Material Requirements

Planning (MRP)

MRP
The logic for determining the number of
parts, components, and materials needed
to produce a product.
It also provides a schedule specifying
when each of these materials, parts, and
components should be ordered and
produced

Independent vs. Dependent

Demand

Independent demand

Influenced by market conditions, i.e., originates outside the

system (say cars, bicycles, refrigerators, washing machines)
Uncertain

Dependent demand

Depends on demand of independent items, i.e., make up

independent demand products
Known
Example: Subassemblies, components parts

Independent vs. Dependent

Demand

Demand Pattern for Independent

versus Dependent Items

Key Differences: Dependent vs. Independent Demand

Attribute
Nature of Demand

Dependent
Demand
No uncertainty

Independent
Demand
Uncertainty

Goal

Meet requirements Meet demand for a

exactly
targeted service
level

Service Level
Demand
occurrence
Estimation of
demand
How much to
order?

100%
Often lumpy

100% difficult
Often continuous

By production
planning
Known with
certainty

By forecasting
Estimate based on
past consumption

Material Requirements Planning (MRP)

MRP is a technique that has been employed since the

1940s and 1950s.
Joe Orlicky is known as the Father of MRP
The use and application of MRP grew through the
1970s and 1980s as the power of computer hardware
and software increased.
MRP gradually evolved into a broader system called
manufacturing resource planning (MRP II).

Material Requirements Planning

(MRP)

MRP is a computerized inventory system

developed specifically to manage dependent
demand items

MRP works backward from the due date using

lead times to determine when and how much to
order for
Subassemblies, component parts & raw
materials

MRP

MRP begins with a schedule for finished goods

that is converted into a schedule of requirements
for subassemblies, component parts and raw
materials needed to produce the finished items in
the specified time frame

MRP designed to answer the following questions

What is needed ?

How much is needed?

When is it needed ?

MRP

MRP thus works with finished products, or end items,

and their constituent parts, called lower level items
According to one study, 80% of high performing
manufacturing plants have implemented MRP
MRP works well for assembling complex discrete
products produced in batches
Example: computers, consumer durables, furniture,
watches, trucks, generators, motors, machine tools

Inputs and Outputs of MRP

MRP
MPS

BOM

MRP

Inventory Records

Planned Order
Release

Work Order

Purchase order

Rescheduling
Notices

Master Production Schedule

A time table that specifies what (end item)
is to be made and when
Time period used for planning is called a
time bucket
MPS shows how many of each individual
item must be completed each period

Aggregate Production Plan and

MPS -- Amplifiers

How does MPS differ from APMotors

Aggregate Production Plan - Cars

Hundai Motors:
Month

# of Cars

Jan

10,000

Feb
Mar
April
May

12,000
8,000
11,000
7,000

MASTER PRODUCTION SCHEDULE

Weeks
of
January

Santro

II

III

1,200 2,000 2,500

IV

Total

700

6,400

Accent

700

950

1,300

250

3,200

Sonata

100

50

200

50

400

2,000 3,000 4,000 1,000 10,000

1. Master Production Schedule

(MPS)

Master production schedule states

which end items are to be produced, when
these are needed, and in what quantities.

Example: A master schedule for end item

X:

Comes from: customer orders, forecasts and orders from

warehouses to build up seasonal inventories, and
interplant transfers

2. Bill of Materials (BOM)

A document that lists the components, their description,

sequence in which the product is created and the
quantity of each required to make one unit of a product
Thus relationship between end items and lower level
items is described by the BOM
It depicts exactly how a firm makes the item in the
master schedule
Extremely important to have BOM correct to have
accurate material estimates

2. Bill of Materials (BOM)

The BOM file is often called the product

structure file or product tree because it
shows how a product is put together

Assembly Diagram & Product

Structure Tree

Product Structure Tree of

Sub-Assembly

Product Structure Tree of Product

X With Levels

(Highest)

(Lowest)

