MRP and Related Concepts TLA (Three Letter Acronym) Definitions ATP: Available to Promise BOM: Bill of Materials DRP: Distribution Requirements Planning MPS: Master Production Schedule MRP: Materials Requirements Planning PAC: Production Activity Control SOP: Sales and Operations Planning

Where Does MRP Fit?

Master Scheduling I Controls the timing and quantity of production for products or product families Primary interface point for actual customer orders Coordinates forecasted demand and actual orders with production activity Serves as tool for agreement between marketing and operations (but at a different level than SOP)

Master Scheduling II Feeds more detailed material planning Indicates the quantity and timing (i.e., delivery times) for a product or group of products More detailed than SOP weekly versus monthly specific products versus “average” must satisfy the needs of marketing must be feasible for operations

Link between SOP and MPS Month: January February March Output: 200 300 400 SOP January (weeks) 1 2 3 4 Push Mowers 25 25 25 25 Self-propelled 35 40 Riding 12 13 MPS

MPS Formulas: Definitions ATPt = Available to promise in period t EIt = Ending Inventory for period t (same as projected on-hand inventory for next period) Ft = Forecasted demand for period t MPSt = MPS quantity available in period t OBt = orders booked for period t

MPS Formulas:

Detailed MPS for Widgets On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 165 140 120 85 20 Master Schedule 300 250 Notes: Planning time fence  cumulative lead time for product What seems to be the lot-sizing rule here?

Projected On-Hand Inventory On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 165 140 120 85 20 Projected On-Hand Inventory 230 65 215 190 Master Schedule 300 250 i.e. Projected on-hand inventory for week 47: = 65 + 300 – 150 = 215

Available-to-Promise On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 165 140 120 85 20 Projected On-Hand Inventory 230 65 215 190 Master schedule 300 250 Available-to-Promise   40 70 120 ATP(45) = 100 + 300 – (170 + 165) = 65 ATP(47) = 300 – (140+120) = 40 ATP(49) = 250 – (85 + 45) = 120

Change in Forecast Demand On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 Orders Booked 170 165 140 120 85 20 Projected On-Hand Inventory 230 65 215 15 115 (35) Master schedule 300 250 Available-to-Promise   40 Are we in trouble yet?

Change in Orders Booked On-hand inventory at end of October = 100 Month November December Week 45 46 47 48 49 50 51 52 Forecast Demand 150 125 Orders Booked 170 230 140 120 85 20 Projected On-Hand Inventory Master schedule 300 250 Available-to-Promise   40 Note impact of ATP(45) and on-hand inventory projections

Key Points about MPS Provides more detail than SOP Tracks the following information: Actual versus forecasted demand Available-to-Promise This gives sales information for accepting or not accepting new orders for delivery in a given week

A Final View of Master Scheduling SOP Marketing Operations MPS Rough-Cut Capacity Plan

Material Requirements Planning MRP in the planning cycle The logic of MRP an extended example Considerations of MRP

Assume that we’ve scheduled 500 chairs to be ready five weeks from now. what?

Material Needed for a Chair Back supports (3) Side rails (2) Front legs (2) Cross bars (2) Seat

Chair Structure Tree (aka “Bill of Materials”) Leg Assembly Seat Back Assembly Legs (2) Cross bar Side rails (2) Back Supports (3)

Graphic Lead-Time Week 1 Week 2 Week 3 Week 4 Week 5 Back Support (2 weeks) Side Rails (2 weeks) Back Assembly Cross Bar (2 weeks) (1 week) Chair Assembly Seats (2 weeks) (1 week) Leg Assembly Legs (2 weeks) Cross Bar (2 weeks) (1 week)

Lead-Time Key Points To have finished chairs at the beginning of Week 5, we must begin production and order materials in Week 1. “Exploding” the bill of materials tells us when to order things. Not much we can do to adjust output of chairs for the next 4 weeks. Why?

Material Requirements Planning (MRP) We need the following inputs: Bill-of-Materials (BOM) Inventory records Master production schedule We’ll get the following outputs: What items should be ordered When each item should be ordered How much of each should be ordered

The MRP Process Starts with the MPS End items are also known as “Level 0” items

The “Parent / Child” Relationship Refer back to bill of materials on slide 20, or insert duplicate after this slide for ready reference Where do the gross requirements come from? Do you understand the MRP logic? ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

Going Deeper… 25 25 25

Moving from “Level 1” items to “Level 2” items . . . 25 25 25 Where do the gross requirements for LEGS come from?

