MRP and Related Concepts

TLA (Three Letter Acronym) Definitions

ATP: Available to Promise BOM: Bill of Materials DRP: Distribution Requirements Planning MPS: Master Production Schedule MRP: Materials Requirements Planning PAC: Production Activity Control SOP: Sales and Operations Planning
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Where Does MRP Fit?

SOP MPS MRP PAC
Tactical Capacity Planning

Production, Order Fulfillment, Cushions

Material Quantities and Timing

Vendor Order Managment

Supply Chain Management and PDCA

Production Management and PDCA

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Master Scheduling I
Controls the timing and quantity of production for products or product families Primary interface point for actual customer orders Coordinates forecasted demand and actual orders with production activity Serves as tool for agreement between marketing and operations (but at a different level than SOP)
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Master Scheduling II
Feeds more detailed material planning Indicates the quantity and timing (i.e., delivery times) for a product or group of products More detailed than SOP

weekly versus monthly

specific products versus average must satisfy the needs of marketing must be feasible for operations
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Link between SOP and MPS

Month: Output: January 200 February 300 March 400

SOP

January (weeks) Push Mowers Self-propelled Riding

1 25 12

2 25 35

3 25 13

4 25 40

MPS
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MPS Formulas: Definitions

ATPt = Available to promise in period t

EIt = Ending Inventory for period t (same as projected on-hand inventory for next period)
Ft = Forecasted demand for period t MPSt = MPS quantity available in period t OBt = orders booked for period t

MPS Formulas:
EI t EI t 1 MPSt max( Ft ,OBt ) ATPt EI t 1 MPSt OBi
i t z 1

where z period when next positive MPSt is due

Detailed MPS for Widgets

On-hand inventory at end of October = Month Week Forecast Demand Orders Booked Master Schedule 45 150 170 300 November 46 150 165 0 47 150 140 300 48 150 120 0 49 125 85 250 100 December 50 125 45 0 51 125 20 250 52 125 0 0

Notes: Planning time fence cumulative lead time for product What seems to be the lot-sizing rule here?
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Projected On-Hand Inventory

On-hand inventory at end of October = Month Week Forecast Demand 45 150 November 46 150 47 150 48 150 49 125 100 December 50 125 51 125 52 125

Orders Booked
Projected On-Hand Inventory

170
230

165
65

140
215

120
65

85
190

45
65

20
190

0
65

Master Schedule

300

300

250

250

i.e. Projected on-hand inventory for week 47: = 65 + 300 150 = 215

Available-to-Promise
On-hand inventory at end of October = Month Week Forecast Demand 45 150 November 46 150 47 150 48 150 49 125 100 December 50 125 51 125 52 125

Orders Booked
Projected On-Hand Inventory Master schedule Available-to-Promise

170
230 300 65

165
65 0

140
215 300 40

120
65 0

85
190 250 120 70

45
65 0

20
190 250 230

0
65 0

ATP(45) = 100 + 300 (170 + 165) = 65 ATP(47) = 300 (140+120) = 40 ATP(49) = 250 (85 + 45) = 120
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Change in Forecast Demand

On-hand inventory at end of October = Month Week Forecast Demand 45 150 November 46 150 47 150 48 150 49 150 100 December 50 150 51 150 52 150

Orders Booked
Projected On-Hand Inventory Master schedule Available-to-Promise

170
230 300 65

165
65 0

140
215 300 40

120
65 0

85
165 250 120

45
15 0

20
115 250 230

0
(35) 0

Are we in trouble yet?

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Change in Orders Booked

On-hand inventory at end of October = Month Week Forecast Demand 45 150 November 46 150 47 150 48 150 49 125 100 December 50 125 51 125 52 125

Orders Booked
Projected On-Hand Inventory Master schedule Available-to-Promise

170
230 300 0

230
0 0

140
150 300 40

120
0 0

85
125 250 120

45
0 0

20
125 250 230

0
0 0

Note impact of ATP(45) and on-hand inventory projections

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Key Points about MPS

Provides more detail than SOP Tracks the following information:
Actual versus forecasted demand Available-to-Promise
This gives sales information for accepting or not accepting new orders for delivery in a given week

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A Final View of Master Scheduling

SOP Marketing Operations

MPS

Rough-Cut Capacity Plan

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Material Requirements Planning

MRP in the planning cycle The logic of MRP
an extended example

Considerations of MRP

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Assume that weve scheduled 500 chairs to be ready five weeks from now.

