MRP

Chapter 12
 Dependent vs. Independent Demand
• Independent demand: Demand for end items.

• Dependent demand: Demand for items that are

subassemblies or component parts to be used in
production of finished goods.

– Once the independent demand is known, the

dependent demand can be determined.

– Inventory management technique required for

Dependent Demand is different from that for
Independent Demand
 Independent and Dependent
Demand Independent Demand
(end item)

A Dependent Demand
(component parts)

B(4) C(2)

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

Independent demand is uncertain.

Dependent demand is certain.
 Comparison
Independent demand Dependent demand

Demand
Demand

“Lumpy” demand
Stable demand

Time Time
Amount on hand

Amount on hand

Safety stock
Time Time
Material requirements planning (MRP)

• Material requirements planning (MRP):

Computer-based information system that translates
master schedule requirements for end items into
time-phased requirements for subassemblies,
components, and raw materials.
• MRP works backward from the due date using lead
times and other information to determine when and
how much to order.
 Before MRP
• Two difficulties of ordering and scheduling:
1. Enormous task of setting up schedules, keeping track of
large numbers of parts and components, and coping with
schedule and order changes.
2. Lack of differentiation between independent demand and
dependent demand. Too often, techniques designed for
independent-demand items were used to handle
assembled items, which resulted in excessive inventories.

• Consequently, inventory planning and scheduling

presented major problems for manufacturers.
 MRP
• MRP begins with a schedule for finished goods that is
converted into a schedule of requirements for
subassemblies, component parts and raw materials
needed to produce the finished items in the specified time
frame
• MRP designed to answer the following questions
• What is needed ?
• How much is needed?
• When is it needed ?
 MRP

• Computerized inventory control &

production planning system
• Schedules component items when they
are needed - no earlier and no later
 Objectives of MRP

• Improve customer service

• Reduce inventory investment
• Improve plant operating efficiency
 When to Use MRP

• Dependent and discrete items

• Complex products
• Job shop production
• Assemble-to-order environments
Overview of MRP
 MPS versus MRP
– Master Production Schedule (MPS)
• End items
• Fewer items
• Higher level management involvement

– Material Requirement Planning

• Sub-assemblies, components, purchased parts
• Large number of items
• Detailed schedule (e.g., start date, order quantities,
purchase orders
 Assumptions

1. Known deterministic demands.

2. Fixed, known production lead times.

3. Capacity is not a constraint.

 MRP Inputs

1. A master production schedule

2. A Bill of Materials
3. An inventory records file
 MRP Inputs: Master Schedule

• Master (production) schedule (MPS):

states which end items are to be produced,
when these are needed, and in what
quantities.
• Example: A master schedule for end item X:

Come from: customer orders, forecasts and orders

from warehouses to build up seasonal inventories
 Master Schedule (Cont.)
• Cumulative lead time: The sum of the
lead times that sequential phases of a
process require, from ordering of parts or
raw materials to completion of final
assembly.
• The master schedule should cover the
cumulative lead time.
 Cumulative Lead Time
• The sum of the lead times that sequential phases of a
process require, from ordering of parts or raw materials to
completion of the final assembly.

Assembly

Subassembly

Fabrication
Procurement

1 2 3 4 5 6 7 8 9 10
Time period (weeks)
 MRP Inputs: Bill-of-Materials

• Bill of materials (BOM): a listing of all of

the raw materials, parts, subassemblies,
and assemblies needed to produce one
unit of a product.
– Each finished product has its own bill of
materials.
• Product structure tree: Visual depiction
of the requirements in a bill of materials,
where all components are listed by levels.
Assembly Diagram & Product
Structure Tree
Partial Product Structure Tree for a
Bicycle
Level
Bicycle 0

Frame Seat Assembly Wheel (2) 1

Tubing (5 ft.) Tire Rim Assemble Tube

2

Rim Axle Spoke (28)

