Lecture 32. Revision:. Material Requirement Planning Lecture 32 Revision: Material Requirement Planning Maintenance and Reliability Books Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M. Clive, P.E., CFPIM, Fleming College Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005, N.Y.: McGraw-Hill/Irwin. Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of Business, Rollins College, Prentice Hall

Objectives Material Requirement Planning Nature of Demand Inputs to MRP Bill of Material Planned Orders Net requirement plan MRP and JIT Lot sizing techniques Maintenance and reliability Reliability Product failure rate Providing redundancy Maintenance cost Total productive maintenance

Material Requirement Planning

Material Requirements Planning Material Requirements Planning is a system to calculate requirements for dependent demand items It establishes a schedule (priority plan) showing the components required at each level of the assembly and, based on lead times, calculates the time when these components will be needed It is a system to avoid missing parts for the end item

Material Requirements Planning Process We need to determine What to order How much to order When to order This will involve Lead times Bills of material Inventory Status Planning data

Nature of Demand Two Types of Demand Independent Dependent Is not related to the demand for any other product and must be forecast Master production schedule (MPS) items are independent demand items Dependent Is directly related to other items or end items Such demand should be calculated and need not and should not be forecast

Nature of Demand If you have an order for 23 Tables, what components Independent Demand (Forecast) Table Legs (4) Ends (2) Sides Top (1) Hardware Kit (1) Item #206 #433 #711 #025 #822 Dependent Demand (Calculated) If you have an order for 23 Tables, what components would you need to produce them?

Objectives of MRP Two Major Objectives Determine Requirements What to order How much to order When to order When to schedule delivery Keep Priorities Current It must be able to add and delete, expedite, delay, and change orders based upon present priorities

Linkages with Other Manufacturing Planning and Control Functions Business Plan Production MPS PC and Purchasing MRP Planning Execution The MRP is driven by the MPS; it is concerned with the components needed to make the end items. The MRP in turn drives, or is input to, production control (PC) and purchasing

Inputs to the MRP System Four Major Inputs: Master Production Schedule Inventory Records Planning Data Bills of Material MPS Inventory Status Bill of Material MRP Planning Data

Inputs to the MRP System Master Production Schedule (MPS) The MPS provides information on planned and scheduled orders for end items (how much is wanted and when) Inventory Status Inventory status provides information on what is already available. Inventory records include the status of each item, including amounts on order and on hand and the location

Inputs to the MRP System Bills of Material Bills of material describe components and the quantity of each needed to make one unit Planning Data Planning data include lot size, lead time, scrap factors, yield factors, and safety stock The Computer Computers are needed because they are fast , accurate, and have the ability to store and manipulate data and produce information rapidly

Bills of Material Bill of Material “a listing of all the subassemblies, intermediates, parts, and raw materials that go into making the parent assembly showing the quantities of each required to make an assembly” APICS Dictionary, 8th edition, 1995 The bill of material shows all the parts required to make one of the item Each part or item has only one part number

Bills of Material Parent Parent–Component Relationship Table Legs (4) An assembly is considered a parent, and the items that comprise it are called its component items. Parent Table Legs (4) Ends (2) Sides (2) Top (1) Hardware Kit (1) Component Item #206 Item #433 Item #711 Item #025 Item #822

Bills of Material The multilevel bill is made up of subassemblies. The subassemblies reflect the way manufacturing plans to build the product. The lowest items on the bill are usually purchased parts. All parts and subassemblies have unique numbers. By convention, the final assembly is considered level zero. Levels down the bill are numbered consecutively.

Bills of Material The multilevel bill is a collection of single-level bills. Each single-level bill shows the parts to make one parent. To reduce storage space and to make maintenance easier, the computer stores single-level bills only. Items can be both parents of components and components of other parents.

Bills of Material Low-Level Coding and Netting - A component may reside on more than one level in a bill of material The low-level code is the lowest level on which a part resides in all bills of material. Every part has only one low-level code. Low-level are determined by starting at the lowest level of a bill of material and, working up, recording the level against the part. If a part occurs on a higher level, its existence on the lower level has already been recorded. Once the low-level codes are obtained, the net requirements for each part can be calculated.

