MEN AND MATERIALS

MANAGEMENT - II
UNIT 3
 UNIT OBJECTIVES
Understand the concept of Material
requirements planning (MRP)
Explain the different types of lot
sizing techniques
Understand the use of safety
stock in MRP
Analyse the various aspects of data
requirements and management
Inventory ?
Inventory means ………………………………………..

any stock of direct or

indirect material
stocked in order to meet
both expected and
unexpected demand in
the future
 stock of material

It’s a
stock of materialused to satisfy
customer demand or support the production of goods
or services
The study of inventories is
necessary as it is an
organizational asset that
needs to be
acquired
allocated
and controlled
inventories influence sales and revenue generation
 crores
1 Value of inventory as on 1st April 2010 12.40
2 Value of inventory as on 31st March 2011 17.60
3 Average inventory holding during the year
15.00
4 Materials consumed during the year
60.00
5 Average inventory as no: of month's consumption
3months
6 Inventory turn over rate
4
Sl DetaiIs Company Company Company
No: X Y Z

I. Sales 100.00 100.00 100.00

2. Gross Profit @ 12.5% 12.50 12.50 12.50
3. Materials Consumed 50.00 50.00 50.00
4. Inventories held in terms of Months consumption 1 6 12
Turnover Rate 12 2 1
Value of inventories held
4.20 25.00 50.00
5. Inventory carrying cost @ 25% of value of inventory 1.05 6.25 12.50
6. Net profit 11.45 6.25 0
 INVENTORY CONTROL
WHY INVENTORY

buffer stock
decoupling
production smoothing
material handling
bulk purchases
e x c e s s i n v e n t o r y
 Inventory Management
The basic purpose of
inventory management is
to control inventory by
managing
flow of material
It provides information for
efficient management of
the flow of material
 Inventory Management

setting policies and controls for

monitoring the inventory levels
 Inventory Management

It determines the level of

stocks that ought to be
maintained and
replenished based on
the quantity of the
orders
An inventory management system is involved :

• Planning
• Acquisition
• Stock keeping
• Disposition
 materials requirements planning

MRP was developed as a concept that

questioned many of the existing concepts
and techniques of inventory management
 group discussion
Mobile manufacturing unit
Production 250 set per day
battery stock as on today 10000
lead time for supply of battery 25 days

When will you place order for battery and how much quantity
Materials requirements planning

These techniques were built on

order point (OP) concepts or
the stock replenishment
concept
 Materials requirements planning

MRP concept: restoration of inventory to its previous state

 Materials requirements planning

The paradox of IM states that:

if you cannot match inputs to outputs from the

inventory, you can never control inventory; however,
if you can match inputs to the outputs, the less is
the need for inventory.
 Order point versus MRP

There are 2 ways in which

inventories can be managed in an
organization.
One is material requirements method
and the other is order point method
 MRP OP
• MRP refers to a time-phased • As opposed to MRP, demand is treated
replenishment approach in which by OP systems at all echelons in the
inventory status’s reviewed and new supply chain as independent.
shipment plans are generated
periodically. • Order point attempts to protect users
against forecast errors and other
• Time phased logic is employed for unexpected occurrences by adding a
anticipating requirements for upstream cushion called ‘safety stock’.
inventory echelons, while forecasting is
employed for anticipating requirements • OP systems are deemed reactive,
at independent demand level. because of lack of mechanisms for
anticipating demand changes which
sometimes results in inadequate
• MRP systems are usually deemed performance in situations.
proactive. It works better than
conventional OP systems in cases • When OP systems are used, relatively
where supply chain integration is lesser information coordination is
viable. required.
I N V E N T O R Y

OR

LIABILITY
I N V E N T O R Y

OR the balance that can be

attained between

the carrying costs of

holding excessive inventory
LIABILITY and the opportunity cost of
a lost sale
 how inventory being built up?

