Material Requirement Planning

Manufacturing resource planning is a method for the effective planning of a

manufacturer's resources. MRP II is composed of several linked functions, such as
business planning, sales and operations planning, capacity requirements planning, and all
related support systems. The output from these MRP II functions can be integrated into
financial reports, such as the business plan, purchase commitment report, shipping
budget, and inventory projections. It has the capability of specifically addressing
operational planning and financial planning, and has simulation capability that allows its
users to conduct sensitivity analyses (answering "what if" questions).

The earliest form of manufacturing resource planning was known as material

requirements planning (MRP). This system was vastly improved upon until it no longer
resembled the original version. The newer version was so fundamentally different from
MRP, that a new term seemed appropriate. Oliver Wight coined the acronym MRP II for
manufacturing resource planning.

In order to best understand MRP II, one must have a basic understanding of MRP, so we
will begin with a look at MRP and then expand into MRP II.

MATERIAL REQUIREMENTS PLANNING

Material requirements planning (MRP) is a computer-based, time-phased system for
planning and controlling the production and inventory function of a firm from the
purchase of materials to the shipment of finished goods. All MRP systems are computer
based since the detail involved and the inherent burden of computation make manual use
prohibitive. MRP is time phased because it not only determines what and how much
needs to be made or purchased, but also when.

A material requirement planning first appeared in the early 1970s and was popularized by
a book of the same name by Joseph Orlicky. Its use was quickly heralded as the new
manufacturing panacea, but enthusiasm slowed somewhat when firms began to realize
the difficulty inherent in its implementation.

The MRP system is composed of three primary modules, all of which function as a form
of input. These are the master production schedule, the bill-of-materials, and the
inventory status file. Each module serves a unique purpose that is inter-related with the
purpose of the other modules, and produces several forms of usable output.
MASTER PRODUCTION SCHEDULE.

The master production schedule (MPS) is basically the production schedule for finished
goods. This schedule is usually derived from current orders, plus any forecast
requirements. The MPS is divided into units of time called "buckets." While any time
frame may be utilized, usually days or weeks is appropriate. The MPS is also said to be
the aggregate plan "disaggregated." In other words, the plan for goods to be produced in
aggregate is broken down into its individual units or finished goods.

The MPS is initially developed from firm customer orders or from forecasts of demand
before the MRP system begins to operate. The MPS is an input to the MRP system.
Designed to meet market demand, the MPS identifies the quantity of each and product
(end item) and when it needs to be produced during each future period in the production-
planning horizon.

THE MRP PROCESS.

The MRP logic starts at the MPS, where it learns the schedule for finished goods (how
many and when). It takes this information to the BOM where it "explodes" the gross
requirements for all component parts. The MRP package then takes its knowledge of the
gross requirements for all components parts to the inventory status file, where the on-
hand balances are listed. It then subtracts the on-hand balances and open orders from the
gross requirements for components yielding the net requirements for each component.

Of course, we now know not only how many components are needed but when they are
needed in order to complete the schedule for finished goods on time. By subtracting the
lead time from the due date for each part, we now see when an order must be placed for
each part so that it can be received in time to avoid a delay in the MPS. A manual version
of MRP for a part with requirements of 100 in period 3 and 250 in period 6 and with a
two-period lead time is shown in Figure 2.

Notice that in order for the firm to meet demand on time (the MPS), they must place an
order for 25 in Period 1 and an order for 200 in Period 4. The reader should be aware that
this is an overly simplified version of MRP, which does not include such relevant factors
as lot sizing and safety stock.

EXPANDING INTO MRP II

With MRP generating the material and schedule requirements necessary for meeting the
appropriate sales and inventory demands, more than the obvious manufacturing resources
for supporting the MRP plan was found to be needed. Financial resources would have to
be generated in varying amounts and timing. Also, the process would require varying
degrees of marketing resource support. Production, marketing, and finance would be
operating without complete knowledge or even regard for what the other functional areas
of the firm were doing.

In the early 1980s MRP was expanded into a much broader approach. This new approach,
manufacturing resource planning (MRP II), was an effort to expand the scope of
production resource planning and to involve other functional areas of the firm in the
planning process, most notably marketing and finance, but also engineering, personnel,
and purchasing. Incorporation of other functional areas allows all areas of the firm to
focus on a common set of goals. It also provides a means for generating a variety of
reports to help managers in varying functions monitor the process and make necessary
adjustments as the work progresses.

