CH 03

Material Requirements Planning (MRP)
Unlike many other approaches and techniques, material requirements planning works which is its best recommendation.
Joseph Orlicky, 1974
Wallace J. Hopp, Mark L. Spearman, 1996, 2000
http://factory-physics.com
History
Begun around 1960 as computerized approach to purchasing and production scheduling. Joseph Orlicky, Oliver Wight, and others. Prior to MRP, production of every part and end item was triggered by the inventory falling below a given level (reorder point). APICS launched MRP Crusade in 1972 to promote MRP.
Key Insight
Independent Demand finished products Dependent Demand components
It makes no sense to independently forecast dependent demands.
Assumptions
1. Known deterministic demands. 2. Fixed, known production leadtimes. 3. In actual practice, lead times are related to the level of WIP. Flow Time = WIP / Throughput Rate (Littles Law)
Idea is to back out demand for components by using leadtimes and bills of material.
Capacity Requirements Planning
100 Capacity (Hours or Units)

1 2 3 4 5 6
Who in the organization actually does this?

MRP Procedure
1. Netting: net requirements against projected inventory --Gross Requirements over time (e.g., weekly buckets) --Scheduled Receipts and current inventory --Net Requirements 2. Lot Sizing: planned order quantities 3. Time Phasing: planned orders backed out by leadtime 4. BOM Explosion: gross requirements for components
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Inputs
Master Production Schedule (MPS): due dates and quantities for all top level items Due dates assigned to orders into time buckets (week, day, hour, etc.) Bills of Material (BOM): for all parent items Inventory Status: (on hand plus scheduled receipts) for all items Planned Leadtimes: for all items Components of leadtime Move Setup Process time Queue time (80-90% total time)
Example - Stool
Indented BOM Stool Base (1) Legs (4) Bolts (2) Seat (1) Bolts (2) Graphical BOM
Stool
Level 0
Base (1)
Seat (1)
Level 1
Legs (4)
Bolts (4)
Bolts (2) Level 2
Note: bolts are treated at lowest level in which they occur for MRP calcs. Actually, they might be left off BOM 8 altogether in practice.
Example
Item: Stool (Leadtime = 1 week) Week Gross Reqs Sched Receipts Proj Inventory Net Reqs Planned Orders 0 1 2 3 4 5 120 -100 100 6
20
20
20
20
20 100
-100
Item: Base (Leadtime = 1 week) Week Gross Reqs Sched Receipts Proj Inventory Net Reqs Planned Orders
4 100 -100 100
0 100
-100
-100
Example (cont.)
BOM explosion
Item: Legs (Leadtime = 2 weeks) Week Gross Reqs Sched Receipts Proj Inventory Net Reqs Planned Orders 0 1 2 200 0 3 400 -200 200 4 5 6
0 200
-200
-200
-200
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Terminology
Level Code: lowest level on any BOM on which part is found Planning Horizon: should be longer than longest cumulative leadtime for any product Time Bucket: units planning horizon is divided into Lot-for-Lot: batch sizes equal demands (other lot sizing techniques, e.g., EOQ or Wagner-Whitin can be used) Pegging: identify gross requirements with next level in BOM (single pegging) or customer order (full pegging) that generated it. Single usually used because full is difficult due to lot-sizing, yield loss, safety stocks, etc.
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Pegging and Bottom up Planning Table 3.7 MRP Calculations for Part 300 Part 300 Required from B Required from 100 Gross Requirements Scheduled Receipts Adjusted Scheduled Receipts Projected on-hand Net Requirements 50 125 100 100 50 25 25 -65 65 65 15 15 1 2 35 90 3 4 30 60 90 15 5 6 15 7 8
Planed order receipts 65 15 Planed order releases On-hand = 40 Scheduled releases = none Lot-for-lot LT = 1 week
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Bottom Up Planning
Reference Figure 3.7 Assume that the scheduled receipt for week 2 for 100 units is not coming in! Have 50 units of inventory, with requirements of 125. Implications I can fill 50 units of demand from part 100 or 50 units from part B. If I go with part 100, that will allow me to fill some of the demand of part A (100 needed for part A). Can I ship 50 units to the customer now and 50 units later? What if I cover the demand of part B? Correct choice depends on the customers involved.
http://factory-physics.com 13
More Terminology
Firm Planned Orders (FPOs): planned order that the MRP system does not automatically change when conditions change --- can stabilize system Service Parts: parts used in service and maintenance --- must be included in gross requirements Order Launching: process of releasing orders to shop or vendors --- may include inflation factor to compensate for shrinkage Exception Codes: codes to identify possible data inaccuracy (e.g., dates beyond planning horizon, exceptionally large or small order quantities, invalid part numbers, etc.) or system diagnostics (e.g., orders open past due, component delays, etc.)
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Conceptual Changes in Lotsizing Approaches
Before, EOQ represented a basic trade-off between inventory costs and setup costs. Goldratt: If I am not at capacity on an operation requiring a setup, the time spent on a setup is a mirage. Make setups occur as frequently as possible (smaller lot sizes) as long as capacity is available Produce only when inventory level reaches zero (Wagner Whitin) is not optimal when capacity is a constraint Authors know of no commercial MRP system that uses WW.
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Important Questions About Optimal Lot-sizing

