Material Requirement Planning

MRP is a means for determining the number of parts, components & materials needed to produce a product. Dependent demand drives MRP. Dependent demand means that the demand for one item is related to the demand for another demand.

So, MRP is a dependent demand technique that uses a bill of material, inventory, expected receipts & master production schedule to determine material requirements.

MRP provides time scheduling information specifying when each of the materials, parts & components should be produced/ordered.

It is software based production planning & inventory control system used to manage manufacturing processes.

Application of MRP/Benefits of MRP:         

-          Low level of in process inventories.

-          Ability to track material requirements.

-          Ability to evaluate capacity requirements.

-          Means of allocating production time.

-          It is most valuable in industries where a number of products are made in batches using the same productive equipment. Most valuable to companies involved in assembly operation and least valuable to those in fabrication.  Fabrication items are manufactured by machine rather than assembled from parts.

Purposes of MRP:

-          The main purpose of a basic MRP system is to control the inventory level, assign operating priorities for items, and plan capacity to load the production system.

-          The theme of MRP is getting the right place at the right time.

Dependent inventory model requirements or requirement for effective MRP:

Effective use of dependent inventory model requires that the operations mangers know the following:

1      1.  Master Production Schedule (MPS)

Master production schedule deals with the end products but if end item is quite large/quite expensive.  MPS may schedule major subassemblies or components instead. MPS is time-phased plan specifying what is to be made and when. It should be in accordance with production plan. The production plan sets the overall level of output in broad terms (e.g. product families, standard hours or dollar value). It also includes a variety of inputs, including financial plans, customer demand, engineering capabilities etc. The master production schedule is derived from the aggregate schedule.

Aggregate production plan is established in gross terms such as families of products. The master production schedules are established in terms of specific products.

Characteristics of good master schedule:

-          Include all demand from product sales, warehouse  replenishment, spares and inter-plant requirements.

-          Never loosed site of the aggregate plan.

-          Be involved with customer order promising.

-          Be visible to all levels of management.

-          Identify and communicate all problems.

Time fences :

Flexibility within master production schedule depends upon several factors like:

production  lead time, commitment of parts and components to a specific end item, amount of excess capacity, reluctance or willingness of management to make changes. Time fences is defined as time having some specified level of opportunity for the customer to make changes.

Frozen-No schedule change allowed within this window.

Moderately firm- Specific changes allowed within product group as long as parts are available.

Flexible- significant variation allowed as long as overall capacity requirements remain at the same level.

2. Bills of materials (BOM)

BOM is list of quantities of components, ingredients and materials required to make a product. It is a file that contains complete product description listing but only the materials, parts and components but also the sequence in which product is created. It is one of major input of MRP program. BOM file is often called the product structure file or product free because it shows how a product is put together. It contains the information to identify each item and the quantity used per unit of each product.BOM can be shown as follows:

                                              Fig: product tree structure for assembly 

Items above any level are called parents; items below any level are called components/children.

Modular bill of material:

BOM may be organized are around product modules. Modules are not final products to be sold but are components that can be produced and assembled into units. They are often major components of final products or product options A modular bill of material is the term for a buildable item that can be produced and stocked as a subassembly. Many end items that are large and expensive are better scheduled and controlled as modules.

Super bills:

A super bill of material includes items with fractional options. E.g  0.3 of part meaning 30 % of the units produced contain that part and 70 % do not.

Modular and super bills of materials are called planning bills of materials since they simplify the planning process.

Low level coding:

If all identical parts occur at the same level for each product, the total no. of parts and materials needed for a product can be computed easily.  Low level coding of items is necessary when identical items exist at various levels in the BOM. Low level coding means item is coded at the lowest level at which it occurs.

3. Accurate inventory records:

Good inventory management is an absolute necessity for an MRP system to work. Experts suggest at least 99% record accuracy for the MRP to work.

4. Purchase order outstanding

Well managed purchasing and inventory control departments should provide knowledge of purchase order outstanding. When the purchase orders are executed records of those orders and their scheduled delivery dates must be available to production department. Only with good purchasing data can managers prepare a good production plan and effectively execute MRP system.

5. Lead time for components       

Once managers determine when products are needed they need to determine when to acquire them. The time required to acquire on item is known as lead time. In purchasing system lead time is the time between recognition of the need for an order and receiving it. In production system it is the order wait move, queue, setup and runtimes for each component.

MRP system

-          The MRP closely interacts with master schedule inventory record/status files, bill of materials and output reports.

MRP system works as follows:

-          Orders for products are used to create a master production schedule, which states the number of items to be produced during specific time periods.

-          A bill of material identifies the specific materials used to make each item and the correct quantities of each.

-          The inventory record files contain data such as the no. of units on hand and an order.

-          These three sources master production schedule, bill of material and inventory record file become the data source for the MRP programs.

-          MRP program expands the production schedule into a detailed order scheduling plan for the entire production sequence.

Inputs of MRP

·         Demand for products/ Master Production Schedule

Product demand for end item comes primarily from two main sources. The first is known customers who have placed specific orders such as those generated by sales personnel, or from interdepartmental transactions. These orders usually carry promised delivery date. The second source is forecast demand. These are the normal independent demand orders which are predicted using several forecasting techniques. In addition to the demand for the end products customers also order specific parts and components either as spare parts or for service and repair. These demands are not usually part of MPS; instead they are fed directly into MRP program at appropriate levels.

