Materials Requirements Planning

Collins Industries  Largest manufacturer of ambulances in the world  International competitor  12 major ambulance designs  18,000 different inventory items  6,000 manufactured parts  12,000 purchased parts  MRP seems to be a good way to manage inventories: IBM’s MAPICS system is used

Independent and Dependent Demand Independent Demand A B(4) C(2) D(2)E(1) D(3) F(2) Dependent Demand Independent demand is uncertain. Dependent demand is certain.

 Dependent demand : Demand for items that are subassemblies or component parts to be used in production of finished goods.  Once the independent demand is known, the dependent demand can be determined. Dependent Demand

Demand Characteristics Week 400 – 300 – 200 – 100 – No. of tables Continuous demand M T W Th F M T W Th F – – – – No. of tables Discrete demand Independent demand 100 tables Dependent demand 100 x 1 = 100 tabletops 100 x 4 = 400 table legs

Dependent vs Independent Demand Time Demand Stable demand “Lumpy” demand Amount on hand Safety stock

Material Requirements Planning Defined )  Materials requirements planning (MRP) is a computerized inventory planning and control system for determining when (no earlier and no later) and how many of each of the parts, components, and materials should be ordered or produced  Dependent demand drives MRP  MRP is a software system

Material Requirements Planning System Based on a master production schedule, a material requirements planning system:  Creates schedules identifying the specific parts and materials required to produce end items  Determines exact unit numbers needed  Determines the dates when orders for those materials should be released, based on lead times

9 © The McGraw-Hill Companies, Inc., 2004 Firm orders from known customers Forecasts of demand from random customers Aggregate production plan Bill of material file Engineering design changes Inventory record file Inventory transactions Master production Schedule (MPS) Primary reports Secondary reports Planned order schedule for inventory and production control (work orders, purchase orders), rescheduling notices Exception reports Planning reports Reports for performance control Material planning (MRP computer program)

MRP Inputs 1: Master Production Schedule Drives MRP process with a schedule of finished products; states which end items are to be produced, when these are needed, and in what quantities Quantities may consist of a combination of customer orders & demand forecasts Quantities represent what needs to be produced, not what can be produced

Master Production Schedule (MPS) Time-phased plan specifying how many and when the firm plans to build each end item Aggregate Plan (Product Groups) Aggregate Plan (Product Groups) MPS (Specific End Items)

Master Production Schedule Item / Week Oct 3 Oct. 10 Oct. 17 Oct.24 Oct. 31 Clipboard Lapdesk Lapboard Pencil Case Shows items to be produced Derived from aggregate plan Example:

MRP Inputs 2: Bill-of-Materials Bill of materials (BOM) : One of the three primary inputs of MRP; a listing of all of the raw materials, parts, subassemblies, and assemblies needed to produce one unit of a product. Product structure tree : Visual depiction of the requirements in a bill of materials, where all components are listed by levels.

Bicycle(1) P/N 1000 Handle Bars (1) P/N 1001 Frame Assembly (1) P/N 1002 Wheels (2) P/N 1003 Frame (1) P/N 1004 Product Structure Tree: Example 2 Product Structure Tree: Example 2

Product Drawing: Example 3 Top clip (1)Bottom clip (1) Pivot (1)Spring (1) Rivets (2) Finished clipboardPressboard (1) Clipboard

Product Structure Tree ( Example 3) Clipboard Level 0 Level 1 Level 2 Spring (1) Bottom Clip (1) Top Clip (1) Pivot (1) Rivets (2) Clip Ass’y (1) Pressboard (1)

MRP Inputs 3: Inventory Records File  One of the three primary inputs of MRP  Includes information on the inventory status of each item by time period  Gross requirements  Scheduled receipts  Amount on hand  Lead times  Lot sizes  And more....

MRP Terminology (1 of 3)  Gross requirements  Scheduled receipts  Projected on hand  Net requirements  Planned-order receipts  Planned-order releases

MPR Terminology (2 of 3)  Gross requirements  Total expected demand  Scheduled receipts  Open orders scheduled to arrive  Projected on hand  Expected inventory on hand at the beginning of each time period

MRP Processing Terminology (3 of 3)  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 be ordered in each time period

MRP Processing Logic: Assembly Time Chart Procurement of raw material D Procurement of raw material F Procurement of part C Procurement of part H Procurement of raw material I Fabrication of part G Fabrication of part E Subassembly A Subassembly B Final assembly and inspection Weeks

Calculation of Gross Requirements Therefore, these are the gross requirements for B Periods Master schedule for S sold directly A C B Lead time = 4 for A Master schedule for A S B C Lead time = 6 for S Master schedule for S = = Periods Gross requirements: B

