LGT 2106

Principles of Operations Management

2023/24, Semester 1

Lecture 3
Materials Management
 Learning Outcomes of Lecture 3
1. Explain what material requirements planning (MRP) is

2. Understand how the MRP system is structured

3. Analyze an MRP problem

4. Evaluate and compare MRP lot-sizing techniques

References: Jacobs & Chase, 15th ed, Chapter 21.

Material Requirements Planning (MRP)
• Material requirements planning (MRP): the logic that ties production functions
together from a material planning and control view
• MRP has been installed almost universally in manufacturing firms, even small ones

• Determine the number of subassemblies, components, and raw materials required and
their build dates to complete a given number of end products by a specific date
• How much of each part to obtain?
• When to order or produce the parts?
• What is Material Requirements Planning? - YouTube

• MRP is based on dependent demand

Independent & Dependent Demand
• Independent demand refers to the demand for end products (which originates outside of the system)
• Dependent demand refers to demand for components that make up products, and is caused by the
demand for a higher-level item

• Determining the number of dependent demand items needed is essentially a straightforward

multiplication process
• If one Part A takes 5 parts of B to make it, then 5 parts of A require 25 parts of B

• Example in automobile industry

• Independent demand:
• Sport Utility Vehicle (SUV) × 100
• Multi-Purpose Vehicle (MPV) × 200
• Dependent demand
• Tires × 1200
• Steering wheels × 300
Where MRP Can Be Used
• MRP is most valuable in industries where a number of products are made in batches
using the same productive equipment

• MRP is most valuable to companies involved in assembly operations, and least

valuable to those in make-to-order fabrication

• MRP does not work well in companies that produce a low number of units annually
• Better handled using project management
Industry Applications and Expected Benefits of MRP
Master Production Schedule
• Master production schedule (MPS) is the time-phased production plan that
specifies how many of each end item the firm plans to build, and when
• Major input to the MRP process

• All production systems have limited capacity and limited resources

• The aggregate plan provides the general range of operation; the master scheduler must specify
exactly what is to be produced

• To determine an acceptable feasible schedule to be released to the shop, trial master

production schedules are tested using the MRP program
Aggregate Plan and the Master Production Schedule for Mattresses

The next level down (not shown) would be the MRP program that develops detailed schedules
showing when cotton batting, springs, and hardwood are needed to make the mattresses.
Planning Sequence
• Specify product groups
• No specific items
Aggregate Plan

• How many of each end item to build

Master Production • When to build each end item
Schedule (MPS)

• Calculate and schedule all raw materials, parts, and

Materials Requirement
supplies needed to make the item specified by the MPS
Planning (MRP)
Duties of Master Scheduler
• Include all demands from product sales, warehouse replenishment, spares, and
interplant requirements

• Never lose sight of the aggregate plan

• Be involved with customer order promising

• Be visible to all levels of management

• Objectively trade off manufacturing, marketing, and engineering conflicts

• Identify and communicate all problems

Master Production Schedule: Time Fences
• Flexibility within a master production schedule depends on several factors
• Production lead time
• Commitment of parts and components to an end item
• Relationship between customer and vendor
• Amount of excess capacity
• How willing management is to make changes

• Time fences: periods of time having some specified level of opportunity for
customer to make changes
• Frozen: make no or only insignificant changes to products
• Slushy: allow some changes in specific products within a family
• Liquid: allow almost any variation in products
Master Production Schedule Time Fences
Goals, Objectives, and Philosophy of MRP
• Goal
• Control inventory levels, assign operating priorities to items, and plan capacity to load the production system
• Inventory
• Order the right part at the right quantity at the right time

• Priorities
• Order with the right due date and keep the due date valid

• Capacity
• Plan for a complete work load for both machines and workers
• Plan an accurate load – make only what is needed
• Plan for an adequate time to view future loads
Benefits for MRP System
• Lower selling price due to increased scheduling efficiency

• Lower inventory levels due to more accurate record keeping

• Improved customer service because products are made and delivered as needed

• Faster response to market demands

• Increased flexibility to change the master schedule

• Reduced idle time to more efficient shop floor loading

Benefits for MRP System (cont’d)
• Managers can see the planned schedule before the orders are actually released

• Tells when to de-expedite as well as expedite as orders change

• Delays/cancels orders or changes quantities as customers adjust their orders to market

requirements

• Advances or delays order due dates as required

• Aids capacity planning by identifying bottlenecks

MRP System Structure
• The material requirements planning portion of manufacturing activities most closely interacts
with the master schedule, bill-of-materials file, inventory records file, and output reports
 Bill-of-Materials (BOM)
• A list of subassemblies, components,
and raw materials, and their
respective quantities required to
produce specific end items