3
Example 1
 Example 1
• Using the information above to do the
follows:
a) Determine the quantities of B, C, D, E, and F
needed to assemble one X.
 Solution to Example 1
a) X X :1

B : 2 1  2 B(2) C C : 11  1

D : 3  2  6 D(3) E E : 1 2  2 E(2) F(2)

E : 2 1  2 F : 2  1  2
E(4) • Thus, one X will require
E : 4  6  24 • B: 2 C: 1
• D:6 F: 2
• E: 28 (Note that E occurs in three places,
with 2+2+24)
 Example 1
• Using the information above:
a) Determine the quantities of B, C, D, E, and F
needed to assemble one X.
b) Determine the quantities of B, C, D, E, and F
needed to assemble ten X's, if you have the
following in inventory:
Component On hand
B 4
C 10
D 8
E 60
 ComponentOn hand
Solution to Example 1 B 4
C 10
b) X X : 10 D 8
E 60
B : 2 10  20 C : 110  10
 4 B(2)  10 C
16 0

D : 3 16  48 E :0 F :0
E : 116  16
 8 D(3) E E(2) F(2)
40 • Thus, given the amounts of on-hand
E(4) inventory, 10 Xs will require
E : 4  40  160 • B: 16 C: 0
 60
• D: 40 F: 0
100
• E: 116 (=16+100)
 Low-Level Coding

• Low-level coding
– Restructuring the bill of materials so that multiple
occurrences of a component all coincide with the
lowest level at which the component occurs

Level 0 X

Level 1 B(2) C

Level 2 D(3) F(2)

Level 3 E(4) E E(2)

 Example - Low Level Coding
• Notice that Item E appears in levels 1, 2, and 3.
In MRP, this item is treated as a level 3 item (the
lowest level).
Level
0 Y

1 A B C D E

F E G H
2

3 E
 MRP Inputs: Inventory Records

• Inventory records
– Includes information on the status of each item by
time period, called time buckets
• Information about
– Gross requirements
– Scheduled receipts
– Expected amount on hand
• Other details for each item such as
– Supplier
– Lead time
– Lot size policy
– Changes due to stock receipts and withdrawals
– Canceled orders and similar events
Assembly Time Chart
Example

Assume that we’ve

scheduled 500 chairs to
be ready five weeks
from now.
 Material Needed for a Chair

Side rails (2)

Seat
Front legs (2)

Cross bars (2)

Back supports (3)

 Product Structure Tree

Chair

Leg Seat Back Assembly

Assembly

Back
Legs (2) Cross Side Cross Supports
bar rails (2) bar (3)
 Assembly Time Chart

Week 1 Week 2 Week 3 Week 4 Week 5

Back Support (2 weeks)

Side Rails (2 weeks) Back

Assembly
Cross Bar (2 weeks)
(1 week) Chair
Seats (2 weeks) Assembly
(1 week)
Leg
Legs (2 weeks)
Assembly
Cross Bar (2 weeks) (1 week)
 Lead-Time Key Points

• To have finished chairs at the beginning

of Week 5, we must begin production
and order materials in Week 1.
• “Exploding” the bill of materials tells us
when to order things.
• Not much we can do to adjust output of
chairs for the next 4 weeks. Why?
 MRP
Purchased Items
Internally Manufactured
Processor chips
Memory chips
Floppy drives
Mother boards
Hard drives
Video interfaces
Monitors
Floppy drive interfaces
Power cords
Hard drive interfaces
Transistors
Monitor chasses
Clock crystals
Computer chasses
 What the MRP will tell you:

For Each Component Produced

• When to begin production

• Allowance for set-up time
• How much to produce
• How often to produce
 What the MRP will tell you:

For Each Component Purchased

• When to order
• Allowance for the lead time
• How much to order
• How often to order
 Items Already On Order
Purchase Orders Outstanding or Open
Orders
Open Orders Open Orders
(Purchased Items) (Manufactured Items)
• Items being ordered • Items being
• Items being processed by
processed by production
suppliers • Items waiting for
components
• Items in transport
• Items waiting for
• Items being processing
inspected by • Items being inspected
38
receiving.
 Lead Times

