Production Planning and Control MATERIAL REQUIREMENT PLANNING Haeryip Sihombing Universiti Teknikal Malaysia Melaka (UTeM) BMFP 4513 4a MRP Overview MRP is known as a push system, since it plans production according to forecasts of future demand and pushes out products accordingly MRP planning is based on time buckets (or periods) Orders (current demand) and forecasts (future demand) for end-items drive the system These requirements drive the need for subassemblies and components at lower levels of the bill-of-materials (BOM) HAERY SIHOMBING 1 MRP Systems The inventory control mechanisms we studied to this point are much better for single-item planning Many products manufacturers produce have a complex bill-of-materials (recipe of components) Demand for components is dependent on endproduct demand (which we ll call independent demand items) MRP systems encode the interdependence among various end-items and components MRP Overview The end-item demands are translated into a Master Production Schedule (MPS) MPS contains: Gross Requirements On-Hand Inventory Scheduled Receipts MRP Procedure: Netting: Subtract out on-hand and scheduled receipts from Gross Requirements Lot Sizing: Given net requirements, determine periods in which production will occur, and the corresponding lot sizes (often uses Wagner-Whitin lot sizing procedure) MRP Overview MRP Procedure (cont d) Time Phasing: Offset due dates of required items based on lead times to determine order release times BOM Explosion: Go down to the next level in the BOM and use the lot sizes at the higher level to determine gross requirements Repeat for all levels in the BOM Notes on Netting: We first use on-hand inventory to satisfy gross requirements If on-hand inventory is insufficient to meet some future demand and scheduled receipts are scheduled following this future demand, it doesn t make sense to plan a new order, since an outstanding order exists MRP Overview Notes on Netting (cont d) Instead of generating any new orders, we first attempt to expedite currently scheduled receipts so they arrive earlier (we assume this is possible, if not, the schedule will be infeasible and customers will require notification of a delay) When currently scheduled receipts are exhausted and netted out, we then have a set of net requirements that we use as requirements for the lot sizing procedure. For now we ll assume one of two very simple lot sizing rules: Lot-for-lot Fixed order period (FOP) 1
MRP Example Consider the following BOM: And the table of req ts Part A 100 (2) 200 300 400 Part A 1 2 3 4 5 6 7 8 Gross Req ts 15 20 50 10 30 30 30 30 Sched. Receipts 10 10 100 Adj. SRs Proj. On-Hand 20 Net Req ts Planned Order Rec. Planned Order Rel. MRP Example We first see how far our on-hand can take us, and whether we ll have to adjust the scheduled receipts Since the first 3 periods demand equals 85, and the sum of the on-hand plus SRs until then is 40, we should adjust SRs by expediting the order receipt scheduled for period 4 We can then project on-hand inventory Part A 1 2 3 4 5 6 7 8 Gross Req ts 15 20 50 10 30 30 30 30 Sched. Receipts 10 10 100 Adj. SRs 20 100 Proj. On-Hand 20 5 5 55 45 15-15 Net Req ts Planned Order Rec. Planned Order Rel. MRP Example From period 6 on we have no on-hand or scheduled receipts, so the deficit becomes net requirements Part A 1 2 3 4 5 6 7 8 Gross Req ts 15 20 50 10 30 30 30 30 Sched. Receipts 10 10 100 Adj. SRs 20 100 Proj. On-Hand 20 5 5 55 45 15-15 Net Req ts 15 30 30 Planned Order Rec. Planned Order Rel. MRP Example Suppose our lot-sizing rule is an FOP = 2 Suppose producing Part A (given that all of its components are available takes 2 periods We then generate the planned order releases Part A 1 2 3 4 5 6 7 8 Gross Req ts 15 20 50 10 30 30 30 30 Sched. Receipts 10 10 100 Adj. SRs 20 100 Proj. On-Hand 20 5 5 55 45 15-15 Net Req ts 15 30 30 Planned Order Rec. 45 30 Planned Order Rel. 45 30 MRP Example Next, we move down in the BOM to component 100: Component 100 has 40 on-hand, no scheduled receipts and a 2 week lead time Part A 100 (2) 200 300 400 Component 100 1 2 3 4 5 6 7 8 Gross Req ts 90 60 Sched. Receipts Adj. SRs Proj. On-Hand 40 40 40 40-50 Net Req ts 50 60 Planned Order Rec. 50 60 Planned Order Rel. 50 60 Lot Sizing Rules for MRP We discussed three lot-sizing procedures: Lot-for-lot, FOP, and Wagner-Whitin Here we consider additional heuristic rules Fixed Order Quantity and EOQ Each time we order, we order a set amount We cannot directly apply the EOQ formula, since we have no constant demand rate, D One strategy is to use the average demand per period in place of D in the EOQ formula and use the result as the fixed order quantity We schedule order receipts for periods in which we project negative on-hand inventory 2
