Adeyl Khan, Faculty, BBA, NSU
Material requirements planning (MRP)
 Computer-based information system that translates
master schedule requirements for end items into
time-phased requirements for subassemblies,
components, and raw materials.
BOM
Lead
Times
Lot Sizing
Policies
Planned
Order Releases
MPS
MRP
Current
Availabilities
Adeyl Khan, Faculty, BBA, NSU
Priority
Planning
Glossary
 Bill of materials (BOM): 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.
 Low-level coding: Restructuring the bill of
materials so that multiple occurrences of a
component all coincide with the lowest level the
component occurs
Adeyl Khan, Faculty, BBA, NSU
14-3
Independent and Dependent Demand
Independent Demand
Dependent Demand
A
C(2)
B(4)
D(2)
Adeyl Khan, Faculty, BBA, NSU
E(1)
D(3)
F(2)
Independent demand is uncertain.
Dependent demand is certain.
14-4
Stable demand
Demand
Demand
Dependent vs Independent Demand
“Lumpy” demand
Time
Amount on hand
Amount on hand
Time
Safety stock
Time
Adeyl Khan, Faculty, BBA, NSU
Figure 14.1
Time
14-5
MRP Inputs
 Master Production Schedule
 Time-phased plan specifying timing and quantity
of production for each end item.
 Material Requirement Planning Process
 Product Structure Tree
 Lead Times
Adeyl Khan, Faculty, BBA, NSU
14-6
Bill of Materials
 Bill of Materials – Parent-child diagram that shows
what goes into what.
Used to make sure
enough parts for
production plan
Bike
Frame
Assy
Components
Each part has LT,
ordering policy
Wheel
Assy
Wheel
Frame
Hubs &
Rims
Adeyl Khan, Faculty, BBA, NSU
Spokes
Tires
One BOM for every end
product
Product Structure Tree
Level
0
1
Chair
Leg
Assembly
Legs (2)
2
Cross
bar
Back
Assembly
Seat
Side
Rails (2)
Cross
bar
Back
Supports (3)
3
Figure 14.5
Adeyl Khan, Faculty, BBA, NSU
14-8
MRP Processing
MRP Inputs
MRP Processing
MRP Outputs
Changes
Order releases
Master
schedule
Planned-order
schedules
Primary
reports
Bill of
materials
MRP computer
programs
Inventory
records
Adeyl Khan, Faculty, BBA, NSU
Figure 14.2
Exception reports
Planning reports
Secondary
reports
Performancecontrol
reports
Inventory
transaction
14-9
Master Schedule- A primary input
 Master schedule
 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.
Adeyl Khan, Faculty, BBA, NSU
14-10
Planning Horizon
Assembly
Subassembly
Fabrication
Procurement
1
2
3
4
5
6
7
8
9
10
Time Period (weeks)
Figure 14.4
Adeyl Khan, Faculty, BBA, NSU
14-11
Inventory Records
 One of the three primary inputs in MRP
 Includes information on the status of each item by
time period
 Gross requirements
 Scheduled receipts
 Amount on hand
 Lead times
 Lot sizes
 And more …
Adeyl Khan, Faculty, BBA, NSU
14-12
Inventory Requirements Calculation
 Net requirements:
 Net Requirements = Gross Requirements – Available
Inventory
 Available Inventory:
 Available Inventory = Projected on hand – Safety
stock – Inventory allocated to other items
Adeyl Khan, Faculty, BBA, NSU
14-13
Assembly Time Chart
Figure 14.7
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
Adeyl Khan, Faculty, BBA, NSU
Subassembly B
4
5
6
7
8
9
10
11
14-14
MRP Processing- Outputs
 Gross requirements
 Total expected demand
 Scheduled receipts
 Open orders scheduled to
arrive
 Planned on hand
 Expected inventory on hand
at the beginning of each time
period
 Net requirements
 Actual amount needed in
each time period
 Planned-order receipts
 Quantity expected to received
at the beginning of the period
 Offset by lead time
 Planned-order releases
 Planned amount to order in
each time period
Adeyl Khan, Faculty, BBA, NSU
14-15
MRP 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.
