Operations Management II

Departamento de Organización de
Empresas y Marketing Dirección de Operaciones II- English teaching
Área de Organización de Empresas

SECTION 2: TACTICAL/OPERATIONAL
DECISIONS

Chapter 4.- Material Requirements Planning

 CHAPTER 4
MATERIAL REQUIREMENTS PLANNING (MRP)

4.1. Introduction
4.2. Dependent Inventory Model Requirements
4.2.1. Master Production Schedule (MPS)
4.2.2. Bills of Material
4.2.3. Lead Times for Each Component
4.3. MRP Structure
4.4. MRP in Services

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 4.1 Introduction
 Material Requirements Planning (MRP): a
dependent demand technique that uses bill-of-
material, inventory, expected receipts, and a master
production schedule to determine material
requirements
 Dependent demand: demand for one item is related
to the demand for another item
 Enterprise Resource Planning (ERP): information
system for identifying and planning the enterprise-
wide resources needed to take, make, ship, and
account for customer orders
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 4.2 Dependent Inventory Model
Requirements
 Dependent inventory models require:
 Master Production Schedule (MPS): what is to be made
and when
 Specifications or bill of material: materials and parts
required to make the product
 Inventory availability: what is in stock
 Purchase orders outstanding: what is on order
 Lead times: how long it takes to get various components

 Consistent with long-range strategy and work within

the resources allocated by earlier strategic decisions
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4.2.1. Master Production Schedule
(MPS)
 Specifies what is to be made and when
 Must be in accordance with the aggregate
production plan
 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
 The MPS is the result of the production
planning process
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4.2.1. 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

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4.2.1. Master Production
Schedule (MPS)
Months January February
Aggregate Production Plan 1,500 1,200
(shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(shows the specific type and
quantity of amplifier to be
produced
240 watt amplifier 100 100 100 100
150 watt amplifier 500 500 450 450
75 watt amplifier 300 100

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The Planning Process

8
The Planning Process
Production Marketing Finance
Capacity Customer Cash flow
Inventory demand

Procurement Human resources

Supplier Manpower
performance planning

Management Engineering
Return on Aggregate Design
investment production completion
Capital plan

Change
production
Master production plan?
schedule

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The Planning Process
Master production
schedule Change
master
Change production
requirements? Material schedule?
requirements plan
Change
capacity? Capacity
requirements plan

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

Execute
material plans

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4.2.2. Bills of Material
 Bills of Material (BOM): a listing of the
components, their description, and the quantity
of each required to make one unit of product
 It provides a product structure (tree):
 Items above any level are called parents;
 items below any level are called components or
children
 Low-Level Coding: is necessary when identical
items exist at various levels in the BOM. It
means that the item is coded at the lowest level
at which it occurs
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 Low-Level Coding
Level WRONG Level RIGHT
0 A 0 A

1 B(2) C(3) 1 B(2) C(3)

2 D(2) E(2) E(2) F(2) 2 E(2) E(2) F(2)

3 G(1) D(2) 3 D(2) G(1) D(2)

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 BOM Example
Speaker Kits, Inc., packages high-fidelity
components for mail order. Components for the top-
of-the-line speaker kit, “Awesome” (A), include 2
standard 12-inch speaker kits (B) and 3 speaker kits
with amp-boosters (C). Each B consists of 2
speakers (D) and 2 shipping boxes each with an
installation kit (E). Each of the three 300-watt stereo
kits (C) has 2 speaker boosters (F) and 2 installation
kits (E). Each speaker booster (F) includes 2
speakers (D) and 1 amp-booster (G). Given this
information, we can construct the following product
structure:
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 BOM Example
Level Product structure for “Awesome” (A)
0 A

1 B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/
amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and

3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws

Amp-booster

12” Speaker 12” Speaker

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 BOM Example
Level Product structure for “Awesome” (A)
0 A
Part B: 2 x number of As = (2)(50) = 100
Std. 12” Speaker300
kit w/
1 BPart
(2)
C:
Std. 12” 3 x number
Speaker kit of As = (3)(50)
C =
(3) amp-booster
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
2 Part E: E(2) 2 x number of Bs E(2) F(2) Std. 12” Speaker
+ 2 x number of Cs = (2)(100) + (2)(150) booster
= assembly
500
Part F: 2 x Packing
numberbox
ofandCs = (2)(150) = 300
3 D(2) Part G: 1installation
x numberkitofofFs =
wire, (1)(300)
G(1) = D(2) 300
bolts, and screws

