Chapter 7

MATERIALS REQUIREMENT PLANNING (MRP)

7.1 Objectives and Applicability of MRP
7.2 MRP Inputs
7.3 The MRP Process
7.4 MRP Outputs
7.5 Manufacturing Resource Planning (MRP II)
7.6 MRP lot sizing

Chapter Objectives

1. Explain the changing role of materials requirements planning (MRP) within a

manufacturing organization.
2. Discuss the role of MRP within an enterprise resource planning (ERP) system.

3. Introduce the fundamental concepts and calculations that drive an MRP system.

4. Define the various elements that make up an MRP system.

5. Demonstrate how MRP-related systems are applied in service operations.

6. Recognize that MRP and JIT can be used together within an organization.

Introduction

Material requirements planning (MRP) was introduced in the 1970s as a computerized

inventory control system that would calculate the demand for component items, keep track
of when they are needed, and generate work orders and purchase orders that take into
account the lead time required to make the items in-house or buy them from a supplier.

Much of the credit for introducing MRP and educating industry about its benefits goes to
three individuals, Joseph Orlicky, George Plossl, and Oliver Wight, and to a professional
society they endorsed, known as the American Production and Inventory Control Society
APICS.

Basically an information system, MRP was quite revolutionary in its early days, because it
brought computers and systematic planning to the manufacturing function. Since its
introduction, the system has undergone several revisions that reflect the increased power
and accessibility of computers and the changing role of manufacturing. For example, MRP
II for manufacturing resource planning is much broader in scope than the original material
planner, incorporating marketing and financial functions as well. In today's modern
factories, MRP II is the standard for management information systems and an important
component of computer-integrated manufacturing (CIM).
7.1 Objectives and Applicability of MRP

The main objective of any inventory system (MRP) is to ensure that material is available
when needed at the lowest possible level of inventory--which can easily lead to a
tremendous investment of funds in unnecessary inventory. One objective of MRP is to
maintain the lowest possible level of inventory. MRP does this by determining when
component items are needed and scheduling them to be ready at that time, no earlier and no
later.

MRP was the first inventory system to recognize that inventories of raw materials,
components, and finished goods may need to be handled differently. In the process of
planning inventory levels for these various types of goods, the system also planned
purchasing activities (for raw materials and purchased components), manufacturing
activities (for component parts and assemblies), and delivery schedules (for finished
products). Thus, the system was more than an inventory control system; it became a
production scheduling system as well.

One of the few certainties in a manufacturing environment is that things rarely go as

planned--orders arrive late, machines break down, workers are absent, designs are changed,
and so on. With its computerized database, MRP is able to keep track of the relationship of
job orders so that if a delay in one aspect of production is unavoidable, other related
activities can be rescheduled, too. MRP systems have the ability to keep schedules valid
and up-to-date.

When to Use MRP

Managing inventory of components with dependent demand is different from managing

finished goods inventory. For one thing, the demand for component parts does not have to
be forecasted; it can be derived from the demand for the finished product. For example,
suppose demand for a table, consisting of four legs and a tabletop, is 100 units per week.
Then, demand for tabletops would also be 100 per week and demand for table legs would
be 400 per week. Demand for table legs is totally dependent on the demand for tables. The
demand for tables may be forecasted, but the demand for table legs is calculated. The tables
are an example of independent demand. The tabletop and table legs exhibit dependent
demand.

Another difference between finished products and component parts is the continuity of
their demand. For the inventory control systems in the previous chapter, we assumed
demand occurred at a constant rate. The inventory systems were designed to keep some
inventory on hand at all times, enough, we hoped, to meet each day's demand. With
component items, demand does not necessarily occur on a continuous basis. Let us assume
in our table example that table legs are the last items to be assembled onto the tables before
shipping. Also assume that it takes one week to make a batch of tables and that table legs
are assembled onto the tabletops every Friday. If we were to graph the demand for table
legs, as shown in figure 7.1, it would be zero for Monday, Tuesday, Wednesday, and
Thursday, but on Friday the demand for table legs would jump to 400. The same pattern
would repeat the following week. With this scenario, we do not need to keep an inventory
of table legs available on Monday through Thursday of any week. We need table legs only
on Fridays. Looking at our graph, demand for table legs occurs in lumps; it is discrete, not
continuous. Using an inventory system such as EOQ for component items would result in
inventory being held that we know will not be needed until a later date. The excess
inventory takes up space, soaks up funds, and requires additional resources for counting,
sorting, storing, and moving.

