P/OM

SESSION VII B
MATERIAL REQUIREMENTS PLANNING
 MATERIAL REQUIREMENT PLANNING

Managing production system includes

materials management, sourcing, follow up,
controlling productivity
Complexities of producing numerous
different products can cause
confusion, inefficiencies & inferior
customer service
 MATERIAL REQUIREMENT PLANNING

To control such an environment, timely

and accurate information is required
MRP system can provide this vital info
 MATERIAL REQUIREMENT PLANNING

Managers using reactive systems

ask, “What should I do now?”

Managers using planning

systems ask, “What will I need in
the future? How much and
when?”
 Reactive systems

simple to manage

high inventory cost OR ordering cost

unreliable delivery performance

 Planning system

complex to manage 
reduced inventory cost (it carries only those
items & components that are needed – no
more/no less) 
Reduces order processing delays => reduced LT
=> better deliveries => better customer service 
accurate information required 
 Planning system

requires a lot of discipline 

Commitment by scheduler, supervisor, managers,
etc. 
 Demand Dependency

It is the degree to which demand of an item is

dependent on demand for another item
E.g. demand for tea/coffee will determine the
quantity of sugar/milk, etc. required
MRP obviates the need of large safety stocks for
dependent demand items
 MRP : a scheduling & ordering system

It is a software based production, planning and

inventory control system used to manage the
manufacturing process
It generates time-phased materials requirements
for production operations (provides due dates for
components)
Operations Planning & Scheduling System
Operations
Output planning Capacity planning
Aggregate output Aggregate capacity
planning planning

Master production Rough-cut capacity

scheduling planning

Material requirements Detailed capacity

planning planning

Loading

Sequencing
Shop Short-term
Detailed floor control capacity control
Scheduling

Expediting
Operations Planning & Scheduling System

MRP enables to estimate dept.-wise

capacity requirement
 MRP : Objective & Methods

Inventory reduction – how much of what and

when? No extra inventory
Reduction in production & delivery LT – priorities
production activities. Ensures smooth production
due to efficient inventory management
 MRP : Objective & Methods

Realistic commitments – WYSIWYG – better

customer satisfaction. New orders are added to the
system and revised total load plan is generated and
given to production manager.
Increased efficiency – MRP ensures close
coordination among various departments as
products progress through them. Fewer unplanned
interruptions, better production efficiency.
 MRP : System Components

Main sources of information (input) are:

1. Master Production Schedule
2. Inventory Status File
3. BOM
4. Purchase orders outstanding
5. Lead times
 MRP provides……

3 kinds of information
1. Order release requirements (orders to
be released now)

2. Order re-scheduling (expedite, de-

expedite, cancel open orders)

3. Planned orders (future)

 MRP system
Master
production
schedule (MPS)

MRP
Inventory
processing BOM file
status file
logic

Order release Orders rescheduling Planned

requirements (orders (expedite, de-expedite, orders
to be released now) cancel open orders) (future)
 MPS (master production schedule)

Initially developed from (a) existing orders OR

(b) demand forecast
MPS provides input to MRP system
MPS includes replacement (service) components
for customers
MPS ultimately governs MRP on sourcing plan &
producing sub-components, to meet deliveries
 Inventory Status File

It contains the following:

identification number,
quantity on hand,
safety stock level,
quantity disbursed and
sourcing LT for every item
 BOM

Identifies manufacturing process (sequence of

build up)
Identifies quantities of finished unit & the
departments performing the build up sequence
*Primary info to MRP from BOM is the product
structure
Product structures for 2 assembled products
Product structures for 2 assembled products

A&D are upper level end items

Components are lower-level items
Each item is given unique identification number
MRP schedules & time-phases the orders for lower
level component items
MRP processing logic
 MRP processing logic

It accepts the Master Production Schedule

Determines components schedules
Calculates for each item in each product for each
time period (normally 1 week) in the planning
horizon
How much is required Vs. how much is already
available in-house
 MRP processing logic

Data processing determines the overall

requirements to meet deliveries
Bicycle components
 Management info from MRP
MRP report for one item

The report clearly identifies the sourcing actions required for on-schedule
production
Can notify the suppliers in advance
Weekly updating – expedite, de-expedite, cancel
**Information system is valuable when thousands of sub-components must
be coordinated among numerous suppliers & work centers
Terminology of MRP
 Terminology of MRP
1. Allocated quantity : in-house quantity but already
allocated to some other order
2. Gross requirements : ‘overall quantity needed’ to
meet planned output levels. *Planned output for end
items come from MIS. *Planned output for
components come from MRP
3. Scheduled receipts : quantity that will be received at
the start of time period against previously placed
orders
 Terminology of MRP

