Chapter 14
Material Requirements
Planning
Extensive additions and changes have been made by Dr. Ömer
Yağız to this slide set to increase learning effectiveness .
Review of Inventory Management
• We will first take a look at the basics of Inventory
Management and then discuss Material Requirements
Planning, a technique which is used to plan, schedule
and control items for which demand is “dependent”.
• The concept of “dependent demand” will be explained
in the slides to follow.
Types of Inventories
• Raw materials & purchased parts
• Partially completed goods called
work in progress
• Finished-goods inventories
–
•
•
•
•
•
(manufacturing firms)
or merchandise
(retail stores)
Types of Inventories (Cont’d)
Replacement parts, tools, & supplies
Goods-in-transit to warehouses or customers
Functions of Inventory
To meet anticipated demand
To smooth production requirements
To decouple components of the production-
•
•
•
•
distribution
To protect against stock-outs
Functions of Inventory (Cont’d)
To take advantage of order cycles
To help hedge against price increases or to take
advantage of quantity discounts
To permit operations (WIP)
Inventory Counting Systems
• Periodic System
Physical count of items made at periodic intervals
• Perpetual Inventory System
System that keeps track
of removals from inventory
continuously, thus monitoring
current levels of each item
Inventory Counting Systems (Cont’d)
• Two-Bin System - Two containers of inventory; reorder
when the first is empty
• Universal Bar Code - Bar code
printed on a label that has
information about the item
to which it is attached
ABC Classification System
Classifying inventory according to some measure of
importance and allocating control efforts accordingly.
A - very important
B - mod. important
C - least important
Figure 13-2
The Inventory Cycle
Profile of Inventory Level Over Time
Q
Usage
rate
Quantity
on hand
Reorder
point
Receive
order
Place Receive
order order
Place
order
Lead time
•
•
•
•
Costs of Inventory
Holding (or carrying) costs
Setup (or production change) costs
Ordering costs
Shortage costs
Receive
order
Time
Basic Fixed-Order Quantity Model
Annual
Annual
Total Annual Cost = Purchase + Ordering +
Cost
Cost
TC = DC +
D
Q
S +
H
Q
2
TC
D
C
Q
S
R
L
H
Annual
Holding
Cost
Total annual cost
Demand
Cost per unit
Order quantity
Cost of placing an order
or setup cost
Reorder point
Lead time
Annual holding and storage cost
per unit of inventory
12
Total Cost
Annual
Annual
Total cost = carrying + ordering
cost
cost
TC =
Q
H
2
+
DS
Q
Deriving the EOQ
Using calculus, we take the derivative of the total cost
function and set the derivative (slope) equal to zero and
solve for Q.
Q OPT =
2DS
=
H
2( Annual Demand )(Order or Setup Cost )
Annual Holding Cost
Figure 13-4
Cost Minimization Goal
Annual Cost
The Total-Cost Curve is U-Shaped
TC 
Q
D
H S
2
Q
Ordering Costs
QO (optimal order quantity) Order Quantity
(Q)
Minimum Total Cost
The total cost curve reaches its minimum where the
carrying and ordering costs are equal.
EOQ Example
Annual Demand = 1,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = $2.50
Lead time = 7 days
Cost per unit = $15
Determine the economic order quantity and the reorder point.
14
Solution
Q OPT =
2DS
=
H
2(1,000 )(10)
= 89.443 units or 90 units
2.50
Why do we round up?
d =
1,000 units / year
= 2.74 units / day
365 days / year
_
R eorder point, R = d L = 2.74units / day (7days) = 19.18 or 20 units
When the inventory level reaches 20, order 90 units.
15
Another Illustration --- Output by Excel
W eeks in y ear=
Day s in y ear=
Annual demand=
Order c ost
Carry ing c ost=
Purc hase pric e=
52
365
1000
9
2
20
weeks
day s
units
$/order
$/unit/y ear
$/unit
EOQ=
No of orders=
Time bet. orders=
Time bet. orders=
Time bet. orders=
Max Inventory =
Avg. Invent.=
Tot. Order. Cost=
Tot. Carry Cost=
Tot. Inv. Cost=
Tot. Cost inc Purc .
