• Material requirements planning

What is
(MRP) systems have been installed
MRP? almost universally in manufacturing
firms, even those considered small.
The reason is that MRP is a logical,
easily understandable approach to
the problem of determining the
number of parts, components, and
materials needed to produce each
end item. MRP also provides the
schedule specifying when each of
these materials, parts, and
components should be ordered or
produced.
Manufacturing Resource Planning(MRP II)
• However, as computer power grew and applications
expanded, so did the breadth of MRP. Soon it considered
resources as well as materials and was called MRP II,
standing for manufacturing resource planning. A complete
MRP program included 20 or so modules controlling the
entire system from order entry through scheduling,
inventory control, finance, accounting, accounts payable,
and so on. Today MRP impacts the entire system and
includes just-in-time, kanban, and computer- integrated
manufacturing (CIM).
Dependent
Demand
• Dependent
demand is
caused by the
demand for a
higher-level
item.

Examples:
Tires, wheels,
and engines
are dependent
demand items
based on the
demand for
automobiles.
Independent
Demand
• Independent
demand is the
demand for a
finished
product, which
is being ordered
by an outside
party.

Example:
Cars (finish
product)
Where MRP can be used?
• MRP is most valuable in industries where a number of products are made in
batches using the same productive equipment.
• The list in Exhibit 16.1 includes examples of different industry types and the
expected benefit from MRP. As you can see in the exhibit, MRP is most
valuable to companies involved in assembly operations and least valuable to
those in fabrication.

One more point to note: MRP does not work well in companies that pro- duce
a low number of units annually. Especially for companies producing complex,
expensive products requiring advanced research and design, experience has
shown that lead times tend to be too long and too uncertain, and the product
configuration too complex. Such companies need the control features that
network scheduling techniques offer.
A SIMPLE MRP EXAMPLE
• Before discussing details of an MRP system, we briefly explain how quantities
are calculated, lead times are offset, and order releases and receipts are
established. Suppose that we are to produce Product T, which is made of two
parts U and three parts V. Part U, in turn, is made of one part W and two
parts X. Part V is made of two parts W and two parts Y.
Exhibit 16.2 shows the product structure tree of Product T. By simple
computation, we calculate that if 100 units of T are required, we need
Exhibit16.3showswhichitemsareneededandwhen.WehavethuscreatedamaterialrequirementsplanbasedonthedemandforProductT,theknowledgeofhowTismade,andthetimeneededtoobtaineachpart.

Fromthissimpleilustration,itisapparentthatdevelopingamaterialrequirementsplanmanuallyforthousandsorevenhundredsofitemswouldbeimpractical-agreatdealofcomputationisneeded,andatremendousamountofdatamustbeavailableabouttheinventorystatus(numberofunitsonhand,onorder,andsoforth)andabouttheproductstructure(how
theproductismadeandhowmanyunitsofeachmaterialarerequired).Becausewearecompelledtouseacomputer,ouremphasisfromhereoninthischapteristodiscussthefilesneededforacomputerprogramandthegeneralmakeupofthesystem.However,thebasiclogicoftheprogramisessentialythesameasthatforoursimpleexample.
MASTER PRODUCTION SCHEDULE
• Generally, the master schedule deals with end items. If the end item is quite
large or quite expensive, however, the master schedule may schedule major
subassemblies or components instead.

• All production systems have limited capacity and limited resources. This
presents a chal- lenging job for the master scheduler. Although the aggregate
plan provides the general range of operation, the master scheduler must
specify exactly what is to be produced. These deci- sions are made while
responding to pressures from various functional areas, such as the sales
department (meet the customer's promised due date), finance (minimize
inventory), manage- ment (maximize productivity and customer service,
minimize resource needs), and manufac- turing (have level schedules and
minimize setup time)
To ensure good master scheduling, the master scheduler (the human being) must;

• Include all demands from product sales, warehouse replenishment,

spares, and inter-plant requirements.

• Never lose sight of the aggregate plan.

• Be involved with customer order promising.

• Be visible to all levels of management.

