25-11-2019

Material Requirement
Planning (MRP)

MRP
 Dependent vs. Independent Demand
 What is MRP?
 The benefits and requirements of MRP
 Inputs, outputs, and nature of MRP processing
 How to translate the requirements in a Master
Production Schedule into material requirements
for lower-level items (components)
 Lot Sizing Techniques
 Extensions of MRP (MRP II, Closed-Loop MRP,
ERP)

2
material
BOM -

Bill of
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Hierarchy of Production Decisions

Long-range Capacity Planning

Independent Demand

A Dependent Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

Independent demand is uncertain.

Dependent demand is certain.

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Dependent Demand
For any product, all
components of that product
are dependent demand
items.
Given a quantity for the
product, the demand for all
parts and components can
be calculated.

Demand Characteristics
Independent demand Dependent demand

BED 100 x 1 =

Tabletop, 100 tabletops

legs 100 tables

Continuous demand
100 x 4 = 400 table legs

400 – Discrete demand

400 –
300 –
No. of tables

300 –
No. of tables

200 –
200 –
100 –
100 –

1 2 3 4 5
Week M T W Th F M T W Th F

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Dependent vs Independent
Demand

MRP
 MRP is a computerized inventory planning and control system for
determining when (no earlier and no later) and how many of each
of the parts, components, and materials should be ordered or
produced.
 MRP integrates data from production schedules
(MPS) with inventory records, scheduled receipts
and the bill of materials (BOM) to determine
purchasing and production schedules for the
components required to build a product
 Dependent demand drives MRP
 MRP is a software system

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When to Use MRP

 Dependent and discrete items

 Complex products
 Job shop production
 Assemble-to-order environments

MRP
The MRP is designed to
answer three questions:
What is needed?
How much is needed?
When is it needed?

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Inputs to MRP
 MRP is a dependent demand
technique that uses
 Master Production Schedule (MPS)
 Bill-of-Material (BOM)
 On-hand inventory data
 Expected receipts (outstanding
purchase orders)
 Lead Time information
to determine material requirements.

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Overview of MRP

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Master Production Schedule (MPS)

 Time-phased plan specifying how many
and when the company plans to produce
each end item
Aggregate Plan
(Product Groups)

MPS
(Specific End Items)

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Master Production Schedule (MPS)

 MPS is established in terms of specific
products
 The MPS is a statement of what is to be
produced, not a forecast of demand
 Must be in accordance with the aggregate
production plan
 Before it is executed, MPS must be tested
for feasibility (Capacity Requirements
Planning)

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MPS Example – 1

One possible MPS…

p
Aggregate pion

15

MPS Example – 2
Months January February
Aggregate Production Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100

Figure 14.2
© 2011 Pearson Education, Inc. publishing as Prentice Hall

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Bills of Material (BOM)

 One of the primary inputs of MRP
 Provides a listing of all of the raw materials, parts,
subassemblies, and assemblies needed to produce one
unit of a product.
 Provides product structure tree: Visual depiction of the
requirements in a bill of materials, where all components
are listed by levels.
 Product structure
 Items above given level are called
parents
 Items below given level are called
children

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Product Structure Tree – Example 1

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Product Structure Tree: Example 2

Bicycle(1)
P/N 1000

Handle Bars (1) Frame Assembly (1)

P/N 1001 P/N 1002

Wheels (2) Frame (1)

P/N 1003 P/N 1004

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Product Drawing - Clipboard

Clipboard

Top clip (1) Bottom clip (1)

Pivot (1) Spring (1)

Rivets (2)
Finished clipboard Pressboard (1)

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Product Structure Tree : Example 3

Clipboard Level 0

Pressboard Clip Ass’y Rivets

(1) (1) (2) Level 1

Top Clip Bottom Clip Pivot Spring

(1) (1) (1) (1) Level 2

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Accurate Inventory Records for Outstanding

Purchase Orders (Scheduled Receipts)

 Accurate inventory records are

absolutely required for MRP (or
any dependent demand system) to
operate correctly
 Generally MRP systems require
more than 99% accuracy
 Outstanding purchase orders must
accurately reflect quantities and
scheduled receipts

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Lead Times
 The time required to purchase,
produce, or assemble an item
 For production – the sum of the
order, wait, move, setup, store,
and run times
 For purchased items – the time
between the recognition of a need
and the availability of the item for
production

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MRP Outputs: Primary

Planned orders
A schedule indicating the
amount and timing of
future
production and/or
purchasing orders

