Ch03

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1© Wallace J. Hopp, Mark L. Spearman, 1996, 2000 http://factory-physics.com

Material Requirements Planning (MRP)

Unlike many other approaches and techniques, materialrequirements planning “works” which is its best recommendation.

— Joseph Orlicky, 1974


History

• Begun around 1960 as computerized approach to purchasing andproduction scheduling.

• Joseph Orlicky, Oliver Wight, and others.

• Prior to MRP, production of every part and end item was triggered by theinventory falling below a given level (reorder point).

• APICS launched “MRP Crusade” in 1972 to promote MRP.

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Key Insight

• Independent Demand — finished products

• Dependent Demand — components

It makes no sense to independently forecast dependent demands.


Assumptions

1. Known deterministic demands.

2. Fixed, known production leadtimes.

3. In actual practice, lead times are related to the level of WIP.

Flow Time = WIP / Throughput Rate (Little’s Law)

Idea is to “back out” demand for components by using leadtimes and bills ofmaterial.

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Capacity Requirements Planning

Capacity(Hours orUnits)

100

1 2 3 4 5 6

Who in the organization actually does this?


MRP Procedure

1. Netting: net requirements against projected inventory

--Gross Requirements over time (e.g., weekly buckets)

--Scheduled Receipts and current inventory

--Net Requirements

2. Lot Sizing: planned order quantities

3. Time Phasing: planned orders backed out by leadtime

4. BOM Explosion: gross requirements for components

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Inputs

• Master Production Schedule (MPS): due dates and quantities for all toplevel items

Due dates assigned to orders into time buckets (week, day, hour, etc.)

• Bills of Material (BOM): for all parent items

• Inventory Status: (on hand plus scheduled receipts) for all items

• Planned Leadtimes: for all itemsComponents of leadtime

MoveSetupProcess timeQueue time (80-90% total time)


Example - Stool

Indented BOM Graphical BOM

Stool

Base (1)

Legs (4)

Bolts (2)

Seat (1)

Bolts (2)

Stool

Base (1)

Legs (4)

Level 0

Level 1Seat (1)

Bolts (4) Bolts (2) Level 2

Note: bolts are treated at lowest level in which they occur for MRP calcs.Actually, they might be left off BOM altogether in practice.

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Example

Item: Stool (Leadtime = 1 week)

Week 0 1 2 3 4 5 6Gross Reqs 120Sched ReceiptsProj Inventory 20 20 20 20 20 -100 -100Net Reqs 100Planned Orders 100

Item: Base (Leadtime = 1 week)

Week 0 1 2 3 4 5 6Gross Reqs 100Sched ReceiptsProj Inventory 0 0 0 0 -100 -100 -100Net Reqs 100Planned Orders 100


Example (cont.)

Item: Legs (Leadtime = 2 weeks)

Week 0 1 2 3 4 5 6Gross Reqs 400Sched Receipts 200Proj Inventory 0 0 0 -200 -200 -200 -200Net Reqs 200Planned Orders 200

BOM explosion

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Terminology

Level Code: lowest level on any BOM on which part is found

Planning Horizon: should be longer than longest cumulative leadtime for anyproduct

Time Bucket: units planning horizon is divided into

Lot-for-Lot: batch sizes equal demands (other lot sizing techniques, e.g., EOQ orWagner-Whitin can be used)

Pegging: identify gross requirements with next level in BOM (single pegging) orcustomer order (full pegging) that generated it. Single usually used becausefull is difficult due to lot-sizing, yield loss, safety stocks, etc.


Pegging and Bottom up Planning

Required from B

Required from 100

Gross Requirements

Part 300 1 2 3 4 5 6 7 8

Projected on-hand

Net Requirements

Table 3.7 MRP Calculations for Part 300

Scheduled Receipts

Adjusted Scheduled Receipts

Planed order receipts

Planed order releasesOn-hand = 40 Scheduled releases = none Lot-for-lot LT = 1 week

30 15

90

125 90 15

50 50 25 25 -65

65

65

15

15

35

60

100

100

65 15

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Bottom Up Planning

Reference Figure 3.7

Assume that the scheduled receipt for week 2 for 100 units is notcoming in!Have 50 units of inventory, with requirements of 125.