Poor manufacturing methods

inadequate production planning
inaccurate forecasting of goods

resulting insufficient working capital

companies that can operate with lesser inventory
are considered to be operating more efficiently
MRP METHODOLOGY

• Master production scheduling (MPS)

MPS represents the most important plan in the resource management system.
- It meets the demand for individual products in the product group.
- It shows when incoming sales orders can be scheduled into production.
- It also shows when each shipment can be scheduled for delivery.
- It takes into account current backlogs so that production and delivery
schedules are realistic.
ag gregate planning
 rough-cut capacity planning

The process of translating aggregate plans into plans

for individual products is called desegregation
 rough-cut capacity planning

To generate the necessary details, planners

disaggregate the higher level production plans and
transform them into a more detailed schedule.
 rough-cut capacity planning

A trial master schedule is developed. This is called

rough-cut capacity planning.
 rough-cut capacity planning

The rough-cut capacity plan gives details about the quantities

and timing of the planned production of a product
 Aggregate
Planning

Disaggregation

Rough cut capacity

planning

Master
Schedule
Disaggregation
Framework for
Manufacturing Plans
and Schedules
 The rough-cut capacity plan provides 3 outputs

• The master production schedule (MPS)

• the time fences (setting various time intervals for
commitments)
• the available-to-promise inventory, which is
based on the projected in-hand inventory
(inventory available for the next planning period).
 Inputs Outputs
Beginning inventory
Projected inventory

Master
Forecast Scheduling Master production schedule

Committed ATP: Uncommitted inventory

Customer orders
 Beginning
Inventory
JUNE JULY
64 1 2 3 4 5 6 7 8
Customer Orders
(committed) 33 30 30 30 40
Projected on-hand
inventory 31 1 -29
short medium long
 Economic,
Corporate competitive, Aggregate
strategies and political demand
and policies conditions forecasts

Establishes operations
Business Plan
and capacity strategies

Establishes
Aggregate plan
operations capacity

Master schedule Establishes schedules

for specific products
 Product depth is an
important factor in the
scope and duration of MRP
data processing job.
 Material requirements planning is able to plan
schedules through the linkages provided between
the parent items and the components in the BoM
 Bike

Frame Wheel
first level
Assy Assy

Components Frame Wheel Tires second level

Hubs & Spokes

Rims third level
some snaps from real scenario…..
BMW M3 V8
 ITEM PART NAME STD MATERIALS
1 BODY SUBASSEMBLY CARBON STEEL
2 NOZZLE O-RING VITON
STAINLESS STEEL WITH
3 NOZZLE SUBASSEMBLY SOFT SEAT
4 DISK SUBASSEMBLY STAINLESS STEEL
5 SET SPRING STAINLESS STEEL
6 BONNET O-RING BUNA N
7 BONNET BOLTS ALLOY STEEL
8 ADJUSTMENT SCREW STAINLESS STEEL
9 ADJUSTMENT BUSHING STAINLESS STEEL

10 BONNET SUBASSEMBLY CARBON STEEL

11 ADJUSTMENT SCREW O-RING BUNA N

12 WASHER CARBON STEEL
13 LOCKNUT CARBON STEEL
14 CLOSED CAP ALUMINUM ALLOY
9100 SERIES THREADED J, K, L & M ORIFICES
In an MRP system, the major roles of the BoM are:

• Specifying how products are built

• Scheduling and assembly of products,
sub-assemblies and components.
• Identifying optional product features for improved forecasting
• Stating the MPS in the fewest possible no of items.
• Planning subassembly priorities
• Product costing
• Efficient computer file storage and file maintenance.
In order to improve the quality of
forecasting and simplify master
production scheduling, its
possible to plan for sets of parts,

assemblies or sub-assemblies,
commonly called modules
In Modularizing , the end item BoM are rearranged grouping
components into useful sets, with 2 diff objectives:

• disentangling combinations of optional

prod features.
• segregating components common to
many parents from those unique to
one parent or peculiar to some
function.
 Pseudo bills of material
The objective of modularization is to
have the smallest possible no of items
to forecast and plan for in master
schedule. A technique of creating
pseudo bills of material or superbills or
S-bills is often used to meet this
objective
Pseudo bills are artificial entities created
solely to facilitate planning by
reducing the no of items to be
planned
A useful pseudo bill is the
kit number or K- number.