Visual description of the requirements in a bill of materials, where all

components are listed by levels

Indented Parts List for Meter A and Meter B

A Product Structure Tree

Note: Restructuring the BOM so that multiple occurrences of a component all coincide
with the lowest level at which the component occurs

BOM & Product Structure Tree (An

Example)

Partial Bill
of Materials for a Bicycle

3. Inventory Record

Third input in MRP

It tells us about the status of inventory of an item
at present, or in a given interval of time in the
coming future
On

hand
On Order (scheduled receipt)
Lead time
Lot size
Code

Outputs of MRP
(Primary Reports)

Planned order receipt A schedule indicating the

quantity that is planned to arrive at the beginning of a
period

Planned Order release Authorizes the execution of

planned orders (work order + purchase order). To
determine planned order release, count backward from
the planned order receipt using the lead time

Order changes report Changes to planned order,

including revisions for due dates or order quantities and
cancellation of orders

Outputs of MRP
(Secondary Reports)
Performance control report evaluate
system performance, deviations from
plans, missed deliveries, and stock outs
Exception reports attention to major
discrepancies such as late and overdue
orders, requirements for non-existence
parts, reporting errors

MRP Terminologies

Gross Requirements: Total demand for an item during

each time period. For end items, these quantities are
shown in the master production schedule

For components, these quantities are derived from the planned

order releases of their immediate parents

Scheduled Receipts: Orders that have been released

and scheduled to be received from vendors by the
beginning of a period

Projected On-Hand: The expected amount of inventory

that will be on hand at the beginning of each time period
(SR + Avl inv from last period)

MRP Terminologies

Net requirements: The actual amount needed in each

time period

Planned Order Receipts: The quantity expected to be

received from a vendor or in-house shop at the
beginning of the period in which it is shown. It is the
amount of an order that is required to meet a net
requirement in the period.

Under lot-for-lot ordering, this quantity will equal net requirements.

Under lot-size ordering, this quantity may exceed net requirements. Any
excess is added to available inventory in the next time period.

MRP Terminologies

Planned Order Release: Indicates a

planned amount to order in the beginning
of each time period; equals planned-order
receipts offset by lead time.

Format of MRP
Week Number

Item:
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned-order
receipts
Planned-order
releases

MRP Explosion

The MRP process of determining

requirements for lower level items
(subassemblies, components, raw
materials) based on the master production
schedule

Planned Order Report

PERIOD
ITEM

A
B

Y1

Z1

X1

X2

X3

Y2

Z2

Z3

Lot Sizing in MRP Systems

Lot-for-Lot (L4L)
Sets planned orders to exactly match
the net requirements. Eliminates
holding costs
Economic order quantity (EOQ)
Balances setup and holding costs

Lot Sizing in MRP Systems

Least total cost (LTC)

Balances carrying cost and setup cost for various
lot sizes, and selects the one where they are most
nearly equal

Least unit cost (LUC)

Adds ordering and inventory carrying costs for
each trial lot size and divides by number of units
in each lot size, picking the lot size with the
lowest unit cost

Lot-for-Lot

MRP and Capacity Planning

MRP , as it was originally introduced, considered

only materials. MRP does not compare the
planned orders to the available capacity. Most
MRP plans assume infinite loading; that is an
infinite amount of capacity is available, which is
not realistic. Individual machines or work
centres may have capacity shortages and
backlogs of work to be completed
We therefore need capacity planning.

Two Approaches to Capacity

Planning

Rough-cut capacity planning

Uses the MPS (end item) as the source of product
demand information
Capacity determination at critical work centres
Capacity Requirement Planning
Completed at the component level rather than at the
end item level
Uses planned order release from MRP
Capacity determination at all work centres

Focused on critical
work centres

Rough-Cut Capacity and CRP

Capacity Requirements
Planning (CRP)
CRP determines if all the work centres
involved have the capacity to implement
the MRP plan.
A load profile compares weekly loads
needs against a profile of actual capacity.

