Material Requirements Planning (MRP)

Material Requirements Planning (MRP) Unlike many other approaches and techniques, material requirements planning works which is its best recommendation. Joseph Orlicky, 1974 1 History Begun around 1960 as computerized approach to purchasing and production scheduling. Joseph Orlicky, Oliver Wight, and others. Prior to MRP, production of every part and end item was triggered by the inventory falling below a given level (reorder point). APICS launched MRP Crusade in 1972 to promote MRP. 2 1

Key Insight Independent Demand finished products Dependent Demand components It makes no sense to independently forecast dependent demands. 3 Assumptions 1. Known deterministic demands. 2. Fixed, known production leadtimes. 3. In actual practice, lead times are related to the level of WIP. Flow Time = WIP / Throughput Rate (Little s Law) Idea is to back out demand for components by using leadtimes and bills of material. 4 2

Capacity Requirements Planning 100 Capacity (Hours or Units) 1 2 3 4 5 6 Who in the organization actually does this? 5 MRP Procedure 1. Netting: net requirements against projected inventory --Gross Requirements over time (e.g., weekly buckets) --Scheduled Receipts and current inventory --Net Requirements 2. Lot Sizing: planned order quantities 3. Time Phasing: planned orders backed out by leadtime 4. BOM Explosion: gross requirements for components 6 3

Inputs Master Production Schedule (MPS): due dates and quantities for all top level items Due dates assigned to orders into time buckets (week, day, hour, etc.) Bills of Material (BOM): for all parent items Inventory Status: (on hand plus scheduled receipts) for all items Planned Leadtimes: for all items Components of leadtime Move Setup Process time Queue time (80-90% total time) 7 Example - Stool Indented BOM Graphical BOM Stool Base (1) Legs (4) Bolts (2) Seat (1) Bolts (2) Stool Level 0 Base (1) Seat (1) Level 1 Legs (4) Bolts (4) Bolts (2) Level 2 Note: bolts are treated at lowest level in which they occur for MRP calcs. Actually, they might be left off BOM altogether in practice. 8 4

Example Item: Stool (Leadtime = 1 week) Week 0 1 2 3 4 5 6 Gross Reqs 120 Sched Receipts Proj Inventory 20 20 20 20 20-100 -100 Net Reqs 100 Planned Orders 100 Item: Base (Leadtime = 1 week) Week 0 1 2 3 4 5 6 Gross Reqs 100 Sched Receipts Proj Inventory 0 0 0 0-100 -100-100 Net Reqs 100 Planned Orders 100 9 Example (cont.) BOM explosion Item: Legs (Leadtime = 2 weeks) Week 0 1 2 3 4 5 6 Gross Reqs 400 Sched Receipts 200 Proj Inventory 0 0 0-200 -200-200 -200 Net Reqs 200 Planned Orders 200 10 5

Terminology Level Code: lowest level on any BOM on which part is found Planning Horizon: should be longer than longest cumulative leadtime for any product Time Bucket: units planning horizon is divided into Lot-for-Lot: batch sizes equal demands (other lot sizing techniques, e.g., EOQ or Wagner-Whitin can be used) Pegging: identify gross requirements with next level in BOM (single pegging) or customer order (full pegging) that generated it. Single usually used because full is difficult due to lot-sizing, yield loss, safety stocks, etc. 11 Pegging and Bottom up Planning Table 3.7 MRP Calculations for Part 300 Part 300 1 2 3 4 5 6 7 8 Required from B Required from 100 Gross Requirements Scheduled Receipts 35 30 15 90 125 60 90 15 100 Adjusted Scheduled Receipts 100 Projected on-hand 50 50 25 25-65 Net Requirements 65 15 Planed order receipts 65 15 Planed order releases 65 15 On-hand = 40 Scheduled releases = none Lot-for-lot LT = 1 week 12 6

