Topic 13

Material Requirement Planning

&
Capacity Requirement Planning

Topic 13 - 0

Materials Requirement Planning (MRP)

MRP:
is a Planning Procedure through which, the Supply Plan
(Production Plan for Parts that made in-house, or Procurement Plan
for Purchased Materials) for all Materials (RM/Parts/Subassembly.)
that required to produce End Product are Determined, in terms of
Timing and Quantity based on the Information from
MPS/BOM/Inventory to achieve desired objectives.

Three Major Inputs to MRP:

1. MPS

2. Inventory Status Record

3. BOM

Two Major Outputs from MRP:

1. Planned Order Report: When/How Much/Releasing/Receipt
2. Exception Report: Orders to be Expedite/Deferred/Canceled.

Why Need MRP?

Topic 13 - 1

1. Demand for Dependent Items can be Anticipatedanticipated

exactly after MPS determined for End Products.
2. Lumpy Nature of Dependent Demand - Build high Unnecessary
Inventory at some periods while Make Stockout at other periods
when [Q, R] or [T, M] system is used.

Objectives of MRP:
1. Satisfying Master Production Scheduling (MPS).
2. Minimizing Inventory Investment Costs.
3. Maximizing System Operating Efficiency (Better Control).
4. Improving Customer Service Level (Reduced Leadtime).
5. Providing Right Parts at Right Quantity on Right Time.

Required Inputs to MRP

Topic 13 - 2

1. From MPS: Demand for End Product at Each Period.

2. From BOM:
Product Structure (Level Coding) with required Quantity and
Parent ship.
Leadtime (Production Leadtime/Purchasing Leadtime).

3. From Inventory Records:

1. Inventory On-Hand/On-Order (for all Materials).
2. Safety Stock Level Desired.
3. Lot sizing Rules: (Many Rules)
a. Variable Lot Size: Lot-for-Lot/Other Heuristics.
b. Fixed Lot Size: EOQ/Multiplier of Specified (50, 100,..)

MRP Information and Processing

Topic 13 - 3

MRP requires the following information to process and produce planned

orders and reports:

Topic 13 - 4

Calculation Procedure of MRP

From Product Structure: Level by Level (Level-0 to Lowest Level)

Topic 13 - 5

1. Determine Gross Requirement (GR) from higher Level Order

Released.

2. Calculate Net Requirement (NR) from Inventory Records:

NR = GR - (On-hand) - (Scheduled Receipt)

3. Establish Planned-Order-Receipt from Net Requirement.

4. Set Planned-Order-Released from Planned-Order-Receipt

backward by required Leadtime.

5. Repeat same steps for all RM/Parts/Subassemblies.

The Basic Time-Phased MRP Records

Item number 100 on-hand quantity = 10 lead time = 2 WK
Lot size = 50
safety stock = 0
Week
1
2
3
4
5
Gross requirements
10
40
30

Topic 13 - 6

Scheduled receipts
50
Projected available balance
Net requirements
Planned order receipts
Planned order releases
Gross requirements: the overall quantity on an item needed during each time
period
Scheduled receipts: the quantity of an item that will be received at the
beginning of a time period as a result of manufacturing orders or purchase
orders that have already been placed (open orders)
Projected available balance: the expected quantity of an item in inventory at
the end of each time period. It can be calculated by the following equation:
projected
= projected
+ scheduled
+ planned order gross
available
available
receipts in
receipts in
requirements in
balance in the
balance in
period t
period t
period t
period t
period t-1
Net requirements: the net quantity of an item that must be provided to satisfy
the parent or MPS requirements. It can be calculated by the following
equation:
Net requirements in = gross
+ projected available - scheduled receipts
period t
requirements in
balance in period t-1 in period in period t
period t
Planned order receipts: the size of the planned order (the order has not placed
or released yet) and when it is needed. This appears in the same period as the
Net requirements, but its size is modified by the appropriate lot sizing
policy.
Planned order release: when the order should be placed or released so that the
items are available when needed by the parent. This is the same period as the
Planned order receipts offset for the items lead time. Planned Order
Releases at one level generate the gross requirements at lower levels. When
the order is placed, it is removed from the planned order receipts and
planned order releases row and entered in the scheduled receipts row.