Figure 7.1

Industries that manufacture complex products, requiring the coordination of component

production, find MRP especially useful. A complex product may have hundreds of
component parts, dozens of assemblies, and several levels of assembly. MRP tries to ensure
that multiple components of an assembly are ready at the same time so that they can be
assembled together. Products with simple structures do not need MRP to plan production or
monitor inventory levels.

The advantages of MRP are more evident when the manufacturing environment is
complex and uncertain. Manufacturing environments in which customer orders are erratic,
each job takes a different path through the system, lead time is uncertain, and due dates
vary need an information system such as MRP to keep track of the different jobs and
coordinate their schedules. The type of environment we are describing is characteristic of
batch, or job shop, processes. Although MRP is currently available for continuous and
repetitive manufacturing, it was designed primarily for systems that produce goods in
batches.

Finally, MRP systems are very useful in industries where the customer is allowed to choose
among many different options. These products have many common components and are
inventoried in some form before the customer order is received. For example, customers of
a well-known electronics firm routinely expect delivery in six weeks on goods that take
twenty-eight weeks to manufacture. The manufacturer copes with this seemingly unrealistic
demand by producing major assemblies and subassemblies in advance of the customer
order and then completing the product upon receipt of the order. This type of operation is
called assemble-to-order.
 THE COMPETITIVE EDGE
MRP Improves Customer Service
Courtaulds Performance Films makes coextruded oriented polypropylene, the plastic
film that covers food products in your supermarket. Courtaulds has two
manufacturing plants, one in Swindon, England, and the other in Mantes, France.
The plants run 24 hours a day, 7 days a week. After the chemical process of making
a film base, the film is extruded, gripped by a fast-moving chain, heated, and
stretched lengthwise by 500 percent and sideways by 1,000 percent. That means the
final product is five times longer and ten times wider than it was before the extruding
process. Prior to MRP, Courtaulds met delivery promises only 75 percent of the
time. The company had difficulty scheduling the 60 types of raw materials, 40 types
of films, and 12,500 make-to-order end products. Courtaulds visited neighbor
Formica, a Class A MRP user, to learn the secret of its 95 percent on-time deliveries.
Courtaulds implemented MRP and quickly became a class A user itself.

The most beneficial aspect of MRP for Courtaulds is its master scheduling
component. Courtaulds can instruct the system to keep 5 to 10 percent of the master
schedule uncommitted until one week before production. This leaves space for
"orders of opportunity." The system also reserves capacity in advance for major
customers and treats all other customers on a first-come, first-served basis.

The available-to-promise (ATP) capability is especially useful in make-to-order

environments. ATP displays the status of the four manufacturing lines in England
and France and responds to inquiries about capacity that is available to promise to
customers. With this information, Courtaulds can make better decisions on whether
to accept new orders and can quote more realistic delivery dates for orders that are
accepted.
Source: Based on Walter Goddard, "Getting a Grip on Customer Service," Modern Materials
Handling (September 1992): 41.

7.2 MRP Inputs

As shown in figure 7.2, there are three major inputs to the MRP process:

 The master production schedule,

 The product structure file, and
 The inventory master file.
Figure 7.2

Master Production Schedule

The master production schedule (MPS), also called the master schedule, specifies which
end items or finished products a firm is to produce, how many are needed, and when they
are needed. Recall that aggregate production planning creates a similar schedule for
product lines or families, given by months or quarters of a year. The master production
schedule works within the constraints of the production plan but produces a more specific
schedule by individual products. The time frame is more specific, too. An MPS is usually
expressed in days or weeks and may extend over several months to cover the complete
manufacture of the items contained in the MPS. The total length of time required to
manufacture a product is called its cumulative lead time.

The below tables show the different forms of MPS for a manufacturing company.

