Section Objectives

1

• Section Objectives
• After completing this section, you should be able
  to
• 1. Describe the conditions under which MRP is
  most appropriate.
• 2. Describe the inputs, outputs and nature of
  MRP processing.
• 3. Explain how requirements in a master schedule
  are translated into material requirements for
  lower level items.
• 4. Discuss possible uses of safety stock and
  safety time.
• 5. Explain how an MRP system is useful in
  capacity requirements planning.
• 6. Outline benefits and difficulties of MRP.
• 7. Describe MRP II and how it relates to MRP.

2

• MRP Whazzit
• a computer-based information system designed to
  handle ordering and scheduling of of
  dependent-demand inventories (i.e. raw materials,
  component parts and subassemblies).
• MRP Inputs
• Master Production Schedule (MPS) Based on
  customers orders and demand forecasts, the MPS
  details exactly what end products must be
  manufactured or assembled, when they must be
  manufactured and what quantities are needed.
• Bill of Materials File (BOM) Specifies amount
  of raw materials, components and subassemblies
  needed to manufacture or assemble the end
  product. Tells both the requirements and when
  they will be needed.
• Inventory Status File Maintains inventory
  records so that the company may subtract the
  amount on hand from the gross requirements, thus
  identifying net requirements at any time.
• MRP Program Explodes end product demand into
  gross requirements for individual parts and other
  materials. Then the program calculates net
  requirements based on the inventory status file
  and places orders for the inputs necessary to the
  production / assembly process.

3
MRP Inputs
MRP Processing
MRP Outputs
Changes
Order releases
Master production schedule
Orders Forecast
Design Changes
Receipts Withdrawals
Planned-order schedules
Primary Reports
Exception reports
MRP Computer Program
Bill-of- materials file
Planning reports
Performance- control reports
Secondary Reports
Inventory status file
Inventory transaction
4

• MRP Outputs
• Outputs and Reports Records and information
  related to
• (i) quantities the company should order and when
• (ii) any need to expedite or reschedule arrival
  dates or needed product quantities
• (iii) cancelled need for product
• (iv) MRP system status

5
Master Schedule
A master schedule for end item X
Week Number
Item X
1
2
3
4
5
6
7
8
Quantity
100
150
Planning horizon for cumulative lead time
Assembly
Subassembly
Fabrication
Procurement
1
2
3
4
5
6
7
8
9
10
6
Bill of Materials File
Level
X
0
B
C
1
(2)
D
E
E
F
2
(3)
(2)
(2)
E
(4)
3
Product structure tree for end item X
7

• Using the information presented in the product
  structure tree
• a. Determine the quantities of B, C, D, E and F
  needed to assemble one X.
• b. Determine the quantities of these components
  necessary to assemble 200 Xs.
• Solution to a b
• Quantity Quantity
• to make to make
• Component 1 X 200 X
• B.....2 Bs per X 2 400
• D.....3 Ds per B 2 Bs per X 6
  1200
• E.....1 E per B 2 Bs per X 2 400
• E.....4 Es per D 3 Ds per B 2 Bs per X
  24 4800
• C.....1 C per X 1 200
• E.....2 Es per C 1C per X 2 400
• F.....2 Fs per C 1 C per X 2 400

8

• Inventory Records File
• Stores information on the status of each item by
  time period. Includes
• 1. Gross Requirements. The total expected
  demand for an item or raw material during each
  time period.
• 2. Scheduled Receipts. Open orders scheduled to
  arrive from vendors or elsewhere.
• Projected on Hand. Expected amount of inventory
  that will be on hand at the beginning of each
  time period.
• scheduled receipts available from last
  period.
• 4. Supplier. The name(s) and address(es) of the
  items supplier(s).
• 5. Lead Time. The average length of time, in
  days or weeks, between placing and receiving an
  order from the supplier.
• 6. Lot Size. Standard order size. This may be
  determined by techniques such as lot-for-lot
  ordering, EOQ, part period balancing, etc.