Setup costs Very difficult to estimate in manufacturing systems -May depend on schedule sequence -True costs depends on capacity situation Assumption of deterministic demand and deterministic production -production schedules are always changing because of dynamic conditions in the factory. Assumption of independent products that do not use common resources. Very seldom will see common resources not used.
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Important Questions About Optimal Lot-sizing

WW leads us to the conclusion that we should produce either nothing in a period or the demand of an integer num ber of future periods. -generates a production schedule that is very lumpy. There are reasons for generating a level loaded production schedule, one in which the same amount of products are produced in every time period.
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Problem Formulation
t= A time period, t = 1 to T, where T is the planning horizon. Dt = Demand in time period t (in units). Ct = Unit production costs ($/unit), excluding setup or inventory cost in period t. At = Setup (order) cost to produce (purchase) a lot in period t ($). Ht = Holding costs to carry a unit of inventory from period t to period t+1 ($/unit). e.g., if holding costs consists entirely of interest on money tied up in inventory, where i is the annual interest rate and periods correspond to weeks, then
h=
I * Ct 52
It =Inventory (units) left over at the end of period t. Qt =The lot size (units) in period t; this is the decision variable
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Problem Objective
Satisfy all demands at minimum cost (production, setup, and holding costs) All the demands must be filled, only the timing of production is open to choice. If the unit production cost does not vary with t, then production cost will be the same regardless of timing and can be dropped from consideration. Look at an example: assume setup costs, production costs, and holding costs are all constant over time. Thus, need only to consider setup costs and holding costs.
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Lot Sizing in MRP

Lot-for-lot chase demand Fixed order quantity method constant lot sizes EOQ using average demand Fixed order period method use constant lot intervals Part period balancing try to make setup/ordering cost equal to holding cost Wagner-Whitin optimal method
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Data For An Example Problem Table 2.1
t Dt
6 7
9 10
20 50 10 50 50 10 20 40 20 30
ct 10 10 10 10 10 10 10 10 10 10 At 100 100 100 100 100 100 100 100 100 100 ht 1 1 1 1 1 1 1 1 1 1
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Lot-for-lot
Simply produce in period t the net requirements for period t. Minimizes inventory carrying costs and maxim izes total setup costs. It is simple and it is consistent with just in time. Tends to generate a more smooth production schedule. In situations where setup costs are minim al (assembly lines), it is probably the best policy to use.
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Lot Sizing Example

t Dt LL 1 20 20 2 50 50 3 10 10 4 50 50 5 50 50 6 10 10 7 20 20 8 40 40 9 20 20 10 30 30
A = 100 h =1 300 D= = 30 10
Lot-for-Lot: $1000
No carrying cost, ten setups @$100 each
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Lot Sizing Example (cont.)

EOQ:
Note: EOQ is a special case of fixed order quantity.
10 30 Total 300 308 $400 $371 $771
Q=
2 AD = h
2 x100 x 30 = 77 1
t 1 2 3 4 5 6 Dt 20 50 10 50 50 10 Qt 77 77 77 Setup 100 100 100 Holding 57 7 74 24 51 Total
7 20
8 9 40 20 77 100 41 21 58
38
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Fixed Order Period From EOQ

Calculate EOQ using formula presented earlier. Then Fixed Order Period, P = Q/D Calculating P in this manner has all the limitations noted earlier in Chapter .
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Fixed Order Period Example--Further Comments

