Material Requirements Planning (MRP)

1. Material Requirements Planning (MRP) Class Agenda: Lecture - 60 Minutes Break - 15 Minutes Problem Solutions - 60 Minutes Break - 15 Minutes Case Review - 45 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

3. The Planning Process Production Plan Master Production Schedule Material Requirements Plan Capacity Requirements Plan No Realistic?? 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.

5. Bicycle(1) P/N 1000 Frame Assembly (1) Handle Bars (1) P/N 1001 P/N 1002 Wheels (2) Frame (1) P/N 1003 P/N 1004 Bill-of-Material Product Structure Tree

6. Material Requirements Planning (MRP) • Manufacturing computer information system • Determines quantity & timing of dependent demand items

7. Master Production Schedule BOM (Bill-of-Material) MRP by period report Lead Times MRP by date report (Item Master File) MRP Programs Planned orders report Inventory Data Purchase requirements Purchasing data Exception reports Structure of the MRP System

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

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

10. S A C B C B Lead time = 6 for S Master schedule for S Master schedule for S sold directly Lead time = 4 for A Master schedule for A 12 9 11 10 13 8 Periods 6 5 9 10 11 2 7 8 3 1 40 20 30 40 50 15 10 10 Periods 1 2 3 4 5 6 7 8 Therefore, these are the gross requirements for B 10 50 20 40+10 = 50 15+30 = 45 40 Gross requirements: B Derivation of 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

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 ModelHow Much to Order? Annual Cost Total Cost Curve Holding Cost Curve Order (Setup) Cost Curve Order Quantity Optimal Order Quantity (Q*)

15. × × 2 D S Optimal Order Quantity = = Q* H D = = Expected Number of Orders N Q* Working Days / Year Expected Time Between Orders = = T N D D = Demand per year S = Setup (order) cost per order H = Holding (carrying) cost d = Demand per day L = Lead time in days = d Working Days / Year = × ROP d L EOQ Model Equations

16. Inventory Level AverageInventory (Q*/2) Optimal Order Quantity(Q*) Reorder Point (ROP) Time Lead Time EOQ ModelWhen To Order

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

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

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. 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. 14.2 - Net Materials Plan

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

26. 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. 14.5 - Continued

30. 14.5 - Continued

31. 14.20 - 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. 14.20 - 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.