MATERIAL REQUIREMENTS PLANNING (MRP)
MRP is an information system which is used to order or produce dependent demand
items (i.e. raw materials and components of assembled parts). It converts a production
schedule of finished goods into a schedule of requirements for the items that make up the
finished part, often with the aid of computers.
Finished products that the customers demand are considered to be independent
demand items. Parts that are not used in production and that are sold to customers (i.e.,
service parts) are also independent demand items. All other components and parts that are
used in production of finished products are considered to be dependent demand items as the
demand on them is derived from the demand on the finished product. That is, the demand
on such parts is dependent on the demand of the finished products or other parent items.
For example, headlights are dependent demand items when they are used in the
production of cars. If the independent customer demand for cars is 100, then the number of
headlights required would be dependent on the number of cars and would be 2 x 100 = 200
as each car requires 2 headlights. The headlights that are sold to customers as service, spare,
or replacement parts, on the other hand are independent demand items.
The inputs of MRP are the master production schedule, bill of materials, and
inventory status file, whereas the primary MRP
output is a schedule of planned orders for the dependent demand items that make up the
finished product.
The master production schedule specifies which finished products or service parts
are to be manufactured, the independent demand for each item, and when the items are
required. The bill of materials (BOM) lists all of the raw materials, components, and
subassemblies and their quantities that are necessary to produce each unit of finished
product. The last major input to MRP is the inventory status file, which states how much
inventory is currently on hand as well as the scheduled receipts for a particular item.
MRP can be updated by using either a regenerative approach or a net change
approach. A regenerative system is a batch type computerized MRP that performs periodic
calculations for every item. In a net change system, an on-line computerized MRP
immediately calculates changes as they occur; these computations
are made for only those items whose statuses have changed from the previous report rather
than for every item as in the case of regenerative system. The net change system works
best for systems that experience frequent changes, while the regenerative system can be
used under stable conditions.
MRP Processing
MRP processing begins by examining the finished items in the master production
schedule and "exploding" them into a schedule of requirements for the dependent demand
items using the bill of materials and inventory information as shown in the following
example.
Example:
Based on the following master production schedule, inventory on hand, scheduled
receipts, and bill of materials for the end item A, determine the size and timing of planned
order releases for each of the component parts. All lead times are one week.
Indep.
Demand
(week)
1
2
3
4
5
6
7
8
9
Inventory
On Hand
Scheduled
Receipts
(week)
1
2
3
4
5
6
7
8
9
MASTER SCHEDULE
Item
A
B
C
D
E
20
50
80
130
70
0
20
0
40
50
F
G
20
20
20
20
20
20
20
20
20
120
20
0
50
60
30
300
30
40
Bill of Materials
A
________________|_______________
|
|
|
2B
C
3D
____|____
____|____
|
|
|
|
4E
F
2E
G
Solution:
PERIOD (Week)
H
A
N
D
M
L
E
V
EI
L
T
O
N
E
EXPLOSION REPORTS:
1
2
3
4
Gross Requirements
Scheduled Receipts
0
A
0
Available
0
0
30
Planned Orders
30
20
B  2A
50
80
0
0
20
80
1
2
3
Gross Requirements
80
B
20 Available
4
5
6
40 160
20
20
20
CA
2
3
Gross Requirements
Scheduled Receipts
50
Available
50
50
50
0
0
130 70
7
8
9
0
0
0
230 140
230 140
5
20
80
30
0
50
D  3A
HA
N
D
0
6
7
8
9
130 70
0
50
Planned Orders
M
0
4
Net Requirements
L
E
V
EI
L
T
O
E
N
0
PERIOD (Week)
H
A
N
D
M
L
E
V
EI
L
T
O
N
E
0
20 160
1
0
130 70
260 140
20 160
Planned Orders
C
9
30
Net Requirements
1
8
130 70
Scheduled receipts
1
7
PERIOD (Week)
H
A
N
D
M
6
30
Net Requirements
L
E
V
EI
L
T
O
N
E
5
0
0
0
130 70
130 70
PERIOD (Week)
1
2
3
Gross Requirements
4
5
6
60 240
7
8
9
390 210
Scheduled Receipts
1
D
40 Available
Net Requirements
Planlanned Orders
40
40
40
0
0
20 240
20 240
0
0
0
390 210
390 210
0
PERIOD (Week)
H
A
N
D
M
L
E
V
EI
L
T
O
N
E
E4B+2D+Ind.dem.
