MATERIAL REQUIREMENTS

PLANNING (MRP)
(CHAPTER 12)
Planning Stages in Operation
MRP

▪ The logic for determining the number of raw

materials, component parts, sub-assemblies, and
assemblies needed to produce a product.

▪ It also provides a schedule specifying when each of

these materials, should be ordered and produced
 Independent vs. Dependent
Demand
▪ Independent demand
 Influenced by market conditions, i.e., originates outside the
system (say, cars, bicycles, refrigerators, washing machines)
 Uncertain

▪ Dependent demand
 Depends on demand of independent items, i.e., make up
independent demand products
 Known
 Example: Subassemblies, components parts
Independent vs. Dependent
Demand
 Key Differences: Dependent vs. Independent Demand

Attribute Dependent Independent

Demand Demand
Nature of Demand No uncertainty Uncertainty

Goal Meet requirements Meet demand for a

exactly targeted service
level
Service Level 100% 100% difficult
Demand Often lumpy Often continuous
occurrence
Estimation of By production By forecasting
demand planning
How much to Known with Estimate based on
order? certainty past consumption
Material Requirements Planning
(MRP)
▪ MRP is a technique that has been employed since
the 1960s.
▪ Joe Orlicky is known as the Father of MRP
▪ The use and application of MRP grew through the
1970s and 1980s as the power of computer
hardware and software increased.
▪ MRP gradually evolved into a broader system
called manufacturing resource planning (MRP II).
Material Requirements
Planning (MRP)
▪ MRP is a computerized inventory system
developed specifically to manage dependent
demand items

▪ MRP works backward from the due date using

lead times to determine when and how much to
order for
 Subassemblies, component parts & raw materials
 MRP
▪ MRP begins with a schedule for finished goods that is
converted into a schedule of requirements for
subassemblies, component parts and raw materials
needed to produce the finished items in the specified
time frame
▪ MRP designed to answer the following questions
• What is needed ?
• How much is needed?
• When is it needed ?
MRP
▪ MRP thus works with finished products, or end
items, and their constituent parts, called lower level
items
▪ According to one study, 80% of high performing
manufacturing plants have implemented MRP

▪ MRP works well for assembling complex discrete

products produced in batches
 Example: computers, consumer durables,
furniture, watches, trucks, generators, motors,
machine tools
Inputs and Outputs of MRP
Master Production Schedule

▪ A time-table that specifies what (end item)

is to be made and when
▪ Time period used for planning is called a
time bucket
▪ MPS shows how many of each individual
item must be completed each period
How does MPS differ from AP-
Motors
 1. Master Production
Schedule (MPS)
▪ Master production schedule states which end items are to be
produced, when these are needed, and in what quantities.
• Example: A master schedule for end item X:

Comes from: customer orders, forecasts and orders from

warehouses to build up seasonal inventories, and
interplant transfers
2. Bill of Materials (BOM)

▪ A document that lists the components, their description,

sequence in which the product is created and the
quantity of each required to make one unit of a product
 Thus relationship between end items and lower level
items is described by the BOM
▪ It depicts exactly how a firm makes the item in the
master schedule
▪ Extremely important to have BOM correct to have
accurate material estimates
2. Bill of Materials (BOM)

▪ The BOM file is often called the product

structure file or product tree because it
shows how a product is put together
 Assembly Diagram & Product
Structure Tree
Product Structure Tree of
Product X With Levels

(Highest)

(Lowest)

Visual description of the requirements in a bill of materials, where all

components are listed by levels
 A Product Structure Tree

Note: Restructuring the BOM so that multiple occurrences of a component all coincide
with the lowest level at which the component occurs
Partial Bill
of Materials for a Bicycle
3. Inventory Record

▪ Third input in MRP

▪ It tells us about the status of inventory of an item
at present, or in a given interval of time in the
coming future
 On hand
 On Order (scheduled receipt)
 Lead time
 Lot size
 Code
Outputs of MRP
(Primary Reports)
▪ Planned order receipt – A schedule indicating the quantity
that is planned to arrive at the beginning of a period

▪ Planned Order release – Authorizes the execution of

planned orders (work order + purchase order). To
determine planned order release, count backward from the
planned order receipt using the lead time

▪ Order changes report – Changes to planned order,

including revisions for due dates or order quantities and
cancellation of orders
 Outputs of MRP
(Secondary Reports)
▪ Performance control report – evaluate system
performance, deviations from plans, missed
deliveries, and stock outs
▪ Exception reports – attention to major
discrepancies such as late and overdue orders,
requirements for non-existence parts,
reporting errors
MRP Terminologies

▪ Gross Requirements: Total demand for an item during

each time period. For end items, these quantities are
shown in the master production schedule
 For components, these quantities are derived from the planned
order releases of their immediate parents

▪ Scheduled Receipts: Orders that have been released and

scheduled to be received from vendors by the beginning of
a period

▪ Projected On-Hand: The expected amount of inventory

that will be on hand at the beginning of each time period
(SR + Avl inv from last period)
 MRP Terminologies
▪ Net requirements: The actual amount needed in each time
period

▪ Planned Order Receipts: The quantity expected to be received

from a vendor or in-house shop at the beginning of the period
in which it is shown. It is the amount of an order that is required
to meet a net requirement in the period.
 Under lot-for-lot ordering, this quantity will equal net
requirements. Under lot-size ordering, this quantity
may exceed net requirements. Any excess is added to
available inventory in the next time period.
 MRP Terminologies

▪Planned Order Release: Indicates a planned

amount to order in the beginning of each time
period; equals planned-order receipts offset by
lead time.
Format of MRP

