6. Material Requirements Planning (MRP)

Homework problems: 2,6,7,8,9,13.

1. MRP Foundation

· Material requirements planning (MRP):· A computer-based information system that

translates master schedule requirements for end items into time-phased requirements for subassemblies, components, and raw materials.

· The MRP is designed to answer three questions:1. What is needed?

2. How much is needed?

3. When is it needed?

1. MRP Foundation

· Dependent demand· Demand for items that are subassemblies or

component parts to be used in the production of finished goods.

· Dependent demand tends to be sporadic or “lumpy”

· Large quantities are used at specific points in time with little or no usage at other times

1. MRP Foundation

What went wrong when EOQ is used to manage a dependent demand item ?

· Incorrect assumption of uniform, continuous demand

· Incorrect assumption on item independence

· Lack of Forward visibility

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Overview of MRP

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· Master Production Schedule (MPS)· Bill of Materials (BOM)· Inventory Records

MPR Inputs

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Product structure tree example

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· Inventory records/status data· 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· Changes due to stock receipts and withdrawals· Canceled orders and similar events

MRP Inputs: Inventory Records

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Week 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

MRP Record

Gross requirements•Total expected demandScheduled receipts•Open orders scheduled to arriveProjected Available•Expected inventory on hand at the beginning of each time period

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Week Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

MRP Record

Net requirements•Actual amount needed in each time periodPlanned-order receipts•Quantity expected to received at the beginning of the period offset by lead timePlanned-order releases•Planned amount to order in each time period

6-12

Resourceplanning

Sales and operationsplanning

Demandmanagement

Master productionscheduling

Detailed capacityplanning

Detailed materialplanning

Material andcapacity plans

Shop-floorsystems

Suppliersystems

Enterprise R

esource Planning (E

RP

) System

Front End

Engine

Back End

Manufacturing Planning and Control System

Time-phased requirement (MRP) records

Routing file

Inventory status data

Bills of material

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MPR: Development

· The MRP is based on the product structure tree diagram· Requirements are determined level by level, beginning

with the end item and working down the tree· The timing and quantity of each “parent” becomes the

basis for determining the timing and quantity of the children items directly below it.

· The “children” items then become the “parent” items for the next level, and so on

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MRP: Updating PAB

· PAB: projected available balance· SR: scheduled receipts· PR: planned order receipts· GR: gross requirements

PABt=PABt-1 + SRt + PRt - GRt

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Basic MRP Record

On hand

Period

1 2 3 4 5

Gross requirements 10 40 10

Scheduled receipts 50

Projected available balance (PAB) 4 54 44 44 4 44

Net requirements 6

Planned order receipts 50

Planned order releases 50

Lead time = 1 periodLot size = 50

A previously released order due in period 1

A unreleased order due in period 5

Requirements from all sources

Bill of Materials

The BOM shows the components and sub-assemblies required to produce one unit of product

Indented Bill of Materials

Finished item is not indented

Components and sub-assemblies are indented relative to their order of usage

Level 1 components

Level 1 sub-assemblies

Level 2 sub-assemblies

Indented BOM example

Sub-assemblies are represented by separate levels

Finished product is located at the top, components below

MRP Explosion

• Explosion–the process of translating product requirements into component part requirements– Considers existing inventories and scheduled receipts

• Calculating the quantities of all components needed to satisfy requirements for any given part.– Continued until all parts have been considered,

leading to exact requirements for all purchased and/or raw material parts

Gross and Net Requirements

• Gross requirements represent the total planned usage for the part

• Net requirements account for existing inventory and/or scheduled receipts

100 req’d – 25 inventory = 75 net req’d

75 req’d – 22 inventory – 25 sched. rec. = 28 net req’d

Net req’d for assembly becomes gross req’d for component

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Product Structure Tree & Low level coding

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X

B(2)

D(3)

E(4)

E

C

E(2) F(2)

Level 0

Level 1

Level 2

Level 3

· Low-level coding· Restructuring the bill of material so that multiple

occurrences of a component all coincide with the lowest level at which the component occurs

