Material Requirement Planning

for Sporadic Demand

Need for a Method to deal with the great complexity of inventory

control for job shops that have many interdependent parts.

Method to be able to organize all of the data on stock-keeping units.

To keep track of stock levels, and order timing, while coordinating process scheduling with delivery dates for customers.

Challenge of organizing all of this information continued to grow with the increasing size of markets, product line

variety, and production capabilities

The Background for MRP

Order Point Policy (OPP) assumptions-◦ Demand is independent◦ Demand for the item has to be regular and

relatively continuous over time.

MRP assumptions-◦ Demand is dependent because it will organize and

control bringing together the kit of interdependent parts and subassemblies to make up the end product.

◦ Demand for the item is sporadic and lumpy.

Dependent Demand Systems Characterize MRP

Stock on hand Patterns OPP Application MRP Application(Smooth and independent demand) (Lumpy and dependent demand) SOH SOH

Safety Stock level

There is always SOH SOH is obtained as needed

The distinction is being made between predictions that are generated by customer notification of intentions to buy (MRP), as compared to forecasts based on demand distribution that exists in a steady state over time.

Actual customer orders on-hand provide relatively solid information about future demands. However, cancellation of orders are not uncommon, so risk factors still play a part in the determination of future events.

Forecasting Considerations

Master Production Schedule Bill of material Inventory stock level reports

Inputs to MRP Information System

Aggregate planning determines the resource capability and capacity to produce generic product in standard hours or in some generalized dimension.

For example, the aggregate plan might specify the number of gallons of paint to be made in January. The master production schedule converts this number into a time phased plan, which indicated exactly when each type and color of paint and size of can should be made, and how much of it should be made.

Master Production Schedule

The basis of assignment of MPs are customer orders and forecasts of orders to come that are considered highly probable.

The MPS makes the assignments in response to sales department commitments, which are called order promising.

Inputs and Outputs of MPS

Customer orders at hand

Parent Product forecasts

Best use of available resources

MPS

Customer and Order Priorities

MRP System needs these inputs

If marketing promises data that production cannot be deliver, changes are required either in the due dates promised to customers or in the production schedules for the plant.

Changes in order promising

In make-to-stock inventory environment, there may be sufficient inventory in stock to help fulfill order promising. The emphasis is on having sufficient stock-on-hand to provide excellent service with minimum delivery times.

In make-to-order inventory environment, there is no finished goods inventory to call upon. Greater dependency exists between sales, which promises delivery, and P/OM, which has to produce what is to be delivered.

The assemble-to-order inventory environment is one where end-items are built from subassemblies. Master production schedules ensure that these subassemblies are available to meet demand within promised due dates.

A BOM is “a listing of all of the subassemblies, intermediates, parts, and raw materials that go into a parent assembly showing the quantity of each required to make an assembly”.

It is used in conjunction with the MPS to determine the items for which purchase requisitions and purchase orders must be released.

Bill of material

Single-level BOM

Parent VCR

X(2) Y(1) Z(1) B(1)

Multi-level BOM

Parent VCR

X(2) Y(1) Z(1) B(1)

P(2) R(1) S(4) T(2)M(1

)N(1) Q(2)Q(1)

Multilevel product structure is called explosion.

In executing the explosion, the task is to identify the components of a given parent item and to ascertain the location of their inventor records in computer storage so that they may be retrieved and processed.

Explosion

Input-Drives Plans Output- Drive actions

Other Outputs

Operation of MRP

Master Production Schedule

Supplier informationLead times

Bill of materialsProduct tree

Inventory record fileStock on hand

information

Inventory transactions Updating

MRP System

Master Production Schedule

Planned-order timetable and orders

released

Exception and performance

Reports

Gross requirements GRt for end-items for week t are required by MRP and stated by the MPS. Inventory data are on file for the prior week’s stock-on-hand, SOHt-1.

And there may be some open orders to be received at the beginning of week t, called Scheduled Receipts, SRt.

Gross requirements less projected stock-on-hand at time t are called Net Requirements, NRt.

NRt = GRt - SOHt-1- SRt.

The determination of NRt is called netting. Based on NRt and order policies, planned-order receipt, PRt, and planned-order release times can be calculated.

MRP Basic Calculations

The best way to understand MRP is to simulate the action.

Some scenarios covered include: Lot-for-lot ordering; no parts-sharing parents; SOH = 80; LT = 2; @ level one.

Lot-for-lot ordering; no parts-sharing parents; SOH = 40: LT = 1; @ level two.

Lot-for-lot ordering; no parts-sharing parents; SOH = 0; LT = 1; @ level two.

Economic order quantity (EOQ) for a part that shares two parents;

SOH = 80; LT = 1; @ level 1

MRP in Action

Lot-for-lot sizing is one of the simplest ordering methods. However, it places more orders than other methods which order less frequently in larger quantities.

Lot-for-lot is MRP’s version of just-in-time.Lot-for-lot means buying the exact amount in each cell with a

Net Requirement (NRt); using the appropriate Lead Time (LT).

Lot-for-lot means that planned-order release (and planned-order receipt) are equal to NRt.

An alternative is to group together the requirements of several NRt cells to gain volume discounts, smaller number of orders, and other efficiencies.

Lot Sizing

15-8 Updating

• There are two approaches for updating the MRP:

Regeneration MRP—MPS is totally reexploded down through all BOMs, to maintain valid priorities.

