MATERIAL Requirements planning MRP

PLANNING AND CONTROL SYSTEM Strategic planning Sales & Operations Plan. (aggregated) Master Production Schedule (MPS) Material Requirements Plan. Purchasing Control Production Control Input /Output Control Detailed Capacity Req. P. Rough-cut Capacity Plan. Resource Planning Plan Execution Demand Forecasts Customers Orders Resources

Materials Requirements Planning MRP MRP system Production and inventory management system in dependent demand inventory environment . System was developed by Orlicky in the early seventies of last century MRP determines the items orders quantities and the time periods (time „buckets”) in which those orders must be placed to meet MPS needs. Backgraund of MRP Distinction of independent demand and dependent demand inventory Availability of relatively powerful, reliable and cost-efective computers

Material Requirements Planning – MRP Assumptions: Component items inventory, unlike finished goods inventory cannot usefully be treated as independent items. The demand for them is dependent for the assemblies of which they are part. When a time phased scheduled (Master Schedule) is available, the demand for the dependent components can be calculated. So, it makes no sense to forecast them. Classical inventory control models assume a uniform or a well defined demand pattern. However, the dependency of component demand on the demand for their parents, gives rise to a phenomenon of discontinuous demand at the component level. Discontinuous demand occurs because of the effects of lot sizing and the fact that demand for an item often arises from a number of product sources. The implication of the discontinuous demand is that order point techniques are inappropriate for manufacturing inventories.

Independent and Dependent Demand INDEPENDENT DEMAND - the demand for item is independent on the demand for others item.. The typical dependency is only on external customer demand. Final products and spare parts inventory. DEPENDENT DEMAND - demand for item is dependent upon the demand for some other item (parent item). Components and raw materials Bill of Materials CAR WEEL TIRE

Stock Consumption and Demand Inventory Reorder Point System used in dependent inventory case Independent demand Car Dependent demand Weel RP Product STOCK CONSUMPTION Demand STOCK DEMAND Tire Discontinuous Steady and Continuous Time Time Assembly Time Time Component Time Time

Basic Structure of MRP system MASTER PRODUCTION SCHEDULE (MPS) MATERIAL REQUIREMENTS PLANNING (MRP) Gross Requirements calculation Netting 3. Lot sizing 4. Offsetting. Backward scheduling Master Items File Lot size, Lead time Bill of Materials Inventory status On Hand and Projected inventory Scheduled receipts of openned orders Planned Purchasing Order Releases Planned Manufacturing Order Releases

MRP Explosion BOM X B C D F E Product Structure (Bill of Materials) Total (cumulated) lead time of Product X X B C D E F (2) (3) (4) (1) 1 2 3 Level 1 2 3 4 6 5 Week p – production z - purchasing Ez Dp Bp Ez Xp X MPS: 6 th week Ez Cp Fz

MRP Record Time Period t 1 2 3 4 5 6 7 Gross requirements Scheduled receipts Projected available Net requirements Planned receipts Planned order release Gross requirements – total quantity needed of a particular item in each time bucket (time period) Scheduled receipts – quantity for which an order has been released and which is planned for receipt during a given time bucket. Entries in this row indicate when the order should come in and how many units should be in it. Scheduled receipts correspond to orders that have actually been placed some time in the past, but not yet received. Projected available (projected ending inventory) – shows the planned number units that should be available at the end of each time bucket. If the number of units avaiable is not sufficient to cover gross requirements, then Net requirements indicates the number of units the company is short. Planned receipts – shows when orders must arrive in order to avoid a shortage of necessary parts or materials. Planned receipts correspond to orders planned for release, but not yet released Planned order releases – indicates the time periods in which the orders must be released (or placed) to arrive at the correct time

Projected available t - 1 Safety stock paramiter MRP Logic Gross requirements calculation (MPS + Bill of Materials) Net requirements calculation (NRt = GRt – SRt – PAIt-1 + SS) Lot Sizing – order quantity calculation using proper lot sizing method ( Lot For Lot, Fixed Quantity, Fixed Periods, Economic Order Quantity, Part Period Balancing, Wagner Whitin algorithm) Backward scheduling (Timing) – placing a planned order in the appropriate time period (lead time) Net req-ments t Gross req-ments t Scheduled receipts t Projected available t - 1 Safety stock paramiter = - - +

