CHAPTER 11

RESOURCE REQUIREMENTS
PLANNING SYSTEMS
MATERIAL REQUIREMENTS
PLANNING (MRP)

• Principle that many materials held in inventory have

dependent demand.

• Computer-based system that determines how much of

each material, any inventory item with a unique part
number, should be purchased or produces in each future
time period to support the MPS.
 INDEPENDENT VS. DEPENDENT
DEMAND

Independent Demand -
End Product
demand at the customer end
product level

Dependent Demand -
demand for items that are
subassemblies, component
parts or raw materials to be
used in the production of
end products
E(1)
MATERIAL REQUIREMENTS
PLANNING (MRP)
Objectives:

1. Improve customer service

2. Reduce inventory investment

3. Improve plant operating efficiency

MATERIAL REQUIREMENTS
PLANNING (MRP)

1. Improve customer service

• Meeting delivery promises and shortening delivery times.

• Promises are locked into the MRP control system that guides
production.
MATERIAL REQUIREMENTS
PLANNING (MRP)
2. Reduce inventory investment
• Long periods of low levels of inventory interspersed with brief
periods of full inventories.
• MRP better controls the quantity and timing of deliveries of
inventory items.
• Reduced numbers of stock-outs and material delivery delays
• Reduction of the incidence of scrapped inventory items.
• Increase in capacity of the production dept. by decreased production
idle time.
MATERIAL REQUIREMENTS
PLANNING (MRP)
2. Reduce inventory investment
• Long periods of low levels of inventory interspersed with brief
periods of full inventories.
• MRP better controls the quantity and timing of deliveries of
inventory items.
• Reduced numbers of stock-outs and material delivery delays
• Reduction of the incidence of scrapped inventory items.
• Increase in capacity of the production dept. by decreased production
idle time.
MATERIAL REQUIREMENTS
PLANNING (MRP)

3. Improve plant operating efficiency

• Inventory turns
• Delivery promises met
 MATERIAL REQUIREMENTS
PLANNING (MRP) INPUTS AND
OUTPUTS Changes
Master Order releases
Schedule Planned-order
schedules
Primary
reports

Bill of MRP System

Materials
Exception reports
Planning reports
Performance-
control
Inventory reports
Inventory Transactions
Status Secondary
File reports
18 - 9
 MASTER SCHEDULE
• One of the 3 primary inputs of MRP
• States which end items are to be produced, when these are
needed, and in what quantities.

Week Number
Item: X 1 2 3 4 5 6 7 8
Quantity 100 150
 Master Scheduling Process
• is a procedure for considering inventories, customer orders, &
forecasts to produce a projected inventory, master production
schedule & ATP.

Projected
Beginning Inventory
Inventory
Master
Master
Forecast Production
scheduling
Schedule
Customer
Orders Available To
Promise
(uncommitted
inventory)
 Product Planning Horizon
• shows the timing, lead times and steps in the
manufacturing process to assure that the end item is
manufactured correctly and on-time.
Assembly
Procurement
Lead Time
Sub-assembly

Fabrication Assembly Lead

Sub-assembly Time
Lead Time
Procurement

1 2 3 4 5 6 7 8 9 10

Cumulative Lead Time - the sum of the lead times that

sequential phases of a process require.
 Assembly Time Chart
• show the material order points needed to meet
scheduled availability of the end item
Procurement of
raw material D Fabrication
of part E
Procurement of Subassembly A
raw material F Final assembly
Procurement
Of part C and inspection
Procurement of
part H
Procurement of
raw material I Fabrication Subassembly B
of part G

1 2 3 4 5 6 7 8 9 10 11
Material D, F and I must be ordered at the beginning of week 2 to meet
a delivery at the beginning of week 12
 BILL OF MATERIALS (BOM)
• One of the 3 primary inputs of MRP
• A listing of all the raw materials, parts, subassemblies, and
assemblies needed to produce one unit of a product.

• The Bill of Materials File contains all Bill of Materials for

each end product the company produces.

• A Product Structure Tree a visual depiction of the

requirements in a bill of materials, where all components are
listed by levels
BILL OF MATERIALS (BOM)
BILL OF MATERIALS (BOM)
 Product Structure Tree - Example
Example 1: Use the information presented below to answer the
following? Determine the quantities of B, C, D, E and F to complete
one X. Determine the quantities of each of these components to
produce 200 X’s.

