1 1 Slide © 2001 South-Western College Publishing/Thomson Learning Anderson Sweeney Williams Anderson Sweeney Williams Slides Prepared by JOHN LOUCKS QUANTITATIVE METHODS FOR BUSINESS 8e QUANTITATIVE METHODS FOR BUSINESS 8e

2 2 Slide Chapter 14 Inventory Management: Dependent-Demand n Objectives of MRP n Inputs to MRP n Gross and Net Requirements n Lot Sizing and Safety Stock n MRP and a Time-phased Production Schedule n Implementing an MRP System n Just-in-Time

3 3 Slide Material Requirements Planning n Material requirements planning (MRP) is used to control a manufacturing inventory system. n The major function of an MRP system is to translate the demand for finished goods into detailed inventory requirements for all their components. n MRP serves as part of a data processing system whose function is to monitor and control the status of production and perform inventory control. n One goal of MRP is to minimize the investment in manufacturing inventories. n Another goal is to ensure all new materials, parts and subassemblies are available when needed, thus preventing production delays from occurring.

4 4 Slide MRP Inputs n One input to an MRP system is the master production schedule (MPS) which summarizes requirements and deadlines for finished goods over the planning horizon. n Another input is the bill of materials (BOM) which is a structured parts list detailing the sequencing of the assembly of the product. n A third input is an MRP inventory record for each raw material, part or subassembly showing everything affecting the inventory level over the planning horizon.

5 5 Slide Bill of Materials n One graphical representation of a bill of materials is known as a product structure tree. n In this representation, the finished product (end item) is shown at the top of the hierarchy (level 0). n At the level below this (level 1) are the subassemblies or parts making up the finished product. n In the next level (level 2) are the subassemblies or parts making up the subassemblies of level 1. n The parts or subassemblies shown at each level of the hierarchy are said to be the parent of the parts or subassemblies directly below them in the hierarchy. n Each item in the bill of materials, except for the end product, has a parent.

6 6 Slide Inventory Record n Information contained in the inventory record can be classified as either inventory transaction information or planning information. n Inventory transaction information includes events such as the receipt of goods from a supplier, the disbursement of items from inventory to satisfy production, the occurrence of scrap, etc. n Planning information includes lead time, safety stock, lot sizing method, etc.

7 7 Slide MRP Calculations n In manufacturing there is often a dependent demand between different components. In this case, (Net Component Requirements) = (Gross Component Requirements) - (Number of Components in Inventory). n The process of generating net requirements for components from the master production schedule for an end item is called a BOM explosion. n The gross component requirement is the quantity of the component necessary to support production at the next higher level of assembly.

8 8 Slide MRP Calculations n The net requirements calculation enables one to determine the required additions to inventory. n An order placed during a previous planning period but scheduled to arrive during the current planning period is called a scheduled receipt. n An order placed during the current planning period is referred to as a planned order release. n An order’s arrival is known as a planned order receipt. Items are normally assumed to arrive at the beginning of a time period. n Both net and gross requirements are assumed to refer to requirements at the beginning of a time period.

9 9 Slide Lot Sizing n Two often used methods for determining the amount of inventory to order during the planning period are the fixed-order-size and the lot-for-lot rules. n The fixed order size rule is appropriate for purchased components when such a lot size is necessary to take advantage of quantity discounts, when an economic order quantity (EOQ) rule is being used, or when batches must be of a certain size due to equipment capacities. n The lot for lot rule has the lot size equal to the net requirement for the period in which the lot will become available. In this case, the planned order receipts are identical to the net requirements for a time period.

10 Slide Safety Stock n Safety stock can be used to buffer the production system against uncertainty. n This includes uncertainty about gross requirements, lead times, defective parts, pilferage, etc. n Safety stock is indicated in the MRP planning worksheet as a projected balance in each time bucket. n In calculating net requirements, it should be included in the total for the gross requirements.

11 Slide Time Phasing n MRP determines the date the net requirements are needed by a procedure called time phasing. n In time phasing, a production plan for components is developed by working backwards from the desired completion date of the finished product through the various manufacturing stages. n Time phasing is used to determine the appropriate planning horizon for each subassembly or parent corresponding to the planning horizon for the end product. n An MRP worksheet can then be prepared for the part or subassembly over this planning horizon.

