MRP

Learning Objectives
 Describe the conditions under which MRP
is most appropriate.
 Describe the inputs, outputs, and nature of
MRP processing.
 Explain how requirements in a master
production schedule are translated into
material requirements for lower-level items.
 Discuss the benefits and requirements of
MRP.
 Learning Objectives
 Explain how an MRP system is useful in
capacity requirements planning.
 Outline the potential benefits and some of
the difficulties users have encountered with
MRP.
 Describe MRP II and its benefits.
 Describe ERP, what it provides, and its
hidden costs.
 MRP

 Material requirements planning (MRP):

Computer-based information system that
translates master schedule requirements
for end items into time-phased
requirements for subassemblies,
components, and raw materials.
Time-phase based
• Subassemblies
End products MRP
• Components
• Raw materials
Independent and Dependent
Demand Independent Demand

A Dependent Demand

B(4) C(2)

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

Independent demand is uncertain.

Dependent demand is certain.
 Dependant Demand

 Dependent demand: Demand for

items that are subassemblies or
component parts to be used in
production of finished goods.
 Once the independent demand is
known, the dependent demand can be
determined.
 Demand

Demand
Demand

“Lumpy” demand
Stable demand

Time Time
Amount on hand

Amount on hand

Safety stock
Time Time
 Overview of MRP
MRP Inputs MRP Processing MRP Outputs

Changes
Order releases
Master
schedule Planned-order
schedules
Primary
reports Exception reports
Bill of Planning reports
materials MRP computer Secondary
Performance-
programs reports control
reports

Inventory
records Inventory
transaction
 MPR Inputs

 Master Production Schedule

 Time-phased plan specifying timing and
quantity of production for each end item.
 Material Requirement Planning Process
 Master Schedule

Master schedule: One of three primary

inputs in MRP; states which end
items are to be produced, when
these are needed, and in what
quantities.
Cumulative lead time: The sum of the
lead times that sequential phases of
a process require, from ordering of
parts or raw materials to completion
of final assembly.
 Planning Horizon

Assembly

Subassembly

Fabrication

Procurement

1 2 3 4 5 6 7 8 9 10

Time Period (weeks)

 Bill-of-Materials

Bill of materials (BOM): One of the three

primary inputs of MRP; a listing of all of the raw
materials, parts, subassemblies, and assemblies
needed to produce one unit of a product.
Product structure tree: Visual depiction of the
requirements in a bill of materials, where all
components are listed by levels.
Low-level coding: Restructuring the bill of
materials so that multiple occurrences of a
component all coincide with the lowest level the
component occurs
 Product Structure Tree
Level Chair
0

1 Leg Back
Assembly Seat Assembly

Cross Side Cross Back

2 Legs (2)
bar Rails (2) bar Supports (3)

Level
0 X X

1 B (2) C B (2) C

2 D (3) E E (2) F (2) D (3) E E (2) F (2)

3 E (4) E (4) E E (2)

 Inventory Records
 One of the three primary inputs in MRP
 Includes information on the status of
each item by time period
 Gross requirements
 Scheduled receipts
 Amount on hand
 Lead times
 Lot sizes
 And more …
 Inventory Requirements
 Net requirements:
Net Requirements = Gross Requirements
– Available Inventory

 Available Inventory:
Available Inventory = Projected on hand
– Safety stock
– Inventory allocated to
other items
 Assembly Time Chart
Procurement of
raw material D Fabrication
of part E
Subassembly A
Procurement of Final assembly
raw material F and inspection
Procurement of
part C

Procurement of
part H
Subassembly B

Procurement of Fabrication
raw material I of part G

1 2 3 4 5 6 7 8 9 10 11
 Time-Phased Product
Structure
Must have D and E
completed here so
Start production of D production can
begin on B
Lead time
1 week
D (2)
2 weeks to A 1 weeks
produce
B 2 weeks
B (2)
2 weeks C 1 weeks
E (2)
A D 1 weeks
2 weeks 1 week E 2 weeks
2 weeks
E (2)
1 week
F 3 weeks
G (1) C (3) G 2 weeks
3 weeks
F (2)
1 week
D (2)
| | | | | | | |

1 2 3 4 5 6 7 8
Time in weeks
 Gross Requirements Plan
Week
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
Order release date 150 1 week
E. Required date 200 300
Order release date 200 300 2 week
F. Required date 300
Order release date 300 3 weeks
D. Required date 600 200
Order release date 600 200 1 week
G. Required date 300
Order release date 300 2 week
Net Requirements Plan
Net Requirements Plan
 MRP Processing

