Chapter Fifteen:
Material Requirements Planning (MRP)
for Sporadic Demand
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Outline of Chapter Fifteen
15-1 The Background for MRP
15-2 Dependent Demand Systems Characterize MRP
15-3 The Master Production Schedule (MPS)
15-4 Operation of the MRP
15-5 MRP Basic Calculations and Concepts
15-6 MRP in Action
15-7 Lot Sizing
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Outline of Chapter Fifteen (continued)
15-8
Updating
15-9
Capacity Requirements Planning (CRP)
15-10 Distribution Resource Planning (DRP)
15-11 Weaknesses of MRP
15-12 Closed-Loop MRP
15-13 Strengths of MRP II (Manufacturing Resource
Planning)
15-14 Emerging Power of ERP
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15-1 The Background for MRP
•
MRP means material requirements planning for specific types
of inventory situations. It is well-suited to manage inventories
for job shops, and for service operations, where demand for
an end product is sporadic.
•
MRP is an information system that is able to coordinate data
about parts and component materials that do not have regular
continuous OPP-type usage patterns—characteristic of flow
shops.
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15-1 The Background for MRP (continued)
•
Unlike OPP with quantitative models of optimization, MRP systems are
logical organizers of information. MRP link a multiplicity of orders to the
processes that will make the finished goods. The systems of connected
complexity easily befuddle people, but not the computers that these same
people program.
•
MRP synchronizes parts and components that go into parent products.
For example, restaurants have menus that specify what comes on a plate
for each dish that can be ordered. If peas and mash potatoes go with
meat loaf, then the MRP places orders with suppliers of all ingredients so
that they will all be on hand in time to clean, cook, plate, and deliver the
dishes that customers request.
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The Background for MRP
•
The first book on MRP was written by Joseph Orlicky, who
developed MRP at IBM in 1975. We pay tribute to Orlicky, and to
Ollie Wight who carried on the crusade for MRP sponsored by the
American Production and Inventory Control Society (APICS).
•
As Ollie Wight said, MRP is critical because 70% of all stock carried
is of the MRP demand-type which is not regular, continuous and
independent as is the OPP demand-type. Today, tens of thousands
of companies located all over the world use various kinds of MRPs.
•
Let us also acknowledge that constant improvements in computer
memory, speed, and cost, since 1970 have made it possible for
MRP systems to tame what would otherwise be massive information
overload.
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15-2 Dependent Demand Systems Characterize
MRP
MRP assumptions are that:
1.
Parts and components demands are dependent on the parent demand (also
called end product demand). Parts and components have different lead times with
different suppliers and must all be treated individually.
2.
Demand for the parent is sporadic or lumpy which passes along to the parts and
components. Figure 15-1 illustrates sporadic demand and contrasts the MRP
assumption with the OPP assumption. Sporadic demand forecasts are feasible.
Figure 15-1 Stock on Hand (SOH) Patterns for OPP and MRP
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15-3 The Master Production Schedule (MPS)
The MPS is one of three inputs to the MRP information system. The others are 1) the
bill of material (BOM) describing end products, and 2) inventory stock–level reports.
Aggregate plans specify what and how much will be made. The MPS converts this
information into a time-phased plan with a starting date for the order so that the
promised customer delivery date will be met. This “order promising” means that a
delivery commitment has been made. Figure 15-2 illustrates the Time-Phased MPS
Function.
Figure 15-2 Note relationship to later use of the terms: Place order = plannedorder release; receive order = planned-order receipt. Examples of parent products
include mobile phones, VCRs, DVDs, digital cameras, laptops, bicycles, autos,
farm equipment, and industrial machines.
Note: Place order = planned-order release; Receive order = planned-order receipt
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Cumulative Lead Time Tree
•
Cumulative lead time for a parent product is found by looking at the
longest lead-time path to obtain all of the parts that go into it—as the
end- or parent-item.
•
To assemble A in Figure 15-3 requires ordering B one week, and C
two weeks before the assembly operation is scheduled to begin.
•
Subassembly C requires 2 weeks for D and 4 weeks for E. The
longest ordering chain is six weeks (A+C+E). E must be ordered six
weeks before the A-assembly.