12 Slide MRP Record Updating n Two approaches used to update MRP records are the regeneration approach and the net change approach. n In the regeneration approach, the records for all items are updated periodically. n In the net change approach, the MRP system recalculates net requirements whenever changes make it necessary; however, only the records affected by the new or revised information are updated.

13 Slide Example: Columbia Mopeds Columbia Mopeds is a manufacturer of off-road mopeds. The following product structure tree represents the bill of materials for its dual carburetor model 621 moped. MOPEDMOPED ENGINEASSEMBLYENGINEASSEMBLY MOTORMOTORCARBURETOR(2)CARBURETOR(2) GASTANKGASTANKWHEELASSEMBLY(2)WHEELASSEMBLY(2) HUBASSEMBLYHUBASSEMBLYTIRETIRE FRAMEFRAME

14 Slide Example: Columbia Mopeds n Component Lead Times Component Lead Time (Weeks) Component Lead Time (Weeks) Engine Assembly 1 Engine Assembly 1 Motor 1 Motor 1 Carburetor 2 Carburetor 2 Gas Tank 2 Gas Tank 2 Wheel Assembly 1 Wheel Assembly 1 Tire 3 Tire 3 Hub Assembly 1 Hub Assembly 1 Frame 3 Frame 3

15 Slide Example: Columbia Mopeds The company is currently planning production for weeks 10 through 16. Based on existing orders and demand forecasts, the master production schedule is as follows: a) Determine how many units of each component will be needed to support the production of 1000 mopeds in week 10. b) Determine the planned order release date for each component to support the production of 1000 mopeds in week WEEKWEEK PROD. QTY.

16 Slide Example: Columbia Mopeds n To find the gross requirements of each component to support the production of 1000 mopeds in week 10: Each moped requires one engine assembly, one gas tank, two wheel assemblies and one frame. Thus, 1000 engine assemblies, 1000 gas tanks, 2000 ( = 2 x 1000) wheel assemblies, and 1000 frames will be needed to support production.Each moped requires one engine assembly, one gas tank, two wheel assemblies and one frame. Thus, 1000 engine assemblies, 1000 gas tanks, 2000 ( = 2 x 1000) wheel assemblies, and 1000 frames will be needed to support production. Each engine assembly requires one motor and two carburetors. Hence the 1000 engine assemblies require 1000 motors and 2000 carburetors.Each engine assembly requires one motor and two carburetors. Hence the 1000 engine assemblies require 1000 motors and 2000 carburetors. Since each wheel assembly requires one tire and one hub assembly, 2000 tires and 2000 hub assemblies will be required to produce 2000 wheel assemblies.Since each wheel assembly requires one tire and one hub assembly, 2000 tires and 2000 hub assemblies will be required to produce 2000 wheel assemblies.

17 Slide Example: Columbia Mopeds n Gross Requirements Item Units Item Units Moped 1000 Moped 1000 Engine Assembly 1000 Engine Assembly 1000 Motor 1000 Motor 1000 Carburetor 2000 Carburetor 2000 Gas Tank 1000 Gas Tank 1000 Wheel Assembly 2000 Wheel Assembly 2000 Tire 2000 Tire 2000 Hub Assembly 2000 Hub Assembly 2000 Frame 1000 Frame 1000

18 Slide Example: Columbia Mopeds n To determine the planned order release date for each of the components required to support the production of 1000 mopeds in week 10: Note that each of the four level 1 components (engine assembly, gas tank, wheel assembly, and frame) must be available in week 10.Note that each of the four level 1 components (engine assembly, gas tank, wheel assembly, and frame) must be available in week 10. Given that the lead time for the engine assembly is one week, its planned order release date should be week 9 (= 10 -1).Given that the lead time for the engine assembly is one week, its planned order release date should be week 9 (= 10 -1). Similarly, as the lead time for gas tanks is two weeks, its planned release date should be week 8 (= 10- 2). Following the same reasoning, the planned order release date for the wheel assembly should be week 9 (= ) and for the frame, week 7 (= ).Similarly, as the lead time for gas tanks is two weeks, its planned release date should be week 8 (= 10- 2). Following the same reasoning, the planned order release date for the wheel assembly should be week 9 (= ) and for the frame, week 7 (= ).