• Objectively trade off manufacturing, marketing, and engineering

conflicts.

• Identify and communicate all problems.

Exhibit 16.4 shows an aggregate plan for the total number of mattresses planned per
month, without regard for mattress type. The lower portion shows a master production
schedule specifying the exact type of mattress and the quantity planned for production by
week. The next level down (not shown) would be the MRP program that develops detailed
schedules showing when cotton batting, springs, and hardwood are needed to make the
mattresses.
Master production schedule(MPS)
• The master production schedule (MPS) is the time-phased plan specifying
how many and when the firm plans to build each end item.

For example, the aggregate plan for a furniture company may specify the total
volume of mattresses it plans to produce over the next month or next quarter.

The MPS goes the next step down and identifies the exact size mattresses
and their qualities and styles. All of the mattresses sold by the company
would be specified by the MPS. The MPS also states period by period
(usually weekly) how many and when each of these mattress types is
needed.

Still further down the disaggregation process is the MRP program, which
calculates and schedules all raw materials, parts, and supplies needed to
make the mattress specified by the MPS.
TIME FENCES
• The purpose of time fences is to maintain a reasonably controlled flow
through the production system. Unless some operating rules are established
and adhered to, the system could be chaotic and filled with overdue orders
and constant expediting.
• Exhibit 16.5 shows an example of a master production schedule time
fence. Management defines time fences as periods of time having
some specified level of opportunity for the customer to make
changes. (The customer may be the firm's own marketing
department, which may be considering product promotions,
broadening variety, or the like.) Note in the exhibit that for the next
eight weeks, this particular master schedule is frozen. Each firm has
its own time fences and operating rules. Under these rules, frozen
could be defined as anything from absolutely no changes in one
company to only the most minor of changes in another. Moderately
firm may allow changes in specific products within a product group so
long as parts are available. Flexible may allow almost any variations
in products, with the provisions that capacity remains about the same
and that there are no long lead time items involved.
Available to promise
• Some firms use a feature known as available to promise
for items that are master scheduled. This feature identifies
the difference between the number of units currently
included in the master schedule and firm customer orders.
For example, assume the master schedule indicates that
100 units of Model 538 mattress are going to be made
during week seven. If firm customer orders now only
indicate that 65 of those mattresses have actually been
sold, the sales group has another 35 mattresses
"available to promise" for delivery during that week. This
can be a powerful tool for coordinating sales and
production activities.
MATERIAL REQUIREMENTS
PLANNING (MRP) SYSTEMS
• Material requirements planning (MRP) system creates
schedules identifying the specific parts and materials
required to produce end items, the exact numbers
needed, and the dates when orders for these materials
should be released and be received or completed with- in
the production cycle. MRP systems use a computer
program to carry out these operations. Most firms have
used computerized inventory systems for years, but they
were independent of the scheduling system; MRP links
them together.
PURPOSES OF MRP
• The main purposes of a basic MRP system are to
control inventory levels, assign operating
priorities for items, and plan capacity to load the
production system. The theme of MRP is "getting
the right materials to the right place at the right
time.
MATERIAL REQUIREMENTS PLANNING
SYSTEM STRUCTURE
• The material requirements planning portion of manufacturing
activities most closely interacts with the master schedule, bill of
materials file, inventory records file, and the output reports as shown
in Exhibit 16.6.

• Each facet of Exhibit 16.6 is detailed in the following sections, but

essentially, the MRP system works as follows: Orders for products
are used to create a master production schedule. which states the
number of items to be produced during specific time periods. A bill of
materials file identifies the specific materials used to make each item
and the correct quantities of each. The inventory records file contains
data such as the number of units on hand and on order. These three
sources-master production schedule, bill of materials file, and
inventory records file-become the data sources for the material
requirements program, which expands the production schedule into a
detailed order scheduling plan for the entire production sequence.
DEMAND FOR PRODUCTS
• Product demand for end items comes primarily from two main
sources.

The first is known customers who have placed specific orders, such
as those generated by sales personnel, or from inter department
transactions. These orders usually carry promised delivery dates.
There is no forecasting involved in these orders-simply add them up.