The objective with K bills and S-bills is the

same: to assign a single new identity code
to sets of items that constitute a logical
planning group and employing the format
of a BoM, to relate such items to an MPS
requirement.
5 major inputs to determine the correct inventory

- Master production schedule (MPS)

- Orders for externally manufactured components
- Forecast of items that have independent demand
- The product structure records ( BoM)
- Inventory status records

The MRP system cannot function without these basic

inputs. All MRP system outputs are produced by
processing inputs from these 5 major sources.
• The master production schedule is the plan that the company
develops for production, staffing, inventory etc. and is the
primary input for MRP. The defining parameter of MPS is its
planning horizon.

• External demands for components takes many forms. These

may include intermediate products, spare part orders,
interplant orders, demand for components needed by
marketing/sales for promotions, destructive testing etc.

• Forecasts of independent demand for components are usually

made outside the MRP program. Forecast is reviewed against
the planners’ input and reasonable quantities are added to
gross requirements.
 Determining gross and net requirements
The term ‘ gross requirement’ has a specific
meaning in MRP; it’s the quantity of an item
needed to support the processing of a
parent order or orders.

This may or may not be the total quantity of

the item that appears in the end product.

In MRP, the gross requirement is the

demand at each item level, rather than
demand at product or master production
schedule end-item level.
 The net requirements in an MRP program are calculated
from the gross requirements. Relationship is as follows:

Net requirements = Gross req – Inventory(in hand) – scheduled receipts.

The common term ‘scheduled receipts’ used in formula

above indicates the released and not the planned orders.
 Procurement of
raw material D Fabrication
of part E
Subassembly A
Procurement of Final assembly
raw material F and inspection
Procurement of
part C

Procurement of
part H
Subassembly B

Procurement of Fabrication
raw material I of part G

1 2 3 4 5 6 7 8 9 10 11
g r o u p l e a r n i n g

LOT SIZING AND SAFETY STOCK

 LOT SIZING AND SAFETY STOCK

Lot sizing is the best

researched aspect of material
requirements planning, as its
meant to determine planned
order quantities.
 LOT SIZING AND SAFETY STOCK

Lot sizing is also another

reason why the top-to-bottom,
level-by-level procedure must
be followed
 Many distinct lot-sizing techniques are available

• Fixed order quantity (FOQ)

• Economic order quantity (EOQ)
• Period order quantity (POQ)
• Lot for lot ordering (L4L)
• Fixed period requirements (FPR)
• Least unit cost (LUC)
• Least total cost (LTC)
• Economic part period (EPP)
• Wagner-whitin algorithm ( W-W method)
1. Fixed order quantity:

The FOQ policy maintains the same order

quantity each time an order is issued. This
maybe specified for any item under an
MRP system, but in practice, limited to a
few items with high ordering costs.
2. Economic order quantity

This model was developed by Ford w. Harris in 1915. it is the oldest

technique in the field and is still an aid to sound planning. This
technique is not suitable for discrete, discontinuous, non-uniform
demand situations and is generally used for continuous and
assembly line type operations only.
3. Period order quantity

The POQ technique, sometimes called the

economic time cycle, uses the logic of EOQ. It is
used in discrete demand situations. EOQ is
computed with the standard formula, in which
the future demand is the MRP net requirement
schedule of the item.
4. Lot for Lot ordering
Its the simplest of all the different procedure,
though it is a special case of POQ. Sometimes
its also called discrete ordering. It provides
period-by-period coverage of net
requirements and the planned order quantity
always equals the quantity of net
requirements being covered.
5. Fixed Period Requirements

This is a converse technique to the FOQ. It

determines the supply not by forecasting but
by adding up discrete future planned net
requirements. This technique is equivalent to
the old rule of ordering X months’ supply
used in some stock replenishment systems.
6. Least unit cost