Example
Period Net Requirements Planned Order Recpts 1 2 3 4 5 6 7 8 9
15 45 60
25 15 20 15 60 15
Let P = 3. Skip first period, no demand. Sixty units covers demand for periods 2, 3, and 4. Period 5 is skipped because there is no demand. Sixty units covers demand in periods 6, 7, 8. Fifteen units covers demand in period 9, which is the last period in the planning Horizon.
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Part-Period Balancing
Combines the assumptions of WW with the mechanics of the EOQ. One of the assumptions of the EOQ is that it sets the average setup costs equal to the average inventory carrying costs. Part-period. The number of parts in a lot times the number of periods they are carried in inventory. Part-period balancing tries to make the setup costs as close to the carrying costs as possible.
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Part-Period Balancing Example (Cont.)
Period Net Requirements Planned Order Receipts

Quantity Period 6 25 40 60 75 Setup Costs $150 $150 $150 $150
1 2
5 6
8 9
15 45
25 15 20 15
Part-periods 0 15 x 1 = 15 15 + 20 x 2 = 55 55 + 15 x 3 = 100
Inventory Carrying Costs $0 $30 $110 $200
Fixed order quantity method (without modifications) tends to work better than WW when dealing with multi-level production systems with capacity limitations.
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14
Nervousness
Item A (Leadtime = 2 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 Gross Reqs 2 24 3 5 1 3 4 Sched Receipts Proj Inventory 28 26 2 -1 -6 -7 -10 -14 Net Reqs 1 5 1 3 4 Planned Orders 14 50 8 50 -64 50
Component B (Leadtime = 4 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 Gross Reqs 14 50 Sched Receipts 14 Proj Inventory 2 2 2 2 2 2 -48 Net Reqs 48 Planned Orders 48
Note: we are using FOP lot-sizing rule.

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Nervousness Example (cont.)

Item A (Leadtime = 2 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 8 Gross Reqs 2 23 3 5 1 3 4 50 Sched Receipts Proj Inventory 28 26 3 0 -5 -6 -9 -13 -63 Net Reqs 5 1 3 4 50 Planned Orders 63 Component B (Leadtime = 4 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 8 Gross Reqs 63 Sched Receipts 14 Proj Inventory 2 16 -47 Net Reqs 47 Planned Orders 47* * Past Due
Note: Small reduction in requirements caused large change in orders and

made schedule infeasible.
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Reducing Nervousness
Reduce Causes of Plan Changes: Stabilize MPS (e.g., frozen zones and time fences) Reduce unplanned demands by incorporating spare parts forecasts into gross requirements Use discipline in following MRP plan for releases Control changes in safety stocks or leadtimes Alter Lot-Sizing Procedures: Fixed order quantities at top level Lot for lot at intermediate levels Fixed order intervals at bottom level Use Firm Planned Orders: Planned orders that do not automatically change when conditions change Managerial action required to change a FPO
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Handling Change
New order in MPS Order completed late Scrap loss Engineering changes in BOM
Regenerative MRP: completely re-do MRP calculations starting with MPS and exploding through BOMs. Net Change MRP: store material requirements plan and alter only those parts affected by change (continuously on-line or batched daily). Comparison: Regenerative fixes errors. Net change responds faster to changes (but must be regenerated occasionally for accuracy.
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Rescheduling
Top Down Planning: use MRP system with changes (e.g., altered MPS or scheduled receipts) to recompute plan can lead to infeasibilities (exception codes) Orlicky suggested using minimum leadtimes bottom line is that MPS may be infeasible Bottom Up Replanning: use pegging and firm planned orders to guide rescheduling process pegging allows tracing of release to sources in MPS FPOs allow fixing of releases necessary for firm customer orders compressed leadtimes (expediting) are often used to justify using FPOs to override system leadtimes
33
Safety Stocks and Safety Leadtimes

Safety Stocks:
generate net requirements to ensure min level of inventory at all times used as hedge against quantity uncertainties (e.g., yield loss)
Safety Leadtimes:
inflate production leadtimes in part record used as hedge against time uncertainty (e.g., delivery delays)
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17
Safety Stock Example

Item: Screws (Leadtime = 1 week) Week Gross Reqs Sched Receipts Proj Inventory Net Reqs Planned Orders 1 2 400 500 100 3 4 200 -100 120 800 5 800 -900 800 6
100 120
Note: safety stock level is 20.
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Safety Stock vs. Safety Leadtime