The second source is forecast demand. These are the normal

independent-demand orders; the forecasting models presented in
Chapter 13 can be used to predict the quantities. The demand from
the known customers and the forecast demand are combined and
become the input for the master production schedule.
BILL OF MATERIALS FILE
• The bill of materials (BOM) file contains the complete
product description, listing not only Bill of materials (BOM)
the materials, parts, and components but also the
sequence in which the product is created. This BOM file is
one of the three main inputs to the MRP program. (The
other two are the master schedule and the inventory
records file.)

• The BOM file is often called the product structure file or

product tree because it shows how a product is put
together. It contains the information to identify each item
and the quantity used per unit of the item of which it is a
part.
INVENTORY RECORDS FILE
• The inventory records file can be quite lengthy. Exhibit 16.10 shows the
variety of information contained in the inventory records. The MRP program
accesses the status segment of the record according to specific time periods
(called time buckets in MRP slang). These records are accessed as needed
during the program run.
INVENTORY TRANSACTION FILE
• The inventory status file is kept up to date by
posting inventory transactions as they occur.
These changes occur because of stock receipts
and disbursements, scrap losses, wrong parts,
canceled orders, and so forth.
MRP COMPUTER PROGRAM
• The material requirements planning program operates
using information from the inventory records, the master
schedule, and the bill of materials. The process of
calculating the exact requirements for each item managed
by the system is often referred to as the "explosion"
process.

Working from the top level downward in the bill of

materials, requirements from parent items are used to
calculate the requirements for component items.
Consideration is taken of current on-hand balances, and
orders that are scheduled for receipt in the future.
 The following is a general description of the MRP explosion process:
1. The requirements for level 0 items, typically referred to as "end items," are retrieved from the master schedule. These
requirements are referred to as "gross requirements" by the MRP program. Typically, the gross requirements are scheduled in
weekly time buckets.

2. Next, the program uses the current on-hand balance, together with the schedule of orders that will be received in the future
to calculate the "net requirements." Net requirements are the amounts that are needed week by week in the future over and
above what is currently on hand or committed to through an order already released and scheduled.

3. Using net requirements the program calculates when orders should be received to meet these requirements. This can be a
simple process of just scheduling orders to arrive according to the exact net requirements or a more complicated process
where requirements are combined for multiple periods. This schedule of when orders should arrive is referred to as "planned-
order receipts."

4. Since there is typically a lead time associated with each order, the next step is to find a schedule for when orders are
actually released. Offsetting the "planned-order receipts" by the required lead time does this. This schedule is referred to as
the
"planned-order release."

5. After these four steps have been completed for all the level zero items, the program moves to level 1 items.

6. The gross requirements for each level 1 item are calculated from the planned-order release schedule for the parents of
each level 1 item. Any additional independent demand also needs to be included in the gross requirements.

7. After the gross requirements have been determined, net requirements, planned-order receipts, and planned-order releases
are calculated as described in steps 2-4 above.

8. This process is then repeated for each level in the bill of materials.
NET CHANGE SYSTEMS
• Net change systems are "activity" driven
and requirements and schedules are
updated whenever a transaction is
processed that has an impact on the item.