When finance knows which items will be purchased and when products will be delivered,
it can accurately project the firm's cash flows. In addition, personnel can project hiring or
layoff requirements, while marketing can keep track of up-to-the-minute changes in
delivery times, lead times, and so on. Cost accounting information is gathered,
engineering input is recorded, and a distribution requirement planning is performed.

An MRP II system also has a simulation capability that enables its users to conduct
sensitivity analyses or evaluate a variety of possible scenarios. The MRP II system can
simulate a certain decision's impact throughout the organization, and predict its results in
terms of customer orders, due dates, or other "what if" outcomes. Being able to answer
these "what if" questions provides a firmer grasp of available options and their potential
consequences.

As with MRP, MRP II requires a computer system for implementation because of its
complexity and relatively large scale. Pursuit of MRP or MRP II in a clerical fashion
would prove far too cumbersome to ever be useful.

In addition to its efficient performance of the data processing and file handling, a
computer also allows the system to run remarkably quick, providing near-immediate
results and reports when asked to simulate a decision.

CLASSES OF FIRMS USING MRP AND MRP II

MRP and MRP II users are classified by the degree to which they utilize the various
aspects of these systems. Class D companies have MRP working in their data processing
area, but utilize little more than the inventory status file and the master production
schedule, both of which may be poorly used and mismanaged. Typically, these firms are
not getting much return for the expense incurred by the system.

Class C firms use their MRP system as an inventory ordering technique but make little
use of its scheduling capabilities.

Class B companies utilize the basic MRP system (MPS, BOM, and Inventory file) with
the addition of capacity requirements planning and a shop floor control system. Class B
users have not incorporated purchasing into the system and do not have a management
team that uses the system to run the business, but rather see it as a production and
inventory control system.

Class A firms are said use the system in a closed loop mode. Their system consists of the
basic MRP system, plus capacity planning and control, shop floor control, and vendor
scheduling systems. In addition, their management uses the system to run the business.
The system provides the game plan for sales, finance, manufacturing, purchasing, and
engineering. Management then can use the system's report capability to monitor accuracy
in the BOM, the inventory status file, and routing, as well as monitor the attainment of
the MPS and capacity plans.

Class A firms have also tied in the financial system and have developed the system's
simulation capabilities to answer "what if" questions. Because everyone is using the same
numbers (e.g., finance and production), management has to work with only one set of
numbers to run the business.
Material requirements planning (MRP) has become a centerpiece for all manufacturing
systems. The key to successful production and operations management in a
manufacturing company is the balancing of requirements and capacities. It’s that simple
and yet very challenging.
To understand it is essential and to practice it can be a lot of fun.
Remember what you are trying to do: Meet the needs of your customers. How?
By having the product available when it is wanted. In production management, we do this
by knowing in advance what our requirements are now and in future and planning ahead
to have the capacity available.

To begin with we shall define MRP

Material requirements planning (MRP) a system of planning and scheduling the time-
phased materials requirement for production operations.

PLANNING FOR MATERIALS NEEDS

In recent years material requirements planning systems have replaced reactive inventory
systems in many organizations. Managers using reactive
systems ask,” What should I do now?” Whereas managers using planning systems look
ahead and ask.” What will I need in the future? How much and when?”
Improved customer service and other advantages come at a cost, however. They require a
system for accurate inventory and product buildup information. They also require a
realistic master production schedule (MPS) to specify when various quantities of end
items will be completed.

DEMAND DEPENDENCY
Demand dependency is an important consideration in choosing between reactive and
planning systems. Demand dependency is the degree to which the demand for some item
is associated with the demand for another item. With independent demand, demand for
one item is unrelated to the demand for others. In the dependent demand situation, if we
know the demand for one item, we can deduce the demand for one or more related items.

APPLING MRP AS A SCHEDULING AND ODERING SYSTEM

MRP is a system of planning and scheduling the time-phased materials requirements for
production operations. As such, it is geared toward meeting the end-item outputs
prescribed in the master production schedule.

