MRP (Material

Requirements Planning)
 Definition : MRP

• A dependent demand technique that uses bill-of-materials,

inventory, expected receipts, and a master production
schedule to determine material requirements.
• Dependency exists for all component parts, subassemblies,
and supplies once a master production schedule is known.
Dependent models are better not only for manufacturers
and distributors but also for a wide variety of firms. The
dependent technique used in a production environment is
“Materials requirement planning(MRP)”.
 Effective use of the dependent inventory
models requires the following :
• Master Production Schedule (what is to be made and
when)
• Specification or the Bill of materials (materials and parts
to make the product)
• Inventory availability (what is in stock)
• Purchase orders outstanding (what is in order)
• Lead times (how long it takes to get various components)
The Master Production Schedule

• It is derived from the Aggregate Schedule

• It is a statement of what is to be produced, not a forecast of
demand. The MPS can be expressed in any of the following
terms:
a. A customer order in a job shop (make to order) company
b. Modules in a repetitive (assemble to order or forecast)
company
c. An end item in a continuous (stock to forecast) company
BOM

Bill of Materials
-A listing of the components, their description, and the
quantity of each required to make one unit of a product.

Modular Bills
• - Bill of Materials organized by major subassemblies or by
product options.
- May be organized around product modules. They are often major
components of the final product or product options.
Planning Bills

• A material grouping created in order to assign an

artificial parent to the bill of material. Such bills
use
a. When we want to group subassemblies so the number of
items to be scheduled is reduced.
b. When we want to issue “kits” to the production
department
Phantom bills

• Bill of materials for components, usually

assemblies, that exist only temporarily:
they are never inventoried.
a. These are coded to receive special treatment
b.Lead times are zero
c. They are handled as an integral part of their
parent item
Low-level coding

• A number that identifies items at the lowest level

at which they occur.
a. Ensures that an item is always at the lowest level of
usage
b. Is a convention to allow easy computing of the
requirements of an item.
c. When the BOM has thousands of items or when
requirements are frequently computed, the ease and
speed of computation becomes a major concern.
Lead Time

• In purchasing systems, the time

between recognition of the need for an
order and receiving it;
• Production systems, it is the order,
wait, move, queue, setup, and run
times foreach component.
Gross Materials Requirement Plan

•A schedule that shows the total

demand for an item (prior to
subtraction of on-hand inventory and
scheduled receipts) and (1) when it
must be ordered from suppliers, or (2)
when production must be started to
meet its demand by a particular date.
MRP Structure

Net Materials requirements

- The result of adjusting gross requirements for
inventory on hand and scheduled receipts.
Planned order receipts
- The quantity planned to be received at a future
date
Planned order release
- The scheduled date for an order to released
MRP Dynamics

• Is lieu of changes in production schedule, design and production

process. The MRP plan is also modified.

Time Fences
- A way of allowing a segment of the master schedule to be
designated as “not to be rescheduled”
Pegging
- tracing upward in the bill of materials (BOM) from the
component to the parent item.
Four approaches to MRP & JIT

1. Finite Capacity Scheduling (FCS)

- provides precise scheduling needed for rapid
material movement.
2. Small bucket approach (Process focused job
shops)
- where lead times are relatively stable and
poor balance between work centers.
Four approaches to MRP & JIT

3. Balanced flow approach

- supports the planning & scheduling of for
repetitive operations

4. Supermarket
- subassemblies, components & parts are stored
in a common area adjacent to the production area
where they are used. Usually used Kanbans for
replenishment.
 Lot Sizing Techniques

•The process in determining lot sizes.

1. Lot-for-lot
- A lot sizing plan that generates exactly what was required to
meet the plan.
2. EOQ (Economic Order Quantity)
- may be preferable when demand is independent.
 Lot Sizing Techniques

3. Part Period Balancing

- An inventory ordering technique that balances set-up and
holding costs by changing the lot size to reflect requirements of the
next lot size in the future.
4. Economic Part Period
- That period of time when the ratio of set-up cost and holding
cost is equal.
 Extensions of MRP

• Closed Loop MRP

- A system that provides feedback to the capacity plan, MPS, &
production plan so planning can be kept valid at all times.
• Capacity Planning
- to move the work between time periods to smooth the load or
atleast bring within capacity, Tactics are ;
a. Overlapping (Reduced Lead Time)
b. Operations Splitting (Additional machine, Set-up)
c. Lot splitting (Braeaking of order ahead)
Extensions of MRP

• Materials requirements planning II (MRP II)

- a system that allows with the MRP in place,
inventory data to be augmented by other resource
variables.
- By utilizing the logic of MRP, resource such as
labor, machine-hours, and cost can be accurately
determined and scheduled.
DRP (Distribution Resource Planning)

• A time phased stock replenishment plan for all

levels of a distribution network.
DRP requires the following :
1. Gross Requirements
2. Minimum Levels of Inventories to meet customer
service levels
3. Accurate Lead Time
4. Definition of the distribution structure
Enterprise Resource Planning (ERP)

• An information system for identifying &

planning the enterprise-wide resource
needed to take, make, ship and account
for customer orders.
• 1. SAP
2. ERP Vendor
Exercise & Practice
MRP Exercise Number 01 :

