Chapter 12: Learning Objectives

• You should be able to:

1. Describe the conditions under which MRP is most appropriate
2. Describe the inputs, outputs, and nature of MRP processing
3. Explain how requirements in a MPS are translated into material requirements
for lower-level items
4. Discuss the benefits and requirements of MRP
5. Explain how an MRP system is useful in capacity requirements planning
6. Outline the potential benefits and some of the difficulties users have
encountered with MRP
7. Describe MRPII and its benefits
8. Describe ERP, what it provides, and its hidden costs

Instructor Slides 12-1

Independent and Dependent Demand
Independent Demand

A Dependent Demand

B(4) C(2)

D(2) E(1) D(3) F(2)

Independent demand is uncertain.

Dependent demand is certain.
 Dependent Demand
• Dependent demand
– Demand for items that are subassemblies or
component parts to be used in the production of
finished goods.
– Once the independent demand is known, the
dependent demand can be determined.
– Dependent demand tends to be sporadic or
“lumpy”
• Large quantities are used at specific points in
time with little or no usage at other times
Instructor Slides 12-3
 Dependent vs Independent Demand

Instructor Slides 12-4

 MRP
• Material requirements planning (MRP):
– A computer-based information system that
translates master schedule requirements for end
items into time-phased requirements for
subassemblies, components, and raw materials.
– The MRP is designed to answer three questions:
1. What is needed? Type
2. How much is needed? quantity
3. When is it needed? time

Instructor Slides 12-5

Overview of MRP

12-6
Instructor Slides
 MRP
• MRP begins with a schedule for finished
goods that is converted into a schedule
of requirements for the subassemblies,
component parts, and raw materials
needed to produce the finished items in
the specified time frame.
 MRP Inputs: Master Schedule
• Master schedule:
– One of three primary inputs in MRP; states which end items are to be
produced, when these are needed, and in what quantities.
– Managers like to plan far enough into the future so they have
reasonable estimates of upcoming demands
– The master schedule should cover a period that is at least equivalent
to the cumulative lead time
– Cumulative lead time
» 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.

Instructor Slides 12-8

 Cumulative Lead Time

Instructor Slides 12-9

 MRP Inputs: Bill of Materials
• Bill of Materials (BOM)
– A listing of all of the assemblies, subassemblies,
parts, and raw materials needed to produce one
unit of a product
– Product structure tree
• A visual depiction of the requirements in a bill of
materials, where all components are listed by levels

Instructor Slides 12-10

 Low-Level Coding
• Low-level coding
– Restructuring the bill of material so that multiple
occurrences of a component all coincide with the
lowest level at which the component occurs

Instructor Slides 12-11

 Example: product structure tree
diagram
• An end item X is composed of two Bs and one C. moreover,
each B requires three Ds and one E, and each D requires
four Es. Similarly, each C is made up of two Es and two Fs.
The items at each level are components of the next level up
and, as in a family tree, are parents of their respective
components. The available inventory on hand of each items
B, C, D, and E are 4, 10, 8, and 60 respectively. Note that
the quantities of each item in the product structure tree refer
only to the amounts needed to complete the assembly at the
next higher level. Use this information to do the following:
a. Draw the product tree diagram
b. Determine the quantities of B, C, D, E, and F needed to
assemble one unit of X
c. Determine the quantities of these components that will
required to assemble 10 Xs, taking into account the quantities
on hand of various components
 Solution: tree diagram
X

C
B(2)

D(3) E E(2) F(2)

B: 2
C: 1
E(4)
D: 2 ×3 = 6
E: 4 ×3 ×2 + 1 ×2 +2 ×1 = 28
F: 2
 Solution: tree diagram
X

B: 2 ×10=20 - 4=16 C C: 1 ×10 =10 -10 = 0

B(2)

D: 3 ×16 = 48 - 8 = 40

D(3) E E(2) F(2)

E: 1 × 16 = 16
B: 16

E(4) C: 0
D: 40
E: 4 × 40 = 160 – 60 = 100
E: 116
F: 0
 MRP Inputs: Inventory Records
Inventory records
 Includes information on the status of each item by time period, called
time buckets
 Information about
– Gross requirements
– Scheduled receipts
– Expected amount on hand
 Other details for each item such as
– Supplier
– Lead time
– Lot size policy
– Changes due to stock receipts and withdrawals
– Canceled orders and similar events

12-15
Instructor Slides
 Assembly Time Chart

Instructor Slides 12-16

 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 bill of materials offset by lead times.
• The quantities that are generated by exploding the bill of
materials are gross requirements; they don’t take into
consideration any inventory that is currently on hand or
due to be received.
• The materials that a firm must actually acquire to meet
the demand generated by the master schedule are the
net material requirements which is calculated as the
gross requirements minus the projected inventory plus a
safety stock.
 MRP Record
Week Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

Gross requirements
• Total expected demand
Scheduled receipts
• Open orders scheduled to arrive
Projected on hand inventory
• Expected inventory on hand at the beginning of each time
period 12-18
Instructor Slides
 MRP Record
Week Number 1 2 3 4 5 6