MRP OBJCTIVES AND METHODS

MRP provides the following:

1. Inventory reduction: MRP determines how many of component is needed and when, in
order to meet the master schedule.
2. Reduction in production and delivery lead times: MRP identifies materials and
components quantities, timings, availabilities, and procurement and production actions
required to meet delivery dealings.
3. Realistic commitments: Realistic delivery promises can enhance customer satisfaction.
By using MRP, production can give marketing timely information about likely delivery
times to prospective customers.
4. Increased efficiency: MRP provides close coordination among various work centers as
products progress through them.

BILL OF MATERIALS (BOM)

The BOM identifies how each end product is manufactured, specifying all
subcomponents items, their sequence of buildup, their quantity in each finished unit, and
the work centers performing the buildup sequence.

The bill-of-materials is a file made up of bills-of-material (BOM). Each BOM is a

hierarchical listing of the type and number of parts needed to produce one unit of finished
goods. Other information, such as the routings (the route through the system that
individual parts take on the way to becoming a finished good), alternate routings, or
substitute materials may be also be contained with the BOM.

A tool known as a product structure tree is used to clarify the relationship among the
parts making up each unit of finished goods. A product structure tree for a rolling cart
might appear on a bill-of-material. This cart consists of a top that is pressed from a sheet
of steel; a frame formed from four steel bars; and a leg assembly consisting of four legs,
each with a caster attached. Each caster is made up of a wheel, a ball bearing, an axle,
and a caster frame.

The bill-of-material can be used to determine the gross number of component parts
needed to manufacturer a given number of finished goods. Since a gross number is
determined, safety stock can be reduced because component parts may be shared by any
number of finished goods (this is known as commonality).

The process of determining gross requirements of components is termed the "explosion"

process, or "exploding" the bill-of-material. Assuming we need 100 rolling carts, we can
use our example product structure tree to compute the gross requirements for each rolling
cart component. We can easily see that in order to produce 100 rolling carts, we would
need 100 tops, which would require 100 sheets of steel; 100 leg assemblies, which would
require 400 legs and 400 casters (requiring 400 wheels, 400 ball bearings, 400 axles, and
400 caster frames); and 100 frames, which would require 400 bars.

A BOM can be displayed in the following formats:

• A single-level BOM that displays the assembly or sub-assembly with only one
level of children. Thus it displays the components directly needed to make the
assembly or sub-assembly.
 • An indented BOM that displays the highest-level item closest to the left margin
and the components used in that item indented more to the right.
• modular bill of materials (modular BOM) is type of bill of materials (BOM)
and a critical element in defining the product structure of an end-item

Modular BOMs define the component materials, documents, parts and

engineering drawings needed to complete a sub-assembly. While the terms BOM
and modular BOM are most commonly used in association with physical
products, the concept can be used in a variety of industries (e.g. software, medical
records). Modular BOMs are used by modern information systems to serve a
variety of purposes, such as defining the components needed to produce a sub-
assembly, and providing cost information for each component and "rolled-up"
cost information for the overall sub-assembly.

For option-based, configurable products (e.g. automobiles, PCs) companies

needed to plan every combination and permutation of options to ensure they could
fulfill customer demands. With a modular BOM structure, companies can plan the
demand for each module independent of the end-item demand by estimating the
popularity of the module sub-assembly.

INVENTORY STATUS FILE

The MRP system must retain an up-to-date file of the inventory status of each item in the
product structure. This file provides accurate information about the availability of every
item controlled by the MRP system which can then maintain an accurate accounting of all
inventory transaction, both actual and planned.

THE MRP PROCESSING LOGIC

The MRP processing logic accepts the master schedule and determines the components
schedules for successively lower-level items of the product structures. It calculates for
each item in each product structure and for each time period (typically one week) in the
planning horizon how many of that item are needed (gross requirements), how many
units from inventory are already available, the net quantity that must be planned on
receiving in new shipments (planned order receipts), and when orders for the new
shipments must be placed (planned order releases) so that all materials arrive just when
needed.

THE MRP COMPUTATIONAL PROCEDURE

The MRP computational procedure uses the input information to calculate the current
records for each component and item.

