As summarized in Table 5.9, the demand characteristics of dependent demand inventory are quite different from those of independent demand inventory. Therefore, the inventory control and planning for dependent demand require different approaches. These include material requirements planning (MRP), which is referred to as a time-phased, priority-dependent inventory control and planning system, which calculates the material require-ments and schedules orders to meet changing demand while minimizing unnecessary inventories. MRP consists of a set of logically related procedures, decision rules, and records designed to translate a master production schedule into time-phased net require-ments, and the planned coverage of such requirerequire-ments, for each dependent demand inventory item needed to implement this schedule (Orlicky, 1975).
Table 5.9. Independent Demand versus Dependent Demand Inventory
Characteristics Independent Demand Dependent Demand
Demand pattern Is influenced by market conditions; origi-nates from outside the company.
Is related to the demand for another item;
originates within the company.
Order pattern Is often made up of numerous small orders (continuous and uniform).
Is often lumpy (discrete).
Estimation Might occur at uncertain times; should be forecasted.
Can be better controlled by the company when it occurs; should be calculated (derived).
Example Finished goods, supplies, spare parts, etc. Work in process, raw materials
The main objectives of MRP are to ensure the availability of materials, components, parts, and subassemblies for planned production by planning manufacturing activities, delivery schedules, and ordering processes ahead of the actual needs. The principal func-tions of MRP are as follows:
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• Order the right material—i.e., what to order
• Order in the right quantity—i.e., how much to order
• Order at the right time—i.e., when to order The basic needs of MRP include
• Master production schedule—A forecast of what products need to be made in the next few months
• Bill of material—A recipe that tells you which materials are used, in what quan-tities, to build each product
• Lead time—The time required to obtain or manufacture all products and materials
• Batch size—The maximum amount that can be processed at any one time
• Inventory balance—The on-hand stock balance of all your products and materials
Among these needs, as shown in Figure 5.8, the three primary inputs of MRP are a master production schedule (MPS), bill of materials (BOM), and the inventory record/
status file (or item master file). To elaborate, MPS is a statement summarizing the exact quantity and timing of producing finished products that will meet the anticipated demand. MPS basically drives the MRP process. BOM is often dubbed as a product structure tree that hierarchically lists all the raw materials, components/part, and subas-semblies required to produce a finished product. The detailed functions of BOM are to
• Provide tree views of needed parts, components, and materials (e.g., manufac-turer part numbers, defined alternate approved materials, and sequencing for materials).
• Automate the planning and purchasing of materials with start and finish dates.
• Allow users to create work orders by final end quantity or on full or partial batch multipliers.
• Allow users to easily add, change, or delete the components required for any work order where changes are frequent.
• Support calculation of costs that include a variety of labor and overhead calculations
The inventory record file represents a database that contains detailed information about the amount of inventory on hand, the amount and timing of scheduled order to receive, and the amount and timing of future orders that will meet the demand requirements.
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End-Item Forecasts Production Plan
Bill of Materials Inventory Record File
Master Production Schedule
MRP Program
Open orders
Secondary reports
Rescheduling Open release
Planned orders Inventory status data Output and Reports Customer Orders
Figure 5.8. MRP inputs and outputs
As recapitulated in Table 5.10, MRP is radically different from EOQ in many respects. Therefore, MRP requires different processes.
Table 5.10. A Comparison of EOQ with MRP
EOQ MRP
Independent demand Dependent demand
Continuous/uniform demand Discrete/lumpy demand
Continuous lead time demand No lead-time demand
Reorder point ordering signal Time-phased ordering signal
Historical demand base Future production base
Forecast all items Forecast end items only
Quantity-based system Quantity and time-based system
Safety stock for all items Safety stocks for end items only
Items for sale Items for internal usage
Reactive Proactive
The MRP Calculation Process
Per Russell and Taylor (2006), MRP is designed to address the following questions by taking three calculation steps: netting (a process of subtracting on-hand inventory and
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scheduled receipts from gross requirements to produce net requirements), lot sizing (a process of determining the quantities in which items are usually made or purchased) and time phasing (a process of subtracting an item’s lead time from its due date to know when to order an item):
• Which parts, components, and materials are needed to produce the end item?
• Do we have any of those parts, components, and materials already built or secured? How much?
• Which parts, components, and materials called for by the BOM are in stock and which ones need to be bought or made, and when do they have to be here?
• How can we schedule production or purchase orders to meet future needs/
demands?
To answer these questions, each entry in the MRP matrix should be either predeter-mined or calculated. Entries in the MRP matrix include gross requirements, which are the total amount required for a particular item that can be derived from either the MPS or planned order release of the parent for parts, components, and materials. Therefore, for dependent demand inventory, gross requirements are tantamount to the amount of planned order release of the parent. Scheduled receipts represent orders such as work-in-process or in-transit items that have been already ordered and that are scheduled to arrive at future periods. Changing these receipt quantities or dates will incur real cost. On-hand inventory is the amount of inventory that is currently on hand or projected to be on hand and available for use at the end of each period. On-hand inventory can be calculated as follows:
On-hand in the previous period
- gross requirements in the previous period + scheduled receipts in the previous period + planned order receipts in the previous period - safety stock
= on-hand inventory in the current period
Therefore, if on-hand inventory turns out to be negative, the negative amount of on-hand inventory represents an inventory shortage that requires additional production or order. Net requirements are the actual amount of a particular item that needs to be produced or ordered after taking into account on-hand inventory and scheduled receipts.