CAPACITY REQUIREMENT PLANNING

Workload for a Work Center

Capacity
Work center Effective Capacity/week (2 machines):
(# machines)(# shifts) (# of hours/shift) (# days/week)
(utilization)(efficiency)
Utilization: Time working / Time available

Efficiency: Actual output / standard output

Load: Standard hours of work assigned to a production facility

Load % = (Load / Capacity)100%

Scheduled Workload for a Work

Center
190.3
137.8

161.5
128.8

2m/c * 2 shifts/day * 10 hours/shift * 5 days/week * 85%(m/c Util) * 0.95 (m/c efficiency) =161.5 hrs/week

Capacity Levelling
Work Overtime
Selecting an alternative work center
Subcontract
Scheduling part of work of week 11 into
week 10
Renegotiate due date

Safety Stock

It would seem that an MRP inventory system should not require

safety stock. Practically, however, there may be exceptions.
Typically SS built-into projected on-hand inventory

Why is safety stock necessary?

Two types of uncertainties are prevalent
A. The quantity of components received (soln: SS)
I.
II.

B.

Poor quality may result in quantity loss

Reliability in supplier may result in quantity uncertainty

Timing of the receipts (solution: safety time)

A.

Machine breakdowns, fluctuations in staffing

Updating MRP Schedules

Updating MRP schedule is required because

Customers may cancel or amend order
Suppliers could default on supply
Unexpected disruptions in manufacturing
Two techniques of updating
Regeneration, i.e., re plan the whole system (run MRP from
scratch, updated periodically, 100% replacement of the existing
information)
Net change
Instead of running the entire MRP system, schedules of
components pertaining to portions where changes have
happened are updated.
Applies to sub-set of data as opposed to regeneration

MRP Dynamics - System

Nervousness

MRP systems work best under conditions of reasonable

stability
Frequent changes in an MRP system leads to major
changes in the order profiles for lower level
subassemblies or components creating havoc for
purchasing and production departments. This is called
system nervousness Tool helpful in reducing system
nervousness
Time fences

Freezing the Master Schedule

Time Fences in MPS

Period

frozen
(firm or
fixed)

slushy
somewhat
firm

liquid
(open)

Time Fences divide a scheduling time horizon into three

sections or phases, referred as frozen, slushy, and liquid.

Strict adherence to time fence policies and rules.

Pegging

Tracing upward in the BOM from the

component to the parent item. By pegging
upward, the production planner can
determine the cause for the requirement
and make a judgement about the
necessary for a change in schedule

MRP Benefits
Reduction in inventory
Increased customer satisfaction due to
meeting delivery schedules
Faster response to market changes
Improved labor & equipment utilization
Better inventory planning & scheduling

Benefits of MRP

Ability to easily determine inventory

usage by backflushing

Back flushing: Exploding an end items

bill of materials to determine the
quantities of the components that were
used to make the item.

MRP Problems Encountered

Data integrity is low
Not frequent updates of databases when
changes takes place
Uncertainties related to lead time and
quantity delivered

Requirements of Successful
MRP System

Computer and necessary software

Accurate and up-to-date
Master schedules
Bills of materials

Inventory records
User knowledge
Management support

Manufacturing Resource Planning

(MRP II)

Evolved from MRP in 1980s

Didnt replace or improve MRP. Rather expanded the scope
to include capacity requirements planning and to involve
other functional areas of the organization:
Purchasing, Manufacturing, Marketing, Finance,
Logistics
MRP II employed common database and an integrated
platform where sales, inventory, purchasing transactions
were updated in both inventory and accounting applications

An Overview of MRP II
Manufacturing

Master
production schedule

Marketing
Production
plan

MRP

Rough-cut
capacity planning

Capacity
planning

Adjust
production plan
Yes

Problems?

No

Requirements
schedules

No
Problems?

Adjust master schedule

Market
Demand

Finance

Yes

Aggregate Sales and

Operations Planning

Planning Level and Activities

Planning Stages in Operation

Aggregate Planning
Aggregate planning is a big picture approach to production
plan to meet the demand throughout the year or so.
It is not concerned with individual products, but with a single
aggregate product representing all products.
For example, in a TV manufacturing plant, the aggregate
planning does not go into all models and sizes. It only
deals with a single representative aggregate TV.
All models are lumped together and represent a single
product; hence the term aggregate planning.