Combining Requirements: “Cross Bars” 25 25 25 Note effect of differences in lead times and order sizes on the gross requirements for each component

Impact of Longer Lead Times We cannot do this since the planned order would be in the past…. Thus the 250 crossbars will be delivered late one week to back assembly. What does this do to our chair schedule? 25 25 25

Do You Understand ... Why it is important to have an accurate BOM and accurate inventory information? Why do we need to “freeze” production schedules? Where do gross requirements come from? The is the difference between planned and scheduled receipts?

Other Considerations I MRP Feedback Feedback Planned Orders Production Suppliers

Other Considerations II When do we update the system? Capacity requirements planning using MRP output “Pegging” Lot sizing issues

Recall ... 25 25 25 Look at the “lumpiness” of demand for legs

If we order “lot-for-lot” 25 25 25 Much smoother demand for legs, lower average inventory

Distribution Requirements Planning (DRP) Anticipates downstream demand Uses this information, not predetermined reorder points or periodic reviews, to determine when to order Computer-based software systems needed to deal with the added complexity The key difference between DRP and the other methods is that DRP uses demand forecasts and knowledge about the participant’s inventory policies to determine when to place an order. DRP is more complex and usually requires a computer-based system, but is far better when demand levels are unpredictable. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

DRP Example I Suppose we forecast demand for Wholesaler A for the next 8 days (the best time horizon to use will depend on many factors) Based on this, we anticipate that Wholesaler A will order on Day 3 As before, Wholesaler A has a reorder point of 50, and orders in quantities of 200. The DRP record shows the forecasted demand for the next 8 days, the expected ending inventory level, and when Wholesaler A will expect to receive an order. For example, the wholesaler starts Day 1 with 85 units and expects to sell 20, leaving it with 65 at the end of the day. Wholesaler A falls below its order point some time on Day 2. As a result, Wholesaler A places an order which it expects to receive on Day 3. Based on the expected demand rate of 20 per day, Wholesaler A shouldn’t expect to receive another order over the remaining days showing in the record. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

DRP Example II Combined, we expect to see orders on Days 3 and 4 Here, we have completed a similar DRP record for Wholesaler B, and added its expected orders to those of Wholesaler A to get a line titled “Total expected orders” for the next 8 days. We extend the analysis to include Wholesaler B Combined, we expect to see orders on Days 3 and 4 ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

DRP Example III Special notes: Even though the orders cause the demand to look “lumpy”, DRP allows the distributor to anticipate when the orders are required, and to plan accordingly. In this case, the distributor will need to plan on receiving 400 units in Day 3 (Q = 400 for the distributor). If it takes 2 days to get units to the distributor from the factory, this means the distributor should plan on releasing the order on Day 1. The distributor then uses this information to plan its own orders. In this case, suppose it takes two days for the supplier to replenish; based on the information, the distributor would order on Day 1 ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

DRP Benefits Helps improve customer service Provides a better and faster understanding of the impact of shortages and/or promotions Helps reduce costs Inventory Freight Production Provides integration between the stages in the supply chain “Reduced costs” deserves some more explanation. To the extent that the distributor could “see” when the wholesalers would require more product, the distributor could use that information to combine orders, plan production, or even combine freight shipments. The point is, with better information, the Distributor will have more choices on how to run its business. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield

DRP Constraints Accurate forecasts and inventory levels Necessary to anticipate correctly when orders will be placed Consistent and reliable lead times To ensure that orders can be placed and arrive by the time they are needed “Nervousness” Even slight changes in demand for downstream partners can have a significant impact on order volumes, especially when order sizes are relatively high “Nervousness” is a concept discussed in more detail in Module 12. “Nervousness” refers to the idea that slight changes in demand at the Wholesaler level may dramatically affect when they place orders. Look again at Wholesaler A. If demand turns out to be just 14 units in Day 2, then the reorder point wouldn’t be reached until Day 3. The result would be that Wholesaler A would not expect to receive more units until Day 4. The “nervousness” in this case is that a relatively small change in demand (20 - 14 = 6 units) shifted an order for 200 units. ©2006 Pearson Prentice Hall — Introduction to Operations and Supply Chain Management — Bozarth & Handfield