For Purchased Items For Manufactured Items

Order Processing Time Setup Time
+ +
Order filling time Queue time
+ +
Order shipping time Run time
+ +
Receiving and Handling time
inspection
 MRP Outputs: Primary

• Primary Outputs
– Planned orders
• A schedule indicating the amount and timing of
future orders
– Order releases
• Authorizing the execution of planned orders
– Changes
• Revisions of the dates or quantities, or the
cancellation of orders
 MRP Outputs: Secondary

• Secondary Outputs
– Performance-control reports
• Evaluation of system operation, including deviations from
plans and cost information
– e.g., missed deliveries and stockouts
– Planning reports
• Data useful for assessing future material requirements
– e.g., purchase commitments
– Exception reports
• Data on any major discrepancies encountered
– e.g., late and overdue orders, excessive scrap rates,
requirements for nonexistent parts
 MRP Processing

• MRP processing takes the end item

requirements specified by the master
schedule and “explodes” them into time-
phased requirements for assemblies,
parts, and raw materials offset by lead
times
 MRP Processing Logic
• Based on the master schedule to determine the
components schedules for successively lower-level items
throughout the product structures.
• It calculates schedules for each of the time periods
(usually weekly) in the scheduling time horizon
• Gross requirements
• Schedule receipts
• Projected on hand
• Net requirements
• Planned-order receipts
• Planned-order releases
 MRP: Development

• The MRP is based on the product structure tree

diagram
• Requirements are determined level by level,
beginning with the end item and working down
the tree
– The timing and quantity of each “parent” becomes the
basis for determining the timing and quantity of the
“children” items directly below it
– The “children” items then become the “parent” items
for the next level, and so on
 Format of MRP

Week Number 0 1 2 3 4 5 6 7 8

Item:
Gross requirements

Scheduled receipts
Projected on hand

Net requirements

Planned-order receipts
Planned-order releases
 MRP Processing
– Gross requirements: Total expected
demand for an item or raw material in a time
period.
– Scheduled receipts: Open orders scheduled
to arrive from vendors or elsewhere in the
pipeline by the beginning of a period.
– Projected on hand: Expected amount of
inventory that will be on hand at the beginning
of each time period:
Scheduled receipts + inventory carried
forward
 MRP Processing

• Net requirements: The actual amount that

we need to procure in each time period:
Gross requirements - projected on-hand
• Planned-order receipts: The quantity
expected to be received by the beginning of
the period in which it is shown.
• Planned-order releases: Planned amount
to order in each time period; planned-order
receipts offset by lead time.
 MRP Item
Gross requirements
1 2 3
10 15 20 12
4 5
5
Logic Scheduled receipts
Projected on hand
Net requirements
Planned-order receipts
Planned-order releases

The MPS is converted into the gross requirements for

each component for each time period (time bucket) in
the planning horizon using the bill of materials.
 Example
• Consider the two product structure trees shown below:

A C

B D D(2) F

• Develop a MRP for item D. Given that the master

schedule calls for 80 units of A in week 4 and 50 units of
C in week 5. There’s a beg. inv. of 110 units of D on
hand and all items have lead times of one week.
Solution to Example-- MRP for Item A
Week Number 0 1 2 3 4 5 6
Quantity of A 80
Quantity of C 50

Item: A LT=1 week

Gross requirements 80
Scheduled receipts

Projected on hand

Net requirements 80
Planned-order receipts 80
Planned-order releases 80
times 1
Solution to Example -- MRP for Item C
Week Number 0 1 2 3 4 5 6
Quantity of A 80
Quantity of C 50

Item: C LT=1 week

Gross requirements
50
Scheduled receipts

Projected on hand

Net requirements 50
Planned-order receipts 50
Planned-order releases 50
times 2
Solution to Example -- MRP for Item D
80 50
Item A Item C
times 1 times 2
D LT=1 week 1 2 3 4 5 6
Gross requirements 80 100
Scheduled receipts

