McGraw-Hill/Irwin
MPC 6 th Edition
Chapter 6a
Copyright © 2011 by The McGraw-Hill Companies, Inc. All rights reserved.

Advanced Material
Requirements Planning
After the initial phase of Material
Requirements Planning (MRP) is complete, advanced issues become the new focus of the firm.
6a-2

Agenda
Advanced MRP –Definition
Determining Order Quantities
Buffering
Nervousness
6a-3

Determining Manufacturing
Order Quantities
 A number of quantity-determination (lot-sizing) procedures have been developed
 The primary consideration in MRP lot-sizing procedures is the nature of the net requirements data

Requirements don’t reflect the independent demand assumption of constant uniform demand
 Requirements are discrete
 Requirements can be lumpy
6a-4

MRP Lot-Sizing
Assumptions
 All requirements occur at the beginning of the period
 All future requirements must be met (no backorders)
 Ordering decisions occur at regular intervals
 Requirements are appropriately offset for manufacturing lead times
 Component requirements are satisfied at a uniform rate during each period
6a-5

Determining Order
Quantities
Economic Order
Quantity (EOQ)
Periodic Order
Quantity (POQ)
Lot-Sizing
Procedures
Part Period
Balancing (PPB)
Wagner-Whitin
Algorithm
6a-6

Economic Order Quantity
(EOQ)
 Simple, widely used technique
 Assumes constant, uniform demand
 May require adjustment when demand is lumpy
EOQ
C p

2 C p
D
C
H

Ordering Cost
D

C
H

Average
Holding
Demand
Cost per Period
6a-7

Periodic Order Quantity
(POQ)
 Uses EOQ formula to compute time between orders (TBO)
 Lot-size varies based upon the forecast requirements for the coverage period

Doesn’t allow for combining orders during periods of light demand
6a-8

Part Period Balancing (PPB)
 Attempts to equalize the costs of ordering and holding inventory
 Considers alternate coverage periods and the scenario where ordering and inventory costs are most nearly equal

Won’t always identify the cost-minimizing plan
6a-9

Wagner-Whitin Algorithm
 Optimizing procedure to identify the costminimizing plan for a time-phased schedule
 Requires much more computational effort
 May not identify optimal plan under all conditions
6a-10

Buffering against
Uncertainty
 Buffering can be effective when uncertainty is unavoidable
 Buffering should not be used to accommodate a poorly performing MRP system
 Uncertainty has two main sources
 Demand –timing and quantity
 Supply –timing and quantity
6a-11

Safety Stock and Safety
Lead Time
 There are two basic ways to buffer uncertainty
 Safety stock –additional stock intended to cover unanticipated requirements
 Safety lead time –releasing orders earlier than necessary to ensure receipt before the required due date
6a-12

Performance of Safety Stock vs. Safety Lead Time
Timing Uncertainty
Quantity Uncertainty
Safety lead time outperforms safety stock under timing uncertainty
Safety stock outperforms safety lead time under quantity uncertainty
6a-13

Other Buffering Techniques
 Scrap allowances –useful if scrap is significant and unavoidable
 Reduce uncertainty
 Increase forecast accuracy, improve system parameter accuracy (BOM, inventory), reduce lead times, improve product quality.
 Provide system slack
 Additional production capacity to allow for unplanned requirements
 Slack costs money
6a-14

Nervousness
 Nervousness occurs when even small changes to higher-level MRP records or the master production schedule leads to significant changes in the MRP plans
 Nervousness is most damaging in MRP systems with many levels in the product structure
 Some lot-sizing techniques (such as POQ) can amplify the nervousness
6a-15

Reducing System
Nervousness
Reduce the causes of MRP plan changes
Change lot-sizing procedures
Use firm planned orders in
MRP records
Ways to Reduce
Nervousness
Manage execution nervousness by passing users information less frequently
6a-16

Principles
 MRP enhancements should be attempted only after a basic MPC system is in place.
 Discrete lot-sizing procedures can reduce inventory costs, but the complexity shouldn’t outweigh the savings.
 Safety stocks should be used when uncertainty is related to quantity.
 Safety lead times should be sued when uncertainty is related to timing.
6a-17

Principles
 MRP system nervousness can result from lotsizing rules, parameter changes, and other causes. Precautions should be taken to dampen the amplitude and impact.
 Uncertainty needs to be reduced before implementing complex procedures.
 MRP system enhancements should follow the development of ever more intelligent users.
6a-18

Quiz – Chapter 6a
 What is the primary consideration when selecting a lot-sizing procedure?
 In a situation where the main source of uncertainty is due to timing of customer orders, which buffering strategy would be expected to perform best?
 In a situation where the main source of uncertainty is due to quantity of demand, which buffering strategy would be expected to perform best?
6a-19