MATERIAL REQUIREMENT

PLANNING
Hierarchical Nature of Planning
Production Capacity Resource
Items Planning Planning Level

Product lines or Aggregate Resource

production requirements Plants
families
plan plan

Master Rough-cut Critical work

Individual
production capacity centers
products
schedule plan

Material Capacity All work

Components requirements requirements plan centers
plan

Shop floor Input/

Manufacturing Individual
schedule output
operations machines
control

Copyright 2006 John Wiley & Sons, Inc. 13-2

 Dealing with the Problem Complexity
through Decomposition
Corporate Strategy

Aggregate Unit Aggregate Planning

Demand (Plan. Hor.: 1 year, Time Unit: 1 month)

Capacity and Aggregate Production Plans

End Item (SKU) Master Production Scheduling

Demand (Plan. Hor.: a few months, Time Unit: 1 week)

SKU-level Production Plans

Manufacturing Materials Requirement Planning

and Procurement (Plan. Hor.: a few months, Time Unit: 1 week)
lead times
Component Production lots and due dates

Part process Shop floor-level Production Control

plans (Plan. Hor.: a day or a shift, Time Unit: real-time)
 At the operational level . .
1. The MPS is developed to generate a
sustainable Materials Requirement Planning
(MRP) system and to provide the
information for coordination with sales.
2. The MPS is a statement of planned future
output.
MATERIAL MANAGEMENT/
INVENTORY MANAGEMENT
1. STATISTICAL INVENTORY CONTROL:
independent item
2. METERIAL REQUIREMENT PLANNING
(MRP II): dependent item
 Definitions
• Inventory-A physical resource that a firm holds in
stock with the intent of selling it or transforming it
into a more valuable state.

• Inventory System- A set of policies and controls that

monitors levels of inventory and determines what
levels should be maintained, when stock should be
replenished, and how large orders should be
 Inventory
• Def. - A physical resource that a firm holds in stock
with the intent of selling it or transforming it into a
more valuable state.
• Raw Materials
• Works-in-Process
• Finished Goods
• Maintenance, Repair and Operating (MRO)
 Expensive Stuff
• The average carrying cost of inventory across
all mfg.. in the U.S. is 30-35% of its value.
• What does that mean?
• Savings from reduced inventory result in
increased profit.
 Zero Inventory?
• Reducing amounts of raw materials and purchased
parts and subassemblies by having suppliers deliver
them directly.

• Reducing the amount of works-in process by using

just-in-time production.

• Reducing the amount of finished goods by shipping

to markets as soon as possible.
Inventory Positions in the Supply Chain

Raw Works
Materials Finished Finished
in
Goods Goods
Process
in Field
 Reasons for Inventories
• Improve customer service
• Economies of purchasing
• Economies of production
• Transportation savings
• Hedge against future
• Unplanned shocks (labor strikes, natural disasters,
surges in demand, etc.)
• To maintain independence of supply chain
 Inventory and Value
• Remember this?
– Quality
– Speed
– Flexibility
– Cost
 Nature of Inventory: Adding Value through
Inventory
• Quality - inventory can be a “buffer” against poor quality;
conversely, low inventory levels may force high quality
• Speed - location of inventory has gigantic effect on speed
• Flexibility - location, level of anticipatory inventory both have
effects
• Cost - direct: purchasing, delivery, manufacturing
indirect: holding, stockout.
HR systems may promote this-3 year postings
 Nature of Inventory:
Functional Roles of Inventory
• Transit
• Buffer
• Seasonal
• Decoupling
• Speculative
• Lot Sizing or Cycle
• Mistakes
 Design of Inventory Mgmt. Systems: Macro
Issues
• Need for Finished Goods Inventories
– Need to satisfy internal or external customers?
– Can someone else in the value chain carry the inventory?
• Ownership of Inventories
• Specific Contents of Inventories
• Locations of Inventories
• Tracking
 How to Measure Inventory
• The Dilemma: closely monitor and control
inventories to keep them as low as possible while
providing acceptable customer service.
• Average Aggregate Inventory Value: how much of
the company’s total assets are invested in inventory?
• Ford:6.825 billion
• Sears: 4.039 billion
 Inventory Measures
• Weeks of Supply
– Ford: 3.51 weeks
– Sears: 9.2 weeks
• Inventory Turnover (Turns)
– Ford: 14.8 turns
– Sears: 5.7 turns
– GM: 8 turns
– Toyota: 35 turns
 Reasons Against Inventory
• Non-value added costs
• Opportunity cost
• Complacency
• Inventory deteriorates, becomes obsolete,
lost, stolen, etc.
 Inventory Costs
• Setup costs/Procurement costs;

