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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 1970s. 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 Planning
Defined
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 orders
Faster response to market changes
Improved utilization of facilities and labour
Reduced 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?
Realistic
No
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 Information
MRP 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 Structure
Figure 14.5
Output 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 Files
Purchasing data
BOM
Lead times
(Item master file)
Inventory data
Master
production schedule
Material
requirement
planning programs
(computer and
software)
MRP Inputs MRP Processing MRP Outputs
Master
schedule
Bill of
materials

Inventory
records

MRP computer
programs
Changes
Order releases
Planned-order
schedules
Exception reports
Planning reports
Performance-
control
reports
Inventory
transaction
Primary
reports
Secondary
reports
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Major Inputs to MRP Process:
1. Bill of Material
Product structure file
Determines which component items need to be scheduled
Product Structure Record
Clipboard
Level 0
Level 1
Level 2
Sprin
g (1)
Bottom
Clip (1)
Top
Clip (1)
Piv
ot
(1)
Rivet
s (2)
Clip
Assembly
(1)
Pressboa
rd (1)
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.
Level0
(FinishedGood)
Level1
Level2
Level3
Level4
Level5
Level6
Transmission
Suspension
& Brake
Chassis
Engine
Assembly
Body &
Accessories
Exhaust &
Fuel System
Piston
Assembly
Cylinder
head
Crankshaft Camshaft
Piston Sub-
Assemblies (4)
Connecting
Rods (4)
All Terrain
Vehicle (ATV)
Piston
6 Steel
Bar ()
24 Solid
Steel Bar
Engine
Block
Seals &
Gaskets
Piston Rings
(3)
12 Steel
Bar ()
24 Solid
Steel Bar
denotes additionalmaterialsnotshown
Level0
(FinishedGood)
Level1
Level2
Level3
Level4
Level5
Level6
Transmission
Suspension
& Brake
Chassis
Engine
Assembly
Body &
Accessories
Exhaust &
Fuel System
Piston
Assembly
Cylinder
head
Crankshaft Camshaft
Piston Sub-
Assemblies (4)
Connecting
Rods (4)
All Terrain
Vehicle (ATV)
Piston
6 Steel
Bar ()
24 Solid
Steel Bar
Engine
Block
Seals &
Gaskets
Piston Rings
(3)
12 Steel
Bar ()
24 Solid
Steel Bar
Level0
(FinishedGood)
Level1
Level2
Level3
Level4
Level5
Level6
Transmission
Suspension
& Brake
Chassis
Engine
Assembly
Body &
Accessories
Exhaust &
Fuel System
Piston
Assembly
Cylinder
head
Crankshaft Camshaft
Piston Sub-
Assemblies (4)
Connecting
Rods (4)
All Terrain
Vehicle (ATV)
Piston
6 Steel
Bar ()
24 Solid
Steel Bar
Engine
Block
Seals &
Gaskets
Piston Rings
(3)
12 Steel
Bar ()
24 Solid
Steel Bar
Level0
(FinishedGood)
Level1
Level2
Level3
Level4
Level5
Level6
Transmission
Suspension
& Brake
Chassis
Engine
Assembly
Body &
Accessories
Exhaust &
Fuel System
Piston
Assembly
Cylinder
head
Crankshaft Camshaft
Piston Sub-
Assemblies (4)
Connecting
Rods (4)
All Terrain
Vehicle (ATV)
Piston
6 Steel
Bar ()
24 Solid
Steel Bar
Engine
Block
Seals &
Gaskets
Piston Rings
(3)
12 Steel
Bar ()
24 Solid
Steel Bar
Level0
(FinishedGood)
Level1
Level2
Level3
Level4
Level5
Level6
Level0
(FinishedGood)
Level1
Level2
Level3
Level4
Level5
Level6
Transmission
Suspension
& Brake
Chassis
Engine
Assembly
Body &
Accessories
Exhaust &
Fuel System
Piston
Assembly
Cylinder
head
Crankshaft Camshaft
Piston Sub-
Assemblies (4)
Connecting
Rods (4)
All Terrain
Vehicle (ATV)
Piston
6 Steel
Bar ()
24 Solid
Steel Bar
Engine
Block
Seals &
Gaskets
Piston Rings
(3)
12 Steel
Bar ()
24 Solid
Steel Bar
Transmission Transmission
Suspension
& Brake
Suspension
& Brake
Chassis Chassis
Engine
Assembly
Engine
Assembly
Body &
Accessories
Body &
Accessories
Exhaust &
Fuel System
Exhaust &
Fuel System
Piston
Assembly
Piston
Assembly
Cylinder
head
Cylinder
head
Crankshaft Crankshaft Camshaft Camshaft
Piston Sub-
Assemblies (4)
Piston Sub-
Assemblies (4)
Connecting
Rods (4)
Connecting
Rods (4)
All Terrain
Vehicle (ATV)
All Terrain
Vehicle (ATV)
Piston Piston
6 Steel
Bar ()
6 Steel
Bar ()
24 Solid
Steel Bar
24 Solid
Steel Bar
Engine
Block
Engine
Block
Seals &
Gaskets
Seals &
Gaskets
Piston Rings
(3)
Piston Rings
(3)
12 Steel
Bar ()
12 Steel
Bar ()
24 Solid
Steel Bar
24 Solid
Steel Bar
denotes additionalmaterialsnotshown denotes additionalmaterialsnotshown
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

PERIOD
MPS ITEM 1 2 3 4 5

Clipboard 85 95 120 100 100
Lapdesk 0 50 0 50 0
Lapboard 75 120 47 20 17
Pencil 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
(MPS)
Specifies what is to be made and when
Must be in accordance with the aggregate
production plan
Aggregate production plan sets the overall level
of output in broad terms
As the process moves from planning to
execution, each step must be tested for
feasibility
The MPS is the result of the production planning
process
Master Production Schedule
(MPS)
MPS is established in terms of specific products
Schedule must be followed for a reasonable
length of time
The MPS is quite often fixed or frozen in the near
term part of the plan
The MPS is a rolling schedule
The MPS is a statement of what is to be
produced, not a forecast of demand
Master Production Schedule
(MPS)
A customer order in a job shop (make-to-
order) company
Modules in a repetitive (assemble-to-stock)
company
An end item in a continuous (make-to-stock)
company
Can be expressed in any of the
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 firms 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
following
occur:
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

Abbrev
iation
Policy Definition
LFL
Lot for
lot
Deliver in each period the amount required
FOP
Fixed
order
period
When a delivery is required deliver the amount required for the
next m periods, where m is a parameter of the policy.
FOQ
Fixed
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.
WW
Wagner-
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)
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)
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.


Manufacturing Resources Planning (MRP II)
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).

Manufacturing Resources Planning (MRP II)
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.
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Distribution Resource Planning (DRP)
The relationship between MRP II and DRP
Market 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