Level
0 X

1 B(2) C
B-2 B - 400
C-1 C - 200
D - 3x2 = 6 D - 1200
D(3) E E(2) F(2)
2 E - 4x3x2+1x2+2 = 28 E - 5600
F-2 F - 400

3 E(4)
 INVENTORY RECORDS
• One of the 3 primary inputs of MRP
• Includes information on the status of each item by
time period.
Item LLC
Lot Size LT 1 2 3 4 5 6 7 8 9 10

Gross Requirements
Scheduled Receipts

Projected on Hand
Net Requirements
Planned Order Receipts
Planned Order Releases
 INVENTORY RECORDS

• Gross requirements: The total expected demand for an end

item or raw material during each time period without regard to
the amount on hand. For end items, these quantities are shown
in the master schedule; for components, these quantities are
derived from the planned-order releases of their immediate
"parents.“

• Scheduled receipts: Open orders scheduled to arrive from

vendors or elsewhere in the pipeline by the beginning of a
period.

• Projected on hand: The expected amount of inventory that

will be on hand at the beginning of each time period, i.e.,
scheduled receipts plus available inventory from last period.
 INVENTORY RECORDS
•Net requirements: The actual amount needed in each time period.

•Planned-order receipts: The quantity expected to be received by

the beginning of the period in which it is shown. Under lot-for-lot
ordering, this quantity will equal net requirements. Under lot-sizing
ordering, this quantity may exceed net requirements. Any excess is
added to available inventory in the next time period for simplicity,
although in reality, it would be available in that period.

•Planned-order releases: Indicates a planned amount to order in

each time period; equals planned-order receipts offset by lead time.
This amount generates gross requirements at the next level in the
assembly or production chain. When an order is executed, it is
removed from "planned-order releases" and enter under "scheduled
receipts."
 MRP COMPUTER PROGRAM
1. Determine the number of end items needed in each time period
(buckets).

2. Number of service parts not included in the MPS but deduced

from the customer orders are included as end items.

3. MPS and the service parts are exploded into gross

requirements (bill of material).

4. Gross materials requirements are modified (on hand and on

order materials). Net Requirements > 0, orders must be placed.

5. Orders are offset to earlier time periods to allow lead times.

 OUTPUTS OF MRP
1. Planned order schedule- a plan of the quantity of each
material to be ordered in each time period.
2. Changes in planned orders- modification of previous
planned orders.

Secondary
3. Exception reports- flag items requiring management
attention.
4. Performance report- how well the system is operating.
5. Planning reports- used bin future inventory-planning
activities.
 LOT-SIZING IN MRP
• How much of the material to order.

• Produce-to-order firms: size of customer’s order is

usually the lot size that will be produced because it
cannot be assumed that their will be other orders

• Produce-to-stock firms: size of production depends

on the demand for the product.
 LOT-SIZING IN MRP

• Operations manager order and produce large lots of

materials because:

• Annual cost of changing machines is less and production

capacity is greater.

• Annual cost of placing orders is less.

• Price breaks and transportation cost breaks

 LOT-SIZING IN MRP
• Operations manager order and produce small lots of
materials because:

• Lower average inventory levels and annual cost of

carrying inventories.

• Lower risk of obsolescence.

• Less in-process inventory and faster production of orders.

 LOT-SIZING IN MRP
• Operations manager can’t have the benefits of both small and
large lots.

• Chapter 10: EOQ – MPS and MRP costly

• EOQ assumes that per-unit cost does not depend on the
quantity of a material ordered.
• EOQ assumes that the demand for a material is uniform
from week to week.
• MRP and MPS, the net requirements for material have lumpy
demand (demand varies week to week)
• Lot sizing methods often exhibit lower costs than the EOQ- lot-
for-lot method and the period order quantity
 ISSUES IN MRP
• Lot-sizing- applied at every level in the production
structure.
• Lower-level components- no serious problems

• Net change Versus Regenerative MRP Systems

• Net Change MRP – update the MPS as changes in the MPS
occur. The MRP system is then activated to generate one set of
MRP outputs. It only show the net changes in the past MRP
runs and not an entire set of MRP outputs.

• Regenerative MRP – a complete MRP run is processed

periodically. New MPS, an updated inventory status file, and
up-to-date bills of material file are fed into the MRP computer
program, which generates a complete set of outputs.
 ISSUES IN MRP
• Safety Stock- avoiding excessive stock-outs
• Users argue that safety stock performs the same function
in the MRP systems as in other inventory planning
systems.