Amp-booster

12” Speaker 12” Speaker

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4.2.3. Lead Times for Each
Component
 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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4.2.3. Lead Times for Each
Component
Must have D and E
Start production of D completed here so
production can
begin on B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |

1 2 3 4 5 6 7 8
Time in weeks 17
4.3. MRP Structure
 Gross material requirements plan:
A schedule that shows the total demand for an item
(prior to subtraction of on-hand inventory and
scheduled receipts) and (1)when it must be ordered
from suppliers, or (2)when production must be started
to meet its demand by a particular date
 It combines a MPS and the time-phased schedule
 It shows when an item must be ordered from
suppliers if there is no inventory on hand or when the
production of an item must be started to satisfy
demand for the finished product by a particular date
 Gross material requirements (GRi)
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 4.3. MRP Structure
Week
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
Order release date 150 1 week
E. Required date 200 300
Order release date 200 300 2 week
F. Required date 300
Order release date 300 3 weeks
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300
Order release date 300 2 week

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4.3. MRP Structure
 Net material requirements plan: the result of adjusting gross
requirements for inventory on hand and scheduled receipts
 Planned receipt: the quantity planned to be received at a future
date (PRi)
 Planned order receipt: the quantity of a planned order to be
received at a future date (PORi)
 Planned order release: the scheduled date for an order to be
released, or, when the order needs to be made. It needs to take into
account the lead time for each product or component to be delivered
or made and the date in which it needs to be received or made
(PORRi)
 Availability (Ai): real quantity in stock
Ai+1 = Ai + PRi + PORi -GRi
 Security Stock (SSi): inventory that has to be maintained to avoid
lack of inventory. This quantity cannot be used in the planning
process.

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 Net material requirements (NRi): is the result of adjusting the
gross material requirements with the available inventory and the
planned receipts

NRi= GRi - (Ai - SSi) - PRi

If the expression is [-], it means that the company does not need to
make an order and therefore NRi = 0

If the expression is [+], it means that the company needs to place

and order

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 Lot-sizing techniques
An MRP system is an excellent way to determine production schedules and
net requirements. However, whenever we have a net requirement, a
decision must be made about how much to order (lot-sizing decision)
Lot-sizing decision: the process of, of techniques used in, determining the
lot size
 Lot-for-lot: generates exactly what was required to meet the plan

Q = NRi

 Optimal Order quantity: we fix the order quantity using the optimal
order quantity model (see annex)

 Constant period: the lot is equal to the sum of the net material
requirements for the chosen period
 We can fix the interval between orders intuitively
 The interval between orders is chosen from a constant period basic model
(see annex)

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 Adjustments in the lot size:
After determining the lot size, sometimes that lot size may need to
be adjusted regarding some practical issues, for example:

 Multiples: Sometimes, because of cost issues, packaging or process

needs, the lots must be a multiple of certain number. Therefore, we
have to round up the obtained lot size to the closest multiple.

 Minimum and maximum: Sometimes there are some capacity

restrictions and we establish a minimum and a maximum quantity for
the lot size. With this technique we can avoid the risk of obsolescense
of a lot size too big or the high processing cost of small lots.

 Defective factor: sometimes we want to foresee the existence of

defective components in a lot with the following expression:
 PORRi = PORi/(1-%defective)

These adjustments can lead to an excess in the stock that may be used
for future needs.
 Example 1 Net Material Requirements Planning

Item On Hand Planned Lead Time

 Given the data in the Receipts
table, build the Net A 20 10 (t=8) 1
Material Requirements
B 15 10 (t=1) 2
Plan
C 20 1

 Note: the lead time is D 10 20 (t=1) 1

represented in weeks E 10 2

F 5 3

G 0 5 (t=3) 2

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 NET MATERIAL REQUIREMENTS PLAN FOR
PRODUCT (A)
– Data: Lot size = lot-for-lot; Security Stock= 20; Level Code = 0;
Item= A