1
Gross Requirements
2
3
20 120
4
5
112
0
6
7
1700
980
Scheduled Receipts
2
E
50 Available
50
30
90
0
0
90
112
0
1120
FB+Ind. dem.
20 Available
940
20
40 180 20 250 160 20
20
4
5
6
7
300
0
20
0
0
20
40
120 100
40
0
0
0
0
150 160 20
20
150 160 20
20
PERIOD (Week)
2
3
4
5
6
7
8
9
0
0
20 240 120 390 210
Scheduled Receipts
60
Available
60
Planned Orders
940
20
GD+Ind.dem.
Net Requirements
1700
9
H
A
N
D
L
E
V
EI
L
T
O
N
E
M
0
0
8
Gross Requirements
G
0
3
1
2
0
2
Net Requirements
Planned Orders
1700
0
1
Scheduled receipts
F
0
PERIOD (Week)
H
A
N
D
M
L
E
V
EI
L
T
O
N
E
Planned Orders
2
9
40
Net Requirements
Gross Requirements
8
40
0
0
0
0
200 120 390 210
200 120 390 210
NOTE: Planned orders don't necessarily mean planned purchase orders. It normally means
planned production order unless a certain component is purchased. For example, assuming
that item G is manufactured internally, we must place a production order for 200 G's in
Period 3 so that they will be ready in Period 4 as the lead time is 1 period(week).
Capacity Requirements
MRP is very helpful in determining the capacity requirements. This concept is
illustrated through the output of the previous MRP problem where the output is a schedule
of planned orders. Suppose that there are no jobs currently worked on in the drilling center
and only parts C, E, F, and G must go through the drilling process. Suppose part C requires
0.4 hr./unit, E requires 0.2 hr./unit, F requires 0.1 hr./unit, and G requires 0.3 hr./unit in the
drilling center. Then the capacity requirements for the drilling center, in Period 3, for
example would be:
0(0.4) + 1120(0.2) + 0(0.1) + 200(0.3) = 284 hrs.
That means, the drilling center must have 284 hrs. of capacity available in Period 3 to
process the planned orders for C, E, F, and G in Period 3 (i.e. 0, 1120, 0, and 200
respectively from the previous problem).
Determining the planned orders is not sufficient; we must follow up by capacity
requirements computations to check the planned orders for feasibility and see if we have
enough capacity to produce the specified planned orders. In this example, if the available
capacity in the drilling department is less than 284 hrs. in Period 3, we may add capacity by
hiring, using overtime, adding more machines, or subcontracting or even revising the master
schedule if such a revision shifts some of the planned orders to the under utilized capacity
periods in a feasible way.
Lot Sizing Techniques
Deciding on a particular lot size to order or produce is an important issue in MRP.
Unlike independent demand items where demand is typically distributed in a relatively
uniform manner, demand for dependent items is usually lumpy with much shorter planning
horizon. Hence, economic lot sizing is significantly more complex.
With independent demand items, we usually use two lot sizing techniques; EOQ
(economic order quantity) is used for ordering and EPQ (economic production quantity) is
used for manufacturing. Conversely, there are many different techniques to choose from for
dependent demand items. Below is a discussion on some of the lot sizing techniques for
dependent demand items; Lot-for-lot (LFL), Fixed-order-quantity (FOQ), Fixed-periodrequirements (FPR), Economic-order-quantity (EOQ), and Period-order-quantity (POQ).
Lot for Lot Ordering (LFL)
When using LFL ordering, the lot size to order or produce is equal to the amount
demanded for that particular period. Not only is this the easiest lot sizing approach to use,
but it also eliminates inventory holding costs as shown in the following example.
Example:
Assume lead time is zero for simplicity.(Assume this for all of the lot
examples that follow.)