EOQ
Q u an tity
O r d er C o st
10
20
30
40
50
60
70
80
90
94.86
100
110
120
130
140
150
160
170
900.00
450.00
300.00
225.00
180.00
150.00
128.57
112.50
100.00
94.88
90.00
81.82
75.00
69.23
64.29
60.00
56.25
52.94
94.868
10.54
0.094868
4.93
34.63
94.87
47.43
94.87
94.87
189.74
20,189.74
units
orders
yr
weeks
day s
units
units
$/y ear
$/y ear
$/y ear
$/y ear
H o ld in g C o st T o tal C o st
10.00
20.00
30.00
40.00
50.00
60.00
70.00
80.00
90.00
94.86
100.00
110.00
120.00
130.00
140.00
150.00
160.00
170.00
910.00
470.00
330.00
265.00
230.00
210.00
198.57
192.50
190.00
189.74
190.00
191.82
195.00
199.23
204.29
210.00
216.25
222.94
The fact that
EOQ=Order
cost or holding
cost is
coincidental
CO ST BEHAVIO R O F THE EO Q MO DEL
1,000.00
900.00
Order Co st
Ho lding Co st
800.00
To tal Co st
700.00
600.00
500.00
C O S T ($ )
400.00
Minimum of TC curve
300.00
200.00
100.00
170
160
150
140
ORDER QUANTITY (units)
130
120
110
100
90
80
70
60
50
40
30
20
10
0.00
In-Class Exercise
Annual Demand = 10,000 units
Days per year considered in average daily demand = 365
Cost to place an order = $10
Holding cost per unit per year = 10% of cost per unit
Lead time = 10 days
Cost per unit = $15
Determine the economic order quantity and the reorder point.
16
Solution
Q OPT =
d=
2D S
=
H
2(10,000 )(10)
= 365.148 un its, or 366 u n its
1.50
10,000 units / year
= 27.397 units / day
365 days / year
_
R = d L = 27.397 units / day (10 days) = 273.97 or 274 u n its
When the inventory level reaches 274, order 366 units.
17
Dependent vs. Independent demand
• Independent demand -- demand for an end item (finished
product) that is determined by market forces (price, disposable
income, price of substitutes, state of the economy, etc.)
Forecasting methods are used for independent demand
• Dependent demand - demand arising from the demand for a
higher level item
NOTE: Dependent demand must be calculated
Dependent Demand -- calculated
Bicycle(1)
P/N 1000
Handle Bars (1)
P/N 1001
Frame Assy (1)
P/N 1002
Wheels (2)
P/N 1003
Frame (1)
P/N 1004
Production Planning and Scheduling Framework
Aggregate
Production
Planning
Resource
Planning
Demand
Forecasting
Master
Production
Schedule
Rough-cut
Capacity
Planning
Detailed
Capacity
Planning
Material
Requirements
Planning
Feedback
Purchasing
Shop-Floor
Control
What is MRP?
• Material Requirements Planning (MRP) is a production
system that is specifically designed to handle
dependent demand inventory items.
• A computerized inventory control & production planning system
• Schedules component items when they are needed - no earlier and no later
History of MRP
• Begun in 1960 as a computerized approach to
production scheduling and purchasing.
• Joseph Orlicky, Oliver Wight, and others.
• American Production and Inventory Control Society
(APICS) launched “MRP Crusade” in 1972 to promote
MRP.
When to Use MRP
• Dependent and discrete items
• Complex products
• Job shop production
• Assemble-to-order environments
MRP provides answers for three questions
• What is needed?
• How much is needed?
• When is it needed?
• Master Production Schedule (MPS)
• Time-phased plan specifying timing and quantity of
production for each end item.
• Material Requirement Planning Process
Figure 14-1
Demand
Demand
Independent vs Dependent Demand
Stable demand
“Lumpy” demand
Time
Amount on hand
Amount on hand
Time
Safety stock
Time
Time
Figure 14-2
MRP Inputs
MRP Processing
MRP Outputs
Changes
Order releases
Master
schedule
Planned-order
schedules
Primary
reports
Bill of
materials
file
Inventory
records
file
MRP computer
programs
Exception reports
Planning reports
Secondary
reports
Performancecontrol
reports
Inventory
transaction
Master Production Schedule (MPS)
W eek
Item : X
1
2
Q uantity
3
4
50
5
6
7
100
8
200
Figure 14-4
Planning Horizon
Assembly
Subassembly
Fabrication
Procurement
1
2
3
4
5
6
7
8
9
10
Master Schedule
Master schedule: One of three primary inputs in MRP; states which end
items are to be produced, when these are needed, and in what quantities.
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.
Time fences: Series of time intervals during which order changes are
allowed or restricted.
Bill-of-Materials
Bill of materials: One of the three primary inputs of MRP; a listing of
all of the raw materials, parts, subassemblies, and assemblies
needed to produce one unit of a product.
Product structure tree: Visual depiction of the requirements in a bill
of materials, where all components are listed by levels.
