chap 5-- MRP

Chapter 5

Material Requirement Planning System

Operations Planning Operations planning is usually hierarchical & can be divided into three broad planning categories

– Long-range- Aggregate Production Plan (APP) involves the construction of facilities & major equipment purchases

– Intermediate - Shows the quantity & timing of end items (i.e., master production schedule- MPS)

– Short-range - detailed planning process for components & parts to support the master production schedule (i.e., materials requirement planning- MRP)

Operations Planning (Cont.)Computer based “push” resource

systems:• Closed-loop MRP - incorporates the aggregate

production plan, the master production schedule material requirements plan, & capacity requirements plan.

• Manufacturing resource planning (MRP-II) incorporates the business & sales plans with the closed-loop MRP system (allows “what-if”).

• Enterprise requirements planning (ERP) is an extension of MRP-II (integrates with units/partners)

• Distribution requirement planning (DRP) describes the time-phased net requirements from warehouses & distribution centers customer demand minus any on hand in-transit inventories.

Contributors to MRP

• Material Requirements Planning was introduced in the 1970’s. Much of the credit goes to three individuals by the names of Joseph Orlicky, George Plossl, and Oliver Wight. The American Production and Inventory Control Society (APICS), which was endorsed by Orlicky, Plossl, and Wight, was also credited with the introduction of MRP.

What is MRP?• Computerized Inventory Control• Production Planning System• Management Information System• Manufacturing Control System• MRP is a system that controls inventory levels, plans

production, helps supply management with important information, and helps with the manufacturing control system with respect to the production of assembled parts.

Material Requirements PlanningDefined• Materials requirements planning (MRP) is a

means for determining the number of parts, components, and materials needed to produce a product

• MRP provides time scheduling information specifying when each of the materials, parts, and components should be ordered or produced

• Dependent demand drives MRP• MRP is a software system

When to use MRP• Job Shop Production• Complex Products• Assemble-to-Order Environments• Discrete and Dependent Demand

Items

Advantages of MRP

• Forward looking when planning (visibility)• Useful simulator• Provides valid, credible priorities

– priorities reflect actual needs, not implied needs.

• Provides managers with control over the execution system

• Forms basis for building credible, valid formal system

Advantages contd…

• Better response to customer ordersBetter response to customer orders• Faster response to market changesFaster response to market changes• Improved utilization of facilities and labourImproved utilization of facilities and labour• Reduced inventory levelsReduced inventory levels

What can MRP do?

• Reduce Inventory Levels• Reduce Component

Shortages• Improve Shipping

Performance• Improve Customer

Service• Improve Productivity• Simplified and Accurate

Scheduling

• Reduce Purchasing Cost• Improve Production

Schedules• Reduce Manufacturing

Cost• Reduce Lead Times• Less Scrap and Rework• Higher Production

Quality

What can MRP do?• Improve

Communication• Improve Plant

Efficiency• Reduce Freight Cost• Reduction in Excess

Inventory

• Reduce Overtime• Improve Supply

Schedules• Improve Calculation of

Material Requirements• Improve Competitive

Position

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

Change master production schedule?

Execute material plans

Execute capacity plans

Detail capacity plan

Material requirements plan

Master production schedule

Aggregate production plan

Change requirements?

Change capacity?

RealisticNo

Yes

Change production

plan?

Is capacity plan being

met?

Is execution meeting

the plan?

Three Basic Steps of MRP

• Identifying Requirements• Running MRP – Creating the

Suggestions• Firming the Suggestions

Step 1: Identifying the Requirements

• Quantity on Hand• Quantity on Open Purchase Order• Quantity in/or Planned for

Manufacturing• Quantity Committed to Existing Orders• Quantity Forecasted

Step 1: Important InformationMRP is…..

