MATERIAL REQUIREMENTS PLANNING (MRP)

Learning Objectives:

Producing a product made of multiple components requires significant coordination to ensure that component parts are available when they are required for production. This segment examines how MRP can accomplish this coordination.

Contents:

Master Production Schedule

Material Requirements Planning

Links for production planning and control

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Translating an Aggregate Plan into a Production and Ordering Schedule

Aggregate Plan (3-12 months ahead)

Master Production Schedule (1-3 months)

Material Requirements Plan (0-3 months)

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MASTER PRODUCTION SCHEDULE (MPS)

- A detailed plan that states how many END ITEMS (the final product sold to the customer) will be available for sale or distribution during specific periods

- Short time frame: 1-3 months

Purposes of the Master Production Schedule:

• to set due dates for the availability of end items
• to provide information regarding resources and materials required to support the aggregate plan
• as an input to Materials Requirements Planning, which will set specific production schedules for parts and components used in end items

What the Master Production Schedule is NOT:

• a sales forecast (MPS summarizes production to meet sales forecasts)
• a manufacturing schedule (MPS tells when end items are available for sale, but not when the end items or their component parts will be manufactured)

Inputs To Mps

• Market requirements
• Production Plan from Aggregate Planning
• Resources available

Constraints

• Quantities of individual items must equal aggregate quantities from the Production Plan
• Demand which must be met

· Capacity available

Output

An MPS showing end items available every month (or period) that is feasible with respect to demand and capacity.

At this point we know when we need units available so we can plan when to produce or order using MRP.

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Material Requirements Planning (MRP)

A computerized system for managing dependent-demand inventory, scheduling replenishment orders, and meeting demand for end items as given in the Master Production Schedule.

Two basic characteristics of MRP:

1. MRP derives demand for components, subassemblies, materials, etc., from demand for and production schedules of parent items.
2. MRP offsets replenishment orders (purchase orders or production schedules) relative to the date when replenishment is needed.

Information Needed for MRP

Information Obtained from MRP

Demand for all products. Lead times for all finished goods, components, parts and raw materials Lot sizing policies for all parts Opening inventory levels Safety stock requirements Any orders previously placed but which haven't arrived yet

Planned orders: replenishment orders to be released at a future time Order release notice: notices to release planned orders Action notices: notices to expedite, de-expedite, or cancel orders, or to change order quantities or due dates Priority reports: information regarding which orders should be given priority Inventory status information Performance reports such as inactive items, actual lead times, late orders, etc.

 MRP Inputs

1. Master Production Schedule

2. Product Structure
3. Inventory Levels

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MRP Matrix – download a sample MRP Matrix here and print two up to take to class.

Lot Sizing Choices in MRP

Lot sizing:

Determining the lot size (order quantity or production quantity) of an item

Static lot sizing rule:

• A decision rule that orders the same quantity each time an order is placed.
• Tend to generate higher average on-hand inventory because they create inventory remnants.
• Can provide extra safety stock.

Dynamic lot sizing rule:

• A decision rule that changes the order quantity with each order, typically so that each order is just large enough to prevent shortages over a specified time period.
• Tend to cause instability by tying lot-size to gross requirements.
• Lower-level components may not be able to respond sufficiently fast to changes in requirements.

Static Lot-sizing Rules

1. Fixed order quantity (FOQ)

• Order (or produce) a fixed quantity, or a multiple of that fixed quantity.

2. Economic Order Quantity (EOQ)

• Order (or produce) the economic order quantity, plus any additional items needed to replenish safety stock if it has fallen below its desired level.
• Yields minimum total setup/ordering plus holding costs.
• Assumes relatively constant demand.

Dynamic Lot-sizing Rules

1. Lot-for-Lot (L4L)

• Order (or produce) exactly the quantity required in each period to satisfy gross requirements and to maintain safety stock at its required level.
• Simple to use, and agrees with Just-In-Time philosophy of ordering/producing only when required.
• Lot size can be modified easily for purchase discounts or restrictions, scrap allowances, process constraints, etc.
• Minimizes on-hand inventory, but maximizes number of orders placed (so can be expensive if setup/ordering costs are significant).

2. Periodic Order Quantity (POQ)

• Order/produce a quantity equal to the gross requirements for P periods minus any items in on-hand inventory plus any additional items needed to replenish safety stock if it has fallen below its desired level.
• Restores safety stock and covers exactly P periods of gross requirements.
• Reduces on-hand inventory by attempting to match the quantity ordered to the quantity required.

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Example 1:

Completing MRP Tables

Objective:

The purpose of MRP is to schedule orders for end items and the components of those end items. We wish to determine when to release orders and how much to order.

Step 1

Begin with the end items. Complete one table at a time.

• Schedule the gross requirements, GR.
• Enter records for any scheduled receipts, SR.
• Consider GR, SR and inventory, I, to determine timing and size of orders we will plan to receive, PR. These are orders which we must receive to meet demand.

PR_t = I_t-1 + SR_t - GR_t - I_t

• Use the lead time to schedule the planned order releases, POR, so that the orders are received when they are needed.

Time of POR = Time of PR - L

• A POR for an end item in week t becomes a GR in week t for every component part of the end item.

Step 2

Schedule the components. If a component occurs at more than one level it is scheduled at the deepest level so that you will know all demand for parents of the component before you try to schedule the component.

Level 1 components:

The POR's for end items are scheduled as GR's for level 1 components. Any spare parts orders are scheduled as GR's also.

• Complete the table as discussed in step 1.

Repeat the process for all components.

For each component the gross requirements come from planned order releases for all direct parents of the component and from any orders for spare parts.

The final result will be planned orders (quantity and timing) for end products and all of their component which must be made in order to meet demand.

Example 2

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Implementation of Materials Requirements Planning Systems

Favourable environments for MRP:

• batch manufacturing environment
• stable demand
• limited number of products
• large number of bill-of-materials levels
• large lot sizes

Some conditions which are less favourable for MRP

Process-focused environments:

• many customized products
• small production volumes
• small number of bill-of-materials levels

Just-In-Time environments:

• small batch sizes
• demand pulls parts and components through the system

Other Types of MRP Systems

Closed-loop MRP:

MRP system that provides feedback to other stages of the production plan, such as the aggregate production plan, capacity plan, and Master Production Schedule.

Manufacturing Resource Planning (MRP II):

A planning system that uses all outputs of a MRP system to integrate production, marketing, and financial plans.

Distribution Resource Planning (DRP):

A time-phased stock replenishment technique for distribution networks based on MRP procedures and logic.

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Links

Industry Week - View selected industry related articles in the Industry Week magazine by clicking on the magazines or by searching for a topic.

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