IEOR 254

LP Models for the MRP Problem

Spring, 2007

Prof. Leachman

Introduction

Basic material requirements planning seeks to establish a schedule of order releases in a product
network (also known as the "bill of materials") to meet given external demands for the products.
While it is not necessary to solve a linear program to calculate a solution to the MRP problem, it
is possible to do so. This is important when we wish to incorporate all of the MRP functions into
a planning system that utilizes LP in its planning engine.

We can formulate linear programming models to carry out the MRP calculation as follows. The
given parameters of the requirements planning problem are as follows:

i = product; we assume the products of the network are numbered 1, 2, 3, ... ,N, with the property
that if product i is an input to manufacture of product j, then i < j.

t = time grid point; t = 1, 2, ... ,T mark the end points of equal-length periods within the planning
horizon T.

Li = lead time for the manufacturing process to produce product i, reflecting the manufacturing
flow time for lots of product i.

gi = expected yield of the manufacturing process to produce product i.

aij = amount of product i required as direct input per unit released of product j.

dit = external demand for product i due at time t.

Ii,0 = initial inventory of product i, completed but not yet transferred for external or internal use.

wit = projected output during [t-1, t] from work-in-process (WIP) of product i, defined for t = 1,
2, ... ,Li. All released but uncompleted orders for product i must be accounted for by the wit
parameters.

The goal of the requirements planning is to define a pattern of order releases for each product
that is as small as possible and as late as possible to meet the given external demands. We will let
orit denote the decision variable for the quantity of product i to be released during period [t-1, t].
The output corresponding to the release orit is gi ori,t occurring in period (t+Li).
Formulations assuming feasibility

For ease of exposition, we first develop formulations assuming the given demands can be
feasibly met by a pattern of order releases in positive time.

The constraints of the MRP problem are easy to identify: there should be mass conservation of
each product at each time point. For this purpose, let Iit denote the completed but untransferred
inventory of product i at time t (i.e., at the end of period t). The constraints require that Iit,
properly defined in terms of the order releases and the demands, be non-negative.

The objective function for the MRP problem is less obvious. Most textbook LP formulations for
production planning seek to minimize production and inventory holding costs. Assuming the
problem is feasible, we can provide a formulation using only inventory holding costs in the
objective function that will give an optimal solution the same as the solution of the MRP
algorithm, as follows.

Let hi denote the holding cost for product i per unit per unit time. We require that all hi > 0, and
that hi < hj if product i is required as input in the production of product j, i.e., holding costs
increase as value is added. The LP model is then

N T
(1) Minimize hi I it
i =1 t =1
subject to
N
(2) I it = I i ,t 1 + wit a
j =i +1
ij or jt d it , t = 1,..., Li , i = 1,..., N .
N
(3) I it = I i ,t 1 + g i ori ,t Li a
j =i +1
ij or jt d it , t = Li + 1,..., T , i = 1,..., N .

(4) orit 0 , I it 0 , t = 1,...,T , i = 1,..., N .

We can also provide an objective function that works using only production costs in the
objective function, if those costs are properly discounted. Let cit denote the discounted cost per
unit order release of product i during period t. We require that cit > 0 and cit > ci,t+1 for all i and t.
Then we can replace (1) by

N T
(5) Minimize cit orit
i =1 t =1

subject to (2), (3) and (4).

Formulations to cope with infeasibility

In the case the demand patterns are impossible to meet considering the lead times, the initial
inventory and the WIP, the foregoing LPs will be infeasible and provide no solution at all. The
MRP algorithm also has a problem in this case. It takes any overdue releases (i,e,, releases
needed before period 1) and it lumps them in with releases needed in period 1 before generating
releases for predecessor products (i,e., products at the next lower level of the bill of materials). In
the case there are such shortages in a multi-level bill of materials, and the shortages occur above
the lowest level of the bill, the MRP algorithm provides an infeasible schedule of order releases.
(By infeasible" we mean the pattern of releases can not be physically executed since mass
conservation is violated.)

We can modify the LP formulations to always generate an executable schedule of releases, even
if the given demands are impossible to meet on time, as follows. We must introduce new
variables measuring the amount of shortage of each product, called backorder variables. We let
BOit denote the amount of shortage of product i at time t. Let bi denote the cost per unit short per
period of product i. We modify formulation (1) - (4) to the following:

N T N T
(6) Minimize hi I it + bi BOit
i =1 t =1 i =1 t =1
subject to

N
(7) I it BOit = I i ,t 1 BOi ,t 1 + wit a
j =i +1
ij or jt d it , t = 1,..., Li , i = 1,..., N .
N
(8) I it BOit = I i ,t 1 BOi ,t 1 + g i ori ,t Li a
j =i +1
ij or jt d it , t = Li + 1,..., T , i = 1,..., N .

(9) orit 0, I it 0, BOit 0, i = 1,..., N , t = 1,..., T .

In some cases, there may be choices among products with common predecessors as to which
products should bear the shortages. The relative values selected for bi will drive which products
will bear such shortages. Note that, after the sum of lead times of a product and all its
predecessor products, shortages are impossible. (Why?)

Generalization Using Cumulative Constraints

The constraints of the MRP formulations express mass conservation of the products. As above,
they are expressed in accounting balance form, i.e., in terms of accounting balance of start-of-
period and end-of-period inventory quantities. Mass conservation also may be expressed in
cumulative form. Let capital-letter functions denote cumulative amounts, i.e., Di(t) is the
cumulative external demand for product i up to time t, ORj(t) is the cumulative release of input
material to make product j at time t (measured in units of product j), and Wi(t) denote the
cumulative projected output at time t of work-in-process to make product i. Then, in the case of
no shortages allowed, the mass conservation of product i at time t is expressed as
 N
(10) Di (t ) + a OR
j +1+1
ij j (t ) I i 0 + Wit + g i ORi ,t Li , for all t 0 .

A truly feasible production plan must have expression (10) satisfied throughout continuous time.
If (10) is evaluated at the integer time grid points, and a difference between expressions for time
t and time t-1 is taken, the resulting expression is (2) or (3). Thus the accounting balance form
constraints are equivalent to enforcing (10) at solely the integer time grid points. This is
sufficient to guarantee mass conservation throughout continuous time, provided all the rates of
inflow and outflow from inventory are at constant rates within each time period, i.e., the
cumulative functions are piecewise linear, changing slope only at the time grid points.

When we address production systems with non-integer lead times, we will need to enforce (10)
at other times than just the given time grid points.