LUC provides an iterative approach to

lot size determination, i.e. it uses a
trial-and-error approach for
determining the order quantity. Main
drawback however of LUC is that it
considers only one lot at a time.
7. Least total cost

This technique is based on the

rationale that the sum of the set-up
and inventory carrying costs (total
cost) for all lots within the planning
horizon should be minimized. The LTC
technique, is biased towards larger
order quantities.
8. Economic part period

This technique is also called the part-period

balancing (PPB) method. It employs the same
logic as LTC, but its computation is simpler,
avoiding the laborious iterative computations
of LTC. The measure of the least total cost is
the Economic part period.
9. Wagner-Whitin algorithm

This algorithm is a dynamic programming approach

to determine optimal lot sizes, in discrete,
discontinuous and non-uniform demand situations.
W-W method requires a high computational
capability. It minimizes the combined total cost of set
up and of carrying inventory.
Scrap allowances :
A scrap allowance, or shrinkage factor, is a quantity added to
compensate for anticipated process losses or scrap.
Scrap allowances are important in discrete lot sizing.
The scrap allowance is usually based on past experience and is
at best a guess, and will normally vary from item to item.
The proper way to handle SA in the time phased MRP record is
to include them in the planned-order quantities, i.e. the full
quantity.
There are 4 factors that affect the performance of lot-sizing
techniques. They are:

• Variability of period
demands
• Length of the planning
horizon
• Size of the planning period
• And ratio of ordering and
unit costs.
Planning horizon
length of time over which to
plan the production schedule.

Time period (or time bucket)

smallest unit of time in which
end-item production is
schedule.
Safety stock Order point MRP assumes
that demands during replenishment periods
are uniform and can be predicted accurately
Since there are often fallacies in their basic
assumptions, safety stock, or buffer stock,
needs to be maintained.
This is a cushion on inventory in excess of
the planned requirements to help meet
unplanned needs.
 DATA REQUIREMENTS AND MANAGEMENT

Files and Databases

All MRP systems used
today, are based on
computer programs.
Computer files constitute
the foundation on which
the MRP structure is built
 DATA REQUIREMENTS AND MANAGEMENT

Files and Databases

Dealing with and managing
data is crucial to ensure the
proper working of the
system. It is a major part of
the implementation strategy
in MRP.
 DATA REQUIREMENTS AND MANAGEMENT

Files and Databases

Therefore, file data quality
and integrity underlies
effective operation of MRP.
File data has to be accurate,
timely, and accessible.
 There are 2 classes of data on
which computer programs operate:
data input by transactions
and
data in files
• Data file management functions consist of the following :
- File creation
- File organization
- File access
- File updating (transaction process)
- File maintenance
- Inquiry capability
- Report generation
Updating Inventory Records

Any event that changes the inventory status is called an

inventory transaction. Inventory transactions modify
the inventory status of items to reflect its true status.
Updating Inventory Records

There are several types of entries that are required for

the program to process inventory records:
Inventory transactions, pseudo-transactions, user-
controlled exceptions to regular processing logic, final
assembly schedule entries, error-correction entries and
file-maintenance entries.
Competition is forcing companies to continuously improve their
product/service quality, increase productivity, lower costs and
increase the speed of new product introductions.

To maintain one’s competitive edge in the future, managements

are increasingly favoring accuracy over sophistication in their
information systems.

The objective of data integrity is to find and eliminate the

causes of errors.
Uses of MRP outputs :

Outputs of MRP relate to 2 areas :

the production schedule &
the purchasing schedule.

These are generated by MRP if it sees an imbalance of

supply and demand.
MRP system outputs are provided through

i The Order Action Report :

This indicates the orders that are to be
released during the current time period
and the orders that are to be cancelled
ii The Open orders report:

This shows which orders are to

be expedited or de-expedited.

