Material Requirement Planning

MRP
 Structure of the MRP System

Master Production
BOM
Schedule
MRP by Period Report

MRP by date report

Lead Times Planned order report

(Item Master File)
Purchase advice

Exception report

Inventory Data Exception report

MRP planning
programs
(computer and
software)
 Lot Sizing Rules

Lot-for-Lot
EOQ
Periodic Order Quantity
Fixed Order Quantity
Part Period Balancing
 Calculation Sheet

Week

1 2 3 4 5
Gross Requirements
Scheduled Receipts
On Hand
Net Requirements
Planned Receipts
Planned order releases
 MRP Example

Week
1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275
On Hand 650
Net Requirements
Planned Receipts
Planned order releases

Required safety stock = 100

Lead time 1 week
Complete the Materials Requirement Plan
 MRP Example

Week
1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275 0 0 0 0 0
On Hand 650 805 465 155 0 0
Net Requirements 0 0 0 375 410 380
Planned Receipts
Planned order releases
Bal Inv

Required safety stock = 100

Lead time 1 week
 MRP Example

Week
0 1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275 0 0 0 0 0
On Hand 650 805 465 155 100 100
Net Requirements 0 0 0 375 310 280
Planned Receipts 0 0 0 475 410 380
Planned order releases
Bal Inv 805 465 155 100 100 100

Required safety stock = 100

Lead time 1 week
 MRP Example

Week
0 1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275 0 0 0 0 0
On Hand 650 805 465 155 100 100
Net Requirements 0 0 0 375 310 280
Planned Receipts 0 0 0 475 410 380
Planned order releases - - - 475 410 380 -
Bal Inv 805 465 155 100 100 100

Required safety stock = 100

Lead time 1 week
 What you have just done is called Lot-for-Lot (LFL)
scheduling approach.
If the ordering cost is Rs. 500 and the holding cost
is Rs. 5 per week, what is the total cost of this
schedule ?
Week
0 1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275 0 0 0 0 0
On Hand 650 805 465 155 100 100
Net Requirements 0 0 0 375 310 280
Planned Receipts 0 0 0 475 410 380
Planned order releases - - - 475 410 380 -
Bal Inv 805 465 155 100 100 100
 Week
0 1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275 0 0 0 0 0
On Hand 650 805 465 155 100 100
Net Requirements 0 0 0 375 310 280
Planned Receipts 0 0 0 475 410 380
Planned order releases - - - 475 410 380 -
Bal Inv 805 465 155 100 100 100

Tot Ordering cost = No. of orders x ordering cost = 3 x 500

Tot Inventory cost = Balance Inv for each week x holding cost
= (805+465+155+100+100+100) x 5
 EOQ Approach

Co = 500, Ch = 5 x 6 = 30, Demand = 2090 – 275 – 650 = 1165

EOQ = (2 x Demand x Co / Ch)0.5 = 198
Week
0 1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275 0 0 0 0 0
On Hand 650 805 465 155 219 205
Net Requirements 0 0 0 375 191 175
198+198+198 198+198 198+198
Planned Receipts 0 0 0
= 594 = 396 = 396
Planned order releases - - - 594 396 396 -
Bal Inv 805 465 155 219 205 221

594 - 375 = 219

 Periodic Order Quantity (POQ)

Week
1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275
On Hand 650
Net Requirements
Planned Receipts
Planned order releases

Req Quantity = 2090 – 275 – 650 = 1165

EOQ = 198
No. of Ordering periods = 1165/198 = 5.88, round-off to 6
This means you have to order for a quantity equal to next
week requirement
 Periodic Order Quantity (POQ)

Week
0 1 2 3 4 5 6
Gross Requirements 120 340 310 530 410 380
Scheduled Receipts 275 0 0 0 0 0
On Hand 650 805 465 155 100 100
Net Requirements 0 0 0 375 310 280
Planned Receipts 0 0 0 475 410 380
Planned order releases - - - 475 410 380 -
Bal Inv 805 465 155 100 100 100

This has become equivalent to Lot-for-Lot approach.

However, this has happened for this particular example and
will not be the case every time.
 Example 2
Periodic Order Quantity (POQ)

Week
1 2 3 4 5 6 7 8 9 10
Gross
20 10 20 25 0 15 10 20 0 30
Req

Co = 150, Ch = 2 per week

 Fixed Order Quantity (FOQ)

Same order quantity every time an order is placed.