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MRP Outputs: Secondary

 Secondary Outputs
 Performance-control reports
 e.g., missed deliveries and
stockouts
 Planning reports
 Data useful for assessing future
material requirements
 e.g., purchase commitments
 Exception reports
 excessive scrap rates,

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MRP Record/Table

Week Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

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MPR Terminology
 Gross requirements : Total expected demand

 Scheduled receipts : Open orders scheduled to arrive

 Projected on hand : Expected inventory on hand at the

beginning of each time period

 Net requirements : Actual amount needed in each time period

and equal to (Gross requirements – available inventory)

 Planned-order receipts : Quantity expected to be received at

the beginning of the period and offset by lead time

 Planned-order releases : Planned amount to be ordered in

each time period

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The MRP Process

Step 1: Use the MPS to find the gross requirements of level 0 items.
Step 2: Subtract any stock on hand to give the net requirements of
level 0 items, and schedule production/assemble to start so
that these net requirements can be made in time.
Step 3: If there are any more level of materials, use the BOM to
translate the last level of production starts into gross
requirements for the next level of material. If there are no
more levels, Go to Step 5.
Step 4: Take each of the materials in turn and:
a) Subtract the stock on hand and scheduled deliveries to find the
quantities of materials to order;
b) Use the lead time and any other relevant information to find the time
of orders

Go to Step 3
Step 5: When there are no more levels of materials, finalize the
timetable of events/activities.

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The MRP Process

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Example MRP
To produce
Shutter ←
Need
→
Wood
Frames (2)
sections (4)

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Example MRP
Demand

at the
Inventory higi -
→

Gross -
On hand =

Start
(LT -1W) Producing -7
per shutter →

Note : Given data data: Scheduled Receipt in First Week – Wood Section 70 units

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MRP Processing: Example 2

FINAL PRODUCT

50 X

75 A(2) 25 B(1)
✗
units

C(3) ← 10 →
C(2) 20 D(5)

Requirements include 95 units (80 firm orders and 15 forecast) of X

in week 10

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POR is
8th week
↑( 1

X because LT = 2
-

A(2) P2

-
-

It takes
2 A’s for
each X
-
x*
32 -d
A -
L

B 2C +

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A(2) B(1)

It takes
1 B for
each X

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A(2) B(1)

C(3)

It takes 3
C’s for
each A

35

A(2) B(1)

C(3) C(2)

It takes 2
C’s for
each B

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A(2) B(1)

C(3) C(2) D(5)

It takes 5
D’s for each
B

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2213
I
22
MRP Exercise no A
f

=xct
[1] A company assembles dining room tables using bought-in parts of four legs and
a top. These have lead times of two and three weeks respectively, and assembly
takes a week. The company receives orders for 20 tables to be delivered in week 5 3W
- - -

of a production period and 40 tables in week 7, but has current stocks of only two
. . .
complete tables, 40 legs, and 22 tops. Develop a timetable of activities for the
company (that is when should it order parts and assemble the final products)?.

[2] A production schedule requires 45 units of a product to be available in week 12

of a cycle, 60 units in week 13 and 40 units in week 16. There are currently 10
units of the product in stock, but the company always keeps 5 units in reserve to
cover emergency orders. Each unit of the product takes two weeks to assemble
from 2 units of part B and 3 units of part C. Each unit of Part B is made in one
week from 1 unit of material D and 3 units of material E. Part C is assembled in two
weeks from 2 units of component F. Lead times for D, E, and F are one, two, and
three weeks respectively. Current stocks are 50 units of B, 100 of C, 40 of D, 150
of E, and 100 of F. The company keeps minimum stocks of 20 units of D, 100 of E,
and 50 F. The minimum order size for E is 300 units, while F can only be ordered in
discrete batches of 100 units. An order placed with a subcontractor for 100 units of
C is expected to arrive in week 8. Develop BOM as a diagram, and develop a
timetable of activities for the company (that is when should it order parts and
assemble the final products)?.

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MRP Exercise Problem 1 - Solution LT 1

=

-
O
Wor
There are no more levels of

C5C7
&G materials, so we can finalize
the timetables of activities:

E
Week 2: Place Order 32 Legs

Week 3: Place Order 36 Tops

Week 4: Place order 160 Legs,

and Assembles 18 Tables

Week 6: Assemble 40 Tables

x2

30-0 3 days
21

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Updating the MRP System

 An MRP is not a static document
 As time passes
 Some orders get completed
 Other orders are nearing completion
 New orders will have been entered
 Existing orders will have been altered
 Quantity changes
 Delays
 Missed deliveries

