1. Material Requirements Planning (MRP)
Class Agenda:
Lecture Minutes
Break Minutes
Problem Solutions Minutes
Case Review Minutes

2. Requirements for Effective Use of Dependent Demand Inventory Models
Effective use of dependent demand inventory models requires that the operations manager know the:
master production schedule
specifications or bills-of-material
inventory availability
purchase orders outstanding
lead times
You might add to this list that the operations manager must know that inventory records, bill-of-materials, etc., are accurate.

3. The Planning Process No Yes Production Plan Master Production Schedule
Material
Requirements
Plan
Capacity
Requirements
Plan No
Realistic??
It is probably best to walk the students through each step of this process.
For most products we can create a master production schedule. And, once we have a master production schedule, MRP is the next logical step.
Yes
Execute Capacity
Plans
Execute Material
Plans

4. Bill-of-Material
List of components & quantities needed to make product
Provides product structure (tree)
Parents: Items above given level
Children: Items below given level
Shows low-level coding
Lowest level in structure item occurs
Top level is 0; next level is 1 etc.
A bicycle provides a good example for deriving a bill-of-material. Most students remember enough of the parts of a bicycle to develop several levels.

5. Bill-of-Material Product Structure Tree
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
Special Bills-of-Material
Modular bills
Modules are final components used to make assemble-to-stock end items
Planning bills
Used to assign artificial parent
Reduces number of items scheduled
Phantom bills
Used for subassemblies that exist temporarily

6. Material Requirements Planning (MRP)
Manufacturing computer information system
Determines quantity & timing of dependent demand items
A point to stress here is that while MRP is heavily computer-based, it is more than simply a computer program.
MRP Requirements
Computer system
Mainly discrete products
Accurate bill-of-material
Accurate inventory status
99% inventory accuracy
Stable lead times
MRP Benefits
Increased customer satisfaction due to meeting delivery schedules
Faster response to market changes
Improved labor & equipment utilization
Better inventory planning & scheduling
Reduced inventory levels without reduced customer service

7. Structure of the MRP System
MRP by period report
MRP by date report
Planned orders report
Purchase requirements
Exception reports
MRP
Programs
Master Production
Schedule
BOM
Lead Times
(Item Master File)
(Bill-of-Material)
Inventory Data
Purchasing data
Emphasize that this slide illustrates the overall technological structure of MRP - people and process are also extremely important in its actual success.

8. MRP and The Production Planning Process
Forecast &
Firm Orders
Material
Requirements
Planning
Aggregate
Production
Resource
Availability
Master
Scheduling
Shop
Floor
Schedules
Capacity
Realistic?
No, modify CRP, MRP, or MPS
Yes
This slide illustrates the fit of MRP into the overall production planning process. It would be helpful to walk through the actual relationship with your students.

9. Master Production Schedule
Shows items to be produced
End item, customer order, module
Derived from aggregate plan

10. Derivation of Master Schedule
Therefore, these are the gross requirements for B 10
40+10
= 50 40 50 20
15+30
= 45
Periods
Gross requirements: B 1 2 3
Master schedule for S sold directly 15 A C B 5 6 7 8 9 11
Lead time = 4 for A
Master schedule for A 30 S 12 13
Lead time = 6 for S
Master schedule for S
This slide is also animated in an attempt to demonstrate the “building” of the master schedule.

11. MRP Dynamics Supports “replanning”
Problem with system “nervousness”
“Time fence” - allows a segment of the master schedule to be designated as “not to be rescheduled”
“Pegging” - tracing upward in the bill-of-materials from the component to the parent item
That a manager can react to changes, doesn’t mean he/she should
This slide does merit discussion - especially the items about system nervousness and the manager’s reaction to change.

12. MRP and JIT
MRP - a planning and scheduling technique with fixed lead times
JIT - a way to move material expeditiously
Integrating the two:
Small bucket approach and back flushing
Balanced flow approach

13. Lot-Sizing Techniques
Lot-for-lot - Order exactly what is needed.
Economic Order Quantity - One order quantity.
Part Period Balancing - Allow the order quantity to vary.

