Material Requirements Planning

1. Material Requirements Planning Managing Inventories of Items With Dependent Demand

2. Demand Types • Dependent Demand: Demand for items that are component parts to be used in the production of finished goods • Independent Demand: Demand generated outside the system. Usually, demand for end-items or items sold individually, e.g. spare parts

3. Demand & MRP • Dependent demand should be handled differently than independent demand • Production should be planned taking into consideration the link between independent demand and sub-assembly requirements • Material Requirements Planning (MRP) is the universally accepted tool for managing inventories of items with dependent demand

4. MRP Functionality • Material Requirements Planning: Calculate the quantity of raw materials and sub-assemblies to produce the necessary end-item quantities (as expressed with independent demand) • Coordination of Purchase and Production Orders (or Jobs): Determine and coordinate the start times of all jobs so that end-items are completed before due dates

5. Time in MRP • In MRP systems, time is divided in fixed intervals or it is considered a continuous variable • Item requirements within a specific time interval are usually supposed to apply from the beginning of the interval

6. MRP Schematic Master Production Schedule Inventory Status Delivery data Product Structure, i.e., Bill of Material Material Requirements Plan Purchasing Requirements Production Requirements

7. MRP Inputs • Master Production Schedule (MPS) • Gross Requirements (authorized) • Production Forecasts • Item Master File (BOM) • Lot Sizing Rule • Period order quantity (POQ) or (FOP) • Lot for lot (L4L) • Fixed order quantity (FOQ)

8. MRP Inputs • Planning Lead Time (Constant) • Inventory Status (on-hand Inventory) • Scheduled Receipts • Identifier (Purchase Order of Job number) • Due date and release date • Unit of measure and quantity

9. Item Master Data • Item master data contains: • Item code • Item description • Bill of Materials • Lot-size • Planned lead times

10. Bill of Materials The relation between an end-item and its sub-assemblies is described in the Bill of Materials (BOM). For example for end items A and B, the BOM is: BOM example for end items A & B

11. Bill of Materials • Usually, an end-item is composed of many components and sometimes it is even linked to several different BOMs • Production uses BOMs to calculate the load and material requirements at each production stage in order to produce an end-item

12. Bill of Materials • For each BOM component, a Low Level Code (LLC) is defined; this code indicates the lowest level a specific component is found • End-items have LLCs equal to zero • A group of items used only for the assembly of end-items has LLC equal to 1 • A group used for the production of items with LLC equal to 1, has LLC equal to 2 and so forth • Most commercial MRP packages integrate a BOM processor which automatically attributes the LLC to all items based on BOM data

13. Master Production Schedule (MPS) • MPS contains information about: • Gross requirements • Due dates • Purchase and production orders and scheduled receipts • On-hand inventory

14. MPS Example

15. Product Families Product and sub-assemblies Month - Quarter Day, Week, Month Years Weeks to months Week Month - Quarter Planning/Production General Management MPS Vs. Forecasts Forecasting MPS Unit Time frame Horizon Updating Function

16. On-hand Inventory • Inventory records contain information about: • Storage location • Current available quantities • Raw material inventory status • “Crib" inventory(pre-processed and stored inventory) • Sub-assembly inventory status • Allocation of reserved items to on-going processes

17. Scheduled Receipts • A scheduled receipt refers to: • For purchased items: the issuance of a purchase order and notification of the supplier • For produced items: the production routing and the issuance of a production order • As soon as the purchase/production order is issued, the scheduled order issuance is deleted and a scheduled receipt is generated

18. Lot-sizing • The lot sizing rule determines the balance between two contradicting goals: • The decrease of on-hand inventory (small lot size) • The decrease of order intervals (large lot size) • Lot size rules are used to balance the costs of high inventory levels and administration costs induced by too many orders

19. Planning Lead Time • Planning lead time (PLT)is used to determine the start time of each operation • Start time is calculated by subtracting the PLT from the due date • If PLTs were accurate, MRP would result in Just-in-Time production • Usually, PLTs cannot be known a priori and most of the times they are purposely elongated

20. MRPProcedure • For each BOM level (starting from level 0), MRP performs: • Netting:Calculation of net requirements • Gross requirements are subtracted from on-hand inventory and scheduled receipts • Gross requirements for items with LLC=0 derive from MPS while for items with LLC>0 derive from previously executed MRP calculations • Lot sizing:The material requirements are divided in lots according to the lot-sizing rule used

21. MRPProcedure • Time phasing:Start times for each job is calculated by subtracting lead times from due dates • BOM explosion:Based on start times, the lot size and BOM, gross requirements are calculated for the lower LLC • Iteration:All steps are repeated until all BOM levels are processed

22. MRP Netting • Netting performs mainly two functions: • Adjust Scheduled Receipts • Calculate net requirements • MRP assumes that all Scheduled Receipts (SR) will be delivered before any other is placed • MRP assumes that gross requirements will be first met by current inventory, then by adjusting SRs and finally by placing new production/purchase orders

23. MRP Netting • Gross requirements that cannot be met by current inventory and/or adjusted SRs are netrequirements • If t* is the first time bucket where SRs and current inventory cannot meet gross requirements, net requirements are calculated as follows: • Equal to zero for t<t*, • Equal to ‘negative inventory’ (It) for period t* • Equal to gross requirements (Dt) after period t* • Net requirements are used in the next level of MRP calculations (lotsizing)