Net change enables the system to reflect in

"real time" the exact status of each item
managed by the system.
AN EXAMPLE USING MRP
• Ampere, Inc., produces a line of electric meters installed
in residential buildings by electric utility companies to
measure power consumption. Meters used on single-
family homes are of two basic types for different voltage
and amperage ranges. In addition to complete meters,
some subassemblies are sold separately for repair or for
changeovers to a different voltage or power load. The
problem for the MRP system is to determine a production
schedule to identify each item, the period it is needed, and
the appropriate quantities. The schedule is then checked
for feasibility, and the schedule is modified if necessary
FORECASTING DEMAND
• Demand for the meters and components originates from two sources: regular
customers that place firm orders and unidentified customers that make the
normal random demands for these items.
Exhibit 16.11 shows the requirements for meters A and B and Subassembly D
for a three-month period (months three through five). There are some "other
parts" used to make the meters.
DEVELOPING A MASTER PRODUCTION
SCHEDULE
• Exhibit 16.12 shows the trial master schedule that we use under these
conditions, with demand for months 3, 4, and 5 listed in the first week of each
month, or as Weeks 9, 13, and 17. For brevity, we will work with demand
through Week 9. The schedule we develop should be examined for resource
availability, capacity availability, and so on, and then revised and run again.
We will stop with our example at the end of this one schedule.
BILL OF MATERIALS (PRODUCT
STRUCTURE) FILE
• The product structure for meters A and B is shown in Exhibit 16.13 in the
typical way using low-level coding, in which each item is placed at the lowest
level at which it appears in the structure hierarchy. Meters A and B consist of
a common subassembly C and some parts that include part D. To keep things
simple, we will focus on only one of the parts, part D, which is a transformer.
• From the product structure, notice that part D (the transformer) is used in
subassembly C (which is used in both meters A and B). In the case of meter
A, an additional part D (trans- former) is needed. The "2" in parentheses next
to D when used to make a C indicates that two D's are required for every C
that is made. The product structure, as well as the indented parts list in
Exhibit 16.14, indicates how the meters are actually made. First subassembly
C is made and potentially these are carried in inventory. In a final assembly
process, meters A and B are put together and in the case of meter A an
additional part D is used.
INVENTORY RECORDS (ITEM MASTER) FILE
• For this example, the pertinent data include the on-hand inventory at the start
of the program run, safety stock requirements, and the current status of
orders that have already been released (see Exhibit 16.15).
PERFORMING THE MRP CALCULATIONS (LOGIC OF
THE MRP COMPUTER PROGRAM)
• Conditions are now set to perform the MRP calculations: End-item requirements have
been presented in the master production schedule, while the status of inventory and
the order lead times are available, and we also have the pertinent product structure
data. The MRP calculations (often referred to as an explosion) are done level by level,
in conjunction with the inventory data and data from the master schedule.
IMPROVEMENTS IN THE MRP SYSTEM
• MRP, as it was originally introduced and as we have discussed it so
far in this chapter, considered only materials. Revising the schedule
because of capacity considerations was done external to the MRP
software program. Often, the schedule needs revision because of
capacity constraints requiring the MRP program to be run again. (The
Nichols case at the end of this chapter requires that the schedule be
revised manually in Question 2 of the case.) The response to all other
elements and resource requirements were not part of the system.
Later refinements included the capacity of the work centers as part of
the software program. Feedback of information was also introduced.
We give an example of capacity planning at a work center and a
closed-loop system. Following that we discuss MRP II systems.
COMPUTING WORK CENTER LOAD
• Each work center is generally a functionally defined center so that jobs routed
to it require the same type of work and the same equipment. From the work
center view, if there is adequate capacity, the issue is just sequencing
because all jobs will be done on time. If there is insufficient capacity, however,
the problem must be resolved because some jobs will be late unless the
schedule is adjusted.
• Exhibit 16.18 shows a loading representation of Work Center A for the three weeks.
The scheduled work exceeds capacity for Week 11. There are several options
available:
1. Work overtime.

2. Select an alternative work center that could perform the task.

3. Subcontract to an outside shop.

4. Try to schedule part of the work of Week 11 earlier into Week 10, and delay part of the
work into Week 12.

5. Renegotiate the due date and reschedule.

• An MRP program with a capacity requirements planning module allows rescheduling to

try to level capacity. Two techniques used are backward scheduling and forward
scheduling-the fourth option on the preceding list. The objective of the master
scheduler is to try to spread the load in Exhibit 16.18 more evenly to remain within the
available capacity
•

Recognize that the input to the MRP system is the master production schedule, as was
stated earlier in the chapter. The MRP program does an explosion of all the parts,
components, and other resources needed to meet this schedule. The capacity requirements
planning module then checks the MRP output to see if sufficient capacity exists. If it does
not, feedback to the MRP module indicates that the schedule needs to be modified.
Continuing through the MRP system. orders are released to the production system by
executing the capacity and material plans. From that point on, it is a matter of monitoring,
data collection, completing the order, and evaluating results. Any changes in production,
capacity, or material are fed back into the system.
CLOSED-LOOP MRP
• When the material requirements planning (MRP) system has information
feedback from its module outputs, this is termed closed-loop MRP. Closed-
loop MRP is defined as

