1.0 INTRODUCTION Material requirements
planning (MRP) is a computer-based information system for ordering and scheduling of
dependent-demand inventories (e.g. raw
materials, component parts, and subassemblies). (Recall that dependent demand is the demand for items that
are subassemblies or component parts to be used in the production of finished
goods).
What is involved in MRP is the translation of a production plan
for a specified number of finished
products into requirements for component parts and raw materials working backward, using lead time
information to determine when and how
much to order.
MRP is as much a philosophy as it is a technique, and as much an
approach to scheduling as it is to
inventory control. MRP begins with a schedule of finished goods that is converted into a schedule of
requirements for subassemblies,
components parts, and raw materials needed to produce the finished items
in the specified time frame. What this
amounts to, is that MRP is designed to
answer three questions: What is needed? How much is needed? And when it
is needed? The primary inputs of MRP
necessary to answer these questions are
(i) a bill of material,
which tells the composition of a finished product; (ii) a master schedule which tells how much finished
product is desired and when; and (iii)
an inventory records file, which tells how much inventory is on hand or on order. This information is then processed
to determine the planning horizon.
Outputs from the process include planned-order schedule, order
releases, changes performance-control
reports, planning repots and exception reports.
These inputs and output are discussed in more detail in subsequent
sections.
2.0 OBJECTIVES
After completing this note, you should be able to:
(i) Describe the conditions under which MRP is most
appropriate.
(ii) Describe the input, outputs and nature of MRP
processing.
(iii) Explain how requirements in a master production schedule are
translated into material requirements for
lower-level items.
(iv) Discuss the benefits and requirements of MRP.
(v) Explain how an MRP system is useful in capacity
requirements planning.
(vi) Outline the potential benefits and some of the difficulties
users have encountered with MRP.
(vii) Describe MRP II and how it relates to MRP.
3.0 MAIN CONTENT
3.1 MRP Inputs As already mentioned
in proceeding section, an MRP system has three major sources of information: a master schedule, a
bill- of-material file, and an inventory
records file. Let's consider each of these inputs.
3.1.1 The Master Schedule The master schedule
states which end items are to be produced, when they are needed, and in what quantities. Figure 12.1
illustrates a portion of a master
schedule that shows planned output for end items X for the planning
horizon. The schedule indicates that 100
notes of X will be needed (e.g., for shipments
to customers) at the start of week 4 and that another 150 notes will be
needed at the start of week 8.
Figure 12.1. A portion of master schedule.
Week Number
Item X 1 2 3 4 5 6 7 8
Quantity 100 150
The quantities in a master schedule come from a number of
different sources, including customer
orders, forecasts, orders from warehouses to build up seasonal inventories, and external
demand. The master schedule separates
the planning horizon into a series of time
periods or time buckets, which are often expressed in weeks.
However, the time bucket
need not be of equal length. It is
important that the master schedule cover the stacked or cumulative lead time necessary to produce the end items. This
cumulative lead time is the sum of the
lead times that sequential phases of a process require, from ordering of parts or raw materials to completion of final
assembly. Stability in short-term
production plans is very important; without it, changes in order quantity and/or timing can render
material requirements plans almost
useless. To minimize such problems, many firms establish a series of
time intervals, called time fences,
during which changes can be made to orders.
For example, a firm might
specify time fences of 4,8, and 12 weeks, with the nearest fence being the most restrictive and
farthest fence being less restrictive.
Beyond 12 weeks changes are expected; from 8 to 12 weeks, substitutions
of one end item for another may be
permitted as long as the components are
available and the production plan is not compromised; from 4 to 8 weeks,
the plan is fixed, but small charges may
be allowed; and the plan is frozen out to
the four-week fence.
3.1.2 The Bill-of-Material File.
A bill of materials (BOM) containing a listing of all the
assemblies, subassemblies, parts, and
raw materials that are needed to produce one note of a finished product. This means that each
finished product has its own bill of
materials. The listing in BOM is
hierarchical; it shows the quantity of each item needed to complete one note of the following level of
assembly. The nature of this aspect of a
BOM is perhaps grasped most readily by considering a product structure tree, which provides a visual depiction of
the subassemblies and components that
are needed to assemble a product. Figure 12.2 shows a product tree for a chair.
