Introduction

It was discussed in demand forecasting that in the dependent demand situation, if the demand
for an item is known, the demand for other related items can be deduced. For example, if the
demand of an automobile is known, the demand of its sub-assemblies and sub components can
easily be deduced. For dependent demand situations, normal reactive inventory control
systems (i.e. EOQ etc.) are not suitable because they result in high inventory costs and
unreliable delivery schedules. More recently, managers have realized that inventory planning
systems (such as materials requirements planning) are better suited for dependent demand
items. MRP is a simple system of calculating arithmetically the requirements of the input
materials at different points of time based on actual production plan. MRP can also be defined
as a planning and scheduling system to meet time-phased materials requirements for
production operations. MRP always tries to meet the delivery schedule of end products as
specified in the master production schedule.

MRP Objectives

MRP has several objectives, such as:

Reduction in Inventory Cost: By providing the right quantity of material at right time to meet
master production schedule, MRP tries to avoid the cost of excessive inventory.

Meeting Delivery Schedule: By minimizing the delays in materials procurement, production

decision making, MRP helps avoid delays in production thereby meeting delivery schedules
more consistently.

Improved Performance: By stream lining the production operations and minimizing the
unplanned interruptions, MRP focuses on having all components available at right place in right
quantity at right time.

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MRP System

A simple sketch of an MRP system is shown in figure 1. It can be seen from the figure that an
MRP system has three major input components:

Master Production Schedule (MPS): MPS is designed to meet the market demand (both the firm
orders and forecasted demand) in future in the taken planning horizon. MPS mainly depicts the
detailed delivery schedule of the end products. However, orders for replacement components
can also be included in it to make it more comprehensive.

Bill of Materials (BOM) File: BOM represents the product structure. It encompasses information
about all sub components needed, their quantity, and their sequence of buildup in the end
product. Information about the work centers performing buildup operations is also included in
it.

Inventory Status File: Inventory status file keeps an up-to-date record of each item in the
inventory. Information such as, item identification number, quantity on hand, safety stock level,
quantity already allocated and the procurement lead time of each item is recorded in this file.

After getting input from these sources, MRP logic processes the available information and gives
information about the following:

Planned Orders Receipts: This is the order quantity of an item that is planned to be ordered so
that it is received at the beginning of the period under consideration to meet the net
requirements of that period. This order has not yet been placed and will be placed in future.

Planned Order Release: This is the order quantity of an item that is planned to be ordered in the
planned time period for this order that will ensure that the item is received when needed.
Planned order release is determined by offsetting the planned order receipt by procurement
lead time of that item.

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Order Rescheduling: This highlight the need of any expediting, de-expediting, and cancellation
of open orders etc. in case of unexpected situations.

3
Example MRP Application

A- Forecasting demand

Demand for the Shoes and components originate from two sources: regular customers that place firm
orders, and unidentified customers that make the normal random demands for these items. Future
Requirements for Shoe Article A and B, Subassembly D, and Part E Stemming from Specific Customer
Orders and from Random Sources:

Shoe Article A Shoe Article B Subassembly D Part E

Month Known Random Known Random Known Random Known Random
3 1000 250 400 60 200 70 300 80
4 600 250 300 60 180 70 350 80
5 300 250 500 60 250 70 300 80
6 700 250 400 60 200 70 250 80
7 600 250 300 60 150 70 200 80
8 700 250 700 60 160 70 200 80

Our schedule assumes that all items are to be available the first week of the month. The following table
shows the trial master schedule that we use, with demands for months 3 and 4 listed in the first week of
the month, or as weeks 9 and 13.

B- A Master Schedule to Satisfy Demand Requirements

Week
9 10 11 12 13 14 15 16 17
Shoe Article A 1250 850 550
Shoe Article B 460 360 560
Subassembly D 270 250 320
Part E 380 430 380

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 C- Bill of Materials

The product structure for Shoe Article A and B is shown below in the typical way using low level coding,
in which each item is placed at the lowest level at which it appears in the structure hierarchy. Quantities
in parentheses indicate the number of units required per unit of the parent item.

D- Inventory Records (Item Master) File

For this example, the pertinent data contained in the inventory records file are the on-hand inventory at
the start of the program run and the lead times.

Item On-Hand Inventory Lead Time (Weeks)

A 50 2
B 60 2
C 40 1
D 30 1
E 30 1
F 40 1

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 E- Running the MRP Program

The MRP program explodes the item requirements according to the BOM file, level by level, in
conjunction with the inventory records file. A released data for the net requirements order is offset to
an earlier time period to account for the lead-time. Orders for parts and subassemblies are added
through the inventory file, bypassing the master production schedule, which does not schedule at a low
enough level to include spares and repair parts.

