Material Requirements Planning

(Chapter 12)

Alok Raj
PODS Area
Office: Room No 14, 2nd Floor, Library Building, Tel. 3439
Email: [email protected]
Material Requirements Planning
Introduction
❖ Material requirements planning (MRP): The logic for
determining the number of parts, components, and
materials needed to produce a product.
❖ It is for dependent demand.
 Dependent demand
 Independent demand

❖ MRP is more applicable in case of batch production

or assembly operations.
Where we can apply ?
The Planning Process
Aggregate Production Plan

Months January February

Aggregate Plan 1,500 1,200
(Shows the total
quantity of amplifiers)
Weeks 1 2 3 4 5 6 7 8
Master Production Schedule
(Shows the specific type and
quantity of amplifier to be
produced)
240-watt amplifier 100 100 100 100
150-watt amplifier 500 500 450 450
75-watt amplifier 300 100
Overview of MRP
Data Files Output Reports

MRP by
BOM Master period report
production schedule
MRP by
date report

Lead times
(Item master file) Planned order
report

Inventory data
Purchase advice
Material
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
Order early or late
or not needed

Order quantity too

small or too large
Master Production Schedule (MPS)

Month 1 2
Aggregate Production Plan
Car Production 1000 1050

Week 1 2 3 4 5 6 7
8
Model X 200 100 200 100 100 Master Production Plan
Model Y 200 300 200 100 200
Model Z 50 50 100 150
Bill of Materials (BOM)
❖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
Example
Inventory records
❖ Includes information on the status of each item by time period,
called time buckets
 Information about
 Gross requirements
 Scheduled receipts
 Expected amount on hand

 Other details for each item such as

 Supplier
 Lead time
 Lot size policy
 Changes due to stock receipts and withdrawals
 Canceled orders and similar events
 MRP Record
Week Number 1 2 3 4 5 6 Gross requirements(Gt)
• Total amount required for a particular item
Gross Scheduled receipts(St)
Requirements • Orders that have already been released and that
are scheduled to arrive as of the beginning of the
Scheduled
period
Receipts Projected Available balance(Pt)
Projected on • Amount of inventory expected as of the end of a
Available period.
Net requirements
balance
• The amount needed when the projected available
Net balance plus the scheduled receipts in a period
requirements are not sufficient to cover gross requirement
Planned-order receipts(Pot)
Planned-order- • The amount of an order that is required to meet a
receipt net requirement in the period
Planned-order releases
Planned-order
• The planned order receipt offset by the lead time
release
Example MRP

Shutter

Wood
Frames (2)
sections (4)
Example 1: MRP
 Example 1: MRP
LT = 3 0 1 2 3 4 5 6 7 8

Gross Requirements 125 325 275 200 300 175 350 250

Scheduled Receipts 450 425

Projected Inventory 100 425 100 250 50

Net Requirements 250 350 250

175

Planned Order receipts 250 175 350 250

Planned Order Release 250 175 350 250

Lot-for-Lot (L4L) ordering

Lot Sizing Rules

❖ Lot-for-Lot (L4L) ordering

❖ Economic Order Quantity (EOQ)

❖ Periodic Order Quantity (POQ)

Lot Sizing Rules
❖ Lot-for-lot
➢ This technique orders just what is required for
production based on net requirements
✓ May not always be feasible
✓ If setup costs are high, lot-for-lot can be expensive
❖ Economic order quantity (EOQ)
➢ EOQ expects a known constant demand and MRP systems
often deal with unknown and variable demand
Lot-Sizing Techniques
❖ Periodicorder quantity (POQ) orders quantity
needed for a predetermined time period
➢ Interval = EOQ / average demand per period
➢ Order quantity set to cover the interval
➢ Order quantity recalculated at the time of the order
release
➢ No extra inventory
Lot-for-Lot Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 0 0 0 0 0 0 0 0 0 0
hand
Net
0 30 40 0 10 40 30 0 30 55
requirements
Planned order
30 40 10 40 30 30 55
receipts
Planned order
30 40 10 40 30 30 55
releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
No on-hand inventory is carried through the system
Total holding cost = $0, There are seven setups for this item in this plan.
Total ordering cost = 7 x $100 = $700
EOQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 0 43 3 3 66 26 69 69 39 57
hand
Net
0 30 0 0 7 0 4 0 0 16
requirements
Planned order
73 73 73 73
receipts
Planned order
73 73 73 73
releases

Holding cost = $1/unit/week; Setup cost = $100; Lead time = 1 week

Total demand in 10 weeks= 270; EOQ = ?
Holding cost = 375 units x $1 (including 57 units on hand at end of week 10), Ordering
cost = 4 x $100 = $400, Total cost = $375 + $400 = $775
Material Flow
EOQ Lot Size Example
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35
hand
Net
requirements
Planned order
receipts
Planned order
releases

Holding cost = $2/unit/week; Setup cost = $100; Lead time = 1 week

Total demand in 10 weeks= 270; EOQ = ?
Total cost=?
Periodic Order Quantity
❖ The EOQ attempts to minimize the total cost of ordering
and carrying inventory and is based on the assumption
that demand is uniform.
❖ Often demand is not uniform, particularly in material
requirements planning, and using the EOQ does not
produce a minimum cost.
❖ The period-order quantity lot-size rule is based on the
same theory as the economic-order quantity.
❖ It uses the EOQ formula to calculate an economic time
between orders. This is calculated by dividing the EOQ by
the demand rate.
Periodic Order Quantity
WEEK 1 2 3 4 5 6 7 8 9 10
Gross
35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on
35 0 40 0 0 70 30 0 0 55 0
hand
Net
0 30 0 0 10 0 0 0 30 0
requirements
Planned order
70 80 0 85 0
receipts
Planned order
70 80 85
releases
EOQ = 73 units; Average weekly gross requirements = 27; POQ interval = 73/27 ≅ 3 weeks
Setups = 3 x $100 = $300, Holding cost = (40 + 70 + 30 + 55) units x $1 = $195
Total cost = $300 + $195 = $495
Note: Orders are postponed if no demand exists
Lot-Sizing Summary

For these three examples

COSTS
SETUP HOLDING TOTAL
Lot-for-lot $700 $0 $700
EOQ $400 $375 $775
POQ $300 $195 $495
Lot-Sizing Summary
▶ When setup costs are significant and demand is
reasonably smooth, POQ or EOQ should give
reasonable results