Figure 12.2: Product
Structure Tree Chair 
A product structure tree is useful in illustrating how the
bill of materials is used to determine
the quantities of each of the ingredients (requirements) needed to obtain a desired number of end items
3.1.3 The Inventory
Records File The inventory records
file is used to store information on the status of each item by time period. This includes gross
amount on hand. It also includes other
details for each item, such as supplier, lead time, and lot size -
changes due to stock receipts and withdrawal,
canceled orders, and similar events also are
recorded in this file.
3.2 MRP Processing MRP processing takes
the end-item requirements specified by the master schedule and "explodes" them into
time-phased requirements for assemblies,
parts, and raw materials using the bull of materials offset by lead
times. The quantities that are generated
by exploding the bill of materials are gross
requirements. It is the total expected demand for an item or raw
material during each time period without
regard to the amount on hand. For end items, these quantities are shown in the master schedule;
for components, these quantities equal
the planned-order releases of their immediate "parents"
Scheduled Receipt: - Open orders scheduled to arrive from vendors
or elsewhere in the pipeline 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; schedule receipts plus available inventory from last period. Net-requirements: - The
actual amount needed in each time
period.
Planned-order receipts: - The quantity expected to be received by
the beginning of the period in which it is
shown. 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.
Planned-order releases: - Indicates a planned amount to order in each
time period; equal planned-order
receipts offset by lead time. This amount generates gross requirements at the next level in the
assembly or production chain. When an
order is executed, it is removed from "planned-order releases" and
entered under "Scheduled
receipts"
Let us illustrate MRP processing with the following example.
Suppose firm that produces wood shutters and bookcases has
received two orders for shutters: one
for 100 shutters and one for 150 shutters. The 100-note order is due for delivery at the start of
week 4 of the current schedule, and the
150-note order is due for delivery at the start of week 8. Each shutter
consists of four slatted wood sections
and two frames. The wood sections are made by the firm, and fabrication takes one week. The
frames are ordered and lead time is two
weeks. Assembly of the shutters requires one week. There is a scheduled receipt of 70 wood sections in (i .e. at the
beginning of) week 1. Determine the size
and timing of planned-order releases necessary to meet delivery requirements under each of these
conditions: Lot-for-lot ordering (i e
order size equal to net requirements)
Lot-size ordering with a
lot size of 20 notes for frames and 70 notes for wood sections to answer tree question, you first
develop a master schedule as
follows:
Week number 1 2 3 4 5 6 7 8
Quantity 100 150
Next, using the master schedule, determine gross requirements for
shutters. Then, compute net
requirements. Assuming lot-for-lot ordering, determine planned-order receipt quantities and the
planned - order release timing to
satisfy the master schedule
Since the master schedule calls for 100 shutters to be ready for
delivery, and no shutters are projected
to be on hand at the start of week 4, the next
requirements are also 100 shutters. Therefore planned receipts for week
4 equals 100 shutters. Some shutters are
assembled during week 7 in order to be
available for delivery at the start of week 8.
The planned-order release of 100 shutters at the start of week 3
means that 200 frames (gross
requirements) must be available at that time. Since more are expected to be on hand, this generates net
requirements of 200 frames and
necessitates planned receipts of 200 frames by the start of week 3. With
a two week lead time, this means that
200 frames must be ordered at the start of week
1.
Similarly, the planned-order release of 150 shutters at week 7
generates gross net requirement 300
frames for week 7 as well as planned receipts for that time. The two-week lead time means
frames must be ordered at the start of
week 5. The planned-order release of 100
shutters at the start of week 3 also generates
gross requirements of 400 wood sections at that time.
However, because 70 wood
sections are expected to be on hand, net requirements are 400-70 =330. This means a planned receipt of 330 by the
start of week 3. Since fabrication time
is one week, the fabrication must start (planned order release) at the beginning of week 2. Similarly, the planned-order release of 150
shutters in week 7 generates gross requirements
of 600 wood sections at that point. Since no on-hand inventory of wood sections is projected, net requirements
are also 600, and planned-order receipt
is 600 notes. Again, the one week lead time means 600 sections are scheduled for fabrication at the start of
week 6.
Finally under lot-size ordering, the only difference is the
possibility that planned receipts will
exceed net requirements. The excess is recorded as projected inventory in the following period.
For example, the order size for frames
is 320 notes. Net requirements for week 3 are 200; thus, there is an excess of 320-200 = 120 notes, which become
projected inventory in the next week.