Figure 15-3
Cumulative LeadTime Tree
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Total Manufacturing Planning and Control
System (MPCS)
•
In prior steps, aggregate scheduling led to an authorized production
plan. This, in turn, produces the Master Production Schedule (MPS)
which intends to satisfy customer order expectations as well as
specific orders on hand.
•
Once the MPS is accepted and authorized, the planning process
proceeds to details of scheduling that are the province of the MRP
system. The steps are flow charted in Figure 15-4. This process is
called the total manufacturing planning and control system (MPCS).
Figure 15-4
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Inputs and Outputs of MPS
•
Table 15-3 shows an MPS chart. One is created for every parent
product. This is the output of the middle step (labeled MPS) for the
total MPCS in Figure 15-4.
•
The MPS chart in Table 15-3 indicates that 20 units of the parent
product are to be made in the second week ahead from now. It if
takes 4 weeks (LT = 4) to order parts that are needed for the parent
product, then the order should have been placed 3 weeks before
week 1.
•
45 units are required 5 weeks ahead. The planned order must be
released now in week 1.
•
Order in week 5 for 60 units required in week 9.
Table 15-3 MPS Chart for Specific Parent Product
Weeks ahead
Gross (amount)
requirements
1
2
20
3
4
5
45
6
7
8
9
60
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MPS: Inputs and Outputs
•
Master production schedulers create make-build specs for each
parent product subject to the Inputs and Outputs shown in Figure
15-5.
•
The MPS combines customer orders on hand with (hard) parent
product forecasts. Customer and order priorities and best use of
available resources are other important inputs.
•
Outputs go to the MRP for planned order releases.
Figure 15-5
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Inventory Environments and Order
Promising
•
Order promising commitments by sales and production’s order
fulfillment goals are matched and coordinated by the MPS.
Inventory environment (IE) for the parent products is the systems
driver.
•
Make-to-stock (MTS) has latitude in what is scheduled. P/OM’s
objective is to provide excellent service to customers by maintaining
proper stocks of inventories to meet demand due dates.
•
Make-to-order (MTO) is an environment where finished goods
inventories do not exist to support service to customers. There is
great dependency between sales and P/OM which requires
capacity and materials to meet delivery expectations. MPS/MRP are
constantly changing.
•
Assemble-to-order (ATO) is an (IE) where end-items are built from
subassemblies. The MPS ensures correct stock-on-hand (SOH) for
the kits to meet due dates. Often, the MPS is primarily concerned
with making parts and only secondarily with parent products.
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Bill of Material (BOM)
•
The Bill of Material (BOM) for a dinner party is the cook’s shopping
list organized by dishes and what is required for each one of them.
•
MRP cannot be used without bills of material. However, MRP did
not invent these detailed lists of information about assemblies,
subassemblies, sub-subs, etc.
•
BOMs were used by P/OM long before MRP was created (1975).
•
Figure 15-8 shows a multi-level BOM with some detailed coded
information about levels where the parent is at level zero. These
multi-level product structures use an explosion of parts. Orlicky’s
word to reflect that no detail should be missed.
Figure 15-8
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15-4 Operation of the MRP
•
Figure 15-9 shows Inputs and Outputs of the MRP system.
•
MPS and BOM have been discussed. It’s not surprising that the IRF is a
critical third input to the MRP.
•
Output driver is the planned-order timetable for planned-order releases.
In some inventory environments changes are more of a problem than in
others.
Figure 15-9
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15-5 MRP Basic Calculations
•
Gross requirements GRt for end-items for week t are required
by MRP and stated by the MPS. Inventory data are on file for
the prior week’s stock-on-hand, SOHt-1.
•
And there may be some open orders to be received at the
beginning of week t, called Scheduled Receipts, SRt.
•
Gross requirements less projected stock-on-hand at time t
are called Net Requirements, NRt.
•
NRt = GRt - SOHt-1- SRt.
•
The determination of NRt is called netting. Based on NRt and
order policies, planned-order receipt, PRt, and planned-order
release times can be calculated.
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15-6 MRP in Action
•
The best way to understand MRP is to simulate the action.
•
Some scenarios covered in Section 15-6 include:
1. Lot-for-lot ordering; no parts-sharing parents;
SOH = 80; LT = 2; @ level one.
2. Lot-for-lot ordering; no parts-sharing parents;
SOH = 40: LT = 1; @ level two.