MPS examples

Period 1 2 3 4 5 6 7 8 9 10 11 12
10 10 10 10 10 10 10 10 10 10 10
Forecast 10
20 20 20 20 20 20 20 20 20 20 20 20
Available 20
10 10 10 10 10 10 10 10 10 10 10 10
MPS
A level production MPS approach to seasonal sales

Period 1 2 3 4 5 6 7 8 9 10 11 12
5 5 5 5 5 15 15 15 15 15 15
Forecast 5
25 30 35 40 45 50 45 40 35 30 25 20
Available 20
10 10 10 10 10 10 10 10 10 10 10 10
MPS

A chase sales MPS approach to seasonal sales

Period 1 2 3 4 5 6 7 8 9 10 11 12
5 5 5 5 5 15 15 15 15 15 15
Forecast 5
20 20 20 20 20 20 20 20 20 20 20 20
Available 20
5 5 5 5 5 5 15 15 15 15 15 15
MPS

Lot sizing in MPS; with safety stock of 5 and lead time of 0

Period 1 2 3 4 5 6 7 8 9 10 11 12
5 5 5 5 5 15 15 15 15 15 15
Forecast 5
15 10 5 30 25 20 5 20 5 20 5 20
Available 20
30 30 30 30
MPS

Table 7.1

Several comments should be made concerning the quantities contained in the MPS:

 The quantities represent production, not demand. As we saw in the MPS chapter,
production does not necessarily have to match demand. Strategy decisions made in
the production planning stage filter down to the master production schedule.
 The quantities may consist of a combination of customer orders and demand
forecasts. Some figures in the MPS are confirmed, but others are predictions. As
might be expected, the quantities in the more recent time periods are more firm,
whereas the forecasted quantities further in the future may need to be revised
several times before the schedule is completed. Some companies set a time fence,
within which no more changes to the master schedule are allowed. This helps to
stabilize the production environment.

 The quantities represent what needs to be produced, not what can be produced.
Because the MPS is derived from the aggregate production plan, its requirements
are probably "doable," but until the MRP system considers the specific resource
 needs and the timing of those needs, the feasibility of the MPS cannot be
guaranteed. Thus, the MRP system is often used to simulate production to verify
that the MPS is feasible or to confirm that a particular order can be completed by a
certain date before the quote is given to the customer.

The master production schedule drives the MRP process. The schedule of finished products
provided by the master schedule is needed before the MRP system can do its job of
generating production schedules for component items.

Product Structure File

Once the MPS is set, the MRP system accesses the product structure file to determine
which component items need to be scheduled. The product structure file contains a bill of
material (BOM) for every item produced. The bill of material for a product lists the items
that go into the product, includes a brief description of each item, and specifies when and in
what quantity each item is needed in the assembly process.

When each item is needed can best be described in the form of a product structure diagram,
as shown in figure 7.3 for a clipboard.

Figure 7.3

An assembled item is sometimes referred to as a parent, and a component as a child. The

number in parentheses beside each item is the quantity of a given component needed to
make one parent. Thus, one clip assembly, two rivets, and one board are needed to make
each clipboard. The clip assembly, rivets, and board appear at the same level of the product
structure because they are to be assembled together.

A diagram can be converted to a computerized bill of material by labeling the levels in the
product structure. The final product, or end item, at the top of the structure--in this case, the
clipboard--is labeled level 0. The level number increases as we move down the product
structure. The clipboard has three levels of assembly.
Table 7.2

The bill of material for the clipboard, listed in table 7.2 shows some levels indented
underneath others. This specifies which components belong to which parents and can easily
be matched to the product structure diagram.

Several specialized bills of material have been designed to simplify information

requirements, clarify relationships, and reduce computer processing time. They include
phantom bills, K-bills, and modular bills.

 Phantom bills are used for transient subassemblies that never see a stockroom
because they are immediately consumed in the next stage of manufacture. These
items have a lead time of zero and a special code so that no orders for them will be
released. Phantom bills are becoming more common as companies adopt just-in-
time and cellular manufacturing concepts that speed products through the
manufacturing and assembly process.
 Kit numbers, or K-bills, group small, loose parts such as fasteners, nuts, and bolts
together under one pseudo-item number. In this way, requirements for the items are
processed only once (for the group), rather than for each individual item. K-bills
reduce the paperwork, processing time, and file space required in generating orders
for small, inexpensive items that are usually ordered infrequently in large quantities.
 Modular bills of material are appropriate when the product is manufactured in
major subassemblies or modules that are later assembled into the final product with
customer-designated options. With this approach, the end item in the master
production schedule is not a finished product, but a major option or module. This
reduces the number of bills of material that need to be input, maintained, and
processed by the MRP system.

