Chapter 6 Material Requirements Planning

1. Chapter 6Material Requirements Planning

2. Material Requirements Planning (MRP) Material Requirements Planning (MRP) has the managerial objective of providing “the right part at the right time” to meet the schedules for completed products. MRP provides a formal plan for each part number–raw materials, components, and finished products.

3. Manufacturing Planning and Control System Resource planning Sales and operations planning Demand management Enterprise Resource Planning (ERP) System Master production scheduling Front End Detailed material planning Inventory status data Routing file Bills of material Time-phased requirement (MRP) records Detailed capacity planning Engine Material and capacity plans Shop-floor systems Supplier systems Back End

4. Basic MRP Record

5. Basic MRP Record A previously released order due in period 1 Requirements from all sources A unreleased order due in period 5

6. Bill of Materials The BOM shows the components and sub-assemblies required to produce a product

7. Product Structure Diagram Finished product is located at the top, components below Sub-assemblies are represented by separate levels

8. Indented Bill of Materials Finished item is not indented Level 2 sub-assemblies Level 1 sub-assemblies Level 1 components Components and sub-assemblies are indented relative to their order of usage

9. Explosion • Explosion–the process of translating product requirements into component part requirements • Considers existing inventories and scheduled receipts • Calculating the quantities of all components needed to satisfy requirements for any given part. • Continued until all parts have been considered, leading to exact requirements for all purchased and/or raw material parts

10. Gross and Net Requirements • Gross requirements represent the total planned usage for the part • Net requirements account for existing inventory and/or scheduled receipts 100 req’d – 25 inventory = 75 net req’d Net req’d for assembly becomes gross req’d for component 75 req’d – 22 inventory – 25 sched. rec. = 28 net req’d

11. Demand Types in MRP • Dependent–component or sub-assembly demand driven by net requirements from the next higher level (e.g. scoop demand caused by net requirements for scoop assemblies) • Independent–demand driven by requirements from outside the firm (e.g. customer orders)

12. Lead Time Offsetting • Gross to net explosion shows how much of each part is required, but not when • Timing requires consideration of two factors • Lead times–how long does it take to obtain the component or sub-assembly • Precedent relationships–the order in which parts must be assembled • MRP considers both factors when developing the plan

13. Scheduling Logic • Two common approaches to scheduling exist • Front schedule–schedule each step as early as possible • Back schedule–schedule each step as late as possible • MRP combines back scheduling and gross to net explosion • Reduced inventories • Minimized storage time

14. Back Scheduling Top handle assembly has the longest duration of any sub-assembly Scoop assembly must be complete before final assembly can begin Only when all sub-assemblies and components are available can final assembly begin

15. MRP Records Planned order release for top handle assembly becomes gross requirement for top handle component and nail (note 2 nails required per assembly) Lot-for-lot order policy exactly matches supply to net requirements Fixed lot size order policy requires orders in multiples of lot size

16. MRP Technical Issues • Processing frequency–recalculating all records and requirements is called regeneration • This is a computationally intensive process so it is often run in the background and during periods of low system demand • Net change approach only recalculates those records that have experienced changes • Less frequent processing results in an out-of-date picture • More frequent processing increases computer costs and may lead to system nervousness

17. Safety Stock and Safety Lead Time • Safety stock is buffer stock over and above the quantity needed to satisfy gross requirements • Used when quantity uncertainty is the issue • Safety lead time changes both the release and due date of shop and/or purchase orders to provide a margin for error • Used when timing of orders is the issue • Safety lead time is not just an inflated lead time

18. Pegging • Pegging provides a link between demand (order releases, customer orders, etc.) and the gross requirements for parts • Pegging records include the specific part numbers associated with a gross requirement • Pegging information can track the impact of a problem (e.g. material shortage) back to the order(s) it will affect

19. Firm Planned Orders • Regeneration of the MRP records can lead to large numbers of planned order changes • To avoid this, a planned order can be converted to a firm planned order (FPO) • An FPO is not the same as a scheduled delivery, but can’t be changed by the MRP system • Temporarily overrides the MRP system to provide stability or to solve problems

20. Planning Horizon • Total amount of time included in MRP calculations • Longer planning horizon increases computational requirements • Shorter planning horizon may result in less-effective plans if significant future demand is not visible • At a minimum, should cover the cumulative lead time for all finished goods items