The lot size may be dictated by

Quantity discounts
Truck load capacity
Minimum purchase quantity
 Part Period Balancing (PPB)

The periods between orders and quantity per

order is not fixed.

A balance between ordering costs and holding

costs will decide the number of periods for which
to order.
 Part Period Balancing: Example

Week 1 2 3 4 5 6 7 8 9 10
Gross Req 50 0 40 90 110 0 30 40

Co = 160/order
Ch = 1/unit/week
 Part Period Balancing: Example

Week 1 2 3 4 5 6 7 8 9 10
Gross Req 50 0 40 90 110 0 30 40

Co = 160/order
Ch = 1/unit/week

Periods lot size Inventory H_Cost O_Cost TC/UNIT

3 50 0 0 160 3.20
3,4 50 0 0 160 3.20
3,4,5 90 40+40 80 160 2.67
3,4,5,6 180 130+130+90 350 160 2.83
 Part Period Balancing: Example

Week 1 2 3 4 5 6 7 8 9 10
Gross Req 50 0 40 90 110 0 30 40

Co = 160/order
Ch = 1/unit/week

Periods lot size Inventory H_Cost O_Cost TC/UNIT

6 90 0 0 160 1.78
6,7 200 110 110 160 1.35
6,7,8 200 110 110 160 1.35
6,7,8,9 230 140+30+30 200 160 1.57
 Part Period Balancing: Example

Week 1 2 3 4 5 6 7 8 9 10
Gross Req 50 0 40 90 110 0 30 40

Co = 160/order
Ch = 1/unit/week

Periods lot size Inventory H_Cost O_Cost TC/UNIT

9 30 0 0 160 5.33
9,10 70 40 40 160 2.86
 Example 2
Solve the same problem with PPB

Week
1 2 3 4 5 6 7 8 9 10
Gross
20 10 20 25 0 15 10 20 0 30
Req

Co = 150, Ch = 2 per week

Dealing with Uncertainty in MRP

There are several sources of uncertainty that we have ignored

so far. These include uncertainty in the quantity demanded,
quantity supplied (yield losses), and uncertainty in the lead
time.

Many MRP systems cope with uncertainty by Inflating lead

times, setting higher safety stock levels for end items with
higher randomness demand and items produced at bottleneck
operations.
QA
Long Lead times

There are many pressures to increase planned lead

times in an MRP system. MRP uses constant lead
times when, in fact, actual lead times vary
considerably. To compensate, planners typically
choose pessimistic estimates. Long lead times lead
to large work-in-process (WIP) inventories.
Capacity

A conventional MRP system does not include capacity

calculations. One way to address this problem is to make sure
that the MPS is capacity feasible.

Newer MRP systems do Capacity Requirement Planning (CRP).

CRP makes use of the bill of resources (BOR) and lead time
information (which may vary with quantity ordered) for each item
on the MPS.
The BOR specifies the number of hours required at each
critical resource to build a particular end item and its
components, and then aggregates the number of hours
required at each critical resource over the end items in the
MPS.
High Sensitivity

MRP is typically applied in a rolling horizon basis. As

customer orders firm up, and forecasts become better, a new
MPS is fed to MRP which produces updated planned order
releases that may be very different form the original. Even
small changes in the MPS can result in large changes in
planned order releases. For example a small decrease in
demand may cause a formerly feasible MRP plan to become
infeasible.
MRP II

MRP II works within a hierarchy that divides planning into

long-range planning, medium range planning, and short-
term control.

The additional functions of MRP II include Aggregate

planning, MPS, RCCP, MRP, CRP and scheduling.
 MRP II
APP
Change APP ?

Master production
RCCP schedule
Change master
Change requirements? production schedule?
MRP

Change capacity?
CRP

Realistic
No
Yes
Execute material plans

Scheduling
ERP

ERP attempts to be an integrated manufacturing system

by bringing together other functional areas such as
marketing and finance.
ERP
ERP Systems and Bolt-On modules

SAP is currently the leading provider of ERP systems. Many

companies such as i2 Technologies, and Manugistics have
developed bolt-on modules that run on top of ERP systems.

These companies address specific problems that are not solved

by ERP. For example, a better forecasting system or a finite-
capacity scheduler can be added (bolt-on) to SAP.

Lately SAP has developed many of the capabilities that were

formerly available only through bolt-on modules.