MRP Calculation with No Common Part

Bill of material:

Topic 13 - 7

Lead Time (WK)

Quantity

A
3
1

B
1
2

Master Schedule:
Week
MPS planned order releases for X

1
110

Material Requirements Plan:

Item number A
on-hand quantity= 70
Lot size = 100
Gross requirements
Schedules receipts
100
Projected available balance
Net requirements
Planned order receipts
Planned order releases
Item number B

on-hand quantity = 20
Lot size = lot-for-lot

Gross requirements
Scheduled receipts
Projected available balance
Net requirements
Planned order receipts
Planned order releases

200

MRP Exercise

Topic 13 - 8

3
60

5
15

lead time = 3WK

safety stock = 0

lead time = 1 WK
safety stock = 0

Given the following data, develop a materials requirements plan for

all items. Order quantities are always the minimum needed to
satisfy immediate requirements. (Lot-for-lot)
Gross requirements for end products:
End
product 1
A
B

Week
5

6
30

8
10
5

20

Product structure tree:

D(3)

C(2)

C(1)

Items
A
B
C
D
E
F

Item:

D(1)

E(2)

C(1)

Lead Time
1 week
2
3
1
2
3

Parent item:

Lead Time:

F(3)

E(2)

Inventory On Hand
5
0
10
25
0
70

Order Policy:

Topic 13 - 9

Safety Stock:

Period
1
Gross
requirement
On hand
Net
requirement
Planned
order receipts
Planned
order releases

13

14

Item:
Parent item:
Period
1 2
Gross
requirement
On hand
Net
requirement
Planned
order receipts
Planned
order releases

Lead Time:
Order Policy:
Safety Stock:
3 4 5 6 7 8 9 10 11
12 13

14

Item:
Parent item:
Period
1 2
Gross
requirement
On hand
Net
requirement
Planned
order receipts
Planned
order releases

Lead Time:
Order Policy:
Safety Stock:
3 4 5 6 7 8 9 10 11
12 13

14

Item:
Period

Lead Time:
Order Policy:
Safety Stock:
3 4 5 6 7 8 9 10 11
12 13

14

Parent item:
1 2

Topic 13 - 10

10

11

12

Gross
requirement
On hand
Net
requirement
Planned
order receipts
Planned
order releases
Item:
Parent item:
Period
1 2
Gross
requirement
On hand
Net
requirement
Planned
order receipts
Planned
order releases

Lead Time:
Order Policy:
Safety Stock:
3 4 5 6 7 8 9 10 11
12 13

14

Item:
Parent item:
Period
1 2
Gross
requirement
On hand
Net
requirement
Planned
order receipts
Planned
order releases

Lead Time:
Order Policy:
Safety Stock:
3 4 5 6 7 8 9 10 11
12 13

14

MRP: Development and Challenges

Topic 13 - 11

Development of MRP System:

Stage-1: Buffer to Order Release (before 1950s).
Stage-2: Maintain Valid Order Due-Date (During 1960s).
Stage-3: Improving Planning and Execution (after 1970).
Stage-4: Integrating all Operations Planning/Scheduling/
Controlling Activities into MRP II system.
(MRP-II: Manufacturing Resources Planning System.)

Challenges to MRP Systems:

1. MRP vs. Just-In-Time Production.
2. MRP vs. Cellular Manufacturing.
3. MRP vs. CIM (Computer-Integrated-Manufacturing).

Issues in MRP
Topic 13 - 12

 Lot-Sizing
Useful at lower levels but may drive excess inventory when
applied at higher levels
Net Change versus Regenerative MRP
Net change may generate too many action notices
Regenerate more costly to run but appears to be easier to
manage
Safety Stock
Use depends on uncertainty of demand more uncertain the
greater the need for safety stock
Assemble-to-order firms
MPS and MRP treated separately from Final Assembly
Schedule (FAS)
Use Modular Bill of Materials
MRP I to MRP II
MRP I simply exploded demand (MPS) into required materials
MRP II became Manufacturing Resource Planning which
provides a closed-loop business management system
o Financial management
o Shop floor control
o Operations management
o Simulation capability
Evaluation of MRP
Most beneficial to process-focused systems that have long
processing times and complex multistage production steps
Lead times must be reliable
Must freeze MPS for some time before actual production certain
demand
Difficult to implement

Capacity Requirement Planning (CRP)

Topic 13 - 13

Why Need CRP: Detailed production plans for all parts and endproducts are developed in MRP/MPS, but Separately. These jobs
may be processed in same work centers (WC). Verification of
capacity: WC-by-WC, period-by-period, thus is necessary to ensure
enough capacity at each WC to meet the plan.

Major Inputs to CRP:

1. Planned Orders (from MRP).
2. Order Processing Status (from PAC reports).
3. Job Routings (from Database).
4. Work Center (Standard) Capacity (from Database).

Output from CRP: Work Center Load Analysis Report.