Planned-order releases and NRt are recalculatedfrom scratch. Perhaps weekly timing.

Net change MRP—MRP is retained in the computer. When a change is needed in requirements, BOM listing, or open-order inventory status, partial explosion and netting are used only for affected parts. Too much

netting accumulates errors but allows rapid response and avoids costly regeneration. Timing is as needed

which could be hourly, or even less, in times of stress.

15-9 Capacity Requirements Planning (CRP)

• CRP is an extension of MRP which is required when capacity must be readjusted because the MRP system delivers a plan

that is not feasible with existing capacity configurations. In Figure 15-13 see MR > RA.

Figure 15-13

Rough-Cut Capacity Planning (RCCP)

• RCCP uses approximation methods to determine if there is sufficient capacity to accomplish objectives. RCCP occurs when the aggregate plan is being transformed into the MPS.

• RCCP checks to see if there is enough capacity using a Bill of Resources (BOR).

• BOR is a listing of key resources needed to make one unit of each item (or GT family) for which production is planned.

• RCCP and BOR are pre-MRP whereas, CRP is post-MRP

15-10 Distribution Resource Planning (DRP)

• DRP refers to distribution resource planning. It is part of MRPII (See Section 15-13 and Figure 15-15 for discussion of “the big

MRPII picture.”) When DRP has this all-inclusive view of supply chain management, it is called DRP2.

• DRP1, on the other hand, is defined as the time-phased order point approach used to “explode” planned orders at the

branch warehouse level. DRP1 is the application of MRP logic in tracing parts to end-products.

• DRP2 extends distribution requirements planning methods of DRP1 to the inter-functional business system. It does this by

applying the total systems point of view to strategic planning, whereas DRP1 is tactical in nature.

15-11 Weaknesses of MRP

• MRP is vulnerable to variability in lead times. Parent products cannot be made if parts or components are undelivered.

• MRP is supposed to do away with need for safety stock. P/OM may take protective measures such as lengthening estimated LT to offset delivery delays. Such “safety time” translates into added stock being carried as if it were buffer or safety stock.

• Order cancellations upset the system and require extensive “regeneration” or “net change” calculations. This is time

consuming and delays production.• Data errors, especially cumulative ones that occur with net

change MRP, deteriorate systems performance.

15-12 Closed-Loop MRP

• The core of the closed-loop MRP is the traditional material requirements planning function. Closed-loop has additional planning functions added which make it significantly more

powerful as a systems model. Figure 15-14 shows CRP and DRP1 with feedback links to make corrections and adjustments.

Figure 15-14

15-13 Strengths of MRPII (Manufacturing Resource Planning)

• MRPII entails total manufacturing resource planning as part of the strategic business plan. At the top of the chart in Figure 15-15 is

strategic business planning. • Everything else may seem the same but it is a different game. Because

strategic planning drives MRPII, this permits inclusion of product mix, advertising, new computer systems, etc.

Figure 15-15

15-14 Emerging Power of ERP

• MRPII is the basis and foundation for Enterprise Resource Planning (ERP).

• Transformation of MRPII to extensive applications of ERP is accomplished by converting the Business Planning box at the top of Figure 15-15 into an Enterprise-Wide Planning Box that

spans the globe. Broad strategy creates the conditions for detailed tactics. Success/failure are feedback for adjustments.

• Experiences of ERP providers (such as Oracle, SAP, IBM, Microsoft, and other smaller consulting firms that cannot spend

as much on advertising, but are in the business), is that ERP has many pitfalls—some can be avoided, but are the price for

gaining total control of the expanded global enterprise.

Spotlights in Review 15-1 Innovation: Everyone Has Something to Say

about It People tend to think that innovation is a property—and that

you can’t have enough of it. The derivation from Latin, innovare, to renew, raises the point of when to convert the old to the new. Old can be tried and true, while new can be at risk of failure. This view is borne out by facts that a small percent of new products succeed enough to have been worth the time and money.

There are ways to manage innovation to improve results and share risk. Partnerships to bring various kinds of expertise to bear are worthwhile. Too new, too different, and too risky may explain why large R&D budgets of established firms seldom motive them to venture into new initiatives. Keuffel & Esser (leading slide rule firm) did not survive calculators. Brush Electric Co. (leader in carbon arc lamps) could not shift to tungsten and the light bulbs of the 1900s.

Continuous innovation (kaizen) or radical reengineering (REE) are options open to every company. Startups are free of old baggage and have greater flexibility to innovate than established firms.

Spotlights in Review 15-2The Fallacy of Pursuing Local Optimums

Dr. Eliyahu M. Goldratt, author of The Goal and The Race, is world renowned for developing startling, yet eminently sensible, new methods for production control. His management philosophies and systems of thinking about problems continuously challenge companies to “break outside of the box” of conventional practices.

Early in his career, Goldratt developed the fundamental concepts for bottleneck-based finite scheduling. He concluded that optimizing production scheduling in isolation from other business variables does not lead to higher productivity or attainment of company goals. The evolution of these ideas he called the Theory of Constraints (TOC).

As time progressed these theories captured ever-larger slices of all management activities including project management and marketing. The fundamental base was the P/OM system extended to avoid local optimums. TOC guides the search for global optimization with benefit accruing to all who participate in Dr. Goldratt’s systems approach.