Material Requirements Planning (MRP)

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© Wallace J. Hopp, Mark L. Spearman, 1996, 2000 http://factory-physics.com

Material Requirements Planning (MRP)

Unlike many other approaches and techniques, material

requirements planning “works” which is its best recommendation.

— Joseph Orlicky, 1974

History

• Begun around 1960 as computerized approach to purchasing and production scheduling.

• Joseph Orlicky, Oliver Wight, and others.

• Prior to MRP, production of every part and end item was triggered by the inventory falling below a given level (reorder point).

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Key Insight

• Independent Demand — finished products

• Dependent Demand — components

It makes no sense to independently forecast dependent demands.

Assumptions

1. Known deterministic demands. 2. Fixed, known production leadtimes.

3. In actual practice, lead times are related to the level of WIP. Flow Time = WIP / Throughput Rate (Little’s Law)

Idea is to “back out” demand for components by using leadtimes and bills of material.

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Capacity Requirements Planning

Capacity

(Hours or

Units)

100

1 2 3 4 5 6

Who in the organization actually does this?

MRP Procedure

1. Netting: net requirements against projected inventory

--Gross Requirements over time (e.g., weekly buckets) --Scheduled Receipts and current inventory

--Net Requirements

2. Lot Sizing: planned order quantities

3. Time Phasing: planned orders backed out by leadtime

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Inputs

• Master Production Schedule (MPS): due dates and quantities for all top level items

Due dates assigned to orders into time buckets (week, day, hour, etc.) • Bills of Material (BOM): for all parent items

• Inventory Status: (on hand plus scheduled receipts) for all items • Planned Leadtimes: for all items

Components of leadtime

Move Setup Process time

Queue time (80-90% total time)

Example - Stool

Indented BOM

Graphical BOM

Stool

Base (1)

Legs (4)

Bolts (2)

Seat (1)

Bolts (2)

Stool

Base (1)

Legs (4)

Level 0

Level 1

Seat (1)

Bolts (4)

Bolts (2)

Level 2

Note: bolts are treated at lowest level

in which they occur for MRP calcs. Actually, they might be left off BOM

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Example

Item: Stool (Leadtime = 1 week)

Week 0 1 2 3 4 5 6 Gross Reqs 120 Sched Receipts Proj Inventory 20 20 20 20 20 -100 -100 Net Reqs 100 Planned Orders 100

Item: Base (Leadtime = 1 week)

Week 0 1 2 3 4 5 6 Gross Reqs 100 Sched Receipts Proj Inventory 0 0 0 0 -100 -100 -100 Net Reqs 100 Planned Orders 100

Example (cont.)

Item: Legs (Leadtime = 2 weeks)

Week 0 1 2 3 4 5 6 Gross Reqs 400 Sched Receipts 200 Proj Inventory 0 0 0 -200 -200 -200 -200 Net Reqs 200 Planned Orders 200

BOM explosion

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Terminology

Level Code: lowest level on any BOM on which part is found

Planning Horizon: should be longer than longest cumulative leadtime for any

product

Time Bucket: units planning horizon is divided into

Lot-for-Lot: batch sizes equal demands (other lot sizing techniques, e.g., EOQ or

Wagner-Whitin can be used)

Pegging: identify gross requirements with next level in BOM (single pegging) or

customer order (full pegging) that generated it. Single usually used because full is difficult due to lot-sizing, yield loss, safety stocks, etc.

Pegging and Bottom up Planning

Required from B

Required from 100

Gross Requirements

Part 300 1 2

3

4

5

6

7

8 Projected on-hand

Net Requirements

Table 3.7 MRP Calculations for Part 300

Scheduled Receipts

Adjusted Scheduled Receipts

Planed order receipts

Planed order releases

On-hand = 40 Scheduled releases = none Lot-for-lot LT = 1 week

30

15

90

125

90

15

50 50 25

25 -65

65

15

35

60

100

65

15

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Bottom Up Planning

Reference Figure 3.7

Assume that the scheduled receipt for week 2 for 100 units is not

coming in!

Have 50 units of inventory, with requirements of 125.