9
MRP Processing

• MRP processing involves taking end item
  requirements and exploding them into
  time-phased requirements for assemblies, parts
  and raw materials.

Procurement of RM D
Order point
Fabrication of part E
Subassembly A
Procurement of RM F
Final assembly and inspection
Procurement of part C
Subassembly B
Procurement of RM I
Fabrication of part G
1
2
3
4
5
6
7
8
9
10
11
Week number
Available for delivery
10
MRP Processing
1
2
3
4
5
6
7
8
Week number
Item
Gross requirements
Scheduled receipts
Projected on hand
Net requirements
Planned-order receipts
Planned-order releases
11

• MRP Processing Problem Illustration
• A firm that produces wood shutters and bookcases
  has received two orders for shutters one for 100
  shutters and one for 150 shutters. The 100-unit
  order is due at the start of week 4 of the
  current schedule, and the 150-unit order is due
  for delivery at the start of week 8.
• Each shutter consists of four slated wood
  sections and two frames. The wood sections are
  made by the firm, and fabrication takes one week.
  The frames are ordered, and lead time is two
  weeks. There is a scheduled receipt of 70 wood
  sections in week 1 (i.e. at the beginning of week
  1).
• Determine the size and timing of planned-order
  releases necessary to meet delivery requirements
  under each of the following conditions
• 1. Lot-for-lot ordering (i.e. order size equal
  to net requirements).
• 2. Lot-size ordering with a lot size of 320
  units for frames and 70 units for wood
  
  
  
  sections.

12

• MRP Processing Problem Solution - Lot-for-Lot
  Ordering

1. Develop a Master Schedule
Week number
1
2
3
4
5
6
7
8
Quantity
100
150
2. Develop a Product Tree Structure
Shutter
Frames (2)
Wood sections (4)
3. Develop an Assembly Time Chart
Make wood sections
Make wood sections
Assemble shutters
Assemble shutters
Procure frames
Procure frames
1
2
3
4
5
6
7
8
13
Week number
1
2
3
4
5
6
7
8
4. Master schedule for shutters
100
150
Gross requirements
Shutters LT 1 week
100
150
Scheduled receipts
Projected on hand
Net requirements
100
150
Planned-order receipts
100
150
Planned-order releases
100
150
times 2
times 2
Frames LT 2 week
Gross requirements
200
300
Scheduled receipts
Projected on hand
Net requirements
200
300
Planned-order receipts
200
300
Planned-order releases
200
300
14
Week number
1
2
3
4
5
6
7
8
4. Master schedule for shutters
100
150
Gross requirements
Shutters LT 1 week
100
150
Scheduled receipts
Projected on hand
Net requirements
100
150
Planned-order receipts
100
150
Planned-order releases
100
150
times 4
times 4
Wood sections LT 1 week
Gross requirements
400
600
Scheduled receipts
70
Projected on hand
70
70
70
Net requirements
330
600
Planned-order receipts
330
600
Planned-order releases
330
600
15

• MRP Processing Problem Solution - Lot Size
  Ordering

1. Develop a Master Schedule
Week number
1
2
3
4
5
6
7
8
Quantity
100
150
2. Develop a Product Tree Structure
Shutter
Frames (2)
Wood sections (4)
3. Develop an Assembly Time Chart
Make wood sections
Make wood sections
Assemble shutters
Assemble shutters
Procure frames
Procure frames
1
2
3
4
5
6
7
8
16
Week number
1
2
3
4
5
6
7
8
4. Master schedule for shutters
100
150
Gross requirements
Shutters LT 1 week
100
150
Scheduled receipts
Projected on hand
Net requirements
100
150
Planned-order receipts
100
150
Planned-order releases
100
150
times 2
times 2
Frames LT 2 week Lot size 320
Gross requirements
200
300
Scheduled receipts
Projected on hand
120
120
120
120
140
Net requirements
200
180
Planned-order receipts
320
320
Planned-order releases
320
320
17
Week number
1
2
3
4
5
6
7
8
4. Master schedule for shutters
100
150
Gross requirements
Shutters LT 1 week
100
150
Scheduled receipts
Projected on hand
Net requirements
100
150
Planned-order receipts
100
150
Planned-order releases
100
150
times 4
times 4
Wood sections LT 1 week Lot size 70
Gross requirements
400
600
Scheduled receipts
70
Projected on hand
70
70
70
20
20
20
20
50
Net requirements
330
580
Planned-order receipts
350
630
Planned-order releases
350
630
18

