Material Requirements

Planning
Dr. Everette S. Gardner, Jr.
 End item
R

Time
LT LT

Component
R

Time
LT
Raw material

Time
LT

Order point system with dependent demand

MRP 2
End item
R

Time

Component

Time
Raw material

Time

The MRP approach

MRP 3
 The simultaneous probability
problem
• When components are ordered independently with an order point
system, the probability that all will be in stock at the same time is
much lower than the probabilities for individual components

• Computation:
Let Pn = Prob. that n components are
in stock simultaneously

Si = Prob. of stockout on one

order cycle for component i

Then
Pn = S1 x S2 x S3 … Sn

MRP 4
 The simultaneous probability
problem (cont.)

• Example:

End Item

1 2 3

S1 = .9 S2 = .9 S3 = .9

.729
P3 = .9 x .9 x .9 =

= Prob. that all 3 components will be available at any given time to

build the end item
MRP 5
Probabilities of simultaneous
availability of components
Number of Service level
component items 90% 95%
1 .900 .950
2 .810 .902
3 .729 .857
4 .656 .814
5 .590 .774
6 .531 .735
7 .478 .698
8 .430 .663
9 .387 .630
10 .348 .599
15 .206 .463
20 .121 .358
25 .071 .277
MRP 6
 Demand
forecasts and
customer orders

Aggregate
Product planning/
design master Inventory
changes scheduling transactions

Bill MRP Inventory

of system records
materials

Mfg. orders Capacity report

Purchase Performance/
orders exceptions

Detailed
Purchasing
scheduling
dept.
system

MRP inputs and outputs

MRP 7
 Product tree vs. indented parts list

• Product tree

A Level 0

B(2) C(4) Level 1

D(1) E(3) D(2) F(1) G(3) Level 2

MRP 8
 Product tree vs. indented parts list
(cont.)
• Indented parts list

● A
● B(2)
● D(1)
● E(3)
● C(4)
● D(2)
● F(1)
● G(3)

MRP 9
 Week
Lead
1 2 3 4 5 6 7 8 9 time

Gross Rqmts.
A 1
Planned order rls.
Gross Rqmts.
B 2
Planned order rls.
Gross Rqmts.
C 3
Planned order rls.
Gross Rqmts.
D 3
Planned order rls.
Gross Rqmts.
2
E Planned order rls.
Gross Rqmts.
3
F Planned order rls.
Gross Rqmts.
4
G Planned order rls.

Quiz: MRP plan to produce 10 units

of A — due in week 9
MRP 10
Problems in requirements
computations

• Product structure

• Recurring requirements within the planning

horizon

• Multilevel items

• Rescheduling open orders

MRP 11
Product structure

• Bills of material are hierarchical with distinct levels

• To compute requirements, always proceed down bill of

materials, processing all requirements at one level before
starting another

MRP 12
 Product structure (cont.)
• Example:
Level Inventory O.H.
Truck 0 0

A. Transmission (1) 1 2

B. Gearbox (1) 2 15

C. Gear (1) 3 7

D. Forging Blank (1) 4 46

Suppose we are to produce 100 trucks. What are the net

requirements for each component?
MRP 13
Recurrence of requirements within
the planning horizon
• The same item may be required for several different lots within
the planning horizon – always process one lot entirely, level by
level, before starting the next.

• Example: One lot of 12 trucks, followed by 2nd lot of 100

Lot 1 Lot 2
Level 1: Gross requirements 12 100

MRP 14
Multilevel items
The same item may appear at different levels on one or more BOMs –
result is multiple retrievals of same record to update system.

Examples:

1 X Y Z

2 A A

3 A

4 A

MRP 15
Multilevel items (cont.)
Solution: Low-level coding. Lowest level an item appears is coded
on inv. record. Processing delayed until that level reached.

1 X Y Z

A A A A
4

MRP 16
 Rescheduling open orders
• Tests for open order misalignment:
1. Are open orders scheduled for periods following the period in
which a net requirement appears?