What does Aggregate Mean?

Overall terms
Product

families or product lines rather than individual

products, thus the term aggregate
In other words, one collapses a multi-product firm to
a single-product firm, the product being aggregate
units of production
Big picture approach to planning
Aggregate, for example # bicycles to be produced,
but would not identify bicycles by colour, size, type
etc.

How does MPS differ from AP

Aggregation (Example)

Suppose a bicycle manufacturer makes three models (Standard,

Deluxe, Sports)
Time: Standard: 30 m/c hours, Deluxe: 60 m/c hours, Sports: 90 m/c
hours
Thus manufacturing 1 deluxe model is equivalent to manufacturing 2
standard models. 1 sports model is equivalent to manufacturing 3
standard models from resource consumption perspective
Thus a monthly demand of 1000 standard cycles, 500 deluxe, and
250 sports can be aggregated as 2750 standard models on the
basis of machine hours

Identifying Aggregate Units of

Production
Product
Family

Material cost/ Revenue /

Unit (Rs)
unit (Rs)

Prodn. Time
/unit
(includes
setup time)

% share of
units sold

15

54

5.76

10

30

3.04

25

39

3.88

20

12

49

5.00

10

36

3.66

20

13

48

4.37

15

Material cost / aggregate unit = 15*0.10+7*0.25+9*0.20+12*0.10+9*0.20+13*0.15 = Rs 10

Revenue / aggregate unit = 54*0.10+30*0.25+39*0.20+49*0.10+36*0.20+48*0.15 = Rs 40
Production time / agg. unit = 5.76*0.1+3.04*.25+3.88*0.20+5*0.1+3.66*0.20+4.37*0.15 = 4 hrs

Why Aggregate Planning?

A plan for orderly and systematic change

of production capacity to meet peaks and
valleys of expected customer demand

Getting the most output for the amount of

resources available, which is important in
times of scarce production resources

Why Aggregate Planning?

Provides for fully loaded facilities, thus

minimizing
Overloading

and under loading

Minimizing cost over the planning period

Adequate production capacity to meet

expected aggregate demand
Optimize

supply

balance between demand and

Steps in Aggregate Planning

1.

Begin with sales forecast for each product that

indicates the quantities to be sold in each time
period (usually months, or quarters) over the
planning horizon (3-18 months)

2.

Total all the individual product or service

forecast into one aggregate demand.

Steps in Aggregate Planning

4.

Determine capacities (regular time, OT,

subcontracting) for each period
Determine unit costs for regular time, OT,
subcontracting, holding inventories, back
orders, layoffs etc.

5.

Identify company policy (chase, level, mixed)

3.

Steps in Aggregate Planning

6.

7.

Develop alternative plans and compute

cost for each
Select the best alternative that satisfies
companys objectives

Strategies for Meeting Demand

Proactive
Alter

Reactive
Alter

demand to match capacity

capacity to match demand

Mixed
Some

of each

Strategies for Meeting Demand

Proactive strategies
Influencing

Offer discounts and promotions

Increase
Counter

Demand

advertising in slack periods

seasonal products

Lawnmowers (summer) and snow-blowers (winter)

Strategies for Meeting Demand

Reactive Strategies
Changing

inventory levels
Vary workforce size (hiring and lay-off)
Varying shifts
Varying working hours
Varying production through overtime or idle
time
Subcontracting

Inputs and Costs in AP

Decision Variable

Costs

Varying work force size

Hiring, training, firing costs

Using Overtime

Overtime costs

Varying inventory levels

Holding costs

Accepting back orders

Back order costs

Subcontracting others

Subcontracting costs

Outputs of Aggregate Planning

Total cost of a plan
Projected levels of

Inventory

held
Output from

Regular time, overtime, subcontracting

Employment

Graphical Method
Popular technique

Easy to understand and use

Trial-and-error approaches that do
not guarantee an optimal solution
Require only limited computations