3. Lot-for-lot ordering; no parts-sharing parents;
SOH = 0; LT = 1; @ level two.
4. Economic order quantity (EOQ) for a part that shares two parents;
SOH = 80; LT = 1; @ level 1
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15-7 Lot Sizing
•
Lot-for-lot sizing is one of the simplest ordering methods. However, it
places more orders than other methods which order less frequently in
larger quantities.
•
Lot-for-lot is MRP’s version of just-in-time.
•
Lot-for-lot means buying the exact amount in each cell with a Net
Requirement (NRt); using the appropriate Lead Time (LT).
•
Lot-for-lot means that planned-order release (and planned-order receipt)
are equal to NRt.
•
An alternative is to group together the requirements of several NRt cells to
gain volume discounts, smaller number of orders, and other efficiencies.
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15-8 Updating
•
There are two approaches for updating the MRP:


Regeneration MRP—MPS is totally reexploded down through all
BOMs, to maintain valid priorities. Planned-order releases and NRt
are recalculatedfrom scratch. Perhaps weekly timing.
Net change MRP—MRP is retained in the computer. When a
change is needed in requirements, BOM listing, or open-order
inventory status, partial explosion and netting are used only for
affected parts. Too much netting accumulates errors but allows
rapid response and avoids costly regeneration. Timing is as
needed which could be hourly, or even less, in times of stress.
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15-9 Capacity Requirements Planning (CRP)
•
CRP is an extension of MRP which is required when capacity must be
readjusted because the MRP system delivers a plan that is not feasible
with existing capacity configurations. In Figure 15-13 see MR > RA.
Figure 15-13
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Rough-Cut Capacity Planning (RCCP)
•
RCCP uses approximation methods to determine if
there is sufficient capacity to accomplish objectives.
RCCP occurs when the aggregate plan is being
transformed into the MPS.
•
RCCP checks to see if there is enough capacity using
a Bill of Resources (BOR).
•
BOR is a listing of key resources needed to make one
unit of each item (or GT family) for which production is
planned.
•
RCCP and BOR are pre-MRP whereas, CRP is postMRP
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15-10 Distribution Resource Planning (DRP)
•
DRP refers to distribution resource planning. It is part of MRPII (See
Section 15-13 and Figure 15-15 for discussion of “the big MRPII
picture.”) When DRP has this all-inclusive view of supply chain
management, it is called DRP2.
•
DRP1, on the other hand, is defined as the time-phased order point
approach used to “explode” planned orders at the branch warehouse
level. DRP1 is the application of MRP logic in tracing parts to endproducts.
•
DRP2 extends distribution requirements planning methods of DRP1 to
the inter-functional business system. It does this by applying the total
systems point of view to strategic planning, whereas DRP1 is tactical
in nature.
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15-11 Weaknesses of MRP
•
MRP is vulnerable to variability in lead times. Parent products cannot
be made if parts or components are undelivered.
•
MRP is supposed to do away with need for safety stock. P/OM may
take protective measures such as lengthening estimated LT to offset
delivery delays. Such “safety time” translates into added stock being
carried as if it were buffer or safety stock.
•
Order cancellations upset the system and require extensive
“regeneration” or “net change” calculations. This is time consuming
and delays production.
•
Data errors, especially cumulative ones that occur with net change
MRP, deteriorate systems performance.
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15-12 Closed-Loop MRP
•
The core of the closed-loop MRP is the traditional material requirements
planning function. Closed-loop has additional planning functions added
which make it significantly more powerful as a systems model. Figure 1514 shows CRP and DRP1 with feedback links to make corrections and
adjustments.
Figure 15-14
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15-13 Strengths of MRPII
(Manufacturing Resource Planning)
•
MRPII entails total manufacturing resource planning as part of the strategic
business plan. At the top of the chart in Figure 15-15 is strategic business
planning.
•
Everything else may seem the same but it is a different game. Because strategic
planning drives MRPII, this permits inclusion of product mix, advertising, new
computer systems, etc.
Figure 15-15
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15-14 Emerging Power of ERP
•
MRPII is the basis and foundation for Enterprise Resource Planning
(ERP).
•
Transformation of MRPII to extensive applications of ERP is
accomplished by converting the Business Planning box at the top of
Figure 15-15 into an Enterprise-Wide Planning Box that spans the
globe. Broad strategy creates the conditions for detailed tactics.