Gross Requirements

Scheduled Receipts

Projected on hand

Net requirements

Planned-order-receipt

Planned-order release

Net requirements
• Actual amount needed in each time period
Planned-order receipts
• Quantity expected to be received at the beginning of the
period offset by lead time
Planned-order releases
• Planned amount to order in each time period
12-19
Instructor Slides
 MRP: Development
• The MRP is based on the product structure tree diagram
• Requirements are determined level by level, beginning with
the end item and working down the tree
– The timing and quantity of each “parent” becomes the basis for
determining the timing and quantity of the “children” items directly
below it.
– The “children” items then become the “parent” items for the next
level, and so on

Instructor Slides 12-20

 Example: MRP Processing
• A firm that produces wood shutters and bookcases has
received two orders for shutters: one for 100 shutters and one
for 150 shutters. The 100-unit order is due for delivery at the
start of week 4 of the current schedule, and the 150-unit order
is due for delivery at the start of week 8. each shutter consists
of two frames and four slatted wood sections. 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) week1.
determine the size and timing of planned-order releases
necessary to meet delivery requirements under each of these
conditions:
1. lot-for-lot ordering (i.e., order size equal to net requirements)
2. Lot-size ordering with a lot size of 320 units for frames and 70
units for wood sections.
 Example MRP

Instructor Slides 12-22

 Solution: MRP Processing
a. Develop a master schedule:
Week number 1 2 3 4 5 6 7 8
Quantity 100
150
b. Develop a product
Shutter structure tree

Frames (2) Wood sections (4)

c. Using the master schedule, determine gross

requirements for shutters. Next compute net
requirements
Example MRP

12-24
Instructor Slides
Example MRP

12-25
Instructor Slides
 Using the MRP
• Pegging
– The process of identifying the parent items that
have generated a given set of material
requirements for an item

Instructor Slides 12-26

 Updating the System
• An MRP is not a static document
– As time passes
• Some orders get completed
• Other orders are nearing completion
• New orders will have been entered
• Existing orders will have been altered
– Quantity changes
– Delays
– Missed deliveries

Instructor Slides 12-27

 MRP Outputs: Primary
• Primary Outputs
– Planned orders
• A schedule indicating the amount and timing of future
orders
– Order releases
• Authorizing the execution of planned orders
– Changes
• Revisions of the dates or quantities, or the cancellation of
orders

Instructor Slides 12-28

 MRP Outputs: Secondary
Secondary Outputs
 Performance-control reports
Evaluation of system operation, including deviations from plans and
cost information
– e.g., missed deliveries and stockouts
 Planning reports
Data useful for assessing future material requirements
– e.g., purchase commitments
 Exception reports
Data on any major discrepancies encountered
– E.g., late and overdue orders, excessive scrap rates, requirements for
nonexistent parts

Instructor Slides 12-29

 Other MRP Considerations:
Lot Sizing Rules
• Lot-for-Lot (L4L) ordering
– The order or run size is set equal to the demand for that period
– Minimizes investment in inventory
– It results in variable order quantities
– A new setup is required for each run
• Economic Order Quantity (EOQ)
– Can lead to minimum costs if usage of item is fairly uniform
• This may be the case for some lower-level items that are common to different
‘parents’
• Less appropriate for ‘lumpy demand’ items because inventory remnants often result
• Fixed Period Ordering
– Provides coverage for some predetermined number of periods

Instructor Slides 12-30

 Other MRP Considerations:
Safety Stock
• Safety Stock
– Theoretically, MRP systems should not require safety stock
– Variability may necessitate the strategic use of safety stock
• A bottleneck process or one with varying scrap rates may cause
shortages in downstream operations
• Shortages may occur if orders are late or fabrication or assembly
times are longer than expected
• When lead times are variable, the concept of safety time is often
used
– Safety time
» Scheduling orders for arrival or completions sufficiently ahead of
their need that the probability of shortage is eliminated or
significantly reduced

Instructor Slides 12-31

 MRP in Services
• Food catering service
– End item  catered food
– Dependent demand  ingredients for each
recipe, i.e., bill of materials
• Hotel renovation
– Activities and materials “exploded” into
component parts for cost estimation and
scheduling

Instructor Slides 12-32

 MRP Benefits
• Enables managers to easily
– determine the quantities of each component for a given order size
– To know when to release orders for each component
– To be alerted when items need attention
• Additional benefits
– Low levels of in-process inventories
– The ability to track material requirements
– The ability to evaluate capacity requirements
– A means of allocating production time
– The ability to easily determine inventory usage via backflushing
– Exploding an end item’s BOM to determine the quantities of the
components that were used to make the item

Instructor Slides 12-33

 MRP Requirements
• To implement an effective MRP system requires:
– A computer and the necessary software to handle computations and
maintain records
– Accurate and up-to-date
• Master schedules
• Bills of materials
• Inventory records
– Integrity of data files

Instructor Slides 12-34