1. Operations Management (2) Topic 4 Prof. Upendra Kachru Material Requirements Planning

2. Operations Management Prof. Upendra Kachru

3. Operations Management Prof. Upendra Kachru The MPS is an authoritative statement translating the aggregate plan into how many (and how), items are to be produced, and when. A trial MPS schedule is developed from the aggregate plan. This is called the Master Schedule or the rough-cut capacity planning process. MASTER PRODUCTION SCHEDULE (MPS)

4. Operations Management Master Production Schedule (MPS) Prof. Upendra Kachru Rough-cut capacity planning is converted into the Master Production Schedule (MPS). The MPS represents the most important plan in the resource-management system. It provides details about the quantities and delivery timings of a product, but not the production plan.

5. Operations Management MASTER PRODUCTION SCHEDULE (MPS) 5 The MPS process deals with more detailed information than the aggregate plan. It is a 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) Prof. Upendra Kachru

6. Operations Management Prof. Upendra Kachru THE MASTER SCHEDULING FUNCTION MASTER SCHEDULING Capacity constraints Forecasts Production plan Customer orders What to produce (identification) (identification) When to produce (timing) (timing) How much to produce (quantity) (quantity) Product lead time constraints

7. Operations Management Prof. Upendra Kachru From the point of quantity and timing related production planning systems, four categories of systems are possible to manage and control inventories. Statistical Order Point; Lot Requirement Planning; Time Phased Order Point, Material Requirements Planning (MRP). We will limit our discussions to MRP as it is probably the most comprehensive approach to manufacturing inventory and other dependents demand inventory management systems.

8. Operations Management Prof. Upendra Kachru MATERIAL PLANNING Master Production Schedule (MPS) Material Requirements Planning (MRP) Inventory Status Records Product Structure Records PurchasingManufacturing (what we plan) (what we have) (what we require) (what we need)

9. Operations Management Prof. Upendra Kachru A MRP system, narrowly defined, consists of a set of logically related procedures, decision rules and records designed to translate a master production schedule into net requirements and the planned coverage of such requirements, for each component inventory item needed to implement the schedule. MATERIAL REQUIREMENTS PLANNING (MRP)

10. Operations Management Prof. Upendra Kachru Material Requirement Planning (MRP) is a process that enables continuous planning based on re-evaluation of demand and on changing planning parameters (lead time determination, make or buy decisions, lot sizing). WHAT DOES IT DO? MRP uses bill of material, master production schedules, and inventories for identifying the amounts and types of material required for future manufacturing projects. Dependent demand drives MRP

11. Operations Management Prof. Upendra Kachru Material Requirement Planning has as it's objectives ensuring that we can have the: Right Material, The Right Amount, At the Right Time and Right Place. WHAT ARE THE OBJECTIVES OF MRP?

12. Operations Management Prof. Upendra Kachru The main function of Material Requirements Planning is to guarantee material availability. It is used to procure or produce the requirement quantities on time both for internal purposes and for sales and distribution. This process involves the monitoring of stocks and, in particular, the creation of procurement proposals for purchasing and production. WHAT ARE THE FUNCTIONS OF MRP?

13. Operations Management Prof. Upendra Kachru 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 Material Requirements Planning System

14. Operations Management The bill of materials is a materials list that provides information useful to reconstruct the manufacturing process. It is the master product definition that contains ‘as- designed’ information. The information includes product description:  Materials  Parts  Components  Production sequence Prof. Upendra Kachru Bill of Materials

15. Operations Management 15 The bill of material file provides complete information on:  Raw materials in stock  Semi finished component parts in stock  Finished component parts in stock  Sub-assemblies in stock  Component parts in process  Sub-assemblies in process Prof. Upendra Kachru Bill Of Materials (BOM) File:

16. Operations Management Typical Product Structure Prof. Upendra Kachru FG ZNHA P BIX RQX QRSX D E A Level 1 Level 2 Level 3 The bill of material file guides the explosion process.