Week Number 0 1 2 3 4 5 6 7 8

Item:
Gross requirements

Scheduled receipts

Projected on hand

Net requirements

Planned-order
receipts
Planned-order
releases
MRP Explosion

▪ The MRP process of determining

requirements for lower level items
(subassemblies, components, raw
materials) based on the master production
schedule
Lot Sizing in MRP Systems

▪ Lot-for-Lot (L4L)
 Sets planned orders to exactly match
the net requirements. Eliminates
holding costs
▪ Economic order quantity (EOQ)
 Balances setup and holding costs
Lot Sizing in MRP Systems

▪ Least total cost (LTC)

 Balances carrying cost and setup cost for various lot
sizes, and selects the one where they are most
nearly equal

▪ Least unit cost (LUC)

 Adds ordering and inventory carrying costs for each
trial lot size and divides by number of units in each
lot size, picking the lot size with the lowest unit cost
Lot-for-Lot
MRP and Capacity Planning

▪ MRP , as it was originally introduced, considered

only materials. MRP does not compare the
planned orders to the available capacity. Most
MRP plans assume infinite loading; that is an
infinite amount of capacity is available, which is
not realistic. Individual machines or work centres
may have capacity shortages and backlogs of work
to be completed
▪ We therefore need capacity planning.
Two Approaches to Capacity
Planning
▪ Rough-cut capacity planning
 Uses the MPS (end item) as the source of product
demand information
 Capacity determination at critical work centres
▪ Capacity Requirement Planning
 Completed at the component level rather than at the
end item level
 Uses planned order release from MRP
 Capacity determination at all work centres
Focused on critical
work centres
 Capacity Requirements
Planning (CRP)
▪ CRP determines if all the work centres involved
have the capacity to implement the MRP plan.
▪ A load profile compares weekly loads needs
against a profile of actual capacity.
Workload for a Work Center
 Scheduled Workload for a Work
Center

190.3
161.5

137.8 128.8

2m/c * 2 shifts/day * 10 hours/shift * 5 days/week * 85%(m/c Util) * 0.95 (m/c efficiency) =161.5
hrs/week
Capacity Levelling

▪ Work Overtime
▪ Selecting an alternative work center
▪ Subcontract
▪ Scheduling part of work of week 11 into week 10
▪ Renegotiate due date
Safety Stock

▪ It would seem that an MRP inventory system should not require

safety stock. Practically, however, there may be exceptions.
Typically, SS built-into projected on-hand inventory
Why is safety stock necessary?
 Two types of uncertainties are prevalent
A. The quantity of components received (soln: SS)
I. Poor quality may result in quantity loss
II. Reliability in supplier may result in quantity
uncertainty
B. Timing of the receipts (solution: safety time)
A. Machine breakdowns, fluctuations in staffing
B. When supplier lead times are variable, safety time is
used in place of safety stock
 Updating MRP Schedules

▪ Updating MRP schedule is required because

 Customers may cancel or amend order
 Suppliers could default on supply
 Unexpected disruptions in manufacturing

▪ Two techniques of updating

 Regeneration, i.e., re plan the whole system (run MRP from scratch,
updated periodically, 100% replacement of the existing information)
 Net change
 Instead of running the entire MRP system, schedules of components
pertaining to portions where changes have happened are updated.
 Applies to sub-set of data as opposed to regeneration
MRP Dynamics - System
Nervousness
▪ MRP systems work best under conditions of reasonable
stability
▪ Frequent changes in an MRP system leads to major
changes in the order profiles for lower level
subassemblies or components creating havoc for
purchasing and production departments. This is called
system nervousness Tool helpful in reducing system
nervousness
 Time fences
Freezing the Master Schedule
 Time Fences in MPS

Period
1 2 3 4 5 6 7 8 9

“frozen” “slushy” “liquid”

(firm or somewhat (open)
fixed) firm

Time Fences divide a scheduling time horizon into three

sections or phases, referred as frozen, slushy, and liquid.
Strict adherence to time fence policies and rules.
Pegging or
Bottom-up Re-planning
▪ Tracing upward in the BOM from the
component to the parent item. By pegging
upward, the production planner can
determine the cause for the requirement
and make a judgement about the
necessary for a change in schedule
Car Recalls (India)

Business Standard 15.6.2016

MRP Benefits
▪ Reduction in inventory
▪ Increased customer satisfaction due to
meeting delivery schedules
▪ Faster response to market changes
▪ Improved labor & equipment utilization
▪ Better inventory planning & scheduling
MRP – Problems Encountered

▪ Data integrity is low

▪ Not frequent updates of databases when
changes takes place
▪ Uncertainties related to lead time and quantity
delivered
Requirements of Successful MRP
System

▪Computer and necessary software

▪Accurate and up-to-date
 Master schedules

 Bills of materials

 Inventory records
▪User knowledge
▪Management support
Manufacturing Resource Planning
(MRP II)
❑ MRP evolved in 1960s
❑ MRP, the predecessor and backbone of MRP II (1980s) and
ERP (1990s)
❑ Didn’t replace or improve MRP. Rather expanded the scope
to include capacity requirements planning and to involve
other functional areas of the organization:
❑ Purchasing, Manufacturing, Marketing, Finance,
Logistics
❑ MRP II employed common database and an integrated
platform where sales, inventory, purchasing transactions
were updated in both inventory and accounting applications
 An Overview of MRP II

Market Master
Finance Manufacturing production schedule
Demand

Marketing
Production

Adjust master schedule

plan MRP

Rough-cut Capacity
capacity planning planning
Adjust
production plan
Yes No Requirements No Yes
Problems? schedules Problems?
 An Overview of MRP II

Market Master
Finance Manufacturing production schedule
Demand

Marketing
Production

Adjust master schedule

plan MRP

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