Low-Level Coding

Low Level Coding

14127 Rivet is a common part. It belongs to Level 2, not 1.

Level 0

Level 1

Level 3

Level 2

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· Lot-for-Lot (L4L) ordering· The order or run size is set equal to the

demand for that period· Minimizes investment in inventory· It results in variable order quantities· A new setup is required for each run

MPR Lot Sizing Rules (L4L)

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MPR Lot Sizing Rules (EOQ)

· Economic Order Quantity (EOQ)· Also called fixed order quantity (FOQ)· Can lead to minimum costs if usage of

item is fairly uniform· This may be the case for some lower-level

items that are common to different ‘parents’· Less appropriate for ‘lumpy demand’ items

because inventory remnants often result

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MPR Lot Sizing Rules (POQ)

· Fixed Period Ordering (POQ)· Provides coverage for some

predetermined number of periods· When an order is planned (i.e., planned

order receipts), it should be sufficient to cover the next P periods (e.g., p=3)

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Example MRP

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Example MRP: L-4-L ordering

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Example MRP: EOQ

• Gross to net explosion shows how much of each part is required, but not when

• Timing requires consideration of two factors– Lead times–how long does it take to obtain the

component or sub-assembly– Precedent relationships–the order in which parts

must be assembled

• MRP considers both factors when developing the plan

Lead Time Offsetting

• Two common approaches to scheduling exist– Front schedule–schedule each step as early as

possible. This approach is simple, but parts are scheduled (and finished) earlier than need be, thus increasing WIP inventory.

– Back schedule–schedule each step as late as possible. This approach will reduce WIP, minimize storage (and time) of completed parts, reserve flexibility (postpone the commitment or raw materials to specific products), but it requires accurate BOM data and lead time estimation.

Scheduling Logic

• MRP combines back scheduling and performs the gross requirements to net requirements explosion.– Reduced inventories– Minimized storage time

Scheduling Logic and MRP

Back Scheduling

Top handle assembly has the longest duration of any sub-assembly

Scoop assembly must be complete before final assembly can begin

Only when all sub-assemblies and components are available can final assembly begin

MRP RecordsPlanned order release for top handle assembly becomes gross requirement for top handle component and nail (note 2 nails required per assembly)

Lot-for-lot order policy exactly matches supply to net requirements

Fixed lot size order policy requires orders in multiples of lot size

• Processing frequency–recalculating all records and requirements is called regeneration– This is a computationally intensive process so it is often run in

the background and during periods of low system demand

• Net change approach only recalculates those records that have experienced changes

• Less frequent processing results in an out-of-date picture

• More frequent processing increases computer costs and may lead to system nervousness

MRP Technical Issues

Theoretically, MRP systems should not require safety stock

Variability may necessitate the strategic use of safety stock

A bottleneck process or one with varying scrap rates may cause shortages in downstream operations

Shortages may occur if orders are late or fabrication or assembly times are longer than expected

When lead times are variable, the concept of safety lead time is often used

Safety Lead Time (see Fig. 6.9)– Scheduling orders for arrival or completion

sufficiently ahead of their need that the probability of shortage is eliminated or significantly reduced

Safety Stock & Safety Lead Time

• Safety stock is buffer stock over and above the quantity needed to satisfy gross requirements– Used when quantity uncertainty is the issue

• Safety lead time changes both the release and due date of shop and/or purchase orders to provide a margin for error– Used when timing of orders is the issue– Safety lead time is not just an inflated lead time

Safety Stock & Safety Lead Time

• Pegging provides a link between demand (order releases, customer orders, etc.) and the gross requirements for parts– Pegging records include the specific part numbers

associated with a gross requirement– Pegging information can track the impact of a

problem (e.g. material shortage) back to the order(s) it will affect

Pegging

• Regeneration of the MRP records can lead to large numbers of planned order changes

• To avoid this, a planned order can be converted to a firm planned order (FPO)– An FPO is not the same as a scheduled delivery,

but can’t be changed by the MRP system– Temporarily overrides the MRP system to provide

stability or to solve problems

Firm Planned Orders

• Total amount of time included in MRP calculations– Longer planning horizon increases computational

requirements– Shorter planning horizon may result in less-

effective plans if significant future demand is not visible

– At a minimum, should cover the cumulative lead time for all finished goods items

Planning Horizon

• Scheduled receipts represent an actual commitment (purchase order, production order, etc.)