4. Available quantity : quantity expected to be available

at the end of a time period for production in
subsequent periods

• Available qty = qty available from the previous period +

schedule receipts + planned order receipts gross
requirement
 Terminology of MRP

5. Net requirements : net quantity to be acquired to

meet production requirements for the period
net requirements = gross requirement – scheduled receipts –
qty. available from previous period

6. Planned order receipts – quantity that is planned to

be ordered for receiving at the start of the period.
The order has not yet been placed
 Terminology of MRP

7. Planned order release : it’s a release that shows

the order plan of items vis-à-vis time period.
What, how much & when. When this order is
released, it becomes a ‘scheduled receipt’
MRP - example
Chair – manufacturing sequence
Chair – manufacturing sequence
MRP - example
Info Processing System (Reverse T&A)

Determine & plan for end products

Determine and plan for lower level items

 Lead-time off-setting

Q. When must the order be placed so that the item

arrives when it is needed?
A. The processing system responds by ‘offsetting’ the
length of LT as indicated in the inventory status file
for that item
 Indented BOM
Provides the information regarding relationship
between product and its components
indented BOM for Model ‘H’ chair

It’s easy to see how many of which component is

required at which level
 Product Explosion

To produce a product, often multiple units of a

lower level item is required.
E.g. 1 unit of H requires 4 units of E.
450 units of H requires 450 x 4 = 1800 units of E
This process of multiplication is called Product
Explosion or BOM explosion
 Low Level Coding

A single item may be used at several points of

production. E.g. nut-bolts
MRP by convention assigns the item to the lowest
level in which it occurs in the product structure
Using MRP outputs for material decisions

In order to maintain the schedule, planned order

releases must be acted upon in the relevant weeks
The cells which represent the weeks are the
ACTION BUCKETS.
*The ‘action’ is to release the order.
Keeping MRP ‘current’ in a changing environment

MRP is not static

Changes with (i) new orders (ii) current production
floor conditions (iii) anticipated changes for the
future
MRP must be updated with current information
BUT should also provide stability for production
operations
 Four aspects of MRP

(i) Pegging

(ii) Cycle Counting

(iii) Updating

(iv) Time Fences

 (i) Pegging
“tracing upward in the BOM from the components to
the parent item”

In real life material plans get disrupted every now

and then
Pegging identifies which components get affected
by such disruptions
 (i) Pegging

Pegging shows the level-

by-level linkages among
components and their
time-phased status in the
MRP records

pegging the MRP records

 (ii) Cycle Counting

Components are counted, deducting defective units at

each stage of production and in storage area on a regular
basis
System data should be same as actual physical inventory
MRP records are updated, weekly or daily
Updated records highlight excesses or shortages and
thereby indicated how the production schedules need to
be adjusted
 (iii) Updating

Updating is required when new jobs arrive OR

when technology changes the production design
Two updating approaches are used
(a) regenerative
(b) net change
 (iii) Updating

Regenerative  completely reprocesses the

entire set of information & recreates the complete
MRP from start to end
Net change  reprocesses only those portions
that are affected by informational changes
 (iv) Time Fences

allows a part of the master schedule to be

designated as ‘not to be rescheduled’

Dynamics of MRP environment can create

potential confusion => system nervousness

 (iv) Time Fences

Stability is gained by using ‘time fence’

Time fence = shortest LT from raw material to
finished product
Within the time fence, add longest LT at each level
of product structure + longest LT for sourcing
*frozen part of MPS is called firm planned orders
(iv) Time Fences
 (iv) Time Fences

The longest LT at levels 0, 1 & 2 are 1, 2 and 4 = 7 weeks + sourcing LT

 LOT sizing

MRP system generates planned order releases

which triggers P.O. for vendors
Set up costs(cost of ordering) + holding cost
a. LOT-FOR-LOT ORDERING (dynamic)
b. E.O.Q. TECHNIQUE (static)
 LOT SIZING – L4L TECHNIQUE

 Lot sizing technique that generates exactly what is

needed
 No safety stock or anticipation of further orders
 Works most efficiently when
– Frequent orders are economical (low set-up or
ordering costs)
– JIT inventory techniques has been implemented
 LOT SIZING – L4L TECHNIQUE

Consider the given lot sizing problem, the net

requirement are given for 8 weeks
Week 1 Week 2 Week 3 Week 4 Week 5 Week 6 Week 7 Week 8
50 60 70 60 95 75 60 55

Cost per item Rs 10

Order/Setup cost Rs 47
Inventory carrying cost/week 0.5 %
 LOT SIZING – L4L TECHNIQUE

Lot-for-Lot Run Size for an MRP schedule

Week Net Requirement Production Ending Holding Cost Set up Cost Total Cost
Quantity Quantity