Implications

I can fill 50 units of demand from part 100 or 50 units from part

B. If I go with part 100, that will allow me to fill some of the demand

of part A (100 needed for part A). Can I ship 50 units to the

customer now and 50 units later? What if I cover the demand of

part B? Correct choice depends on the customers involved.

More Terminology

Firm Planned Orders (FPO’s): planned order that the MRP system does not

automatically change when conditions change --- can stabilize system

Service Parts: parts used in service and maintenance --- must be included in gross

requirements

Order Launching: process of releasing orders to shop or vendors --- may include

inflation factor to compensate for shrinkage

Exception Codes: codes to identify possible data inaccuracy (e.g., dates beyond

planning horizon, exceptionally large or small order quantities, invalid part numbers, etc.) or system diagnostics (e.g., orders open past due, component delays, etc.)

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Conceptual Changes in Lotsizing Approaches

Before, EOQ represented a basic trade-off between inventory costs

and setup costs.

Goldratt: If I am not at capacity on an operation requiring a setup,

the time spent on a setup is a mirage.

Make setups occur as frequently as possible (smaller lot sizes) as long

as capacity is available

Produce only when inventory level reaches zero (Wagner Whitin) is

not optimal when capacity is a constraint

Authors know of no commercial MRP system that uses WW.

Important Questions About “Optimal” Lot-sizing

Setup costs

Very difficult to estimate in manufacturing systems

-May depend on schedule sequence

-True costs depends on capacity situation

Assumption of deterministic demand and deterministic production

-production schedules are always changing because of dynamic

conditions in the factory.

Assumption of independent products that do not use common

resources. Very seldom will see common resources not used.

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Important Questions About “Optimal” Lot-sizing

WW leads us to the conclusion that we should produce either

nothing in a period or the demand of an integer num ber of

future periods.

-generates a production schedule that is very “lumpy.”

There are reasons for generating a level loaded production

schedule, one in which the same amount of products are

produced in every time period.

Problem Formulation

t= A time period, t = 1 to T, where T is the planning horizon. Dt = Demand in time period t (in units).

Ct = Unit production costs ($/unit), excluding setup or inventory cost in

period t.

At = Setup (order) cost to produce (purchase) a lot in period t ($).

Ht = Holding costs to carry a unit of inventory from period t to

period t+1 ($/unit). e.g., if holding costs consists entirely of interest on money tied up in inventory, where i is the annual interest rate and periods correspond to weeks, then

It =Inventory (units) left over at the end of period t.

Qt =The lot size (units) in period t; this is the decision variable

h =

I * C

t

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Problem Objective

Satisfy all demands at minimum cost (production, setup, and holding

costs)

All the demands must be filled, only the timing of production is open to

choice.

If the unit production cost does not vary with t, then production cost

will be the same regardless of timing and can be dropped from

consideration.

Look at an example: assume setup costs, production costs, and holding

costs are all constant over time. Thus, need only to consider setup

costs and holding costs.

Lot Sizing in MRP

• Lot-for-lot — “chase” demand

• Fixed order quantity method — constant lot sizes • EOQ — using average demand

• Fixed order period method — use constant lot intervals

• Part period balancing — try to make setup/ordering cost equal to holding cost

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Data For An Example Problem

Table 2.1

t

1

2

3

4

5

6

7

8 _{9 10}

D

t

c

t

A

t

h

t

20 50 10 50 50 10 20 40 20 30

10 10 10 10 10 10 10 10 10 10

100 100 100 100 100 100 100 100 100 100

1

1 Lot-for-lot

Simply produce in period t the net requirements for period t.

Minimizes inventory carrying costs and maxim izes total setup

costs.

It is simple and it is consistent with just in time.

Tends to generate a more smooth production schedule.

In situations where setup costs are minim al (assembly lines), it

is probably the best policy to use.

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Lot Sizing Example

t 1 2 3 4 5 6 7 8 9 10 Dt 20 50 10 50 50 10 20 40 20 30 LL 20 50 10 50 50 10 20 40 20 30 30 10 300 1 100 = = = = D h A

Lot-for-Lot:

$1000

No carrying cost, ten setups @$100 each

Lot Sizing Example (cont.)

