14-1

Material Requirements Planning Material Requirements Planning (MRP)(MRP)

Class Agenda: Lecture - 60 MinutesBreak - 15 MinutesProblem Solutions - 60 MinutesBreak - 15 MinutesCase Review - 45 Minutes

14-2

Requirements for Effective Use of Dependent Requirements for Effective Use of Dependent Demand Inventory ModelsDemand Inventory Models

Effective use of dependent demand inventory models requires that the operations manager know the: master production schedule specifications or bills-of-material inventory availability purchase orders outstanding lead times

14-3

The Planning ProcessThe Planning ProcessProduction Plan

Execute MaterialPlans

Master ProductionSchedule

MaterialRequirements

Plan

CapacityRequirements

Plan

Execute CapacityPlans

Realistic??No

Yes

14-4

List of components & quantities needed to make product

Provides product structure (tree) Parents: Items above given level Children: Items below given level

Shows low-level coding Lowest level in structure item occurs Top level is 0; next level is 1 etc.

Bill-of-MaterialBill-of-Material

14-5

Bicycle(1)P/N 1000

Handle Bars (1)P/N 1001

Frame Assembly (1)P/N 1002

Wheels (2)P/N 1003

Frame (1)P/N 1004

Bill-of-MaterialBill-of-Material Product Structure Tree Product Structure Tree

14-6

Manufacturing computer information system Determines quantity & timing of dependent

demand items

Material Requirements Planning Material Requirements Planning (MRP)(MRP)

14-7

Structure of the MRP SystemStructure of the MRP System

MRP by period report

MRP by date report

Planned orders report

Purchase requirements

Exception reports

MRPPrograms

Master ProductionSchedule

BOM

Lead Times

(Item Master File)

(Bill-of-Material)

Inventory Data

Purchasing data

14-8

Forecast &Firm Orders

MaterialRequirements

Planning

AggregateProductionPlanning

ResourceAvailability

MasterProductionScheduling

ShopFloor

Schedules

CapacityRequirements

PlanningRealistic?

No, modify CRP, MRP, or MPSNo, modify CRP, MRP, or MPS

YesYes

MRP and The Production Planning MRP and The Production Planning ProcessProcess

14-9

Shows items to be produced End item, customer order, module

Derived from aggregate plan

Master Production ScheduleMaster Production Schedule

14-10

Derivation of Master ScheduleDerivation of Master Schedule

Therefore, these are the gross

requirements for B10 40+10 = 50 40 50 20 15+30

= 45

1 2 3 4 5 6 7 8Periods

Gross requirements: B

Periods

10 101 2 3

Master schedule for S sold directly

40 50 15

A

CB

5 6 7 8 9 10 11

Lead time = 4 for AMaster schedule for A

40 20 30

S

B C

8 9 10 1211 13

Lead time = 6 for SMaster schedule for S

14-11

MRP DynamicsMRP Dynamics Supports “replanning”

Problem with system “nervousness”

“Time fence” - allows a segment of the master schedule to be designated as “not to be rescheduled”

“Pegging” - tracing upward in the bill-of-materials from the component to the parent item

That a manager can react to changes, doesn’t mean he/she should

14-12

MRP and JITMRP and JIT

MRP - a planning and scheduling technique with fixed lead times

JIT - a way to move material expeditiously Integrating the two:

Small bucket approach and back flushing Balanced flow approach

14-13

Lot-Sizing TechniquesLot-Sizing Techniques

Lot-for-lot - Order exactly what is needed.

Economic Order Quantity - One order quantity.

Part Period Balancing - Allow the order quantity to vary.

14-14

Order QuantityOrder Quantity

Annual CostAnnual Cost

Holding Cost Curve

Holding Cost CurveTotal Cost Curve

Total Cost Curve

Order (Setup) Cost CurveOrder (Setup) Cost Curve

Optimal Optimal Order Quantity (Q*)Order Quantity (Q*)

EOQ ModelEOQ ModelHow Much to Order?How Much to Order?

14-15

Optimal Order Quantity

Expected Number of Orders

Expected Time Between Orders Working Days / Year

Working Days / Year

= =× ×

= =

= =

=

= ×

Q*D SH

NDQ*

TN

dD

ROP d L

2

DD = Demand per year = Demand per year

SS = Setup (order) cost per order = Setup (order) cost per order

HH = Holding (carrying) cost = Holding (carrying) cost

dd = Demand per day = Demand per day

LL = Lead time in days = Lead time in days

EOQ Model EquationsEOQ Model Equations

14-16

EOQ ModelEOQ ModelWhen To OrderWhen To Order

Reorder Reorder Point Point (ROP)(ROP)

TimeTime

Inventory LevelInventory Level

AverageAverageInventory Inventory

(Q*/2)(Q*/2)

Lead TimeLead Time

Optimal Optimal Order Order QuantityQuantity(Q*)(Q*)

14-17

Part Period BalancingPart Period Balancing

• Allows the order quantity to vary to cover future requirements while balancing setup and holding costs.

• Calculates the Economic Part Period (EPP) - The period of time when the ratio of setup cost to holding cost is equal.

14-18

Extensions of MRPExtensions of MRP Closed loop MRP

- Feedback to Capacity plan, MPS

Capacity planning - load reports- Reported resource requirement in a work center.