• A system built around material requirements that includes the additional

planning functions of sales and operations (production planning, master
production scheduling, and capacity requirements planning). Once this
planning phase is complete and the plans have been accepted as realistic
and attainable, the execution functions come into play. These include the
manufacturing control functions of input-output (capacity) measurement,
detailed scheduling and dispatching, as well as anticipated delay reports from
both the plant and suppliers, supplier scheduling, etc. The term "closed-loop"
implies that not only is each of these elements included in the overall system,
but also that feedback is provided by the execution functions so that the
planning can be kept valid at all times.
MRP II (MANUFACTURING RESOURCES
PLANNING)
• An expansion of the material requirements planning system to include other portions of
the productive system was natural and to be expected. One of the first to be included was
the purchasing function. At the same time, there was a more detailed inclusion of the
production system itself-on the shop floor, in dispatching, and in the detailed scheduling
control. MRP had already included work center capacity limitations, so it was obvious that
the name material requirements planning was no longer adequate to describe the
expanded system. Someone (probably Ollie Wight) introduced the name manufacturing
resource planning (MRP II) to reflect the idea that more and more of the firm was
becoming involved in the program. To quote Wight,

The fundamental manufacturing equation is:

What are we going to make?

What does it take to make it?

What do we have?

What do we have to get??

FLOW MANUFACTURING: EMBEDDING JIT
INTO MRP
• MRP and JIT each have benefits. The question is, Can
they work together successfully, and how would one go
about combining them? As stated earlier in the chapter,
most major manufacturing firms use MRP. Of the firms
using MRP, many in repetitive manufacturing also use JIT
techniques.

Although JIT is best suited to repetitive manufacturing,

MRP is used in everything from custom job shops to
assembly-line production. A challenge arises in integrating
the shop-floor improvement approaches of JIT with an
MRP-based planning and control system.
FLOW MANUFACTURING

• Flow manufacturing is now being

used by many software vendors to
describe new software modules
that combine MRP and JIT logic.
Exhibit 16.20 shows a master production schedule with an MRP system on the left. MRP
systems can help create the master production schedule. From that point on, it remains a pure
MRP system. Scheduling resources such as inventory are continuously controlled and monitored.

The right side of Exhibit 16.20 shows a master production schedule at the top feeding a JIT
system. Computer control has been severed, and the JIT portion operates as its own separate
pull method drawing from preceding stages. MRP may well be used to help create the master
production schedule.
LOST SIZING IN MRP SYSTEMS
• The determination of lot sizes in an MRP system is a complicated and
difficult problem. Lot sizes are the part quantities issued in the
planned order receipt and planned order release sections of an MRP
schedule. For parts produced in-house, lot sizes are the production
quantities of batch sizes. For purchased parts, these are the quantities
ordered from the supplier. Lot sizes generally meet part requirements
for one or more periods.

• Most lot-sizing techniques deal with how to balance the setup or order
costs and holding costs associated with meeting the net requirements
generated by the MRP planning process. Many MRP systems have
options for computing lot sizes based on some of the more commonly
used techniques. It should be obvious, though, that the use of lot-
sizing techniques increases the complexity in generating MRP
schedules. When fully exploded, the numbers of parts scheduled can
be enormous.
• Next we explain four lot-sizing techniques using a common example.
The lot-sizing techniques presented are lot-for-lot (L4L), economic
order quantity (EOQ), least total cost (LTC), and least unit cost (LUC).

• Consider the following MRP lot-sizing problem; the net requirements

are shown for eight scheduling weeks:
LOT-FOR-LOT
Lot-for-lot (L4L) is the most common technique. It

• Sets planned orders to exactly match the net requirements.

• Produces exactly what is needed each week with none carried over
into future periods.