EOQ:

t 1 2 3 4 5 6 7 8 9 10 Total Dt 20 50 10 50 50 10 20 40 20 30 300 Qt 77 77 77 77 308 Setup 100 100 100 100 $400 Holding 57 7 74 24 51 41 21 58 38 $371 Total $771 Q AD h x x = 2 = 2 100 30= 1 77

Note: EOQ is a

special case of

fixed order quantity.

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Fixed Order Period From EOQ

Calculate EOQ using formula presented earlier.

Then Fixed Order Period, P = Q/D

Calculating P in this manner has all the limitations noted

earlier in Chapter .

Fixed Order Period

Example--Further Comments

Example

Period

Net Requirements

Planned Order Recpts

1

2

3

4

5

6 7 8

9 15 45

25 15 20 15

60

15 Let P = 3. Skip first period, no demand. Sixty units covers demand

for periods 2, 3, and 4. Period 5 is skipped because there is no

demand. Sixty units covers demand in periods 6, 7, 8. Fifteen units

covers demand in period 9, which is the last period in the planning

Horizon.

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Part-Period Balancing

Combines the assumptions of WW with the mechanics of the EOQ.

One of the assumptions of the EOQ is that it sets the average setup

costs equal to the average inventory carrying costs.

Part-period. The number of parts in a lot times the number of

periods they are carried in inventory.

Part-period balancing tries to make the setup costs as close to the

carrying costs as possible.

Part-Period Balancing Example (Cont.)

Period

Net Requirements

Planned Order Receipts

1 2

3

4 5 6

7 8 9

15 45

25 15 20 15

Quantity

Period 6 Setup Costs Part-periods Inventory_{Carrying Costs}

25 $150 0 $0

40 $150

15 x 1 = 15 $30

60 _$150 _{15 + 20 x 2 = 55} _$110

75 $150 55 + 15 x 3 = 100 $200

Fixed order quantity method (without modifications) tends to

work better than WW when dealing with multi-level production

systems with capacity limitations.

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Nervousness

Note:

we are using FOP lot-sizing rule.

Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)

Week 0 1 2 3 4 5 6 7 8 Gross Reqs 2 24 3 5 1 3 4 50 Sched Receipts Proj Inventory 28 26 2 -1 -6 -7 -10 -14 -64 Net Reqs 1 5 1 3 4 50 Planned Orders 14 50

Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)

Week 0 1 2 3 4 5 6 7 8 Gross Reqs 14 50 Sched Receipts 14 Proj Inventory 2 2 2 2 2 2 -48 Net Reqs 48 Planned Orders 48

Nervousness Example (cont.)

* Past Due

Note:

Small reduction in requirements caused large change in orders and Item A (Leadtime = 2 weeks, Order Interval = 5 weeks)

Week 0 1 2 3 4 5 6 7 8 Gross Reqs 2 23 3 5 1 3 4 50 Sched Receipts Proj Inventory 28 26 3 0 -5 -6 -9 -13 -63 Net Reqs 5 1 3 4 50 Planned Orders 63

Component B (Leadtime = 4 weeks, Order Interval = 5 weeks)

Week 0 1 2 3 4 5 6 7 8 Gross Reqs 63 Sched Receipts 14 Proj Inventory 2 16 -47 Net Reqs 47 Planned Orders 47*

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Reducing Nervousness

Reduce Causes of Plan Changes:

• Stabilize MPS (e.g., frozen zones and time fences)

• Reduce unplanned demands by incorporating spare parts forecasts into gross requirements

• Use discipline in following MRP plan for releases • Control changes in safety stocks or leadtimes

Alter Lot-Sizing Procedures:

• Fixed order quantities at top level • Lot for lot at intermediate levels • Fixed order intervals at bottom level

Use Firm Planned Orders:

• Planned orders that do not automatically change when conditions change • Managerial action required to change a FPO

Handling Change

• New order in MPS • Order completed late • Scrap loss

• Engineering changes in BOM

Regenerative MRP: completely re-do MRP calculations starting with MPS and

exploding through BOMs.

Net Change MRP: store material requirements plan and alter only those parts

affected by change (continuously on-line or batched daily).