19 Slide Example: Columbia Mopeds Considering the level 2 components, observe that in order to have engine assemblies ready for assembly in week 9 (their planned release date), the motor and carburetor must be available by week 9. Given that the motors have a one-week lead time, this means they should have a planned release date of week 8 (= 9 -1). Similarly, the planned release date for the carburetors should be week 7 (= 9 - 2).Considering the level 2 components, observe that in order to have engine assemblies ready for assembly in week 9 (their planned release date), the motor and carburetor must be available by week 9. Given that the motors have a one-week lead time, this means they should have a planned release date of week 8 (= 9 -1). Similarly, the planned release date for the carburetors should be week 7 (= 9 - 2). Repeating this process for the level 2 components of the wheel assemblies, the planned release date for the tires should be week 6 (= 9 - 3), and the planned release date for the hubs should be week 8 (= 9 - 1).Repeating this process for the level 2 components of the wheel assemblies, the planned release date for the tires should be week 6 (= 9 - 3), and the planned release date for the hubs should be week 8 (= 9 - 1).

20 Slide Example: Columbia Mopeds n Planned Order Release Dates Item Planned Order Release Date (Week) Moped 10 Moped 10 Engine Assembly 9 Engine Assembly 9 Motor 8 Motor 8 Carburetor 7 Carburetor 7 Gas Tank 8 Gas Tank 8 Wheel Assembly 9 Wheel Assembly 9 Tire 6 Tire 6 Hub Assembly 8 Hub Assembly 8 Frame 7 Frame 7

21 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tanks for Weeks , assuming: There is a projected balance of 400 gas tanks at the beginning of week 10.There is a projected balance of 400 gas tanks at the beginning of week 10. There is a scheduled receipt of 900 tanks in week 10.There is a scheduled receipt of 900 tanks in week 10. Columbia Mopeds uses a lot-for-lot rule for ordering gas tanks.Columbia Mopeds uses a lot-for-lot rule for ordering gas tanks. A safety stock of 200 gas tanks is desired.A safety stock of 200 gas tanks is desired. Lead time for gas tanks is two weeks.Lead time for gas tanks is two weeks. The following gross requirements, by week:The following gross requirements, by week: WEEK GR. REQ.

22 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Initially GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM:: GAS TANK LEAD TIME: 2 ITEM:: GAS TANK LEAD TIME: 2 LOT SIZE: L-F-L SAFETY STK: 200 LOT SIZE: L-F-L SAFETY STK: WEEK 400

23 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 10 To complete the worksheet, begin at week 10. Since there is a projected balance of 400 gas tanks at the beginning of week 10 and scheduled receipts of 900 gas tanks in week 10 (assumed to arrive at the beginning of the week), a total of 1300 (= ) gas tanks are available at the beginning of week 10. As the gross requirements in week 10 are for 1000 gas tanks, this leaves a projected balance of 300 (= ) at the end of week 10 (i.e. at the beginning of week 11). Since 300 gas tanks is greater than the desired safety stock of 200 gas tanks, there are no net requirements in week 10 and therefore no planned order receipts.

24 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 10 The worksheet now looks as follows: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM:: GAS TANK LEAD TIME: 2 ITEM:: GAS TANK LEAD TIME: 2 LOT SIZE: L-F-L SAFETY STK: 200 LOT SIZE: L-F-L SAFETY STK: WEEK 400

25 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 11 There are no gross requirements for week 11. Thus, the projected balance at the end of week 11 (the beginning of week 12) remains at 300 and there are no net requirements for week 11. GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: GAS TANK LEAD TIME: 2 ITEM: GAS TANK LEAD TIME: 2 LOT SIZE: L-F-L SAFETY STK: 200 LOT SIZE: L-F-L SAFETY STK: WEEK 400

26 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 12 In week 12 there are gross requirements for 1300 gas tanks. In addition, 200 gas tanks must remain in inventory as safety stock. Hence, the total requirement for week 12 is 1500 (= ) gas tanks. Since there is a projected balance of 300 at the beginning of week 12, the net requirement for week 12 is 1200 (= ) gas tanks. As a lot-for-lot rule is being used, this means that there should be a planned order receipt of 1200 gas tanks in week 12 (at the beginning of the week). Since the lead time for gas tanks is two weeks, this means that there should be a planned order release for the 1200 gas tanks in week 10 (= ).

