Inventory MRP Fatme

INVENTORY
MANAGEMENT
Dr. Fatme Makssoud

What is inventory?
A physical resource that a
firm holds in stock with the
intent of selling it or
transforming it into a more
valuable state.
Purpose of inventory
management
• How many units to order?
• when to order? discount
Types of Inventories
Raw materials – Basic inputs that are converted into finished product through the manufacturing
process
Purchased parts and supplies
Finished Goods -Completely manufactured products ready for sale
Work-in-process – Semi-manufactured products needs some works before they become finished goods
Two Forms of Demand
Dependent Independent
(not used by customer directly) • Demand for items used by
• Demand for items used to external customers
produce final products • Cars, computers, and
• Tires stored at a plant are houses are examples of
an example of a dependent independent demand
demand item inventory
MRP (Material Requirements Planning)
• Describe the inputs and outputs to an MRP system, the
steps of MRP and execute the MRP process
• Discuss different lot sizing rules.
• Lot-for-lot ordering policy (L4L), need 5 order 5
• Minimum order quantities
• Maximum order quantities
• Multiple order quantities
• Economic order quantity (EOQ)
• ReOrder Point (ROP)
• Periodic order quantity (POQ)
MRP Inputs and Outputs
• Inputs
• Master production schedule
• Product structure file
• Item master file
• Outputs
• Planned order releases
• Work orders
• Purchase orders
• Rescheduling notices
A. Master Production Schedule
PERIOD
MPS ITEM 1 2 3 4 5
Pencil Case 125 125 125 125 125
Clipboard 85 95 120 100 100
Lapboard 75 120 47 20 17
Lapdesk 0 50 0 50 0
B. Product Structure
Product Structure Tree/diagram
Bill of material (BOM): a list of all the materials, parts, and assemblies that make up a
product, including quantities, parent–component relationships, and order of assembly.
C. Item Master (Inventory) File
• Contains all information about the item; on-hand quantity, ordered quantities,
lot size, safety stock, lead time, inventory policy, …
DESCRIPTION INVENTORY POLICY
Item Pressboard Lead time 1

Item no. 7341 Annual demand 5000
Item type Purch Holding cost 1
Product/sales class Comp Ordering/setup cost 50
Value class B Safety stock 0
Buyer/planner RSR Reorder point 39
Vendor/drawing 07142 EOQ 316
Phantom code N Minimum order qty 100
Unit price/cost 1.25 Maximum order qty 500
Multiple order qty 1
MRP Processes
A. Exploding the MPS (Master Production Schedule)
B. Netting out the inventory
• the process of subtracting on-hand quantities and
scheduled receipts from gross requirements to produce
net requirements
C. Lot sizing
• determining the quantities in which items are made or
purchased
D. Time-phasing
• Time-shifting according to lead time (the time between receiving
an order to deliver the goods or services to a customer).
MRP Matrix
Lot Sizing Policy Lead time
 Net Requiremen ts   Gross Requiremen ts   Projected Inventory   Scheduled   Safety 

             
 in period t   in period t   at the start of period t   receipts   Stock 
MRP Example
Master Production Schedule:
1 2 3 4 5
Clipboard 85 95 120 100 100
Lapdesk 0 60 0 60 0
Item Master File:

CLIPBOARD LAPDESK PRESSBOARD
On hand 25 20 150
On order 175 (Period 1) 0 0
(sch receipt)
Lot size L4L Mult 50 Min 100
Lead time 1 1 1
MRP Example
MRP Example 15.1 p. 502
ITEM: CLIPBOARD PERIOD

LOT SIZE: L4L LT: 1 1 2 3 4 5
Gross Requirements 85 95 120 100 100

Scheduled Receipts
Projected on Hand
Net Requirements
Planned Order Receipts
Planned Order Releases
MRP Example

LOT SIZE: L4L LT: 1 1 2 3 4 5

Scheduled Receipts 175
Projected on Hand 25
Net Requirements
MRP Example
LOT SIZE: L4L LT: 1 1 2 3 4 5