Lot-Sizing Rules Part-Period Balancing Example Suppose our requirements for the next 9 periods are (0, 15, 45, 0, 0, 25, 15, 20, 15) Let A = $150, and let h = $2 per unit per period Our first setup is in period 2: Satisfy demand until: Setup Cost Part-Periods Holding Cost 2 $150 0 $0 3 $150 45 $90 6 $150 145 $290 Since $90 is closer to $150, we use the setup in period 2 to satisfy demand for periods 2 and 3 (Q 2 = 60) Lot-Sizing Rules Part-Period Balancing Example (cont d) Our next setup is in period 6 Satisfy demand until: Setup Cost Part-Periods Holding Cost 6 $150 0 $0 7 $150 15 $30 8 $150 55 $110 9 $150 100 $200 The setup in period 6 covers demand until period 8 More Lot-Sizing Rules Least-Unit Cost Heuristic Do a setup in the first period necessary (call this period i), then Work forward, period by period (as with PPB) and calculate the average cost incurred per unit Stop at the first period in which the cost per unit increases, call this period i + k. The setup in period i covers demand from period i to period i + k 1. More Lot-Sizing Rules Silver Meal Heuristic Do a setup in the first period necessary (call this period i), then Work forward, period by period (as with PPB) and calculate the average cost incurred per period Stop at the first period in which the cost per period increases, call this period i + k. The setup in period i covers demand from period i to period i + k 1. Safety Stock and Safety Lead Times Benefits of MRP MRP assumes data are deterministic Lead times are fixed Demand requirements are certain Lot size yields are 100% This is clearly not the case in most production environments Safety stock inflates requirements to buffer against demand uncertainties Safety lead times inflate expected lead time to ensure supply availability at production stages Also inflate requirements based upon expected yield If yield equals y, multiple requirements by 1/y 1. Better response to customer orders 2. Faster response to market changes 3. Improved utilization of facilities and labor 4. Reduced inventory levels 3
Dependent Demand The demand for one item is related to the demand for another item Given a quantity for the end item, the demand for all parts and components can be calculated In general, used whenever a schedule can be established for an item MRP is the common technique Dependent Demand Effective use of dependent demand inventory models requires the following 1. Master production schedule 2. Specifications or bill of material 3. Inventory availability 4. Purchase orders outstanding 5. Lead times Master Production Schedule (MPS) Master Production Schedule (MPS) Specifies what is to be made and when Must be in accordance with the aggregate production plan Aggregate production plan sets the overall level of output in broad terms As the process moves from planning to execution, each step must be tested for feasibility The MPS is the result of the production planning process MPS is established in terms of specific products Schedule must be followed for a reasonable length of time The MPS is quite often fixed or frozen in the near term part of the plan The MPS is a rolling schedule The MPS is a statement of what is to be produced, not a forecast of demand Master Production Schedule (MPS) Aggregate Production Plan Can be expressed in any of the following terms: A customer order in a job shop (maketo-order) company Modules in a repetitive (assemble-tostock) company An end item in a continuous (make-tostock) company Months January February Aggregate Production 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 Figure 14.2 4