Graphical Method
Month

Expected
Demand

Production Demand /
Days
day

Avg. daily
demand

Jan

900

22

41

50

Feb

700

18

39

50

March

800

21

38

50

April

1200

21

57

50

May

1500

22

68

50

June

1100

20

55

50

6,200

124

Graphical Method

Note: Forecast differs from average demand

Aggregate Planning Techniques

Two pure forms of aggregate planning

strategies
Level Production
Maintain constant workforce and
adjust inventory
Chase

Demand
Hiring and Firing people

Aggregate Planning Techniques

Mixed Strategy
Combination of
Overtime, under time, & subcontracting
Part Time employees
Hiring and firing
Inventory
Backordering
Note: When one alternative: Pure Strategy
When two or more are selected: Mixed strategies

Level Production Strategy

It is an aggregate planning in which monthly production

is uniform
Requires no overtime, no change in work force levels,
and no subcontracting
Toyota and Nissan follow this strategy
Finished goods inventory go up or down to buffer the
difference between demand and production

Level Production Strategy

LEVEL PRODUCTION STRATEGY

Assume begin inventory: 2000

Chase Production Strategy

It attempts to achieve output rates that match demand

forecast for that period.

This strategy can be accomplished by:

Vary workforce levels (hiring and firing)

Service businesses use because they dont have the

option to build inventory of their product

Chase Production Strategy

CHASE DEMAND STRATEGY

Chase vs. Level

Chase Approach

Advantages
Investment

Level Approach

Advantages

in inventory

is low
Labor

utilization in high

Disadvantages
The

cost of adjusting
output rates and/or
workforce levels

Stable output rates and

workforce

Disadvantages
Greater

inventory costs

Increased

overtime and

idle time

Resource utilizations vary

over time

Mixed Strategy

For most firms, neither a chase strategy

nor a level strategy is likely to prove ideal,
so a combination of options must be
achieved to meet demand and minimize
cost

More complex than pure ones but typically

yield a better strategy

OVERTIME & SUBCONTRACTING

Linear Programming
Approaches to AP

Finds minimum cost solution related to

regular labour time, overtime,
subcontracting, caring inventory, and costs
associated with changing the size of
workforce

Mathematical Techniques to
Aggregate Planning

Linear Programming
Optimal

solutions
Cost minimization
Profit maximization

Appropriate when cost and variable

relationships are linear

Application in industry limited

Transportation Method in AP

Transportation Method in AP

Transportation Method
(An Example)

Total Costs

Period

Demand

Regular
Production

Overtime

Subcontract

End
Inventory

1
2
3
4
Total

900
1500
1600
3000
7000

1000
1200
1300
1300
4800

100
150
200
200
650

0
250
500
500
1250

500
600
1000
0
2100

Total Cost: 4800$20+650$25+1250$28+2100$3 = $153,550

Transportation Method
(Second Example Prob 7)

Transportation Method: Cost of

Plan

Period 1: 50($0)+300($50)+50($65)+50($80)=$22,250
Period 2: 400($50)+50($65)+100($80)=$31,250
Period 3: 50($81)+450($50)+50($65)+200($80)=$45,800

Total Cost: $99,300

Simulation Models in AP

Development of computerized model under

variety of conditions to find reasonably
acceptable solutions
Advantages
Lends

itself to problems that are difficult to solve

mathematically
Experimenting system behaviour without any risk
Compresses time to understand system
Understand system behaviour under wide range of
conditions

Simulation Models in AP

Limitations
Simulation

does not produce optimal

solutions, it merely indicates approximate
behaviour for a set of inputs

Simulations

are based on models, and

models are only approximation of reality

Summary of Aggregate
Planning Techniques
Technique

Solution
Approach

Characteristics

Spreadsheet

Heuristic (trial and

error)

Intuitively appealing,
easy to understand,
solution not optimal

Linear Programming

Optimizing

Computerized

Simulation

Heuristic (trial and

error)

Computerized
models can be
examined under
various scenarios