Material Requirements Planning

(Chapter 14)

Alok Raj
PODS Area
Office: Room No 14, 2nd Floor, Library Building, Tel. 3439
Email: alokraj@xlri.ac.in
Material Requirements Planning

Forecasting

Workforce
Supply Chain support

Aggregate
Planning

Master
production
Inventory on hand
External Capacity

Scheduling
Material Requirements Planning

Months January February

Aggregate 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
Material Requirements Planning
❖ Material requirements planning (MRP): The logic
for determining the number of parts, components,
and materials needed to produce a product.
❖ It is for dependent demand.
● Dependent demand
● Independent demand

❖ MRP is more applicable in case of batch production

or assembly operations.
Material Requirements Planning

❖ Specifies what is to be made and when

❖ Must be in accordance with the aggregate production
plan
❖ Inputs from financial plans, customer demand,
engineering, labor availability, inventory
fluctuations, supplier performance
❖ As the process moves from planning to execution, each
step must be tested for feasibility
Bill of Materials (BOM)
❖ List of components, ingredients, and materials
needed to make product
❖ Provides product structure
✔ Item has at least one level below parents
✔ Item has at least one level above components
Product Structure
Tree
Level Bill of Quantity
materials
0 Chair 1
1 Leg assembly 1
2 Legs 2
2 Cross bar 1
1 Seat 1
1 Back assembly 1
2 Side rails 2
2 Cross bar 1
2 Back supports 3
BOM Example

Level
Product structure for “Awesome” (A)
0 A

1 B C
(2) (3)

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

3 D G D
(2) (1) (2)
BOM Example

For an order of 50 Awesome speaker kits

Part B: 2 x number of As = (2)(50) = 100

Part C: 3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
Part E: 2 x number of Bs
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 x number of Cs = (2)(150) = 300
Part G: 1 x number of Fs = (1)(300) = 300
Lead Times for
Components
► The time required to purchase, produce, or assemble
an item
► For production – the sum
of the move, setup, and COMPONENT LEAD TIME
A 1 week
assembly or run times
B 2 weeks
► For purchased items – C 1 week
the time between the D 1 week
recognition of a need E 2 weeks
and when it's available F 3 weeks
for production G 2 weeks
Time-Phased Product
Structure
Must have D and E
Start production of D
completed here so
production can begin
1 week on B
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 8
Time in
7
weeks
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"
Determining Gross
Requirements

❖ 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)
Determining Gross
Requirements
❖ 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
only one level in the BOM
Determining Gross
Requirements
Gross Material Requirements Plan for 50 Awesome Speaker Kits (As) with Order Release Dates Also Shown

WEEK
LEAD
1 2 3 4 5 6 7 8 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 weeks
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 weeks
Inventory records
❖ Includes information on the status of each item by time
period, called time buckets
● Information about
◻ Gross requirements
◻ Scheduled receipts
◻ Expected amount on hand

● Other details for each item such as

◻ Supplier
◻ Lead time
◻ Lot size policy
◻ Changes due to stock receipts and withdrawals
◻ Canceled orders and similar events
 MRP
Record
Week Number 1 2 3 4 5 6 Gross requirements(Gt)
• Total amount required for a particular item
Gross Scheduled receipts(St)
• Orders that have already been released and that
Requirements
are scheduled to arrive as of the beginning of the
period
Scheduled Projected Available balance(Pt)
Receipts • Amount of inventory expected as of the end of a
period.
Projected on Net requirements
Available • The amount needed when the projected available
balance balance plus the scheduled receipts in a period
are not sufficient to cover gross requirement
Net requirements Planned-order receipts(Pot)
• The amount of an order that is required to meet a
Planned-order- net requirement in the period
receipt Planned-order releases
• The planned order receipt offset by the lead time
Planned-order
release
 ITEM ON HAND ITEM O0N HAND

A 10 E 10

B 15 F 5

C 20 G 0

D 10

2 × number of As =
80

3 × number of As =
120
Net Requirements Plan

2 × number of Bs = 130
2 × number of Cs = 200

2 × number of Cs = 200

2 × number of Bs = 130
2 × number of Fs = 390

1 × number of Fs = 195
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 – on-hand inventory)
❖ The planned order receipt for Item A in week 8 is
40 units – 40 = 50 – 10
Determining Net Requirements
❖ 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
❖ 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
Determining Net Requirements

❖ The on-hand inventory record for Item B is updated

to reflect the use of the 15 items in inventory and
shows no on-hand inventory in week 8
❖ This is referred to as the Gross-to-Net calculation
and is the third basic function of the MRP
process
Lot Sizing Rules

❖ Lot-for-Lot (L4L) ordering

❖ Economic Order Quantity (EOQ)

❖ Periodic Order Quantity (POQ)

Lot-Sizing
Techniques
❖ Lot-for-lot technique orders just what is required
for production based on net requirements
► May not always be feasible
► If setup costs are high, lot-for-lot can be expensive
❖ Economic order quantity (EOQ)
► EOQ expects a known constant demand and MRP
systems often deal with unknown and variable demand
 Lot-Sizing
❖Techniques
Periodic order quantity (POQ) orders quantity needed
for a predetermined time period
► Interval = EOQ / average demand per period
► Order quantity set to cover the interval
► Order quantity recalculated at the time of the order release
► No extra inventory
 Lot-for-Lot (L4L)
ordering
LT = 1 0 1 2 3 4 5 6 7 8 9 10

Gross
35 30 40 0 10 40 30 0 30 55
Requirements
Scheduled
Receipts
Projected
35 35 0 0 0 0 0 0 0 0 0
Inventory

Net Requirements 0 30 40 0 10 40 30 0 30 55

Planned Order
30 40 10 40 30 30 55
Release

Holding costs=$1/unit/week, setup cost=$100;gross requirements average

per week 27; lead time=1 week

Holding cost =0; ordering cost=700;Total cost 700

 Economic Order Quantity (EOQ)

LT = 1 0 1 2 3 4 5 6 7 8 9 10

Gross
35 30 40 0 10 40 30 0 30 55
Requirements
Scheduled
Receipts
Projected 35
Inventory

Net Requirements

Planned Order
Release

Holding costs=$1/unit/week, setup cost=$100;gross requirements average

per week 27; lead time=1 week
 Periodic Order Quantity(POQ)
LT = 1 0 1 2 3 4 5 6 7 8 9 10

Gross
35 30 40 0 10 40 30 0 30 55
Requirements
Scheduled
Receipts
Projected 35
Inventory

Net Requirements

Planned Order
Release

Holding costs=$1/unit/week, setup cost=$100;gross requirements average

per week 27; lead time=1 week
Lot Sizing summary

Setup costs Holding costs Total

Lot for lot $700 $0 $700
Economic order quantity $400 $375 $775
Periodic order quantity $300 $195 $495
Problem
Consider the following data relevant to an MRP
lot-sizing problem
● Item cost per unit $25
● Set up cost per unit $25
● Inventory carrying cost per year 20.8%

1 2 3 4 5 6 7 8
105 80 130 50 0 200 125 100

● Use the lot sizing rules (lot for lot, EOQ, and Least unit
cost policy) and propose an MRP schedule under each
rule. Assume there is no beginning inventory