ImplicationsI can fill 50 units of demand from part 100 or 50 units from partB.If I go with part 100, that will allow me to fill some of the demandof part A (100 needed for part A). Can I ship 50 units to thecustomer now and 50 units later? What if I cover the demand ofpart B? Correct choice depends on the customers involved.


More Terminology

Firm Planned Orders (FPO’s): planned order that the MRP system does notautomatically change when conditions change --- can stabilize system

Service Parts: parts used in service and maintenance --- must be included in grossrequirements

Order Launching: process of releasing orders to shop or vendors --- may includeinflation factor to compensate for shrinkage

Exception Codes: codes to identify possible data inaccuracy (e.g., dates beyondplanning horizon, exceptionally large or small order quantities, invalid partnumbers, etc.) or system diagnostics (e.g., orders open past due, componentdelays, etc.)

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Conceptual Changes in Lotsizing Approaches

Before, EOQ represented a basic trade-off between inventory costsand setup costs.

Goldratt: If I am not at capacity on an operation requiring a setup,the time spent on a setup is a mirage.

Make setups occur as frequently as possible (smaller lot sizes) as longas capacity is available

Produce only when inventory level reaches zero (Wagner Whitin) isnot optimal when capacity is a constraint

Authors know of no commercial MRP system that uses WW.


Important Questions About “Optimal” Lot-sizing

Setup costsVery difficult to estimate in manufacturing systems

-May depend on schedule sequence-True costs depends on capacity situation

Assumption of deterministic demand and deterministic production-production schedules are always changing because of dynamicconditions in the factory.

Assumption of independent products that do not use commonresources. Very seldom will see common resources not used.

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Important Questions About “Optimal” Lot-sizing

WW leads us to the conclusion that we should produce eithernothing in a period or the demand of an integer number offuture periods.-generates a production schedule that is very “lumpy.”

There are reasons for generating a level loaded productionschedule, one in which the same amount of products areproduced in every time period.


Problem Formulation

t= A time period, t = 1 to T, where T is the planning horizon.Dt = Demand in time period t (in units).

Ct = Unit production costs ($/unit), excluding setup or inventory cost inperiod t.

At = Setup (order) cost to produce (purchase) a lot in period t ($).Ht = Holding costs to carry a unit of inventory from period t to

period t+1 ($/unit). e.g., if holding costs consists entirely of interest onmoney tied up in inventory, where i is the annual interest rate andperiods correspond to weeks, then

It =Inventory (units) left over at the end of period t.

Qt =The lot size (units) in period t; this is the decision variable

h = I * Ct

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Problem Objective

Satisfy all demands at minimum cost (production, setup, and holdingcosts)

All the demands must be filled, only the timing of production is open tochoice.

If the unit production cost does not vary with t, then production costwill be the same regardless of timing and can be dropped fromconsideration.

Look at an example: assume setup costs, production costs, and holdingcosts are all constant over time. Thus, need only to consider setupcosts and holding costs.


Lot Sizing in MRP

• Lot-for-lot — “chase” demand

• Fixed order quantity method — constant lot sizes

• EOQ — using average demand

• Fixed order period method — use constant lot intervals

• Part period balancing — try to make setup/ordering cost equal to holdingcost

• Wagner-Whitin — “optimal” method

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Data For An Example ProblemTable 2.1

t 1 2 3 4 5 6 7 8 9 10

Dt

ct

At

ht

20 50 10 50 50 10 20 40 20 30

10 10 10 10 10 10 10 10 10 10

100 100 100 100 100 100 100 100 100 100

1 1 1 1 1 1 1 1 1 1


Lot-for-lot

Simply produce in period t the net requirements for period t.

Minimizes inventory carrying costs and maximizes total setupcosts.

It is simple and it is consistent with just in time.

Tends to generate a more smooth production schedule.

In situations where setup costs are minimal (assembly lines), itis probably the best policy to use.

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Lot Sizing Example

t 1 2 3 4 5 6 7 8 9 10Dt 20 50 10 50 50 10 20 40 20 30

LL 20 50 10 50 50 10 20 40 20 30

3010

300

1

100

==

=

=

D

h

A

Lot-for-Lot: $1000 No carrying cost, ten setups @$100 each


Lot Sizing Example (cont.)