Similarly, net frame requirements of 180 notes are 140 less than the 320 order size; again, the excess become
projected inventory in week 9.
The same thing happens with
wood sections; an excess of planned receipt in weeks 3 and 7 is added to projected inventory in weeks 4
and 8. Note that the order size must be
in multiples of the lot size; for week 3 it is 5 times 70 and for week 7
it is 9 times 70. The importance of computer becomes evident
when you consider that a typical firm
would have not one but many end items for which it needs to develop material requirements plans, each with its
own set of components.
Inventories on hand and on
order, schedules, order releases, and so on must all be up dated as changes and rescheduling
occurs. Without the aid of a computer,
the task would be almost hopeless; with the computer, all of these
things can be accomplished with much
less difficulty.
Updating the System. The two basic systems to update MRP records
are regenerative and net change. A
regenerative system is updated periodically; a
net-change system is continuously updated. A regenerative system is essentially a
batch-type system, which compiles all
changes (e.g. new orders, receipts) that occur within the time interval
(e.g. week) and periodically updates the
system. Using that information, a revised
production plan is developed (if needed) in the same way that the
original plan was developed (e.g.
exploding the bill of materials level by level).
In a net-change system, the basic production plan is modified to
reflect changes as they occur. If some
defective purchased parts had to be returned to a vendor, this information is entered into the system
as soon as it becomes known. Only the
changes are exposed through the system, level by level; the basic plan would not be regenerated. The regenerative system is best suited to
fairly stable systems, whereas the netchange
system is best suited to systems that have frequent changes. The obvious disadvantage of a regenerative system
is the potential amount of lag between
the time information becomes available and the time it can be incorporated into the material requirements
plan.
On the other hand, processing
costs are typically less using regenerative systems; changes that occur
in a given time period could ultimately
cancel each other, thereby avoiding the need
to modify and then remodify the plan. The disadvantages of the
net-change system relate to the computer
processing costs involved in continuously
updating the system and the constant state of flux in a system caused by
many small changes. On way around this
is to enter minor changes periodically and
major changes immediately. The primary advantage of the net-change
system is that management can have
up-to-date information for planning and control
purposes.
3.3 MRP Outputs
MRP systems have the ability to provide management with a fairly
broad range of outputs. These are often
classified as primary reports, which are the main reports, and secondary reports, which are
optional outputs.
3.3.1 Primary Reports
Production and inventory planning and control are part of primary
reports. These reports normally include
the following: (1) Planned orders, a
schedule indicating the amount and timing of future orders.
(2) Order releases, authorizing the execution of planned orders. (3) Changes to planned orders, including
revisions of due dates or order
quantities and cancellations of orders.
3.3.2 Secondary Reports
Performance control, planning, and exceptions belong to secondary
reports. (1) Performance-control repots
are used to evaluate system operation. They
aid managers by measuring deviations from plans, including missed deliveries and stock-outs, and by providing
information that can be used to assess
cost performance. (2) Planning reports
are useful in forecasting future inventory requirements. They include purchase commitments and other
data that can be used to assess future
material requirements. (3) Exception
reports call attention to major discrepancies such as late and overdue orders, excessive scrap rates,
reporting errors and requirements for
none existent parts. The wide range of
output generally permits users to adapt MRP to their particular needs.
3.3.3 Safety Stock
Theoretically, inventory systems with dependent demand should not
require safety stock below the end-item
level. This is one of the main advantages of an
MRP approach. Supposedly, safety stock is not needed because usage quantities can be projected once the master
schedule has been established.
Practically, however, there may be exceptions. For example, a
bottleneck process or one with varying
scrap rates can cause shortage in downstream
operations. However, a major advantage of MRP is lost by holding safety
stock for all lower-level items.
When lead times are variable, the concept of safety time instead of safety stock is often used.
This results in scheduling orders for
arrival or completion sufficiently ahead of the time they are needed in
order to eliminate or substantially
reduce the element of chance in waiting for those items. Frequently, managers elect to carry
safety stock for end items, which are
subject to random demand and for selected lower-level operations when
safety time is not feasible.
3.3.4 Lot Sizing
Choosing a lot size to order or for production is an important
issue in inventory management for both
independent- and dependent-demand items. This is called lot sizing. For independent-demand items,
economic order sizes and economic run
sizes are often used. Mangers can
realize economies of scale by grouping order or run sizes. This would be the case if the additional cost in
covered by holding extra notes until
they were used led to a saving in set up or ordering cost. This
determination can be very complex at
times. Let's consider some of the methods used to handle lot sizing.