Bottom Up Planning Reference Figure 3.7 Assume that the scheduled receipt for week 2 for 100 units is not coming in! Have 50 units of inventory, with requirements of 125. Implications I can fill 50 units of demand from part 100 or 50 units from part B. If I go with part 100, that will allow me to fill some of the demand of part A (100 needed for part A). Can I ship 50 units to the customer now and 50 units later? What if I cover the demand of part B? Correct choice depends on the customers involved. 13 More Terminology Firm Planned Orders (FPO s): planned order that the MRP system does not automatically change when conditions change --- can stabilize system Service Parts: parts used in service and maintenance --- must be included in gross requirements Order Launching: process of releasing orders to shop or vendors --- may include inflation factor to compensate for shrinkage Exception Codes: codes to identify possible data inaccuracy (e.g., dates beyond planning horizon, exceptionally large or small order quantities, invalid part numbers, etc.) or system diagnostics (e.g., orders open past due, component delays, etc.) 14 7

Conceptual Changes in Lotsizing Approaches Before, EOQ represented a basic trade-off between inventory costs and setup costs. Goldratt: If I am not at capacity on an operation requiring a setup, the time spent on a setup is a mirage. Make setups occur as frequently as possible (smaller lot sizes) as long as capacity is available Produce only when inventory level reaches zero (Wagner Whitin) is not optimal when capacity is a constraint Authors know of no commercial MRP system that uses WW. 15 Important Questions About Optimal Lot-sizing Setup costs Very difficult to estimate in manufacturing systems -May depend on schedule sequence -True costs depends on capacity situation Assumption of deterministic demand and deterministic production -production schedules are always changing because of dynamic conditions in the factory. Assumption of independent products that do not use common resources. Very seldom will see common resources not used. 16 8

Important Questions About Optimal Lot-sizing WW leads us to the conclusion that we should produce either nothing in a period or the demand of an integer number of future periods. -generates a production schedule that is very lumpy. There are reasons for generating a level loaded production schedule, one in which the same amount of products are produced in every time period. 17 Problem Formulation t= A time period, t = 1 to T, where T is the planning horizon. Dt = Demand in time period t (in units). Ct = Unit production costs ($/unit), excluding setup or inventory cost in period t. At = Setup (order) cost to produce (purchase) a lot in period t ($). Ht = Holding costs to carry a unit of inventory from period t to period t+1 ($/unit). e.g., if holding costs consists entirely of interest on money tied up in inventory, where i is the annual interest rate and periods correspond to weeks, then h = I * C t 52 It =Inventory (units) left over at the end of period t. Qt =The lot size (units) in period t; this is the decision variable 18 9

Problem Objective Satisfy all demands at minimum cost (production, setup, and holding costs) All the demands must be filled, only the timing of production is open to choice. If the unit production cost does not vary with t, then production cost will be the same regardless of timing and can be dropped from consideration. Look at an example: assume setup costs, production costs, and holding costs are all constant over time. Thus, need only to consider setup costs and holding costs. 19 Lot Sizing in MRP Lot-for-lot chase demand Fixed order quantity method constant lot sizes EOQ using average demand Fixed order period method use constant lot intervals Part period balancing try to make setup/ordering cost equal to holding cost Wagner-Whitin optimal method 20 10

Data For An Example Problem Table 2.1 t 1 2 3 4 5 6 7 8 9 10 Dt 20 50 10 50 50 10 20 40 20 30 ct 10 10 10 10 10 10 10 10 10 10 At 100 100 100 100 100 100 100 100 100 100 ht 1 1 1 1 1 1 1 1 1 1 21 Lot-for-lot Simply produce in period t the net requirements for period t. Minimizes inventory carrying costs and maxim izes total setup costs. It is simple and it is consistent with just in time. Tends to generate a more smooth production schedule. In situations where setup costs are minim al (assembly lines), it is probably the best policy to use. 22 11