Projected on hand 110 110 110 110 30

Net requirements 0 70
Planned-order receipts 70
Planned-order releases 70
 Product Structure Tree

Chair

Leg Seat Back Assembly

Assembly

Back
Legs (2) Cross Side Cross Supports
bar rails (2) bar (3)
 Assembly Time Chart

Week 1 Week 2 Week 3 Week 4 Week 5

Back Support (2 weeks)

Side Rails (2 weeks) Back

Assembly
Cross Bar (2 weeks)
(1 week) Chair
Seats (2 weeks) Assembly
(1 week)
Leg
Legs (2 weeks)
Assembly
Cross Bar (2 weeks) (1 week)
 The MRP Process Starts with the
MPS of end items
Chairs Lead Time = 1 week
Week
1 2 3 4 5 6 7
Planned order receipts 0 0 0 0 500 400 400
Planned order releases 0 0 0 500 400 400 0

End items are also known as “Level 0” items

 The “Parent / Child” Relationship

Chairs
LT = 1 week Week
1 2 3 4 5 6 7
Planned order receipts 0 0 0 0 500 400 400
Planned order releases 0 0 0 500 400 400 0

Seat
LT = 2 weeks Week
Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
Scheduled Receipts
Projected On Hand 0 0 0 0 0 0 0 0
Net Requirements 500 400 400
Planned Receipts 500 400 400
Planned Order 500 400 400
Where do the gross requirements come from?
 Seat
LT = 2 weeks Week
Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
Scheduled Receipts
Projected On Hand 0 0 0 0 0 0 0 0
Net Requirements 500 400 400
Planned Receipts 500 400 400
Planned Order Releases 500 400 400

Leg Assembly
LT = 1 week Week
Going Minimum order = 1000 1 2 3 4 5 6 7

Deeper… Gross Requirements

Scheduled Receipts
0 0 0 500 400 400 0

Projected On Hand 25 25 25 25 25 525 125 725

Net Requirements 475 275
Planned Receipts 1000 1000
Planned Order Releases 1000 1000

Back Assembly
LT = 1 week Week
Multiple of 250 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
Scheduled Receipts 250
Projected On Hand 0 0 250 250 250 0 100 200
Net Requirements 250 400 300
Planned Receipts 250 500 500
Planned Order Releases 250 500 500

Leg Assembly
LT = 1 week Week
Minimum Order = 1000 1 2 3 4 5 6 7
 Moving from “Level 1” items
to “Level 2” items . . .
Leg Assem bly
LT = 1 week Week
Minimum Order = 1000 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
Scheduled Receipts
Projected On Hand 25 25 25 25 25 525 125 725
Net Requirements 475 275
Planned Receipts 1000 1000
Planned Order 1000 1000

Legs
LT = 2 weeks Week
Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 0 2000 0 2000 0 0
Scheduled Receipts
Projected On Hand 0 0 0 0 0 0 0 0
Net Requirements 2000 2000
Planned Receipts 2000 2000
Planned Order 2000 2000

Where do the gross requirements for LEGS come from?

 Combining Requirements: “Cross
Bars”
Leg Assembly
LT = 1 week Week
Minimum Order = 1000 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
Scheduled Receipts
Projected On Hand 25 25 25 25 25 525 125 725
Net Requirements 475 275
Planned Receipts 1000 1000 Note effect of
Planned Order 1000 1000
differences in
Back Assembly
LT = 1 week Week lead times and
Multiple of 250 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
order sizes on
Scheduled Receipts
Projected On Hand 0 0
250
250 250 250 0 100 200
the gross
Net Requirements
Planned Receipts
250
250
400
500
300
500
requirements
Planned Order 250 500 500 for each
Crossbars
LT = 2 weeks Week
component
Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 0 1250 500 1500 0 0
Scheduled Receipts
Projected On Hand 0 0 0 0 0 0 0 0
Net Requirements 1250 500 1500
Planned Receipts 1250 500 1500
Planned Order 1250 500 1500
 Impact of Longer Lead Times
We cannot Leg Assem bly
LT = 1 week Week
do this since Minimum Order = 1000
Gross Requirements
1
0
2
0
3
0
4
500
5
400
6
400
7
0
the planned Scheduled Receipts
Projected On Hand 25 25 25 25 25 525 125 725
order would Net Requirements 475 275
Planned Receipts 1000 1000
be in the Planned Order 1000 1000