• Minimizes carrying cost.

• Does not take into account setup costs or capacity limitations.

Exhibit 16.21 shows the lot-for-lot calculations. The net requirements are given in column2.

Because the logic of lot-for-lot says the production quantity (column 3) will exactly match
the required quantity (column 2), there will be no inventory left at the end (column 4).
ECONOMIC ORDER QUANTITY
• The EOQ model uses an estimate of total annual demand, the setup or order cost, and
the annual holding cost. EOQ was not designed for a sys- tem with discrete time
periods such as MRP. The lot-sizing techniques used for MRP assume that part
requirements are satisfied at the start of the period. Holding costs are then charged
only to the ending inventory for the period, not to the average inventory as in the case
of the EOQ model.

EOQ assumes that parts are used continuously during the period. The lot sizes
generated by EOQ do not always cover the entire number of periods. For example, the
EOQ might provide the requirements for 4.6 periods. Using the same data as in the lot-
for-lot example, the economic order quantity is calculated as follows:
Exhibit 16.22 shows the MRP schedule using an EOQ of 351 units. The EOQ
lot size in Week I is enough to meet requirements for Weeks I through 5 and a
portion of Week 6. Then, in Week 6 another EOQ lot is planned to meet the
requirements for Weeks 6 through 8. Notice that the EOQ plan leaves some
inventory at the end of Week 8 to carry forward into Week 9.
LEAST TOTAL COST
• The least total cost method (LTC) is a dynamic lot-sizing technique that
calculates the order quantity by comparing the carrying cost and the setup (or
ordering) costs for various lot sizes and then selects the lot in which these are
most nearly equal.
• The top half of Exhibit 16.23 shows the least cost lot size results. The
procedure to compute least total cost lot sizes is to compare order costs
and holding costs for various numbers. of weeks. For example, costs are
compared for producing in Week 1 to cover the requirements for Week 1;
producing in Week I for Weeks 1 and 2; producing in Week I to cover
Weeks 1, 2, and 3, and so on. The correct selection is the lot size where
the ordering costs and holding costs are approximately equal. In Exhibit
16.23 the best lot size is 335 because a $38 carrying cost and a $47
ordering cost are closer than $56.75 and $47 ($9 versus $9.75). This lot
size covers requirements for Weeks 1 through 5.

Exhibit 16.23 shows that holding and ordering costs are closest in the
quantity hat covers requirements for Weeks 6 through 8. Notice that the
holding and ordering costs here are far apart. This is because our
example extends only to Week 8. If the planning horizon were longer, the
lot size planned for Week 6 would likely cover more weeks into the future
beyond Week 8. This brings up one of the limitations of both LTC and
LUC (discussed below). Both techniques are influenced by the length of
the planning horizon. The bottom half of Exhibit 16.23 shows the final run
size and total cost.
LEAST UNIT COST
• The least unit cost method is a dynamic lot-sizing technique that adds ordering and
inventory carrying cost for each trial lot size and divides by the number of units in each
lot size, picking the lot size with the lowest unit cost. The top half of Exhibit 16.24
calculates the unit cost for ordering lots to meet the needs of Weeks I through 8. Note
that the minimum occurred when the quantity 410, ordered in Week 1, was sufficient to
cover Weeks I through 6. The lot size planned for Week 7 covers through the end of the
planning horizon.
CHOOSING THE BEST LOT SIZE
• Using the lot-for-lot method, the total cost for the eight weeks is $376;
the EOQ total cost is $171.05; the least total cost method is $140.50;
and the least unit cost is $153.50. The lowest cost was obtained
using the least total cost method of $140.50. If there were more than
eight weeks, the lowest cost could differ.

• The advantage of the least unit cost method is that it is a more

complete analysis and would take into account ordering or setup
costs that might change as the order size increases. If the ordering or
setup costs remain constant, the lowest total cost method is more
attractive because it is simpler and easier to compute; yet it would be
just as accurate under that restriction.
 GROUP 8

THANK YOU FOR LISTENING!

Honeylen Marata
Aj Anne Palgan
RG Velasco