Lot Sizing Example t 1 2 3 4 5 6 7 8 9 10 D t 20 50 10 50 50 10 20 40 20 30 LL 20 50 10 50 50 10 20 40 20 30 A = 100 h = 1 300 D = = 30 10 Lot-for-Lot: $1000 No carrying cost, ten setups @$100 each 23 Lot Sizing Example (cont.) EOQ: 2AD 2x100x30 Q = = = 77 h 1 Note: EOQ is a special case of fixed order quantity. t 1 2 3 4 5 6 7 8 9 10 Total D t 20 50 10 50 50 10 20 40 20 30 300 Q t 77 77 77 77 308 Setup 100 100 100 100 $400 Holding 57 7 74 24 51 41 21 58 38 $371 Total $771 24 12

Fixed Order Period From EOQ Calculate EOQ using formula presented earlier. Then Fixed Order Period, P = Q/D Calculating P in this manner has all the limitations noted earlier in Chapter. 25 Fixed Order Period Example--Further Comments Example Period Net Requirements Planned Order Recpts 1 2 3 4 5 6 7 8 9 15 45 25 15 20 15 60 60 15 Let P = 3. Skip first period, no demand. Sixty units covers demand for periods 2, 3, and 4. Period 5 is skipped because there is no demand. Sixty units covers demand in periods 6, 7, 8. Fifteen units covers demand in period 9, which is the last period in the planning Horizon. 26 13

Part-Period Balancing Combines the assumptions of WW with the mechanics of the EOQ. One of the assumptions of the EOQ is that it sets the average setup costs equal to the average inventory carrying costs. Part-period. The number of parts in a lot times the number of periods they are carried in inventory. Part-period balancing tries to make the setup costs as close to the carrying costs as possible. 27 Part-Period Balancing Example (Cont.) Period Net Requirements Planned Order Receipts 1 2 3 4 5 6 7 8 9 15 45 25 15 20 15 Quantity Period 6 Setup Costs Part-periods Inventory Carrying Costs 25 $150 0 $0 40 $150 15 x 1 = 15 $30 60 $150 15 + 20 x 2 = 55 $110 75 $150 55 + 15 x 3 = 100 $200 Fixed order quantity method (without modifications) tends to work better than WW when dealing with multi-level production systems with capacity limitations. 28 14

Nervousness Item A (Leadtime = 2 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 8 Gross Reqs 2 24 3 5 1 3 4 50 Sched Receipts Proj Inventory 28 26 2-1 -6-7 -10-14 -64 Net Reqs 1 5 1 3 4 50 Planned Orders 14 50 Component B (Leadtime = 4 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 8 Gross Reqs 14 50 Sched Receipts 14 Proj Inventory 2 2 2 2 2 2-48 Net Reqs 48 Planned Orders 48 Note: we are using FOP lot-sizing rule. 29 Nervousness Example (cont.) Item A (Leadtime = 2 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 8 Gross Reqs 2 23 3 5 1 3 4 50 Sched Receipts Proj Inventory 28 26 3 0-5 -6-9 -13-63 Net Reqs 5 1 3 4 50 Planned Orders 63 Component B (Leadtime = 4 weeks, Order Interval = 5 weeks) Week 0 1 2 3 4 5 6 7 8 Gross Reqs 63 Sched Receipts 14 Proj Inventory 2 16-47 Net Reqs 47 Planned Orders 47* * Past Due Note: Small reduction in requirements caused large change in orders and made schedule infeasible. 30 15

Reducing Nervousness Reduce Causes of Plan Changes: Stabilize MPS (e.g., frozen zones and time fences) Reduce unplanned demands by incorporating spare parts forecasts into gross requirements Use discipline in following MRP plan for releases Control changes in safety stocks or leadtimes Alter Lot-Sizing Procedures: Fixed order quantities at top level Lot for lot at intermediate levels Fixed order intervals at bottom level Use Firm Planned Orders: Planned orders that do not automatically change when conditions change Managerial action required to change a FPO 31 Handling Change New order in MPS Order completed late Scrap loss Engineering changes in BOM Regenerative MRP: completely re-do MRP calculations starting with MPS and exploding through BOMs. Net Change MRP: store material requirements plan and alter only those parts affected by change (continuously on-line or batched daily). Comparison: Regenerative fixes errors. Net change responds faster to changes (but must be regenerated occasionally for accuracy. 32 16