Comparison:

– Regenerative fixes errors.

– Net change responds faster to changes (but must be regenerated occasionally for accuracy.

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Rescheduling

Top Down Planning: use MRP system with changes (e.g., altered MPS or

scheduled receipts) to recompute plan • can lead to infeasibilities (exception codes) • Orlicky suggested using minimum leadtimes • bottom line is that MPS may be infeasible

Bottom Up Replanning: use pegging and firm planned orders to guide

rescheduling process

• pegging allows tracing of release to sources in MPS

• FPO’s allow fixing of releases necessary for firm customer orders • compressed leadtimes (expediting) are often used to justify using FPO’s to

override system leadtimes

Safety Stocks and Safety Leadtimes

Safety Stocks:

– generate net requirements to ensure min level of inventory at all times – used as hedge against quantity uncertainties (e.g., yield loss)

Safety Leadtimes:

– inflate production leadtimes in part record

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Safety Stock Example

Note:

safety stock level is 20.

Item: Screws (Leadtime = 1 week)

Week 1 2 3 4 5 6 Gross Reqs 400 200 800 Sched Receipts 500 Proj Inventory 100 100 -100 -900 -Net Reqs 120 800 Planned Orders 120 800

Safety Stock vs. Safety Leadtime

Item: A (Leadtime = 2 weeks, Order Quantity =50)

Week 0 1 2 3 4 5 Gross Reqs 20 40 20 0 30 Sched Receipts 50 Proj Inventory 40 20 30 10 10 -20 Net Reqs 20 Planned Orders 50

Safety Stock = 20 units

Week 0 1 2 3 4 5 Gross Reqs 20 40 20 0 30 Sched Receipts 50 Proj Inventory 40 20 30 10 10 -20 Net Reqs 10 30 Planned Orders 50

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Safety Stock vs. Safety Leadtime (cont.)

Safety Leadtime = 1 week

Week 0 1 2 3 4 5 Gross Reqs 20 40 20 0 30 Sched Receipts 50 Proj Inventory 40 20 30 10 10 -20 Net Reqs 20 Planned Orders 50

Manufacturing Resource Planning (MRP II)

• Sometime called MRP, in contrast with mrp (“little” mrp); more recent implementations are called ERP (Enterprise Resource Planning). • Extended MRP into:

– Master Production Scheduling (MPS) – Rough Cut Capacity Planning (RCCP) – Capacity Requirements Planning (CRP) – Production Activity Control (PAC)

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MRP II Planning Hierarchy

Demand Forecast Ag gregate Production Planning Master Production Scheduling Material Requirements Planning Job Pool Job Release Job Dispatching Capacity Requirements Planning Rough-cut Capacity Planning Resource Planning Routing Data Inventory Status Bills of Material

Master Production Scheduling (MPS)

• MPS drives MRP

• Should be accurate in near term (firm orders) • May be inaccurate in long term (forecasts) • Software supports

– forecasting – order entry

– netting against inventory

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Rough Cut Capacity Planning (RCCP)

• Quick check on capacity of key resources • Use Bill of Resource (BOR) for each item in MPS

• Generates usage of resources by exploding MPS against BOR (offset by leadtimes)

• Infeasibilities addressed by altering MPS or adding capacity (e.g., overtime)

Capacity Requirements Planning (CRP)

• Uses routing data (work centers and times) for all items • Explodes orders against routing information

• Generates usage profile of all work centers • Identifies overload conditions

• More detailed than RCCP • No provision for fixing problems • Leadtimes remain fixed despite queueing

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Production Activity Control (PAC)

• Sometimes called “shop floor control” • Provides routing/standard time information • Sets planned start times

• Can be used for prioritizing/expediting

• Can perform input-output control (compare planned with actual throughput)

• Modern term is MES (Manufacturing Execution System), which represents functions between Planning and Control.

Conclusions

Insight:

distinction between independent and dependent demands

Advantages:

• General approach

• Supports planning hierarchy (MRP II)

Problems:

• Assumptions --- especially infinite capacity • Cultural factors --- e.g., data accuracy, training, etc. • Focus --- authority delegated to computer