. . . Now what?

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Material Needed for a Chair

Side rails (2)

Seat

Front legs (2)

Cross bars (2) Back supports (3)

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Chair Structure Tree (aka Bill of Materials)

Chair

Leg Assembly

Seat

Back Assembly

Legs (2)

Cross bar

Side rails (2)

Cross bar

Back Supports (3)

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Graphic Lead-Time
Week 1 Week 2 Week 3 Week 4 Week 5

Back Support (2 weeks) Side Rails (2 weeks) Cross Bar (2 weeks) Back Assembly (1 week) Seats (2 weeks)
Leg Assembly (1 week)
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Chair Assembly (1 week)

Legs (2 weeks)
Cross Bar (2 weeks)

Lead-Time Key Points

To have finished chairs at the beginning of Week 5, we must begin production and order materials in Week 1. Exploding the bill of materials tells us when to order things. Not much we can do to adjust output of chairs for the next 4 weeks. Why?
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Material Requirements Planning (MRP)

We need the following inputs: 1. Bill-of-Materials (BOM) 2. Inventory records 3. Master production schedule Well get the following outputs: 1. What items should be ordered 2. When each item should be ordered 3. How much of each should be ordered
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The MRP Process Starts with the MPS

Chairs
Lead Time = 1 week Week 1 2 3 4 5 0 0 0 0 500 0 0 0 500 400

MPS Due Date Start Assembly

6 400 400

7 400 0

End items are also known as Level 0 items

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The Parent / Child Relationship

Chairs
LT = 1 week MPS Due Date Start Assembly 1 0 0 2 0 0 Week 3 4 0 0 0 500 Week 3 4 0 500 0 0 500 500 400 5 500 400 6 400 400 7 400 0

Seat
LT = 2 weeks Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 0 0 5 400 0 400 400 6 400 0 400 400 7 0 0

500

400

Where do the gross requirements come from? Do you understand the MRP logic?
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Chairs
LT = 1 week MPS Due Date Start Assembly 1 0 0 2 0 0 3 0 0 Week 4 0 500 Week 4 500 0 500 500 400 5 500 400 6 400 400 7 400 0

Seat
LT = 2 weeks Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 0 0 3 0 0 5 400 0 400 400 6 400 0 400 400 7 0 0

Going Deeper

500

400

Leg Assembly
LT = 1 week Minimum Order = 1000 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 25 2 0 Week 3 4 0 500 5 400 125 6 400 725 275 1000 7 0 725

25 0

25 0

25 0

525 475 1000

1000 Week 3 4 0 500 250 0 250 250 500

1000

Back Assembly
LT = 1 week Minimum Order = 250 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 0 250 250 5 400 100 400 500 500 6 400 200 300 500 7 0 200

250

Moving from Level 1 items to Level 2 items . . .

Leg Assembly
LT = 1 week Minimum Order = 1000 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 25 2 0 Week 3 4 0 500 525 475 1000 5 400 125 6 400 725 275 1000 7 0 725

25 0 25 0 25 0
1000

1000

Legs
LT = 2 weeks Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 Week 2 3 4 5 0 2000 0 2000 0 0 2000 2000 2000 0 0 2000 2000 6 0 0 7 0 0

2000

Where do the gross requirements for LEGS come from?

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Combining Requirements: Cross Bars

Leg Assembly
LT = 1 week Minimum Order = 1000 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 25 2 0 Week 3 4 0 500 5 400 125 6 400 725 275 1000 7 0 725

25 0

25 0

25 0
1000

525 475 1000

1000 Week 4 500 0 250 250 500

Back Assembly
LT = 1 week Minimum Order = 250 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 0 250 250 3 0 0 5 400 100 400 500 500 6 400 200 300 500 7 0 200

250

Crossbars
LT = 2 weeks Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 3 0 1250 0 1250 1250 500 1500 0 Week 4 5 500 1500 0 0 500 1500 500 1500 6 0 0 7 0 0

Note effect of differences in lead times and order sizes on the gross requirements for each component

1250

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Impact of Longer Lead Times

Leg Assembly

We cannot do this since the planned order would be in the past. Thus the 250 crossbars will be delivered late one week to back assembly. What does this do to our chair schedule?