Therefore, net requirements can be calculated as below:
Net requirements = gross requirements - scheduled receipts - on-hand inventory (Only the positive figure is considered; if it is negative, it should be left out of the calculation.)
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It should be noted that if the result of net requirements is a negative figure, the net requirements are regarded as zero. Planned order receipts are the amount of an order that needs to be placed to meet net requirements. It should be noted that this amount can differ depending on the particular lot-sizing rule that is used. This includes either a static or dynamic rule. A static rule can be subdivided as follows:
• An EOQ rule that orders minimum quantity
• A periodic order quantity rule that orders maximum quantity
On the other hand, under a dynamic lot-for-lot (L4L) rule, the exact quantity will be ordered. With L4L ordering, planned order receipts are tantamount to net require-ments. Finally, planned order releases are planned order receipts offset by the lead time.
Planned order releases are so-called “pretend” orders whose changes will not incur any cost.
Example of MRP
To better understand how an MRP system works, let’s consider the case of a furniture manufacturer that assembles a folding chair. Figure 5.9 shows its product structure tree or BOM (diagrammatic recipe). This also can be summarized in a non-graphical fashion, as illustrated in Table 5.11. The BOM shows that the gross requirements for one fin-ished chair include one seat, one seatback (back support), and four legs. Let’s suppose that 100 units of folding chairs should be delivered to this manufacturer’s customer in eight weeks from now, with one week of lead time. The lead time needed to buy seats and backseats is two weeks, whereas the legs need only one week of lead time to acquire from the supplier. The lead time required to procure all other parts, such as tapping screws, river nuts, washers, crossbeams, and angel stops, is one week. After checking inventories for chair components, this manufacturer discovered that there are 20 units of seat inventory on hand, 30 units of seatback inventory, 150 units of tapping screws, 40 units of front legs, and 30 units of back legs on hand. There is no inventory on hand for the other components and parts. To figure out what components, how much of them, and when they should be ordered to meet the production schedule, this manufacturer creates the inventory record file illustrated in Figures 5.10, 5.11, and 5.12 using the MRP calcu-lation process explained earlier.
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Folding Chair
River nuts (4) Washer (4)
Angle stop (2)
Back leg (2) Seat (1)
Foam cushion (1)
Leg assembly (4) Seatback (1)
Tapping screw (6)
Crossbeam (1) Front leg (2)
Figure 5.9. A product structure tree for a folding chair
Table 5.11. Bill of Materials for a Folding Chair (in a Non-graphical Format)
Item Number Description Material Type Total Weight in Product (grams) Purchased Item?
1 Folding chair No
2 Seat Steel 1,366 Yes
3 Seatback Plastic 279 Yes
4 Legs Steel Yes
5 Front leg Steel 1,360 Yes
6 Back leg Steel 394 Yes
7 Crossbeam Steel 312 Yes
8 Seat cushion Polyurethane 56 Yes
9 Tapping screw Stainless steel 3 Yes
10 River nut Steel 4 Yes
11 Washer Steel 2 Yes
12 Angle stop Rubber 5 Yes
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Inventory record file for seat, LT = 2 weeks
Planned order
Figure 5.10. Inventory record file for the seat component
Planned order
Inventory record file for seatback, LT = 2 weeks
Figure 5.11. Inventory record file for the seatback component
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From Figures 5.10 and 5.11, we learn that the furniture manufacturer should place an order of 80 units of seats and 70 units of seatbacks in week 5 to meet the production schedule. Figure 5.12 also indicates that 270 additional units of tapping screws should be ordered in the third week to avoid any shortages of tapping screws for scheduled produc-tion. Using the same logics and procedures, the company can develop inventory record files for the remaining components and parts for the folding chairs. As illustrated, MRP helps the company determine what components and parts are needed to produce the fin-ished product and which components and parts called for by the BOM are in stock and which ones the company has to buy, and when they have to be available for production.
Planned order
Inventory record file for tapping screws, LT = 1 week
Figure 5.12. Inventory record file for the tapping screws
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Pros and Cons of MRP
MRP is known to bring the following benefits:
• It maintains a reasonable level of safety stock.
• It improves customer service (quicker reaction to market demand).
• It increases sales.
• It minimizes or eliminates inventories.
• It reduces idle time.
• It reduces setup costs.
• It identifies process problems.
• It schedules production based on actual demand.
• It aids capacity planning.
• It coordinates materials ordering.
• It is most suitable for batch or intermittent production schedules.
Despite numerous merits, MRP may suffer from the following drawbacks:
• It’s computer intensive.
• Its planning “brain” is predicated on a “push” system rather than the more popular “pull” system of manufacturing.
• It’s known to be ineffective at the micro level
• It’s difficult to make changes once operating.
• It cannot capture rising ordering and transportation costs.
• It’s usually insensitive to short-term fluctuations in demand.
• It frequently becomes quite complex.
• It may not work exactly as intended.