·         Inventory record files

MRP system must update the inventory system. Inventory status file is a complete documentation of inventory status containing each item in product structure including items identification, on hand quantity, safety stock level, quantity allocated and lead time of each item. In other words inventory status file provides information about items to be ordered, quantity of items, time of order release etc.

·         Inventory transaction file

The inventory status file is kept up to date by posting inventory transactions as they occur. These changes occur because of stock receipts and disbursements, scrap losses, wrong parts, cancelled orders and so forth.

·         Bill of material already discussed.

MRP Computer Processing

MRP program operates using information from inventory records, master schedule and bill of materials. Master schedule specifies a list of products needed in each period. BOM specifies the detail description of the materials and parts needed to make each product. Similarly the number of units of each product and material currently on hand and an order are contained in the inventory file.

MRP program works on the inventory file which is segmented into time periods. While continually referring to BOM file to compute the quantities of each item needed. The number of units of each item required is then corrected for on hand amounts and the net requirements is offset (set back in time) to allow for the lead time needed to obtain the material..

The process of calculating the exact requirements for each item managed by the system is often referred to as the explosion process.

Output of MRP        

From the information given availed by MRP program varieties of reports can be prepared. These reports are usually classified as primary and secondary reports.

Primary reports: these are the main reports used in inventory and production control. These reports include the following matters:

i)                    Planned order including quantities and timing to be released at the future time.

ii)                  Order release notice to execute planned orders.

iii)                Changes in due date of open ordering due to rescheduling.

iv)                Cancellations or suspensions of open orders due to cancellation/suspension of orders on MPS.

v)                  Inventory status data

Secondary reports

Following are different secondary reports.

i)                    Planning reports: these types of reports are to be used for planning of future activities e. g. they are used in forecasting inventory.

ii)                  Performance reports: these are used for the purpose of pointing out inactive items and determining the agreement between actual and programmed item lead times and between actual and programmed quantity usage and costs.

iii)                Exceptions reports: they point out serious discrepancies such as errors, out of range situations, late or overdue orders, excessive scrap.

Embedding JIT to MRP (flow manufacturing)

MRP and JIT both have their benefits. So the question now is can they work together successfully and would one combine them.

Most major manufacturing firms used MRP of the firms using MRP many in repetitive manufacturing also use JIT techniques. Although JIT is best suited to repetitive manufacturing, MRP is used in everything from custom job shop  to assembly line production.

A challenge arises in integrating the shop floor improvement approaches of JIT with an MRP based planning and control system.

The MRP/JIT combination creates what might be considered a hybrid manufacturing system.

The term flow manufacturing is now being used by many software vendors to describe new software modules that combine JIT and MRP logic.

An MRP system combined with JIT can provide the best of both MRP & JIT.

MRP provides the plan and an accurate picture of requirements; while JIT rapidly moves materials in small batches, reducing work in process inventory.

Lot sizing in MRP systems

The determination of lost size in an MRP system is a complicated and difficult problem. Lot sizes are the part quantities issued in the planned order receipt planned order release section of an MRP schedule. For parts produced in house, lot sizes are the production quantities of batch size. For purchased parts, these are the quantities ordered from the suppliers. Lot sizes generally meet part requirement for one or more periods

Most lot-sizing techniques deal with how to balance the step up or order costs and holding cost associated with meeting the net requirements generated by the MRP planning process. Many MRP system have options for computing lots sizes based on some of the more commonly used techniques. It should be obvious, though, that the uses of lot-sizing techniques increase the complexity in generating MRP schedules. When fully exploded, the numbers of parts scheduled can be enormous.

Four types of lot-sizing techniques are lot-for-lot (L4L), economic order quantity (EOQ),least total unit cost(LTC), and least unit cost(LUC). 

Lot for Lot (L4L)

It is the most common technique. It:

·         Sets planned orders to exactly match the net requirements.

·         Produces exactly what is needed each week with none carried over into the future periods.

·         Minimizes the carrying cost

·         Does not consider set up cost or capacity limitations.

The lot sizing techniques used for MRP assume that part requirements are satisfied at the start of the period. Holding cost are charged only to the ending inventory for the period not for the average inventory as in case of EOQ. EOQ assumes the parts are used continuously during the period. The logic for L4L says the production quantity will exactly match the required quantity so there will be no inventory left at the end. Without any inventory to carry over to the next period there is zero holding cost.L4L causes high setup cost.

Economic order quantity (EOQ)

In EOQ model either fairly constant demand must exist or safety stock must be kept to provide for demand variability. The EOQ model uses an estimate of total annual demand, the setup or order cost and the amount of holding cost. It assumes that part requirement is satisfied at the start of the period. Holding cost is charged at ending inventory. Lot sizes generated by EOQ do not always cover the entire periods. It might provide requirement for say 4.6 periods.

Least total cost method (LTC)

The least total cost method is a dynamic lot sizing technique that calculates the order quantity by comparing the carrying cost and setup cost for various lot sizes and then selects the lot in which these are most nearly equal.

Least unit cost (LUC)

LUC is a dynamic lot sizing technique that adds ordering and inventory carrying cost for each trial lot size and divides by the number of units in each lot size, picking the lot size with lowest unit cost.

Limitations of both LTC and LUC are that they are influenced by the length of the planning horizon.