McGraw-Hill/Irwin The McGraw-Hill Companies, Inc. 2007, All Rights Reserved

Materials Requirements Materials Requirements PlanningPlanning

Chapter 16Chapter 16

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Chapter 16 OutlineChapter 16 Outline

Definition of MRP SystemsDefinition of MRP Systems

MRP versus Order-Point SystemsMRP versus Order-Point Systems

MRP ExampleMRP Example

MRP ElementsMRP Elements

Operating an MRP SystemOperating an MRP System

The Successful MRP SystemThe Successful MRP System

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Introduction to MRPIntroduction to MRPUsed to manage dependent demand itemsUsed to manage dependent demand items– Raw materials and purchased partsRaw materials and purchased parts– Work in process (WIP)Work in process (WIP)

Driven by the master schedule (which is Driven by the master schedule (which is driven by S&OP).driven by S&OP).End items ‘exploded’ into all components End items ‘exploded’ into all components using bill of materials (BOM)using bill of materials (BOM)Schedule offset based on lead timesSchedule offset based on lead timesIs the heart of a larger ERP systemIs the heart of a larger ERP system

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Definitions of MRP SystemsDefinitions of MRP Systems

Developed by Joe Orlicky at IBM, 1975.Developed by Joe Orlicky at IBM, 1975.– IBM 370 was the first computer with the IBM 370 was the first computer with the

capacity to handle MRP calculationscapacity to handle MRP calculations

Types of MRP:Types of MRP:– Type I. An inventory control system (MRP)Type I. An inventory control system (MRP)

– Type II. Manufacturing Resource Planning system Type II. Manufacturing Resource Planning system (MRPII)(MRPII)

– Type III. Enterprise Resource Planning (ERP) systemType III. Enterprise Resource Planning (ERP) system

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Definitions of MRP SystemsDefinitions of MRP SystemsThree principal functions of MRP (Orlicky):Three principal functions of MRP (Orlicky):

InventoryInventory– Order the right partOrder the right part– Order in the right quantityOrder in the right quantity– Order at the right timeOrder at the right time

PrioritiesPriorities– Order with the right due dateOrder with the right due date– Keep the due date validKeep the due date valid

CapacityCapacity– A complete loadA complete load– An accurate (valid) loadAn accurate (valid) load– An adequate time span for visibility of future loadAn adequate time span for visibility of future load

TR 4-6

Firm orders from Customers Sister plants Stock replenishment

Engineering Design changes

BOM

Forecast of Demand

Purchase Orders

Vendors

MRP Parts Explosion

Rough-cutcapacity planning

Capacity planning

Shop Orders

Shop-floor control

Master schedule

S & OP

Closed Loop MRP System

Operations ProductRaw Materials

Inventory Records

Inv. Transactions

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Attribute MRP Order Point

Demand Dependent Independent

Order philosophy Requirements Replenishment

Forecast Based on master schedule Based on past demand

Control concept Control all items ABC

Objectives Meet manufacturing needs Meet customer needs

Lot sizing Discrete EOQ

Demand pattern Lumpy but predictable Random

Types of inventory Work in process and rawmaterials

Finished goods and spareparts

Attribute MRP Order Point

Demand Dependent Independent

Order philosophy Requirements Replenishment

Forecast Based on master schedule Based on past demand

Control concept Control all items ABC

Objectives Meet manufacturing needs Meet customer needs

Lot sizing Discrete EOQ

Demand pattern Lumpy but predictable Random

Types of inventory Work in process and rawmaterials

Finished goods and spareparts

Comparison of MRP & Order-Point Systems

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MRP ElementsMRP Elements

InputsInputs1.1. Master ScheduleMaster Schedule

2.2. Bill of Materials (BOM)Bill of Materials (BOM)

3.3. Inventory RecordsInventory Records

Capacity Planning (feasibility)Capacity Planning (feasibility)

Planned Order Releases (Planned Order Releases (outputsoutputs))– Purchasing (buy)Purchasing (buy)– Shop Floor Control (make)Shop Floor Control (make)

MRP InputsMRP Inputs

1.1. Master scheduleMaster schedule

2.2. Product structure file (bill of materials or Product structure file (bill of materials or BOM)BOM)1.1. Parts & subassemblies contained in productParts & subassemblies contained in product

2.2. Sequence of operationsSequence of operations

3.3. Inventory master fileInventory master file1.1. Item master informationItem master information

2.2. Balances & ordering informationBalances & ordering information

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11. Master Schedule. Master Schedule

Quantities derived from S&OP production plan Quantities derived from S&OP production plan (product groups) [input](product groups) [input]

Drives MRP process with a schedule of finished Drives MRP process with a schedule of finished products (actual items by week) [output]products (actual items by week) [output]

Quantities may consist of a combination of Quantities may consist of a combination of customer orders & demand forecastscustomer orders & demand forecasts

Quantities represent what needs to be produced, Quantities represent what needs to be produced, not what can be produced (infinite capacity not what can be produced (infinite capacity planning)planning)

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2. MRP Example of BOM

Top

Leg

Long Rail

Short Rail

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BOM (Product Structure)BOM (Product Structure)

Short Rails (2)1 week

Table (End Item)1 week

Long Rails (2)1 week

Legs (4)1 week

Top (1)2 weeks

Leg Assembly (1)1 week

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Indented BOMIndented BOMLevel CodeLevel Code ComponentComponent

