Material Requirements Planning

Hierarchy of Planning Decisions

 Capacity planning is a strategic function with
implications in the long term.

Strategic decisions:
 Building more facilities/Closing facilities
 Recruiting more staff/Laying off
 Changing process to use higher technology
 Increase capital investment
 Selling equipment and so on
Hierarchy of Planning Decisions
 Capacity plans followed by a hierarchy of decisions about
how this capacity can be best used and what short-term
adjustments are needed:
 Aggregate plans
overall production for families of products (typically by month)
 Master Schedules
a detailed time table of production for individual products
(typically by week)
 Short term schedules
which show detailed allocation of jobs to equipment (typically
by day)
Examples
A company which makes bicycles in three plants.
The series of decisions are:

1. STRATEGIC PLANS: Make fundamental decisions

 Make bikes for next few years
 Product and process design decisions
 Continue operations in 3 factories A, B and C
2. CAPACITY PLANS: examine long-term forecasts
and make adjustments to match capacity to these

Long term forecasts suggest sale of 5000 bikes a year.

There is a shortage of capacity of 2000 bikes a year.
Decisions made:
 Factory A to make 1000 bikes a year (AS USUAL)
 Factory B to make 2000 bikes a year (ALLOW 2
SHIFTS)
 Factory C to make 2000 bikes a year (INCREASE
STAFF)
3. AGGREGATE PLANS: breaks down capacity plans
into monthly plans for individual facilities.

Typical Decisions:
 Factory A to make 100 bikes in January. This needs a
staff of 100 and achieves 90% utilization of
equipment

 Factory B to make 250 bikes in January. This needs

200 staff and achieves 85% utilization of equipment.

 And so on….
4. MASTER SCHEDULE: breaks down aggregate
plans into weekly plans for individual products.

Typical Decisions (in FACTORY A):

 Week 1 of January (10 alpha bikes; 5 beta bikes; 10
super bikes)
 Week 2 of January (5 alpha and 25 super bikes)
 Week 3 of January (10 alpha bikes and 10 super
bikes)
 And so on….
5. SHORT TERM SCHEDULES: breaks down master
schedule into daily timetable for individual batches of
bikes and equipments.

Typical Decisions (in FACTORY A; WEEK 1 of JAN):

 MONDAY MORNING SHIFT
 1 alpha bike on machines 1 to 4
 1 super bike on machines 5 to 8 then
 1 beta bike on machines 1 to 8
 MONDAY AFTERNOON SHIFT
 2 BETA BIKES ON MACHINES 1 TO 8
 TUESDAY MORNING SHIFT
 And so on….
 MPS Example

Months January February

Aggregate Production Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced)
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
Objectives of MPS
Determine the quantity and timing of completion of
end items over a medium-range planning horizon
Schedule end items (finished goods and parts shipped
as end items) to be completed promptly and when
promised to the customer
Avoid overloading or underloading the production
facility so that production capacity is efficiently
utilized and low production costs result
MPS Time Fences
Frozen

No schedule changes allowed

Moderately Firm

Specific changes allowed within product groups as long

as parts are available
Flexible/ Open

Significant variation allowed as long as overall capacity

requirements remain at the same levels
All production capacity not allocated
 Example of Time Fences
Moderately
Frozen Firm Flexible

Capacity
Forecast and available
capacity
Firm Customer Orders

8 15 26

Weeks
Time Fences
The rules for scheduling:
Do not change orders in the frozen zone
Do not exceed the agreed on percentage changes when
modifying orders in the other zones
Try to level load as much as possible
Do not exceed the capacity of the system when
promising orders.
If an order must be pulled into level load, pull it into the
earliest possible week without missing the promise.
Material Requirements Planning
A means for determining the number of parts,
components, and materials needed to produce a
product
Provides time scheduling information specifying
when each of the materials, parts, and components
should be ordered or produced
Dependent demand drives MRP
Benefits of MRP
Better response to customer orders

Faster response to market changes

Improved utilization of facilities and labor

Reduced inventory levels

Dependent Demand
Effective use of dependent demand inventory models
requires the following

1. Master production schedule

2. Specifications or bill of material
3. Inventory availability
4. Purchase orders outstanding
5. Lead times
 Example of MRP Logic
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
A B 2 days
C 1 day
D 3 days
E 4 days
B(4) C(2) F 1 day

Total Unit Demand

Day 10 50 A
D(2) E(1) D(3) F(2) Day 8 20 B (Spares)
Day 6 15 D (Spares)
 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.

Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
Order Placement 50

LT = 1 day
 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.

Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
Order Placement 50
B Required 20 200
Order Placement 20 200

LT = 2
Spares
A 4x50=200

B(4) C(2)

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

 20
Finally, repeating the process for all components, we have the final materials
requirements plan:

Day: 1 2 3 4 5 6 7 8 9 10
A Required 50
LT=1 Order Placement 50
B Required 20 200
LT=2 Order Placement 20 200
C Required 100
LT=1 Order Placement 100
D Required 55 400 300
LT=3 Order Placement 55 400 300
E Required 20 200
LT=4 Order Placement 20 200
F Required 200
LT=1 Order Placement 200

A
Part D: Day 6
B(4) C(2) 40 + 15 spares

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

Bills of Material (BOM)
List of components, ingredients, and materials
needed to make product
Provides product structure
Items above given level are called parents
Items below given level are called children
 BOM Product Structure
Level Product structure for “Awesome” (A)
0 A

Std. 12” Speaker kit w/

1 B(2) Std. 12” Speaker kit C(3) amp-booster

2 E(2) E(2) F(2) Std. 12” Speaker

booster assembly

Packing box and installation

3 D(2) kit of wire, bolts, and screws G(1) D(2)

Amp-booster

12” Speaker 12” Speaker

BOM Explosion

Part B: 2 x number of As = (2)(50) = 100

Part C: 3 x number of As = (3)(50) = 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
Part E:E(2) 2 x number of Bs E(2) F(2) Std. 12” Speaker
+ 2 x number of Cs = booster
(2)(100) + (2)(150) = assembly
500
Part F: 2Packing
x number of Cs =
box and installation
(2)(150) = 300
Part G: 1kitxofnumber of and
wire, bolts, Fs screws
= (1)(300) = 300
Accurate Records
Accurate inventory records are absolutely required
for MRP to operate correctly
Generally MRP systems require at least 99%
accuracy
Outstanding purchase orders must accurately reflect
quantities and scheduled receipts
Lead Times
The time required to purchase, produce, or
assemble an item
For production – the sum of the order, wait, move,
setup, store, and run times
For purchased items – the time between the
recognition of need for the item and its availability
for production
Time-Phased Product Structure
Must have D and E
Start production of D completed here so
production can begin on
B
1 week
2 weeks to
D produce
B
2 weeks
E
A
2 weeks 1 week
E
2 weeks 1 week
G C
3 weeks
F
1 week
D
| | | | | | | |

1 2 3 4 5 6 7 8
Time in weeks
Determining Gross Requirements
Starts with a production schedule for the end item
50 units of Item A in week 8

Using the lead time for the item, determine the week in
which the order should be released
One week lead time means order for 50 units should be
released in week 7
This step is often called “lead time offset” or “time
phasing”
Determining Gross Requirements
From the BOM, every Item A requires 2 Item Bs
100 Item Bs are required in week 7 to satisfy the order
release for Item A
The lead time for the Item B is 2 weeks
Release an order for 100 units of Item B in week 5

The timing and quantity for component requirements

are determined by the order release of the parent(s)
Determining Gross Requirements

The process continues through the entire BOM one

level at a time – often called “explosion”
By processing the BOM by level, items with multiple
parents are only processed once, saving time and
resources and reducing confusion
Low-level coding
Ensures that each item appears at only one level in the
BOM
 Gross Requirements Plan
Week
1 2 3 4 5 6 7 8 Lead Time
A. Required date 50
Order release date 50 1 week
B. Required date 100
Order release date 100 2 weeks
C. Required date 150
Order release date 150 1 week
E. Required date 200 300
Order release date 200 300 2 weeks
F. Required date 300
Order release date 300 3 weeks
G. Required date 600 200
Order release date 600 200 1 week
G. Required date 300
Order release date 300 2 weeks
Net Requirements Plan
Net Requirements Plan
Determining Net Requirements
Starts with a production schedule for the end item
50 units of Item A in week 8