INFORMATION PROCESSING SEQUENCE

The MRP processing logic is applied first to the high-level items (end products) in the
product structure, then to the items on the next lower level.
INDENTED BILL OF MATERIALS
To do its level-by-level calculations, the MRP processing logic obviously needs
information about an end item’s relationship to all its subcomponents.

PRODUCT EXPLOSION
To create a parent item we often need multiple units of a lower-level item.

LOW-LEVEL CODING
Often a single item is in the product structure of several end items, or it exists in several
levels of one product structure.

USING MRP OUTPUTS FOR MATERIALS DECISIONS

MRP merely indicates what actions are needed to meet the MPS goal; now management
must act to “make things happen”- to cause (control) the productive system to execute so
that management gets the results it wants.

KEEPING MRP CURRENT IN A CHANGING ENVIRONMENT

MRP is not state; it is responsive to new job orders from customers and current shop
conditions, as well as changes anticipated for the future.

1. Pegging: The process of tracing through the MRP records and all levels in the product
structure to identify how changes in the records of one component will affect the records
of other components.
2. Cycle counting: Counting on-hand inventories at regular intervals to verify inventory
quantities shown in the MRP
3. Regenerative method: A procedure, used at regular intervals, to update the MRP by
completely reprocessing the entire set of information and recreating the entire MRP
4. Time fence: A designated length of time that must pass without changing the MPS, to
stabilize the MRP system; afterward, the MPS is allowed to change.

LOT SIZING
The MRP system generates planned order releases, which trigger purchase orders for
outside suppliers or work orders for internal component production.

1. Lot-for-lot ordering: A lot sizing policy in which order quantity equals

Net requirements for the period.
2. Part-period method: A lot sizing policy in which order quantity varies according to a
comparison of holding versus ordering costs.

DETAILED CAPACITY PLANNING

Each time the MRP system is updated managers must ask whether shop capacity is
sufficient to implement the current plan. Detailed capacity planning (also called capacity
requirements planning) is a technique that addresses this question and it does so in more
detail than the rough-cut method. New information from MRP permits refinements that
were not possible at the rough-cut level.
A document that shows the routing of a component, including the work centers and an
operation time, through its production processes is called route sheet.
To visualize the time-phased capacity requirements, we first construct the operation
setback chart for the end item.

LIMITATIONS AND ADVANTAGES OF MRP

The limitations of MRP stem from the conditions that must be met before it can be used.
A computer is necessary; the product structure must be assembly oriented; bill of
materials and inventory status information must be assembled and computerized; and a
valid master schedule must be prepared. Another limitation has to do with data integrity.
Unreliable inventory and transactions data from the shop floor can ruin a well-planned
MRP system. Training personnel to keep accurate records is not an easy task, but it is
critical to successful MRP implementation. In general, the system must be believable,
accurate, and directly useful or else it will become an expensive ornament that is
bypassed in favor of informal, ad hoc methods.

The dynamic nature of the MRP system is a vital advantage. It reacts well to changing
conditions; in fact, it thrives on change. Changing conditions from the master schedule
for several periods into the future can affect not only the end item but also hundreds, even
thousands, of components. Because the production-inventory data system is
computerized, management can make a new
MRP computer run to revise production and procurement plans that react quickly to
changes in customer demands as reflected in the master schedule.

MRP USER EXPERIENCES

Some users reported implementation problems- lack of communication about
MRP within the company, lack of company expertise, and inadequate support from
marketing and manufacturing personnel – all of which were viewed as more severe than
computer hardware/software problems. When asked about the major problem in
implementing MRP in their firm, the respondents most frequently answered “education of
personnel” and “top management support.”
Production/inventory control managers rated the accuracy of information in their
production processes. These managers felt the least accurate information they had,
overall, was on capacity (and capacity planning), market forecasts, and shop floor
control. Their most accurate information was bill of materials records, followed by
master production schedule and inventory records.
Finally, users assessed the benefits of MRP. They cited greater inventory turnover,
shorter delivery lead time, better-kept delivery promises, and fewer adjustments in
internal production to compensate for unavailable materials, and fewer materials
expediters.
It is evident from the result of this study that MRP is an improvement over previous
production planning and control systems for many users. Its applications are growing as
operations managers continue to develop better methods for materials management.