Production Planning and Control MRP Overview MATERIAL ... · PDF file1 HAERY SIHOMBING 1 MATERIAL REQUIREMENT PLANNING Production Planning and Control Haeryip Sihombing Universiti

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HAERY SIHOMBING 1

MATERIAL REQUIREMENT PLANNING

Production Planning and Control

Haeryip Sihombing

Universiti Teknikal Malaysia Melaka

(UTeM)

4aBMFP 4513

MRP Overview

MRP is known as a push system, since it plans production according to forecasts of future demand and pushes out products accordingly

MRP planning is based on time buckets (or periods)

Orders (current demand) and forecasts (future demand) for end-items drive the system

These requirements drive the need for subassemblies and components at lower levels of the bill-of-materials (BOM)

MRP Systems

The inventory control mechanisms we studied to

this point are much better for single-item planning

Many products manufacturers produce have a

complex bill-of-materials (recipe of components)

Demand for components is dependent on end-

product demand (which we’ll call independent

demand items)

MRP systems encode the interdependence

among various end-items and components

MRP Overview

The end-item demands are translated into a Master Production Schedule (MPS)

MPS contains: Gross Requirements

On-Hand Inventory

Scheduled Receipts

MRP Procedure: Netting: Subtract out on-hand and scheduled receipts from

Gross Requirements

Lot Sizing: Given net requirements, determine periods in which production will occur, and the corresponding lot sizes (often uses Wagner-Whitin lot sizing procedure)

MRP Overview

MRP Procedure (cont’d) Time Phasing: Offset due dates of required items based

on lead times to determine order release times

BOM Explosion: Go down to the next level in the BOM and use the lot sizes at the higher level to determine gross requirements

Repeat for all levels in the BOM

Notes on Netting: We first use on-hand inventory to satisfy gross

requirements

If on-hand inventory is insufficient to meet some future demand and scheduled receipts are scheduled following this future demand, it doesn’t make sense to plan a new order, since an outstanding order exists

MRP Overview

Notes on Netting (cont’d) Instead of generating any new orders, we first attempt to

expedite currently scheduled receipts so they arrive earlier (we assume this is possible, if not, the schedule will be infeasible and customers will require notification of a delay)

When currently scheduled receipts are exhausted and netted out, we then have a set of net requirements that we use as requirements for the lot sizing procedure.

For now we’ll assume one of two very simple lot sizing rules: Lot-for-lot

Fixed order period (FOP)

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MRP Example

Consider the following BOM:

And the table of req’ts

Part A

100 (2) 200

300 400

Part A 1 2 3 4 5 6 7 8

Gross Req’ts 15 20 50 10 30 30 30 30

Sched. Receipts 10 10 100

Adj. SRs

Proj. On-Hand 20

Net Req’ts

Planned Order Rec.

Planned Order Rel.

MRP Example

We first see how far our on-hand can take us, and whether we’ll

have to adjust the scheduled receipts

Since the first 3 periods demand equals 85, and the sum of the

on-hand plus SRs until then is 40, we should adjust SRs by

expediting the order receipt scheduled for period 4

We can then project on-hand inventory

Part A 1 2 3 4 5 6 7 8

Gross Req’ts 15 20 50 10 30 30 30 30


Adj. SRs 20 100

Proj. On-Hand 20 5 5 55 45 15 -15

Net Req’ts

Planned Order Rec.

Planned Order Rel.

MRP Example

From period 6 on we have no on-hand or

scheduled receipts, so the deficit becomes net

requirements

Part A 1 2 3 4 5 6 7 8

Gross Req’ts 15 20 50 10 30 30 30 30


Adj. SRs 20 100

Proj. On-Hand 20 5 5 55 45 15 -15

Net Req’ts 15 30 30

Planned Order Rec.

Planned Order Rel.