1 50 50 0 Rs 0.00 Rs 47 Rs 47

2 60 60 0 0.00 47 94

3 70 70 0 0.00 47 141

4 60 60 0 0.00 47 188

5 95 95 0 0.00 47 235

6 75 75 0 0.00 47 282

7 60 60 0 0.00 47 329

8 55 55 0 0.00 47 376
 LOT SIZING – E.O.Q. TECHNIQUE

 Annual demand = D = 525 x 52 = 3412.5 units

8
 Annual holding cost =H= 0.5%xRs 10x52 weeks=2.60
units

 Setup cost = S = Rs 47

EOQ = √2DS = 351 units

√H
 LOT SIZING – E.O.Q. TECHNIQUE

EOQ Run Size for an MRP schedule

Week Net Requirement Production Ending Holding Cost Set up Cost Total Cost
Quantity Inventory

1 50 351 301 Rs 15.05 Rs 47 Rs 62.05

2 60 0 241 12.05 0 74.10

3 70 0 171 8.55 0 82.65

4 60 0 111 5.55 0 88.20

5 95 0 16 0.80 0 89.00

6 75 351 292 14.60 47 150.60

7 60 0 232 11.60 0 162.20

8 55 0 177 8.85 0 171.05

∑=525
 Detailed Capacity Planning (DCP)

a.k.a. capacity requirements planning

Each time the MRP system is updated, it is
imperative to check whether sufficient capacity is
available
DCP addresses this question
 Detailed Capacity Planning

*E.g. detailed capacity analysis for component A

(the front legs)
Step 1: route sheet is developed for component A
route sheet for component A
 Detailed Capacity Planning

Step 2 : construct the operation set-back chart

partial operation set-back chart for chair model H

 Limitations of MRP

A computer is necessary 
Product structure must be assembly oriented 
BOM + inventory status information must be
recorded & computerised 
Valid master schedule must be prepared 
Data integrity 
Training people else ad hoc methods resurfaces 
 Advantages of MRP

Dynamic nature 
Reacts well to changing activities (real time
adjustments for thousands of components)
Better PPC 
Better inventory management 
Shorter delivery LT – sourcing 
Better deliveries 
 Managers speak……

Least accurate information is available on

capacity, market forecasts, production control

Most accurate information on BOM, MPS,

inventory records
Manufacturing Resource Planning (MRPII)

‘closed loop’ MRP

MRP systems was developed on a segregated
basis
MRPII connects many of the information
subsystems to the MRP system
Synchronises all aspects of the business (sales,
purchasing, manufacturing, finance, engineering) by
adopting a focal production plan
 MRPII

MRPII involves developing a production plan from

the business plan to specify monthly projections for
each product line over next 1 to 5 years.
Developed by consensus of all executives
Production dept.  produce (PS)
Sales dept.  sell (PSFPD)
Finance  ??
 Rough Cut Capacity Planning (RCCP)

Used to evaluate capacity with availability

A repeating occurrence of an abundance amount
of inventory being created or pulled through a
supply chain is a big problem
RCCP prevents over production and determines
the appropriate amount of capacity that should be
used in the system
MRPII: an integrated system for planning & control
BUSINESS PLAN MANUFACTURING
(materials, capacity,
production schedules
PRODUCTION
PLAN
Purchasing
(vendor orders)
M.P.S.

ROUGH CUT
CAPACITY
PLAN
Engineering
(process &
M.R.P. product
design)

Marketing (sales
DETAILED order entry, delivery
CAPACITY projections)
PLAN
Finance (capital
requirements for
capacity, working capital
SHOP FLOOR CONTROL; PURCHASES
requirements)
CONTROL
Accounting (a/c
payable; a/c
receivable)
 Purchasing

1. Purchasing  activities related to procuring

materials and supplies consumed during production
2. Materials management  activities relating to
managing the flow of materials into and through the
firm
3. Physical distribution  activities relating to (2) as
well as to storing & transporting finished products
through distribution system to customers
 Purchasing : objectives

1. Good value – price & quality combo

2. Reliable schedule – on time, JIT
3. Minimised investment – depends on economies
of order size, carrying costs, stock out costs
4. Efficient admin – keeping the cost of buying at
low levels, coordinate with other depts.
effectively
 Effective purchasing

a. Purchasing requirement – description, qty, del.

date, etc.
b. Sources of supply – personnel knowledge,
salespersons, ads, trade & industry associations,
peers, company records, etc. (sometimes
vendors must be developed)
c. Cost of supply – cost per transaction, inventory
carrying costs, make or buy
 Effective purchasing

d. Prices & Value – buy at better prices (common

sources of price – lists, quotations, market px.,
competitive bids, direct negotiations)
e. Administering the purchase – requisition  costs are
evaluated  sources identified  price & values
established  P.O. is raised  supplies are received
payments authorised  records are kept

These admin. functions must be performed efficiently/timely