Chapter Four

Material requirement planning

What is MRP
 MRP (Material requirements planning) is a computer
based production planning and inventory control system.
 “Material requirements planning (MRP) is a production
planning, scheduling, and inventory control system used to
manage manufacturing processes”.
 it is to assure that required material are available when it is
needed.
 Cont’d
MRP is the part of ERP that deals specifically with the control and
management of manufacturing inventories and the products produced by those
inventories
Material requirement planning combines traditional inventory methods that
stress quantity with the important elements of time.
It is supplied with valuable information that was unavailable with older
methods, such as
When customers demand for component parts must be satisfied and whether such
demand will be spaced in time or all at once
When existing stocks will run out;
When replenishment orders should be sent out (order release); and
When the quantity ordered will arrive (order receipt).
 What are the major question those answered
by MRP
 What is needed?
 How much is needed? and
 When is it needed for dependent demand items?
 Dependent demand Vs independent
Demand
When demand for items is derived from plans to
make certain products, those items said to have
dependent demand.
The demand for finished product which determine the
amount of raw materials, parts, subassemblies, and
assemblies for producing it is called independent
demand.
 The main objective of MRP
The objective of inventory management under an MRP system is to
improve customer service, minimizing inventory investment, and
maximize production operating efficiency.
The main theme of MRP is “getting the right materials to the right
place at the right time”.
 Ensure materials are available for production
 Maintain the lowest possible material and product levels in store
 Plan manufacturing activities, delivery schedules and purchasing
activities.
 Advantage of MRP
• Following are some of its benefits:
 Improved customer services
 Improved productivity
 Reduced purchasing cost
 Reduced inventory levels
 Reduce manufacturing cost
 Higher quality products
 Increased efficiency
 Limitation
• Following are some of its limitations:
 Need to have an expensive computer system
 Need accurate and up-to-date inputs
 The reporting requirements are excessive
 Resistance from inside company
How MRP works
 MRP input and output
 MRP system is a common sense computer-based approach to
coordinating the purchasing and the use of materials with the needs of
complex production schedules.
 the major input are
 the master production schedule
 the bill of material
The inventory record file
 Master production schedule
 The master schedule states which end items are to be produced,
when these items are needed, and what quantities are needed. The
master production schedule is the controlling mechanism of the MRP
system.
The manager using an MRP system specifies the needs, and the
system generates all of the production and purchasing schedules for
each component and subcomponent of each end item.
 The quantities in a master schedule can come from a number of
different sources, including customer orders, forecasts, order from
wholesalers and external demand.
The Bill of Materials (BOM):
A bill of materials (BOM) contains a listing of all of the assemblies,
sub assemblies, parts, and raw materials that are needed to produce one
unit of a finished product. Thus, each finished product has its own bill of
materials.
 This list includes all components, of course, but it also includes items
required for productions that do not become part of the end item,
The bill of materials used in the MRP system also provides additional
information to link the items, including the specific place in the process
where each item is needed and lead times for obtaining each item.
This type of bill of materials is referred to as a ''structured'' bill of
materials
 Inventory Record File or Inventory Master File
The inventory master file contains an extensive amount of information on every
item that is produced, ordered, or inventoried in the system. It includes such data
as on hand quantities, on order quantities, lot sizes safety stock, lead time and past
usage figures.
The inventory master file is updated whenever items are withdrawn from or
added to inventory or whenever an order is released revised or completed.
An accurate inventory count is essential to a successful MRP system.
The primary inputs of MRP are bills of materials, which tells the composition of a
finished product; a master schedule, which tells us how much finished product, is
desired, and when; and inventory record file, which tells how much inventory is
on hand or on order.
 Product Structure File
Once the MPS is set, the MRP system accesses the product structure file to
determine which component items need to be scheduled. The product structure
file contains a bill of materials (BOM) for every item produced. The bill of
material lists the item when and in what quantity each item is needed in the
assembly process.
When each item is needed can best be described in the form of a product
structure diagram, as shown in figure below
An assembled item is sometimes referred to as a parent, and a component as a
child. The number in parentheses beside each item is the quantity of a given
component needed to make one parent
• A product structure tree is useful in illustrating how the bill of material
is used to determine the quantities of each of the ingredients
(requirements) needed to obtain a desired number of end items
 MRP Processing
The core of MRP is determined the quantity and timing necessary for each
components in order to achieve quantity and timing of end items in master
schedule.
 each end items are expanded into it is components using bill of materials
file,
 this is the same as identifying an end items product tree.
 the quantity that are generated by exploding the bill of material are gross
requirement: they don’t consider currently on hand and to be received.
 The materials that must actually be required to meet the demand
generated by the master schedule are the net requirements.
 Cont’d
• The determination of net requirement is the core for MRP processing.
Net requirement in period t = Gross requirement in period t- projected inventory in period t

• The timing and sizes of orders (i.e., materials ordered from suppliers or
work started with in the firm) are determined by planned-order releases.
• The timing of the receipts of these quantities is indicated by planned-order
receipts.
• Depending on ordering policy, the planned-order releases may be a
specified quantity or they may be equal to the quantity needed at that time.
 Cont’d

 Gross requirements: the gross requirements are the total expected demand for
an item or raw material during each time period/production plan.
 Schedule receipts: The schedule receipts (some times called open orders) are
orders that have been placed but not yet completed or scheduled to arrive from
vendors or elsewhere in the pipeline.
 Project on hand: the expected amount of inventory that will be on hand at the
beginning of each time period: scheduled receipt + available from last period.
 Net requirements: the actual amount needed in each time period.
 Planned order receipt: A planned receipt is a new order not yet released to the
shop or the supplier. It is the quantity expected to be received by the beginning
of the period in which it is shown.
 Planning for receipt of these new orders will keep the projected on-hand
balance from dropping below the desired safety stock level.
 Cont’d
• Planned-order-releases: A planned order release indicates when an order
for a specified quantity of an item is to be issued.
• It shows a planned amount to order in each time period; equals planned-
order receipts offset by lead time.
 Cont’d

