Material Requirements Planning Dr. Everette S. Gardner, Jr.

MRP2 End item Component Raw material R Time LT R Time LT R Time LT Order point system with dependent demand

MRP3 End item Component Raw material R Time The MRP approach

MRP4 The simultaneous probability problem When components are ordered independently with an order point system, the probability that all will be in stock at the same time is much lower than the probabilities for individual components Computation: Let P n = Prob. that n components are in stock simultaneously S i = Prob. of stockout on one order cycle for component i Then P n = S 1 x S 2 x S 3 … S n

MRP5 The simultaneous probability problem (cont.) Example: End Item S 1 =.9 S 2 =.9 S 3 =.9 P 3 =.9 x.9 x.9 = = Prob. that all 3 components will be available at any given time to build the end item

MRP6 Probabilities of simultaneous availability of components Number of Service level component items90% 95%

MRP7 Mfg. orders Demand forecasts and customer orders Aggregate planning/ master scheduling Product design changes Inventory transactions Bill of materials MRP system Inventory records Purchase orders Capacity report Performance/ exceptions Detailed scheduling system Purchasing dept. MRP inputs and outputs

MRP8 Product tree vs. indented parts list Product tree ALevel 0 B(2) C(4)Level 1 D(1) E(3) D(2) F(1) G(3)Level 2

MRP9 Product tree vs. indented parts list (cont.) Indented parts list ● A ● B(2) ● D(1) ● E(3) ● C(4) ● D(2) ● F(1) ● G(3)

MRP10 Week Lead time Quiz: MRP plan to produce 10 units of A — due in week 9 Gross Rqmts. Planned order rls. 1 Gross Rqmts. Planned order rls. 2 Gross Rqmts. Planned order rls. 3 Gross Rqmts. Planned order rls. 3 Gross Rqmts. Planned order rls. 2 Gross Rqmts. Planned order rls. 3 Gross Rqmts. Planned order rls. 4 A B C G F E D

MRP11 Problems in requirements computations Product structure Recurring requirements within the planning horizon Multilevel items Rescheduling open orders

MRP12 Product structure Bills of material are hierarchical with distinct levels To compute requirements, always proceed down bill of materials, processing all requirements at one level before starting another

MRP13 Product structure (cont.) Example: LevelInventory O.H. Truck 0 0 A. Transmission (1) 1 2 B. Gearbox (1) 2 15 C. Gear (1) 3 7 D. Forging Blank (1) 4 46 Suppose we are to produce 100 trucks. What are the net requirements for each component?

MRP14 Recurrence of requirements within the planning horizon The same item may be required for several different lots within the planning horizon – always process one lot entirely, level by level, before starting the next. Example: One lot of 12 trucks, followed by 2nd lot of 100 Lot 1 Lot 2 Level 1: Gross requirements

MRP15 Multilevel items The same item may appear at different levels on one or more BOMs – result is multiple retrievals of same record to update system. Examples: X A Y A Z A A

MRP16 Multilevel items (cont.) Solution: Low-level coding. Lowest level an item appears is coded on inv. record. Processing delayed until that level reached X A Y A Z A A

MRP17 Rescheduling open orders Tests for open order misalignment: 1. Are open orders scheduled for periods following the period in which a net requirement appears? 2. Is an open order scheduled for a period in which gross requirement ≤ inv. O. H. at end of preceding period? 3. Is lead-time sufficient?

MRP18 Rescheduling open orders (cont.) Example: Week ● Most MRP systems make such schedule changes automatically. Gross requirements30510 Scheduled receipts20 On hand

MRP19 Tactical questions in MRP Regeneration vs. net change Lot sizing Safety stocks

MRP20 Regeneration vs. net change Regeneration Complete replanning of requirements and update of inventory status for all items High data processing efficiency Usually initiated by weekly update of master schedule Net change Daily update based on inventory transactions More responsive to changing conditions Requires more discipline in file maintenance

MRP21 Lot sizing implications in MRP The load profiles at work centers in the system depend on the lot sizing rules used Load profiles determine: undertime / overtime leadtimes Example: Lot size Pd. Demand Rule 1 Rule (Assume 1 unit requires 1 machine hour.)

MRP22 Lot sizing implications in MRP (cont.) Load profile – Load profile – Rule 1 Rule 2 Machine hrs

MRP23 Lot sizing techniques used in MRP systems Lot-for-lot (L4L) – most used Economic order quantity (EOQ) Period order quantity (POQ)

MRP24 Lot-for-lot (L4L) example (Assume Ø LT) The L4L technique: Minimizes carrying costs Is certainly the best method for - highly discontinuous demand - expensive purchased items Period Total Net rqmts Planned order MRP1.xls

MRP25 EOQ example Setup cost, S = $100 Unit price, C = $50 Holding costs, H R =.24 per annum H P =.02 per period Annual demand, D = 200 Q = (2DS / CH R ) 1/2 = 58 Period Net rqmts Planned orders58 Remnants

MRP26 Period order quantity example Technique: 1. Compute EOQ to determine number of orders per year 2. Divide number of periods in one year by number of orders to get ordering interval EOQ = 58 Number of periods in one year = 12 D = / 58 = 3.4 (orders per year) 12 / 3.4 = 3.5 (ordering interval) Period Total Net rqmts Planned orders853530

MRP27 Safety stocks in MRP systems Need for safety stocks: Variations in demand due to end-item forecast errors and inventory errors Variations in supply – both lead-times and quantities Since demand is not random, traditional statistical techniques do not apply. Options to provide safety factors: Fixed quantity buffer stocks Safety lead-time Increase gross requirements

MRP28 Safety stocks in MRP systems (cont.) Fixed quantity buffer stocks Good rule of thumb: Set buffer = max. demand likely in a single period Never generate order solely to replenish buffer stocks Safety time method Simply order early Distorts LTs and priorities Better than buffer stocks for items with infrequent demand Also better for purchases outside company Increase in gross requirements Should be done at end item level only so that »Components available in matched sets »Safety stocks are not duplicated at different levels