Material Requirements Planning

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Material Requirements Planning

• Dr. Everette S. Gardner, Jr.

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End item
R
Time
LT
LT
Component
R
Time
LT
Raw material
R
Time
LT
Order point system with dependent demand
3

End item
R
Time
Component
Time
Raw material
Time
The MRP approach
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The simultaneous probability problem

• When components are ordered independently with an
  order point system, the probability that all will
  be in stock at the same time is much lower than
  the probabilities for individual components
• Computation
• Let Pn Prob. that n components are
• in stock simultaneously
• Si Prob. of stockout on one
• order cycle for component i
• Then
• Pn S1 x S2 x S3 Sn

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The simultaneous probability problem (cont.)

• Example
• End Item
• S1 .9 S2 .9 S3
  .9
• P3 .9 x .9 x .9
• Prob. that all 3 components will be available
  at any given time to
• build the end item

1
2
3
.729
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Probabilities of simultaneous availability of
components

• Number of Service level
• component items 90 95
• 1 .900 .950
• 2 .810 .902
• 3 .729 .857
• 4 .656 .814
• 5 .590 .774
• 6 .531 .735
• 7 .478 .698
• 8 .430 .663
• 9 .387 .630
• 10 .348 .599
• 15 .206 .463
• 20 .121 .358
• 25 .071 .277

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Demand forecasts and customer orders
Aggregate planning/ master scheduling
Product design changes
Inventory transactions
Bill of materials
Inventory records
MRP system
Capacity report
Mfg. orders
Purchase orders
Performance/ exceptions
Detailed scheduling system
Purchasing dept.
MRP inputs and outputs
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Product tree vs. indented parts list

• Product tree
• A Level 0
• B(2) C(4) Level 1
• D(1) E(3) D(2) F(1)
  G(3) Level 2

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Product tree vs. indented parts list (cont.)

• Indented parts list
• ? A
• ? B(2)
• ? D(1)
• ? E(3)
• ? C(4)
• ? D(2)
• ? F(1)
• ? G(3)

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• Week
• Lead
• 1 2 3 4
  5 6 7 8 9
  time

A
B
C
D
E
F
G
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Problems in requirementscomputations

• Product structure
• Recurring requirements within the planning
  horizon
• Multilevel items
• Rescheduling open orders

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Product structure

• Bills of material are hierarchical with distinct
  levels
• To compute requirements, always proceed down bill
  of materials, processing all requirements at one
  level before starting another

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Product structure (cont.)

• Example
• Level Inventory O.H.
• Truck 0 0
• A. Transmission (1) 1 2
• B. Gearbox (1) 2 15
• C. Gear (1) 3 7
• D. Forging Blank (1) 4 46
• Suppose we are to produce 100 trucks. What are
  the net requirements for each component?

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Recurrence of requirements within the planning
horizon

• The same item may be required for several
  different lots within the planning horizon
  always process one lot entirely, level by level,
  before starting the next.
• Example One lot of 12 trucks, followed by 2nd
  lot of 100
• Lot 1 Lot 2
• Level 1 Gross requirements 12 100

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Multilevel items

• The same item may appear at different levels on
  one or more BOMs result is multiple retrievals
  of same record to update system.
• Examples
• 1
• 2
• 3
• 4

Z
X
Y
A
A
A
A
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Multilevel items (cont.)

• Solution Low-level coding. Lowest level an
  item appears is coded on inv. record. Processing
  delayed until that level reached.
• 1
• 2
• 3
• 4

Z
X
Y
A
A
A
A
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Rescheduling open orders

• Tests for open order misalignment
• 1. Are open orders scheduled for periods
  following the period in which a net requirement
  appears?
• 2. Is an open order scheduled for a period in
  which gross requirement inv. O. H. at
  end of preceding period?
• 3. Is lead-time sufficient?

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Rescheduling open orders (cont.)

• Example
• Week
• 1 2 3 4 5 6
• ? Most MRP systems make such schedule changes
  automatically.

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Tactical questions in MRP

• Regeneration vs. net change
• Lot sizing
• Safety stocks

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Regeneration vs. net change

• Regeneration
• Complete replanning of requirements and update of
  inventory status for all items
• High data processing efficiency
• Usually initiated by weekly update of master
  schedule
• Net change
• Daily update based on inventory transactions
• More responsive to changing conditions
• Requires more discipline in file maintenance

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Lot sizing implications in MRP

• The load profiles at work centers in the system
  depend on the lot sizing rules used
• Load profiles determine
• undertime / overtime
• leadtimes
• Example
• Lot size Lot size
• Pd. Demand Rule 1 Rule 2
• 1 5 5 20
• 2 15 15 0
• 3 15 15 20
• 4 5 5 0
• (Assume 1 unit requires 1 machine hour.)

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Lot sizing implications in MRP (cont.)

• 20 20
• 15 15
• 10 10
• 5 5
• 0 0
• Load profile Load profile
• Rule 1 Rule 2

Machine hrs.
4
1
2
3
1
2
4
3
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Lot sizing techniques used in MRP systems

• Lot-for-lot (L4L) most used
• Economic order quantity (EOQ)
• Period order quantity (POQ)

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Lot-for-lot (L4L) example

• (Assume Ø LT)
• The L4L technique
• Minimizes carrying costs
• Is certainly the best method for
• - highly discontinuous demand
• - expensive purchased items

MRP1.xls
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EOQ example

• Setup cost, S 100
• Unit price, C 50
• Holding costs, HR .24 per annum
• HP .02 per period
• Annual demand, D 200
• Q (2DS / CHR)1/2 58

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Period order quantity example

• Technique
• 1. Compute EOQ to determine number of orders per
  year
• 2. Divide number of periods in one year by
  number of orders to get ordering interval
• EOQ 58
• Number of periods in one year 12
• D 200
• 200 / 58 3.4 (orders per year)
• 12 / 3.4 3.5 (ordering interval)

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Safety stocks in MRP systems

• Need for safety stocks
• Variations in demand due to end-item forecast
  errors and inventory errors
• Variations in supply both lead-times and
  quantities
• Since demand is not random, traditional
  statistical techniques do not apply.
• Options to provide safety factors
• Fixed quantity buffer stocks
• Safety lead-time
• Increase gross requirements

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Safety stocks in MRP systems (cont.)

• Fixed quantity buffer stocks
• Good rule of thumb Set buffer max. demand
  likely in a single period
• Never generate order solely to replenish buffer
  stocks
• Safety time method
• Simply order early
• Distorts LTs and priorities
• Better than buffer stocks for items with
  infrequent demand
• Also better for purchases outside company
• Increase in gross requirements
• Should be done at end item level only so that
• Components available in matched sets
• Safety stocks are not duplicated at different
  levels