Item: A (Leadtime = 2 weeks, Order Quantity =50) Week Gross Reqs Sched Receipts Proj Inventory Net Reqs Planned Orders 0 1 20 20 2 40 50 30 3 20 10 50 Safety Stock = 20 units Week Gross Reqs Sched Receipts Proj Inventory Net Reqs Planned Orders
4 0 10
5 30 -20 20
40
1 20 20 50
40
2 40 50 30
3 20 10 10
4 0 10
5 30 -20 30
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Safety Stock vs. Safety Leadtime (cont.)
Safety Leadtime = 1 week Week Gross Reqs Sched Receipts Proj Inventory Net Reqs Planned Orders 0 1 20 20 2 40 50 30 50 3 20 10 4 0 10 5 30 -20 20
40
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Manufacturing Resource Planning (MRP II)

Sometime called MRP, in contrast with mrp (little mrp); more recent implementations are called ERP (Enterprise Resource Planning). Extended MRP into: Master Production Scheduling (MPS) Rough Cut Capacity Planning (RCCP) Capacity Requirements Planning (CRP) Production Activity Control (PAC)
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MRP II Planning Hierarchy

Demand Forecast Resource Planning Rough-cut Capacity Planning Bills of Material Inventory Status Ag gregate Production Planning Master Production Scheduling Material Requirements Planning Job Pool Job Release Job Dispatching 39 Capacity Requirements Planning Routing Data
Master Production Scheduling (MPS)

MPS drives MRP Should be accurate in near term (firm orders) May be inaccurate in long term (forecasts) Software supports forecasting order entry netting against inventory Frequently establishes a frozen zone in MPS
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Rough Cut Capacity Planning (RCCP)

Quick check on capacity of key resources Use Bill of Resource (BOR) for each item in MPS Generates usage of resources by exploding MPS against BOR (offset by leadtimes) Infeasibilities addressed by altering MPS or adding capacity (e.g., overtime)
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Capacity Requirements Planning (CRP)

Uses routing data (work centers and times) for all items Explodes orders against routing information Generates usage profile of all work centers Identifies overload conditions More detailed than RCCP No provision for fixing problems Leadtimes remain fixed despite queueing
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Production Activity Control (PAC)

Sometimes called shop floor control Provides routing/standard time information Sets planned start times Can be used for prioritizing/expediting Can perform input-output control (compare planned with actual throughput) Modern term is MES (Manufacturing Execution System), which represents functions between Planning and Control.
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Conclusions
Insight: distinction between independent and dependent demands Advantages:
General approach Supports planning hierarchy (MRP II)
Problems:
Assumptions --- especially infinite capacity Cultural factors --- e.g., data accuracy, training, etc. Focus --- authority delegated to computer
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Material Requirements Planning (MRP)

Joseph Orlicky, 1974

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

It makes no sense to independently forecast dependent demands.

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Capacity Requirements Planning

100 Capacity (Hours or Units)

Who in the organization actually does this?

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Bolts (2) Level 2

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

4 100 -100 100

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Conceptual Changes in Lotsizing Approaches

Important Questions About Optimal Lot-sizing

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Important Questions About Optimal Lot-sizing

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Lot Sizing in MRP

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Data For An Example Problem Table 2.1

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Lot Sizing Example

No carrying cost, ten setups @$100 each

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Lot Sizing Example (cont.)

t 1 2 3 4 5 6 Dt 20 50 10 50 50 10 Qt 77 77 77 Setup 100 100 100 Holding 57 7 74 24 51 Total

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Fixed Order Period From EOQ

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Fixed Order Period Example--Further Comments

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Part-Period Balancing Example (Cont.)

Period Net Requirements Planned Order Receipts

Inventory Carrying Costs $0 $30 $110 $200

Note: we are using FOP lot-sizing rule.

Nervousness Example (cont.)

Note: Small reduction in requirements caused large change in orders and

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Safety Stocks and Safety Leadtimes

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Safety Stock Example

Note: safety stock level is 20.

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Safety Stock vs. Safety Leadtime

Safety Stock vs. Safety Leadtime (cont.)

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Manufacturing Resource Planning (MRP II)

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

MRP II Planning Hierarchy

Wallace J. Hopp, Mark L. Spearman, 1996, 2000

Master Production Scheduling (MPS)

Wallace J. Hopp, Mark L. Spearman, 1996, 2000