MRP Example

Suppose our lot-sizing rule is an FOP = 2

Suppose producing Part A (given that all of its

components are available takes 2 periods

We then generate the planned order releases

Part A 1 2 3 4 5 6 7 8

Gross Req’ts 15 20 50 10 30 30 30 30


Adj. SRs 20 100

Proj. On-Hand 20 5 5 55 45 15 -15

Net Req’ts 15 30 30

Planned Order Rec. 45 30

Planned Order Rel. 45 30

MRP Example

Next, we move down in the BOM to

component 100:

Component 100 has 40 on-hand, no

scheduled receipts and a 2 week lead time

Part A

100 (2) 200

300 400

Component 100 1 2 3 4 5 6 7 8

Gross Req’ts 90 60

Sched. Receipts

Adj. SRs

Proj. On-Hand 40 40 40 40 -50

Net Req’ts 50 60

Planned Order Rec. 50 60

Planned Order Rel. 50 60

Lot Sizing Rules for MRP

We discussed three lot-sizing procedures:

Lot-for-lot, FOP, and Wagner-Whitin

Here we consider additional heuristic rules

Fixed Order Quantity and EOQ Each time we order, we order a set amount

We cannot directly apply the EOQ formula, since we have no constant demand rate, D

One strategy is to use the average demand per period in place of D in the EOQ formula and use the result as the fixed order quantity

We schedule order receipts for periods in which we project negative on-hand inventory

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Lot-Sizing Rules

Part-Period Balancing Example

Suppose our requirements for the next 9 periods are

• (0, 15, 45, 0, 0, 25, 15, 20, 15)

• Let A = $150, and let h = $2 per unit per period

Our first setup is in period 2:

Since $90 is closer to $150, we use the setup in period 2

to satisfy demand for periods 2 and 3 (Q2 = 60)

Satisfy demand until: Setup Cost Part-Periods Holding Cost

2 $150 0 $0

3 $150 45 $90

6 $150 145 $290

Lot-Sizing Rules

Part-Period Balancing Example (cont’d)

Our next setup is in period 6

The setup in period 6 covers demand until period 8

Satisfy demand until: Setup Cost Part-Periods Holding Cost

6 $150 0 $0

7 $150 15 $30

8 $150 55 $110

9 $150 100 $200

More Lot-Sizing Rules

Least-Unit Cost Heuristic

Do a setup in the first period necessary (call this

period i), then

Work forward, period by period (as with PPB) and

calculate the average cost incurred per unit

Stop at the first period in which the cost per unit increases,

call this period i + k.

The setup in period i covers demand from period i to

period i + k – 1.

More Lot-Sizing Rules

Silver Meal Heuristic

Do a setup in the first period necessary (call this

period i), then

Work forward, period by period (as with PPB) and

calculate the average cost incurred per period

Stop at the first period in which the cost per period

increases, call this period i + k.

The setup in period i covers demand from period i to

period i + k – 1.

Safety Stock and Safety Lead Times

MRP assumes data are deterministic

Lead times are fixed

Demand requirements are certain

Lot size yields are 100%

This is clearly not the case in most production environments

Safety stock inflates requirements to buffer against demand uncertainties

Safety lead times inflate expected lead time to ensure supply availability at production stages

Also inflate requirements based upon expected yield

If yield equals y, multiple requirements by 1/y

Benefits of MRP

1. Better response to customer orders

2. Faster response to market changes

3. Improved utilization of facilities and labor

4. Reduced inventory levels

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Dependent Demand

The demand for one item is related to the demand for another item

Given a quantity for the end item, the demand for all parts and components can be calculated

In general, used whenever a schedule can be established for an item

MRP is the common technique

Dependent Demand

1. Master production schedule

2. Specifications or bill of material

3. Inventory availability

4. Purchase orders outstanding

5. Lead times

Effective use of dependent demand inventory models requires the following

Master Production Schedule (MPS)

Specifies what is to be made and when

Must be in accordance with the aggregate production plan

Aggregate production plan sets the overall level of output in broad terms

As the process moves from planning to execution, each step must be tested for feasibility

The MPS is the result of the production planning process


MPS is established in terms of specific products

Schedule must be followed for a reasonable length of time

The MPS is quite often fixed or frozen in the near term part of the plan

The MPS is a rolling schedule

The MPS is a statement of what is to be produced, not a forecast of demand


A customer order in a job shop (make-to-order) company

Modules in a repetitive (assemble-to-stock) company

An end item in a continuous (make-to-stock) company

Can be expressed in any of the following terms:

Aggregate Production Plan

Months January February

Aggregate Production Plan 1,500 1,200(shows the totalquantity of amplifiers)

Weeks 1 2 3 4 5 6 7 8

Master Production Schedule(shows the specific type andquantity of amplifier to beproduced

240 watt amplifier 100 100 100 100

150 watt amplifier 500 500 450 450

75 watt amplifier 300 100

Figure 14.2

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The Planning Process

Figure 14.1

Change production

plan?Master production schedule

ManagementReturn oninvestmentCapital

EngineeringDesigncompletion

Aggregate production

plan

ProcurementSupplierperformance

Human resourcesManpowerplanning

ProductionCapacityInventory

MarketingCustomerdemand

FinanceCash flow

The Planning Process

Figure 14.1

Is capacity plan being

met?