 Gross requirements
 Schedule receipts
 Projected on hand
 Net requirements
 Planned-order receipts
 Planned-order releases
 MPR Processing
 Gross requirements
 Total expected demand
 Scheduled receipts
 Open orders scheduled to arrive
 Projected on hand
 Expected inventory on hand at the
beginning of each time period
 MPR Processing
 Net requirements
 Actual amount needed in each time period
 Planned-order receipts
 Quantity expected to be received at the
beginning of the period
 Offset by lead time
 Planned-order releases
 Planned amount to order in each time
period
 Lot-Sizing Techniques
 Lot-for-lot techniques order just what
is required for production based on
net requirements
 May not always be feasible
 If setup costs are high, costs may be
high as well
 Economic order quantity (EOQ)
 EOQ expects a known constant
demand and MRP systems often deal
with unknown and variable demand
 Lot-Sizing Techniques
 Part Period Balancing (PPB) looks at
future orders to determine most
economic lot size
 EPP = setup cost / holding cost
 Programming technique
 Assumes a finite time horizon
 Effective, but computationally
burdensome
 Lot-for-Lot Example
Week 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

Holding cost = $1/week; Setup cost = $100/times; Lead time = 1 week

 Lot-for-Lot Example
No on-hand inventory is carried through the system
Total holding cost
1
= $0
2 3 4 5 6 7 8 9 10
Gross
There are seven 35
requirements setups
30 for
40 this
0 item40in this
10 30 plan
0 30 55
Total setup cost = 7 x $100 = $700
Scheduled
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

Holding cost = $1/week; Setup cost = $100/times; Lead time = 1 week

 EOQ Lot Size Example
Week 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Holding cost = $1/week; Setup cost = $100/times; Lead time = 1 week

Average weekly gross requirements = 27; EOQ = 73 units
 EOQ Lot Size Example
Annual demand = 1,404
Total cost = setup cost + holding cost
1 2 3 4 5 6 7
Total cost = (1,404/73) x $100 + (73/2) x ($1 x852 weeks)
9 10

Total
Gross cost = $3,798 /year
35 30 40 0 10 40 30 0 30 55
requirements
Cost for 10 weeks = $3,798 x (10/52) = $730
Scheduled
receipts
Or
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Total
Net cost = setup0 cost
30
+ 0holding
0 7
cost
0 4 0 0 16
requirements
Total cost = 4 x $100 + 318 x ($1 /weeks)
Planned order
Total
receiptscost = $718
73 73 73 73

Planned order
73 73 73 73
releases

Holding cost = $1/week; Setup cost = $100/times; Lead time = 1 week

Average weekly gross requirements = 27; EOQ = 73 units
 PPB Example
1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 50 10 10 0 60 30 30 0
hand
Net
0 30 0 0 0 40 0 0 0 55
requirements
Planned order
80 100 55
receipts
Planned order
80 100 55
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

; EPP = 100 units
 Periods PPB Example
Trial Lot Size
(cumulative net Costs
Combined requirements) Part Periods Setup Holding Total
2 30 0
2, 3 70 1 2 40 =3 40 x41 5 6 7 8 9 10
2, 3, 4
Gross 70 40 = 40 x 1
35 30 40 0 10 40 30 0 30 55
2, 3, 4, 5
requirements 80 70 = 50 x 1 + 10 x 2 100 + 70 = 170
2, 3, 4, 5, 6
Scheduled 120 230 = 90 x 1 + 50 x 2
receipts + 40 x 1
Combine
Projected on periods 2 - 5 as this results in the Part Period
35 closest to the EPP
hand
6
Net 40 0
requirements
6, 7 70 30 = 30 x 1
6, 7, 8 order
Planned 70 30 = 30 x 1
6, 7, 8, 9
receipts 100 120 = 60 x 1 + 30 x 2 100 + 120 = 220
Planned order
Combine periods 6 - 9 as this results in the Part Period
releases closest to the EPP
10 55 0 100 + 0 = 100
Holding cost = $1/week;
Total cost Setup cost = 300
$100;+ 190 = 490
EPP = 100 units
 Lot-Sizing Summary
For these three examples

Lot-for-lot $700
EOQ $730
PPB $490

Wagner-Whitin would have yielded a plan

with a total cost of $455 for this example
 Example
1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 35 0 50 10 10 0 30 0 0 55
hand
Net
0 30 0 0 0 40 0 0 30 0
requirements
Planned order
80 70 85
receipts
Planned order
80 70 85
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