The Planning Process The Planning Process Production Capacity Inventory Procurement Supplier performance Marketing Customer demand Finance Cash flow Human resources Manpower planning Change requirements? Change capacity? Master production schedule Material requirements plan Capacity requirements plan Change master production schedule? Management Return on investment Capital Aggregate production plan Master production schedule Engineering Design completion Change production plan? No Realistic? Yes Execute capacity plans Execute material plans Is capacity plan being met? Is execution meeting the plan? Figure 14.1 Figure 14.1 Focus for Different Process Strategies Bills of Material Number of end items Typical focus of the master production schedule Number of inputs Figure 14.3 Make to Order (Process Focus) Schedule orders Assemble to Order or Forecast (Repetitive) Schedule modules Stock to Forecast (Product Focus) Schedule finished product Examples: Print shop Motorcycles Steel, Beer, Bread Machine shop Autos, TVs Lightbulbs Fine-dining restaurant Fast-food restaurant Paper 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 BOM Example BOM Example Level 0 1 2 3 D (2) Product structure for Awesome (A) A B (2) Std. 12 Speaker kit C (3) Std. 12 Speaker kit w/ amp-booster E (2) E (2) F (2) Std. 12 Speaker booster assembly Packing box and installation kit of wire, bolts, and screws G (1) D (2) Level Product structure for Awesome (A) 0 A Part B: 2 x number of As = (2)(50) = 100 Std. 12 Speaker kit w/ 1 B Part (2) Std. C: 12 3Speaker x number kit of As = (3)(50) C (3) = 300 amp-booster Part D: 2 x number of Bs + 2 x number of Fs = (2)(100) + (2)(300) = 800 2 Part E: E (2) 2 x number of Bs E (2) F (2) Std. 12 Speaker + 2 x number of Cs = (2)(100) + (2)(150) booster = assembly 500 Part F: 2 x number of Cs = (2)(150) = 300 Packing box and 3 D (2) Part G: 1installation x number kit of of Fs wire, = (1)(300) G (1) = D (2) 300 bolts, and screws Amp-booster Amp-booster 12 Speaker 12 Speaker 12 Speaker 12 Speaker 5
Bills of Material Modular Bills Modules are not final products but components that can be assembled into multiple end items Can significantly simplify planning and scheduling Bills of Material Planning Bills Created to assign an artificial parent to the BOM Used to group subassemblies to reduce the number of items planned and scheduled Used to create standard kits for production Bills of Material Phantom Bills Describe subassemblies that exist only temporarily Are part of another assembly and never go into inventory Low-Level Coding Item is coded at the lowest level at which it occurs BOMs are processed one level at a time Accurate Records Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly Generally MRP systems require 99% accuracy Outstanding purchase orders must accurately reflect quantities and schedule receipts Lead Times Time-Phased Product Structure The time required to purchase, produce, or assemble an item For purchased items the time between the recognition of a need and the availability of the item for production For production the sum of the order, wait, move, setup, store, and run times Start production of D 2 weeks 1 week Must have D and E completed here so production can begin on B 2 weeks 1 week E 2 weeks 1 week G C 3 weeks F 1 week D 1 2 3 4 5 6 7 8 Time in weeks D E 2 weeks to produce B A Figure 14.4 6
MRP Structure Determining Gross Requirements Data Files Output Reports BOM Master production schedule MRP by period report MRP by date report Starts with a production schedule for the end item 50 units of Item A in week 8 Lead times (Item master file) Inventory data Purchasing data Figure 14.5 Material requirement planning programs (computer and software) report Purchase advice Exception reports Order early or late or not needed Order quantity too small or too large Using the lead time for the item, determine the week in which the order should be released a 1 week lead time means the order for 50 units should be released in week 7 This step is often called lead time offset or time phasing Determining Gross Requirements Determining Gross Requirements From the BOM, every Item A requires 2 Item Bs 100 Item Bs are required in week 7 to satisfy the order release for Item A The lead time for the Item B is 2 weeks release an order for 100 units of Item B in week 5 The timing and quantity for component requirements are determined by the order release of the parent(s) The process continues through the entire BOM one level at a time often called explosion By processing the BOM by level, items with multiple parents are only processed once, saving time and resources and reducing confusion Low-level coding ensures that each item appears at only one level in the BOM Gross Requirements Plan Net Requirements Plan Week 1 2 3 4 5 6 7 8 Lead Time A. Required date 50 Order release date 50 1 week B. Required date 100 Order release date 100 2 weeks C. Required date 150 Order release date 150 1 week E. Required date 200 300 Order release date 200 300 1 week F. Required date 300 Order release date 300 3 weeks D. Required date 600 200 Order release date 600 200 1 week G. Required date 300 Order release date 300 1 week Table 14.3 7