The creation of a product structure file can take a considerable amount of time.
Accurate bills of material are essential to an effective MRP system. The bill of material
must specify how a product is actually manufactured rather than how it was designed to
be manufactured. Redundant or obsolete part numbers must be purged from the system.
This may not seem like a big task, but in some companies every time a part is
 purchased from a different supplier, it is assigned a different part number. One firm in
the process of implementing MRP was able to eliminate 6,000 extra part numbers from
its database and dispose of thousands of dollars of obsolete inventory that had not
previously been identified as such!

Inventory Master File

The inventory master file contains an extensive amount of information on every item that
is produced, ordered, or inventoried in the system. It includes such data as on-hand
quantities, on-order quantities, lot sizes, safety stock, lead time, and past usage figures.

Table 7.3

Table 7.3 displays the inventory master file of the "board" assembly. It provides a detailed
description of the item, specifies the inventory policy, updates the physical inventory count,
summarizes the item's year-to-date or month-to-date usage, and provides internal codes to
link this file with other related information in the MRP database.

The inventory master file is updated whenever items are withdrawn from or added to
inventory or whenever an order is released, revised, or completed. Accuracy of inventory
transactions is essential to MRP's ability to keep inventory levels at a minimum. It is
estimated that 95 percent inventory accuracy is a prerequisite for an effective MRP system.
Although technologies such as bar codes, voice-activated systems, and automated "picking"
equipment can improve inventory accuracy considerably, a general overhaul of inventory
procedures is often needed. This involves:

1. Maintaining orderly stockrooms;

2. Controlling access to stockrooms;
3. Establishing and enforcing procedures for inventory withdrawal;
 4. Ensuring prompt and accurate entry of inventory transactions;
5. Taking physical inventory count on a regular basis; and
6. Reconciling inventory discrepancies in a timely manner.

If you have taken part in an end-of-year inventory count, you can verify the wide
discrepancies that are commonly found between what the records say is in inventory and
what is physically there. Unfortunately, by the time the errors are discovered, it is too late
to correct them or find out why they occurred. The slate is merely cleaned for next year's
record, with the hope or promise that next time will be better.

Cycle counting is taking physical counts of at least some inventory items daily and
reconciling differences as they occur. The system specifies which items are to be counted
each day on a computer printout and may tie the frequency of the count to the frequency of
orders for the item within the MRP system. Thus, items that are used more often are
counted more often. The cycle counting system may also be related to the ABC
classification system. A items would be counted more often than B items. C items may still
be counted only once a year. Approved cycle counting systems are accepted by the
accounting standards board as valid replacements for end-of-year physical inventories.

7.3 The MRP Process

The MRP system is responsible for scheduling the production of all items beneath the end
item level. It recommends the release of work orders and purchase orders, and issues
rescheduling notices when necessary.

Part No:……..

Period 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected Available balance

Planned Order Release

Order Quantity (Q), Lead Time (LT), Safety Stock (SS), Opening Stock

Table 7.4

The MRP process is best explained through an example. We will use a worksheet
called the MRP matrix to record the calculations that are made. Table 7.4 shows
the matrix and provides a brief description of the entries that are required. Example
7.1 follows.

EXAMPLE
7.1
The Alpha Beta
Company

The Alpha Beta Company produces two products, A and B that are made from
components C and D. Given the following product structures, master scheduling
requirements, and inventory information, determine when orders should be released for
A, B, C, and D and the size of those orders.

SOLUTION:

Table 7.5 shows a completed MRP matrix for each of the four items in the product
structure diagram. The matrices were completed first for the level 0 items, A and B,
then for the level 1 items, C and D.