3.3.4.1 Lot-for-lot ordering
The order or run size for each period is set equal to demand for
that period. This method was
demonstrated in the example in section 3.3. Not only is the order size obvious, but it also virtually
eliminates holding casts for parts carried
over to other periods. Hence, lot-for-lot ordering minimizes investment
in inventory. Its two chief draw backs
are that it usually involves many different
order sizes and thus cannot take advantage of the economies of fixed
order size and it involves a new setup
for each run.
3.3.4.2 Economic Order
Quantity Model
Sometimes economic order quantity models (EOQ) are used. They can
lead to minimum costs if usage is fairly
uniform. This is sometimes the case for lowerlevel items that are common to different parents
and for raw materials. However, the more
lumpy demand is, the less appropriate such an approach is.
3.3.4.3 Fixed - Period Ordering
This type of ordering provided coverage for some predetermined
number of periods (e.g., two or three).
A simple rule is; order to cover a two period
interval. The rule can be modified when common sense suggests a better
way. For example, take a look at the
demand shown in Figure 12.5. Using a twoperiod
rule, an order size of 120 notes would cover the first two period.
The next two periods would be covered by
an order size of 81 notes. However, the
demand, in period 3 & 5 are so small, it would make sense to combine
them both with the 80 notes and order 85 units.
Figure 12.5: Demand of part
3.3.4.4 Part-Period
Model The term part-period refers to
holding a part or parts over a number of periods. For example, if 10 parts were held for two
periods, this would be 10x2 = 20 part
periods. The economic part period (EPP) can be computed as:
EPP = Setup Cost
Note holding cost per period.
In order to determine an order size that is consistent with EPP,
various order sizes are examined for a
planning horizon, and each one's number of part
periods is determined. The one that comes closest to the EPP is selected
as the best lot size. The order sizes
that are examined are based on cumulative
demand. The following example illustrates this approach. Now use the part-period method to determine
order sizes for this demand schedule:
set cost is N80 per run for this item, and note-holding cost is N95 per period.
Solution
3.4 Capacity Requirements Planning
One of the most important features of MRP is its ability to aid
manager in capacity planning. As noted,
a master production schedule that appears feasible on the surface may turn out to be far less
feasible in terms of the resources
requirements needed for fabrication and /or subassembly operations of
lowerlevel items.
Capacity requirement planning is the process of determining
shortage capacity requirements. The
necessary inputs include planned-order releases for MRP, the current shop load, routing information
and job times. Outputs include load
report for each work center. When variances (under loads or over loads)
are projected, managers might consider
remedies such as alternative routing,
changing or eliminating lot splitting. Moving production forward or back
ward can be extremely challenging
because of precedence requirements and
availability of components.
The capacity planning begins with a proposed or tentative master
production schedule that must be tested
for feasibility and possibly, adjusted before it becomes permanent. The proposed schedule is
processed using MRP to ascertain the
material requirements the schedule would generate. These are then translated into resource ( i e capacity)
requirements often in the form of a series
of load reports for each department or work p center, which compares
known and expected future capacity
requirement with projected capacity availability.
An important aspect of capacity requirements planning is the
conversion of quantity requirements into
labour and machine requirements. This is
accomplished by multiplying each period's quantity requirements by
standard labor and/or machine
requirements per note. For instance, if 100 notes of product A are scheduled in the fabrication
department, and each note has a labor
standard time of 2 hours and a machine standard time of 1.5 hours, then 100 notes of A convert into these capacity
requirements.
Labor:- 100 notes x 2 hours/note = 200 labor hours
Machine: 100 notes x 1.5 hours/note = 150 machine hours
These capacity requirements can then be compared with available
department capacity to determine the
extent to which this product utilizes capacity. For example, if the department has 200 labour
hour, and 200 machine hours available,
labor utilization will be 100 percent because of all of the labor capacity will be required by this product.
However, machine capacity will be
underutilized.
Required X 100 = 150hours
X 100 = 75 percent.
Available 200
hours
Underutilization may mean that unused capacity can be used for
other jobs; over utilization indicates
that available capacity is insufficient to handle requirements. To compensate, production may
have to be rescheduled or overtime may
be needed.