24. Netting Example • Gross requirement of 15 units in week 1 can be met by current inventory and so the SR of 10 units can be delayed • In week 2, gross requirement (20) cannot be met by inventory (5) - The SR of week1 is transferred to week1 • The first ‘negative inventory’ is observed in week 6 - Its value represents the net requirements for this period • For weeks 6-8, the net requirements are equal to the gross requirements

25. Lot-sizing • After net requirements, the production lots must be determined • MRP assumes that requirements are deterministic and non-constant • Most common lot-sizing policies: • Lot-for-lot, production lot for a period equals net requirements for this period • Fixed order period (FOP) orperiod order quantity - This policy aims at the reduction of the number of orders by combining net requirements of adjacent periods • Fixed order quantity (FOQ) - This policy aims at the reduction of the number of orders by ordering a fixed amount of items, independent of the net requirements

26. Lot-sizingExample • Suppose the lot-sizing policy for Item A is fixed order period (for P=2 periods) • Net requirements of period 6 and 7 are combined

27. Time phasing • Almost all MRP packages assume that time to perform some processes is strictly predetermined although some systems allow planned lead time increase with job size • MRP treats lead times as properties of the items and sometimes of the jobs/operations but not of the shop floor • For item A, assume that the lead time to assemble it is two periods

28. BOM explosion • Based on planned order releases for Item A, gross requirements for items 100 and 200 can be calculated • As a result, for item 100, 90 units for period 4 and 60 units for period 6 are required. For item 200, 45 units for period 4 and 30 for period 6 are required. • These requirements must be added to any other requirements already generated by other higher level items (such as A) • The next step is to iterate this procedure for items at the lower BOM levels

29. BOM explosion MPS for item B is presented as well as current inventory for items B, 100, 300 and 500.

30. BOM explosion • MRP results for item B

31. BOM explosion • For each unit of B, one unit of 500 is required. Thus, scheduled order releases for item B are equivalent to gross requirements for item 500. • There is no SR As lead time for item 500 is 4 weeks, there is not enough time to prepare 25 units before week4. As a result, a planned order release is generated by MRP with the warning that it might be late.

32. BOM explosion • At the lower level (LLC=2) and for item 100, there are two sources of requirements: 2 units for each A and 1 unit for each 500 • There is no SR

33. BOM explosion • The only item with LLC=3 is item 300. Its requirements are generated by items B and 100. • There is a scheduled receipt of 100 units on week2. No adjusting is needed since this SR may cover the requirements for this period.

34. BOM explosion – Summary

35. MRP Outputs • Planned Order Release • Part Number • Number of Units • Due date • Change Notices • Expediting (move earlier) • Deferring (making due date later)

36. MRP Outputs • Exception Reports, i.e., discrepancies between what is expected and what will transpire: • Job count differences • Inventory discrepancies • Imminently tardy jobs

37. MRP Problems • Capacity Infeasibility • Assumption = production line with fixed lead time • Lead time does not depend upon WIP • Result = infinite capacity • Problem when production levels near capacity

38. MRP Problems • Long Planned Lead Times • Pressure to increase planned lead times • Penalties for late jobs assumed greater than excess inventories • WIP with accumulate & lead times will further increase • Irresponsive approach by production managers

39. MRP Problems • Constant Lead Times • Pessimistic values (inflation) to “secure” due-dates • System Nervousness • Small change in MPS leads to large change in Planned Releases • Strange effects, e.g.: Decrease in demand may result in a feasible MRP Plan to become infeasible!!!

40. MRP Problems • Nervousness example • Two parts, A & B • Part A: • Lead Time of two weeks • Fixed Order Period (five weeks) • Part B (1 required for each Part A): • Lead Time of four weeks • Fixed Order Period (five weeks)

41. MRP Problems • Nervousness example (continued)

42. MRP Problems • Nervousness can be reduced by: • Different lot-sizing rules for different BOM levels • FOQ for end items • FOQ or L4L for intermediate BOM levels • FOP for the lowest levels

43. MRP Problems • Nervousness can be reduced by: • Proper use of lot-sizing rules • E.g., in L4L magnitude of change no larger than MPS • Freezing the early part of the MPS (Frozen Zones) • Time Fences (gradual freezing) • Firm Planned Orders (not allowed to change early PO)

44. MRP Problems • Revisit the example – nervousness eliminated!

45. MRP ΙΙ • Infeasible plans, long planned lead times, system nervousness jeopardize the successful execution of MRP • In order to confront these problems, additional functionalities have been added to the main MRP procedure • These functionalities were implemented in a wider information system known as Manufacturing Resource Planning or MRP II

46. MRP II • Manufacturing Resource Planning • Additional Functions: • Demand Management • Forecasting • Rough-cut Capacity Planning • Capacity Requirements Planning • Dispatching • Input and Output Control

47. MRP II

48. MRP ΙΙ hierarchy Long term planning • Long term planning includes: • resource planning • aggregate planning • forecasting • The planning horizon length for long term planning is usually from six months to five years • The re-planning interval usually varies from once a month to once every six months • Detail level is low. Usually, long term planning deals with families of products

49. MRP ΙΙ hierarchy Forecasting • The forecasting functionality aims at future demand prediction • Long term forecasts are very important since they determine availability, general production planning and staff requirements • Short-term forecasting transforms a long term forecast for a family of products to short-term forecast for individual products • Both functions belong to the demand management module at the medium term planning level

50. MRP ΙΙ hierarchy Resource planning • Resource planningis the procedure during which capacity requirements are calculated during medium term planning • Decisions like infrastructure expansion or the purchase of new facilities belong to resource planning • Future resource availability can be forecasted through resource planning • This data is then entered to the aggregate planning level