• Company Sensitive• Location Sensitive• Date Sensitive

Step 2: Running MRP – Creating the Suggestions

• Critical Items• Expedite Items• Delay Items

Step 3: Firming the Suggestions

• Manufacturing Orders• Purchasing Orders• Various Reports

Overview of the MRP System

Product Structure File

Master Production Schedule

Inventory Master File

Material Requirements Planning

Manufacturing Orders Purchase Orders Various Reports

MRP StructureMRP Structure

Figure 14.5Figure 14.5

Output ReportsOutput Reports

MRP by period report

MRP by date report

Planned order report

Purchase advice

Exception reports

Order early or late or not needed

Order quantity too small or too large

Data FilesData Files

Purchasing data

BOM

Lead times

(Item master file)

Inventory data

Masterproduction schedule

Material requirement

planning programs (computer and

software)

MRP Inputs MRP Processing MRP Outputs

Masterschedule

Bill ofmaterials

Inventoryrecords

MRP computerprograms

Changes

Order releases

Planned-orderschedules

Exception reports

Planning reports

Performance-controlreports

Inventorytransaction

Primaryreports

Secondaryreports

22

Major Inputs to MRP Process:1. Bill of Material

• Product structure file• Determines which component items need to be scheduled

Product Structure RecordProduct Structure Record

ClipboardLevel 0Level 0

Level 1Level 1

Level 2Level 2Spring (1)

Bottom Clip (1)

Top Clip (1)

Pivot (1)

Rivets (2)

Clip Assembly

(1)

Pressboard (1)

Top clip (1) Bottom clip (1)

Pivot (1) Spring (1)

Rivets (2)Finished clipboard Pressboard (1)

Clipboard

Types of BOM

• A primary bill is a list of components you most frequently use to build a product. An alternate bill is another list of components for the same basic assembly. The primary bill is the default for rolling up costs, defining a job, and calculating cumulative item lead times. You must define a primary bill before you define an alternate. A primary bill can have many alternate bills.

• Standard : A standard bill of material is the most common type of bill and lists the mandatory components, the required quantity of each component, and information to control work in process, material planning, and other Manufacturing functions.

• Model : A model bill of material defines the list of options and option classes you can choose in Order Management to order a configuration.

• An indented Bill of Materials shows all the sub-levels and is components for the Assembly. Each standard component on a bill can have multiple reference designators and substitute components. When you create a bill, it exists only in the current organization. To use a bill in another organization, you must either copy it or reference it as a common.

• Planning : A planning bill of material is a bill of material structure that includes a percentage distribution for its components. The percentages associated with the components on a planning bill of material do not need to add to 100%. MRP uses component planning percentage in forecast explosions through planning, model, and option class bills of material.

• A modular bill of material is the term for a buildable item that can be produced and stocked as a subassembly. It is also a standard item with no options within the module. Many end items that are large & expensive are better scheduled and controlled as modules.

• It is particularly advantageous to schedule subassembly modules when the same subassemblies appear in different end items.

Advantages of Modular BOM

• Using a modular bill of materials simplifies the scheduling and control.

• It makes easier to forecast the use of different modules.

• If the same item is used in a number of products, then the total inventory investment can be minimized.

Level 0(Finished Good)

Level 1

Level 2

Level 3

Level 4

Level 5

Level 6

TransmissionSuspension

& BrakeChassis

EngineAssembly

Body &Accessories

Exhaust &Fuel System

PistonAssembly

Cylinderhead

Crankshaft Camshaft

Piston Sub-Assemblies (4)

ConnectingRods (4)

All TerrainVehicle (ATV)

Piston

6” SteelBar (¼)

24” SolidSteel Bar

EngineBlock

Seals &Gaskets

Piston Rings(3)

12” SteelBar (½)


denotes additional materials not shown


Level 1

Level 2

Level 3

Level 4

Level 5

Level 6


& BrakeChassis

EngineAssembly

Body &Accessories


PistonAssembly

Cylinderhead

Crankshaft Camshaft


ConnectingRods (4)


Piston

6” SteelBar (¼)


EngineBlock

Seals &Gaskets

Piston Rings(3)

12” SteelBar (½)



Level 1

Level 2

Level 3

Level 4

Level 5

Level 6


& BrakeChassis

EngineAssembly

Body &Accessories


PistonAssembly

Cylinderhead

Crankshaft Camshaft


ConnectingRods (4)


Piston

6” SteelBar (¼)


EngineBlock

Seals &Gaskets

Piston Rings(3)

12” SteelBar (½)



Level 1

Level 2

Level 3

Level 4

Level 5

Level 6


& BrakeChassis

EngineAssembly

Body &Accessories


PistonAssembly

Cylinderhead

Crankshaft Camshaft


ConnectingRods (4)


Piston

6” SteelBar (¼)


EngineBlock

Seals &Gaskets

Piston Rings(3)

12” SteelBar (½)



