The Material Requirements Planning Process

What is MRP? MRP answers the following questions: What materials are required? How many of the materials are required? When are the materials required?

A Few Key Terms PIR – Planned Independent Requirements Forecasts based on actual and forecasted sales CIR – Customer Independent Requirements Forecasts based on actual customer sales Usually derived from sales orders Dependent Requirement – A dependent item (such as assembly or raw material) Independent Requirement – Not dependent on another material

MRP AND Production

MRP Process Flowchart

MRP Problems (1) Too much inventory Materials in stock that we cannot sell Raw materials that we no longer need in the manufacturing process Materials that have lost significant value Expired materials

MRP Problems (2) Too little inventory Out of stock conditions Backorder conditions

Cisco Case Purchased extra parts Did not accurately estimate demand Did not forecast demand drop-off Cisco wrote off $2.5 billion in inventory in 2001

MRP Data Dependencies Materials (Material masters) Vendors (for acquisition) Production (for estimates) Warehouse (to get raw materials and store finished goods)

Production Planning Process (Overview) SIS Forecasting CO/PA Sales & Operations Planning Strategic Planning Demand Management Detailed Planning MPS MRP Manufacturing Execution Procurement Process Order Settlement

What Causes an MRP Sales and operations planning estimates materials (finished goods) requirements Sales quotation / orders Demand management calculates the required raw materials to produce the finished goods Final production proposals are generated which trigger production

MRP Master Data Bill of material is used to determine raw materials Product routings are used to estimate production time Material Master have various views that control the MRP process

MRP (SAP) Remember that we have four MRP views of a material Discussed in the next screens MRP is defined at the plant level as expected We can subdivide into MRP areas MRP is relevant to both discrete, repetitive, and process manufacturing

MRP vs MPS Master Production Scheduling Material Requirements Planning One level of a material’s BOM is used to calculate material requirements It’s a high level analysis Material Requirements Planning Run after MPS to determine detailed requirements It’s time phased (recommendations to reschedule open orders) Considers dependent requirements Assemblies (semi-finished goods)

MRP (Types of Planning) Consumption-based relies on historical consumption data Reorder point planning See figures 8.3 and 8.4 Forecast-based planning uses historical data and forecasted estimates Time-phased planning is used when materials arrive on specific days of the week

MRP Reorder Point Planning

Reorder Point Planning (Details) When material is withdrawn, the reorder level is checked Net requirements are then calculated Available stock + firmed receipts (purchase orders, production orders) If a shortage exists, calculate the procurement quantity according to material master lot sizing procedure Procurement is then scheduled

MRP (Types of Planning – Illustration)

Material Master (MRP Tabs) MRP1 – Overall strategy MRP2 – Scheduling MRP3 – Material availability MRP4 – BOM Selection

MRP 1 (MRP Procedure) MRP type Forecast-based planning, time-phase planning, etc. Reorder Point is only used only with reorder point planning Planning time fence - Number of days before procurement that planning (automated procurement) is frozen Only applies to MRPs with “firming types”

MRP 1 (Lot Size Data) Lot size – The procedure used to determine the lot size (quantity produced) Static lot-sizing Fixed lot size (predetermined value) Lot-for-lot (exact quantity required) Period lot-sizing (combine requirements for multiple time periods) Optimum lot-sizing (takes into account economic order quantity and economic production quantity)

MRP 1 (Lot Size Data) Minimum and Maximum Lot size contains the min and max amounts that can be made during a production run Ordering costs are used in optimum lot sizing procedures Rounding profiles used to round the lot size to a “deliverable quantity)

MRP 1 (Illustration)

MRP 2 (Procurement) Procurement type In-house production time External In-house production time This comes from production It can be derived from product routing

MRP 2 (Scheduling) In-house production time Only used when we are producing goods “in-house” This comes from production Planned delivery time is only used when material is procured externally GR (Goods receipt) processing time

