Materials Requirements Planning Chapter 18 Materials Requirements Planning

Learning Objectives Describe what MRP is and where it is best applied. Understand the source of the information used by the system. Demonstrate how to do an MRP “explosion.” Explain how order quantities are calculated in MRP systems.

Enterprise Resource Planning and Material Requirements Planning Enterprise resource planning (ERP): a computer system that integrates application programs in accounting, sales, manufacturing, and the other functions in a firm Materials requirements planning (MRP): 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 timing problem Dependent demand drives MRP LO 1

Benefits of MRP Improved facility utilization Faster response to market Increased customer service Better inventory planning Reduced setup costs

Components of MRP Master production schedule (MPS) Bill of materials (BOM) Inventory records file (IRF) Primary output reports

Master Production Schedule The master schedule deals with end items and is a major input to the MRP process All production systems have limited capacity and limited resources The aggregate plan provides the general range of operation, the master scheduler must specify exactly what is to be produced To determine an acceptable feasible schedule to be released to the shop, trial master production schedules are run through the MRP program LO 1

Master Production Schedule 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.

Duties of Master Scheduler Include all demands Never lose sight of the aggregate plan Be involved with customer order promising Be visible to all levels of management Objectively trade off manufacturing, marketing, and engineering conflicts Identify and communicate all problems LO 1

The Aggregate Plan and the MPS for Mattresses Master production schedule (MPS): the time-phased plan specifying how many and when the firm plans to build each end item LO 2

Time Fences Purpose: What they are: 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 LO 2

Time Fences: Types Frozen: anything from no changes to only minor changes Moderately firm: allow changes so long as parts are available Flexible: allow almost any variations LO 2

Where MRP Can be Used LO 1

Material Requirements Planning System Structure LO 2

Demand for Products Customers who have placed specific orders Generated by sales personnel Orders carry promised delivery dates No forecasting of these orders Forecasted demand Normal independent-demand sales Demand for parts and components Spares and repair LO 2

Bill of Materials Bill of materials (BOM): contains the complete product description, listing the materials, parts, and components along with the sequence in which the product is created One of the three main inputs to the MRP program BOM is recipe for making a product Often called the product structure file or product tree because it shows how a product is put together LO 2

Bill of Materials (Product Structure Tree) for Product A

Bills of Materials Continued Modular bill of materials: Buildable item that can be produced and stocked as a subassembly Super bill of materials: Includes items with fractional options LO 2

Bill of Materials Structure LEVEL 1. Christmas tree structure B(1) C(1) 1 D(1) E(4) F(2) G(4) H(4) 2 2. Indented structure Part # Description Quantity Source A Car 1 Assembled B Engine 1 Manufactured D Block 1 Manufactured E Valves 4 Purchased C Body 1 Manufactured F Doors 2 Manufactured G Tires 4 Purchased H Shocks 4 Purchased

Level Coding of Bills of Materials LO 2

Inventory Records File Each inventory item carried as a separate file See, for example, Exhibit 16.15 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

The Inventory Status Record for an Item in Inventory LO 2

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.

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.

MRP Computer Program 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 number of units needed Determines the dates when orders for those materials should be released, based on lead times LO 2

MRP Computer Program MRP program uses information from: Master schedule Bill of materials Inventory records Process of calculating exact requirements for each item is referred to as the explosion process Work from top level down in BoM Consider on-hand balances and scheduled orders LO 2

MRP Scheduling Terminologies Gross Requirements Requirements (demand) as taken from the MPS Scheduled receipts When new or outstanding orders are expected in Projected available balance (On-Hand) Available physical inventory Net requirements Requirements (demand) after available inventories and expected scheduled receipts are consumed Planned order release When to place orders so they come in when needed

MRP Explosion Process The requirements for end items are retrieved from the master schedule These are referred to as “gross requirements” by the MRP program Uses on-hand balance with schedule of orders to calculate the “net requirements” Using net requirements, it calculates when orders should be received to meet these requirements LO 3

