CH 14 - Material Requirements Planning

Operations Management: Sustainability
and Supply Chain Management Outline (1 of 2)

Thirteenth Edition, Global Edition
• Global Company Profile: Wheeled Coach
• Dependent Demand
Chapter 14 • Dependent Inventory Model Requirements

Material Requirements • MRP Structure
Planning (MRP) and ERP
• MRP Management
Copyright © 2020 Pearson Education Ltd. All Rights Reserved. Copyright © 2020 Pearson Education Ltd. All Rights Reserved.
Outline (2 of 2) MRP for Wheeled Coach (1 of 2)

• Lot-Sizing Techniques • Largest manufacturer of ambulances in the world
• Extensions of MRP • International competitor
• MRP In Services • 12 major ambulance designs
• Enterprise Resource Planning (E RP) – 18,000 different inventory items
– 6,000 manufactured parts
– 12,000 purchased parts
MRP for Wheeled Coach (2 of 2) Learning Objectives (1 of 2)
• Four Key Tasks When you complete this chapter you should be able to:
– Material plan must meet both the requirements of the 14.1 Develop a product structure
master schedule and the capabilities of the production
facility 14.2 Build a gross requirements plan
– Plan must be executed as designed 14.3 Build a net requirements plan
– Minimize inventory investment
14.4 Determine lot sizes for lot-for-lot, EOQ, and POQ
– Maintain excellent record integrity
Learning Objectives (2 of 2) Dependent Demand (1 of 3)

When you complete this chapter you should be able to: For any well-defined product for which a schedule can
be established, dependent demand techniques should
14.5 Describe MRP II
be used
14.6 Describe closed-loop MRP
14.7 Describe ERP
Dependent Demand (2 of 3) Dependent Demand (3 of 3)
• Benefits of MRP • The demand for one item is related to the demand for
1. Better response to customer orders another item
2. Faster response to market changes • Given a quantity for the end item, the demand for all parts
3. Improved utilization of facilities and labor and components can be calculated
4. Reduced inventory levels • In general, used whenever a schedule can be established
for an item
• MRP is the common technique
Dependent Inventory Model Master Production Schedule (MPS)

Requirements (1 of 2)
• Effective use of dependent demand inventory models • Specifies what is to be made and when
requires the following
• Must be in accordance with the aggregate production plan
1. Master production schedule
2. Specifications or bill of material • Inputs from financial plans, customer demand,
engineering, labor availability, inventory fluctuations,
3. Inventory availability
supplier performance
4. Purchase orders outstanding
• As the process moves from planning to execution, each
5. Lead times
step must be tested for feasibility
Master Production Schedule (MPS)
(2 of 2) The Planning Process (1 of 3)
• MPS is established in terms of specific products, it Figure 14.1
disaggregates the aggregate plan
• Schedule must be followed for a reasonable length of time
• The MPS is quite often fixed or frozen in the near-term part
of the plan
• The MPS is a rolling schedule
• The MPS is a statement of what is to be produced, not a
forecast of demand
The Planning Process (2 of 3) The Planning Process (3 of 3)

Figure 14.1 Figure 14.1
Aggregate Production Plan Master Production Schedule (MPS)
Figure 14.2 Can be expressed in any of the following terms:
1. A customer order in a job shop (make-to-order)
company
2. Modules in a repetitive (assemble-to-order or
forecast) company
3. An end item in a continuous (stock-to-forecast)
company
MPS Example Bills of Material (1 of 4)

Table 14.1 Master Production Schedule for Chef John's • List of components, ingredients, and materials needed to
Buffalo Chicken Mac & Cheese make product
• Provides product structure
– Items above given level are called parents
– Items below given level are called components or
children
BOM Example (2 of 2)
BOM Example (1 of 2)
For an order of 50 Awesome speaker kits
Part B: 2 × number of As = (2)(50) = 100

Part C: 3 × number of As = (3)(50) = 150
Part D: 2 × number of Bs
+ 2 × number of Fs = (2)(100) + (2)(300) = 800
Part E: 2 x number of Bs
+ 2 × number of Cs = (2)(100) + (2)(150) = 500
Part F: 2 × number of Cs = (2)(150) =300
Part G: 1 × number of Fs = (1)(300) =300
Bills of Material (2 of 4) Bills of Material (3 of 4)