Capacity Requirements Planning

Topic 13 - 14

The objective of capacity requirements planning (CRP) is

CRP Information Flow and Processing

An Example of a Work Center Load Analysis

Report
Topic 13 - 15

Time period
Planned
capacity
Released load
Planned load
Total load
Load to
capacity ratio
Remaining
capacity

1
80

2
80

3
80

4
80

5
80

6
80

7
80

8
80

60
25
85
1.06

50
20
70
.088

55
20
75
0.94

40
30
70
0.88

20
60
80
1.00

10
85
95
1.19

5
50
55
0.69

0
35
35
0.44

-5

10

10

-15

25

45

Load and capacity figures are in labor or machine hours

Total load = released load + planned load
Remaining capacity = planned capacity total load

Standard
Hours 80

Planned
Capacity

Time
Period

An Example of a Work Center Load Analysis

Report
Topic 13 - 16

Period
Planned capacity
Released load
Planned load
Total load
Excess capacity

1
80
60
25

2
80
50
20

3
60
55
20

4
80
40
30

5
80
20
60

6
80
10
85

7
80
5
50

8
80
0
35

9
80
0
20

Note: Load and capacity figures are in labor or machine hours

Total Load =

Excess Capacity =

If excess capacity is 0, the work center is under loaded

If excess capacity is 0, the work center is overloaded

Ways to resolve Capacity Imbalances

Topic 13 - 17

10
80
0
0

There are two major ways to resolve capacity imbalances:

Modify capacity by:

a. Planning to use overtime
b. Rescheduling maintenance/ training/ vacations/
c. Hiring temporary/ part-time workers
d. Shift workers among different work centers

Modify workload by:

a. Selecting alternative job routing
b. Increasing (or decreasing) subcontracting amounts
c. Modify or revising the original MPS or MRP
d. ..

Work Center Loading Methods

Topic 13 - 18

Infinite vs. Finite:

1. Infinite Loading - Not considering Capacity Constraint, leaving
Overload/Under load problems to be corrected later.
2. Finite Loading - Capacity Constraint is considered.

Forward vs. Backward:

1. Forward Loading - Loading from Planned Order Release Date.
2. Backward loading - Loading from Planned Order receipt Date.

Trade-off:
Forward with Infinite Loading: Simple but more Capacity
Imbalance problems.
Backward with Finite Loading: Complex but reduces Capacity
Imbalance problems.

Infinite versus Finite Loading

Topic 13 - 19

Infinite loading

Open Shop Orders

Finite loading

Planned Orders

Forward versus Backward Scheduling

Topic 13 - 20

Material Requirements Planning (MRP)

Topic 13 - 21

1. :Product1.Product A is assembled from one B assembly, three C assemblies, two D assemblies,

and four H components. Each B assembly is made from two F subassemblies. Each C is made
from one G component and one H component. Each D assembly is made from two I assemblies
and three G components. Each F subassembly is made from three H components. Each I
subassembly is made from one H component.
a. Construct a product structure tree for product A.
b. Prepare and indented bill of materials for Product A.
2. Complete the MRP schedule for the part below.
Lot size= 1,200+
Safety stock= 300
Lead time= 2 weeks
Allocated= 150
On hand= 850

Week
Gross requirements
Scheduled receipts
Available
Net requirements
Planned order receipts
Planned order releases

1
100
500

2
600

3
400

4
900

5
1,350

6
700

4
900

5
1,850

6
1,400

3. Complete the MRP schedule for the part below:

Lot size= 2,000+
Lead time= 1 week
On hand= 1,300
Week
Gross requirements
Scheduled receipts
Available
Net requirements
Planned order receipts
Planned order releases

Safety Stock= 400

Allocated= 300

1
1,100
2,000

2
700

3
1,500

4. Given the following product structure tree and inventory information, complete the MRP
schedule below.
Level Code
Product Structure Tree
0
Topic 13 - 22

A
1

B(2
)

C(4
)

2
D(3
)

Product A
Lot size =LFL
Lead time =1
On hand=650
Safety Stock=100
Allocated=75

Week
Gross requirements
Schedules receipts
Available
Net requirements
Planned order receipts
Planned order releases

1
120
275

2
340

3
310

4
530

5
410

6
380

Product B
Lot size =LFL
Lead time =1
On hand=430
Safety Stock=120
Allocated=80

Week
Gross requirements
Schedules receipts
Available
Net requirements
Planned order receipts
Planned order releases

Product C
Lot size =1500+
Lead time =2
On hand=460
Safety Stock=140
Allocated=160

Week
Gross requirements
Schedules receipts
Available
Net requirements
Planned order receipts
Planned order releases

Product D
Lot size =1000+
Lead time =1
On hand=1,100
Safety Stock=200
Allocated=60