MRP Explosion Process Continued Find a schedule for when orders are actually released To account for lead time Move to level 1 items Gross requirements for each level 1 item are calculated from the planned-order release schedule for the parents of each level 1 item Net requirements, planned-order receipts, and planned-order releases are calculated as described in steps 2–4 Repeat for all items in bill of materials LO 3

Product Structure Tree for Assembly A Example 1: MRP Logic and Product Structure Tree 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 Product Structure Tree for Assembly A Lead Times A 1 day B 2 days C 1 day D 3 days E 4 days F 1 day B(4) E(1) D(2) C(2) F(2) D(3) A Total Unit Demand Day 10 50 A Day 8 20 B (Spares) Day 6 15 D (Spares)

Example 1: MRP Logic Backward Scheduling: 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 9th day to receive them on day 10. 50 50 Lead Time

Example 1: MRP Logic B(4) E(1) D(2) C(2) F(2) D(3) A LT = 2 Spares 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. Spares LT = 2 4x50=200 B(4) E(1) D(2) C(2) F(2) D(3) A

32 Example 1: MRP Logic Finally, repeating the process for all components, we have the final materials requirements plan: B(4) E(1) D(2) C(2) F(2) D(3) A 40 + 15 spares Part D: Day 6

Example 2 Straight one-to-one correspondence No multiple parents Level A (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 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. 1 B (1) 2 C (1)

Example 2 LT=2 25 5 35 7 10 21 25 20 LT=2 30 LT=2 2

Example 2 LT=2 25 5 35 7 10 21 25 20 20 20 20 5 15 7 10 21 5 15 7 10 21 LT=2 5 15 7 10 21 30 25 25 10 3 3 7 21 7 21 LT=2 7 21 2 2 2 2 5 21 5 21

Example 3 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

Example 3   1 2 3 4 5 6 7 8 9 10 Gross Requiremts Scheduled Rcpts ITEM X LT=2 On Hand Net Requirements P. Order Releases 95 45   50 50 50 50 50 50 50 50 50 50 45 45 45x2 Gross Requiremts   Scheduled Rcpts    ITEM A LT=3 On Hand Net Requirements P. Order Releases 90 12 15 12 75 75 75 75 75 75 75 75 15 12 15 12 45x1 Gross Requiremts   Scheduled Rcpts ITEM B LT=1 On Hand Net Requirements P. Order Releases 7 45 27 25 25 25 25 25 25 25 18 27 27 15x3 12x3 27x2 45 36 54 10 Gross Requiremts   Scheduled Rcpts ITEM C LT=2 On Hand Net Requirements P. Order Releases 35 36 54 10 10 10 10 10 10 35 36 54 10 35 36 54 10 27x5 15 135 Gross Requiremts   Scheduled Rcpts ITEM D LT=2 On Hand Net Requirements P. Order Releases 130   20 20 20 20 20 20 5 130 130

Example 4: Ampere, Inc., produces a line of electric meters installed in residential buildings Meters are of two basic types for different voltage and amperage ranges Some subassemblies are sold separately for repair or for changeovers The problem is to determine a production schedule to identify each item, the period it is needed, and the appropriate quantities The schedule is then checked for feasibility, and the schedule is modified if necessary. LO 3

Future Requirements for Meters A and B and Subassembly D LO 3

A Master Schedule to Satisfy Demand Requirements Covers month 1,000 + 250 We are converting monthly demand on the last slide to weeks where it will be produced LO 3

Product Structure for Meters A and B LO 3

Number of Units on Hand and Lead Time Data LO 3

MRP Schedule for Meters A and B, and Subassemblies C and D LO 3

Example 18.1: Demand and Data LO 3

VH1-234 Week 1 2 3 4 5 6 7 8 Gross requirements 34 37 41 45 48 Schedule receipts Projected available balance 51 14 173 128 80 32 184 166 Net requirements 27 16 Planned order receipts 200 Planned order releases LO 3

VH2-100 Week 1 2 3 4 5 6 7 8 Gross requirements 104 134 144 155 140 141 145 Schedule receipts Projected available balance 254 120 376 221 87 347 206 61 Net requirements 24 53 Planned order receipts 400 Planned order releases LO 3