Level 1

Level 2

Level 3

Level 4

Level 5

Level 6


Level 1

Level 2

Level 3

Level 4

Level 5

Level 6


& BrakeChassis

EngineAssembly

Body &Accessories


PistonAssembly

Cylinderhead

Crankshaft Camshaft


ConnectingRods (4)


Piston

6” SteelBar (¼)


EngineBlock

Seals &Gaskets

Piston Rings(3)

12” SteelBar (½)


TransmissionTransmissionSuspension

& BrakeSuspension

& BrakeChassisChassis

EngineAssemblyEngine

AssemblyBody &

AccessoriesBody &

AccessoriesExhaust &

Fuel SystemExhaust &

Fuel System

PistonAssembly

PistonAssembly

Cylinderhead

Cylinderhead

CrankshaftCrankshaft CamshaftCamshaft



ConnectingRods (4)

ConnectingRods (4)



PistonPiston

6” SteelBar (¼)6” SteelBar (¼)

24” SolidSteel Bar24” SolidSteel Bar

EngineBlockEngineBlock

Seals &GasketsSeals &Gaskets

Piston Rings(3)

Piston Rings(3)

12” SteelBar (½)

12” SteelBar (½)

24” SolidSteel Bar24” SolidSteel Bar

denotes additional materials not showndenotes additional materials not shown

Major Inputs to MRP Process:2. Master Production Schedule (MPS)

Drives MRP process with a schedule of finished products Quantities represent production not demand Quantities may consist of a combination of customer orders &

demand forecasts Quantities represent what needs to be produced, not what can be

produced Example

PERIODMPS ITEM 1 2 3 4 5

Clipboard 85 95 120 100 100Lapdesk 0 50 0 50 0Lapboard 75 120 47 20 17Pencil Case 125 125 125 125 125

Master Production Scheduling

Master Production Schedule (MPS) - A disaggregation of the APP. Lists the exact end items to be produced for specific periods.

– Planning horizon is shorter than APP, but longer than the lead time to produce the item.

The MPS - used for computing the requirements of all time-phased end items.

System nervousness - small changes in the upper-level-production plan cause major changes in the lower-level production plans. - Firms use a time fence to deal with nervousness

Master Production Schedule Master Production Schedule (MPS)(MPS)

Specifies what is to be made and whenSpecifies what is to be made and when Must be in accordance with the aggregate Must be in accordance with the aggregate

production planproduction plan Aggregate production plan sets the overall level Aggregate production plan sets the overall level

of output in broad termsof output in broad terms As the process moves from planning to As the process moves from planning to

execution, each step must be tested for execution, each step must be tested for feasibilityfeasibility

The MPS is the result of the production planning The MPS is the result of the production planning processprocess


MPS is established in terms of specific productsMPS is established in terms of specific products Schedule must be followed for a reasonable Schedule must be followed for a reasonable

length of timelength of time The MPS is quite often fixed or frozen in the near The MPS is quite often fixed or frozen in the near

term part of the planterm part of the plan The MPS is a rolling scheduleThe MPS is a rolling schedule The MPS is a statement of what is to be The MPS is a statement of what is to be

produced, not a forecast of demandproduced, not a forecast of demand


A customer order in a job shop (make-to-A customer order in a job shop (make-to-order) companyorder) company

Modules in a repetitive (assemble-to-stock) Modules in a repetitive (assemble-to-stock) companycompany

An end item in a continuous (make-to-stock) An end item in a continuous (make-to-stock) companycompany

Can be expressed in any of the Can be expressed in any of the following terms:following terms:

Task performed by a master production scheduler

• Construct and update the MPS• Involves processing MPS transactions,

maintaining MPS records and reports,• having a periodic review and update cycle (rolling

through time), processing• and responding to exception conditions, and

measuring MPS effectiveness on• a routine basis•

Contd..

