1. Materials Requirements Planning
Chapter 18
Materials Requirements Planning

2. 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.

3. 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

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

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

6. 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

7. 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.

8. 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

9. 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

10. 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

11. 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

12. Where MRP Can be Used
LO 1

13. Material Requirements Planning System Structure
LO 2

14. 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

15. 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

16. Bill of Materials (Product Structure Tree) for Product A

17. 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

18. 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 Assembled
B Engine Manufactured
D Block Manufactured
E Valves Purchased
C Body Manufactured
F Doors Manufactured
G Tires Purchased
H Shocks Purchased

19. Level Coding of Bills of Materials
LO 2

20. 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

21. The Inventory Status Record for an Item in Inventory
LO 2

22. 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.

23. 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.

24. 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

25. 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

26. 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

27. 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

28. 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

29. 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 A
Day B (Spares)
Day D (Spares)

30. 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

31. 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. 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
spares
Part D: Day 6

33. 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)

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

35. 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

36. 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

37. 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

38. 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

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

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

41. Product Structure for Meters A and B
LO 3

42. Number of Units on Hand and Lead Time Data
LO 3

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

44. Example 18.1: Demand and Data
LO 3

45. 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

46. 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

47. 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

48. 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

49. 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

50. Economic Order Quantity Run Size for an MRP Schedule
LO 4

51. 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

52. Lot-for-Lot Run Size for an MRP Schedule

53. 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
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

54. 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:
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

55. 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
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

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

57. 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)

58. 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

59. 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

60. 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

61. 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) (160) =$ 71.60

62. Problem 11: Page 620 Q = 450 TC = OC + HC + PC20 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) (1690) =$ 36.90