 Item A: First, we fill in the gross requirements for A, 100 units in period 8.
Since A is an end item, we read this information from the master production
schedule. In the projected on-hand row, we begin with 10 units of A in
inventory and continue with 10 units on hand until we need to use them. At the
end of period 7, we have 10 units of A in inventory. We need 100 A's in period
8. We can use the 10 A's we have on hand and make 90 more. The subtraction of
the on-hand quantity from the gross requirements is called netting. The net
requirement of 90 A's is the gross requirement net of inventory. It appears in the
same time period as the gross requirement. There is no lot-sizing requirement
(A's are ordered in multiples of 1), so the planned order receipts are the same as
the net requirements.
If we need to receive 90 A's by period 8 and it takes 3 periods to make A, we
need to release an order for A in period 5. Thus, the quantity of 90 appears in
period 5 of the planned order release row. This process of subtracting the lead
time from the due date is called lead time offsetting, or time phasing, of
requirements. The planned order release row is the result, or output, of the MRP
 calculations for item A. Only the entries in the final row of each matrix will be
used in subsequent MRP calculations for component items.
 Item B: Item B's matrix is completed in the same fashion as item A's. The gross
requirement of 200 B's in period 6 is given in the master production schedule.
Since there are 5 units of B on hand, the net requirement for B is 195 in period
5. There are no scheduled receipts for B and no lot-sizing requirements. If 195
B's are needed in period 5 and it takes 2 weeks to make B's, we need to release
an order to begin production of B's in period 4.
 Item C: For all level 1 items, we need to calculate the gross requirements by
multiplying the quantity per assembly given in parentheses on the product
structure diagram times the planned order release (POR) of the parent item. This
multiplication process is called explosion.
An order for 90 A's is set to be released in period 5. Three C's are needed for
every A, so we place a gross requirement for 270 C's in period 5. We have 140
C's in inventory. They remain in inventory until period 5, when we use them to
satisfy partially the demand for C's. The net requirement for C is thus 130 units.
But instead of ordering the net requirement of 130, we order the lot-size quantity
of 150. If 130 C's need to be received by period 5 and it takes 4 weeks to make
C's, we need to release the order for C in period 1. The 150 C's will arrive in
period 5. We will use 130 of them to meet A's demand for C's. The remaining 20
units will be placed into inventory.
 Item D: Item D has two parents, A and B. We need to gather all the gross
requirements for D first before completing the rest of the matrix. Item A has a
planned order release of 90 units in period 5. Two D's are required for every A,
so (90x 2) = 180 D's need to be available by period 5. D's other parent, item B,
has a planned order release of 195 units scheduled in period 4. Every B requires
three D's, so (195x 3) = 585 D's are also needed by period 4.
We have 200 D's on hand at the end of period 1. An order of 250 D's is
scheduled to be received in period 2. By the end of period 2, we project that
(200 + 250) = 450 D's will be on hand. We plan to use those 450 D's to fill
partially the first gross requirement entry, leaving a net requirement of (585 
450) = 135 D's in period 4. Since D's are ordered in lots of 250, even though we
need only 135 D's, we will place an order for 250. It takes 2 weeks to make D's.
Since they are needed in period 4, we will plan to release the order in period 2.
When the order arrives, 135 D's will go toward making B's, and the remaining
(250  135) = 115 will be placed into inventory.
The 115 D's projected to be on hand by the end of period 4 can be used to
satisfy partially the gross requirement for 180 D's in period 5, leaving a net
requirement of (180  115) = 65 D's. Because of lot-sizing requirements, we will
order 250 D's. Item D has a lead time of two periods. If we need to receive D's
by period 5, we need to release an order for D in period 3. We plan the order
release for 250 and project that (250  65) = 185 units will be left over and
placed into inventory at the end of period 5.
 We have now completed the MRP calculations. To summarize the results, we
construct a planned order report from the planned order release row of each
matrix, as follows:
Part A

Period 1 2 3 4 5 6 7 8

Gross Requirements 100

Scheduled Receipts 90

Projected Available balance 10 10 10 10 10 10 10 10 0

Planned Order Release 90

Order Quantity (Lot for Lot), Lead Time (LT=3), Safety Stock (SS=0)

Part B

Period 1 2 3 4 5 6 7 8

Gross Requirements 200

Scheduled Receipts 195

Projected Available balance 5 5 5 5 5 5 0 0 0

Planned Order Release 195

Order Quantity (Lot for Lot), Lead Time (LT=2), Safety Stock (SS=0)

Part C

Period 1 2 3 4 5 6 7 8

Gross Requirements 270

Scheduled Receipts 150

Projected Available balance 140 140 140 140 140 20 20 20 20

Planned Order Release 150

Order Quantity (Q=150), Lead Time (LT=4), Safety Stock (SS=0)