• Holding costs/ carrying cost;

• Shortage costs/Out-of-stock costs

 Set up/Procurement Costs
• Order processing
• Shipping
• Handling
• Purchasing cost: c(x)= $100 + $5x
• Mfg. cost: c(x)=$1,000 + $10x
 Holding/Carrying Costs
• Capital (opportunity) costs
• Inventory risk costs
• Space costs
• Inventory service costs
 Shortage/Out-of-Stock Costs
• Lost sales cost
• Back-order cost
 Independent Demand
• Independent demand items are finished
products or parts that are shipped as end
items to customers.
• Forecasting plays a critical role
• Due to uncertainty- extra units must be
carried in inventory
 Dependent Demand
• Dependent demand items are raw materials,
component parts, or subassemblies that are
used to produce a finished product.
• MRP systems-
 Design of Inventory Mgmt. Systems: Micro
Issues

• Order Quantity/Lot size/ Q method

Economic Order Quantity
• Order Timing/periodic Review/P method
• Reorder Point
 Objectives of Inventory Control
• 1) Maximize the level of customer service by
avoiding understocking.
• 2) Promote efficiency in production and
purchasing by minimizing the cost of providing
an adequate level of customer service.
 Balance in Inventory Levels
• When should the company replenish its
inventory, or when should the company place
an order or manufacture a new lot?
• How much should the company order or
produce?
• Next: Economic Order Quantity
 Models for Inventory Management:
EOQ
• EOQ minimizes the sum of holding and setup costs
• Q = 2DCo/Ch
D = annual demand
Co = ordering/setup costs
Ch = cost of holding one unit of inventory
 Seatide
• EOQ = 2DCo/Ch
D = annual demand = 6,000
Co = ordering/setup costs = $60
Ch = cost of holding one unit of inventory
$3.00 x 24% = .72

720,000
2 x 6,000 x 60 .72 1,000
.72
 Marginal Analysis

Holding
Costs

Ordering
Costs

Units
 Reorder Point
• Quantity to which inventory is allowed to drop
before replenishment order is made

• Need to order EOQ at the Reorder Point:

ROP = D X LT
D = Demand rate per period
LT = lead time in periods
 Sawtooth Model
level of inventory average
inventory

units
Q

t time
 Q - System Inventory Control
• based on reorder point - When inventory is
depleted to ROP, order replenishment of
quantity EOQ.
 Order Quantities
• when demand is smooth and continuous, can
operate response-based system by
determining
– best quantity to replenish periodic demand (EOQ)
– frequency of replenishment (ROP)
• Reorder Point
 Planning for Uncertainty
• changing lead times
• changing demand
• Uncertainty creeps in:
– Plug in safety stock
Safety stock - allows manager to determine the
probability of stock levels - based on desired
customer service levels
 Inventory Model Under Uncertainty

reorder Qm
point

safety stock
time
 Models for Inventory Management:
Quantity Discount
• Basically EOQ with quantity discounts
• To solve:
1. Write out the total cost equation
2. Solve EOQ at highest price and no discounts
3. If Qmin falls in a range with a lower price, recalculate EOQ
assuming holding cost for that range. Call this Q2.
4. Evaluate the total cost equation at Q2 at the next highest
price break point.
OR Use a spreadsheet
 P-System
Periodic Review Method
• an alternative to ROP/Q-system control is periodic
review method
• Q-system - each stock item reordered at different
times - complex, no economies of scope or common
prod./transport runs
• P-system - inventory levels for multiple stock items
reviewed at same time - can be reordered together
• higher carrying costs - not optimum, but more
practical
 Using P-System
• audit inventory level at interval (T)
• quantity to place on order is difference
between max. quantity (M) and amount on
hand at time of review
• management task - set optimal T and M to
balance stock availability and cost
• In ABC analysis, which items would use P-
system???
 Types of Inventory Systems

• By Degree of Control required

– often use grouping method, such as ABC
 ABC Analysis
• Which items are C items? B items?
• Which item should we order ahead furthest?
• Which should we spend the most time on?
• Spend time and effort on A + B items
– carry small quantities
– review frequently
 ABC Analysis
• Manage C items by:
– carrying inventories
– concentrating with a few suppliers
– stockless buying
– review infrequently
 MRP II:

Manufacturing Resource Planning

&
Scheduling
 Materials Management
• A plant organizing function that assures a
predictable flow of components and other
inputs through a transformation process.
• It coordinates the activities of both the
internal and external factory
• What is needed When
• i.e. Inventory micro issues
 Development of MRP
• After WWII - D>>S
– Companies use quarterly ordering systems based on confirmed
orders
• WWII boom settles down D = S
– backlog of orders decreases
– quarterly systems become more based on forecasts
– In move from confirmed orders to forecasts, quarterly systems
become less and less accurate
• Wight, others develop MRP
– takes forecasts, breaks them down via dependent demand into
weekly schedules
 Prior to MRP
• Up to 1970s, extensive use of Q and P models
– why? Simple to use, limited information
requirements, “optional”
• Why move to MRP?
– problems with Q and P models
• high levels of inventory
• high stockouts
• poor customer services
– “Order launch & Expedite”
 Other Factors
• Major changes
– high cost of inventory
– increased availability of more powerful computers
– decreasing cost of computers
• MRP now supported by extensive body of
software
 Dependent Demand
• Demand for components driven by the
production schedule
• It is derived - not forecasted
• Consists of WIP and raw materials
• Lumpy- discrete, irregular quantities
• Concept of Parent/Component
• Time Bucket
 MRP and Dependent Demand
• Independent Demand
– Finished Goods
– independent demand in MPS
• Problem with Dependent Demand
– information generated
– challenge - generating 100% CSL
– past approach – Q, P
– new approach - MRP
 Remember This??
MPS Principles
• The MPS must be in concert with the production
plan
• The MPS must drive the entire materials
management system
• Include all known requirements in the
preparation of the MPS and the FAS
• Minimize the number of items needed to
adequately express the MPS and the FAS
 What is the MPS?
• Plan showing availability
• Build schedule
• Stated in BoM terms
 Remember this?
Keys to MPC
• A complete, current and accurate database
– one set of records
– high emphasis on data accuracy
– quick correction of error in db
– accessible to all who need data
 Issues Considered
• Capacity
– Maximum
– Effective
– Demonstrated
• Demand management
• Capacity management
– level
– chase
– mixed
• Requires coordination with marketing
 Nature of MRP
B ik e Level 0

F ra m e Seat B r a k e K it F ro n t W h e e l R ear W heel

Level 1

R im S pokes
Level 2

H oop W ir e
Level 3

• Use forecast to predict required amount of level 0 (end product)

• Use this number to determine number of lower level components needed
(dependent demand)
 Implementation of MRP

• Forecast becomes gross requirements for MRP system

• Break down gross requirements into time buckets
• Calculate net requirements - difference between units
required (i.e. gross requirements or derivation plus
orders for that period) and units expected to be
available in inventory
 Key inputs to MRP

• MPS - merges forecasts and production capacity

• BOM - gives components needed for each end product
in terms of part numbers
• Inventory Records - must be accurate, as MRP uses this
information as the basis of its calculations; should
design inventory system to ensure accuracy
• Order Status - use scheduled receipts to distinguish
those orders that have actually been released
• Planned Lead Times - gives the when information
 MRP Elements
• Gross Requirements
• On-Hand Inventory
– Allocations
• Scheduled Receipts
• Net Requirements
• Planned Order Releases
• Time-phasing
• Parent/Component
 MRP Elements
• Planning factors
• System nervousness
• Firm planning
• Explosion
• Time buckets
– Action bucket
• Rolling the Schedule
• Net Change vs. Regenerative MRP
 Advantages of MRP
• Forward looking when planning (visibility)
• Useful simulator
• Provides valid, credible priorities
– priorities reflect actual needs, not implied needs.
• Provides mangers with control over the execution
system
• Forms basis for building credible, valid formal system
 MRP Works Best When...
• End Products are Standardized
• Batch Production
• End product is moderately complex
• The end product is assembled from a set of
components and raw materials
 Limitations of MRP
• only looks at materials, ignores capacity, shop
floor conditions
• requires user discipline
• requires accurate information/data
• requires valid MPS
• not appropriate for all areas
– high volume production
– projects
 Capacity Requirements Planning

• Wait a second - just because MRP says produce X,

are we able to produce X?
– Need to evaluate the capacity to see if it can meet
plan
• Need all of MRP information plus:
1. How much capacity a process requires to make 1 unit
of a product
2. When does the process need the hours (time) of
capacity
 Types of MRP Systems
• MRP
• Closed Loop MRP
• MRP II
• Distribution Requirements Planning
• DRP II
• Enterprise Requirement Planning
 Reports
• Master Schedule
• Indented Bill of Materials
• BOM - Item Requirements
• Scheduled Receipts
• Planned Orders