00 Table (end-item)Table (end-item)

11 Leg assembly (1)Leg assembly (1)

22 Short rails (2)Short rails (2)

22 Long rails (2)Long rails (2)

22 Legs (4)Legs (4)

11 Top(1)Top(1)

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3. Inventory (item master) File3. Inventory (item master) File

– DescriptionDescription– Part numberPart number– Part namePart name– Safety stockSafety stock– Item classificationItem classification– CostCost– YieldYield– Lead timeLead time– Group to which item Group to which item

belongsbelongs

– Assemblies in which Assemblies in which item is useditem is used

– Shelf lifeShelf life– Batch control Batch control

requirementsrequirements– SubstitutesSubstitutes– Suppliers and their Suppliers and their

ratingsratings– Unit of measure (SKU)Unit of measure (SKU)

“Permanent” information may include:

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Inventory Status FileInventory Status File

QuantitiesQuantities OrderedOrdered ReceivedReceived IssuedIssued AllocatedAllocated Previously allocated that have been issuedPreviously allocated that have been issued

Dates ordered, received, issued, and allocatedDates ordered, received, issued, and allocated

Shipping, production, and purchase numbersShipping, production, and purchase numbers

On-hand balance & Available balanceOn-hand balance & Available balance

Batch identification (e.g. lot number)Batch identification (e.g. lot number)

Changing information includes:

MRP ExampleMRP ExampleThe Alpha Beta CompanyThe Alpha Beta Company

Inventory Position

Item On Hand Scheduled Receipts Lot Size MPS

A 10 0 1 100, period 8

B 5 0 1 200, period 6

C 140 0 150 - - -

D 200 250, period 2 250 - - -

ALT=3

C(3)LT=4

D(2)LT=2

D(3)LT=2

BLT=2

Level (LLC)=0

Level (LLC)=1

BOM

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MRP Matrices For A & BMRP Matrices For A & BItem: A LLC: 0 PeriodLot size: 1 LT: 3 PD 1 2 3 4 5 6 7 8Gross requirements 100Scheduled receiptsProjected on hand 10 10 10 10 10 10 10 10 0Net requirements 90Planned order receipts 90Planned order releases 90

Item: B LLC: 0 PeriodLot size: 1 LT: 2 PD 1 2 3 4 5 6 7 8Gross requirements 200Scheduled receiptsProjected on hand 5 5 5 5 5 5 0 0 0Net requirements 195Planned order receipts 195Planned order releases 195

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Origin of RequirementsOrigin of Requirements

At Level Zero: gross requirements come At Level Zero: gross requirements come from the master production schedule (MPS)from the master production schedule (MPS)

Below level zero: gross requirements come Below level zero: gross requirements come from planned order releases for the next from planned order releases for the next level above.level above.

Net requirements are gross requirements Net requirements are gross requirements plus scheduled receipts minus inventory on-plus scheduled receipts minus inventory on-handhand

MRP Matrices For C & DMRP Matrices For C & DItem: C LLC: 1 PeriodLot size: 150 LT: 4 PD 1 2 3 4 5 6 7 8Gross requirements 270Scheduled receiptsProjected on hand 140 140 140 140 140 20 20 20 20Net requirements 130Planned order receipts 150Planned order releases 150

Item: D LLC: 1 PeriodLot size: 250 LT: 2 PD 1 2 3 4 5 6 7 8Gross requirements 585 180Scheduled receipts 250Projected on hand 200 200 450 450 115 185 185 185 185Net requirements 135 65Planned order receipts 250 250Planned order releases 250 250

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Alpha Beta Planned Order Alpha Beta Planned Order Release ReportRelease Report

PeriodPeriod Item Item QuantityQuantity

11 CC 150150

22 DD 250250

33 DD 250250

44 BB 195195

55 AA 9090

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Operating an MRP SystemOperating an MRP System

Should MRP carry “safety stock”?Should MRP carry “safety stock”?

How much “safety stock” should be carried?How much “safety stock” should be carried?

Issue of “safety lead time”Issue of “safety lead time”

Danger of “informal” system driving out the “formal” Danger of “informal” system driving out the “formal” systemsystem

Expansion of MRP to other functions (finance, HRM, Expansion of MRP to other functions (finance, HRM, etc.) of businessetc.) of business

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Operating a Successful MRP Operating a Successful MRP SystemSystem

Accurate Inventory RecordsAccurate Inventory Records

Stable master production scheduleStable master production schedule

Realistic master production scheduleRealistic master production schedule

Good control of engineering change orders Good control of engineering change orders (impacts BOM)(impacts BOM)

Good interface with capacity planning (CRP)Good interface with capacity planning (CRP)

Reports that are usefulReports that are useful

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Elements of Successful MRP Elements of Successful MRP ImplementationImplementation

Allow enough time (18 months minimum)Allow enough time (18 months minimum)

Put materials people in charge of cross-Put materials people in charge of cross-functional team (not IS or accountants)functional team (not IS or accountants)

Train everyone and train them again!Train everyone and train them again!

Top Management supportTop Management support

Accurate recordsAccurate records

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SummarySummary

Definition of MRP SystemsDefinition of MRP Systems

MRP versus Order-Point SystemsMRP versus Order-Point Systems

MRP ExampleMRP Example

MRP ElementsMRP Elements

Operating an MRP SystemOperating an MRP System

The Successful MRP SystemThe Successful MRP System

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End of Chapter Sixteen