Rescheduling Top Down Planning: use MRP system with changes (e.g., altered MPS or scheduled receipts) to recompute plan can lead to infeasibilities (exception codes) Orlicky suggested using minimum leadtimes bottom line is that MPS may be infeasible Bottom Up Replanning: use pegging and firm planned orders to guide rescheduling process pegging allows tracing of release to sources in MPS FPO s allow fixing of releases necessary for firm customer orders compressed leadtimes (expediting) are often used to justify using FPO s to override system leadtimes 33 Safety Stocks and Safety Leadtimes Safety Stocks: generate net requirements to ensure min level of inventory at all times used as hedge against quantity uncertainties (e.g., yield loss) Safety Leadtimes: inflate production leadtimes in part record used as hedge against time uncertainty (e.g., delivery delays) 34 17

Safety Stock Example Item: Screws (Leadtime = 1 week) Week 1 2 3 4 5 6 Gross Reqs 400 200 800 Sched Receipts 500 Proj Inventory 100 100-100 -900 - Net Reqs 120 800 Planned Orders 120 800 Note: safety stock level is 20. 35 Safety Stock vs. Safety Leadtime Item: A (Leadtime = 2 weeks, Order Quantity =50) Week 0 1 2 3 4 5 Gross Reqs 20 40 20 0 30 Sched Receipts 50 Proj Inventory 40 20 30 10 10-20 Net Reqs 20 Planned Orders 50 Safety Stock = 20 units Week 0 1 2 3 4 5 Gross Reqs 20 40 20 0 30 Sched Receipts 50 Proj Inventory 40 20 30 10 10-20 Net Reqs 10 30 Planned Orders 50 36 18

Safety Stock vs. Safety Leadtime (cont.) Safety Leadtime = 1 week Week 0 1 2 3 4 5 Gross Reqs 20 40 20 0 30 Sched Receipts 50 Proj Inventory 40 20 30 10 10-20 Net Reqs 20 Planned Orders 50 37 Manufacturing Resource Planning (MRP II) Sometime called MRP, in contrast with mrp ( little mrp); more recent implementations are called ERP (Enterprise Resource Planning). Extended MRP into: Master Production Scheduling (MPS) Rough Cut Capacity Planning (RCCP) Capacity Requirements Planning (CRP) Production Activity Control (PAC) 38 19

MRP II Planning Hierarchy Demand Forecast Resource Planning Rough-cut Capacity Planning Bills of Material Inventory Status Aggregate Production Planning Master Production Scheduling Material Requirements Planning Job Pool Job Release Job Dispatching Capacity Requirements Planning Routing Data 39 Master Production Scheduling (MPS) MPS drives MRP Should be accurate in near term (firm orders) May be inaccurate in long term (forecasts) Software supports forecasting order entry netting against inventory Frequently establishes a frozen zone in MPS 40 20

Rough Cut Capacity Planning (RCCP) Quick check on capacity of key resources Use Bill of Resource (BOR) for each item in MPS Generates usage of resources by exploding MPS against BOR (offset by leadtimes) Infeasibilities addressed by altering MPS or adding capacity (e.g., overtime) 41 Capacity Requirements Planning (CRP) Uses routing data (work centers and times) for all items Explodes orders against routing information Generates usage profile of all work centers Identifies overload conditions More detailed than RCCP No provision for fixing problems Leadtimes remain fixed despite queueing 42 21

Production Activity Control (PAC) Sometimes called shop floor control Provides routing/standard time information Sets planned start times Can be used for prioritizing/expediting Can perform input-output control (compare planned with actual throughput) Modern term is MES (Manufacturing Execution System), which represents functions between Planning and Control. 43 Conclusions Insight: distinction between independent and dependent demands Advantages: General approach Supports planning hierarchy (MRP II) Problems: Assumptions --- especially infinite capacity Cultural factors --- e.g., data accuracy, training, etc. Focus --- authority delegated to computer 44 22