Net Requirements Plan Determining Net Requirements Starts with a production schedule for the end item 50 units of Item A in week 8 Because there are 10 Item As on hand, only 40 are actually required (net requirement) = (gross requirement - onhand inventory) The planned order receipt for Item A in week 8 is 40 units 40 = 50-10 Determining Net Requirements Determining Net Requirements Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7 The gross requirement for Item B is now 80 units in week 7 There are 15 units of Item B on hand, so the net requirement is 65 units in week 7 A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5 A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5 The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8 This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process Gross Requirements Schedule MRP Planning Sheet Figure 14.6 A S B C Lead time = 4 for A Master schedule for A B C Lead time = 6 for S Master schedule for S Master schedule for B sold directly Periods 5 6 7 8 9 10 11 8 9 10 11 12 13 1 2 3 40 50 15 40 20 30 10 10 Periods 1 2 3 4 5 6 7 8 Gross requirements: B 10 40+10 =50 40 50 20 15+30 =45 Therefore, these are the gross requirements for B Figure 14.7 8
Net Requirements Plan The logic of net requirements gross requirements + allocations total requirements on scheduled hand + receipts = available inventory net requirements MRP Management MRP is a dynamic system Facilitates replanning when changes occur System nervousness can result from too many changes Time fences put limits on replanning Pegging links each item to its parent allowing effective analysis of changes MRP and JIT MRP is a planning system that does not do detailed scheduling MRP requires fixed lead times which might actually vary with batch size JIT excels at rapidly moving small batches of material through the system Finite Capacity Scheduling MRP systems do not consider capacity during normal planning cycles Finite capacity scheduling (FCS) recognizes actual capacity limits By merging MRP and FCS, a finite schedule is created with feasible capacities which facilitates rapid material movement Small Bucket Approach 1. MRP buckets are reduced to daily or hourly The most common planning period (time bucket) for MRP systems is weekly 2. Planned receipts are used internally to sequence production 3. Inventory is moved through the plant on a JIT basis 4. Completed products are moved to finished goods inventory which reduces required quantities for subsequent planned orders 5. Back flushing based on the BOM is used to deduct inventory that was used in production Lot-Sizing Techniques Lot-for-lot techniques order just what is required for production based on net requirements May not always be feasible If setup costs are high, costs may be high as well Economic order quantity (EOQ) EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand 9
Lot-Sizing Techniques Part Period Balancing (PPB) looks at future orders to determine most economic lot size The Wagner-Whitin algorithm is a complex dynamic programming technique Assumes a finite time horizon Effective, but computationally burdensome Lot-for-Lot Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 0 10 40 30 0 30 55 Scheduled receipts Projected on hand 35 35 0 0 0 0 0 0 0 0 0 Net requirements 0 30 40 0 10 40 30 0 30 55 30 40 10 40 30 30 55 receipts 30 40 10 40 30 30 55 releases Holding cost = $1/week; Setup cost = $100 Lot-for-Lot Example No on-hand inventory is carried through the system Total holding cost = $0 1 2 3 4 5 6 7 8 9 10 There are seven setups for this item in this plan Total setup cost = 7 x $100 = $700 Gross requirements 35 30 40 0 10 40 30 0 30 55 Scheduled receipts EOQ Lot Size Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 0 10 40 30 0 30 55 Scheduled receipts Projected on hand 35 35 0 0 0 0 0 0 0 0 0 Projected on hand 35 35 0 0 0 0 0 0 0 0 0 Net requirements 0 30 40 0 10 40 30 0 30 55 Net requirements 0 30 0 0 7 0 4 0 0 16 receipts 30 40 10 40 30 30 55 receipts 73 73 73 73 releases 30 40 10 40 30 30 55 releases 73 73 73 73 Holding cost = $1/week; Setup cost = $100 Holding cost = $1/week; Setup cost = $100; Average weekly gross requirements = 27; EOQ = 73 units EOQ Lot Size Example Annual demand = 1,404 Total cost = setup cost + holding cost 1 2 3 4 5 6 7 8 9 10 Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks) Total cost = $3,798 Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) = Scheduled $730receipts Gross requirements 35 30 40 0 10 40 30 0 30 55 Projected on hand 35 35 0 0 0 0 0 0 0 0 0 PPB Example 1 2 3 4 5 6 7 8 9 10 Gross requirements 35 30 40 0 10 40 30 0 30 55 Scheduled receipts Projected on hand 35 Net requirements 0 30 0 0 7 0 4 0 0 16 Net requirements receipts releases 73 73 73 73 73 73 73 73 receipts releases Holding cost = $1/week; Setup cost = $100; Average weekly gross requirements = 27; EOQ = 73 units Holding cost = $1/week; Setup cost = $100; EPP = 100 units 10
PPB Example Trial Lot Size Periods (cumulative net Costs Combined requirements) Part Periods Setup Holding Total 2 30 0 1 2 3 4 5 6 7 8 9 10 2, 3 70 40 = 40 x 1 2, 3, 4 70 40 Gross requirements 2, 3, 4, 5 80 40 0 10 40 70 = 40 x 1 + 10 x 3 30 100 + 30 70 = 55 170 35 30 0 2, 3, 4, 5, 6 120 230 = 40 x 1 + 10 x 3 Scheduled receipts + 40 x 4 Combine periods 2-5 as this results in the Part Period closest to the EPP Projected on hand 35 6 40 0 Net requirements 6, 7 Planned 6, 7, 8order receipts 6, 7, 8, 9 70 70 100 30 = 30 x 1 30 = 30 x 1 + 0 x 2 120 = 30 x 1 + 30 x 3 100 + 120 = 220 Planned Combine order periods 6-9 as this results in the Part Period releases closest to the EPP 10 55 0 100 + 0 = 100 Holding cost = $1/week; Total cost Setup cost = 300 $100; + 190 = 490 EPP = 100 units Lot-Sizing Summary For these three examples Lot-for-lot $700 EOQ $730 PPB $490 Wagner-Whitin would have yielded a plan with a total cost of $455 for this example Lot-Sizing Summary Lot-Sizing Summary In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change In practice, this results in system nervousness and instability Lot-for-lot should be used when economical Lot sizes can be modified to allow for scrap, process constraints, and purchase lots Use lot-sizing with care as it can cause considerable distortion of requirements at lower levels of the BOM When setup costs are significant and demand is reasonably smooth, PPB, Wagner-Whitin, or EOQ should give reasonable results Extensions of MRP Closed-Loop MRP MRP system provides input to the capacity plan, MPS, and production planning process Capacity Planning MRP system generates a load report which details capacity requirements This is used to drive the capacity planning process Changes pass back through the MRP system for rescheduling Closed-Loop MRP System Figure 14.8 11
MRP Problems MRP does not account for production capacity limits (or their effects on lead times) Inflated safety lead times lead to high WIP levels System nervousness: MRP is not robust to changes in customer requirements Replanning the current schedule based on changes can lead to infeasible schedules Frozen zones specify a number of periods in which the schedule is fixed (cannot be changed) Can lead to problems with sales and marketing depts. Time fences are usually used, where the first X weeks are absolutely frozen, the next Y weeks can allow changes with a possible customer financial penalties, and beyond X + Y weeks is open for any changes From ERP to APS Systems ERP systems still at best only contain the basic MRP II logic for planning and controlling production More advanced production planning logic requires customized development within the ERP system Advanced Production and Scheduling (APS) systems complement ERP systems by providing more sophisticated production planning and scheduling logic Firms such as I2 Technologies and Manugistics have enjoyed tremendous growth in the late 1990 s due to their APS systems APS Systems Capabilities Demand Planning Sophisticated forecasting techniques to analyze customer buying patterns Supply Planning Synchronizes operations of manufacturers, suppliers, and logistics service providers through information exchange. Provides better, more accurate information for managing incoming materials Demand fulfillment Provides more accurate estimates of order fulfillment dates; manages order promising, provides backlog management, and tracks order fulfillment APS s have modules for managing pull systems and can dynamically track WIP, throughput, and cycle times 12