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Part IV

Methods for Dependent

Demand

Chapter 9

Material Requirements

Planning

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Aims of the Chapter

After reading this chapter you should be able to do the following:

• Understand the limitations of independent demand methods.

• Describe the characteristic approach of MRP.

• Use MRP to timetable orders and operations.

• Outline the benefits and problems of using MRP.

• Adjust MRP schedules with batching rules.

• Add feedback to check for capacity and other problems.

• Discuss some extensions to MRP, including MRPII, DRP and

ERP.

Independent Demand

• Independent Demand: The demand for an item that is

unrelated to the demand for other items.

• Examples of Independent Demand

Demand for Finished Goods (FG), parts required for

destructive testing, service parts requirements or other

slow moving items.

• The best policy in these cases where the historical demand

is close to cero is to “order a replacement unit whenever one

is used”

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Limitations of Independent Demand

• Assumption that demands for items are independent. In reality

there are some linking demands from production plans or some

other sources.

• Assumption that demand is stable and that historical data can be

used for forecast, even when future demand can be found from

production plans or other sources.

• That stock should always be available even if there is no expected

demand.

• Assumption that variables (lead time, demand and costs) are

outside the organization’s control. In reality, they can be varied by

negotiation, using different suppliers, expediting, emergency

procedures, etc.

Limitations of Independent Demand

• Assumption that costs are fixed even though they can vary

according to the supplier, distance to travel (i.e. reorder cost), etc.

• Costs rely on accounting conventions and estimates. Shortage

costs?

• Assumption that variables follow known distributions, but these

can be difficult to identify.

• Even if a high service level is set, a product using many parts is

unlikely to find all of them in stock at the same time.

• The models accept the status quo and give no incentive or

mechanism to find improvements.

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Limitations of Independent Demand

• Independent demand methods are very good at dealing

with any problems of inventory control, but they do have

weaknesses.

• One of the most widely used is material requirements

planning (MRP).

• This is a dependent demand method that is useful when

demands for materials are related through a production

plan.

Approach of Material Requirements

Planning

• Material Requirements Planning (MRP) takes a master schedule

to design a detailed timetable for ordering materials.

• The timetable shows:

– Number of units of an item made (per day, week, month)

– A list of the materials needed for each unit

– The supply for materials

• The objective of the timetables is:

– To show when materials are needed

– To show when bought in materials should be ordered

– To schedule internal production

• The MRP looks at the requirements for each day to calculate the

volume and mix needed for production and meet the delivery date

of the finished goods with the customer.

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Stock Level without MRP

Time

Stock

level

Normal

Stock

Level

Production

Stock Level with MRP

Time

Stock

level

Normal

Stock

Level

Production

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MRP Procedure

• Three main sources: Master Schedule, BOM and

Inventory Records.

a) Master Schedule: number of units of a product to be

made in each period. (Product = Finished Good)

Example: We have 2 types of shampoo, Apple Blossom and Fragrant

Lemon, and each comes in 3 sizes 100ml, 250ml and 500ml. Our product

range is:

MRP Procedure

• B) Bill of Materials (BOM): Is a list where all the materials

needed to make a product are shown according to the

order in which materials are used.

• Example:

There is one base shampoo, two fragrances, three bottle sizes and six

labels. The 100ml and 250ml bottles are fitted with a flip top cap, and

the 500ml bottle has a screw cap. The 100ml bottles are packed 48 to a

small carton, the 250ml is packed 48 in a large carton and the 500ml

uses the same carton but 24 to a carton. Two of the bottle labels are

pasted on the carton, one on each end.

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MRP Procedure

Item master list for the BOM

This is a typical structure of a

single level bill of materials,

describing the relationship

between products and

components

• BOM

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MRP Procedure

• The quantities to order and when the orders should arrive– The MRP can explode the master schedule using the bill of materials

to give details of the materials needed. These are the gross

requirements, which doesn’t consider the materials that may be

already on stock or in transit.

• Gross Requirements: (number of units made) x (amount of

material for each unit)

• Net Requirements: Gross requirements – Inventory OH – Transit

• To find the time to place the orders.

– Need to know the lead time and the transit time of each supplier.

– And relevant information such as: minimum order sizes, set up costs,

discounts, packaging information, and so on.

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MRP Procedure Summary

• Material Requirement Planning uses a bill of material to explode a

master schedule and find the gross requirements for materials

needed to support production.

• Information about current stocks, orders outstanding, reserved

stocks, etc. are then used to find order quantities.

• Lead times are used to time phase these orders so that materials

arrive in time for use.

• The resulting stocks are matched directly to production plans.

Benefits & Problems with MRP

• MRP Benefits

– The wealth of information that it collects, analyses

and distributes.

– Main inputs: master schedule, BOM, inventory

records and any other relevant information.

– Main outputs: a timetable for material orders, for

operations, changes to previous orders, performance

reports, planning reports, records of inventory records

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Timetable for Material Orders

MRP Benefits

It relates stocks to planned operations (link between demand for

products and the supply of materials):

• Materials supply is linked directly to known demand.

• Lower stock levels, with savings in capital, space, etc.

• Higher stock turn-over.

• Better customer service – with no delays caused by shortages

of materials.

• Higher utilization of facilities – as materials are always

available when needed.

• Less time spent on expediting and emergency orders.

• MRP schedules can be used for short term planning.

• Assigns priorities for jobs supplying materials.

• Encourages better planning.

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MRP Problems

• Reduced flexibility to deal with changes.

• Needs a lot of detailed and reliable information.

• Involves a lot of data manipulation.

• Systems can become very complex.

• Assumes that lead times are constant and independent of the

quantities ordered.

• Ignores the order in which materials are really made and

assumes that they are made in the order specified by the BOM.

• Using MRP to schedule the production of parts can give poor

results.

• The lot sizes suggested by MRP can be inefficient.

• MRP may not recognize capacity and other constraints.

• Can be expensive and time consuming to implement.

Adjusting MRP Schedules

• Batching orders

– In order to save costs when ordering the materials to

cover the net requirements, it is convenient to

combine the small orders into larger batches.

– There are four approaches of batching or lot sizing:

A) Lot for lot

B) Fixed order quantity

C) Periodic Orders

D) Batching rules

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Adjusting MRP Schedules

A. Lot for lot: where you order exactly the net requirement

suggested by MRP for each period.

B. Fixed order quantity: where you find an order size that is

convenient, and always order this same amount. (i.e.,

truckload, container load, and economic order quantity, or

some other convenient size).

C. Periodic Orders: where you combine the net requirements over

some fixed number of periods, and place regular orders for

different quantities.

D. Batching Rules: use some specific procedure to calculate the

best pattern of orders. Typically they look for the combination

of orders that gives the minimum overall cost.

Manufacturing Resource

Planning• Material Requirement Planning (MRP) gives schedules for the arrival

of materials needed by operations, and closed loop MRP makes sure

that there is enough capacity to supply these materials. But materials

are only one resource. Organizations have to schedule people,

equipment, facilities, finances, logistics and other resources.

• Eventually we would have a completely integrated system that would

use the master schedule as the basis for planning all the activities

within an organization. This is the aim of manufacturing resource

planning or MRPII.

• MRP II gives an integrated system for synchronizing all functions

within an organization.

• It connects schedules for all activities back to the master schedule.

• The most serious problem with MRP II is the difficulty of getting

complete integration of all functions and systems.