Lot Sizing ? Part C Periods (weeks) 1 2 3 4 5 7 8 6 Net requirements Planned order release 20 ? LOT SIZING ALGORITHMS 1. Lot for Lot - LFL 2. Fixed Order Quantity - FOQ 3. Economic Order Quantity - EOQ 4. Fixed Period Requirements -- FPR 5. Period Order Quantity - POQ 6. Least Unit Cost - LUC 7. Least Total Cost - LTC 8. Part-Period Balancing - PPB 9. Wagner-Whitin Algoritm - WW Tadeusz Zbroja

Algorithm 1 – Lot 4 Lot Lot size = net requirements Example Planning horizon = 9 weeks Period = 1 week Holding cost H = 1 $/unit/week Order cost (set up cost) S = 100 $/order Week 1 2 3 4 5 6 7 8 9 Total Net requirements 35 10 40 20 5 10 30 150 Lot size 35 10 40 20 5 10 30 150 Inventory Holding costs TH = 0 Setup costs TS = 700 Total costs TC = 700

Algorithms 2 - 3 Assumption: Lot size is fixed, order period is variable Algorithm 2 – lot size is set up. Algorithm 3 – lot size is calculated using EOQ model Example: Algorithm 2 (lot size is fixed FQ = 60 units) Week 1 2 3 4 5 6 7 8 9 Total Net requirements 35 10 40 20 5 10 30 150 Lot size 60 60 60 180 Inventory 25 15 15 35 35 15 10 30 180 Holding costs TH = 180 Setup costs TS = 300 Total costs TC = 480

Algorithms 4 - 5 Assumption: Order period is fixed Algoritm 4 – order period is set up. Algoritm 5 – lot size is calculated using EOQ model Example: Algoritm 4 (order period is fixed FP = 3 weeks) Week 1 2 3 4 5 6 7 8 9 Total Net requirements 35 10 40 20 5 10 30 150 Lot size 45 60 45 150 Inventory 10 20 20 40 30 120 Holding costs TH = 120 Setup costs TS = 300 Total costs TC = 420

Algorithms 6 - 9 Assumption: Lot size is variable, order period is variable Example: Algoritm 9 (Wagner’s Whitin’s algorithm) Week 1 2 3 4 5 6 7 8 9 Total Net requirements 35 10 40 20 5 10 30 150 Lot size 45 65 40 150 Inventory 10 25 25 5 30 95 Holding costs TH = 95 Setup costs TS = 300 Total costs TC = 395

Example of MRP calculation MPS Week 1 2 3 4 5 6 7 MPS Product X 15 30 25 BOM X B C D E F (2) (3) (4) (1) 1 2 3

Material Requirements Planning logic Gross requirements calculation Net requirements calculation Lot sizing Backward scheduling - orders release time setting Planned order releases of product X MRP record of item B x2 x2 x2 Item: B Period t 1 2 3 4 5 6 7 Lead time: 1 Gross requirements 30 60 50 Safty stock = 0 Scheduled receipts Lot size: Lot For Lot Projected available Net requirements Planned receipts Planned order release

Material Requirements Planning logic Master Prod. Schedule Period t 1 2 3 4 5 6 7 (MPS) Product X 15 30 25 Master Item: X Period t 1 2 3 4 5 6 7 Lead time: 1 Gross requirement 30 25 Safety stock = 0 Scheduled receipts Lot size: Lot For Lot Projected available Net requirements Planned receipts Planned order release 15 15 15 15 Item: C (2) Period t 1 2 3 4 5 6 7 Lead time: 2 Gross requirement 60 50 Safety stock: 0 Scheduled receipts Lot size: FQ 50 Projected available 20 10 Net requirements 40 Planned receipts Planned order release x2 x2 x2 x2 30 30 50

Material Requirements Planning logic Material Requirements Planning (changes in time) One week later Item: C (2) Period t 2 3 4 5 6 7 8 Lead time: 2 Gross requirement 30 60 50 Safety stock: 0 Scheduled receipts Lot size: FQ 50 Projected available 40 Net requirements 20 Planned receipts Planned order release 50 The order open in week 1

The Advantages of MRP The advantages of using MRP in manufacturing management and production planning On time availability of the right materials required for production. Little inventory (customers report that inventory reduced by 14% on average). Timely delivery of manufactured goods to customers (increased by 17%). Optimal use of manufacturing resources (equipment downtime reduced 14%). Decrease in capital cost due to decreased inventory levels and optimal use of production resources. Collecting the business data for analysis and better planning The Disadvantage – Data Accuracy Risk The lack of data accuracy cause big problems with the planning.