This report is an exception

report listing only those open
orders for which action is
necessary
 The primary outputs of MRP

- Recommendations of planned order releases

- Rescheduling notices changing open-order due dates
- Notices to cancel or suspend open orders
- Item-status-analysis backup data
- Future planned order schedules.
There are 6 categories of outputs by functional use.

• 1.inventory order action

• 2.replanning order priority
• 3.safeguard of priority integrity
• 4.capacity requirements planning
• 5.perfromance control
• 6.reproting errors, incongruities and out-of-limits
situations.
 MRP INPUTS AND OUTPUTS
• Information needed for • Information obtained
MRP from MRP
- Demand for all products. - Planned orders:
replenishment orders be
released at a future time.
- Lead times for finished
- Order release notices:
goods, parts and raw notices to release planned
materials orders.
- Action notices: notices to
- Lot sizing policies for all expedite, de-expedite or
parts. cancel orders.
 MRP INPUTS AND OUTPUTS

• Opening inventory • Priority notices: info

levels. regarding which orders
should be given priority.

• Safety stock
• Inventory status
requirements information

• Any orders previously • Performance reports such

placed but which have as inactive items, actual
not arrived yet. lead times and late orders.
Nowadays, speed and
flexibility are becoming
increasingly important for
competing successfully in
the market place.
MRP is the primary element in the
core system for planning and
controlling manufacturing logistics
and, therefore, it is in interest of the
company to ensure that the system
remains healthy.
PLANNING vs EXECUTION
 APPLICATION: PLANNING vs EXECUTION

Planning and execution have

different purposes. Planning
determines the resources needed
to carry out plans, while execution
applies the available resources to
serve customers best.
 APPLICATION: PLANNING vs EXECUTION

Planning data is soft data, data that may

look precise but often is changed.
 APPLICATION: PLANNING vs EXECUTION

Execution data is hard data, that which needs to

be precise. This is very important as planning
data is often very different from execution data.
Planning involves future activities and assigns
numbers to quantify them and timing to execute them
Execution concentrates
on the present or the
immediate future,
attempting to convert
plans into realties.
MRP is basically a planning tool.
It focuses on the planning phase
by assisting the execution phase
in providing reliable and relevant
data. Too often, MRP users
attempt to use MRP to do both,
though it is not a viable option.
Planning is intended to determine the
amount of resources needed to
execute the plans. Execution applies
resources currently available to
produce what customers want in
immediate future.
It should also be kept in mind that however well
planning and execution of plans are done, there are
bound to be problems. Plans will never be perfect
This brings 2 importannt issues to the fore:

First, planning must anticipate the problems involved in

execution and attempt to minimize its effects.

Second, execution must realize that plans are not perfect

and include actions to get resources organized better.
• Role of inventory planners

Inventory controllers are

responsible for planning
and controlling a specific
group of items.
People performing these
tasks are known as
inventory analysts.
Their primary
responsibilities relate to
execution of the plan.
• Role of inventory planners

Primary activities include the following:

- Release orders for production

- Send requisitions to purchasing
- Change order and requisition quantities or
cancel them.
- Reschedule open shop orders
- Request changes in open purchase order timing
- Approve requests for unplanned stock disbursements
- Handling engineering changes in bills of Material of
items under their control.
- Investigating and correcting errors in inventory records
- Participating in analyses of cycle inventory counts
- Requesting changes in MPS and the like
MRP is a powerful tool for inventory controllers who interact
continuously with MRP, receive its principal outputs, and take
action based on the data it supplies.
Most of these tasks are routine and self-explanatory.
MRP Inputs MRP Processing MRP Outputs

Changes
Order releases
Master
schedule Planned-order
schedules
Primary
reports Exception reports
Bill of Planning reports
materials MRP computer Secondary
Performance-
programs reports control
reports

Inventory
records Inventory
transaction
 UNIT OBJECTIVES
Understand the concept of Material
requirements planning (MRP)
Explain the different types of lot
sizing techniques
Understand the use of safety
stock in MRP
Analyse the various aspects of data
requirements and management
q u e s ti o n s
thank you…………….
[email protected] 9447173004