Item week
4 5 6 7 8 9 10 11 12 13
Gross 1250 850
requirement
On hand 50 50
A Net requirement 1200
(LT=2) planned-order 1200
receipt
Planned-order 1200
release
Gross 460 360
requirement
On hand 60 60
B Net requirement 400
(LT=2) planned-order 400
receipt
Planned-order 400
release
Gross 400 250
requirement 1200
On hand 40 40
C Net requirement 1560
(LT=1) planned-order 1560
receipt
Planned-order 1560
release
Gross 1560 1200 270 430
requirement
On hand 30 30 0 0
D Net requirement 1530 1200 270
(LT=1) planned-order 1530 1200 270
receipt
Planned-order 1530 1200 270
release
Gross 1530 1200 2400 270 380
requirement 400
On hand 30 30 0 0 0 0
E Net requirement 1500 1200 2800 270 380
(LT=1) planned-order 1500 1200 2800 270 380
receipt
Planned-order 1500 1200 2800 270 380
release
Gross 1530 3120 800 270
requirement 1200
F
On hand 40 40 0 0 0
(LT=1)
Net requirement 1490 4320 800 270
planned-order 1490 4320 800 270

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 receipt
Planned-order 1490 4320 800 270
release

The above table shows the planned order release dates for this particular run. The following analysis explains the program logic.
(We confine our analysis to the problem of meeting the gross requirements for 1250 units of Meter A, 460 units of Meter B, 270
units of Subassembly D, and 380 units of part E, all in Week 9)

For the Article A the 50 units of A on hand result in a net requirement of 1200 units of A (1250 units-50 units=1200 units). To
receive Article A in Week 9, the order must be placed in Week 7 to account for the two-week lead-time,

For the Article B the same procedure follows for the item B resulting in a planned 400-unit order released in
Week 7 (460 units-60 units=400 units)
The rational for these steps, is that for an item to be released for processing, all its components must be available. The planned
order release date for the parent item therefore becomes the same gross requirement period for the sub items.

For the Subassembly C

Referring to the Exhibit 3, level 1, one unit of C is required for each A and each B. Therefore, the gross requirements for C in
Week 7 are 1600 units (1200 for A and 400 for B). Taking into account the 40 units on hand and the one-week lead-time, 1560
units of C must be ordered in Week 6.

For the Subassembly D

Referring to the Exhibit 3, level 2, one unit of D is required for each A and each C. The 1200 units of D required for A are gross
requirements in Week 7, and the 1560 units of D required for C are the gross requirements for the Week 6. Using the on hand
inventory first and the one week lead time results in the planned order releases for 1530 units in Week 5 and 1200 units in
Week 6.

For the item E

Referring to the Exhibit 3, level 3, two units of E is required for each A. The 1200 units planned order release for A in Week 7
becomes the gross requirement for 2400 units of E in the same Week. One unit of E is used in each B, so the planned order
release for 400 units of
B in Week 7 becomes the gross requirement for 400 units of E in the same Week. Item E is also used in Item D at the rate of one
per unit so, the 1530 units planned order release for D in Week 5 becomes the gross requirement for 1530 units of E in Week 5
and 1500-unit planned order release in Week 4 after accounting for the 30 units on hand and the one week lead time. The
1200-unit planned order release for D in Week 6 results in gross requirements for 1200 units of E in Week 6 and a planned
order release for 1200 units in Week 5.

For the item F

Item F is used in B, C, and D. The planned order releases for B, C, and D become the gross requirement for F for the same Week,
except that the planned order release for 400 units of B and 1560 of C become gross requirement for 800 and 3200 units of F,
since the usage rate is two per unit.
The independent order for 270 units of subassembly D in Week 9 is handled as an input to D’s gross requirements for that
Week. This is then exploded into the derived requirements for 270 units of E and F. The 380-unit requirement for Part E to meet
an independent repair part demand is fed directly into the gross requirements for Part E.

F- Obtainability Control

The bottom line of each item in Exhibit 5-7 is taken as a proposed load on the productive system. Mr. Hicks asked his colleagues
to examine if the schedule was feasible, because if the schedule have been infeasible or the loading unacceptable, the master
production schedule would have been revised and the MRP package was run again with the new master schedule. This was a
simple example of MRP application. MRP implementation and execution have to confront many difficulties that are related to
the complexity of the production system.