past…. Thus Back Assem bly

LT = 2 weeks Week
the 250 Multiple of 250 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
crossbars Scheduled Receipts 250
Projected On Hand 0 0 250 250 250 0 100 200
will be Net Requirements 250 400 300
Planned Receipts 250 500 500
delivered late Planned Order 250 500 500

one week to Crossbars

LT = 2 weeks Week
back Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 250 1500 500 1000 0 0
assembly. Scheduled Receipts
Projected On Hand 0 0 0 0 0 0 0 0
What does Net Requirements 250 1500 500 1500
this do to our Planned Receipts
Planned Order 250 1500
250
500
1500
1000
500 1500

chair
schedule?
 Example MRP

Shutter

Wood
Frames (2)
sections (4)
Example MRP (cont.)
 Lot-Sizing in MRP

• Lot-size is the quantity ordered/produced at

one time
• Large lots are preferred because:
– Changeovers cost less and capacity increases
– Annual cost of purchase orders decreases
– Price breaks and transportation economies of
scale can be utilized
 Lot-Sizing in MRP

• Small lots are preferred because of:

–Lower inventory carrying cost
–Reduced risk of obsolescence
–Shorter time to produce customer order
 Recall ...
Leg Assembly
LT = 1 week Week
Minimum Order = 1000 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
Scheduled Receipts
Projected On Hand 25 25 25 25 25 525 125 725
Net Requirements 475 275
Planned Receipts 1000 1000
Planned Order 1000 1000

Legs
LT = 2 weeks Week
Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 0 2000 0 2000 0 0
Scheduled Receipts
Projected On Hand 0 0 0 0 0 0 0 0
Net Requirements 2000 2000
Planned Receipts 2000 2000
Planned Order 2000 2000

Look at the “lumpiness” of demand for legs

 If we order “lot-for-lot”
Leg Assembly
LT = 1 week Week
Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 0 0 500 400 400 0
Scheduled Receipts
Projected On Hand 25 25 25 25 25 0 0 0
Net Requirements 475 400 400
Planned Receipts 475 400 400
Planned Order 475 400 400

Legs
LT = 2 weeks Week
Minimum Order = 1 1 2 3 4 5 6 7
Gross Requirements 0 0 950 800 800 0 0
Scheduled Receipts
Projected On Hand 0 0 0 0 0 0 0 0
Net Requirements 950 800 800
Planned Receipts 950 800 800
Planned Order 950 800 800

Much smoother demand for legs, lower average inventory

 MRP Benefits
• Enables managers to easily
– Determine the quantities of each component for a given
order size
– To know when to release orders for each component
– To be alerted when items need attention
• Additional benefits
– Low levels of in-process inventories
– The ability to keep track of material requirements
– The ability to evaluate capacity requirements generated by a
given master schedule
– A means of allocating production time
– The ability to easily determine inventory usage via
backflushing
– Exploding an end item’s BOM to determine the quantities of
the components that were used to make the item
 MRP Requirements

• To implement an effective MRP system

requires:
– A computer and the necessary software to handle
computations and maintain records
– Accurate and up-to-date
• Master schedules
• Bills of materials
• Inventory records
– Integrity of data files
 MRP Difficulties
• Consequence of inaccurate data
– Missing parts
– Ordering incorrect numbers of items
– Inability to stay on schedule
• Other problems
– Assumptions of constant lead times
– Products being produced differently from the BOM
– Failure to alter a BOM when customizing a
product
– Inaccurate forecasts