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Updating the System

 Two basic systems
 Regenerative system: MRP records are
updated periodically
 Essentially a batch system that
compiles all changes that occur within
the time interval and periodically
updates the system
 Net-change system: MRP records are
updated continuously
The production plan is modified to
reflect changes as they occur

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Safety Stock
Theoretically, MRP systems should not require
safety stock
 Variability may necessitate the strategic use of
safety stock
 A bottleneck process or late delivery of
raw materials may cause shortages in
downstream operations
 When lead times are variable, the concept
of safety time is often used
 Safety time: Scheduling orders for arrival
or completions sufficiently ahead of their
need so that the probability of shortage is
eliminated or significantly reduced

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Lot Sizing ~
 If affordable, a lot-for-lot (L4L) policy will incur the lowest inventory holding
costs and it will maintain a smoother production flow.
 Possible reasons for departure from a L4L policy:
 High set up times and costs => need for serial process batching to
control the capacity losses
 Processes (e.g., fermentors, furnaces, etc.) that require a large
production volume in order to maintain a high utilization => need for
parallel process batching
 Selection of a pertinent process batch size
 It must be large enough to maintain feasibility of the production
requirements
 It must control the incurred
 inventory holding costs, and/or
 part delays (this is a measure of disruption to the production
flow caused by batching)
 Move or transfer batches: The quantities in which parts are moved between
the successive processing stations.
 They should be as small as possible to maintain a smooth process
flow

43

Some Lot Sizing Methods employed

in the traditional MRP framework
Main focus: Balance set-up and holding costs
 Wagner-Whitin Algorithm for dynamic Lot Sizing
 Economic Order Quantity (EOQ): Compute a lot size using the EOQ
formula with the demand rate D set equal to the average of the net
requirements observed over the considered planning horizon.
 Periodic Order Quantity (POQ): Compute T = round(EOQ/D), and
every time you schedule a new lot, size it to cover the net
requirements for the subsequent T periods.
 Silver-Meal (SM): Every time you start a new lot, keep adding the net
requirements of the subsequent periods, as long as the average
(setup plus holding) cost per period decreases.
-
 Least Unit Cost (LUC): Every time you start a new lot, keep adding
the net requirements of the subsequent periods, as long as the
average (setup plus holding) cost per unit decreases.
-
=

 Part Period Balancing (PPB): Every time you start a new lot, add a
number of subsequent periods such that the total holding cost
matches the lot set up cost as much as possible.

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How to decide how many batch size should

be there?

Lot-for-Lot Example

① Gross
requirements
Scheduled
1

35
2

30
3

40
4

0
5

10
6

40
7

30
8

0
9

30
10

55

receipts
Projected on
35 0 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

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Lot-for-Lot Example
No on-hand inventory is carried through the system
Total holding cost
1
= $0
2 3 4 5 6 7 8 9 10

-
Gross
There are seven 35
requirements setups
30 for
40 this
0 item40in this
10 30 plan
0 30 55
Total ordering
Scheduled cost = 7 x $100 = $700
receipts
Projected on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

46

23
Gross 2 3 5 67 8 9 10
Reg .
I 4

Schedule 35 30 40 0 10 40 30 0 30 55
eeeaipts

O O O
Project on -
hand 35 O O O O O O

Net
Reg .

0 30 90 0 to 40 30 0 3055

Planned order 0 30 40 0 10 20 30 030 55

Receipt
Planned order 40 O W 40 30 0 30 D-
30
eeelease

Ending Inventory O O O O O O U 00 0
 25-11-2019
deve
of all
Sum
270
f demand of
eavy
& 10 weeks

O
-
..
EOQ Lot Size Example
then find total
demand?

in
Computation of EQO

 Annual demand (D):

(270/10)*52=1404
x
=
 Setup Cost (S)= $100
 Holding Cost (H) = $1*52= $52
care* of
3  EOQ= 73 units
no
*
&weeks
47

EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 0 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements

80508080
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Average weekly gross requirements = 27; EOQ = 73 units

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EOQ Lot Size Example

Total cost = setup cost + holding cost
Total Cost = D/Q x S + Q/2 x H
Total cost = (1,404/73) x $100 + (73/2) x ($1 x

Co 52 weeks)=$3,798
Cost for 10 weeks = $3,798 x (10 weeks/52
weeks) = $730
OR
Total Cost = 4*100 + 375 (including 57

of
units for week 11) = $775

we 49

Periodic Order Quantity

 The EOQ attempts to minimize the total cost of
ordering and carrying inventory and is based on
the assumption that demand is uniform.
 Often demand is not uniform, particularly in
material requirements planning, and using the
EOQ does not produce a minimum cost.
 The period-order quantity lot-size rule is based
on the same theory as the economic-order
quantity.
 It uses the EOQ formula to calculate an
economic time between orders. This is
calculated by dividing the EOQ by the demand
rate.