WEEKS

A
1 2 3 4 5 6 7 8
Gross Requirements
50
Planned receipts 10

Availability 20 20 20 20 20 20 20 20 20

Net Requirements 40

Planned order receipt 40

Planned order release 40

– Data: Lot size = constant period = 2

Planned order receipt 40

Planned order release

40 25
 NET MATERIAL REQUIREMENTS PLAN FOR
PRODUCT (A)
– Data: Lot size = lot-for-lot; Security Stock= 10; Level Code = 1;
Item= B

WEEKS

B
1 2 3 4 5 6 7 8
Gross Requirements 80A

Planned receipts
10
Availability 15 15 25 25 25 25 25 25 10

Net Requirements 65

Planned order receipt 65

Planned order release 65

– Data: Lot size = constant period = 2

Planned order receipt 65

Planned order release 65

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 NET MATERIAL REQUIREMENTS PLAN FOR
PRODUCT (A)
– Data: Lot size = lot-for-lot; Security Stock = 0; Level Code = 1;
Item = C

WEEKS

C
1 2 3 4 5 6 7 8
Gross Requirements 120A

Planned receipts

Availability 20 20 20 20 20 20 20 20 0

Net Requirements 100

Planned order receipt 100

Planned order release 100

– Data: Lot Size = constant period = 2

Planned order receipt
100
Planned order release
100
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 NET MATERIAL REQUIREMENTS PLAN FOR
PRODUCT (A)
– Data: Lot size = lot-for-lot; Security Stock = 0; Level Code = 2;
Item = E

WEEKS

E
1 2 3 4 5 6 7 8
Gross Requirements 130B 200 C

Planned receipts

Availability
10 10 10 10 10 10 0 0 0
Net Requirements 120 200

Planned order receipt 120 200

Planned order release 120 200

– Data: Lot size = constant period = 2

Planned order receipt
320

Planned order release

320 28
 NET MATERIAL REQUIREMENTS PLAN FOR
PRODUCT (A)
– Data: Lot size = lot-for-lot; Security Stock = 0; Level Code = 2;
Item = F

WEEKS

F
1 2 3 4 5 6 7 8
Gross Requirements 200 C

Planned receipts

Availability 5 5 5 5 5 5 5 0 0

Net Requirements 195

Planned order receipt 195

Planned order release 195

– Data: Lot size = constant period = 2

Planned order receipt
195
Planned order release
195 29
 NET MATERIAL REQUIREMENTS PLAN FOR
PRODUCT (A)
– Data: Lot size = lot-for-lot; Security Stock = 15; Level Code = 3;
Item = D

WEEKS

D
1 2 3 4 5 6 7 8
Gross Requirements
390F 130B
Planned receipts
20

Availability
10 10 30 30 15 15 15 15 15
Net Requirements 375 130

Planned order receipt 375 130

Planned order release 375 130

– Data: Lot size = constant period = 2

Planned order receipt
375 130
Planned order release
375 130 30
 NET MATERIAL REQUIREMENTS PLAN FOR
PRODUCT (A)
– Data: Lot size = lot-for-lot; Security Stock = 0; Level Code = 3;
Item = G

WEEKS

G
1 2 3 4 5 6 7 8
Gross Requirements 195F

Planned receipts
5
Availability 0

Net Requirements 190

Planned order receipt 190

Planned order release

190

– Data: Lot size = constant period = 2

Planned order receipt
190
Planned order release
190
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Several schedules contributing to a Gross
Requirements Schedule for B
A S

B C B C
Master schedule
Lead time = 4 for A Lead time = 6 for S for B
Master schedule for A Master schedule for S sold directly

Periods 5 6 7 8 9 10 11 8 9 10 11 12 13 1 2 3
40 50 15 40 20 30 10 10

Periods 1 2 3 4 5 6 7 8
Therefore, these
40+10 15+30
Gross requirements: B 10 40 50 20 are the gross
=50 =45
requirements for B
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4.4 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: breads needed for each meal
 Hospitals: surgical instrument
 Hotels

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 Example 2
A company makes chairs as showed in the
B
picture.
D
The final product is a result of the assembly of
A E three components: A, B and C. B requires one
D and three E; C requires four F and four G.