• Planned orders are only the current plan and can be changed more easily

• Scheduled receipts for production orders already have component materials assigned– Scheduled receipts do not impact gross requirements

• Planned order releases do not have component materials assigned– Planned order releases do impact gross requirements

Scheduled Receipts vs. Planned Order Releases

MRP Processing Example

Note: Component D is required by two parents.

MRP Processing Example

MRP Planner Tasks•Purchase orders•Shop floor (production) ordersRelease

•Change due dates of existing orders (when desirable)Reschedule•Set lot sizes and lead times•Adjust scrap allowances and safety stocksAnalyze and Update

•Identify errors and inconsistencies and eliminate their root causesReconcile

•Take action now to prevent future crisesIdentify Problems

•Adjust records and system parameters to prevent recurrenceSolve Shortages

•Identify system enhancements to improve performanceEnhance

Exception Codes

Separating the vital few from the trivial many

Part numbers with planned orders in

the immediate period

Orders with unsatisfactory

timing or quantity

Requirements that cannot be satisfied

within system parameters

(management input needed)

Bottom-Up Replanning

• Using pegging data to guide efforts to solve material shortages– Pegging data allows the planner to take action

only when actual customer orders are impacted

MRP System OutputPart number and description MRP system data

MRP planning data

Exception messages

MRP System Dynamics

MRP System Issues

Transactions during a period–

unexpected changes

Rescheduling–moving the due date of

an order to an earlier or later

date

Complex transactions–

inventory adjustments, service parts,

etc.

Procedural inadequacies–situations the system wasn’t

designed to handle

An MRP is not a static documentAs time goes by

Some orders get completed

Other orders are near completion

New orders will have been entered

Existing orders will have been alteredQuantity changes

Delays

Missed deliveries– See Figure 6.11,6.12,6.13

System Dynamics

• Effective use of an MRP system allows development of a forward-looking approach to managing material flows.

• The MRP system provides a coordinated set of linked product relationships, which permits decentralized decision making for individual part numbers.

• All decisions made to solve problems must be implemented within the system, and transactions must be processed to reflect the resultant changes.

• Effective use of exception messages allows attention to be focused on the “vital few” rather than the “trivial many.”

Principles

Period 1 2 3 4 5 6 7 8 9 10

Gross Requirements 71 46 49 55 52 47 51 48 56 51

Scheduled Receipts

Proj. Available Bal. 150

Planned Order Rel.

Item A; Lot Size = 150; LT = 1, SS = 0. Average Inventory = ?

10. XYZ Company

Item B; Lot Size = 150; LT = 1, SS = 0. Average Inventory = ?

Period 1 2 3 4 5 6 7 8 9 10

Gross Requirements 77 83 90 22 10 10 16 19 27 79

Scheduled Receipts

Proj. Available Bal. 150

Planned Order Rel.

Item A; Lot Size = 3 weeks supply (P=3); LT = 1, SS = 0. Average Inventory = ?

10. XYZ Company

Item B; Lot Size = 3 weeks supply (P=3); LT = 1, SS = 0. Average Inventory = ?

Period 1 2 3 4 5 6 7 8 9 10

Gross Requirements 71 46 49 55 52 47 51 48 56 51

Scheduled Receipts

Proj. Available Bal. 150

Planned Order Rel.

Period 1 2 3 4 5 6 7 8 9 10

Gross Requirements 77 83 90 22 10 10 16 19 27 79

Scheduled Receipts

Proj. Available Bal. 150

Planned Order Rel.

a. Component C (Q=40, LT=2, SS=0)

14. ABC Manufacturing Company

1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected Available Balance

Planned Order Release

b. Component C (Q=40, LT=2, SS=0)

1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected Available Balance

Planned Order Release