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Periodic Order Quantity

• Periodic order quantity (POQ)
method sets:
• the size of each production lot equal
to the requirements for a fixed
number of periods

③
POG
• Interval (period) = EOQ / average
demand per period
• Order quantity is set to cover the
interval

51

tD
-
* #
Cury =

POQ Lot Size Example

WEEK 1 2 3 4 5 6 7 8 9 10
Gross
requirements
Scheduled
35
-08
30 40 0 10 40 30 0 30 55

receipts

-0
Projected on
hand
35 0 0
000
40 0 0 70 30 0 0 0
55

Net
0 30 0 0 10 0 0 30 0
requirements

initial
Planned order
70 80 0 85 0
receipts
Planned order

not
70 80 85
releases

considfeeered
is EOQ = 73 units; Average weekly gross requirements = 27; POQ interval = 73/27 ≅ 3 weeks

80 = Gross Requirement in Period 5 to 7, as period 8 has ‘0’ gross requirements

work
85 = Gross Requirement in Period 9 and 10, as period 10 is the last period in the planning period.

of
52

=
o
Durg
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POQ Lot Size Example

÷:L  Setups = 3 x $100 = $300

 Holding cost = (40 + 70 + 30 + 55)
units x $1 = $195

¥sM  Total cost = $300 + $195 = $495

~É
•

53

Lot-Sizing Summary
For these three examples

Lot-for-lot $700 ①
EOQ $730 ②
POQ $495 ③

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Benefits of MRP
 Reduced inventories without reduced customer
service

 Ability to track material requirements

 Ability to evaluate capacity requirements

 Means of allocating production time

 Increased customer satisfaction due to meeting

delivery schedules

 Faster response to market changes

55

Requirements of MRP
Computer system and necessary software
Mainly discrete products
Stable lead times
Accurate and up-to-date
Master schedules
Bills of materials
Inventory status records
Integrity of data

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Extensions of MRP`/ MRP

Evolution

57

MRP Evolution

MRP Schedule Materials

Closed Loop Schedule Materials

MRP Incorporate Feedback

Schedule & Purchase Materials

MRP II Coordinate w/ Mfg Resources

ERP

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Closed-Loop MRP
Production Planning
Master Production Scheduling
Material Requirements Planning
Capacity Requirements Planning

No
Realistic? Feedback
Feedback
Yes
Execute:
Capacity Plans
Material Plans

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Manufacturing Resource Planning

(MRP II)
 Goal: Plan and monitor all
resources of a manufacturing
firm (closed loop):
 manufacturing
 marketing
 finance
 engineering
 Simulate the manufacturing
system
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Enterprise Resource Planning (ERP)

 Attempts to integrate all departments and functions

across a company onto a single computer system that
can serve all those different departments’ particular needs
 Organizes and manages a company’s business
processes by sharing information across functional areas
 Standardized record-keeping permit information sharing
and communication throughout the organization
 Produces information in real time and ties in
customers and suppliers

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Typical ERP System

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Enterprise Resource
Planning (ERP)
 ERP modules include
 Basic MRP
 Finance
 Human resources
 Supply chain management (SCM)
 Customer relationship management
(CRM)

63

Risks Associated with ERP

Implementation
 High Cost and Cost Overruns
 Common areas with high costs:
 Training
 Testing and Integration
 Database Conversion
 Disruptions to Operations
 ERP is reengineering--expect major
changes in how business is done

64

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Leading ERP Vendors

Worldwide
 SAP
 Oracle
 PeopleSoft
 Sage
 J.D.Edwards
 Lawson
 Microsoft Dynamics AX
 Great Plains/Solomon
 Invensys (BaaN)
 IFS

65

Advantages of ERP
Systems
1. Provides integration of the
supply chain, production, and
administration
2. Creates commonality of
databases
3. Improves information quality
4. May provide a strategic
advantage

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ERP Drawbacks
1. Very expensive to purchase and even more
so to customize
2. Implementation may require major
changes- Resistance to change
3. So complex that many companies cannot
adjust to it
4. Involves an ongoing, possibly never
completed, process for implementation
5. Training is an on-going activity

67

ERP in the Service Sector

 ERP systems have been developed
for health care, government, retail
stores, hotels, education, and
financial services
 Also called efficient consumer
response (ECR) systems
 Objective is to tie sales to buying,
inventory, logistics, and production

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