21. Scheduled Receipts vs. Planned Order Releases • Scheduled receipts represent an actual commitment (purchase order, production order, etc.) • Planned orders are only the current plan and can be changed more easily • Scheduled receipts for production orders already have component materials assigned • Scheduled receipts do not impact gross requirements • Planned order releases do not have component materials assigned • Planned order releases do impact gross requirements

22. Using the MRP System

23. MRP Planner Tasks

24. Exception Codes

25. Bottom-Up Replanning • Using pegging data to guide efforts to solve material shortages • Pegging data allows the planner to take action only when actual customer orders are impacted

26. MRP System Output Part number and description MRP system data MRP planning data Exception messages

27. MRP System Dynamics

28. Principles • Effective use of an MRP system allows development of a forward-looking approach to managing material flows. • The MRP system provides a coordinated set of linked product relationships, which permits decentralized decision making for individual part numbers. • All decisions made to solve problems must be implemented within the system, and transactions must be processed to reflect the resultant changes. • Effective use of exception messages allows attention to be focused on the “vital few” rather than the “trivial many.”

29. Chapter 6AAdvanced Material Requirements Planning

30. Determining Manufacturing Order Quantities • A number of quantity-determination (lot-sizing) procedures have been developed • The primary consideration in MRP lot-sizing procedures is the nature of the net requirements data • Requirements don’t reflect the independent demand assumption of constant uniform demand • Requirements are discrete • Requirements can be lumpy

31. MRP Lot-Sizing Assumptions • All requirements occur at the beginning of the period • All future requirements must be met (no backorders) • Ordering decisions occur at regular intervals • Requirements are appropriately offset for manufacturing lead times • Component requirements are satisfied at a uniform rate during each period

32. Determining Order Quantities

33. Economic Order Quantity (EOQ) • Simple, widely used technique • Assumes constant, uniform demand • May require adjustment when demand is lumpy

34. Periodic Order Quantity (POQ) • Uses EOQ formula to compute time between orders (TBO) • Lot-size varies based upon the forecast requirements for the coverage period • Doesn’t allow for combining orders during periods of light demand

35. Part Period Balancing (PPB) • Attempts to equalize the costs of ordering and holding inventory • Considers alternate coverage periods and the scenario where ordering and inventory costs are most nearly equal • Won’t always identify the cost-minimizing plan

36. Wagner-Whitin Algorithm • Optimizing procedure to identify the cost-minimizing plan for a time-phased schedule • Requires much more computational effort • May not identify optimal plan under all conditions

37. Buffering against Uncertainty • Buffering can be effective when uncertainty is unavoidable • Buffering should not be used to accommodate a poorly performing MRP system • Uncertainty has two main sources • Demand–timing and quantity • Supply–timing and quantity

38. Safety Stock and Safety Lead Time • There are two basic ways to buffer uncertainty • Safety stock–additional stock intended to cover unanticipated requirements • Safety lead time–releasing orders earlier than necessary to ensure receipt before the required due date

39. Performance of Safety Stock vs. Safety Lead Time Timing Uncertainty Quantity Uncertainty Safety lead time outperforms safety stock under timing uncertainty Safety stock outperforms safety lead time under quantity uncertainty

40. Other Buffering Techniques • Scrap allowances–useful if scrap is significant and unavoidable • Reduce uncertainty • Increase forecast accuracy, improve system parameter accuracy (BOM, inventory), reduce lead times, improve product quality. • Provide system slack • Additional production capacity to allow for unplanned requirements • Slack costs money

41. Nervousness • Nervousness occurs when even small changes to higher-level MRP records or the master production schedule leads to significant changes in the MRP plans • Nervousness is most damaging in MRP systems with many levels in the product structure • Some lot-sizing techniques (such as POQ) can amplify the nervousness

42. Reducing System Nervousness

43. Principles • MRP enhancements should be attempted only after a basic MPC system is in place. • Discrete lot-sizing procedures can reduce inventory costs, but the complexity shouldn’t outweigh the savings. • Safety stocks should be used when uncertainty is related to quantity. • Safety lead times should be sued when uncertainty is related to timing.

44. Principles • MRP system nervousness can result from lot-sizing rules, parameter changes, and other causes. Precautions should be taken to dampen the amplitude and impact. • Uncertainty needs to be reduced before implementing complex procedures. • MRP system enhancements should follow the development of ever more intelligent users.