1997 Prentice-Hall, Inc.

Principles of Operations Management

Inventory for Dependent Demand Chapter 10

10 - 1

Learning Objectives
1997 Prentice-Hall, Inc.

Distinguish dependent from independent demand inventory

Define material requirements planning State the benefits of MRP Identify the requirements of MRP

Explain the inputs & outputs of MRP

Compute order releases
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Inventory Classifications
1997 Prentice-Hall, Inc.

Inventory

Process Stage Raw Mat'l WIP Fin. Goods

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Number & Value A Items B Items C Items

Demand Type

Other

Independent Dependent

Mainten. Repair Operating

 1997 Prentice-Hall, Inc.

Dependent vs. Independent Demand

Materials With Materials With Independent Demand Dependent Demand Company Customers Finished Goods Forecast & Booked Customer Orders EOQ & ROP Parent Items WIP & Raw Materials Calculated

Item Demand Source Material Type Method of Estimating Demand Planning Method
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MRP

 1997 Prentice-Hall, Inc.

Material Requirements Planning (MRP)

Mfg. computer information system

Determines quantity & timing of dependent demand items
1
Gross Requirements Scheduled Receipts Available Net Requirements Planned Order Receipts Planned Order Releases

2 20

3 30

4 25

5 15 8 7 7

2 5 25

23

33

33

1995 Corel Corp.

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MRP Requirements
1997 Prentice-Hall, Inc.

Computer system
Mainly discrete products Accurate bill-of-material Accurate inventory status

99% inventory accuracy

1984-1994 T/Maker Co.

Stable lead times

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MRP Benefits
1997 Prentice-Hall, Inc.

Increased customer satisfaction due to meeting delivery schedules

Faster response to market changes Improved labor & equipment utilization Better inventory planning & scheduling

Reduced inventory levels without reduced customer service

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 1997 Prentice-Hall, Inc.

MRP & Production Planning Process

Aggregate Production Planning Master Production Scheduling No, modify CRP, MRP, or MPS Resource Availability

Forecast & Firm Orders

Material Requirements Planning

Capacity Requirements Planning

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Realistic?

Yes

Shop Floor Schedules

 1997 Prentice-Hall, Inc.

MRP System Input & Output

What to make & when Material Requirements Planning Sys. What items to make & when What is in stock

What items make up the product

How long to make items

What is on order

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 1997 Prentice-Hall, Inc.

MRP System Input & Output

What to make & when Material Requirements Planning Sys. Planned Order & Other Reports What is in stock

What items make up the product

How long to make items

What is on order

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 1997 Prentice-Hall, Inc.

Master Production Schedule

Shows items to be produced

End item, customer order, module

Derived from aggregate plan Example

Item/Week Oct 3 Oct 10 Oct 17 Oct 24 Drills Saws
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300 300

200 450

310 310

300 330

Bill-of-Material
1997 Prentice-Hall, Inc.

List of components & quantities needed to make product

Provides product structure (tree)

Parents: Items above given level Children: Items below given level Lowest level in structure item occurs Top level is 0; next level is 1 etc.

Shows low-level coding

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 1997 Prentice-Hall, Inc.

Bill-of-Material Product Structure Tree

Bicycle(1) P/N 1000

Handle Bars (1) P/N 1001

Frame Assy (1) P/N 1002 Frame (1) P/N 1004

Wheels (2) P/N 1003

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 1997 Prentice-Hall, Inc.

Bill of Material Example

1995 Corel Corp.

Bill of Material P/N: 1000 Name: Bicycle P/N Desc Qty 1001 Handle Bars 1 1002 Frame Assy 1 1003 Wheels 2 1004 Frame 1

Units Level Each 1 Each 1 Each 2 Each 2

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 1997 Prentice-Hall, Inc.

Product Structure Thinking Challenge

The demand for product A is 50. How many of each component is needed to satisfy demand?
A B(2) E(3) D(2)
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Alone Group Class

C(3) E(1) G(1) F(2) D(2)

 1997 Prentice-Hall, Inc.

Product Structure Solution*

A B(2) E(3) E(1) G(1)
50

C(3) F(2) D(2)

D(2)

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 1997 Prentice-Hall, Inc.

MRP System Input & Output

Master Production Schedule Material Requirements Planning Sys. Planned Order & Other Reports

Bill of Materials

Inventory Status

Item Master

Purchasing Data

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Lead Time
1997 Prentice-Hall, Inc.

Input

Wait Time

Move Time

Queue Setup Run Time Time Time

Output

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 1997 Prentice-Hall, Inc.

Lead Times & Product Structure

Handle Bars 2 wk. 1 wk. 1 wk. Bicycle 3 wk. Wheels Frame Assy Lead time

Frame 2 wk.

1
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Time (weeks)

 1997 Prentice-Hall, Inc.

MRP System Input & Output

Master Production Schedule Material Requirements Planning Sys. Planned Order & Other Reports

Bill of Materials

Inventory Status

Item Master

Purchasing Data

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MRP Report
1997 Prentice-Hall, Inc.

1
Gross Requirements Scheduled Receipts Available Net Requirements Planned Order Receipts Planned Order Releases

2 20

3 30

4 25

5 15 8 7 7

2 5
20

25

23

33

33

Lead time = 3; lot policy = lot-for-lot (LFL); on-hand = 20 units; safety stock = 0 units. 10 - 22

MRP Formulas
1997 Prentice-Hall, Inc.

Available = On-hand - Safety stock - Allocated

On-hand is inventory physically present Allocated is inventory reserved for special orders

On-hand = Prior period's on-hand + Scheduled receipts Net requirement = Gross requirement - Available
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 1997 Prentice-Hall, Inc.