Updating the System
 MRP Secondary Reports
 Performance-control reports
 Planning reports
 Exception reports
Adeyl Khan, Faculty, BBA, NSU
• Regenerative system
• Updates MRP records
periodically
• Net-change system
• Updates MPR records
continuously
14-16
Other Considerations
 Safety Stock
 Lot sizing
 Lot-for-lot ordering
 Economic order quantity
 Fixed-period ordering
Adeyl Khan, Faculty, BBA, NSU
14-17
MRP in Services
 Food catering service
 End item => catered food
 Dependent demand => ingredients for each recipe,
i.e. bill of materials
 Hotel renovation
 Activities and materials “exploded” into component
parts for cost estimation and scheduling
Adeyl Khan, Faculty, BBA, NSU
14-18
Benefits of MRP
 Low levels of in-process inventories
 Ability to track material requirements
 Ability to evaluate capacity requirements
 Means of allocating production time
 Ability to easily determine inventory usage by
backflushing
Adeyl Khan, Faculty, BBA, NSU
14-19
Requirements of MRP
 Computer and necessary software
 Accurate and up-to-date
 Master schedules
 Bills of materials
 Inventory records
 Integrity of data
Adeyl Khan, Faculty, BBA, NSU
14-20
Example 2
 Plant produces
 Wood Shutter
 Book Cases
1
2
Quantity
3
4
5
100
6
7
8
150
Shutter
Assembly LT = 1
Frames (2)
Order LT =2
Adeyl Khan, Faculty, BBA, NSU
Wood Section (4)
Fabrication LT = 1
Schedule Re. W 1 = 70
21
Shutter
1
2
3
Quantity
Shutter
4
5
6
7
100
1
2
3
Gross Req.
4
8
150
5
6
7
8
100
150
Net
requirement
100
150
Planned
order
receipts
100
150
Scheduled
Receipts
Projected
on hand
Planned
order
release
Adeyl Khan, Faculty, BBA, NSU
100
150
22
Shutter
1
2
Planned
order
release
Frames
3
4
5
6
100
1
2
Gross Req.
3
7
8
150
4
5
6
7
200
300
Net
requirement
200
300
Planned
order
receipts
200
300
8
Scheduled
Receipts
Projected
on hand
Planned
order
release
200
Adeyl Khan, Faculty, BBA, NSU
300
23
SAMPLE MRP Report
A
B
C [2]
E
D
F
Adeyl Khan, Faculty, BBA, NSU
24
Computing the item Scheduled Releases
Item C
Period
Gross Requirements
Scheduled Receipts
Inventory Position: 20
Net Requirements
Planned Sched. Receipts
Planned Sched. Releases
1
2
3
20
20
40
40
4
40
5
6
12
7
10
40
28
18
72
Safety Stock
Requirements
Parent
Sched. Rel.
Synthesizing
item demand
series
Gross
Reqs
Item External
Demand
Projecting
Inv. Positions
and
Net Reqs.
Scheduled
Receipts
Initial
Inventory
Adeyl Khan, Faculty, BBA, NSU
Net
Reqs
8
9
90
18
-72
72
72
10
11
75
0
-75
75
75
12
0
75
Lot Sizing
Policy
Lot Sizing
Lead Time
Planne
d
Order
Receipt
s
TimePhasing
Planned
Order
Release
Lot Sizing
 If affordable, a lot-for-lot (L4L) policy will incur the lowest inventory
holding costs and it will maintain a smoother production flow.
 Possible reasons for departure from a L4L policy:
 High set up times and costs => need for serial process batching to control the
capacity losses
 Processes that require a large production volume in order to maintain a high
utilization (e.g., fermentors, furnaces, etc.) => need for parallel process batching
 Selection of a pertinent process batch size
 It must be large enough to maintain feasibility of the production requirements
 It must control the incurred


inventory holding costs, and/or
part delays (this is a measure of disruption to the production flow caused by
batching)
 Move or transfer batches: The quantities in which parts are moved between
the successive processing stations.
 They should be as small as possible to maintain a smooth process flow
Adeyl Khan, Faculty, BBA, NSU
Some Lot Sizing Methods employed
in the traditional MRP framework
 Main focus: Balance set-up and holding costs
 Wagner-Whitin Algorithm for dynamic Lot Sizing
 Economic Order Quantity (EOQ): Compute a lot
size using the EOQ formula with the demand rate D
set equal to the average of the net requirements
observed over the considered planning horizon.