3.5 Benefits and Requirements of MRP
3.5.1 Benefits MRP offers a number
of benefits for the typical manufacturing or assembly type of operation, including:
(1) Low levels of in-process inventories
(2) The ability to keep track of material requirements.
(3) The ability to evaluate capacity requirements generated by a
given master schedule.
(4) A means of allocating production time. A range of people in a typical manufacturing
company are important users of
information provided by an MRP system. Production mangers who must balance work loads across departments and
make decisions about scheduling work,
and plant foremen, who are responsible for issuing work orders and maintaining production schedules, also rely
heavily on MRP output. Other users
include customer service representatives, who must be able to supply customers with projected delivery dates,
purchasing managers, and inventory
managers. The benefits of MRP depend on large measure on the use of
a computer to maintain up-to-date
information on material requirements.
3.5.2 Requirements In order to implement and operate an
effective MRP system, it is necessary to
have:
(1) A computer and the necessary software programs to handle computations and maintain records.
(2) Accurate and up-to-date
(a) Master schedule
(b) Bills of materials
(c) Inventory records
(3) Integrity of file data
On the whole, the introduction of MRP has led to a major improvement
in scheduling and inventory management
but it has not proved to be the cure-all
that many hoped it would be. Consequently, manufacturers are beginning
to take a much broader approach to resource
planning one such approach is referred
to as MRP 11.
3.6 MRP II MRP II refers to
manufacturing resources planning. It represents an effort to expand the scope of production resource
planning and to involve other functional
areas of the firm in the planning process. A major purpose of MRP His to integrate primary functions and other
functions such as personnel, engineering
and purchasing in the planning process.
Material requirement planning is at the heart of the process.
Process begins with an aggregation of
demand from all sources (e.g. firm orders, forecasts, safety stock requirement). Production,
marketing and finance personnel work
toward developing a master production schedule. Although
manufacturing people will have a major
input in determining the schedule and a major
responsibility for making it work, marketing and finance will also
have important inputs and
responsibilities. The rationale for having these functional areas work together is the increase
likelihood of developing a plan that works
and with which everyone can live.
Moreover, because each of these functional areas has been involved in formulating the
plan, they will have reasonably good
knowledge of the plan and more reason to work toward achieving it. In addition to the obvious manufacturing
resources needed to support the plan,
financing resources will be needed and must be planned for, both in
amount and timing. Similarly, marketing
resources will also be needed in varying
degree throughout the process. In order for the plan to work, all of
the necessary resources must be
available as needed. Often, an initial plan must be revised based on an assessment of the
availability of various resources.
Once these have been
decided, the master production schedule can be firmed up. At this point, material requirement planning
comes into play generating material and
schedule requirements. More detailed capacity requirement planning must be made next to determine
whether these more specific requirements
can be met. Again some adjustment in the master production schedule may be required. As the schedule unfold, and actual work
begins, a variety of reports help
managers to monitor the process and to make any necessary adjustments
to keep operations on track. In effect, this is a continuing process where
the master production schedule is
updated and revised as necessary to achieve corporate goals.
The business plan that
governs the entire process usually undergo changes too although this tend to be less frequent than the changes made at
lower levels (i. e. the master
production schedule). Finally,
it should be noted that most MRP 11 systems have the capability of performing simulation, enabling managers to
answer a variety of "what if”
questions so they can gain a better appreciation of available options
and their consequences.
4.0 CONCLUSION
In this note, you
have learnt the meaning of MRP and the conditions under which it is appropriate; its inputs and
outputs as well as the nature of MRP
processing; the benefits, requirements and the difficulties encountered
with its use.
5.0 SUMMARY
Material requirements planning (MRP) is an information system used
to handle ordering of dependent-demand
items (i e, components of assembled products).
The planning process begins with customer orders, which are used along
with any back order to develop a master
schedule that indicates the timing and
quantity of finished items. The end items are exploded using the bill
of materials, and material requirements
plans are developed that show quantity
and timing for materials, and timing for ordering or producing
components. The main features of MRP are
the time-phasing of requirements, calculating
component requirements, and planned-order releases. To be successful,
MRP requires a computer program and
accurate master production schedules, bills of
materials, and inventory data. Firms that have not had reasonably
accurate records or schedules have
experienced major difficulties in trying to implement MRP.
MRP 11 is a second-generation approach to planning which incorporates
MRP but adds a broader scope to
manufacturing resource planning because it links business planning, production planning, and
the master production schedule.
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