Bills of Material Uses for Bills of Material Product Definition Engineering Change Control Service Parts Planning Order Entry Manufacturing Costing Etc. Maintaining bills of material and their accuracy is extremely important

Bills of Material List of components, ingredients, and materials needed to make product Provides product structure Items above given level are called parents Items below given level are called children

Packing box and installation kit of wire, bolts, and screws BOM Example Product structure for “Awesome” (A) A Level B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/ amp-booster 1 E(2) F(2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D(2) 12” Speaker G(1) Amp-booster 3

Packing box and installation kit of wire, bolts, and screws BOM Example Product structure for “Awesome” (A) A Level B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/ amp-booster 1 Part B: 2 x number of As = (2)(50) = 100 Part C: 3 x number of As = (3)(50) = 150 Part D: 2 x number of Bs + 2 x number of Fs = (2)(100) + (2)(300) = 800 Part E: 2 x number of Bs + 2 x number of Cs = (2)(100) + (2)(150) = 500 Part F: 2 x number of Cs = (2)(150) = 300 Part G: 1 x number of Fs = (1)(300) = 300 E(2) F(2) Packing box and installation kit of wire, bolts, and screws Std. 12” Speaker booster assembly 2 D(2) 12” Speaker G(1) Amp-booster 3

Bills of Material Modular Bills Modules are not final products but components that can be assembled into multiple end items Can significantly simplify planning and scheduling

Bills of Material Planning Bills (Pseudo Bills) Created to assign an artificial parent to the BOM Used to group subassemblies to reduce the number of items planned and scheduled Used to create standard “kits” for production

Bills of Material Phantom Bills Low-Level Coding Describe subassemblies that exist only temporarily Are part of another assembly and never go into inventory Low-Level Coding Item is coded at the lowest level at which it occurs BOMs are processed one level at a time

Lead Times, Exploding, and Offsetting B C D E LT: 1 wk LT: 2 wk LT: 1 wk LT: 1 wk LT: 1 wk Lead time: The time from when an order is placed until the part is ready for use. Exploding: Multiplying the parent requirements by the usage quantity through the product tree Offsetting: Placing the requirements in their proper time periods based on lead times

Planned Orders Planned Order Receipt That quantity planned to be received at a future date as a result of a planned order release. Planned Order Release Planned order releases are just planned; they have not been released. Orders for material should not be released until the planned order release date arrives. The planned order release of the parent becomes the gross requirement of the component.

Releasing Planned Orders Check availability of components Create shop packet or purchase requisition Allocate components to that order Release planned order, creating a scheduled receipt

Using the Material Requirements Plan The computer can perform all calculations and create planned order releases, but it does not (usually) issue purchase or manufacturing orders or reschedule open orders. Computer software can create exception messages and suggest types of action.

Using the Material Requirements Plan On the basis of action and exception messages, the planner can release planned orders, reschedule existing orders in or out, or change quantities. In addition, the planner works with other planners, master production schedulers, production activity control, and purchasing to solve problems as they arise.

Material Planner’s 3 Types of Orders Planned orders - calculated and controlled by the software Released orders - scheduled receipts; releasing is the responsibility of the planner

Determining Net Requirements Starts with a production schedule for the end item – 50 units of Item A in week 8 Because there are 10 Item As on hand, only 40 are actually required – (net requirement) = (gross requirement - on- hand inventory) The planned order receipt for Item A in week 8 is 40 units – 40 = 50 - 10

Determining Net Requirements Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7 The gross requirement for Item B is now 80 units in week 7 There are 15 units of Item B on hand, so the net requirement is 65 units in week 7 A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

Determining Net Requirements A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5 The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8 This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process

Net Requirements Plan The logic of net requirements Total requirements Gross requirements Allocations + Available inventory Net requirements On hand Scheduled receipts + – =

Gross Requirements Schedule A B C 5 6 7 8 9 10 11 40 50 15 Lead time = 4 for A Master schedule for A S B C 12 13 8 9 10 11 20 30 40 Lead time = 6 for S Master schedule for S 1 2 3 10 Master schedule for B sold directly Periods Gross requirements: B 10 40 50 20 40+10 15+30 =50 =45 1 2 3 4 5 6 7 8 Periods Therefore, these are the gross requirements for B

Safety Stock BOMs, inventory records, purchase and production quantities may not be perfect Consideration of safety stock may be prudent Should be minimized and ultimately eliminated Typically built into projected on-hand inventory

MRP Management MRP is a dynamic system Facilitates replanning when changes occur System nervousness can result from too many changes Time fences put limits on replanning Pegging links each item to its parent allowing effective analysis of changes

MRP and JIT MRP is a planning system that does not do detailed scheduling MRP requires fixed lead times which might actually vary with batch size JIT excels at rapidly moving small batches of material through the system

Finite Capacity Scheduling MRP systems do not consider capacity during normal planning cycles Finite capacity scheduling (FCS) recognizes actual capacity limits By merging MRP and FCS, a finite schedule is created with feasible capacities which facilitates rapid material movement

Small Bucket Approach MRP “buckets” are reduced to daily or hourly The most common planning period (time bucket) for MRP systems is weekly Planned receipts are used internally to sequence production Inventory is moved through the plant on a JIT basis Completed products are moved to finished goods inventory which reduces required quantities for subsequent planned orders Back flushing based on the BOM is used to deduct inventory that was used in production