• Modular Bills • Planning Bills
– Modules are not final products but components that – Also called “pseudo” or super bills
can be assembled into multiple end items – Created to assign an artificial parent to the BOM
– Can significantly simplify planning and scheduling 1. Used to group subassemblies to reduce the
number of items planned and scheduled
2. Used to create standard “kits” for production
Bills of Material (4 of 4) Accurate Inventory Records
• Phantom Bills • Accurate inventory records are absolutely required for
– Describe subassemblies that exist only temporarily MRP (or any dependent demand system) to operate
– Are part of another assembly and never go into correctly
inventory • MRP systems require more than 99% accuracy
• Low-Level Coding
– Item is coded at the lowest level at which it occurs
– BOMs are processed one level at a time
Purchase Orders Outstanding Lead Times for Components

• A by-product of well-managed purchasing and inventory • The time required to Table 14.2 Lead Times for
control department purchase, produce, or Awesome Speaker Kits (As)
assemble an item
• Outstanding purchase orders must accurately reflect COMPONENT LEAD TIME
quantities and scheduled receipts – For production – the A 1 week
sum of the move, setup, B 2 weeks
and assembly or run C 1 week
times D 1 week
– For purchased items – E 2 weeks
the time between the F 3 weeks
recognition of a need G 2 weeks
and when it's available

for production
Time-Phased Product Structure MRP Structure
Determining Gross Requirements Determining Gross Requirements

(1 of 3) (2 of 3)
• Starts with a production schedule for the end item – 50 • From the BOM, every Item A requires 2 Item Bs – 100 Item
units of Item A in week 8 Bs are required in week 7 to satisfy the order release for
Item A
• Using the lead time for the item, determine the week in
which the order should be released – a 1-week lead time • The lead time for the Item B is 2 weeks – release an order
means the order for 50 units should be released in week 7 for 100 units of Item B in week 5
• This step is often called "lead time offset" or "time phasing" • The timing and quantity for component requirements are
determined by the order release of the parent(s)
Determining Gross Requirements
(3 of 3) Gross Requirements Plan
• The process continues through the entire BOM one level at Table 14.3 Gross Material Requirements Plan for 50
a time – often called "explosion" Awesome Speaker Kits (As) with Order Release Dates Also
Shown
• 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
Net Requirements Plan (1 of 3) Net Requirements Plan (2 of 3)

ITEM ON HAND ITEM ON HAND
A 10 E 10
B 15 F 5
C 20 G 0
D 10 blank blank
Determining Net Requirements (1 of 3) Determining Net Requirements (2 of 3)
• Starts with a production schedule for the end item − 50 • Following the lead time offset procedure, the planned order
units of Item A in week 8 release for Item A is now 40 units in week 7
• Because there are 10 Item As on hand, only 40 are • The gross requirement for Item B is now 80 units in week 7
actually required − (net requirement) = (gross requirement
• There are 15 units of Item B on hand, so the net
− on-hand inventory)
requirement is 65 units in week 7
• The planned order receipt for Item A in week 8 is 40 units −
• A planned order receipt of 65 units in week 7 generates a
40 = 50 − 10
planned order release of 65 units in week 5
Determining Net Requirements (3 of 3) Gross Requirements Schedule

• The on-hand inventory record for Item B is updated to Figure 14.5
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 Plan (3 of 3) MRP Management (1 of 3)
The logic of net requirements • MRP dynamics
– Demand-driven MRP strategically alters lead times
and precisely places safety stock within the BOM
structure to improve MRP performance
– Can reduce stockouts and improve stability
Demand-Driven MRP (1 of 2) Demand-Driven MRP (2 of 2)

• Five primary components Figure 14.6
1. Determine where within the BOM structure to position
the safety stock
2. Determine initial safety-stock levels
3. Monitor conditions and adjust levels
4. Identify, track, and prioritize forecasted demand
5. Use DDMRP information for increased
communication and collaboration
MRP Management (2 of 3) MRP Management (3 of 3)
• MRP dynamics • MRP limitations
– Facilitates replanning when changes occur – MRP does not do detailed scheduling–it plans
– System nervousness can result from too many – Works best in product-focused, repetitive environments
changes – Requires fixed lead times and time buckets with
– Time fences put limits on replanning unlimited capacity
– Pegging links each item to its parent, allowing effective
analysis of changes
Lot-Sizing Techniques (1 of 3) Lot-Sizing Techniques (2 of 3)