17. Operations Management A typical Engineering Bill of Materials LevelPart-RevisionQuantityDescriptionMake/buy 116844-23003B1AdapterMake 16844-23003J1Control Unit Buy 16844-23003C3Moisture Tester Make 16844-23003B2EnclosureBuy 16844-23003B1EnclosureBuy 16844-23003D2Machine Screw Buy 16844-23003F3CoverBuy 16844-23003AA4Precipitator y Assy. Make 16844-23003E5ElementBuy 16844-23003E6HousingBuy 16844-23003D4MachineBuy 16844-23003G3PrecipitatorBuy Prof. Upendra Kachru

18. Operations Management Each inventory item is carried as a separate file The inventory record divides the future into time periods called time buckets. The bill of materials pegs materials i.e. lists components of each assembly and subassembly linking of individual item bills which from the product, resulting in a hierarchical, and pyramid like structure with different levels. It Identifies each parent item that created demand Prof. Upendra Kachru BOM File

19. Operations Management It is an artificial grouping of items in bill of materials format, which expresses the relationship of multiple product features, variants and options, where inventory items are arranged in terms of product modules each of which can be planned as a group. Prof. Upendra Kachru Modular Bill of Materials Modular bill kept for each major subassembly Simplifies forecasting and planning

20. Operations Management 4-Cylinder (.40)Bright red (.10)Leather (.20)Grey (.10)Sports coupe (.20) 6-Cylinder (.50)White linen (.10)Tweed (.40)Light blue (.10)Two-door (.20) 8-Cylinder (.10)Sulphur yellow (.10)Plush (.40)Rose (.10)Four-door (.30) Neon orange (.10)Off-white (.20)Station wagon (.30) Metallic blue (.10)Cool green (.10) Emerald green (.10)Black (.20) Jet black (.20)Brown (.10) Champagne (.20)B/W checked (.10) X10 Automobile EnginesExterior colorInteriorInterior colorBody (1 of 3)(1 of 8)(1 of 3)(1 of 8)(1 of 4) Modular BOMs Modular BOM Combinations = 3 x 8 x 3 x 8 x 4 = 2,304 configurations Combinations = 3 + 8 + 3 + 8 + 4 = 26 modular bills

21. Operations Management There are two somewhat different objectives, in modularization.  To disentangle combination of optimal product features.  To segregate common from unique, or peculiar parts. The first is required to facilitate forecasting. The second is aimed at minimizing inventories in components that are common to option alternatives Prof. Upendra Kachru Objectives of Modularization

22. Operations Management Primary Prerequisites For MRP 1.A Master Production Schedule exists and can be stated in bill of materials form; 2.All inventory items are uniquely identified; 3.A bill of material exists at the time of planning 4.Inventory records contain data on the status of every item; 5.There is integrity of file data. Prof. Upendra Kachru

23. Operations Management 1.Individual item lead times are known; 2.Every inventory item goes into and out of stock 3.All of the components of an assembly are needed at the time of release of assembly orders; 4.There is discrete disbursement and usage of component materials 5.Process independence of manufactured items is ensured. Assumptions Prof. Upendra Kachru

24. Operations Management  The process is independent means that a manufacturing order for any given inventory item can be started and completed on its own and not be contingent on the existence or progress of some other order for completing the process.  Thus, ‘mating part’ relationships and set up dependencies do not fit the scheme of MRP. Process Independence Prof. Upendra Kachru

25. Operations Management Available-to- Promise Inventory Prof. Upendra Kachru It is the difference between the inventory available from the previous period and the customer orders booked; the maximum commitment to customers in a given time period. Apart from the first period in which the initial inventory is available from previous week, available-to-promise inventory is found for only those periods in which an MPS value is scheduled.

26. Operations Management Operations managers set various time intervals called time fences to regulate changes in the MPS. Generally at least three time fences are fixed. The first fence before actual production takes place is strictly frozen, i.e., no changes are allowed during this time. (Frozen) During the second time fence, changes are avoided though minor changes may still be permitted. (Moderately Firm ) The third time fence permits product model changes provided the required components are available. (Flexible) Prof. Upendra Kachru Time fences

27. Operations Management 27 Example Of Time Fences 81526 Weeks Frozen Moderately Firm Flexible Firm Customer Orders Forecast and available capacity Capacity Prof. Upendra Kachru

28. Operations Management  The MPS expresses the overall production plan and the span of time covered by it is termed the planning horizon.  Time Fences are given  BOM, its data integrity is ascertained  Orders for components originating from sources external to the plant using the system, and  The forecasts for items subject to independent demand. Prof. Upendra Kachru MRP Inputs

29. Operations Management Prof. Upendra Kachru MRP INPUTS MASTER PRODUCTION SCHEDULE (MPS) (Indicates products to produce and when they are needed) INVENTORY STATUS RECORDS (Contains on-hand balances, open orders, lot sizes, lead times, and safety stock) PRODUCT STRUCTURE RECORDS (Contains bills of materials and shows how product is produced) MATERIAL REQUIREMENTS PLANNING (Explodes BOM per MPS requirements, nets out inventory levels, offsets lead times, and issues reports on: 1. what to order and how many 2. when to order 3. what orders to expedite, deexpedite, or cancel) Forecasts Customer orders Customer orders Inventorytransactions Engineeringchanges