• Also called a product structure or

product tree file because it shows
how a product is put together

• BOM files often list parts using an

indented structure, but not efficient as
the single-level lists
Low-Level Coding of BOM
• If all identical items are placed at the same level, it becomes a simple matter for the
computer to scan across each level and summarize the number of units of each item required
Inventory Records File
• Computerized record-keeping system for the inventory status of all subassemblies, components, and raw materials
• Peg record file (also “where-used file”)
• Traces a material requirement upward in the product structure to identify its parent item
• Inventory transaction file
• Shows changes that result from stock receipts and disbursements, scrap losses, wrong parts, and cancelled orders
MRP Computer Program
• Output Reports
• Primary reports
• Planned orders
• Order release notices
• Changes in due dates
• Cancellations or suspensions of open orders
• Inventory status data

• Secondary reports
• Planning reports
• Performance reports
• Exceptions reports
An Example Using MRP
• Ampere, Inc., produces a line of electric meters installed in residential buildings by
electric utility companies to measure power consumption
• Meters used on single-family homes are of two basic types for different voltage and
amperage ranges
• In addition to complete meters, some subassemblies are sold separately for repair or for
changeovers to a different voltage or power load
• The problem for the MRP system is to determine a production schedule to identify each
item, the period when it is needed, and the appropriate quantities
Forecasting demand
• Two sources of demand for the meters and components
• Regular customers that place firm orders in advance based on the needs of their projects
• Other customers that buy these items as needed, forecast requirements
Developing a Master Production Schedule
• Assume that the quantities to satisfy the known and random
demands must be available during the first week of the month
Bill-of-Materials (Product Structure)

• To keep things simple, we will focus on only one of the parts, part D, which is a transformer
Inventory Records

• Safety stock: minimum amount of inventory that we always want to keep on hand for an item
• On order: inventory scheduled to arrive
 Week
Item 4 5 6 7 8 9
A

Performing MRP Calculations LT = 2 weeks

On hand = 50
Gross requirements
Scheduled receipts
Projected available
Safety stock = 0 balance
Order qty = lot-
for-lot Net requirements
• Gross requirements: total amount required for a particular item at the beginning of Planned order receipts
that week Planned order releases
B
• Scheduled receipts: orders that have already been released and that are scheduled to
LT = 2 weeks Gross requirements
arrive as of the beginning of the period
On hand = 60 Scheduled receipts
• Projected available balance: amount of inventory expected as of the end of a period Projected available
Safety stock = 0 balance
• Initial projected available balance = on-hand inventory-safety stock Order qty = lot-
• Equation for projected available balance: for-lot Net requirements
Planned order receipts
Planned order releases
C

LT = 1 week Gross requirements

On hand = 40 Scheduled receipts
Projected available
Safety stock = 5 balance
• Net requirements: amount needed when Order qty = 2,000 Net requirements
Planned order receipts
projected available balance + scheduled receipts < gross requirement
Planned order releases
• Planned order receipts: amount of an order that is required to meet a net D
requirement in the period LT = 1 week Gross requirements
• Planned order releases: planned order receipt offset by the lead time On hand = 200 Scheduled receipts

Projected available
Safety stock = 20 balance
• Lot-for-lot: Sets planned orders to exactly match the net requirements
Order qty = 5,000 Net requirements
Planned order receipts
Planned order releases
 Week
Item 4 5 6 7 8 9
A
Performing MRP Calculations LT = 2 weeks
On hand = 50
Gross requirements
Scheduled receipts
1250

Projected available 50 50 50 50 50 0
Safety stock = 0 balance
Order qty = lot-for- 1250-50=1200
lot Net requirements
Planned order receipts 1200
Planned order releases 1200
B
LT = 2 weeks Gross requirements 470
On hand = 60 Scheduled receipts 10
Projected available 60 60+10=70 70 70 70 0
Safety stock = 0 balance
Order qty = lot-for- 470-70=400
lot Net requirements
Planned order receipts 400
Planned order releases 400
C

1200 +400
LT = 1 week Gross requirements
On hand = 40 Scheduled receipts
Projected available 2000-1565=435 435 435
40-5=35 35 35
Safety stock = 5 balance
1200+400-
Order qty = 2,000 Net requirements 35=1565
Planned order receipts 2000
Planned order releases 2000
D
4000 1200 270
LT = 1 week Gross requirements
On hand = 200 Scheduled receipts 100