Lot-Sizing Techniques Lot-for-lot techniques order just what is required for production based on net requirements May not always be feasible If setup costs are high, lot-for-lot can be expensive Economic order quantity (EOQ) EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand

Lot-Sizing Techniques Part Period Balancing (PPB) looks at future orders to determine most economic lot size The Wagner-Whitin algorithm is a complex dynamic programming technique Assumes a finite time horizon Effective, but computationally burdensome

Lot-for-Lot Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Lot-for-Lot Example No on-hand inventory is carried through the system Total holding cost = $0 There are seven setups for this item in this plan Total setup cost = 7 x $100 = $700 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

EOQ Lot Size Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand 43 66 26 69 39 Net requirements 16 Planned order receipts 73 Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units

EOQ Lot Size Example Annual demand = 1,404 Total cost = setup cost + holding cost Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks) Total cost = $3,798 Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = $730 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements 16 Planned order receipts 73 Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week Average weekly gross requirements = 27; EOQ = 73 units

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week PPB Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week EPP = 100 units

Holding cost = $1/week; Setup cost = $100; PPB Example Trial Lot Size Periods (cumulative net Costs Combined requirements) Part Periods Setup Holding Total 2 30 0 2, 3 70 40 = 40 x 1 2, 3, 4 70 40 2, 3, 4, 5 80 70 = 40 x 1 + 10 x 3 100 70 170 2, 3, 4, 5, 6 120 230 = 40 x 1 + 10 x 3 + 40 x 4 + = 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand Net requirements Planned order receipts Planned order releases Combine periods 2 - 5 as this results in the Part Period closest to the EPP 6 40 0 6, 7 70 30 = 30 x 1 6, 7, 8 70 30 = 30 x 1 + 0 x 2 6, 7, 8, 9 100 120 = 30 x 1 + 30 x 3 100 120 220 + = Combine periods 6 - 9 as this results in the Part Period closest to the EPP 10 55 0 100 0 100 Total cost 300 190 490 + = Holding cost = $1/week; Setup cost = $100; EPP = 100 units

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week PPB Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 55 Scheduled receipts Projected on hand 50 60 Net requirements Planned order receipts 80 100 Planned order releases Holding cost = $1/week; Setup cost = $100; Lead time = 1 week EPP = 100 units

Wagner-Whitin would have yielded a plan with a total cost of $455 Lot-Sizing Summary For these three examples Lot-for-lot $700 EOQ $730 PPB $490 Wagner-Whitin would have yielded a plan with a total cost of $455

Lot-Sizing Summary In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change In practice, this results in system nervousness and instability Lot-for-lot should be used when low-cost JIT can be achieved

Lot-Sizing Summary Lot sizes can be modified to allow for scrap, process constraints, and purchase lots Use lot-sizing with care as it can cause considerable distortion of requirements at lower levels of the BOM When setup costs are significant and demand is reasonably smooth, PPB, Wagner-Whitin, or EOQ should give reasonable results

Maintenance and Reliability

Strategic Importance of Maintenance and Reliability Failure has far reaching effects on a firm’s Operation Reputation Profitability Dissatisfied customers Idle employees Profits becoming losses Reduced value of investment in plant and equipment

Maintenance and Reliability The objective of maintenance and reliability is to maintain the capability of the system while controlling costs Maintenance is all activities involved in keeping a system’s equipment in working order Reliability is the probability that a machine will function properly for a specified time

Important Tactics Reliability Maintenance Improving individual components Providing redundancy Maintenance Implementing or improving preventive maintenance Increasing repair capability or speed

Maintenance Strategy Employee Involvement Information sharing Skill training Reward system Employee empowerment Results Reduced inventory Improved quality Improved capacity Reputation for quality Continuous improvement Reduced variability Maintenance and Reliability Procedures Clean and lubricate Monitor and adjust Make minor repair Keep computerized records

Reliability Improving individual components Rs = R1 x R2 x R3 x … x Rn where R1 = reliability of component 1 R2 = reliability of component 2 and so on

Overall System Reliability Reliability of the system (percent) Average reliability of each component (percent) | | | | | | | | | 100 99 98 97 96 100 – 80 – 60 – 40 – 20 – 0 – n = 10 n = 1 n = 50 n = 100 n = 200 n = 300 n = 400

Reliability Example R1 .90 R2 .80 R3 .99 Rs Reliability of the process is Rs = R1 x R2 x R3 = .90 x .80 x .99 = .713 or 71.3%

Product Failure Rate (FR) Basic unit of measure for reliability FR(%) = x 100% Number of failures Number of units tested FR(N) = Number of failures Number of unit-hours of operating time Mean time between failures MTBF = 1 FR(N)