Success/failure are feedback for adjustments.
•
Experiences of ERP providers (such as Oracle, SAP, IBM, Microsoft,
and other smaller consulting firms that cannot spend as much on
advertising, but are in the business), is that ERP has many pitfalls—
some can be avoided, but are the price for gaining total control of the
expanded global enterprise.
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Spotlights in Review 15-1
Innovation: Everyone Has Something to Say about It
• People tend to think that innovation is a property—and that you
can’t have enough of it. The derivation from Latin, innovare, to
renew, raises the point of when to convert the old to the new. Old
can be tried and true, while new can be at risk of failure. This view
is borne out by facts that a small percent of new products succeed
enough to have been worth the time and money.
• There are ways to manage innovation to improve results and share
risk. Partnerships to bring various kinds of expertise to bear are
worthwhile. Too new, too different, and too risky may explain why
large R&D budgets of established firms seldom motive them to
venture into new initiatives. Keuffel & Esser (leading slide rule firm)
did not survive calculators. Brush Electric Co. (leader in carbon arc
lamps) could not shift to tungsten and the light bulbs of the 1900s.
• Continuous innovation (kaizen) or radical reengineering (REE) are
options open to every company. Startups are free of old baggage
and have greater flexibility to innovate than established firms.
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Spotlights in Review 15-2
The Fallacy of Pursuing Local Optimums
• Dr. Eliyahu M. Goldratt, author of The Goal and The Race, is world
renowned for developing startling, yet eminently sensible, new
methods for production control. His management philosophies and
systems of thinking about problems continuously challenge
companies to “break outside of the box” of conventional practices.
• Early in his career, Goldratt developed the fundamental concepts for
bottleneck-based finite scheduling. He concluded that optimizing
production scheduling in isolation from other business variables does
not lead to higher productivity or attainment of company goals. The
evolution of these ideas he called the Theory of Constraints (TOC).
• As time progressed these theories captured ever-larger slices of all
management activities including project management and marketing.
The fundamental base was the P/OM system extended to avoid local
optimums. TOC guides the search for global optimization with benefit
accruing to all who participate in Dr. Goldratt’s systems approach.
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Questions You Can Now Answer
• What is the difference between dependent and independent
demand systems? Can you provide an example of each?
• What differences differentiate OPP and MRP?
• When is MRP preferred to OPP for inventory management?
• What important function does the master production schedule
play?
• How does the bill of material differ from the MPS?
• What kinds of forms are used for the BOM?
• What are the data inputs to the MRP?
• What are the information outputs from the MRP?
• What is the lot sizing method used for ordering with MRP?
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Questions You Can Now Answer
• How can capacity requirements planning (CRP) be
described?
• Under what circumstances should the planner use
distribution requirements planning (DRP = DRP1)?
• Under what circumstances should the planner use
distribution resource planning (DRP = DRP2)?
• How does DRP1 relate to replenishing inventory at the
branch warehouse.
• How does DRP2 link key resource planning to the supply
chain?
• What are information coding systems?
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Questions You Can Now Answer
• How do information coding systems capture demands for parts for
more than one product?
• Do information coding systems permit comprehensive item ordering?
• Why is it said that information coding systems are an integral part of
planning for the firm as a whole?
• How do parent items relate to coding systems? Give an example.
• What are the differences between MRP and closed-loop MRP?
• What are the differences between closed-loop MRP and MRP II?
• Why is MRP said to be a true innovation?
• Is ERP a bigger innovation than MRPII?
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Study Areas Ahead
• Spotlight 16-1 titled, The Challenge of Scheduling
Production and Operations: Discussion Based on the
Ancient Puzzle Game, The Tower of Brahma (also
known as the Tower of Hanoi) is a great opportunity to
learn about production scheduling and have some fun.
• Understanding the loading function and Gantt load
charts makes it possible to comprehend aggregate
scheduling, and the workings of the job shop. Loading
is coming in Chapter 16.
• Spotlight 16-2, The Pursuit of Clean Air, is critical for
management to understand how important P/OM has
been and continues to be in this pursuit.
• Contingency planning is not theoretical. It can protect
against disaster. P/OM must understand what it does
and how to use it.
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