Adapted from FERNÁNDEZ SÁNCHEZ, E.; VÁZQUEZ ORDÁS, C.J. ( 1994 ): Dirección de la Producción II. Métodos Operativos,
Cívitas, Madrid.
Master Production Schedule
DAY

1 2 3 4 5 6
CHAIR

400 250

Bills of Material
Data and on hand inventory

Item Lead Time (days) Security Availability Planned receipts

Stock
Chair 1 30 110
C 1 40 90
B 1 35
A 2 50
F 2 110
G 2 160
D 2 45 10 in t=3 & t= 4
E 2 90
Lot sizing method: lot-for-lot

With all this information, please, build the Net Material Requirements Plan
 Example 3
Gross material requirement plan:
Days

1 2 3 4 5 6
TIRES

3000 4000 3000 4000

We know that there are availability of 80 units, the security stock is 100
units, there is a planned receipt of 4020 un. for day 1 and the lead time
is 1 day. We also know that the order cost is Co = 2909 m.u. and the
holding cost is Ch = 0.6 m.u./un. and day.
With this information please, elaborate the net requirements plan,
knowing that the lot sizing technique used is the optimal order quantity
calculated with the optimal order quantity technique.

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Item = Tires; Level Code = 0; PRi= 0; Lot size = optimal order quantity; Security Stock =
100; On hand = 80; Planned receipt: 4020 in t=1

DAYS

Tires 1 2 3 4 5 6
Gross requirements 3.000 4.000 3.000 4.000

Planned receipts 4.020

Availability 80 80 1.100 1.100 1.120 2.140 2.160

Net requirements 3.000 1.980 1.960 0

Planned order receipts 4.020 4.020 4.020

Planned order release 4.020 4.020 4.020

CALCULATION OF THE OPTIMAL ORDER QUANTITY

Planning period: 6 days
Total demand during the planning period= ∑ NNi = (3.000+4.000+3.000+4.000)-(80-100)-4.020 =
10.000 un.
Co: 2.909 m.u./order
Ch : 0,6 m.u./un. and day

2 Co D
Q* = Q* =
2 x 2.909 x 10.000
= 4.020 uns.
Ch θ 0,6 x 6
 Example 4
Gross material requirement plan:
Days

1 2 3 4 5 6 7 8
TIRES

2.040 200 1.200 1.800 810

We know that there are availability of 90 units, the security stock is 40

units and the lead time is 1 day. We also know that the order cost is Co
= 1.500 m.u. and the holding cost is Ch = 1 m.u./un. and day.
With this information please, elaborate the net requirements plan,
knowing that the lot sizing technique used is the constant period
calculated with the constant period basic technique.

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 Item = Tires; Level Code = 0; PRi= 0; Required quantity = 6.050; Lot size = constant
period; Security Stock = 40; On hand = 90;

Days

Tires 1 2 3 4 5 6 7 8
Gross Requirements 2.040 200 1.200 1.800 810

Planned receipts

Availability 90 90 90 90 40 40 40 40 40

Net Requirements 1.990 200 1.200 1.800 810

Planned order receipts 2.190 3.000 810

Planned order release 2.190 3.000 810

CALCULATION OF THE CONSTANT PERIOD USING THE CONSTANT PERIOD BASIC METHOD:
Planning period: 8 days
Total demand during the planning period = Net requirements = 1.990 + 200 + 1.200 + 1.800 + 810
= 6.000
Co: 1.500 m.u.
Ch : 1 m.u./day
2 x 1.500 x 8
2 Co θ T= T=2
T= 1 x 6.000
Ch D 40
 Annex: Optimal order quantity model

 AVAILABLE DATA:
 Planning period: θ

 Total demand during the planning period: D

 Daily demand (rate of daily consumption): d

D
d= d ≡ cnst.
θ

 Co: Ordering cost (m.u./order)

 Ch : Holding cost (m.u. / un. and time)

2 × Co × D
Q*=
Ch × θ
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 Annex: Constant period basic model

 AVAILABLE DATA:
 Planning period: θ

 Total demand during the planning period: D

 Daily demand (rate of daily consumption): d

D
d= d ≡ cnst.
θ

 Co: Ordering cost (m.u./order)

 Ch : Holding cost (m.u. / un. and time)

2 Co θ
T=
Ch D
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