• Determine the quantity of each component

necessary to produce 10 units of assembly A.
Details as follows ;
• 1 Unit of A requires 1 Unit of B & 1 Unit of C
• 1 Unit of B requires 2 units of D & 2 units of C
• 1 Unit of C requires 1 unit of E & 1 Unit of F
• 1 Unit of C requires 1 unit of E & 1 Unit of F
Low-Level Coding

A
B1 C1

D2 C2 E1 F1

E1 F1
Total Requirements

Level Item Quantity per Total

Unit Requirementss
for 10 Alpha
0 A 1 10

1 B 1 10

2 C 3 30

2 D 2 20

3 E 3 30

3 F 3 30
Lot for Lot

• Speaker Kits, Inc., wants to compute its

ordering and carrying cost of inventory for lot-
for-lot criteria. Speaker Kits has determined
that, for the 12 inch speaker/booster assembly,
set-up cost is $100 and holding cost is $1 per
period. The production schedule, as reflected in
net requirements for assemblies, is as follows;
• Average Gross Requirements is 27 per week.
 Lot for Lot

1 2 3 4 5 6 7 8 9 10

Gross Requirements 35 30 40 - 10 40 30 - 30 55

Scheduled Receipts

Projected on Hand 35

Net Requirements

Planned order receipts

Planned Order releases

 Lot for Lot

1 2 3 4 5 6 7 8 9 10

Gross Requirements 35 30 40 - 10 40 30 - 30 55

Scheduled Receipts
Total Cost
Projected on Hand 35 Holding Cost $0.00
Set-up Cost $700.00
Net Requirements - 30 40 - 10 40 30 - 30 55

Planned order receipts - 30 40 - 10 40 30 - 30 55

Planned Order releases 30 40 - 10 40 30 - 30 55 -

 EOQ

1 2 3 4 5 6 7 8 9 10

Gross Requirements 35 30 40 - 10 40 30 - 30 55

Scheduled Receipts

Projected on Hand 35

Net Requirements

Planned order receipts

Planned Order releases

 EOQ

1 2 3 4 5 6 7 8 9 10

Gross Requirements 35 30 40 - 10 40 30 - 30 55

Scheduled Receipts
Total Cost
Projected on Hand 35 - 43 3 3 66 26 69 69 39 Holding Cost $1,898
Set-up Cost $1,900
Net Requirements - 30 - - 7 - 4 - - 16
Total Cost $3,798
Planned order receipts - 73 - - 73 - 73 - - 73

Planned Order releases 73 - - 73 - 73 - - 73 -

 EOQ Method

• Solve for EOQ

• EOQ = 2𝐷𝑆/𝐻
1,404 100
• EOQ =
1(52)

• EOQ = 73 Units
• Number of orders a Year = 1,404/73 Units = 19 per year
• Set-up Cost is = 19 * $100 = $1,900.00
• Holding Cost = 73/2 * ($1*52 Weeks) = $1,898
• Total Cost = Set-up Cost + Holding Cost = $3,798.00
• Cost for the 10 Weeks = $3,798 * 10/52 = $730.00
EPP – Part Period Balancing

• EPP = $100 / $1 = 100 Units (Set-up Cost to Holding Cost Ratio)

• Because holding 100 Units for 1 Period is equal to $100.
• Therefore, similarly Holding 50 units for 2 periods is equal to
$100.
 Computations - EPP

Period Combined Trial Lot Size (cumulative) Part Periods Costs

2 30 -
2,3 70 40 = 40*1
2,3,4 70 40
2,3,4,5 80 70 = 40*1+10*3 40 Units Held for 1
Period=$40, 10 Units held
for 3 periods=$30 = $70
2,3,4,5,6 120 230 = 40*1+10*3+40*4

• Combination of Periods 2 to 5, Order is 80,

Close to EPP of 100
 Computations - EPP

Period Combined Trial Lot Size (cumulative) Part Periods Costs

6 40 0 Set-up of $100.00
6,7 70 30 = 30*1
6,7,8 70 30 = 30*1+0*2 30 Units held for 1 Period
6,7,8,9 100 120 = 30*1 + 30*3 30 Units Held for 1 Period,
30 Units held for 3 Periods

Combination of Periods 6 to 9, Order is 100

Period Combined Trial Lot Size (cumulative) Part Periods Costs
10 55 - Set-up of $100

Period 10 Order
 EPP – Part Period Balancing

1 2 3 4 5 6 7 8 9 10

Gross Requirements 35 30 40 - 10 40 30 - 30 55

Scheduled Receipts Total Cost

Holding Cost $190
Projected on Hand 35 - 50 10 10 - 60 30 30 -
Set-up Cost $300
Net Requirements - 30 - - - 40 - - - 55 Total Cost $490

Planned order receipts - 80 - - - 100 - - - 55

Planned Order releases 80 - - - 100 - - - 55 -

Cost Comparison, Which decisions is the best?

MRP Plan Cost

Lot for Lot $700
EOQ $730
EPP $490
End of MRP Discussion

• Lot for lot – Order only as needed, no safety stock and no

anticipation of further orders.
• EOQ – Preferable when relatively constant independent
demand exists.
• Part Period Balancing – is a more dynamic approach to
balance set-up and holding cost. PPB attempts to balance
Set-up and Holding costs for known DEMAND. It uses
additional information by changing lot size to reflect
future requirements.