Is execution meeting the

plan?

Change master

production schedule?

Change capacity?

Change requirements?

No

Execute material plans

Execute capacity plans

Yes

Realistic?

Capacity requirements plan

Material requirements plan

Master production schedule

Focus for Different Process Strategies

Stock to Forecast

(Product Focus)

Schedule finished product

Assemble to Order or Forecast(Repetitive)

Schedule modules

Make to Order

(Process Focus)

Schedule orders

Examples: Print shop Motorcycles Steel, Beer, Bread

Machine shop Autos, TVs Lightbulbs

Fine-dining restaurant Fast-food restaurant Paper

Typical focus of the master production

schedule

Number of end items

Number of inputs

Figure 14.3

Bills of Material

List of components, ingredients, and materials needed to make product

Provides product structure

Items above given level are called parents

Items below given level are called children

BOM Example

B(2) Std. 12” Speaker kit C(3)Std. 12” Speaker kit w/ amp-booster1

E(2)E(2) F(2)

Packing box and installation kit of wire,

bolts, and screws

Std. 12” Speaker booster assembly

2

D(2)

12” Speaker

D(2)

12” Speaker

G(1)

Amp-booster

3

Product structure for “Awesome” (A)

A

Level

0

BOM Example

B(2) Std. 12” Speaker kit C(3)Std. 12” Speaker kit w/ amp-booster1

E(2)E(2) F(2)

Packing box and installation kit of wire,

bolts, and screws

Std. 12” Speaker booster assembly

2

D(2)

12” Speaker

D(2)

12” Speaker

G(1)

Amp-booster

3

Product structure for “Awesome” (A)

A

Level

0

Part B: 2 x number of As = (2)(50) = 100

Part C: 3 x number of As = (3)(50) = 300

Part D: 2 x number of Bs

+ 2 x number of Fs = (2)(100) + (2)(300) = 800

Part E: 2 x number of Bs

+ 2 x number of Cs = (2)(100) + (2)(150) = 500

Part F: 2 x number of Cs = (2)(150) = 300

Part G: 1 x number of Fs = (1)(300) = 300

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Bills of Material

Modular Bills

Modules are not final products but components that can be assembled into multiple end items

Can significantly simplify planning and scheduling

Bills of Material

Planning Bills

Created to assign an artificial parent to the BOM

Used to group subassemblies to reduce the number of items planned and scheduled

Used to create standard “kits” for production

Bills of Material

Phantom Bills

Describe subassemblies that exist only temporarily

Are part of another assembly and never go into inventory

Low-Level Coding

Item is coded at the lowest level at which it occurs

BOMs are processed one level at a time

Accurate Records

Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly

Generally MRP systems require 99% accuracy

Outstanding purchase orders must accurately reflect quantities and schedule receipts

Lead Times

The time required to purchase, produce, or assemble an item

For purchased items – the time between the recognition of a need and the availability of the item for production

For production – the sum of the order, wait, move, setup, store, and run times

Time-Phased Product Structure

| | | | | | | |

1 2 3 4 5 6 7 8Time in weeks

F

2 weeks

3 weeks

1 week

A

2 weeks

1 week

D

E

2 weeks

D

G

1 week

1 week

2 weeks to produce

B

C

E

Start production of DMust have D and E completed here so

production can begin on B

Figure 14.4

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MRP Structure

Figure 14.5

Output Reports

MRP by period report

MRP by date report

Planned order report

Purchase advice

Exception reports

Order early or late or not needed

Order quantity too small or too large

Data Files

Purchasing data

BOM

Lead times

(Item master file)

Inventory data

Masterproduction schedule

Material requirement

planning programs

(computer and software)

Determining Gross Requirements

Starts with a production schedule for the end item – 50 units of Item A in week 8