Light Socket Week 1 2 3 4 5 6 7 8 Gross requirements 600 400 200 Schedule receipts 500 Projected available balance 905 305 405 205 Net requirements 95 Planned order receipts Planned order releases LO 3

Lot Sizing in MRP Systems Determination of lot sizes in an MRP system is a complicated and difficult problem Lot sizes: the part quantities issued in the planned order receipt and planned order release sections of an MRP schedule We will look at four Economic order quantity (EOQ) Lot-for-lot (L4L) Period order quantity (POQ) LO 4

Economic Order Quantity Calculate reorder quantity based on EOQ EOQ was not designed for a system with discrete time periods such as MRP The lot sizes generated by EOQ do not always cover the entire number of periods LO 4

Economic Order Quantity Run Size for an MRP Schedule LO 4

Lot-for-Lot Sets planned orders to exactly match the net requirements Produces exactly what is needed each week with none carried over into future periods Minimizes carrying cost Does not take into account setup costs or capacity limitations. LO 4

Lot-for-Lot Run Size for an MRP Schedule

Example: EOQ Method If 10(525) +(0.05)(1563) +2(47) 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 1 2 3 4 5 6 7 8 50 60 70 60 95 75 60 55 Solution: WEEK 50 60 70 60 95 75 60 55 18 353 353 353 303 243 173 113 371 296 236 303 243 173 113 18 296 236 181 353 353 TC Policy: If TC=DC+HC+SC Q TC= 10(525) +(0.05)(1563) +2(47) = $5,422.15

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 1 2 3 4 5 6 7 8 50 60 70 60 95 75 60 55 Solution: WEEK 50 60 70 60 95 75 60 55 50 60 70 60 95 75 60 55 50 60 70 60 95 75 60 55 50 60 70 60 95 75 60 55 TC=DC+HC+SC TC= 10(525) +(0.05)(0) +8(47) = $5,626

Example: POQ Method 60 55 TC=DC+HC+SC TC= 10(525) +(0.05)(1190) +2(47) 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 1 2 3 4 5 6 7 8 50 60 70 60 95 75 60 55 Solution: WEEK 50 60 70 60 95 75 60 60 55 55 410 115 410 360 300 230 170 75 115 55 360 300 230 170 75 55 410 115 TC=DC+HC+SC TC= 10(525) +(0.05)(1190) +2(47) = $5,404

Problem 7: Page 619 BOM A B (1) C (1) C (4) E (1) F (1) D (2) E (1)

Problem 7: Page 619 Lower Level Coding BOM A B (1) C (4) C (1) D (2) F (3) F (3) F (1) F (3)

Problem 7: Page 619 50 L=2 Q=LFL 10 20 20 30 30 30 30 30 30 30 30 30 20 20 20 50 L=2 Q=50 30 30 30 20 50 20x1 50x4 200 20 100 100 L=1 Q=100 50 150 150 150 150 150 50 50 30 30 30 50 100

Problem 7: Page 619 From C: 100x2 200 L=3 Q=LFL 100 100 100 100 200 200 From C: 100x1 From B: 50x1 100 50 90 50 L=2 Q=LFL 10 10 10 10 10 50x3 90 50 90 50 90x3 From B: 50x1 270 150 50 300 150 50 L=2 Q=50 30 30 30 30 30 30 30 30 270 120 20 300 150 50

Problem 11: Page 620 20 70 80 20 60 200 50 378 378 90 60 10 378 358 288 208 188 506 306 1 90 60 10 358 288 208 188 128 306 256 2 378 378 TC = OC + HC + PC TC = 2(10) + 0.01(1636) = $ 36.36

Problem 11: Page 620 20 70 80 20 60 200 50 20 70 80 20 60 200 50 90 60 10 20 70 80 20 60 200 50 90 60 10 20 70 80 20 60 200 50 TC = OC + HC + PC TC = 7(10) + 0.01(160) =$ 71.60

Problem 11: Page 620 Q = 450 TC = OC + HC + PC 20 70 80 20 60 200 50 450 50 90 60 10 450 430 360 280 260 200 50 90 60 10 430 360 280 260 200 450 50 Q = 450 TC = OC + HC + PC TC = 2(10) + 0.01(1690) =$ 36.90