27 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 12 The MRP worksheet would now look as follows: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: GAS TANK LEAD TIME: 2 ITEM: GAS TANK LEAD TIME: 2 LOT SIZE: L-F-L SAFETY STK: 200 LOT SIZE: L-F-L SAFETY STK: WEEK 400

28 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 13 The same approach is used to calculate the net requirements for week 13. The formula for determining the net requirements using the lot-for-lot rule is: (Net Requirements) = (Gross Requirements) + (Projected Balance) - (Desired Safety Stock) (Net Requirements) = (Gross Requirements) + (Projected Balance) - (Desired Safety Stock) The projected balance at the end of the week will equal the desired safety stock. Hence net requirements for week 13 will be 800 (= ), and the projected balance at the end of the week will be 200. Because a lot for lot rule is being used, this implies there should be a planned order receipt of 800 gas tanks in week 13. Given the two week lead time, the planned order release of these 800 gas tanks would be week 11.

29 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 13 Now the MRP worksheet would be: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: GAS TANK LEAD TIME: 2 ITEM: GAS TANK LEAD TIME: 2 LOT SIZE: L-F-L SAFETY STK: 200 LOT SIZE: L-F-L SAFETY STK: WEEK

30 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Weeks 14 & 15 In week 14, since the gross requirements are 0, the net requirements will also be 0 and there will be no planned order receipt. The projected balance at the end of week 14 will remain at the safety stock level of 200 units. For week 15, 1400 gas tanks are required. Hence, the net requirements for this week will be 1400 (= ). Thus, there should be a planned order receipt of 1400 units in week 15. These should have a planned order release date of week 13 (= ). The projected balance at the end of week 15 will be 200 units.

31 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Weeks 14 & 15 Now, the MRP worksheet is: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: GAS TANK LEAD TIME: 2 ITEM: GAS TANK LEAD TIME: 2 LOT SIZE: L-F-L SAFETY STK: 200 LOT SIZE: L-F-L SAFETY STK: WEEK

32 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 16 For week 16, the gross requirements of 900 translates into net requirements of 900 (= ), and a planned order receipt of 900. The planned order release date for this order will be week 14 (= ). The projected balance at the end of week 16 will then be equal to the desired safety stock of 200 units.

33 Slide Example: Columbia Mopeds n MRP Worksheet for Gas Tank... Week 16 Thus the completed MRP worksheet for weeks 10 through 16 is: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: GAS TANK LEAD TIME: 2 ITEM: GAS TANK LEAD TIME: 2 LOT SIZE: L-F-L SAFETY STK: 200 LOT SIZE: L-F-L SAFETY STK: WEEK

34 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Week 10 Assume there is a projected balance of 600 frames at the beginning of week 10 and a scheduled receipt of 2000 frames in week 10. The firm uses a fixed order size of 2000 frames and desires no safety stock of frames. Lead time for frames is 3 weeks. The following chart gives the weekly gross requirements for frames: The following chart gives the weekly gross requirements for frames: WEEK GR. REQ.

35 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Initially GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES PLANNED ORDER RELEASES ITEM: FRAME LEAD TIME: 3 ITEM: FRAME LEAD TIME: 3 LOT SIZE: 2000 SAFETY STK: 0 LOT SIZE: 2000 SAFETY STK: WEEK 600

36 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Week 10 Note that there are 2600 frames (the 600 projected balance plus the 2000 scheduled receipt) available for week 10, but only 1000 frames are required. Hence the projected balance at the end of week 10 (the beginning of week 11) is 1600 (= ). Thus, there are no net requirements and no planned order receipts are necessary.

37 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Week 10 GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES PLANNED ORDER RELEASES ITEM: FRAME LEAD TIME: 3 ITEM: FRAME LEAD TIME: 3 LOT SIZE: 2000 SAFETY STK: 0 LOT SIZE: 2000 SAFETY STK: WEEK 600

38 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Weeks 11 & 12 Since the gross requirements in week 11 are 0, the projected balance at the end of week 11 remains at 1600 units. Hence, there are no net requirements and no planned order receipts for week 11. In week 12, the gross requirements of 1300 are less than the projected balance of 1600 units. Therefore, the net requirements and the planned order receipts for week 12 are 0. The projected balance is now 300 (= ).

