1 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Chapter 16 Materials Requirements Planning

2 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Material Requirements Planning (MRP) Components of an MRP System Time Fences MRP Logic and Product Structure Trees MRP Example MRP II Lot Sizing in MRP OBJECTIVES

3 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Material Requirements Planning Defined Materials requirements planning (MRP): —Is a means for determining the number of parts, components, and materials needed to produce a product—the quantity problem —It provides time scheduling information specifying when each of the materials, parts, and components should be ordered or produced—the when or timing problem Dependent demand drives MRP MRP is a software system

4 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Benefits of Material Requirements Planning Improved facility utilization Faster response to market Increased customer service Better inventory planning Reduced setup costs

5 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Components of Material Requirements Planning Master production schedule (MPS) Bill of materials (BOM) Inventory records file (IRF) Primary output reports

6 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Master Production Schedule (MPS) Time-phased plan specifying how many and when the firm plans to build each end item Aggregate Plan (Product Groups) Aggregate Plan (Product Groups) MPS (Specific End Items)

7 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Master production Schedule (MPS) The key input driver for MRP Tells MRP what to schedule, how many, and when they are needed It is time-phased requirement system Usually end items and special order components Aggregation of: —Customer firmed orders —Forecast demands and safety stocks —Service parts and seasonal adjustment, etc.

8 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Time Fences  Purpose: — To maintain reasonably controlled flow through the production system.  What they are: — Periods of time within which the customer can make changes to the order (MPS).

9 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Types of Time Fences Frozen — No schedule changes allowed within this window Moderately Firm — Specific changes allowed within product groups as long as parts are available Flexible — Significant variation allowed as long as overall capacity requirements remain at the same levels

10 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Example of Time Fences Weeks Frozen Moderately Firm Flexible Firm Customer Orders Forecast and available capacity Capacity Exhibit 16.5

11 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Bill of Materials (BOM) File A Complete Product Description  Identifies components, parts, materials, and subassemblies in the product  Shows production sequence for the product  More of a recipe for making the product  Modular BOM: – Buildable items that are storable as subassemblies  Planning BOM: – Fractional options. Fraction of the part contained in the completed unit

12 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Bill of Materials Structure A B(1)C(1) D(1)E(4)F(2)G(4)H(4) 1. Christmas tree structure 2. Indented structure Part #DescriptionQuantitySource A Car 1Assembled B Engine 1Manufactured D Block 1Manufactured E Valves 4 Purchased C Body 1Manufactured F Doors 2Manufactured G Tires 4Purchased H Shocks 4Purchased

13 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Inventory Records File  Each inventory item carried as a separate file — See, for example, Exhibit — Status according to “time buckets” for all items — On-hand quantities — Scheduled receipt of order — Lead times for all orders — Lot size requirements  Pegging — Identify each parent item that created demand

14 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Primary MRP Reports Planned orders to be released at a future time. Order release notices to execute the planned orders. Changes in due dates of open orders due to rescheduling. Cancellations or suspensions of open orders due to cancellation or suspension of orders on the master production schedule. Inventory status data.

15 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Secondary MRP Reports Planning reports, for example, forecasting inventory requirements over a period of time. Performance reports used to determine agreement between actual and programmed usage and costs. Exception reports used to point out serious discrepancies, such as late or overdue orders.

16 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Updating The MRP System Regenerative method: —Limited replanning frequency, weekly or longer —MPS submission triggers replanning —Every end-item in the MPS is exploded —Voluminous output is generated —High data processing efficiency--batch Net change method —High frequency of replanning —But affected parts of MPS are exploded —Limited number of outputs result

17 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Net Change System Activity driven Net change schedules Potential for system nervousness

18 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Material Requirements Planning System Based on a master production schedule, a material requirements planning system: — Creates schedules identifying the specific parts and materials required to produce end items — Determines exact unit numbers needed — Determines the dates when orders for those materials should be released, based on lead times

From Exhibit ©The McGraw-Hill Companies, Inc., 2004 Firm orders from known customers Forecasts of demand from random customers Aggregate product plan Bill of material file Engineering design changes Inventory record file Inventory transactions Master production Schedule (MPS) Primary reports Secondary reports Planned order schedule for inventory and production control Exception reports Planning reports Reports for performance control Material planning (MRP computer program)