Projected on Hand 25 115
Net Requirements 0
(25 + 175) = 200 units available

(200 - 85) = 115 on hand at the end of Period 1
MRP Example
LOT SIZE: L4L LT: 1 1 2 3 4 5

Projected on Hand 25 115 20
Net Requirements 0 0
115 units available

(115 - 95) = 20 on hand at the end of Period 2
MRP Example
LOT SIZE: L4L LT: 1 1 2 3 4 5

Projected on Hand 25 115 20 0
Net Requirements 0 0 100
Planned Order Receipts 100
Planned Order Releases 100
20 units available
(20 - 120) = -100 — 100 additional Clipboards are required
Order must be placed in Period 2 to be received in Period 3
MRP Example
LOT SIZE: L4L LT: 1 1 2 3 4 5

Projected on Hand 25 115 20 0 0 0
Net Requirements 0 0 100 100 100
Planned Order Receipts 100 100 100
Planned Order Releases 100 100 100
Following the same logic Gross Requirements in Periods 4 and 5 develop

Net Requirements, Planned Order Receipts, and Planned Order Releases
MRP Example
ITEM: LAPDESK PERIOD
LOT SIZE: MULT 50 LT: 1 1 2 3 4 5
Scheduled Receipts
Net Requirements
MRP Example
LOT SIZE: MULT 50 LT: 1 1 2 3 4 5
Scheduled Receipts
Projected on Hand 20 20 10 10 0 0
Planned Order Receipts 50 50
Planned Order Releases 50 50
Following the same logic, the Lapdesk MRP matrix is

completed as shown
MRP Example
LOT SIZE: L4L LT: 1 1 2 3 4 5

LOT SIZE: MULT 50 LT: 1 1 2 3 4 5
ITEM: PRESSBOARD PERIOD

LOT SIZE: MIN 100 LT: 1 1 2 3 4 5
Gross Requirements
Scheduled Receipts
Net Requirements
15-24
MRP Example
LOT SIZE: L4L LT: 1 1 2 3 4 5
ITEM: LAPDESK x1 PERIOD x1 x1

LOT SIZE: MULT 50 LT: 1 1 2 3 4 5
ITEM: PRESSBOARD x2 x2 PERIOD

LOT SIZE: MIN 100 LT: 1 1 2 3 4 5
Scheduled Receipts
Net Requirements
MRP Example
LOT SIZE: L4L LT: 1 1 2 3 4 5
ITEM: LAPDESK x1 PERIOD x1 x1

LOT SIZE: MULT 50 LT: 1 1 2 3 4 5
ITEM: PRESSBOARD x2 x2 PERIOD

LOT SIZE: MIN 100 LT: 1 1 2 3 4 5
Scheduled Receipts
Projected on Hand 150 50 50 0 0
Planned Order Receipts 100 150 100
MRP Example
Planned Order Report PERIOD
ITEM 1 2 3 4 5
Clipboard 100 100 100
Lapdesk 50 50
Pressboard 100 150 100
Lot Sizing in MRP Systems
• Lot-for-lot ordering policy (L4L), need 5 order 5
• Minimum order quantities
• Maximum order quantities
• Multiple order quantities
• Economic order quantity (EOQ)
• ReOrder Point (ROP)
• Periodic order quantity (POQ)
EOQ (Economic order quantity )
• The EOQ (Economic order quantity ) : the optimal order quantity Q
that will minimize the sum of carrying costs and ordering costs (total
inventory costs),
EOQ =
ROP (ReOrder Point)
• ROP : The level of inventory at which a new order should be placed
• The reorder point for the basic EOQ model with constant demand
and a constant lead time to receive an order is equal to the amount
demanded during the lead time, R = dL
where
• d : demand rate per period (e.g., daily)
• L : lead time
POQ (Periodic Order Quantity)
The POQ (Periodic Order Quantity) was created as a variation
of the EOQ more suited to variable demand.
• POQ is calculated by dividing the EOQ by average demand
POQ = Q/average D
• It represents the number of demand periods covered by
each order.
ReOrder Point
• The Lifetime sports company is open 311 days per year. If annual
demand of the manufactured product is 10,000 units and the lead
time to receive an order is 10 days, determine the ReOrder Point for
the manufacturing.
• R = dL = (10,000 /311) * (10) = 321,54 units,
• When the inventory level falls to approximately 321 units, a new
order is placed.
Problem 1
Semans is a manufacturer that produces bracket assemblies. Demand for bracket assemblies (X) is 130 units. The following is the BOM in indented form: (We are
not given any lead time)
Description Usage
X Bracket assembly 1
A Wall board 4
B Hanger 2
subassembly
D Hanger casting 3 Below is a table indicating current inventory levels:
E Ceramic knob 1 Item X A B C D E F G
C Rivet head screw 3 Inventory 25 16 60 20 180 160 1,000 100
F Metal tong 4
G Plastic cap 2
b. What are the net requirements of each item in the MPS? (Leave no cells blank - be certain to enter "0" wherever required.)
Item Gross Requirements Net Requirements