• Lot-for-lot technique orders just what is required for • Periodic order quantity (POQ) orders quantity needed for
production based on net requirements a predetermined time period
– May not always be feasible – Interval = EOQ / average demand per period
– If setup costs are high, lot-for-lot can be expensive – Order quantity set to cover the interval
• Economic order quantity (EOQ) – Order quantity recalculated at the time of the order
release
– EOQ expects a known constant demand and MRP
systems often deal with unknown and variable demand – No extra inventory
Lot-Sizing Techniques (3 of 3) Lot-for-Lot Example (1 of 2)
• Dynamic lot sizing techniques
– Balance lot size and setup costs
– Part period balancing (least total cost)
– Least unit cost
– Least period cost (Silver-Meal)
• Dynamic programming approach
– Wagner-Whitin
Holding cost = $1/week; Setup cost = $100; Lead time = 1

week
Lot-for-Lot Example (2 of 2)
EOQ Lot Size Example (1 of 2)
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

No on-hand inventory is carried through the system
Total holding cost = $0
There are seven setups for this item in this plan Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Total ordering cost = 7 × $100 = $700
Average weekly gross requirements = 27; EOQ = 73 units
EOQ Lot Size Example (2 of 2)
POQ Lot Size Example (1 of 2)
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average
weekly gross requirements = 27; EOQ = 73 units
Annual demand D = 1,404
Holding cost = 375 units × $1 (including 57 units on
hand at end of week 10)
Ordering cost = 4 × $100 = $400 EOQ = 73 units; Average weekly gross requirements = 27; POQ
Total cost = $375 + $400 = $775 interval = 73/27 ≅ 3 weeks
POQ Lot Size Example (2 of 2)

Lot-Sizing Summary
For these three examples
d a pla n with a
EOQ = 73 units; Average weekly gross requirements = 27; POQ interval e yielde
= 73/27 ≅ 3 weeks h it in w ould hav 4 5 5
Wagner-
W t of $
total cos
Setups = 3 × $100 = $300
Holding cost = (40 + 70 + 30 + 55) units × $1 = $195
Total cost = $300 + $195 = $495
Lot-Sizing Summary (1 of 2) Lot-Sizing Summary (2 of 2)
• In theory, lot sizes should • Lot sizes can be modified to allow for scrap, process
be recomputed whenever constraints, and purchase lots
there is a lot size or order
• Use lot-sizing with care as it can cause considerable
quantity change
distortion of requirements at lower levels of the BOM
• In practice, this results in
• When setup costs are significant and demand is
system nervousness and
reasonably smooth, POQ or EOQ should give reasonable
instability
results
• Lot-for-lot should be used
when low-cost setups can
be achieved
Extensions of MRP Material Requirements Planning II

• MRP II • Requirement data can be
enriched by other resources
• Closed-Loop MRP
• Generally called MRP II or
• Capacity Planning
Material Resource Planning
• Outputs can include scrap,
packaging waste, effluent,
carbon emissions
• Data used by purchasing,
production scheduling,
capacity planning, inventory,
warehouse management
Material Resource Planning (1 of 2) Material Resource Planning (2 of 2)
Table 14.4 Material Resource Planning (MRP II) Table 14.4 Material Resource Planning (MRP II)
Closed-Loop MRP System Capacity Planning

Figure 14.7 • Feedback from the MRP system
• Load reports show resource requirements for work
centers
• Work can be moved between time periods or work centers
to smooth the load or bring it within capacity
Smoothing Tactics Order Splitting (1 of 2)
1. Overlapping • Develop a capacity plan for a work cell at Wiz Products
– Sends part of the work to following operations before • There are 12 hours available each day
the entire lot is complete
– Reduces lead time • Each order requires 1 hour
3. Operations splitting Day 1 2 3 4 5