2. Is an open order scheduled for a period in which gross

requirement ≤ inv. O. H. at end of preceding period?

3. Is lead-time sufficient?

MRP 17
 Rescheduling open orders (cont.)
• Example:
Week
1 2 3 4 5 6

Gross requirements 30 5 10 10 10

Scheduled receipts 20 20

On hand 27 -3 12 12 22 12 2

● Most MRP systems make such schedule changes automatically.

MRP 18
Tactical questions in MRP

• Regeneration vs. net change

• Lot sizing

• Safety stocks

MRP 19
 Regeneration vs. net change
• Regeneration
• Complete replanning of requirements and update of inventory
status for all items

• High data processing efficiency

• Usually initiated by weekly update of master schedule

• Net change
• Daily update based on inventory transactions

• More responsive to changing conditions

• Requires more discipline in file maintenance

MRP 20
 Lot sizing implications in MRP
• The load profiles at work centers in the system depend on the lot
sizing rules used

• Load profiles determine:

undertime / overtime
leadtimes

• Example:
Lot size Lot size
Pd. Demand Rule 1 Rule 2
1 5 5 20
2 15 15 0
3 15 15 20
4 5 5 0
(Assume 1 unit requires 1 machine hour.)
MRP 21
Lot sizing implications in MRP (cont.)

20 20
Machine hrs.

15 15

10 10

5 5

0 0
1 2 3 4 1 2 3 4

Load profile – Load profile –

Rule 1 Rule 2

MRP 22
Lot sizing techniques used in MRP
systems

• Lot-for-lot (L4L) – most used

• Economic order quantity (EOQ)

• Period order quantity (POQ)

MRP 23
Lot-for-lot (L4L) example

Period 1 2 3 4 5 6 7 8 9 Total
Net rqmts. 35 10 40 20 5 10 30 150
Planned order 35 10 40 20 5 10 30 150

(Assume Ø LT)

The L4L technique:

Minimizes carrying costs

Is certainly the best method for

- highly discontinuous demand
- expensive purchased items

MRP
MRP1.xls 24
EOQ example
Setup cost, S = $100
Unit price, C = $50
Holding costs, HR = .24 per annum
HP = .02 per period
Annual demand, D = 200
Q = (2DS / CHR)1/2 = 58
Period 1 2 3 4 5 6 7 8 9 10

Net rqmts. 35 10 40 20 5 10 30
Planned orders 58 58 58

Remnants 23 13 13 31 31 11 6 54 24 24

MRP 25
Period order quantity example
Technique:
1. Compute EOQ to determine number of orders per year
2. Divide number of periods in one year by number of orders to get
ordering interval

EOQ = 58
Number of periods in one year = 12
D = 200
200 / 58 = 3.4 (orders per year)
12 / 3.4 = 3.5 (ordering interval)

Period 1 2 3 4 5 6 7 8 9 Total
Net rqmts. 35 10 40 20 5 10 30 150
Planned orders 85 35 30

MRP 26
 Safety stocks in MRP systems
• Need for safety stocks:
• Variations in demand due to end-item forecast errors and
inventory errors
• Variations in supply – both lead-times and quantities

• Since demand is not random, traditional statistical

techniques do not apply.

• Options to provide safety factors:

• Fixed quantity buffer stocks
• Safety lead-time
• Increase gross requirements

MRP 27
Safety stocks in MRP systems (cont.)
• Fixed quantity buffer stocks
• Good rule of thumb: Set buffer = max. demand likely in a single
period
• Never generate order solely to replenish buffer stocks

• Safety time method

• Simply order early
• Distorts LTs and priorities
• Better than buffer stocks for items with infrequent demand
• Also better for purchases outside company

• Increase in gross requirements

• Should be done at end item level only so that
» Components available in matched sets
» Safety stocks are not duplicated at different levels
MRP 28