X 130 105
A 420 404
B 210 150
C 315 295
D 450 270
E 150 0
F 1,180 180
G 590 490
Problem 2
In the following MRP planning schedule for Item J, indicate the correct net requirements, planned order receipts, and planned order releases to meet
the gross requirements. Lead time is one week (Leave no cells blank - be certain to enter "0" wherever required.)
Week Number
Item J 0 1 2 3 4 5
Gross requirements 75 50 70
On-hand 40 40
Net requirements
Planned order receipt
Planned order release
Period 1 2 3 4 5
Item J Gross requirements 75 50 70
OH = 40 Scheduled receipts 0 0 0 0 0
LT = 1 Projected available balance 40 0 0 0 0
SS = 0 Net requirements 0 35 0 50 70
Q= L4L Planned order receipts 0 35 0 50 70
Planned order releases 35 0 50 70 0
Problem 3
One unit of A is made of three units of B, one unit of C, and two units of D. B is composed of two units of E and one unit of D. C is made of one unit of B
and two units of E. E is made of one unit of F.
Items B, C, E, and F have one-week lead times; A and D have lead times of two weeks.
Assume that lot-for-lot (L4L) lot sizing is used for Items A, B, and F; Multiply lot of size 50, 50, and 200 are used for Items C, D, and E, respectively. Items
C, E, and F have on-hand (beginning) inventories of 10, 50, and 150, respectively; all other items have zero beginning inventory. We are scheduled to
receive 10 units of A in Week 2, 50 units of E in Week 1, and also 50 units of F in Week 1. There are no other scheduled receipts. If 30 units of A are
required in Week 8, use the low-level-coded bill of materials to find the necessary planned order releases for all components. Note: To simplify data
handling to include the receipt of orders that have actually been placed in previous periods,
the following six-level scheme can be used. (A number of different techniques are used in practice, but the important issue is to keep track of what is on
hand, what is expected to arrive, what is needed, and what size orders should be placed.)
Develop an MRP planning schedule showing gross and net requirements and order release and order receipt
dates. (Leave no cells blank - be certain to enter "0" wherever required.)
It is Monday of Week 1
Problem 3 Our planning horizon is 8 weeks
Period 1 2 3 4 5 6 7 8
Item A Gross requirements 30
OH = 0 Scheduled receipts 10
LT = 2 Projected available balance 0 10 10 10 10 10 10 0

SS = 0 Net requirements 20
Q = L4L Planned order receipts 20
Planned order releases 20
Item C Gross requirements 20
OH = 10 Scheduled receipts

Q = 50 Planned order receipts 50
Item B Gross requirements 50 60

SS = 0 Net requirements 50 60
Q = L4L Planned order receipts 50 60
Planned order releases 50 60