 Periodic Order Quantity (POQ): Compute T =
round(EOQ/D), and every time you schedule a new
lot, size it to cover the net requirements for the
subsequent T periods.
Adeyl Khan, Faculty, BBA, NSU
Some Lot Sizing Methods employed
in the traditional MRP framework …
 Silver-Meal (SM): Every time you start a new lot, keep
adding the net requirements of the subsequent periods,
as long as the average (setup plus holding) cost per
period decreases.
 Least Unit Cost (LUC): Every time you start a new lot,
keep adding the net requirements of the subsequent
periods, as long as the average (setup plus holding) cost
per unit decreases.
 Part Period Balancing (PPB): Every time you start a new
lot, add a number of subsequent periods such that the
total holding cost matches the lot set up cost as much as
possible.
Adeyl Khan, Faculty, BBA, NSU
Financial
planning
Marketing
Adeyl Khan, Faculty, BBA, NSU
Engineering
Purchasing
Manufacturing
14-29
MRP II
Figure 14.14
Manufacturing
Master
production schedule
Adjust master schedule
Market
Demand
Finance
Marketing
Production
plan
MRP
Rough-cut
capacity planning
Capacity
planning
Adjust
production plan
Yes
Problems?
Adeyl Khan, Faculty, BBA, NSU
No
Requirements
schedules
No
Problems?
Yes
14-30
Capacity Planning
 Capacity requirements planning: The process of
determining short-range capacity requirements.
 Load reports
 Department or work center reports that compare
known and expected future capacity requirements
with projected capacity availability.
 Time fences
 Series of time intervals during which order changes
are allowed or restricted.
Adeyl Khan, Faculty, BBA, NSU
14-31
Capacity Planning
Develop a tentative
master production
schedule
Figure 14.15
Use MRP to
simulate material
requirements
Revise tentative
master production
schedule
Rough-cut
capacity planning
No
Is shop
capacity
adequate?
Yes
Firm up a portion
of the MPS
Adeyl Khan, Faculty, BBA, NSU
No
Can
capacity be
changed to meet
requirements
Yes
Change
capacity
14-32
Solved Problem 3
Std. Times
Labor
Machines
Prod. Schedule
0.5 hrs/unit
1 hrs/unit
Av. Capacity
Week
1
2
3
4
Quantity
200
300
100
150
Labor hr
100
150
50
75
Machine hrs
200
300
100
150
Labor
200 hrs
Labor Util.
50.00%
75.00%
25.00%
37.50%
Machines
250 hrs
Machine Util.
80.00% 120.00%
40.00%
60.00%
Adeyl Khan, Faculty, BBA, NSU
33
MRP in Services
 Service applications such as:
 Professional services
 Postal services
 Retail
 Banking
 Healthcare
 Higher education
 Engineering
 Logistical services
 Real estate
Adeyl Khan, Faculty, BBA, NSU
14-34
MRP >> MRPII >> ERP
Integration of financial, manufacturing, and human
resources on a single computer system.
Adeyl Khan, Faculty, BBA, NSU
14-35
ERP Software
 ERP software provides a system to capture and make
data available in real time to decision makers and
other users in the organization
 Provides tools for planning and monitoring various
business processes
 Includes




Production planning and scheduling
Inventory management
Product costing
Distribution
Adeyl Khan, Faculty, BBA, NSU
14-36
ERP Strategy Considerations
 High initial cost
 High cost to maintain
 Future upgrades
 Training
Adeyl Khan, Faculty, BBA, NSU
14-37
Adeyl Khan, Faculty, BBA, NSU
38
Learning Objectives
 Describe the conditions under which MRP is most
appropriate.
 Describe the inputs, outputs, and nature of MRP
processing.
 Explain how requirements in a master production
schedule are translated into material requirements
for lower-level items.
 Discuss the benefits and requirements of MRP.
Adeyl Khan, Faculty, BBA, NSU
14-39
Learning Objectives
 Explain how an MRP system is useful in capacity
requirements planning.
 Outline the potential benefits and some of the
difficulties users have encountered with MRP.
 Describe MRP II and its benefits.
 Describe ERP, what it provides, and its hidden
costs.
Adeyl Khan, Faculty, BBA, NSU
14-40