Week
Gross requirements
Schedules receipts
Available
Net requirements
Planned order receipts
Planned order releases

400

1,500

Engineering a Definition
A bill of material expert generates quality information

Topic 13 - 23

"I'm trying to define the engineering bill of material (BOM) for a paper I'm writing ...
I cannot find a common definition, [although] there are many phrases in use such as `product
structure,' `indentured parts list,' and 'as designed.' However, it is not clear if we are talking
about the same things. Do we have a definition of BOM?"
Product structure, planning BOMs, indentured parts list, indented parts list, and
engineering BOMs all refer to an arrangement of parts to make an assembly. The difference
is in the scope, depth, details, and application.
While it is very similar to the bill required by manufacturing, the BOM created by
production design engineering often is void of data, such as the necessary process levels
required by manufacturing-including subassemblies, intermediates or semi-finished items,
and a specific identification of shape and size of raw materials required to make compo nents. In addition, levels sometimes are included in engineering BOMs that are not required
by manufacturing, especially when manufacturing processes have been "leaned."
Modularizing the DOM
Our reader also asked us about modular BOMs. Modularizing the BOM is one
way of dealing with options and multiple end items. It is a means of grouping parts in a
product by the options to which they are sensitive. We create BOMs for each option, not
each end item, giving the advantage of fewer BOMs, less maintenance, and more
efficient order entry. After modularizing the BOM, we then develop a planning BOM,
which is basically a sorting of the master BOM for planning purposes. We can plan and
schedule using the historical information.
As an example of this concept, consider a company making telephones and
switching equipment. The telephones come in many different varieties: with ringers,
without ringers, single lines, multiple lines, desk sets, wall sets, and so on. The housing
and hand sets come in a variety of colors, including black, red, and ivory. Instead of
planning each configuration separately, one would use a planning or pseudo BOM to
reflect the components with the "quantity per" in the ratio of past usage of, for example,
the colors.
For each hand set, the quantity per of black was 0.3, for red, 0.2, for ivory 0.4, and
so forth, adding up to 100 percent. Therefore, for each 1,000 phones planned, the BOMs
would explode by the ratios of use, thus allowing planners to order the plastic and color
compounds accordingly. This same philosophy would be used with regard to all other
options.
The concept of a planning BOM serves to satisfy one of the ongoing
controversies concerning BOMs: Who owns the BOM-the production department, the
planning department, or the engineering department? To solve this dilemma, some
organizations allow each to have its own.
More on phantoms and pseudos
The term "phantom" was first used as part numbers were put into computer
records for enterprise resources planning. The exploded requirements were again
Topic 13 - 24

exploded against the residual inventory of the phantoms, and the engineering BOMs
included some subassemblies that manufacturing never made.
The term "pseudo" was introduced when forecasting and master scheduling
options created the need to identify groups of parts common to the product or as options.
There is really no difference between the way pseudos and phantoms are handled, so
there is no need to distinguish between the two.
Questions:
Q-1: Do you have a better understanding about BOM and MRP now?

Review Questions for Topic 13:

< MATERIAL REQUIREMENT PLANNING>
andAnd
Topic 13 - 25

< CAPACITY REQUIREMENT PLANNING>

(1) What is a Material Requirements Planning system? Is it used for products under assumptions
of dependent demand or independent demand?
(2) What are the primary inputs and outputs in MRP analysis? What are the objectives of an
MRP system?
(3) What is the meaning of "planned order release" and "planned order receipt" in an MRP
system?
(4) What is meant by low level coding of the product structure tree? How is it used in the MRP
calculation procedure?
(5) What is the information from the Master Production Schedule used in the MRP calculation?
(6) Be prepared to go through the calculations involved in the MRP analysis of a simple product.
(7) Assume that a company has a computerized MRP system. What information would typically
be found in the inventory records file and the product structure tree file (or bill of materials
file)?
(8) Ignoring cost considerations, are there other reasons why it is impractical or not advisable to
update the computerized MRP system on a daily basis?
(9) Is it likely that an MRP system will be justified on a quantifiable quantifiable cost
effectiveness" basis (or economic "payback" basis) or is it more likely that such a system will
be justified on more of a "non-quantifiable" basis?
10) Is "independent demand" more likely to apply to "final" products or sub-components? What
about "dependent demand ?demand? "
11) Explain the logic in using EOQ for final products and MRP for all sub-components. Start by
drawing a typical demand function for final products vs. a typical demand function for subcomponents. Provide a brief explanation.
12) How does MRP II differ from MRP?
13) Discuss the development from the original MRP, MRP II, Enterprise Resource Planning,
and Supply Chain Management.

Topic 13 - 26