Problem 3 Our planning horizon is 8 weeks
Period 1 2 3 4 5 6 7 8
Item D Gross requirements 50 60 40
Q = 50 Planned order receipts 50 100
Item E Gross requirements 100 220
Q = 200 Planned order receipts 400
Item F Gross requirements 400
Q = L4L Planned order receipts 200
Problem 4
One unit of A is composed of two units of B and three units of C. Each B is composed of one unit of F. C is made of one unit of D, one unit of E, and
two units of F. Items A, B, C, and D have 20, 50, 60, and 25 units of on-hand inventory. Items A, B, and C use lot-for-lot (L4L) as their lot-sizing
technique, while D, E, and F require multiples of 50, 100, and 100, respectively, to be purchased. B has scheduled receipts of 30 units in Period 1. No
other scheduled receipts exist. Lead times are one period for Items A, B, and D, and two periods for Items C, E, and F. Gross requirements for A are
20 units in Period 1, 20 units in Period 2, 60 units in Period 6, and 50 units in Period 8.
Note: To simplify data handling to include the receipt of orders that have actually been placed in previous periods, the following six-level scheme
can be used. (A number of different techniques are used in practice, but the important issue is to keep track of what is on hand, what is expected to
arrive, what is needed, and what size orders should be placed.)
Find the planned order releases for all items. (Leave no cells blank - be certain to enter "0" wherever required.)
B (2) C (3)
F D E F (2)
Problem 4
A
Our planning horizon is 8 weeks

B (2) C (3)
F D E F (2)
Period 1 2 3 4 5 6 7 8
Item A Gross requirements 20 20 60 50
SS = 0 Net requirements 20 60 50
Q = L4L Planned order receipts 20 60 50
Planned order releases 20 60 50
Item B Gross requirements 40 120 100
Item C Gross requirements 60 180 150
Problem 4
Period 1 2 3 4 5 6 7 8
Item D Gross requirements 180 150
Item E Gross requirements 180 150
Item F Gross requirements 360 80 300 100
SS = 0 Net requirements 360 40 240 40
Q = 100 Planned order receipts 400 100 300 100
Planned order releases 400 100 300 100

Inventory MRP Fatme

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INVENTORY

Dr. Fatme Makssoud

Purchased parts and supplies

Finished Goods -Completely manufactured products ready for sale

Item Pressboard Lead time 1

 Net Requiremen ts   Gross Requiremen ts   Projected Inventory   Scheduled   Safety 

Item Master File:

ITEM: CLIPBOARD PERIOD

Gross Requirements 85 95 120 100 100

ITEM: CLIPBOARD PERIOD

Gross Requirements 85 95 120 100 100

Gross Requirements 85 95 120 100 100

(25 + 175) = 200 units available

Gross Requirements 85 95 120 100 100

115 units available

Gross Requirements 85 95 120 100 100

Gross Requirements 85 95 120 100 100

Following the same logic Gross Requirements in Periods 4 and 5 develop

Following the same logic, the Lapdesk MRP matrix is

ITEM: LAPDESK PERIOD

ITEM: PRESSBOARD PERIOD

ITEM: LAPDESK x1 PERIOD x1 x1

ITEM: PRESSBOARD x2 x2 PERIOD

ITEM: LAPDESK x1 PERIOD x1 x1

ITEM: PRESSBOARD x2 x2 PERIOD

Item Gross Requirements Net Requirements

Planned order receipt

Planned order release

Item A Gross requirements 30

LT = 2 Projected available balance 0 10 10 10 10 10 10 0

Q = L4L Planned order receipts 20

Planned order releases 20

Item C Gross requirements 20

LT = 1 Projected available balance 10 10 10 10 10 40 40 40

Q = 50 Planned order receipts 50

Planned order releases 50

Item B Gross requirements 50 60

LT = 1 Projected available balance 0 0 0 0 0 0 0 0

Q = L4L Planned order receipts 50 60

Planned order releases 50 60

Our planning horizon is 8 weeks

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