PERIOD (Month)
1
2
3
4
5
6
7
8
9 10
Net Requirements
50 20 25 0 30 25 40 15 35 45
Planned Orders
50 20 25 0 30 25 40 15 35 45
sizing
11
30
30
12
5
5
Fixed Order Quantity (FOQ)
The FOQ approach specifies a fixed number of units to be ordered or produced for
periods in which available inventory cannot meet the demand requirements. An example
using the FOQ approach is illustrated below.
Example:
Order size = 50 units.
Net Requirements
Planned Orders
1
50
50
2
20
50
3
25
0
4
0
0
PERIOD (Month)
5
6
7
8
30 25 40 15
50 0 50 50
9
35
0
10
45
50
11
30
50
12
5
0
Fixed Period Requirements (FPR)
FPR uses a varying ordering quantity that must cover the demand of a predetermined
number of periods as demonstrated in the following example.
Example:
Assume a 4-period requirement.
Net Requirements
Planned Orders
1
50
95
2
20
3
25
4
0
PERIOD (Month)
5
6
7
8
9 10
30 25 40 15 35 45
110
115
11
30
12
5
Economic Order Quantity (EOQ)
The EOQ model performs relatively well with independent demand items whose demands
are more uniform as compared to dependent demand items. However, with dependent demand
items especially at the lower levels, demand tends to be more lumpy, and therefore the EOQ
approach is less appropriate.
In oder to use this technique, first EOQ must be computed on the basis of demand, ordering
cost, and holding cost. Then, a quantity equaling EOQ is ordered for periods in which available
inventory cannot meet the demand.
The difference between Fixed Order Quantity(FOQ) and Economic Order Quantity(EOQ) is
that FOQ is determined subjectively based on experience whereas EOQ is determined
mathematically.
Example:
Assume EOQ = 80 units.
Net Requirements
Planned Orders
1
50
80
2
20
3
25
80
4
0
PERIOD (Month)
5
6
7
8
30 25 40 15
80
9
35
10
45
80
11
30
12
5
Period Order Quantity (POQ)
When using the POQ technique, an order interval(the time between each order) is
computed based on the annual demand and the EOQ as demonstrated in the following
example, and then, a quantity to cover the demand for the periods in that order interval is
ordered.
Example:
Assume EOQ = 80 units, and 1 period = 1 month.
Number of orders = D/Q = 320/80 = 4
Order Interval(OI) = 12 months / 4 orders = 3 months per order
We could also obtain the order interval from the following formula:
OI = Q/D = 80/320 = 0.25 years(1/4 years) or 3 months.
Net Requirements
Planned Orders
1
50
95
2
25
3
20
4
0
PERIOD (Month)
5
6
7
8
30 25 40 15
55
90
9
35
10
45
80
11
30
12
5
NOTE: Even though the planned order of 55 units would normally be under period 4, we move it to
Period 5 as there is no net requirements in Period 4.
MRP versus Order Point Systems
Order point systems can be used with independent demand items, but they are not
suitable for dependent demand items. MRP is suitable for dependent demand items. Order
point is primarily concerned with how much to order when the inventory drops to a certain
level whereas MRP is more concerned with when to order and time-phased requirements.
Order point uses past information whereas MRP emphasizes future information and
generates time-phased requirements on the basis of expected future demand over a planning
horizon.
When applied to parts, the order point system determines the order quantity and
reorder point for a part as if that part is
independent of the other parts or components comprising the same finished product.
For example, if B is a part that goes into the finished product A, the inventory on
hand for item A would affect how many B's are required. If the order quantity for B is
determined by using order point system, the inventory on hand for the parent item A would
not be taken into account and the results would be inaccurate.
On the other hand, MRP considers all the parts and components comprising the
product concurrently and recognizes the relationships and interdependencies between them.
Therefore, using MRP for determining the requirements for dependent demand parts
would be more suitable than the order point method. Also, order point systems are not
appropriate if the demand is not uniform. The demand is not stable for dependent demand
items and therefore the order point system would not be suitable; MRP can deal much better
with lumpy demands of dependent demand items.