EOQ:

t 1 2 3 4 5 6 7 8 9 10 TotalDt 20 50 10 50 50 10 20 40 20 30 300Qt 77 77 77 77 308Setup 100 100 100 100 $400Holding 57 7 74 24 51 41 21 58 38 $371Total $771

QAD

h

x x= = =2 2 100 301

77Note: EOQ is aspecial case offixed order quantity.

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Fixed Order Period From EOQ

Calculate EOQ using formula presented earlier.

Then Fixed Order Period, P = Q/D

Calculating P in this manner has all the limitations notedearlier in Chapter .


Fixed Order PeriodExample--Further Comments

Example

Period

Net Requirements

Planned Order Recpts

1 2 3 4 5 6 7 8 9

15 45 25 15 20 15

60 60 15

Let P = 3. Skip first period, no demand. Sixty units covers demand for periods 2, 3, and 4. Period 5 is skipped because there is no demand. Sixty units covers demand in periods 6, 7, 8. Fifteen units covers demand in period 9, which is the last period in the planning Horizon.

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Part-Period Balancing

Combines the assumptions of WW with the mechanics of the EOQ.

One of the assumptions of the EOQ is that it sets the average setupcosts equal to the average inventory carrying costs.

Part-period. The number of parts in a lot times the number ofperiods they are carried in inventory.

Part-period balancing tries to make the setup costs as close to thecarrying costs as possible.


Part-Period Balancing Example (Cont.)

Period

Net Requirements

Planned Order Receipts

1 2 3 4 5 6 7 8 9

15 45 25 15 2015

QuantityPeriod 6 Setup Costs Part-periods

InventoryCarrying Costs

25 $150 0 $0

40 $150 15 x 1 = 15 $30

60 $150 15 + 20 x 2 = 55 $110

75 $150 55 + 15 x 3 = 100 $200

Fixed order quantity method (without modifications) tends to work better than WW when dealing with multi-level production systems with capacity limitations.

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Nervousness

Note: we are using FOP lot-sizing rule.

Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)Week 0 1 2 3 4 5 6 7 8Gross Reqs 2 24 3 5 1 3 4 50Sched ReceiptsProj Inventory 28 26 2 -1 -6 -7 -10 -14 -64Net Reqs 1 5 1 3 4 50Planned Orders 14 50

Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)Week 0 1 2 3 4 5 6 7 8Gross Reqs 14 50Sched Receipts 14Proj Inventory 2 2 2 2 2 2 -48Net Reqs 48Planned Orders 48


Nervousness Example (cont.)

* Past Due

Note: Small reduction in requirements caused large change in orders andmade schedule infeasible.

Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)Week 0 1 2 3 4 5 6 7 8Gross Reqs 2 23 3 5 1 3 4 50Sched ReceiptsProj Inventory 28 26 3 0 -5 -6 -9 -13 -63Net Reqs 5 1 3 4 50Planned Orders 63

Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)Week 0 1 2 3 4 5 6 7 8Gross Reqs 63Sched Receipts 14Proj Inventory 2 16 -47Net Reqs 47Planned Orders 47*

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Reducing Nervousness

Reduce Causes of Plan Changes:• Stabilize MPS (e.g., frozen zones and time fences)

• Reduce unplanned demands by incorporating spare parts forecasts intogross requirements

• Use discipline in following MRP plan for releases

• Control changes in safety stocks or leadtimes

Alter Lot-Sizing Procedures:• Fixed order quantities at top level

• Lot for lot at intermediate levels

• Fixed order intervals at bottom level

Use Firm Planned Orders:• Planned orders that do not automatically change when conditions change

• Managerial action required to change a FPO


Handling Change

• New order in MPS

• Order completed late

• Scrap loss

• Engineering changes in BOM

Regenerative MRP: completely re-do MRP calculations starting with MPS andexploding through BOMs.

Net Change MRP: store material requirements plan and alter only those partsaffected by change (continuously on-line or batched daily).

Comparison:– Regenerative fixes errors.

– Net change responds faster to changes (but must be regeneratedoccasionally for accuracy.