MRP 2 (Net Requirements) Safety stock Desired Minimum Safety time ind. is used to enable safety stock calculations

MRP 2

MRP 3 (Forecast Requirements) Period Indicator Time period for which planning takes place (M=Monthly, W=Weekly, etc…) Fiscal Variant Use to describe how the fiscal year is calculated (for financial accounting)

MRP 3 (Planning) Strategy group Make to stock Make to order Sales order based consumption Assemble to order Similar to make to order Assemble finished goods from prefabricated assemblies There are others

MRP 3 (Planning) Consumption mode Backward or forward Back. consumption per contains the number of workdays used for backward consumption Forw. Consumption per contains the workdays for future consumption

MRP 3 (Planning) Availability check Strategy to determine whether a material will be available on a specific date Supply side Existing inventory, purchase requisitions, production orders, purchase orders Demand side Material reservations, safety stock, production orders

MRP 3 (Planning

MRP 4 (BOM) BOM Selection Method Requirement Group Determines which bill of material to use based on Production version Date Order quantity Requirement Group Combine or display requirements individually

MRP 4 Define repetitive manufacturing characteristics Storage Location MRP is used to plan for a specific storage location

MRP 4

Forecasting (Introduction) Caveat – Forecasts are always wrong But some are more wrong than others Accurate forecasts essential to manufacturing Our goal is to match supply and demand This is challenging for innovative products, fashions

Forecasting Models Trend Seasonal Trend and seasonal Constant

Strategy Groups On MRP 3, it defines the high-level strategy used to plan production The following are make-to-stock (10) make to stock is the simplest Based on PIRs (30) production by lot size (40) Planning with final assembly Utilizes consumption (discussed in a moment)

Strategy Groups Make-to-order production strategies (20) make-to-order (used for a particular sales order) (50) Planning without final assembly (we are really building “assemblies”) (60) Planning with planning material Use with variant parts such as the same products in different container with different labels

The Process of Consumption Customer Independent Requirements consume materials produced through Planned Independent Requirements CIRs are filled through existing stock Planned Independent Requirements are created in anticipation of customer orders See table 8.1 on page 280

Consumption (Types) Backward Forward Combination CIRs consume PIRs dated prior to the CIR Forward CIRs consume PIRs dated after the CIR Combination

Consumption (Illustration) Lot Size Reorder Point Safety Stock Replenishment Lead Time

Product Groups Instead of planning for a single product, we plan for a group of related products or “product family” It’s possible to hierarchically group products using a process called aggregation Product groups can be nested Materials can belong to different product groups so as to support different planning scenarios

Product Group (SAP) Transaction MC84, MC85, MC86 to maintain product groups

GBI Product Groups

Product Groups (Other) Product groups can be assigned a proportion Low-level plans can be aggregated into high-level plans High-level plans can be disaggregated into low-level plans

Global Bike Product Groups

Sales and Operations Planning (SOP) Purposes Create sales forecasts Define inventory requirements It’s a high-level plan (rough-cut plan) Operations plans are developed from SOP These are the formal plans to produce Required only for make-to-stock production We perform aggregation and disaggregation here

Top-Level Product Group

Second Level Product Group

SOP Planning (SAP)

SOP Planning Used to generate production plans based on various assumptions (sales forecasts) Types Standard planning uses predefined planning models Flexible planning allows users to configure their own sophisticated production plans

SAP Planning Table It’s a tabular form containing sales, production, and stock-level estimates Sales data derived from forecast

Sales Planning Table (Illustration)

Sales Planning (Fields) Sales contains the sales plan (number of units we plan to sell) Production contains the production plan (calculated by the system) Target stock contains the desired inventory levels Day’s supply contains a calculated value Inventory / sales per workday

Sales Plan (Creating) From profitability analysis in management accounting From historical sales From adjusted historical sales Manually From another product group sales plan

Disaggregation One the high-level product group plan is complete we disaggregate to the raw material level

MRP – The final step MRP plans for all elements in the BOM