MRP Example Component B

X
A(1) B(1)

A master schedule calls for starting (planned order release) 2 units of product X in week 1, 20 in week 2, & 10 in week 4. The planned order releases for product Y are 15 in week 4, and 15 in week 5. Determine the gross requirements for component B.
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Y A(1) C(3)

Component B Solution
1997 Prentice-Hall, Inc.

X A(1) B(1) A(1)

Y C(3)

Planned Order Releases X Week 1 2 3 4 5 Qty 2 20 10

Planned Order Releases Y Week 1 2 3 4 5 Qty 15 15

Qty 2 20 10 Week 1 2 3 4 5

Gross Requirements B
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 1997 Prentice-Hall, Inc.

Thinking Challenge Component C

X
A(1) B(1)

A master schedule calls for starting (planned order release) 2 units of product X in week 1, 20 in week 2, & 10 in week 4. The planned order releases for product Y are 15 in week 4, and 15 in week 5. Determine the gross requirements for component C.
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Alone Group Class

Y A(1) C(3)

Component C Solution*
1997 Prentice-Hall, Inc.

X A(1) B(1) A(1)

Y C(3)

Planned Order Releases X Week 1 2 3 4 5 Qty 2 20 10

Planned Order Releases Y Week 1 2 3 4 5 Qty 15 15

Qty 45 45 Week 1 2 3 4 5

Gross Requirements C
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 1997 Prentice-Hall, Inc.

Thinking Challenge Component A

X
A(1) B(1)

A master schedule calls for starting (planned order release) 2 units of product X in week 1, 20 in week 2, & 10 in week 4. The planned order releases for product Y are 15 in week 4, and 15 in week 5. Determine the gross requirements for component A.
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Alone Group Class

Y A(1) C(3)

Component A Solution*
1997 Prentice-Hall, Inc.

X A(1) B(1) A(1)

Y C(3)

Planned Order Releases X Week 1 2 3 4 5 Qty 2 20 10

Planned Order Releases Y Week 1 2 3 4 5 Qty 15 15

Qty 2 20 25 15 Week 1 2 3 4 5

Gross Requirements A
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MRP Solution
1997 Prentice-Hall, Inc.

1
Gross Requirements Scheduled Receipts Available Net Requirements Planned Order Receipts Planned Order Releases

2 20

3 30

4 25

5 15

2 5
20

Lead time = 3; lot policy = lot-for-lot (LFL); on-hand = 20 units; safety stock = 0 units. 10 - 30

MRP Solution
1997 Prentice-Hall, Inc.

An order of 7 must be started in week 2. Lead time is 3 weeks.

1
Gross Requirements Scheduled Receipts Available Net Requirements Planned Order Receipts Planned Order Releases

2 20

3 30

4 25

5 15 8 7 7

2 5
20

25

23

33

33

Lead time = 3; lot policy = lot-for-lot (LFL); on-hand = 20 units; safety stock = 0 units. 10 - 31

 1997 Prentice-Hall, Inc.

Safety Stock

Safety stock decreases Availabl inventory. The amount physical on-hand is still the same (20).

1
Gross Requirements Scheduled Receipts Available

2 20

3 30

4 25

5 15 6 9 9

2 5

20 - 2 = 18 23

21

31

31

Net Requirements Planned Order Receipts Planned Order Releases

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Lead time = 3; lot policy = lot-for-lot (LFL); on-hand = 20 units; safety stock = 2 units.

Lot Size
1997 Prentice-Hall, Inc.

Lot: Batch of material that moves & gets processed together

Reduces setup & handling time & cost Techniques

Lot-for-lot (LFL) Economic order quantity (EOQ) Part period balancing Wagner-Whitin algorithm

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Lot Size
1997 Prentice-Hall, Inc.

Lot size is 5 or multiples (5, 10, 15 etc.). The quantities started (i.e., released) & completed are increased. 1 2 3 4 5

Gross Requirements Scheduled Receipts Available Net Requirements Planned Order Receipts Planned Order Releases

2 5
20

20 30 23

25 33 33

15 8 7 10

25

10

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Lead Time = 3; Lot Size= 5 units (or Multiples); On-Hand = 20 Units; Safety Stock = 0 Units.

 1997 Prentice-Hall, Inc.

MRP Thinking Challenge 1

A(1) LT = 1 B(2) LT = 2 C(4) LT = 3

A master schedule calls for 200 units of product A in period 5. No stock of any components is on-hand or on order. All order sizes are lot-forlot. Determine the amount & timing of all planned order releases.
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Alone

Group Class

 1997 Prentice-Hall, Inc.

MRP Thinking Challenge 2

F(1) LT = 2 G(1) LT = 1 H(4) LT = 2 H(1) LT = 2

A master schedule calls for 50 units of F in week 6, & 60 in week 8. On-hand levels are F = 0, G = 20, & H = 60. Another 20 units of G are scheduled to be received in week 4. Order quantities are lot-for-lot except for H, which has a lot size of 50 or multiples of 50.
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Alone

Group Class

 1997 Prentice-Hall, Inc.

MRP Management Issues

System nervousness

Time fences: Portion of master schedule not scheduled Pegging: Tracing to parent in BOM Reduce time buckets to daily or hourly Use planned receipts to sequence orders Use kanban cards to move material Use back flushing to reduce inventory

Integration with Just-in-Time (JIT)

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Conclusion
1997 Prentice-Hall, Inc.

Distinguished dependent from independent demand inventory

Defined material requirements planning Stated the benefits of MRP Identified the requirements of MRP

Explained the inputs & outputs of MRP

Computed order releases
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