20 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Example of MRP Logic and Product Structure Tree B(4) E(1)D(2) C(2) F(2)D(3) A Product Structure Tree for Assembly A Lead Times A1 day B 2 days C1 day D 3 days E4 days F1 day Total Unit Demand Day A Day 8 20 B (Spares) Day 6 15 D (Spares) Given the product structure tree for “A” and the lead time and demand information below, provide a materials requirements plan that defines the number of units of each component and when they will be needed

21 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved First, the number of units of “A” are scheduled backwards to allow for their lead time. So, in the materials requirement plan below, we have to place an order for 50 units of “A” on the 9 th day to receive them on day 10. LT = 1 day

22 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Next, we need to start scheduling the components that make up “A”. In the case of component “B” we need 4 B’s for each A. Since we need 50 A’s, that means 200 B’s. And again, we back the schedule up for the necessary 2 days of lead time. B(4) E(1)D(2) C(2) F(2)D(3) A Spares LT = 2 4x50=200

B(4) E(1)D(2) C(2) F(2)D(3) A spares Part D: Day 6 Finally, repeating the process for all components, we have the final materials requirements plan: 23

24 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved MRP Scheduling Terminologies Gross Requirements —Gross demand as taken from the MPS Scheduled receipts —When outstanding orders are expected Projected available balance (On-Hand) —Available physical inventory Net requirements —Net demand after available inventories are consumed Planned order release —When to place orders so they come in when needed

25 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved MRP Example 1 Straight one-to-one correspondence —No multiple parents —One component one parent Consider the three level part explosion diagram above. The items do not have multiple parents and only 1 unit of each item goes into the corresponding parent. Suppose that the gross requirements for product A for periods 3, 4, 5, 6, 8, and 10 are 25, 5, 35, 7, 10, and 21, respectively. Suppose also that it takes 2 periods from the period an order was placed to the time it was actually received in inventory, and that the amount of item A on hand was 20; 30 for item B, and 2 for item C. Develop the complete MRP explosion requirements needed to determine the net requirements for item C. The scheduled receipt for product A, the end item, is 25 in period 4. A B C (1) Level 0 1 2

26 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved

27 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved MRP Example 2 A(2)B(1) D(5)C(2) X C(3) Requirements include 95 units (80 firm orders and 15 forecast) of X in week 10

28 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Gross Requiremts Scheduled Rcpts ITEM X LT=2 On Hand Net Requirements P. Order Releases Gross Requiremts Scheduled Rcpts ITEM A LT=3 On Hand Net Requirements P. Order Releases Gross Requiremts Scheduled Rcpts ITEM B LT=1 On Hand Net Requirements P. Order Releases Gross Requiremts Scheduled Rcpts ITEM C LT=2 On Hand Net Requirements P. Order Releases Gross Requiremts Scheduled Rcpts ITEM D LT=2 On Hand Net Requirements P. Order Releases

29 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Closed Loop MRP Production Planning Master Production Scheduling Material Requirements Planning Capacity Requirements Planning Realistic? No Feedback Execute: Capacity Plans Material Plans Yes Feedback

30 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Manufacturing Resource Planning (MRP II) Goal: Plan and monitor all resources of a manufacturing firm (closed loop): — Manufacturing — Marketing — Finance — Engineering Simulate the manufacturing system

31 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Lot Sizing in MRP Programs Economic order quantity (EOQ) Lot-for-lot (L4L) or (LFL) Period order quantity (POQ) Part period balancing (PPB) Least total cost (LTC) Least unit cost (LUC) Silver-Meal heuristics (SM) Wagner-Wittin (WW) Which one to use? —The one that is least costly!

32 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Lot-Sizing Example: EOQ Method The net requirements for a product is as given in the table. If C=$10/unit, S=$47/order, H=.5% of cost/week, find the total cost to meet order demand requirements using the EOQ method. Weekly Net Requirements Solution: TC=10(525)+(.05)(1563)+2(47)=$5, Policy: If

33 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Lot-Sizing Example: LFL Method The net requirements for a product is as given in the table. If C=$10/unit, S=$47/order, H=.5% of cost/week, find the total cost to meet order demand requirements using the LFL method. Weekly Net Requirements Solution: TC=10(525)+(.05)(0)+8(47)=$5,626

34 © 2006 The McGraw-Hill Companies, Inc., All Rights Reserved Lot-Sizing Example: POQ Method The net requirements for a product is as given in the table. If C=$10/unit, S=$47/order, H=.5% of cost/week, find the total cost to meet order demand requirements using the POQ method. Weekly Net Requirements Solution: TC=10(525)+(.05)(1190)+2(47)=$5,404