; EPP = 100 units
 Lot-Sizing Summary
 In theory, lot sizes should be recomputed
whenever there is a lot size or order
quantity change
 In practice, this results in system
nervousness and instability
 Lot-for-lot should be used whenever
economical
 Lot sizes can be modified to allow for
scrap, process constraints, and purchase
lots
 Lot-Sizing Summary

 Use lot-sizing with care as it can cause

considerable distortion of requirements
at lower levels of the BOM
 When setup costs are significant and
demand is reasonably smooth, PPB,
Wagner-Whitin, or EOQ should give
reasonable results
 Updating the System
 Regenerative system
 Updates MRP records periodically
 Net-change system
 Updates MPR records continuously
 MRP Primary Reports

 Planned orders - schedule indicating

the amount and timing of future orders.
 Order releases - Authorization for the
execution of planned orders.
 Changes - revisions of due dates or
order quantities, or cancellations of
orders.
 MRP Secondary Reports
 Performance-control reports
system evaluation, deviation, late
delivery, stockouts
 Planning reports
useful for forecasting future
inventory, assess future material
requirement
 Exception reports
late or overdue orders, excessive
scrap rate, requirement of non-
existing parts
 Material Checking &
Balancing
 Use for monitoring of amount of part and
product during processes
 Needs information to balance materials
Accumulative production planning or target
plan
BOM or Assembly diagram
 Normally periodic checked
 Material Checking &
Balancing
B C G
Assembly diagram
D
A E H I J K

F
Week
9 8 7 6 5 4 3 2 1 0
Accumulative production

Balancing chart
Target Plan

J F M A M J J A S O N D A B C D E F G H I J K
 Resource Requirements Profile

200 – Capacity exceeded 200 – Lot 6 “split”

in periods 4 & 6 Lot 11 moved

Standard labor hours

Standard labor hours

150 – Lot Lot Available 150 – Available

6 11 capacity Lot capacity
6
Lot
Lot Lot 11
Lot
100 – Lot 9 Lot 15
100 – Lot 9 Lot Lot
7 12 7 12 15
Lot Lot
Lot Lot Lot Lot
2 2
1 4 1 4
50 – Lot Lot
50 – Lot Lot
Lot 10 Lot 14 Lot Lot 10 Lot 14 Lot
Lot 13 16 Lot 13 16
Lot 8 Lot 8
3 3
– 5 – 5

1 2 3 4 5 6 7 8 1 2 3 4 5 6 7 8
Period Period
(a) (b)
 Smoothing Tactics
1. Overlapping
 Sends part of the work to following
operations before the entire lot is complete
 Reduces lead time
2. Operations splitting
 Sends the lot to two different machines for
the same operation
 Shorter throughput time but increased setup
costs
3. Lot splitting
 Breaking up the order into smaller lots and
running part ahead of schedule
 Other Considerations

 Safety Stock
 Lot sizing
 Lot-for-lot ordering
 Economic order quantity
 Fixed-period ordering
 MRP in Services

 Food catering service

 End item => catered food
 Dependent demand => ingredients for
each recipe, i.e. bill of materials
 Benefits of MRP

 Low levels of in-process inventories

 Ability to track material requirements
 Ability to evaluate capacity requirements
 Means of allocating production time
 Ability to easily determine inventory usage by
backflushing
 Backflushing: Exploding an end item’s bill of
materials to determine the quantities of the
components that were used to make the item.
 Requirements of MRP

 Computer and necessary software

 Accurate and up-to-date
 Master schedules
 Bills of materials
 Inventory records
 Integrity of data
 MRP II

 Expanded MRP with emphasis

placed on integration
 Financial planning
 Marketing
 Engineering
 Purchasing
 Manufacturing
 MRP II

Market Master
Finance Manufacturing production schedule
Demand

Adjust master schedule

Marketing
Production
plan MRP

Rough-cut Capacity
capacity planning planning
Adjust
production plan
Yes No Requirements No Yes
Problems? schedules Problems?
 ERP

 Enterprise resource planning (ERP):

 Next step in an evolution that began with
MPR and evolved into MRPII
 Integration of financial, manufacturing, and
human resources on a single computer
system.
 ERP Software
 ERP software provides a system to capture and
make data available in real time to decision
makers and other users in the organization
 Provides tools for planning and monitoring
various business processes
 Includes
 Production planning and scheduling
 Inventory management
 Product costing
 Distribution
 MRP in Services
 Service applications such as:
 Professional services
 Postal services
 Retail
 Banking
 Healthcare
 Higher education
 Engineering
 Logistical services
 Real estate
ERP Strategy Considerations
 High initial cost
 High cost to maintain
 Future upgrades
 Training