30. Operations Management The basis for MRP design is based on a concept of dependent demand and a time phasing approach. The approach combines three principles: 1.The inventory system deals with dependent demand. 2.Component demand can be precisely determined from the master schedule. 3.The optimum levels of inventory can be determined by time phasing, i.e., segmenting inventory status data by time. Prof. Upendra Kachru MRP Logic

31. Operations Management In determining net requirements for a low-level inventory item, the quantity that exists under its own identity, as well as any quantities existing as (consumed) components of parent items must be accounted for. Net requirements are developed by allocating (reallocating) quantities in inventory to the quantities of gross requirements, in a level-by-level process. The downward progression from one product level to another is called an explosion. Prof. Upendra Kachru MRP Logic

32. Operations Management 32 MRP Logic and Product Structure Tree B(4) E(1)D(2) C(2) F(2)D(3) A Product Structure Tree for Assembly A Lead Times A1 day B 2 days C1 day D 3 days E4 days F1 day Total Unit Demand Day 10 50 A Day 8 20 B (Spares) Day 6 15 D (Spares) Given the product structure tree for “A” and the lead time and demand information below, provide a materials requirements plan that defines the number of units of each component and when they will be needed Prof. Upendra Kachru

33. Operations Management 33 LT = 1 day First, the number of units of “A” are scheduled backwards to allow for their lead time. So, in the materials requirement plan below, we have to place an order for 50 units of “A” on the 9 th day to receive them on day 10. Prof. Upendra Kachru

34. Operations Management 34 Next, we need to start scheduling the components that make up “A”. In the case of component “B” we need 4 B’s for each A. Since we need 50 A’s, that means 200 B’s. And again, we back the schedule up for the necessary 2 days of lead time. B(4) E(1)D(2) C(2) F(2)D(3) A Spares LT = 2 4x50=20 0 Prof. Upendra Kachru

35. Operations Management 35 B(4) E(1)D(2) C(2) F(2)D(3) A 40 + 15 spares Part D: Day 6 Finally, repeating the process for all components, we have the final materials requirements plan: 35 Prof. Upendra Kachru

36. Operations Management Prof. Upendra Kachru For an MRP to be able to carry out a complete explosion, lot- sizing algorithms must be incorporated into the computer program that controls the requirement computation. Lot sizing techniques can be categorized into those that:  Generate fixed, repetitively ordered quantities, and  Those that generate varying order quantities. Lot Sizing

37. Operations Management The fixed order quantity policy maintains the same order quantity each time an order is issued. This may be specified for any item under an MRP system, but in practice is limited to a few items with high ordering cost. However, this rule is also used when suppliers specify:  Quantity discounts,  Truckload capacity, or  Minimum purchase quantities Prof. Upendra Kachru Fixed Order Quantity (FOQ):

38. Operations Management This model has been discussed in detail in the lesson on Inventory Management. This technique is unsuited to discrete, discontinuous, non- uniform demand situations. It is generally used for continuous and assembly- line type operations only. Prof. Upendra Kachru Economic Order Quantity (EOQ):

39. Operations Management Lot Sizing The common objective of all MRP systems is to determine (gross and net) requirements, so as to be able to generate information needed for correct action in ordering inventory, i.e., relating to procurement and production. In addition to the techniques discussed earlier, lot sizing techniques in MRP programs may include the following:  Fixed Order Quantity (FOQ)  Period Order Quantity (POQ)  Lot for Lot Ordering (L4L)  Least Unit Cost (LUC)  Least Total Cost (LTC) Prof. Upendra Kachru

40. Operations Management The factors that are generally considered in the design of such techniques include:  Variability of demand;  Length of the planning horizon;  Size of the planning period; and  Ratio of setup and unit costs. Prof. Upendra Kachru Factors to Consider

41. Operations Management 41 © The McGraw-Hill Companies, Inc., 2004 Firm orders from known customers Forecasts of demand from random customers Aggregate product 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 Exception reports Planning reports Reports for performance control Material planning (MRP computer program) Prof. Upendra Kachru

42. Operations Management Prof. Upendra Kachru Primary MRP Reports Planned orders to be released at a future time Order release notices to execute the planned orders Changes in due dates of open orders due to rescheduling Cancellations or suspensions of open orders due to cancellation or suspension of orders on the master production schedule Inventory status data