Figure 14-5
Product Structure Tree
Level
0
1
Chair
Leg
Assembly
Seat
Cross
bar
2 Legs (2)
Back
Assembly
Side
Cross
Back
Rails (2) bar Supports (3)
3
Figure 14-6
Low Level Coding
Level
0
X
B(2)
1
2
3
C
D(3)
E
E(2)
E(4)
E
E(2)
MRP Processing
• Gross requirements
• Scheduled receipts
• Projected on hand
F(2)
• Net requirements
• Planned-order receipts
• Planned-order releases
• Gross requirements: total expected demand for an end
item or raw material in a time period
• Scheduled receipts: open orders scheduled to arrive
from vendors or elsewhere in the pipeline
• Projected on hand: expected amount of inventory that
will be on hand at the beginning of each period
• Net requirements: the actual amount needed in each
time period
• Planned order receipts: 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
Figure 14-9
Assembly Time Chart
Procurement of
raw material D Fabrication
of part E
Subassembly A
Procurement of
raw material F
Procurement of
part C
Final assembly
and inspection
Procurement of
part H
Fabrication
of part G
Procurement of
raw material I
1
2
3
Subassembly B
4
5
6
7
8
9
10
11
Illustration (Textbook)
M A S TE R P R O D U C TIO N S C H E D U L E
W eek Num ber
1
2
3
4
Q u a n t it y
5
6
7
8
100
150
S hutter
F ra m e s (2 )
W ood
S e c t io n s (4 )
M A S TE R P R O D U C TIO N S C H E D U L E
W eek Num ber
1
2
3
4
Q u a n t it y
Shutters (LT= 1 wk)
5
6
7
8
100
1
2
150
3
4
5
6
7
8
G R O S S R E Q U IR E M E N TS
0
0
0
100
0
0
0
150
S C H E D U L E D R E C E IP TS
0
0
0
0
0
0
0
0
P R O JE C TE D O N H A N D
0
0
0
0
0
0
0
0
N E T R E Q U IR E M E N TS
0
0
0
100
0
0
0
150
P L A N N E D O R D E R R E C E IP TS
0
0
0
100
0
0
0
150
P LA NNE D O RDE R RE LE A S E S
0
0
100
0
0
0
150
0
Fram es (LT=2 wks)
1
2
3
4
5
6
7
8
G R O S S R E Q U IR E M E N TS
0
0
200
0
0
0
300
0
S C H E D U L E D R E C E IP TS
0
0
0
0
0
0
0
0
P R O JE C TE D O N H A N D
0
0
0
0
0
0
0
0
N E T R E Q U IR E M E N TS
0
0
200
0
0
0
300
0
P L A N N E D O R D E R R E C E IP TS
0
0
200
0
0
0
300
0
200
0
0
0
300
0
0
0
P LA NNE D O RDE R RE LE A S E S
W ood Sections (LT=1 wk)
G R O S S R E Q U IR E M E N TS
1
2
3
4
5
6
7
8
0
0
400
0
0
0
600
0
S C H E D U L E D R E C E IP TS
70
0
0
0
0
0
0
0
P R O JE C TE D O N H A N D
70
70
70
0
0
0
0
0
N E T R E Q U IR E M E N TS
0
0
330
0
0
0
600
0
P L A N N E D O R D E R R E C E IP TS
0
0
330
0
0
0
600
0
P LA NNE D O RDE R RE LE A S E S
0
330
0
0
0
600
0
0
Updating the MRP System
• MRP is not static; it is a “living” document
– completed orders
– nearing completion
– new orders
– changes to orders (quantity, delays, missed or late
deliveries)
Two basic systems of updating
• Regenerative system
– update MRP records periodically
– batch type updating
• Net-change system
– update MRP records continuously
– only changes are updated
MRP Outputs (Primary Reports)
• Planned orders - schedule indicating the amount and
timing of future orders.
• Order releases - Authorization for the execution of
planned orders.
• Changes - revisions of due dates or order quantities,
or cancellations of orders.
MRP Secondary Reports
• Performance-control reports
• Planning reports
• Exception reports
Other Considerations
• Safety Stock
• Lot sizing
–
–
–
–
Lot-for-lot ordering
Economic order quantity
Fixed-period ordering
Part-period model
Capacity Planning
Capacity requirements planning: The process of determining shortrange capacity requirements.
Load reports: Department or work center reports that compare known
and expected future capacity requirements with projected capacity
availability.
Figure 14-17
MRP Planning
Develop a tentative
master production
schedule
Use MRP to
simulate material
requirements
Convert material
requirements to
resource requirements
Revise tentative
master production
schedule
No
Is shop
capacity
adequate?
No
Can
capacity be
changed to meet
requirements
Yes
Firm up a portion
of the MPS
•
•
•
•
Benefits of MRP
Low levels of in-process inventories
Ability to track material requirements
Ability to evaluate capacity requirements
Means of allocating production time
Yes
Change
capacity
Requirements of MRP
• Computer and necessary software
• Accurate and up-to-date
–
–
–
Master schedules
Bills of materials
Inventory records
• Integrity of data
MRP II (Manufacturing Resources Planning)
• Expanded MRP with and emphasis placed on
integration
–
–
–
–
–
Financial planning
Marketing
Engineering
Purchasing
Manufacturing
Figure 14-19
Manufacturing
Master
Master
production
productionschedule
schedule
Marketing
Production
Production
plan
plan
MRP
Rough-cut
Rough-cut
capacity
capacityplanning
planning
Capacity
planning
Adjust
Adjust
production
productionplan
plan
Yes
Problems?
Problems?
No
Requirements
Requirements
schedules
schedules
No
Problems?
Adjust master schedule
Market
Demand
Finance
Yes