• MRP Outputs
• Primary Reports
• Planned orders - amount and timing of future
  orders
• Order releases - authorize the execution of
  planned orders
• Changes to planned orders - changes of due dates
  and/or order quantities
• Secondary Reports
• Performance-control reports - measure deviation
  from plans, including missed deliveries and
  stockouts. Provide information that can be used
  to assess cost performance.
• Planning reports - include purchase commitments
  and other data that can be used to assess future
  material requirements. Useful in forecasting
  future material requirements.
• Exception reports - illustrate major
  discrepancies such as late and overdue orders,
  excessive scrap rates, reporting errors and
  requirements for nonexistent parts.

19

• Other MRP Issues
• Safety Stock supposedly, safety stock is not
  needed because usage quantities can be projected
  once the master schedule has been established.
  However, bottleneck operations or ones that
  produce varying scrap rates can cause shortages
  in downstream operations.
• MRP systems deal with these problems in several
  ways
• 1. Identify activities / operations subject to
  variability and determine the extent of the
  variability.
• 2. When lead times are variable, use concept of
  safety time - this results in scheduling orders
  for arrival or completion sufficiently ahead of
  time to eliminate or reduce the chance of having
  to wait for these items.
• Lot Sizing choosing a lot size to order or for
  production. For independent demand items (i.e.
  end items), economic order sizes (EOQ) and
  economic run sizes are used. For dependent
  demand items, demand tends to be more lumpy and
  the planning horizon shorter. There are some
  models available to assist in planning
• 1. Lot-for lot ordering - order or run size for
  a period is set equal to demand for that period.
  Problems (1) different order sizes prevent
  economies associated with a fixed order size
  (e.g. standard containers / standardized
  procedures) and (2) new setup for each run.
• 2. EOQ models - if demand is uniform, this can
  minimize order (setup) and carrying costs.

20

• 2. EOQ models (continued) - however, the more
  lumpy demand is, the less appropriate such an
  approach.
• 3. Fixed-period ordering - provides coverage for
  some predetermined number of periods, where the
  number of periods is determined by judgment and
  experience. Consider the following
• Using a two-period rule, an order size of
  120 units would cover the first two periods. The
  next two periods would be covered by an order
  size of 81 units. However, the demands in
  periods 3 and 5 are so small, it would make sense
  to combine them both with the 80 units and order
  85 units.
• 4. Part period model - balances setup and
  holding costs. The term, part period, refers to
  holding a part or parts over a number of periods.
  The economic part period, EPP, can be computed
  as the ratio of setup costs to the cost of
  holding a unit for one period. The formula for
  computing the EPP is
• EPP (Setup cost) / (Unit
  holding cost per period)

1
2
3
4
5
Period
70
50
1
80
4
Demand
Cumulative Demand
70
120
121
201
205
21

• Capacity Requirements Planning (CRP)
• Process of determining short-range capacity
  requirements. The necessary inputs include
  planned-order releases for MRP, the current shop
  load, routing information and job times. Outputs
  include load reports for each work centre.

Using MRP to assist in planning
capacity requirements
Develop a tentative master production schedule
Use MRP to simulate material requirements
Revise tentative master production schedule
Convert material requirements to resource
requirements
No
Shop capacity adequate?
Can capacity be changed?
No
Yes
Yes
Develop a tentative master production schedule
Change capacity
22

• Capacity Requirements Planning (CRP)

A hypothetical department load report
Load (units)
Capacity
Now in production
Planned order releases
Expected orders
1
2
3
4
5
6
7
8
9
10
11
12
13
Time period
23