43. Operations Management Conti. Each MRP record has the following information: 1.Item Identity (part number) 2.Order Quantity 3.Date of Order Release 4.Date of Order Completion (due date) Prof. Upendra Kachru

44. Operations Management MRP Record of Rubber Hose Prof. Upendra Kachru Item: ANX-123 Description: Rubber Hose Size: 100 units Lead Time: 2 Weeks Week12345678 Gross Requirements 150100120150 Scheduled Receipts 200 100 15070 Projected on-hand Inventory 50 80 0 Planned Receipts 100 15070 Planned Order Releases 100 150 70 Planned Orders & Order Release Inventory Due dates

45. Operations Management Conti. Once the order has been placed, the types of order action that are required when revising an action taken previously, are limited to the following: 1.Increase in Order Quantity 2.Decrease in Order Quantity 3.Order cancellation 4.Advancement of Order Due Date 5.Deferment of Order Due Date 6.Order suspension (indefinite deferment) Prof. Upendra Kachru

46. Operations Management 46 Prof. Upendra Kachru Secondary MRP Reports Planning Reports, for example, forecasting inventory requirements over a period of time Performance Reports used to determine agreement between actual and programmed usage and costs Exception Reports used to point out serious discrepancies, such as late or overdue orders

47. Operations Management 47 MRP Example 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 Prof. Upendra Kachru

48. Operations Management 48 A(2) X It takes 2 A’s for each X Prof. Upendra Kachru

49. Operations Management 49 B(1)A(2) X It takes 1 B for each X Prof. Upendra Kachru

50. Operations Management 50 A(2)B(1) X C(3) It takes 3 C’s for each A Prof. Upendra Kachru

51. Operations Management 51 A(2)B(1) C(2) X C(3) It takes 2 C’s for each B Prof. Upendra Kachru

52. Operations Management 52 A(2)B(1) D(5)C(2) X C(3) It takes 5 D’s for each B Prof. Upendra Kachru

53. Operations Management Capacity Requirement Planning The master schedule check capacity requirements against capacity availability, but does not take into account lead time off setting, or the amount ahead of time component parts must be made to meet the master schedule for the end items. MRP forms the basis for detailed capacity calculations. The output of the MRP system indicates what component items will have to be produced and when, and this output can therefore be converted into the capacities required to produce these items. Prof. Upendra Kachru

54. Operations Management 1960’s - Systems Just for Inventory Control 1970’s - MRP – Material Requirement Planning (Inventory with material planning & procurement) 1980’s - MRP II – Manufacturing Resources Planning (Extended MRP to shop floor & distribution Mgnt.) Mid 1990’s - ERP – Enterprise Resource Planning (Covering all the activities of an Enterprise) 2000 onwards – ERP II – Collaborative Commerce (Extending ERP to external business entities) Evolution from MRP

55. Operations Management 55 Goal: Plan and monitor all resources of a manufacturing firm (closed loop):  Manufacturing  Marketing  Finance  Engineering Simulate the manufacturing system Prof. Upendra Kachru Manufacturing Resource Planning (MRP II)

56. Operations Management Prof. Upendra Kachru A CLOSED-LOOP SYSTEM

57. Operations Management 57 CLOSED LOOP SYSTEM (Simplified) Production Planning Master Production Scheduling Material Requirements Planning Capacity Requirements Planning Realistic? No Feedback Execute: Capacity Plans Material Plans Yes Feedback Prof. Upendra Kachru

58. Operations Management “Software solution that addresses the Enterprise needs, taking a process view of the overall organization to meet the goals, by tightly integrating all functions and under a common software platform” ERP - Definition

59. Operations Management Integrating all the functions Integrating the systems running in all the locations Transparency of information using a single data source across the organization Software must be responsive Modular Flexible Easy to add functionalities Provide growth path ERP I – Goals

60. Operations Management B Beyond ERP I

61. Operations Management Key Process Integration via ERP Product Lifecycle Management Supply Chain Management Customer Management Customer Management Supplier Collaboration Design Partners Consumers and Channels Integrating Information Islands – ERP II

62. Operations Management Technology Support Costs Functionality 5 Strategic RequirementLevels Goal: To select the Most Suitable Software Package Solution Vendor Product Selection Criteria

63. Operations Management Prof. Upendra Kachru Forecast control  Read Theory of Constraints. This is a supplement to the Chapter on MRP in the text book. Also read the book, ‘The Goal’ by Eliyahu M. Gladratt. It is given in your reading list. Read at Home

64. Operations Management (2) Click to edit company slogan.