The MRP Matrix Gross RequirementsDerived from MPS or planned order releases of the parent Scheduled ReceiptsOn order and scheduled to be received Projected on HandBeg InvAnticipated quantity on hand at the end of the period Net RequirementsGross requirements net of inventory and scheduled receipts Planned Order Receipts When orders need to be received Planned Order Releases When orders need to be placed to be received on time ITEM NAME OR NO.LLC - LOW LEVEL CODEPERIOD LOT SIZE QTY MADE INLY - LEAD TIME12345

MRP Processing: Example 1-School Mate Products Master Production Schedule Clipboard Lapdesk Item Master File (ınventory record file CLIPBOARDLAPDESKPRESSBOARD On hand On order175 (Period 1)00 (sch receipt) LLC001 Lot sizeL4LMult 50Min 100 Lead time111

School Mate Products Product Structure Record Clipboard Lapdesk Pressboard (2) Trim (3’) Beanbag (1) Glue (4 oz) Level 0 Pressboard (1) Clip Ass’y (1) Rivets (2) Level 1

School Mate Products ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand25 Net Requirements Planned Order Receipts Planned Order Releases

School Mate Products ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand25115 Net Requirements0 Planned Order Receipts Planned Order Releases ( ) = 200 units available ( ) = 115 on hand at the end of Period 1

School Mate Products ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand Net Requirements00 Planned Order Receipts Planned Order Releases 115 units available ( ) = 20 on hand at the end of Period 2

School Mate Products ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand Net Requirements00100 Planned Order Receipts100 Planned Order Releases units available ( ) = -100 — 100 additional Clipboards are required Order must be placed in Period 2 to be received in Period 3

School Mate Products ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Gross Requirements Scheduled Receipts175 Projected on Hand Net Requirements Planned Order Receipts Planned Order Releases Following the same logic Gross Requirements in Periods 4 and 5 develop Net Requirements, Planned Order Receipts, and Planned Order Releases

School Mate Products ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Gross Requirements Scheduled Receipts Projected on Hand20 Net Requirements Planned Order Receipts Planned Order Releases

School Mate Products ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Gross Requirements Scheduled Receipts Projected on Hand Net Requirements04050 Planned Order Receipts5050 Planned Order Releases5050 Following the same logic, the Lapdesk MRP matrix is completed as shown

School Mate Products ITEM: PRESSBOARDLLC: 0PERIOD LOT SIZE: MIN 100LT: Gross Requirements Scheduled Receipts Projected on Hand150 Net Requirements Planned Order Receipts Planned Order Releases ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Planned Order Releases ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Planned Order Releases5050

School Mate Products ITEM: PRESSBOARDLLC: 0PERIOD LOT SIZE: MIN 100LT: Gross Requirements Scheduled Receipts Projected on Hand150 Net Requirements Planned Order Receipts Planned Order Releases ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Planned Order Releases ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Planned Order Releases5050 x2 x2 x1 x1 x1

School Mate Products ITEM: PRESSBOARDLLC: 0PERIOD LOT SIZE: MIN 100LT: Gross Requirements Scheduled Receipts Projected on Hand Net Requirements Planned Order Receipts Planned Order Releases ITEM: CLIPBOARDLLC: 0PERIOD LOT SIZE: L4LLT: Planned Order Releases ITEM: LAPDESKLLC: 0PERIOD LOT SIZE: MULT 50LT: Planned Order Releases5050

School Mate Products Planned Order Report PERIOD ITEM12345 Clipboard Lapdesk5050 Pressboard

MRP Processing: Example 2 Example 2 A(2)B(1) D(5)C(2) X C(3) Requirements include 95 units (80 firm orders and 15 forecast) of X in week 10

A(2) X It takes 2 A’s for each X

B(1)A(2) X It takes 1 B for each X

A(2)B(1) X C(3) It takes 3 C’s for each A

A(2)B(1) C(2) X C(3) It takes 2 C’s for each B

A(2)B(1) D(5)C(2) X C(3) It takes 5 D’s for each B

MRP Outputs Planned orders (schedule indicating the amount and timing of orders) Work orders Purchase orders Order releases (authorization for the execution of planned orders) Changes to previous plans or existing schedules (revision of due dates or order quantities, or cancellations of orders) Action notices Rescheduling notices

Benefits of MRP  Reduced inventories without reduced customer service  Ability to track material requirements  Ability to evaluate capacity requirements  Means of allocating production time  Increased customer satisfaction due to meeting delivery schedules  Faster response to market changes  Improved labor and equipment utilization.  Better inventory planning and scheduling

Requirements of MRP  Computer system and necessary software  Mainly discrete products  Stable lead times  Accurate and up-to-date  Master schedules  Bills of materials  Inventory status records  Integrity of data

Extensions of MRP

 Closed loop MRP  Capacity planning - load reports  MRP II - Manufacturing Resources Planning  Enterprise Resources Planning

Forecast & Firm Orders Material Requirements Planning Aggregate Production Planning Resource Availability Master Production Scheduling Shop Floor Schedules Capacity Requirements Planning Realistic? No, modify MPS Yes MRP and The Production Planning Process

Closed Loop MRP

Capacity Planning Capacity requirements planning : The process of determining short-range capacity requirements. Load reports : Department or work center reports that compare known and expected future capacity requirements with projected capacity availability. Time fences : Series of time intervals during which order changes are allowed or restricted.