39 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Weeks 11 & 12 The MRP worksheet is now: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: FRAME LEAD TIME: 3 ITEM: FRAME LEAD TIME: 3 LOT SIZE: 2000 SAFETY STK: 0 LOT SIZE: 2000 SAFETY STK: WEEK

40 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Week 13 In week 13, the gross requirements of 800 frames exceed the projected balance of 300 at the beginning of the week. The net requirements for week 13 would then be 500 (= ). Hence there must be a planned order receipt. As the lot size is 2000, this is the planned order receipt. Since the lead time is 3 weeks, the planned order release date for this order must be week 10 (= ). This order will leave a projected balance of 1500 (= ) at the end of week 13.

41 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Week 13 Now the MRP worksheet is: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: FRAME LEAD TIME: 3 ITEM: FRAME LEAD TIME: 3 LOT SIZE: 2000 SAFETY STK: 0 LOT SIZE: 2000 SAFETY STK: WEEK

42 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Weeks 14 & 15 Since the gross requirements for week 14 are 0, there are no net requirements and no planned order receipt and the projected balance at the end of week 14 remains at In week 15, the gross requirements of 1400 units is less than the projected balance of 1500 units at the beginning of the week. Thus the net requirements and the planned order receipts are both 0. However, the projected balance at the end of week 15 is now 100 (= ).

43 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Weeks 14 & 15 The MRP worksheet is now: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: FRAME LEAD TIME: 3 ITEM: FRAME LEAD TIME: 3 LOT SIZE: 2000 SAFETY STK: 0 LOT SIZE: 2000 SAFETY STK: WEEK

44 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Week 16 In week 16, the gross requirements of 900 units exceed that of the projected balance of 100 units. Hence the net requirements in week 16 are 800 units (= ). Thus, there must be a planned order receipt in week 16 of the fixed order size of Given the 3 week lead time, the planned order release of these 2000 units must be week 13 (= ). The projected balance at the end of week 16 will be 1200 units (= ).

45 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... Week 16 The complete MRP worksheet is: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: FRAME LEAD TIME: 3 ITEM: FRAME LEAD TIME: 3 LOT SIZE: 2000 SAFETY STK: 0 LOT SIZE: 2000 SAFETY STK: WEEK

46 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... With Safety Stock Now consider a desired safety stock of 300 for frames. Note in the completed worksheet for frames that the projected balance exceeds the desired safety stock level of 300 in weeks 10 through 14. In week 13, however, the true net requirements are 800 (= gross requirements (800) + safety stock (300) - projected balance at the end of week 12 (300)). In week 15, the completed worksheet shows a projected balance of only 100. This is less than the desired safety stock of 300. Hence the new net requirements for week 15 is 200 units (= gross requirements (1400) + safety stock (300) - projected balance at the end of week 14 (1500)).

47 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... With Safety Stock There should be a planned order receipt of the fixed size of 2000 in week 15. Since there is a 3 week lead time, this means a planned order release date of week 12 (= ). In week 16, the gross requirements of 500 plus the desired safety stock of 300 does not exceed the projected balance of 2100 at the beginning of week 16 (end of week 15). Hence, the net requirements are 0 and there is no planned order receipt. Then the projected balance at the end of week 16 will be 1200 units (= ).

48 Slide Example: Columbia Mopeds n MRP Worksheet for Frames... With Safety Stock Thus the completed MRP worksheet when a safety stock of 300 is desired is as follows: GROSS REQUIREMENTS SCHEDULED RECEIPTS PROJECTED BALANCE NET REQUIREMENTS PLANNED ORDER RECEIPTS PLANNED ORDER RELEASES ITEM: FRAME LEAD TIME: 3 ITEM: FRAME LEAD TIME: 3 LOT SIZE: 2000 SAFETY STOCK: 300 LOT SIZE: 2000 SAFETY STOCK: WEEK

49 Slide The End of Chapter 14