfy master production schedule requirements.”
Objectives of Material Requirement Planning : The objectives of material requirement planning in
operations management are:

(a) It determines the quantity and timing of finished goods demanded.

(b) It determines the time phased requirements of the demand for materials, components and sub-
assemblies over a specified planning time horizon.

(c) It computes the inventories, work-in-process batch sizes and manufacturing and packing lead times.

(d) It controls inventory by ordering materials and components in relation to orders received rather than
ordering them from stock level point of view.

(e) It improves customer service by meeting delivery schedules promised and shortening the delivery
lead times.

(f) It reduces inventory cost by reducing inventory levels.

(g) It improves plant operating efficiency by better use of productive resources.

MRP System
Material Requirement Planning System Inputs:

Following are the basic three inputs of any MRP System:

a. Master Production Schedule (MPS): This is the schedule of the quantity and timing of all end products
to be produced over a specific planning horizon. The planning horizon should be long enough to cover
the cumulative lead times of all components that must be purchased or manufactured to meet the end
product requirement.
MPS is developed from customer’s orders or from forecasts of demand or both. MPS is the key input
which drives the MRP programme as it tells what the company intends to produce. The maximum length
of time that is planned in a MPS will depend on the company’s ability to forecast demand and its
requirements, but a one year span is usually common.

b. Bill of Material (BOM) File: A bill of material file, also known as product-structure file, is a
computerized file listing all finished products, the quantify of raw materials, parts, sub-assemblies and
assemblies in each product.

The MRP programme obtains information about the components needed to make an end product from
BOM file. A bill of material not only lists all the required parts but also is structured to reflect the
sequence of steps required to produce the end product. The BOM has a series of levels, each of which
represents a stage in the manufacture of the end product. The highest level or zero level of BOM
represents the end product or the finished goods. The next lower level might represent the sub-
assemblies that are combined to make the final assembly.

The next lower level might represent the parts needed to make the sub-assemblies and the bottom
most level might represent the raw material from which the parts are made. Each component at any
level of the BOM is identified by a unique part number. Determining all the lower-level components
needed to make a finished product is called ‘exploding the requirements of the bill of materials.
c. Inventory Status File:

This file contains important information such as what items should be ordered and orders should be
released. The file gives the complete and up-to-date information on the hand quantities, gross
requirements, scheduled receipts and planned order releases for the item. It also tells about lot sizes,
lead times, safety stock level, etc.

The gross requirements are total needs from all resources. Whereas the net requirements are ‘net’ after
allowing for available inventory and scheduled receipt. Schedule receipts are quantities for which order
has already been placed with vendor and in-house shop.

Planned receipts are quantities that will be order on a vendor or in-house shop. Planned order release
indicates the quantity and date to initiate the purchase so that inventory will be received on schedule
after the lead time offset.

The inventory status file keeps the data about the projected use and receipts of each item and
determines the amount of inventory that will be available in each time period. If the projected available
inventory is not sufficient to meet the requirement in a period, the MRP program will recommend that
item to be ordered.

MRP System Outputs: The outputs of any MRP System are:

a. Planned order schedule which is a plan of the quantity of each material to be ordered in each time
period. The order may be purchase order on the suppliers or production orders for parts or sub-
assemblies on production departments.

b. Changes in planned orders (reschedule notices).

c. Planning reports like inventory forecast, purchase commitment reports, stock-out incidences, etc.

d. To project capacity requirements.

Benefits of MRP:

a. Inventory: MRP will substantially reduce inventory investment in dependent demand items while
improving operational efficiency by removing the risk of shortages associated with the EOQ. The MRP
system has numerous benefits over the fixed order size system (EOQ) for control of production items.

b. Purchases: MRP helps in generating purchase order and in case of any changes, reschedule notices
are also generated. These reports facilitate the purchase department in listing out the priority items and
making them available in time.

c. Planning, Engineering and Schedule: MRP plans orders for purchasing and shop scheduling for the
quantity of items that must be available in each time period to produce the end items. The orders are
planned for enough ahead to allow adequate time for scheduled completion of the final product without
having material waiting unnecessarily for entry into a particular stage of the production process.

d. Production: MRP can improve flow of work, thereby reducing intermittent delays and reducing the
manufacturing cycle time for the jobs.

e. Sales: As one of the functions of MRP is to report the changes in demand, it improves the company’s
ability to react to changes in customer orders, improves customer services by helping production meet
assembly dates and helps to reduce delivery lead times.