MRP II - Material Resource Planning- Considers other resources like labor or capital

Enterprise Resource Planning- Connects all functional areas of the business

14-19

MRP in ServicesMRP in Services

Can be used when demand for service or service items is directly related to or derived from demand for other services restaurant - rolls required for each meal hospitals - implements for surgery

14-20

Distribution Resource PlanningDistribution Resource Planning

DRP requires: Gross requirements, which are the same as expected

demand or sales forecasts Minimum levels of inventory to meet customer service

levels Accurate lead times Definition of the distribution structure

14-21

Chapter 14 Problems

14.1a - Product Structure

Alpha

F(2)D(3)

14-22

51 2 3 4

Alpha

F

D

14.1b - Time Phased Product Structure

= Order or start date

6

14-23

14.1c - Gross Requirements Plan

1 2 3 4 5 6A Required 10Work Order Release 10

D Required 30D Order Release 30

F Required 20F Order Release 20

14-24

14.2 - Net Materials Plan

Lead Time Onhand Item ID 1 2 3 4 5 61 2 Alpha Gross Req 10

Sched RecProj On-hand 2 2 2 2 2 2Net Req 8Planned Rec. 8Planned Orders 8

1 4 D Gross Req 24Sched RecProj On-hand 4 4 4 4 4Net Req 20Planned Rec.Planned Orders 20

2 0 F Gross Req 16Sched RecProj On-handNet Req 16Planned Rec.Planned Orders 16

14-25

14.3a - Product Structure

S

T (1) U (2)

W (2)V (1)X (1) Z (3)Y (2)

Parent

Parent & ComponentParent & Component

All Components

14-26

61 2 3 5

S

T

U

14.3b - Time Phased Product Structure

= Order or start date

7

W

V

4

Y

Z

14-27

14.4 - Time Phased Product Structure

1 2 3 4 5 6 7S Required 100Work Order Release 100

T Required 100T Order Release 100

U Required 200U Order Release 200

V Required 100V Order Release 100

W Required 200W Order Release 200

X Required 100X Order Release 100

Y Required 400Y Order Release 400

Z Required 600Z Order Release 600

14-28

14.5 - Net Material Requirements

Lead Time Onhand Item ID 1 2 3 4 5 6 7

2 20 S Gross Req 100Sched RecProj On-hand 20 20 20 20 20 20 20Net Req 80Planned Rec.Planned Orders 80

1 20 T Gross Req 80Sched RecProj On-hand 20 20 20 20 20Net Req 60Planned Rec.Planned Orders 60

2 40 U Gross Req 160Sched RecProj On-hand 40 40 40 40 40Net Req 120Planned Rec.Planned Orders 120

14-29

14.5 - Continued

Lead Time Onhand Item ID 1 2 3 4 5 6

1 20 T Gross Req 80Sched RecProj On-hand 20 20 20 20 20Net Req 60Planned Rec.Planned Orders 60

2 30 V Gross Req 60Sched RecProj On-hand 30 30 30 30Net Req 30Planned Rec.Planned Orders 30

3 30 W Gross Req 120Sched RecProj On-hand 30 30 30 30Net Req 90Planned Rec.Planned Orders 90

1 25 X Gross Req 60Sched RecProj On-hand 25 25 25 25Net Req 35Planned Rec.Planned Orders 35

14-30

Lead Time Onhand Item ID 1 2 3 4 5 6

2 40 U Gross Req 160Sched RecProj On-hand 40 40 40 40 40Net Req 120Planned Rec.Planned Orders 120

2 240 Y Gross Req 240Sched RecProj On-hand 240 240 240Net Req 0Planned Rec.Planned Orders

1 40 Z Gross Req 360Sched RecProj On-hand 40 40 40Net Req 320Planned Rec.Planned Orders 320

14.5 - Continued

14-31

14.20 - EOQ

EOQ = sqr root of 2(demand)(setup cost) / carrying cost

= sqr root of (2)*275*(50) / .25 * 10

= 105

Set up cost = 3 * 50 = $150Inventory cost = (630) * .25 = $157.5

Total = $307.5

This Week 1 2 3 4 5 6 7 8 9 10

Gross Requirments 35 30 45 0 10 40 30 0 30 55Ending Inventory 0 70 40 -5 100 90 50 20 125 95 40Net RequirmentsPlanned Order Rec. 105 105 105Planned Orders 105 105 105

Reorder Point = 275/10 = 27.5 Units

14-32

14.20 - Lot for Lot

Set up cost = 8 * 50 = $400Inventory cost = 0

Total = $400

This Week 1 2 3 4 5 6 7 8 9 10

Gross Requirments 35 30 45 0 10 40 30 0 30 55Projected on Hand 0 0 0 0 0 0 0 0 0 0Net Requirments 35 30 45 0 10 40 30 0 30 55Planned Order Rec. 35 30 45 0 10 40 30 0 30 55Planned Orders 35 30 45 0 10 40 30 0 30 55

14-33

14.20 - Part Period Balancing

Set up cost = 3 * 50 = $150Inventory cost = 280 * .25 = 70

Total = $220

1 2 3 4 5 6 7 8 9 10 11Gross Requirments 35 30 45 0 10 40 30 0 30 55Projected on Hand 85 55 10 10 0 60 30 30 0 0Net RequirmentsPlanned Order Rec. 120 100 55Planned Orders 120 100 55

Holding Units (HU) 30 90 0 40 0 30 0 90 0Cummulative HU 0 30 120 120 160 0 30 30 120 0

Assumption - No carrying cost occurs during the week the order is received.

Economic Part Period = a period of time when the ratio of setup cost to holding cost is equal. EPP = 50/.25 = 200.