• On a day-to-day basis, marketing and production are coordinated through the

• MPS in terms of Order Promising• Order promising is the activity by which

customer order requests receive• shipment dates

An effective MPS provides

• Basis for making customer delivery promises

• Utilising plant capacity effectively• Attaining the firm’s strategic objectives

as reflected in the production plan and• Resolving trade-off between

manufacturing and marketing

• Since MPS is the basis for manufacturing budgets, the financial budgets should be

• integrated with production planning/MPS activities

• • When MPS is extended over a time horizon, is a better basis for capital budgeting

• • Based on the production output specified in the MPS the day-to-day cash flow can be

• forecasted• • The MPS should be realizable and not

overstated

When scheduled production exceeds capacity, usually some or all of the followingoccur: Invalid priority Poor customer service (missed deliveries) Excess in-process inventories High expediting costs Lack of accountability

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Major Inputs to MRP Process:3. Inventory Record

• _________________________________________________• Contains an extensive amount of information on every item that is produced,

ordered, or inventoried in the system• _________________________________________________

DESCRIPTION INVENTORY POLICY

Item Pressboard Lead time 1

Item no. 734 Annual demand 5000

Item type Purch Holding cost 1

Product/sales class Comp Ordering/setup cost 50

Value class B Safety stock 0

Buyer/planner RSR Reorder point 39

Vendor/drawing 07142 EOQ 316

Phantom code N Minimum order qty 100

Unit price/cost 1.25 Maximum order qty 500

Pegging Y Multiple order qty

LLC 1 Policy code 3

Major Inputs to MRP Process:4. Purchase Record

• When purchase orders are executed, records of those orders and their scheduled delivery dates must be available to production personnel.

• The time required to acquire an item is the lead time

• Lead time of a manufactured item consists of move, setup, assembly or run times.

• Lead time of a purchased item includes the time between order release and its retreival.

Major Inputs to MRP Process:5. Lead Times

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

Reports

• Master Schedule• Indented Bill of Materials• BOM - Item Requirements• Scheduled Receipts• Planned Orders

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

Lot size :

• You can define your requirements (to be produced or Procured) in terms of Weekly, Monthly,

• LOT-SIZE- Key that determines which lot size procedure, the system uses with in material planning to calculate the quantity to be procured or produced

Lot Sizing Choices in MRP• Lot sizing:• Determining the lot size (order quantity or

production quantity) of an item• Static lot sizing rule:• A decision rule that orders the same quantity

each time an order is placed.• Tend to generate higher average on-hand

inventory because they create inventory remnants.

• Can provide extra safety stock.

Dynamic lot sizing rule

• A decision rule that changes the order quantity with each order, typically so that each order is just large enough to prevent shortages over a specified time period.

• Tend to cause instability by tying lot-size to gross requirements.

• Lower-level components may not be able to respond sufficiently fast to changes in requirements

Abbreviation

Policy Definition

LFLLot for lot

Deliver in each period the amount required

FOPFixed order period

When a delivery is required deliver the amount required for the next m periods, where m is a parameter of the policy.

FOQFixed order quantity

When a delivery is required deliver the amount Q, where Q is a parameter of the policy. If the current requirement exceeds Q deliver the amount of the current requirement.

WWWagner-Whiten

Determine the optimum production schedule that minimizes the sum of the setup plus inventory costs for the time horizon.

Lot Sizing

Manufacturing Resources Planning (MRP II)

• Moving to MRP II– Materials are only one of the resources; organisations

have to schedule others resources such as people, equipment, facilities, finances, transportation.

– The natural extension of MRP led to Manufacturing Resources Planning (MRP II).


• Manufacturing Resources Planning (MRP II) – While MRP or MRP I address the issues of inbound

logistics flow of the inventory; MRP II adds finance, marketing and somewhat integrated logistics;

– Increase customer satisfaction, improve delivery, better response, reduce inventory levels and costs and allow more flexibility.


• Manufacturing Resources Planning (MRP II) – MRP II provides an integrated system for synchronizing

all related functions within an organisation in the aspects of manufacturing.

– It links up all the schedules for all related functions and resources back to the master schedule.


• MRP II linking up logistics activities– Linking up all activities to master schedule could give a

very efficient logistics;– During the moving up from MRP to MRP II, many

companies see the difficulties. Many companies prefer to implement a partial systems where the MRP approach is still used to plan logistics activities;

– The partial system is ‘retitled’ as distribution resource planning (DRP) or logistics resource planning (LRP).


• The emergence: MRP MRP II ERP– The emergence of the MRP (material requirements

planning) to MRP II (manufacturing resources planning) and the next move of the MRP evolution would possibly embracing the processing, manufacturing and distribution.

The ERP/MRP Integration

• The ERP/MRP integration– This integration it embodied naturally made it

attractive to other functional components of the business – finance, human resources and project management.

– MRP II was found to be a more and more misleading term as it covered more and more extensive domains and it was therefore better ‘renamed’ ERP.