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Rescheduling

Top Down Planning: use MRP system with changes (e.g., altered MPS orscheduled receipts) to recompute plan

• can lead to infeasibilities (exception codes)

• Orlicky suggested using minimum leadtimes

• bottom line is that MPS may be infeasible

Bottom Up Replanning: use pegging and firm planned orders to guiderescheduling process

• pegging allows tracing of release to sources in MPS

• FPO’s allow fixing of releases necessary for firm customer orders

• compressed leadtimes (expediting) are often used to justify using FPO’s tooverride system leadtimes


Safety Stocks and Safety Leadtimes

Safety Stocks:– generate net requirements to ensure min level of inventory at all times

– used as hedge against quantity uncertainties (e.g., yield loss)

Safety Leadtimes:– inflate production leadtimes in part record

– used as hedge against time uncertainty (e.g., delivery delays)

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Safety Stock Example

Note: safety stock level is 20.

Item: Screws (Leadtime = 1 week)

Week 1 2 3 4 5 6Gross Reqs 400 200 800Sched Receipts 500Proj Inventory 100 100 -100 -900 -Net Reqs 120 800Planned Orders 120 800


Safety Stock vs. Safety Leadtime

Item: A (Leadtime = 2 weeks, Order Quantity =50)

Week 0 1 2 3 4 5Gross Reqs 20 40 20 0 30Sched Receipts 50Proj Inventory 40 20 30 10 10 -20Net Reqs 20Planned Orders 50

Safety Stock = 20 units

Week 0 1 2 3 4 5Gross Reqs 20 40 20 0 30Sched Receipts 50Proj Inventory 40 20 30 10 10 -20Net Reqs 10 30Planned Orders 50

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Safety Stock vs. Safety Leadtime (cont.)

Safety Leadtime = 1 week

Week 0 1 2 3 4 5Gross Reqs 20 40 20 0 30Sched Receipts 50Proj Inventory 40 20 30 10 10 -20Net Reqs 20Planned Orders 50


Manufacturing Resource Planning (MRP II)

• Sometime called MRP, in contrast with mrp (“little” mrp); more recentimplementations are called ERP (Enterprise Resource Planning).

• Extended MRP into:

– Master Production Scheduling (MPS)

– Rough Cut Capacity Planning (RCCP)

– Capacity Requirements Planning (CRP)

– Production Activity Control (PAC)

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MRP II Planning Hierarchy

DemandForecast

Aggregate ProductionPlanning

Master ProductionScheduling

Material RequirementsPlanning

JobPool

JobRelease

JobDispatching

Capacity RequirementsPlanning

Rough-cut CapacityPlanning

ResourcePlanning

RoutingData

InventoryStatus

Bills ofMaterial


Master Production Scheduling (MPS)

• MPS drives MRP

• Should be accurate in near term (firm orders)

• May be inaccurate in long term (forecasts)

• Software supports

– forecasting

– order entry

– netting against inventory

• Frequently establishes a “frozen zone” in MPS

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Rough Cut Capacity Planning (RCCP)

• Quick check on capacity of key resources

• Use Bill of Resource (BOR) for each item in MPS

• Generates usage of resources by exploding MPS against BOR (offset byleadtimes)

• Infeasibilities addressed by altering MPS or adding capacity (e.g.,overtime)


Capacity Requirements Planning (CRP)

• Uses routing data (work centers and times) for all items

• Explodes orders against routing information

• Generates usage profile of all work centers

• Identifies overload conditions

• More detailed than RCCP

• No provision for fixing problems

• Leadtimes remain fixed despite queueing

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Production Activity Control (PAC)

• Sometimes called “shop floor control”

• Provides routing/standard time information

• Sets planned start times

• Can be used for prioritizing/expediting

• Can perform input-output control (compare planned with actualthroughput)

• Modern term is MES (Manufacturing Execution System), whichrepresents functions between Planning and Control.


Conclusions

Insight: distinction between independent and dependent demands

Advantages:• General approach

• Supports planning hierarchy (MRP II)

Problems:• Assumptions --- especially infinite capacity

• Cultural factors --- e.g., data accuracy, training, etc.

• Focus --- authority delegated to computer

Ch03

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