LT = 1 week Minimum Order = 1000 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order

1 0 25

2 0

3 0

Week 4 500 525 475 1000

5 400 125

6 400 725 275 1000

7 0 725

25 0

25 0

25 0
1000

1000 Week 4 500 0 250 250 500

Back Assembly
LT = 2 weeks Minimum Order = 250 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 0 250 250 3 0 0 5 400 100 400 500 6 400 200 300 500 7 0 200

250

500

Crossbars
LT = 2 weeks Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 3 250 1500 0 0 250 1500 250 1500 500 1000 Week 4 5 500 1000 0 0 500 1500 500 1500 6 0 0 7 0 0

250 1500

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Do You Understand ...

Why it is important to have an accurate BOM and accurate inventory information? Why do we need to freeze production schedules? Where do gross requirements come from? The is the difference between planned and scheduled receipts?

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Other Considerations I
MRP
Feedback Planned Orders Feedback

Production

Suppliers

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Other Considerations II
When do we update the system?
Capacity requirements planning using MRP output Pegging Lot sizing issues
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Recall ...
Leg Assembly
LT = 1 week Minimum Order = 1000 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 25 2 0 Week 3 4 0 500 5 400 125 6 400 725 275 1000 7 0 725

250

250

250
1000

525 475 1000

1000

Legs
LT = 2 weeks Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 Week 2 3 4 5 0 2000 0 2000 0 0 2000 2000 2000 0 0 2000 2000 6 0 0 7 0 0

2000

Look at the lumpiness of demand for legs

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If we order lot-for-lot
Leg Assembly
LT = 1 week Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 25 0 25 2 0 Week 3 4 0 500 5 400 0 400 400 400 6 400 0 400 400 7 0 0

250

250
475

0 475 475 400

Legs
LT = 2 weeks Minimum Order = 1 Gross Requirements Scheduled Receipts Projected On Hand Net Requirements Planned Receipts Planned Order 1 0 0 0 2 0 0 Week 3 4 950 800 0 950 950 800 0 800 800 5 800 0 800 800 6 0 0 7 0 0

950

800

Much smoother demand for legs, lower average inventory

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Distribution Requirements Planning (DRP)

Anticipates downstream demand
Uses this information, not predetermined reorder points or periodic reviews, to determine when to order

Computer-based software systems needed to deal with the added complexity

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DRP Example I
Wholesaler A
ROP = 50, Q = 200 Forecast Demand Ending Inventory Expected Order Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 20 20 20 20 20 20 20 20 85 65 45 225 205 185 165 145 125 200

Suppose we forecast demand for Wholesaler A for the next 8 days (the best time horizon to use will depend on many factors) Based on this, we anticipate that Wholesaler A will order on Day 3
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DRP Example II
Wholesaler A
ROP = 50, Q = 200 Forecast Demand Ending Inventory Expected Order Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 20 20 20 20 20 20 20 20 85 65 45 225 205 185 165 145 125 200

Wholesaler B
ROP = 75, Q = 200 Forecast Demand Ending Inventory Expected Order Total Orders Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 14 14 14 14 14 14 14 14 108 94 80 66 252 238 224 210 196 200 200 200

We extend the analysis to include Wholesaler B Combined, we expect to see orders on Days 3 and 4
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DRP Example III

Wholesaler A
ROP = 50, Q = 200 Forecast Demand Ending Inventory Expected Order Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 20 20 20 20 20 20 20 20 85 65 45 225 205 185 165 145 125 200

Wholesaler B
ROP = 75, Q = 200 Forecast Demand Ending Inventory Expected Order Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 14 14 14 14 14 14 14 14 108 94 80 66 252 238 224 210 196 200

Distributor
Q = 400 Total Expected Orders Ending Inventory Planned Receipts Planned Orders Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8 200 200 50 50 50 250 50 50 50 50 50 400 400

The distributor then uses this information to plan its own orders. In this case, suppose it takes two days for the supplier to replenish; based on the information, the distributor would order on Day 1
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DRP Benefits
Helps improve customer service Provides a better and faster understanding of the impact of shortages and/or promotions Helps reduce costs
Inventory Freight Production

Provides integration between the stages in the supply chain

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DRP Constraints
Accurate forecasts and inventory levels Consistent and reliable lead times Nervousness
Necessary to anticipate correctly when orders will be placed
To ensure that orders can be placed and arrive by the time they are needed Even slight changes in demand for downstream partners can have a significant impact on order volumes, especially when order sizes are relatively high
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