Enterprise Resource Planning (ERP)

• ERP is the backbone of e-business– Market leaders turbocharged their business to run a

breakneck speed on a transactional backbone called Enterprise Resource Planning (ERP).

– ERP works like an information lubricant, facilitating the exchange data among corporate division through the unification of key processes.

– The first step in back-office transforming.

Enterprise Resource Planning (ERP)

• Elements of ERP– EPR is not a single system but a framework of

administrative applications (accounting and finance, human resources), manufacturing applications (production scheduling, planning), sales distribution (order entry) and integrated logistics.

– ERP unites core business processes – from order processing, production and delivery.

Distribution Resource Planning (DRP)

• Distribution Resource Planning (DRP)– acts as a buffer or automatic synchronous control – by adjusting the order patterns – if inventory needs vary, respond more readily to

system-wide inventory needs and better deal with product availability and timeliness.

– DRP II further enhance the system by planning for the entire storage and movement of inventory by combining MRP II and DRP and you may call this DRP II.

61

Distribution Resource Planning (DRP)

• The relationship between MRP II and DRPMarket 1 Customer

Focus

Market 2 Customer

Focus

Market 3 Customer

Focus

Market 4 Customer

Focus

DRP

Master production schedule

MRPI I

ERP

• Distribution channels are formed to solve three critical distribution problems– functional performance– reduced complexity– specialization.

Contd…• The central focus of distribution is to increase the

efficiency of time, place, and delivery utility• When demand and product availability are

immediate, the producer can perform the exchange and delivery functions itself

• As the number of producers grows and the geographical dispersion of the customer base expands, the need for both internal and external intermediaries who can facilitate the flow of products, services, and information via a distribution process increases.

Contd…

• The need for more detailed distribution planning led to the emergence of distribution requirements planning (DRP) during the 1970s.

• DRP is a widely used and potentially powerful technique for helping outbound logistics systems manage and minimize inbound inventories

Contd…

• This concept extended the time-phase order point found in material requirements planning (MRP) logic to the management of channel inventory

• By the 1980s DRP had become a standard approach for planning and controlling distribution logistics activities and had evolved into distribution resource planning.

Contd…

• The concept now embraces all business functions in the supply channel, not just inventory and logistics

• DRP is usually used with an MRP system, although most DRP models are more comprehensive than stand-alone MRP models and can schedule transportation

Contd…

• The underlying rationale for DRP is to more accurately fore-cast demand and then use that information to develop delivery schedules

• This way, distribution firms can minimize inbound inventory by using MRP in conjunction with other schedules.

Contd…

• One of the key elements of DRP is the DRP table, which includes the following elements– Forecast demand for each stock-keeping unit

(SKU) – Current inventory level of the SKU – Target safety stock – Recommended replenishment quantity – Replenishment lead time

Contd…

• The concept of DRP very closely mimics the logic of MRP

• With MRP– Gross requirements consist of actual customer orders,

forecasted demand, or some combination of both– scheduled receipts are the goods the distributor expects

to receive from orders that already have been released– while goods that already are received and entered into

inventory constitute the on-hand inventory balance– Subtracting scheduled receipts and on-hand inventory

from gross requirements yields net requirements

Contd…

• Based upon the distributor's lot-sizing policy and receiving behavior, planned order receipts are generated

• Firms may order only what they need for the next planning period or for a designated time period

• Known as economic order quantity (EOQ), this involves a lot size based on a costing model

DRP I

• “the application of MRP principles to the distribution environment, integrating the special needs of distribution…[it] is a dynamic model that looks at a time-phased plan of events that affect inventory.”

DRP II

• “Distribution resource planning extends DRP I to include the planning of key resources in a distribution system-warehouse space, manpower levels, transport capacity (e.g., trucks, railcars) and financial flows.”

• Uses the needs of distribution to drive the master schedule, controlling the bill of materials, and materials requirements planning.

Distribution Resource Planning

• DRP requires:– Gross requirements, which are the same as expected

demand or sales forecasts– Minimum levels of inventory to meet customer

service levels– Accurate lead times– Definition of the distribution structure

Management of the inbound flow involves these elements:

• Material planning and control • Purchasing • Receiving • Physical management of materials via

warehousing and storage • Materials handling

Management of the outbound flow involves these elements:

• Order processing • Warehousing and storage • Finished goods management • Material handling and packaging • Shipping • Transportation

chap 5-- MRP

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