Part D

Period 1 2 3 4 5 6 7 8

Gross Requirements 585 180

Scheduled Receipts 250 250 250

Projected Available balance 200 200 450 450 115 185 185 185 185

Planned Order Release 250 250

Order Quantity (Q=250), Lead Time (LT=2), Safety Stock (SS=0)

Table 7.5

The MRP matrices are the worksheets that determine the planned orders for each inventory
item. They are generally not printed out unless requested by the MRP planner. Looking at
the MRP matrix for item D, it appears that the objective of maintaining the lowest possible
level of inventory has been violated. This is due to the lot-sizing requirement that orders
item D in multiples of 250 and the scheduled receipt for D that arrives before it is needed.
The MRP system will issue an error message asking that the scheduled receipt be
postponed until period 4, but it will not comment on the excess inventory due to lot sizing
because the user has input those requirements. Unless there is some problem in obtaining
the two orders for item D, the planner will probably never notice the excess inventory of
item D either. This illustrates one of the problems with MRP systems. Users tend to input
policies that undermine the basic objectives of the system, and the logic of the system is
often hidden from the user.

If the MRP calculations seem tedious, remember that the system is computerized and no
manual calculations are required.

7.4 MRP Outputs

The outputs of the MRP process are planned orders from the planned order release row of
the MRP matrix. As shown in Figure 13.2, these can represent work orders to be released
to the shop floor for in-house production or purchase orders to be sent to outside suppliers.
MRP output can also recommend changes in previous plans or existing schedules. These
action notices, or rescheduling notices, are issued for items that are no longer needed as
soon as planned or for quantities that may have changed. One of the advantages of the
MRP system is its ability to show the effect of a change in one part of the production
process on the rest of the system. It simulates the ordering, receiving, and usage of raw
materials, components, and assemblies into future time periods and issues warnings to the
MRP planner of impending stockouts or missed due dates.
It is the planner's job to respond to the actions contained in the action report. If a planner
decides to expedite an order--that is, have it completed in less than its average lead time--
he or she might call up a supplier or a shop supervisor and ask for priority treatment.
Giving one job higher priority may involve reducing the priority of other jobs. This is
possible if the MRP action report indicates that some jobs are not needed as early as
anticipated. The process of moving some jobs forward in the schedule (expediting) and
moving other jobs backward (de-expediting) allows the material planner, with the aid of
the MRP system, to fine-tune the material plan. Temporary lead time adjustments through
overtime or outside purchases of material can also fix a timing problem in the MRP plan,
but at a cost. An MRP action report that is exceedingly long or does not strike a balance
between speeding up some orders and slowing down others can signify trouble. Action
messages that recommend only the expediting of orders indicate an overloaded master
schedule and an ineffective MRP system.

The MRP system, as the name implies, ensures that material requirements are met.
However, material is not the only resource necessary to produce goods--a certain amount of
labor and machine hours are also required. Thus, the next step in the planning process is to
verify that the MRP plan is "feasible" by checking for the availability of labor and/or
machine hours. This process is called capacity requirements planning.

7.5 Manufacturing Resource Planning (MRP II)

The MRP systems on the market today are composed of many different modules that can
be purchased separately. Typically, the modules include the following:

 Forecasting
 Customer order entry
 Production planning/master production scheduling
 Product structure/bill-of-material processor
 Inventory control
 Material requirements planning
 Capacity planning
 Shop floor control
 Purchasing
 Accounting
 Financial analysis

We can recognize some of these modules as inputs to or outputs from the basic MRP
process. Others represent a broadened scope of MRP-related activities, beginning with
forecasting demand and ending with a financial analysis of the firm.

Companies differ in their approach to implementing MRP, but seldom will a company
purchase an entire MRP system at one time. Most firms install the product structure/bill-of-
material (BOM) processor first and then add the inventory module, followed by the MRP
module. The BOM and inventory modules have large databases and serve as major inputs
to the rest of the process.
Purchasing is also brought online early, usually shortly after the BOM module is installed.
Assemble-to-order companies tend to implement the customer order entry module as soon
as possible.

It may be some time before the master schedule module or higher-level planning modules
are added. How, you may wonder, does the MRP system run without a master schedule?
Actually, a master production schedule is used, but it is not generated or maintained by the
MRP system; it is input by hand.