Example-1:
ABC Company produces end item E17 of 100 units by the beginning of 5th
week. E17 is made from components P1 and P2.
Again P1 is made from three units of RM2 and P2 is made from 1.5 of RM5.
Given the following product structures, and master scheduling, determine
when orders should be released for the end item and components and the
size of those orders.
Assume lead-time for both the end item and components is one week.
Solution:
Figure 4. 2- Product tree for end item

E17

P1 P2
(4) (2)

RM2 RM5
(3) (1.5)
 Develop a master schedule: End item 7

• Table 4.4
Week 1 2 3 4 5 6
Quantity 100

The plan begins with the master schedule.

We can see that 100 units are needed at the start of Week 5. This means
that gross requirements for end Item 7 also are 100 units at the start of
Week 5. Then, because there are no scheduled receipts or available
inventory of End Item, the net requirements are 100 units in Week 5.
Hence, there is a planned receipt of 100 units in Week 5.
Then, because lead-time (for assembly) of the end item is 1 week, there is
a planned order release of 100 units one week ahead of this (i.e., in Week
4).
 Master schedule: End item 7

Table 4.4a

Week 1 2 3 4 5 6
Quantity 100
End item 7 LT=1
table 4.4b
1 2 3 4 5 6
Gross requirements 100
Scheduled receipts -
Available -
Net requirements 100
Planned order receipt 100
Planned order release 100
Part P1 (4) LT=1
table 4.4c
1 2 3 4 5 6
Gross requirements 400
Scheduled receipts 150
Available 150 150

Net requirements 250

Planned order receipt 250
Planned order release 250
Raw material RM2 (3) LT=1
table 4.4d

1 2 3 4 5 6
Gross requirements 750
Scheduled receipts -
Available 100 100
Net requirements 650
Planned order receipt 650
Planned order release 650

Part P2 (2) LT=1

Table 4.4e
1 2 3 4 5 6
Gross requirements 200
Scheduled receipts 40 -
Available 40 40
Net requirements 160
Planned order receipt 160
Planned order release 160
Raw Material RM5 (1.5) Lt=1
Table 4.4f

1 2 3 4 5 6
Gross requirements 240
Scheduled receipts 40
Available 200 200 240
Net requirements 0
Planned order receipt
Planned order release
 Cont’d
Each end item will use 4 of Part P1. Therefore, the planned order release
of 100 units of end Item 7 in Week 4 will create a requirement of 4 x
100=400 of Part P1, also in Week 4.
But Part P1 has a scheduled receipt of 150 units in Week 2, making 150
units available in Weeks 2 and 3.
So, net requirements become 400-150=250 units in week 4.
 Thus, there is a planned order receipt of 250 units of part P1 in Week 4.
Because lead time is one week, there is a planned order release of 250 units
(i.e. fabricate 250 of part P1) one week earlier (i.e. week3.)
 Cont’d

Because each part P1 will require 3 units ( pounds) of Raw Material

Rm2, the 250 units will require 3x250=750 units of Raw Material RM2
will be available ( i.e. are now on hand ).
Hence, net requirements will be 650 units, in week 3. Because lead time
is one week, the planned order release is 650 units in week 1.
Cont’d

Gross requirements for Part P2 are derived from the quantity of the end
item needed (i.e., 100 in this case).
Because two of parts P2 are needed for each unit of the end item a total of
2x100=200 units will be needed.
There are no scheduled receipts, but 40 units will be available, so net
requirements become 160 units.
Thus, a planned order receipt of 160 units in week 4 is needed and a
planned order release of the same amount in week 3 is needed because
lead-time is, again, one week.
Cont’d
•The 160 units of part P2 will require 1.5 x 160 =240 pounds of Raw
Material Rm5 in week 3.
•There is a scheduled receipt of 40 pounds in week3, added to the
previously available quantity of 200 pounds.
•240 pounds will be available in week 3. Because that just equals gross
requirements of Raw Material Rm5, no additional ordering will be
needed.
 MRP output
MRP systems have the ability to provide management with a fairly broad
range of outputs. These are often classified as primary reports, which are
the main reports, and secondary reports, which are optional outputs.
Primary reports concern production and inventory planning and control.
These reports normally include the following:
I. A schedule of planned order, which indicates the amount and timing of
future orders.
II. order release, which authorizes the execution of planned orders
III. Changes to planned orders, which can include revisions of due dates or
order quantities as well as cancellations of orders.
 Cont’d
•Secondary reports concern such things as performance control, planning, and exceptions:
1. Performance-control reports are used to evaluate system operation. They aid managers by
measuring deviations from plans, including missed deliveries and stock outs, and by
providing information that can be used to assess cost performance.
2. Planning reports are useful in forecasting future inventory requirements. They include
purchase commitments and other data that can be used to assess future material requirements
3. Exceptional reports call attention to major discrepancies such as late and overdue orders,
excessive scrap rates, reporting errors, and requirements for non existing parts.
• The wide range of outputs generally permits users to adapt MRP to their particular needs
OTHER CONSIDERATIONS
Aside from the main details of inputs, out puts and processing, managers
must be knowledgeable about a number of other aspects of MRP.
These include the holding of safety stock, lot-sizing choices, and the
possible use of MRP for items that are not finished products.
Safety Stock