Chapter Seven

Material requirements planning

Learning objectives
 Understand and explain in your own words the most appropriate condition
under which material requirements planning (MRP) can function as a system
in an organization
 Describe the objectives and dependent demand requirements of an MRP
system.
 Distinguish between and describe the inputs and outputs required for an MRP
system.
 Describe the structure of an MRP system and all the aspects of the MRP.
 Describe the management processes required to successfully implement and
maintain an MRP system.
 Distinguish between and describe the advantages and disadvantages of an
MRP system.
 Explain the goal of enterprise resource planning (ERP) systems and why it
sometimes fail.
 Explain the advantages and disadvantages of enterprise resource planning
(ERP) systems.
 Explain the impact that electronic commerce has on ERP systems.

7.1 Introduction

 Material requirements planning [ MRP]

 MRP aggregate the production system to produce products at the right time,
place and quantities.
 MRP as a system furnishes critical information regarding the correct quantities
to purchase of raw material or parts utilized in the manufacturing process

7.2 MRP objectives

 MRP system operates on dependent demand

 Management recognize that the MRP system will handle inventories of raw
materials, components and finished goods differently.
 The MRP system is more than just an inventory system, it is also a scheduling
system.
 Reasons for implementing MRP:
- Improve operation efficiency

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 - Improve manner in which customers are treated
- Need to minimize investment in inventory.

MRP is a powerful tool to assist organisations in keeping promised delivery times,

because these dates are locked into the MRP system. The management reports
generated by the MRP system enable an operations manager to measure the
performance of the manufacturing department against these dates, and the promises
made to the organisations customers now become the goals of the manufacturing
department or division.

7.3 Dependent demand requirements

 Demand for one item depends on the demand for another item. An example is
the production of a motor vehicle: the demand for tyres and engines are
dependent on a motor vehicle being built.
 Management of demand: not only orders that are received from customers but
also the forecast demand. Therefore an organization must have the correct
processes in place to enable it to interface with the market. What are these
processes? Example of these processes are the following:
o Keeping an order book
o Every sale inter to the order book
o Forecasting demand
o Promising orders by customers to the sales force
o Distribution of the finished product to the customers

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  Management of customer orders: customer orders are firm orders that have
been placed with the organization by the customers, These orders are
contained in the order book. It is therefore important to manage these orders.
 Order variation: Order variation happens when customers change their minds
about their needs at short notice. Example, imagine if have ordered a new
item of clothing and before taking delivery, you change your mind and inform
the store that you no longer require the item of clothing. This is typical of what
happens daily in both the manufacturing and service industries. .

7.4 Inputs required for an MRP system

Input 1: the Master Production Schedule (mps)

• Master production schedule (MPS): This schedule informs the staff on the
shop floor about component to manufacture and also when to manufacture a
particular component.

• For any organisation, the MPS is the most important tool in the planning and
control of the manufacturing function.

• MPS is the document that spells out what has to be manufactured and by
which time the manufactured product should be finished.

Input 2: Bill of material structure

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 • Bill of material (BOM): Also known as a product structured tree. List that
contains all items needed to build one item of a finished product. The result is
that each finished product produced by an organisation has its own BOM. In
an organisation that does not have an MRP system there might be a BOM for
the engineering department, a BOM for the production department, and a
BOM for the accounting department. The BOM is an up-to-date computerised
list of all material requirements.

Input 3: Accurate inventory levels

• accurate inventory records are the third input to the MRP system
• The following will be included in the time bucket;
o Gross requirements for each part
o Scheduled receipt date of the material
o Stock on hand in the warehouse or store

Without a superb inventory system, an organisation will find it nearly

impossible to install an MRP system.

To guarantee accurate inventory records, organisations might find it

necessary to revise and revamp their inventory procedures. They might need
to do the following:

o Undertake regular physical counts

o Guarantee that the inventory records are updated promptly
o Enforce strict adherence to stock-withdrawal procedures.

The next important information required by the operations department is the lead
times for the required components or materials. The lead time determines to a
great extend the delivery date of the finished product. Lead time for purchase
material is from the day the firm order is placed with the supplier until delivery of
the ordered material.

• 7.5 The structure of an MRP system

• Key terminology to be mentioned:

– Gross requirements: demand for raw material- do not take stock

on hand into account

– Scheduled receipts: orders been placed at suppliers but not yet

received. The quantities will be received at the beginning of the
production period.

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 – Projected on hand: this is the expected amount of any item that
will be available at the beginning of each specific period and any
inventory left over from the previous period

– Net requirements: exact amount of an item needed for a specific

time period

– Planned-ordered receipts: This is the amount of material expected

to be received at the beginning of every time period

– Planned-ordered releases: This is the amount of an item that the

organization plans to order in a specific period.

7.6 Outputs derived from an MRP system

• Primary reports – main report produced

– Change report: detail of changes that can be done – due dates,

quantities ordered and cancellation by customers

– Orders planned: number of orders to be finished and the dates to be

delivered.

– Orders released: authorization to start work on a specific order

• Secondary reports – optional reports produced (measuring of performance)

– Reports relating to performance control – evaluate the performance

of the system as a whole

– Reports relating to planning – these reports are used in the

forecasting for future inventory demand

– Exception reports – highlight the major deviation from what was

planned: unacceptably high scarp rates.

7.7 Other aspects of MRP

• Safety stock: Refer to the buffer stock and is the inventory that composites
for unexpected fluctuations in supply and demand. Example, assume that it is
the lead time that varies, making use of safety stock. The manager should
carry out a proper cost analysis in making a decision about whether or not to
carry safety stock.

• Lot sizes: selecting the optimal size of a batch of products to be

manufactured to meet the requirements of the process. Uses EOQ system to
assist.

7.8 Management of an MRP system

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In most organizations the route being followed involves greater integration of MRP
and just-in-time (JIT) systems.

 Dynamics of MRP:
When changes occur in the design of a product or in the schedules for items
in the production process the BOM and MRP must also be changed.
Whenever a change occurs in the MPS that change must also be reflected in
the materials plan.
o Time fences: this method designates a certain portion of the master
production schedule as not to be rescheduled. The time period taken
when the MPS is rescheduled. The result is that there is certainty about
what is required of the purchasing and productions departments for
that period.
o Pegging: pegging is upward tracing of materials and components in
the BOM from the lower levels to the parent part to enable the planner
to determine the reasons behind the changes in requirements and
whether or not these changes be included in the schedule.
 Material requirements planning and JIT
o The small bucket approach: to achieve excellent results in a job-shop
environment as lead times are usually reasonably stable.
o The balanced flow approach. The MRP system support planning and
scheduling in a repetitive manufacturing environment. (mass
manufacturing)

7.9 Advantages and disadvantages of using MRP system

 Advantages:
- Avoidance of inventory problems
- Effective linkages between planning efforts
- Early identification of problem areas
- Highlights hidden problems
- Instantaneously available information
 Disadvantages:
- MRP requires a detailed MPS
- Effort required in recording information
- Any error has major negative impact

7.10 Enterprise resource planning (ERP)

- ERP – incorporates the entire supply chain, including sales, orders,

scheduling, manufacturing and distribution.

o Align sales with production and integrates customer orders and

delivery data with the production process

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The operation goal of manufacturing and distribution companies is effective planning
and control of resources, priorities and performance. ERP provides a framework that
enables companies around the world to provide customers with the right products in
the right quantities at the right time, quality and price.

o Why ERP sometimes fail:

- Lack of commitment of top management
- Lack of adequate resources
- Lack of proper training
- Lack of communication