– Sends the lot to two different machines for the same Orders 10 14 13 10 14
operation
– Shorter throughput time but increased setup costs
4. Order or lot splitting
– Breaking up the order into smaller lots and running part
earlier (or later) in the schedule
Order Splitting (2 of 2) Order Splitting

Figure 14.8
UTILIZATION:
CAPACITY CAPACITY OVER/ PRODUCTION NEW
UNITS REQUIRED AVAILABLE (UNDER) PLANNER'S PRODUCTION
DAY ORDERED (HOURS) (HOURS) (HOURS) ACTION SCHEDULE
1 10 10 12 (2) blank 12
2 14 14 12 2 Split order: 12
move 2 units
to day 1
3 13 13 12 1 Split order: 13
move one unit
to day 6 or
request
overtime
4 10 10 12 (2) 12
5 14 14 12 2 Split order: 12
move 2 units
to day 4
blank 61 blank blank blank blank blank
MRP in Services (1 of 3) MRP in Services (2 of 3)
• Some services or service items are directly linked to Figure 14.9
demand for other services
• These can be treated as dependent demand services or
items
– Restaurants
– Hospitals
– Hotels
Distribution Resource Planning

MRP in Services (3 of 3) (DRP)
Figure 14.9 Using dependent demand techniques throughout the supply
chain
• Expected demand or sales forecasts become gross
requirements
• All other levels are computed
• DRP pulls inventory through the system
• Small and frequent replenishments
Enterprise Resource Planning (ERP) Enterprise Resource Planning (ERP)
(1 of 2) (2 of 2)
• An extension of the MRP system to tie in customers and • ERP modules include
suppliers – Basic MRP
1. Allows automation and integration of many business – Finance
processes
– Human resources
2. Shares common databases and business practices
– Supply-chain management (SCM)
3. Produces information in real time – Blockchain
• Coordinates business from supplier evaluation to customer – Customer relationship management (CRM)
invoicing – Sustainability
ERP and MRP (1 of 5) ERP and MRP (2 of 5)

ERP and MRP (3 of 5) ERP and MRP (4 of 5)
ERP and MRP (5 of 5) Enterprise Resource Planning (ERP)

Figure 14.10 • ERP systems have the potential to
– Reduce transaction costs
– Increase the speed and accuracy of information
• Facilitates a strategic emphasis on JIT systems and supply
chain integration
• Can be expensive and time-consuming to install
SAP's ERP Modules ERP in the Service Sector
Figure 14.11 • ERP systems have been developed for health care,
government, retail stores, hotels, and financial services
• Also called efficient consumer response (ECR) systems
in the grocery industry
• Objective is to tie sales to buying, inventory, logistics, and
production
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Operations Management: Sustainability

and Supply Chain Management Outline (1 of 2)

Chapter 14 • Dependent Inventory Model Requirements

Outline (2 of 2) MRP for Wheeled Coach (1 of 2)

Learning Objectives (2 of 2) Dependent Demand (1 of 3)

Dependent Inventory Model Master Production Schedule (MPS)

The Planning Process (2 of 3) The Planning Process (3 of 3)

MPS Example Bills of Material (1 of 4)

For an order of 50 Awesome speaker kits

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

Bills of Material (2 of 4) Bills of Material (3 of 4)

Purchase Orders Outstanding Lead Times for Components

recognition of a need G 2 weeks

and when it's available

Determining Gross Requirements Determining Gross Requirements

Net Requirements Plan (1 of 3) Net Requirements Plan (2 of 3)

Determining Net Requirements (3 of 3) Gross Requirements Schedule

Demand-Driven MRP (1 of 2) Demand-Driven MRP (2 of 2)

Lot-Sizing Techniques (1 of 3) Lot-Sizing Techniques (2 of 3)

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

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

POQ Lot Size Example (2 of 2)

Extensions of MRP Material Requirements Planning II

Closed-Loop MRP System Capacity Planning

3. Operations splitting Day 1 2 3 4 5

Order Splitting (2 of 2) Order Splitting

Distribution Resource Planning

ERP and MRP (1 of 5) ERP and MRP (2 of 5)

ERP and MRP (5 of 5) Enterprise Resource Planning (ERP)

This work is protected by United States copyright laws and is

Copyright © 2020 Pearson Education Ltd. All Rights Reserved.

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