• Benefits, Requirements and Limitations of MRP
• Benefits
• Low levels of in-process inventories
• Ability to keep track of material requirements
• Ability to evaluate capacity requirements
  generated by the master schedule
• A means of allocating production time
• Requirements
• Computer and necessary software
• Accurate and up-to-date
• master schedules
• bills of materials
• inventory records
• Integrity of file data
• Limitations
• Recordkeeping deficiencies
• Resistance of supervisory staff
• Time for education, training and convincing of
  employees - often a year or more

24

• Manufacturing Resource Planning - MRP II

Market demand
Master production schedule
Finance
Manufacturing
Marketing
MRP
Production plan
Capacity requirements planning
Rough-cut capacity planning
Problems?
Yes
Adjust
master schedule
Problems?
Yes
No
Adjust
No
production plan
Requirements schedule
25
Enterprise Resource Planning (ERP)

• An extension of the MRP system to tie in
  customers and suppliers
• Allows automation and integration of many
  business processes
• Shares common data bases and business practices
• Produces information in real time
• Coordinates business from supplier evaluation to
  customer invoicing

• ERP modules include
• Basic MRP
• Finance
• Human resources
• Supply chain management (SCM)
• Customer relationship management (CRM)

26
Enterprise Resource Planning (ERP)

• ERP can be highly customized to meet specific
  business requirements
• ERP systems can be integrated with
• Warehouse management
• Logistics
• Electronic catalogs
• Quality management

• ERP systems have the potential to
• Reduce transaction costs
• Increase the speed and accuracy of information
• Facilitates a strategic emphasis on JIT systems
  and integration

27
ERP and MRP
28
ERP and MRP
29
ERP and MRP
Figure 14.11
30
ERP and MRP
31
Advantages of ERP Systems

• Provides integration of the supply-chain,
  production, and administration
• Creates commonality of databases
• Can incorporate improved best processes
• Increases communication and collaboration between
  business units and sites
• Has an off-the-shelf software database
• May provide a strategic advantage

32
Disadvantages of ERP Systems

• Is very expensive to purchase and even more so to
  customize
• Implementation may require major changes in the
  company and its processes
• Is so complex that many companies cannot adjust
  to it
• Involves an ongoing, possibly never ending,
  process for implementation
• Expertise is limited with ongoing staffing
  problems

33
SAPs ERP Modules
34
A firm that produces electric golf carts has
just received an order for 200 carts, which are
to be ready for delivery at the start of week 8.
Information concerning the product is given
below Parts List Lead Time Quantity on
Hand Electric golf cart 1 week
0 Top 1 week 40
Base 1 week 20 Top
Supports (4) 1 week 200
Cover 1 week 0 Base
Motor 2 weeks 300
Body 3 weeks 50 Seats
(2) 2 weeks 150 Body
Frame 1 week 35
Controls 1 week 0 Wheel
assemblies (4) 1 week 240
Using this information, do each of the
following a. Construct a product tree. b.
Construct an assembly time chart. c. Develop a
material requirements plan that will provide 200
golf carts by week 8, assuming lot-for-lot orderin
g.
Material Requirements Planning - Additional
Illustration 1
35
Refer to illustration 1. Assume there has
been a change in the quantity and timing of
orders for golf carts, which is apparently due to
unusually mild weather. The revised plan calls
for 100 golf carts at the start of week 6, 100 at
the start of week 8 and 100 at the start of week
9. Parts List Lead Time Quantity on
Hand Electric golf cart 1 week
0 Top 1 week 40
Base 1 week 20 Top
Supports (4) 1 week 200
Cover 1 week 0 Base
Motor 2 weeks 300
Body 3 weeks 50 Seats
(2) 2 weeks 150 Body
Frame 1 week 35
Controls 1 week 0
Wheel assemblies (4) 1 week
240 a. Develop a master schedule for this
revised plan. b. Determine the timing and
quantities for orders for tops and bases. c.
Assume now that due to equipment problems,
capacity for assembling bases is 50 units per
week. Revise your material plan for bases to
reflect this, but still meet delivery dates.
Material Requirements Planning - Additional
Illustration 2