Capacity Requirements Planning (CRP) Computerized system that projects load from material plan Creates load profile Identifies underloads and overloads

Capacity Usually expressed as standard machine hours or labor hours Capacity= (no. machines or workers) x (no. shifts) x (utilization) x (efficiency)

Capacity Terms Load reports Department or work center reports that compare known and expected future capacity requirements with projected capacity availability. Load profile Compares released and planned orders with work center capacity Capacity Productive capability; includes utilization and efficiency Utilization % of available working time spent working

More Capacity Terms Efficiency Refers to how well a machine or worker porforms compared to a standard output level Load The standard hours of work assigned to a facility Load percent The ratio of load to capacity Load % = (load/capacity)x100%

Determining Loads and Capacities 2 copiers, 2 operators 5 days/wk, 8 hr/day 1/2 hr meals, 1/2 hr maintenance per day The machines are new, so efficiency is estimated at 100% Utilization= 7/8 = 87.5% Daily capacity= 2 machines x 2 shifts x 8 hours/shift x 100% efficiency x 87.5% utilization = 28 hours or 1,680 minutes

Determining Loads and Capacities JOBNO. OFSETUPRUN TIME NO.COPIESTIME (MIN)(MIN/UNIT) TOTAL TIME (500 x 0.08) = , (1,000 x 0.10) = , (5,000 x 0.12) = , (10,000 x 0.14) =1, , (2,000 x 0.10) = min Load percent = 2,385.7 / 1,680 = 1.42 x 100% = 142% Add another shift: Daily capacity= 2 machines x 3 shifts x 8 hours/shift x 100% efficiency x 87.5% utilization = 42 hours or 2,520 minutes Revised load percent = 2,385.7 / 2,520 = x 100% = 94.67%

Initial Load Profile Hours of capacity Time (weeks) Normalcapacity – – – – – – – – – – – – 0 0 –

Remedies for Underloads 1.Acquire more work 2.Pull work ahead that is scheduled for later time periods 3.Reduce normal capacity

Remedies for Overloads  Eliminate unnecessary requirements  Reroute jobs to alternative machines or work centers  Change lot-sizing or safety stock requirements  Split lots between two or more machines  Send pieces to the second operation before the entire lot has completed the first operation  Increase normal capacity  Subcontract  Increase the efficiency of the operation  Push work back to later time periods  Revise master schedule

Adjusted Load Profile Hours of capacity Time (weeks) Normalcapacity – – – – – – – – – – – – 0 0 – Pull ahead Push back Overtime Work an extra shift

 Expanded MRP with emphasis placed on integration of:  Financial planning  Marketing  Engineering  Purchasing  Manufacturing  Human resources Manufacturing Resources Planning- MRP II Manufacturing Resources Planning- MRP II

Manufacturing Resources Planning (MRP II)  Goal: Plan and monitor all resources of a manufacturing firm (closed loop):  manufacturing  marketing  finance  engineering  Simulate the manufacturing system

MarketDemand Productionplan Problems? Rough-cut capacity planning Yes No Yes No Finance Marketing Manufacturing Adjust production plan Master production schedule MRP Capacity req. planning Problems? Requirementsschedules Adjust master schedule MRP II

Enterprise Resource Planning (ERP)  The next step in the evolution that began with MRP and evolved into MRP II  ERP system is a computer system that integrates application programs in finance, accounting, sales, purchasing, distribution, manufacturing, human resources and other functions in the firm.

 MRP II with ties to customers and suppliers (connects with supply-chain and customer management applications)  ERP represents an expanded effort to integrate standardized record keeping that will permit information sharing among different areas of an organizaiton in order to manage the system more effectively  ERP integrates financial, manufacturing and human resources on a single computer system. ERP

Enterprise Resource Planning (ERP)  Attempts to integrate all departments and functions across a company onto a single computer system that can serve all those different departments’ particular needs  Organizes and manages a company’s business processes by sharing information across functional areas  Standardized record-keeping permit information sharing and communication throughout the organization

ERP ERP allows companies to: 1.Automate and integrate many of their business processes 2.Share a common database and business practices throughout the enterprise 3.Produce information in real time ERP systems also include: 1.Supply Chain Management software and 2.Customer Relationship Management software

ERP Modules

ERP’s Central Database Finance & Accounting Sales & Marketing Human Resources Production & Materials Management ERP Data Repository