Operations
Management
Chapter 7
P R O F. D R . F R A N C E S C O D . S A N D U L L I
UNIVERSITY COMPLUTENSE OF MADRID
Operations Management
Chapter 7
Material Requirements Planning (MRP)
Dependent Demand
Components of Dependent Demand
MRP Technique
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
The Dependent Technique used in a
production environment is called
material requirements planning (MRP).
It has the following advantages:
1. Better response to customer orders
2. Faster response to market changes
3. Improved utilization of facilities and labor
4. Reduced inventory levels
Components of Dependent
Demand Techniques
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
MRP Structure
Data Files Output Reports
BOM Master period report
production schedule
MRP by
date report
Lead times
(Item master file) Planned order
report
Inventory data
Material Purchase advice
requirement
planning
programs
(computer and Exception reports
Purchasing data software)
Order early or late
or not needed
Order quantity too
small or too large
Components of Dependent
Demand Techniques
MPS (Master Production Schedule):
Specifies what is to be made and when
Must be in accordance with the aggregate production
plan
Inputs from financial plans, customer demand,
engineering, supplier performance
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
Components of Dependent
Demand Techniques
MPS is established in terms of specific
products
MPS 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
Components of Dependent
Demand Techniques
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
scheduled receipts
Components of Dependent
Demand Techniques
Lead Time: The time required
to purchase, produce, or
assemble an item
For production – the sum of the
order, wait, move, setup, store,
and run times
For purchased items – the time
between the recognition of a need
and the availability of the item for
production
Components of Dependent
Demand Techniques
Bill of Materials (BOM): List of
components, ingredients, and
materials needed to make
product
BOM Provides product structure
Items above given level are called
parents
Items below given level are called
children
Components of Dependent
Demand Techniques
Level Product structure for “Awesome” (A)
0 A
1 B(2) Std. 12” Speaker kit C(3) Std. 12” Speaker kit w/
amp-booster
2 E(2) E(2) F(2) Std. 12” Speaker
booster assembly
Packing box and
3 D(2) installation kit of wire, G(1) D(2)
bolts, and screws
Amp-booster
12” Speaker 12” Speaker
Components of Dependent
Demand Techniques
Level Product structure for “Awesome” (A)
0 A
Part B: 2 x number of As = (2)(50) = 2” Speakeakerer100
Std. 12” kikitt w/
1 BPart C:
(2) Std 3x
. 12”12” Spnumber
eakereakerof
kikAs
it = C
(3)(50)
(3) =am
amp-boostster 150
Part D: 2 x number of Bs
+ 2 x number of Fs = (2)(100) + (2)(300) = 800
2 Part E: 2 xE(number2) of Bs E(2) F(2) Std. 12”2”
Speakeakererly
+ 2 x number of Cs = (2)(100) + (2)(150) = 500
boosterer
Part F: 2 x number of Cs = (2)(150) = as 300
assem
semb b
3 D Part G: 1 x number of Fs = (1)(300) = 300
Packiackin ng box an andd
(2) instalalllatatiion kikitt of wire,e, G(1) D(2)
bolts, an and d sc
scrrew ewss
Amp-booster
12” Speaker 12” Speaker
Determining Gross
Requirements
Starts with a production schedule for the
end item – 50 units of Item A in week 8
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
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)
Determining Gross
Requirements
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
Safety Stock
BOMs, inventory records, purchase
and production quantities may not
be perfect
Consideration of safety stock may
be prudent
Should be minimized and ultimately
eliminated
Typically built into projected on-
hand inventory
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, lot-for-lot can
be expensive
Economic order quantity (EOQ)
EOQ expects a known constant
demand and MRP systems often deal
with unknown and variable demand
Lot-for-Lot Example
1 2 3 4 5 6 7 8 9 10
Gross 35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on 35 35 0 0 0 0 0 0 0 0 0
hand
Net 0 30 40 0 10 40 30 0 30 55
requirements
Planned order 30 40 10 40 30 30 55
receipts
Planned order 30 40 10 40 30 30 55
releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Lot-ot-foror-Lot-Lot Examplple
No on-hand inventory is carried through the system
Total holding cost = $0
1 2 3 4 5 6 7 8 9 10
Gross
There are seven 35
requirements
setups
30 for
40 this
0 item
10 40in this
30 plan
0 30 55
Total setup cost = 7 x $100 = $700
Scheduled
receipts
Projected on 35 35 0 0 0 0 0 0 0 0 0
hand
Net 0 30 40 0 10 40 30 0 30 55
requirements
Planned order 30 40 10 40 30 30 55
receipts
Planned order 30 40 10 40 30 30 55
releases
EOQ Lot Size Example
1 2 3 4 5 6 7 8 9 10
Gross 35 30 40 0 10 40 30 0 30 55
requirements
Scheduled
receipts
Projected on 35 35 0 43 3 3 66 26 69 69 39
hand
Net 0 30 0 0 7 0 4 0 0 16
requirements
Planned order 73 73 73 73
receipts
Planned order 73 73 73 73
releases
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Average weekly gross requirements = 27; EOQ = 73 units
Annual demand =1 1,404 2 3 4 5 6 7 8 9 10
Total
Gross cost = setup 35
cost
30
+40holding
0 10
cost
40 30 0 30 55
Total cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)
requirements
Total cost = $3,798
Scheduled
receiptsfor 10 weeks = $3,798 x (10 weeks/52 weeks) =
Cost
Projected
$730 on
35 35 0 0 0 0 0 0 0 0 0
hand
Net
requirements 0 30 0 0 7 0 4 0 0 16
Planned order
receipts 73 73 73 73
Planned order
releases 73 73 73 73
Holding cost = $1/week; Setup cost = $100; Lead time = 1 week
Average weekly gross requirements = 27; EOQ = 73 units
Net Requirements Plan
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 - on-
hand inventory)
The planned order receipt for Item A in
week 8 is 40 units – 40 = 50 - 10
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
Determining Net
Requirements
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
Net Requirements Plan
The logic of net requirements
Gross
requirements + Allocations
Total
requirements
On Hand - Scheduled Net
– Safety Stock + receipts = requirements
Available inventory
Gross Requirements
Schedule
Figure 14.6
A S
B C B C
Master schedule
Lead time = 4 for A Lead time = 6 for S for B
Master schedule for A Master schedule for S sold directly
5 6 7 8 9 10 11 8 9 10 11 12 13 1 2 3
Periods
40 50 15 40 20 30 10 10
Periods 1 2 3 4 5 6 7 8
40+10 15+30
Gross requirements: B 10 40 50 20 are the gross
=50 =45 requirements for B