Because there are 10 Item As on hand, only 40 are

actually required
Net requirement = Gross requirement – On- hand
inventory
Planned order receipt for Item A in week 8 is 40 units
(= 50 – 10)
Determining Net Requirements
Following the lead time offset procedure, the planned
order release for Item A is now 40 units in week 7
The gross requirement for Item B is now 80 units in
week 7
There are 15 units of Item B on hand, so the net
requirement is 65 units in week 7
A planned order receipt of 65 units in week 7
generates a planned order release of 65 units in week 5
Determining Net Requirements
A planned order receipt of 65 units in week 7
generates a planned order release of 65 units in week 5
The on-hand inventory record for Item B is updated to
reflect the use of the 15 items in inventory and shows
no on-hand inventory in week 8
This is referred to as the Gross-to-Net calculation and
is the third basic function of the MRP process
Net Requirements
The logic of net requirements

Gross requirements
+ Allocations

Total requirements

On hand Scheduled receipts Net requirements

– + =

Available inventory
MRP Management
MRP is a dynamic system
Facilitates re-planning when changes occur

System nervousness
From too many changes

Tools to reduce nervousness

Time fences

Pegging – tracing upward in BOM: links each item to its

parent allowing effective analysis of changes
Lot-Sizing Techniques
Lot-for-lot
Order just what is required for production based on net
requirements
May not always be feasible

If setup costs are high, lot-for-lot is expensive

Economic order quantity (EOQ)

Based on independent constant demand

MRP systems deal with dependent variable demand

Lot-Sizing Techniques
Part Period Balancing (PPB)
Dynamic approach to balance setup & holding costs

Looks at future orders to determine most economic lot

size
Develops Economic Part Period (EPP)

Wagner-Whitin Algorithm
Complex dynamic programming model

Assumes a finite time horizon

Provides good results

Lot-for-Lot Example
1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on 35 35 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order 30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Lot-for-Lot Example

No on-hand inventory is carried through the system

Total holding cost = $0

There are seven setups for this item in this plan

Total setup cost = 7 x $100 = $700
EOQ Lot Size Example
1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on 35 35 0 43 3 3 66 26 69 69 39
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order 73 73 73 73
receipts
Planned order
73 73 73 73
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Average weekly gross requirements = 27; EOQ = 73 units
EOQ Lot Size Example

Annual demand = 1,404

Total cost = setup cost + holding cost
Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)
Total cost = $3,798
Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730
PPB Example
1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on 35
hand
Net
requirements
Planned order
receipts
Planned order
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

EPP = 100 units
PPB Example
Periods
Combined
Trial Lot Size
(cumulative net
requirements) Part Periods Setup
Costs
Holding Total
2 30 0
2, 3 70 1 2
40 =340 x 41 5 6 7 8 9 10
2, 3, 4
Gross 70 40
35 30 40 0 10 40 30 0 30 55
requirements
2, 3, 4, 5 80 70 = 40 x 1 + 10 x 3 100 + 70 = 170
2, 3, 4, 5, 6
Scheduled 120 230 = 40 x 1 + 10 x 3
receipts + 40 x 4
Combine
Projected on periods 2 - 5 as this results in the Part Period closest to
35
hand the EPP
6
Net 40 0
requirements
6, 7 70 30 = 30 x 1
6, 7, 8 order
Planned 70 30 = 30 x 1 + 0 x 2
receipts
6, 7, 8, 9 100 120 = 30 x 1 + 30 x 3 100 + 120 = 220
Planned order
Combine periods 6 - 9 as this results in the Part Period closest to
releases
the EPP
10 55 0 100 + 0 = 100
Total cost 300 + 190 = 490
PPB Example
1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on 35 35 0 50 10 10 0 60 30 30 0
hand
Net
0 30 0 0 0 40 0 0 0 55
requirements
Planned order 80 100 55
receipts
Planned order
80 100 55
releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

EPP = 100 units
Lot-Sizing Summary
For these three examples

Lot-for-lot $700
EOQ $730
PPB $490

a p l an wit h
d h a v e yi el ded
r- Wh it i n w o ul
Wagne al cos t o f $ 4 55
a tot
Lot-Sizing Summary
In theory, lot sizes should be recomputed whenever
there is a schedule or order quantity change
In practice, this results in system nervousness and
instability
Lot-for-lot should be used when low-cost deliveries
can be achieved
Lot-Sizing Summary
Lot sizes can be modified to allow for scrap, process
constraints, and purchase lots
Use lot-sizing with care as it can cause considerable
distortion of requirements at lower levels of the BOM
When setup costs are significant and demand is
reasonably smooth, PPB, Wagner-Whitin, or EOQ
should give reasonable results
Extensions of MRP
Manufacturing Resource Planning (MRP II)

Distribution Resource Planning (DRP)

Enterprise Resource Planning (ERP)