• MRP in Assemble-to-order firms

• Special type of produce-to-order firm
• Millions of possible unique end items because customers
have their choice of option and accessories.
• Final assembly schedule is usually prepared only a week
or two ahead.
• Modular bill of material- product family will list the
forecasted percentage of customer orders
EXPANDING FROM MRP TO MRP II
With MRP generating the material and schedule requirements
necessary for meeting the appropriate sales and inventory
demands, more than the obvious manufacturing resources for
supporting the MRP plan was found to be needed.
Financial resources would have to be generated in varying amounts and
timing.
Also, the process would require varying degrees of marketing resource
support.
Production, marketing, and finance would be operating without
complete knowledge or even regard for what the other functional areas
of the firm were doing.
EXPANDING FROM MRP TO MRP II
• In the early 1980s MRP was expanded into a much broader
approach-manufacturing resource planning (MRP II)

• Oliver Wight coined the acronym MRP II for manufacturing

resource planning.

• MRP II was an effort to expand the scope of production

resource planning and to involve other functional areas of the
firm in the planning process, most notably marketing and
finance, but also engineering, personnel, and purchasing.
 CAPACITY REQUIREMENTS
PLANNING
• process of determining the amount of labor and
machine resources required to accomplish the tasks of
production on a more detailed level, taking into
account all component parts and end items in the
materials plan

• a feasibility check on labor & machine utilization:

• compare the open orders & planned orders (from
the MRP) to the actual shop floor capacity
 CAPACITY REQUIREMENTS
PLANNING
• Basic MRP does not consider capacity limitations
(assumes infinite capacity so no rescheduling, etc.),
so CRP addresses this issue.
 CAPACITY TERMS
 Load profile
 Compares released and planned orders with work center
capacity
 Capacity
 Productive capability; includes utilization and efficiency
 Utilization
 % of available working time spent working
 Efficiency
 Standard Hours Earned/Actual Hours Charged
 Load
 The standard hours of work assigned to a facility
 Load percent
 The ratio of load to capacity
Load % = (load/capacity)x100%
 DETERMINING LOADS
AND CAPACITIES
2 copiers, 2 operators
5 days/wk, 8 hr/day
1/2 hr meals, 1/2 hr maintenance per day

Efficiency = 100%
Utilization = 7/8 = 87.5%
Daily capacity = 2 machines x 2 shifts
x 8 hours/shift x 100% efficiency
x 87.5% utilization
= 28 hours or 1,680 minutes
 DETERMINING LOADS
AND CAPACITIES
JOB NO. OF SETUP RUN TIME
NO. COPIES TIME (MIN) (MIN/UNIT) TOTAL TIME
10 500 5.2 0.08 5.2 + (500 x 0.08) = 45.2
20 1,000 10.6 0.10 10.6 + (1,000 x 0.10) = 110.6
30 5,000 3.4 0.12 3.4 + (5,000 x 0.12) = 603.4
40 10,000 11.2 0.14 11.2 + (10,000 x 0.14) = 1,411.2
50 2,000 15.3 0.10 15.3 + (2,000 x 0.10) = 215.3
2385.7 min
Load percent = 2,385.7 / 1,680 = 1.42 x 100% = 142%
Add another shift:
Daily capacity = 2 machines x 3 shifts x 8 hours/shift
x 100% efficiency x 87.5% utilization
= 42 hours or 2,520 minutes
Revised load percent = 2,385.7 / 2,520 = 0.9467 x 100% = 94.67%
 DETERMINING LOADS
AND CAPACITIES
3 tractors, 3 operators
6 days/wk, 8 hr/day, 2 shifts
2/3 hr meals, 1/2 hr maintenance per day
Efficiency = 100%

Utilization = [8-(2/3+1/2)]/8 = 85.42%

Daily capacity = 3 tractors x 2 shifts
x 8 hours/shift x 100% efficiency
x 85.42% utilization
= 41 hours or 2460 minutes
 DETERMINING LOADS
AND CAPACITIES
JOB LENGTH SETUP RUN TIME
NO. (KM) TIME (MIN) (MIN/KM) TOTAL TIME
A 30 6 20 6 + (30 x 20) = 606
B 40 8 40 8+ (40 x 40) = 1,608
C 20 4 15 4 + (20 x 15) = 304
D 35 5 25 5 + (35 x 25) = 880
F 15 3 12 3 + (15 x 12) = 183
3,581 min
Load percent = 3,581 / 2,460 = 1.45 x 100% = 145%
Add another shift:
Daily capacity = 3 tractors x 3 shifts x 8 hours/shift
x 100% efficiency x 85.42% utilization
= 61.50 hours or 3690 minutes
Revised load percent = 3581 / 3690 = 0.9705 x 100% = 97.05%
End of Chapter 11