The capacity planning module is important for a well-run MRP system, and its absence
often separates the successful MRP user from the unsuccessful user.

Shop floor control is a difficult module to implement and is probably the most
disappointing one in practice.

As MRP evolved and more modules and features were added in the areas of capacity
planning, marketing, and finance, it became clear that the name material requirements
planning was no longer adequate to describe the full range of activities this system could
coordinate. In keeping with the MRP acronym, the new and improved MRP became known
as MRP II, for manufacturing resource planning.

Manufacturing resource planning is a misnomer because MRP II software is also used in

services, such as education, architecture, health care, distribution, and the like. Thus,
systems such as SRP (service requirements planning), DRP (distribution requirements
planning), and BRP (business requirements planning), are also available.

7.6 MRP Lot sizing

Lot sizing aims at determining the optimal size of the lot for a specific component or
assembly or subassembly to be used to run the MRP. The solution will help in calculating
how many periods will be covered by the first order, the second order, and so on until all
the periods in the planning horizon are covered.

The common MRP lot sizing options are:

Lot-for-Lot (L4L):

Lot for lot policy requires that an order be placed each period. So, the number of orders and
ordering cost are maximum. Order as much as it is needed. L4Lminimizes inventory
holding cost, but maximizes ordering cost.

Economic Order Quantity (EOQ):

Every time it is required to place an order, lot size equals EOQ.

EOQ method may choose an order size that covers partial demand of a period. For
example, suppose that EOQ is 15 units. If the demand is 12 units in period 1 and 10 units in
period 2, then a lot size of 15 units covers all of period 1 and only (15-12)=3 units of period
2. So, one does not save the ordering cost of period 2, but carries some 3 units in the
inventory when that 3 units are required in period 2. This is not a good idea because if an
order size of 12 units is chosen, one saves on the holding cost without increasing the
ordering cost!

So, what’s the mistake? Generally, if the order quantity covers a period partially, one can
save on the holding cost without increasing the ordering cost.

Be careful when you compute EOQ. Express both holding cost and demand over the same
period. If the holding cost is annual, use annual demand. If the holding cost is weekly, use
weekly demand.

Part Period Balancing:

Part period balancing heuristic chooses a lot size that equals the demand of some K periods
in future, where K>0.

Holding and ordering costs are computed for each K=1, 2, 3, etc. starting from K=1 and
increasing K by 1 (until the holding cost exceeds the ordering cost). The best K is the one
that minimizes the (absolute) difference between the holding and ordering costs.

Silver-Meal Heuristic:

Silver-Meal heuristic chooses a lot size that equals the demand of some K periods in future,
where K>0. If K =1, the lot size equals the demand of the next period. If K =2, the lot size
equals the demand of the next 2 periods. If K =3, the lot size equals the demand of the next
3 periods, and so on.

The average holding and ordering cost per period is computed for each K=1, 2, 3, etc.
starting from K=1 and increasing K by 1 until the average cost per period starts increasing.
The best K is the last one up to which the average cost per period decreases.

Least Unit Cost (LUC):

Least unit cost heuristic chooses a lot size that equals the demand of some K periods in
future, where K>0.

The average holding and ordering cost per unit is computed for each K=1, 2, 3, etc.
starting from K=1 and increasing K by 1 until the average cost per unit starts increasing.
The best K is the last one up to which the average cost per unit decreases.

Observe similarity between Silver-Meal heuristic and Least unit cost heuristic and Part
period balancing. All the three method use ordering and carrying costs. The only difference
is that Silver-Meal heuristic chooses K on the basis of average cost per period and Least
unit cost on average cost per unit. Part period balancing heuristic chooses K on the basis of
the (absolute) difference between the holding and ordering costs.

Home Work Problem

The MRP gross requirements for Item A are shown here for the next 10 weeks. Lead time
for A is three weeks and setup cost is $10. There is a carrying cost of $0.01 per unit per
week. Beginning inventory is 90 units.

Product Name: A
Period   1 2 3 4 5 6 7 8 9 10
Gross Requirement   30 50 10 20 70 80 20 60 200 50
Scheduled Receipt                      
Projected Balance 90                    
Net Requirement                      
Planned Order Receipt                      
Planned Order Release                      

Develop the MRP matrix for the item A using different lot sizing options.