Failure Rate Example 20 air conditioning units designed for use in NASA space shuttles operated for 1,000 hours One failed after 200 hours and one after 600 hours FR(%) = (100%) = 10% 2 20 FR(N) = = .000106 failure/unit hr 2 20,000 - 1,200 MTBF = = 9,434 hrs 1 .000106

Failure Rate Example 20 air conditioning units designed for use in NASA space shuttles operated for 1,000 hours One failed after 200 hours and one after 600 hours Failure rate per trip FR = FR(N)(24 hrs)(6 days/trip) FR = (.000106)(24)(6) FR = .153 failures per trip FR(%) = (100%) = 10% 2 20 FR(N) = = .000106 failure/unit hr 2 20,000 - 1,200 MTBF = = 9,434 hr 1 .000106

Providing Redundancy Provide backup components to increase reliability + x Probability of first component working Probability of needing second component Probability of second component working (.8) + x (1 - .8) = .8 + .16 = .96

Reliability has increased from .713 to .94 Redundancy Example A redundant process is installed to support the earlier example where Rs = .713 R1 0.90 R2 0.80 R3 0.99 Reliability has increased from .713 to .94 = [.9 + .9(1 - .9)] x [.8 + .8(1 - .8)] x .99 = [.9 + (.9)(.1)] x [.8 + (.8)(.2)] x .99 = .99 x .96 x .99 = .94

Maintenance Two types of maintenance Preventive maintenance – routine inspection and servicing to keep facilities in good repair Breakdown maintenance – emergency or priority repairs on failed equipment

Implementing Preventive Maintenance Need to know when a system requires service or is likely to fail High initial failure rates are known as infant mortality Once a product settles in, MTBF generally follows a normal distribution Good reporting and record keeping can aid the decision on when preventive maintenance should be performed

Computerized Maintenance System Data Files Personnel data with skills, wages, etc. Equipment file with parts list Maintenance and work order schedule Inventory of spare parts Repair history file Output Reports Inventory and purchasing reports Equipment parts list Equipment history reports Cost analysis (Actual vs. standard) Work orders Preventive maintenance Scheduled downtime Emergency maintenance Data entry Work requests Purchase requests Time reporting Contract work

Maintenance Costs The traditional view attempted to balance preventive and breakdown maintenance costs Typically this approach failed to consider the true total cost of breakdowns Inventory Employee morale Schedule unreliability

cost maintenance policy) Maintenance Costs Costs Maintenance commitment Total costs Preventive maintenance costs Breakdown maintenance costs Optimal point (lowest cost maintenance policy) Traditional View

cost maintenance policy) Maintenance Costs Full cost of breakdowns Costs Maintenance commitment Total costs Preventive maintenance costs Optimal point (lowest cost maintenance policy) Full Cost View

Maintenance Cost Example Should the firm contract for maintenance on their printers? Number of Breakdowns Number of Months That Breakdowns Occurred 2 1 8 6 3 4 Total: 20 Average cost of breakdown = $300

Maintenance Cost Example Compute the expected number of breakdowns Number of Breakdowns Frequency 2/20 = .1 2 6/20 = .3 1 8/20 = .4 3 4/20 = .2 ∑ Number of breakdowns Expected number of breakdowns Corresponding frequency = x = (0)(.1) + (1)(.4) + (2)(.3) + (3)(.2) = 1.6 breakdowns per month

Maintenance Cost Example Compute the expected breakdown cost per month with no preventive maintenance Expected breakdown cost Expected number of breakdowns Cost per breakdown = x = (1.6)($300) = $480 per month

Maintenance Cost Example Compute the cost of preventive maintenance Preventive maintenance cost Cost of expected breakdowns if service contract signed Cost of service contract = + = (1 breakdown/month)($300) + $150/month = $450 per month Hire the service firm; it is less expensive

Increasing Repair Capabilities Well-trained personnel Adequate resources Ability to establish repair plan and priorities Ability and authority to do material planning Ability to identify the cause of breakdowns Ability to design ways to extend MTBF

How Maintenance is Performed Operator Maintenance department Manufacturer’s field service Depot service (return equipment) Preventive maintenance costs less and is faster the more we move to the left Competence is higher as we move to the right

Total Productive Maintenance (TPM) Designing machines that are reliable, easy to operate, and easy to maintain Emphasizing total cost of ownership when purchasing machines, so that service and maintenance are included in the cost Developing preventive maintenance plans that utilize the best practices of operators, maintenance departments, and depot service Training workers to operate and maintain their own machines

Establishing Maintenance Policies Simulation Computer analysis of complex situations Model maintenance programs before they are implemented Physical models can also be used Expert systems Computers help users identify problems and select course of action

End of Lecture 32