14. EOQ Model How Much to Order?
Annual Cost
Total Cost Curve
Holding Cost Curve
Order (Setup) Cost Curve
EOQ Assumptions
Known and constant demand
Known and constant lead time
Instantaneous receipt of material
No quantity discounts
Only order (setup) cost and holding cost
No stockouts
Order Quantity
Optimal Order Quantity (Q*)

15. EOQ Model Equations = × Q* D S H N T d ROP L 2 Optimal Order Quantity
Expected Number of Orders
Expected Time Between Orders
Working Days /
Year = × Q* D S H N T d
ROP L 2
D = Demand per year
S = Setup (order) cost per order
H = Holding (carrying) cost
d = Demand per day
L = Lead time in days
Deriving an EOQ
Develop an expression for setup or ordering costs
Develop an expression for holding cost
Set setup cost equal to holding cost
Solve the resulting equation for the best order quantity
For some students, it is most important at this point to explain in detail the meaning and significance of each equation. It might be helpful to actually work through a numerical example.

16. Average Inventory (Q*/2)
EOQ Model When To Order
Reorder Point (ROP)
Time
Inventory Level
Average Inventory (Q*/2)
Lead Time
Optimal Order Quantity (Q*)
One should link this model to the assumptions. You should also explore, at least briefly, how this picture would change if the assumptions were not met.

17. Part Period Balancing
Allows the order quantity to vary to cover future requirements while balancing setup and holding costs.
Calculates the Economic Part Period (EPP) - The period of time when the ratio of setup cost to holding cost is equal.

18. Extensions of MRP Closed loop MRP - Feedback to Capacity plan, MPS
Capacity planning - load reports
- Reported resource requirement in a work center.
MRP II - Material Resource Planning
- Considers other resources like labor or capital
Enterprise Resource Planning
- Connects all functional areas of the business
What does one gain by implementing one of the extensions of MRP?

19. MRP in Services
Can be used when demand for service or service items is directly related to or derived from demand for other services
restaurant - rolls required for each meal
hospitals - implements for surgery
Have the students consider what modifications may be necessary for MRP to be valuable in services.

20. Distribution Resource Planning
DRP requires:
Gross requirements, which are the same as expected demand or sales forecasts
Minimum levels of inventory to meet customer service levels
Accurate lead times
Definition of the distribution structure

21. Chapter 14 Problems
14.1a - Product Structure
Alpha
D(3)
F(2)

22. F Alpha D 1 2 3 4 5 6 = Order or start date
14.1b - Time Phased Product Structure F
Alpha D 1 2 3 4 5 6
= Order or start date

23. 14.1c - Gross Requirements Plan

24. Net Materials Plan

25. S T (1) U (2) Y (2) Z (3) X (1) V (1) W (2) 14.3a - Product Structure
Parent
T (1)
U (2)
Parent & Component
Parent & Component
Y (2)
Z (3)
X (1)
V (1)
W (2)
All Components

26. V W T S U Y Z 1 2 3 4 5 6 7 = Order or start date
14.3b - Time Phased Product Structure V W T S U Y Z 1 2 3 4 5 6 7
= Order or start date

27. 14.4 - Time Phased Product Structure

28. 14.5 - Net Material Requirements

29. Continued

30. Continued

31. EOQ
EOQ = sqr root of 2(demand)(setup cost) / carrying cost
= sqr root of (2)*275*(50) / .25 * 10
= 105
Reorder Point = 275/10 = 27.5 Units
Set up cost = 3 * 50 = $150
Inventory cost = (630) * .25 = $157.5
Total = $307.5

32. Lot for Lot
Set up cost = 8 * 50 = $400
Inventory cost = 0
Total = $400

33. 14.20 - Part Period Balancing
Economic Part Period = a period of time when the ratio of setup cost to holding cost is equal. EPP = 50/.25 = 200.
Set up cost = 3 * 50 = $150
Inventory cost = 280 * .25 = 70
Total = $220
Assumption - No carrying cost occurs during the week the order is received.