Projected available 5000- 1280- 5000-

200-20+100=280 280 80
Safety stock = 20 balance 3720=1280 1200=80 190=4810
4000-
Note the difference between the strategies Order qty = 5,000 Net requirements 280=3720 270-80=190

of order quantity under A, B and C, D Planned order receipts

5000
5000
5000
5000
Planned order releases
Lot Sizing in MRP Systems
• Lot Sizing: Lot sizes are the part quantities issued in the planned order
receipt and the planned order release sections of an MRP schedule
• Most lot-sizing techniques deal with how to balance the setup or order costs
and holding costs associated with meeting the net requirements generated by
the MRP planning process
• Lot-Sizing Techniques
• Lot-for-lot (L4L)
• Economic order quantity (EOQ)
• Least total costs (LTC)
• Least unit cost
Lot-for-Lot (L4L)
• Sets planned orders to exactly match the net requirements

• Produces exactly what is needed each week with no inventory carried over
into future periods

• Minimizes carrying cost

• Does not take into account setup costs or capacity limitations

Economic Order Quantity (EOQ)
• 𝑃: unit production cost
• 𝐷: annual demand quantity (also assume constant demand rate per time unit)
• 𝑆: setup cost
• ℎ: annual holding cost per unit
• Decide the order quantity 𝑄 to minimize the total cost

𝐷 𝑄
𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 𝑄 = 𝑃𝐷 + 𝑆 + ℎ
𝑄 2
production setup holding
cost cost cost

𝐷 𝑄 ∗
2𝐷𝑆
𝑆 =ℎ 𝑄 =
𝑄 2 ℎ
Least Total Costs and Least Unit Cost
• Least total costs
• Dynamic lot-sizing technique that calculates the order quantity by comparing the
carrying cost and the setup (or ordering) costs for various lot sizes and then selects the
lot in which these are most nearly equal

• Least unit cost

• Dynamic lot-sizing technique that adds ordering and inventory carrying cost for each
trial lot size and divides by the number of units in each lot size, picking the lot size
with the lowest unit cost
Example: MRP Lot-Sizing Problem
• Consider the following MRP lot-sizing problem; the net requirements are shown for eight
scheduling weeks:
Lot-for-Lot
• Sets planned orders to exactly match the net requirements
• Produces exactly what is needed each week with no inventory
carried over into future periods
• Minimizes carrying cost
• Does not take into account setup costs or capacity limitations
Economic Order Quantity
525
• Annual demand quantity 𝐷 = × 52 = 3412.5 units
8
• Annual holding cost per unit ℎ = 0.5% × 10$ × 52 𝑤𝑒𝑒𝑘𝑠 = 2.60$ 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
• Setup cost 𝑆 = 47$
2𝐷𝑆 2×3412.5×47
• EOQ= = = 351 𝑢𝑛𝑖𝑡𝑠
ℎ 2.60

301 × 10 × 0.5% = 15.05

 Least Total Costs (LTC)
• Compare the carrying cost and the setup (or ordering) costs for various lot sizes
and then select the lot in which these are most nearly equal

Produce in Inventory: Inventory: Inventory:

Week 1 for 50, 60, 70 60, 70 70
Weeks 1 -3

Week 1 Week 2 Week 3

Carrying (holding) cost = 60 + 70 × 2 × 0.5% × 10$ = 10$

Least Unit Cost
• Add ordering and inventory carrying cost for each trial lot size and divide
by the number of units in each lot size, picking the lot size with the lowest
unit cost

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝑜𝑟𝑑𝑒𝑟𝑒𝑑
Choosing the Best Lot Size
• In the previous example for MRP Lot-Sizing problem
• Lot-for-lot: 376$
• EOQ: 171.05$
• Least total cost: 140.50$
• Least unit cost: 153.50$

• The advantage of Least Unit Cost is that it is a more complete analysis and would take into account
ordering or setup costs that might change as the order size increases

• If the ordering or setup costs remain constant, Least Total Cost method is more attractive because it is
simpler and easier to compute
MRP in Services
• Point-of-sale (POS) terminals Point of Sales Terminal - YouTube
• An inventory management system (one or more cash registers) connected to a central
computer located either on-site or at a remote location

• The POS terminals are designed for single-item pricing, where a single key represents
a specific item on the menu

• For each item sold, the system automatically posts the price of an item and subtracts
all of the items’ ingredients from the inventory records file