Using the lead time for the item, determine the week in which the order should be released – a 1 week lead time means the order for 50 units should be released in week 7

This step is often called “lead time offset” or “time phasing”


From the BOM, every Item A requires 2Item Bs – 100 Item Bs are required in week 7 to satisfy the order release for Item A

The lead time for the Item B is 2 weeks –release an order for 100 units of Item B in week 5

The timing and quantity for component requirements are determined by the order release of the parent(s)


The process continues through the entire BOM one level at a time – often called “explosion”

By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion

Low-level coding ensures that each item appears at only one level in the BOM

Gross Requirements Plan

Table 14.3

Week

1 2 3 4 5 6 7 8 Lead Time

A. Required date 50Order release date 50 1 week

B. Required date 100Order release date 100 2 weeks

C. Required date 150Order release date 150 1 week

E. Required date 200 300Order release date 200 300 1 week

F. Required date 300Order release date 300 3 weeks

D. Required date 600 200Order release date 600 200 1 week

G. Required date 300Order release date 300 1 week

Net Requirements Plan

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Net Requirements Plan Determining Net Requirements

Starts with a production schedule for the end item – 50 units of Item A in week 8

Because there are 10 Item As on hand, only 40 are actually required – (net requirement) = (gross requirement - on-hand inventory)

The planned order receipt for Item A in week 8 is 40 units – 40 = 50 - 10

Determining Net Requirements

Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7

The gross requirement for Item B is now 80 units in week 7

There are 15 units of Item B on hand, so the net requirement is 65 units in week 7

A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

Determining Net Requirements

A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8

This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process

Gross Requirements Schedule

Figure 14.6A

B C

5 6 7 8 9 10 11

40 50 15

Lead time = 4 for AMaster schedule for A

S

B C

12 138 9 10 11

20 3040

Lead time = 6 for SMaster schedule for S

1 2 3

10 10

Master schedulefor B

sold directly

Periods

Therefore, these are the gross requirements for B

Gross requirements: B 10 40 50 2040+10 15+30

=50 =45

1 2 3 4 5 6 7 8Periods

MRP Planning Sheet

Figure 14.7

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Net Requirements Plan

The logic of net requirements

available inventory

net requirements

on hand

scheduled receipts+– =

total requirements

gross requirements

allocations+

MRP Management

MRP is a dynamic system

Facilitates replanning when changes occur

System nervousness can result from too many changes

Time fences put limits on replanning

Pegging links each item to its parent allowing effective analysis of changes

MRP and JIT

MRP is a planning system that does not do detailed scheduling

MRP requires fixed lead times which might actually vary with batch size

JIT excels at rapidly moving small batches of material through the system

Finite Capacity Scheduling

MRP systems do not consider capacity during normal planning cycles

Finite capacity scheduling (FCS) recognizes actual capacity limits

By merging MRP and FCS, a finite schedule is created with feasible capacities which facilitates rapid material movement

Small Bucket Approach

1. MRP “buckets” are reduced to daily or hourly

The most common planning period (time bucket) for MRP systems is weekly

2. Planned receipts are used internally to sequence production

3. Inventory is moved through the plant on a JIT basis

4. Completed products are moved to finished goods inventory which reduces required quantities for subsequent planned orders

5. Back flushing based on the BOM is used to deduct inventory that was used in production

Lot-Sizing Techniques

Lot-for-lot techniques order just what is required for production based on net requirements

May not always be feasible

If setup costs are high, costs may be high as well

Economic order quantity (EOQ)

EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand

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Lot-Sizing Techniques

Part Period Balancing (PPB) looks at future orders to determine most economic lot size

The Wagner-Whitin algorithm is a complex dynamic programming technique

Assumes a finite time horizon

Effective, but computationally burdensome

Lot-for-Lot Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35 35 0 0 0 0 0 0 0 0 0

Net requirements 0 30 40 0 10 40 30 0 30 55

Planned order

receipts30 40 10 40 30 30 55

Planned order

releases30 40 10 40 30 30 55

Holding cost = $1/week; Setup cost = $100

Lot-for-Lot Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts



Planned order

receipts30 40 10 40 30 30 55

Planned order

releases30 40 10 40 30 30 55

Holding cost = $1/week; Setup cost = $100

No on-hand inventory is carried through the systemTotal holding cost = $0

There are seven setups for this item in this planTotal setup cost = 7 x $100 = $700

EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts



Planned order

receipts73 73 73 73

Planned order

releases73 73 73 73

Holding cost = $1/week; Setup cost = $100;

Average weekly gross requirements = 27; EOQ = 73 units

EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts



Planned order

receipts73 73 73 73

Planned order

releases73 73 73 73


Average weekly gross requirements = 27; EOQ = 73 units

Annual demand = 1,404Total cost = setup cost + holding costTotal cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)Total cost = $3,798Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) =

$730

PPB Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts

Projected on hand 35

Net requirements

Planned order

receipts

Planned order

releases


EPP = 100 units

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PPB Example

1 2 3 4 5 6 7 8 9 10


Scheduled receipts

Projected on hand 35

Net requirements

Planned order

receipts

Planned order

releases


EPP = 100 units

2 30 0

2, 3 70 40 = 40 x 1

2, 3, 4 70 40

2, 3, 4, 5 80 70 = 40 x 1 + 10 x 3 100 70 170

2, 3, 4, 5, 6 120 230 = 40 x 1 + 10 x 3

+ 40 x 4

+ =

Combine periods 2 - 5 as this results in the Part Period closest to the EPP

Combine periods 6 - 9 as this results in the Part Period closest to the EPP

6 40 0

6, 7 70 30 = 30 x 1

6, 7, 8 70 30 = 30 x 1 + 0 x 2

6, 7, 8, 9 100 120 = 30 x 1 + 30 x 3 100 120 220+ =

10 55 0 100 0 100

Total cost 300 190 490

+ =

+ =

Trial Lot Size

Periods (cumulative net Costs

Combined requirements) Part Periods Setup Holding Total

Lot-Sizing Summary

For these three examples

Lot-for-lot $700

EOQ $730

PPB $490

Wagner-Whitin would have yielded a plan

with a total cost of $455 for this example

Lot-Sizing Summary

In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change

In practice, this results in system nervousness and instability

Lot-for-lot should be used when economical

Lot sizes can be modified to allow for scrap, process constraints, and purchase lots

Lot-Sizing Summary

Use lot-sizing with care as it can cause considerable distortion of requirements at lower levels of the BOM

When setup costs are significant and demand is reasonably smooth, PPB, Wagner-Whitin, or EOQ should give reasonable results

Extensions of MRP

Closed-Loop MRP

MRP system provides input to the capacity plan, MPS, and production planning process

Capacity Planning

MRP system generates a load report which details capacity requirements

This is used to drive the capacity planning process

Changes pass back through the MRP system for rescheduling

Closed-Loop MRP System

Figure 14.8

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MRP Problems

MRP does not account for production capacity limits (or their effects on lead times)

Inflated safety lead times lead to high WIP levels

System nervousness: MRP is not robust to changes in customer requirements

Replanning the current schedule based on changes can lead to infeasible schedules

Frozen zones specify a number of periods in which the schedule is fixed (cannot be changed)

Can lead to problems with sales and marketing depts.

Time fences are usually used, where the first X weeks are absolutely frozen, the next Y weeks can allow changes with a possible customer financial penalties, and beyond X + Y weeks is open for any changes

From ERP to APS Systems

ERP systems still at best only contain the basic MRP II

logic for planning and controlling production

More advanced production planning logic requires

customized development within the ERP system

Advanced Production and Scheduling (APS) systems

complement ERP systems by providing more sophisticated

production planning and scheduling logic

Firms such as I2 Technologies and Manugistics have

enjoyed tremendous growth in the late 1990’s due to their

APS systems

APS Systems Capabilities

Demand Planning – Sophisticated forecasting techniques

to analyze customer buying patterns

Supply Planning – Synchronizes operations of

manufacturers, suppliers, and logistics service providers

through information exchange. Provides better, more

accurate information for managing incoming materials

Demand fulfillment – Provides more accurate estimates of

order fulfillment dates; manages order promising, provides

backlog management, and tracks order fulfillment

APS’s have modules for managing pull systems and can

dynamically track WIP, throughput, and cycle times

Documents

Production Planning and Control MRP Overview MATERIAL ... · PDF file1 HAERY SIHOMBING 1 MATERIAL REQUIREMENT PLANNING Production Planning and Control Haeryip Sihombing Universiti