Inventory Management

Material Requirements Planning

Chris Caplice ESD.260/15.770/1.260 Logistics Systems Oct 2006

Assumptions: Basic MRP Model

Demand

Lead time

Constant vs Variable Known vs Random Continuous vs Discrete Instantaneous Constant or Variable (deterministic/stochastic) Independent Correlated Indentured Continuous Periodic One Multi (>1)

Discounts

Excess Demand

None All Units or Incremental None All orders are backordered Lost orders Substitution None Uniform with time Single Period Finite Period Infinite One Many

Dependence of items

Perishability

Review Time

Planning Horizon

Number of Echelons

Number of Items

Capacity / Resources

Unlimited Limited (Constrained)

2

Form of Product

Single Stage Multi-Stage

Chris Caplice, MIT

MIT Center for Transportation & Logistics ESD.260

How many components are there?

Image of iPod Shuffle circuitry removed due to copyright restrictions.

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Traditional Management

Purchasing

Production

Marketing

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Supply Chain Integration

Information / Planning
Materials Management Physical Distribution Production Marketing

Vendor

Purchasing

Customer

MRP

MRP

MRP

MPS

DRP

DRP

DRP

Inventory Deployment Material Requirements Planning Master Production Scheduling Distribution Requirements Planning
MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Inventory Management so far . . .

Traditional techniques . . .

Forecast demand independently for each item based on usage history Establish lot sizes independently for each item based on demand forecasts Establish safety stocks independently for each item based on forecast errors Demand is "Continuous [usage occurs in every period] Demand is "Uniform" [average usage per period is stable over time] Demand is "Random" [usage in any given period is not known in advance]
6
Chris Caplice, MIT

Which make the following assumptions . . .

MIT Center for Transportation & Logistics ESD.260

Cycle Stock with a Fixed Lot Size

A= $500, r=25%, v= $50, D = 2000 units/yr, Q*=400 units
600
600

On Hand Inventory

400
400
Demand

200

200

0
0

Problem: Intermittent Demand 4 production periods, 500 units/period, Demand rate 2000/year
MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Fixed Lot Size with Intermittent Demand results in . . .

600

On Hand Inventory

400

200

Can we do better?
MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Another Wrinkle . . . Product Indenture

Bicycle Model 1234

Frame Fork Front fender Rear Fender Sprocket Crank Pedal Chain guard

Front Wheel Rim Axle Spoke Tire Tube

Saddle Shaft Seat Cover

Rear Wheel Rim Axle Spoke Tire Tube Sprocket

Handlebars Bar Gooseneck Grip

Note that each item, sub-assembly, component etc. might feed into multiple end products
MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

Combined Demand Impacts

Suppose a widget is part of three items

Product A 10 items per week (3 Weeks OH) Product B 5 items per week (2 Weeks OH) Product C 7 items per week - (4 Weeks OH)

End demand looks like . . . 1

A B C Widget 10 5 7 22

2
10 5 7 22
10

3
10 5 7 22

4
10 5 7 22

5
10 5 7 22
Chris Caplice, MIT

MIT Center for Transportation & Logistics ESD.260

Combined Demand Impacts

But if ordered separately what will widget demand look like?

Product A 10 items per week (3 Weeks OH) Product B 5 items per week (2 Weeks OH) Product C 7 items per week - (4 Weeks OH)

1
A B C Widget 30 10 28 68

2
0 0 0 0

3
0 10 0 10

4
30 0 0 30

5
0 10 28 38

Important to synchronize
MIT Center for Transportation & Logistics ESD.260

11

Chris Caplice, MIT

Push versus Pull Systems

Simple Example

You make shovels that have 4 parts:

Metal Digger Wooden Pole 2 Screws

Production is 100 shovels per week:

How should I manage my inventory for screws?

A=$0.25, v=$0.01, r=25% D = 800*12=9600 units per year L = 1 week Q* = xL = RMSE(L) =

Metal part is made in 400 item batches on first 2 days of the month Handles are procured from Pole Co. Assembly occurs during first week of each month

What are the values for . . .

MIT Center for Transportation & Logistics ESD.260

12

Chris Caplice, MIT

Push versus Pull Systems

What is my policy if I follow a . . .

Standard EOQ policy?

Standard (s,Q) policy?

Order ~1385 (~every other month) What would the Inventory On Hand look like? So, since L = 193, pick a CSL=95% k=1.64 s=185 + (1.64)193 = 502 units Order 1385 units when inventory position 502

Standard (R,S) policy?

Other methods?

Select a monthly review policy (R=4 weeks) xL+R= 9600/(52/5) = 923 units L+R = 193(5) = 432 units S = 923 + (1.64)432 = 1631 Order up to 1631 units every 4 weeks

MIT Center for Transportation & Logistics ESD.260

13

Chris Caplice, MIT

Material Requirements Planning

Push vs Pull Systems

Push MRP Pull JIT

initiates production in anticipation of future demand initiates production as a reaction to present demand

Major Premises

Inventory control in a production environment Many products, many component parts Complex product indenture structure Production creates "lumpy" demand

Major Concepts

Dependent demand versus independent demand Requirements calculation versus demand forecasting Schedule flow versus stockpile assets Information replaces inventory

MIT Center for Transportation & Logistics ESD.260

14

Chris Caplice, MIT

Material Requirements Planning

Primary Questions

Information Requirements

What What What What

are we going to make? => use forecast does it take to make it? => use res. reqs & BOM do we have? => use inventory records do we need and when? => use mfg schedules

MRP Process

Master Production Schedule Product Indenture Structure Inventory Status Ordering Data Requirements Explosion Use of Bill of Materials (BOM) Net from Gross Requirements Requirements Time Phasing Planned Order Release
15
Chris Caplice, MIT

MIT Center for Transportation & Logistics ESD.260

Example: Bike Co.

BOM Explosion

Bicycle
Wheel (2) Spoke (86) Tire (1) Crank Assembly (1) Sprocket (1) Crank (2) Pedal (2)

Level 0 Level 1

Level 2

MIT Center for Transportation & Logistics ESD.260

16

Chris Caplice, MIT

Bill of Materials
Product Bicycle Wheel Spoke Tire Crank Asm Sprocket Crank Pedal Sub-assembly Component Quantity [1] 2 86 1 1 1 2 2

Weekly buckets
Lead Time 2 1 3 2 1 4 3 3

MRP 1. 2. 3. 4. 5. 6.

Approach: Start with Level i demand (i=0) Find Gross Requirements (GR) and On Hand (OH) for Level i Find Net Requirements (NR) for Level i+1 (NR=GR-OH) Establish Planned Order Release (POR) for Level i using Level i lead times Set GR for Level i+1 based on POR for Level i Set i = i+1 and go to Step 2
17
Chris Caplice, MIT

MIT Center for Transportation & Logistics ESD.260

The MRP Plan for the Bicycle

Objective:
Gross Requirement On Hand
Wheel

Have materials ready for having 25 bikes in week 8

ITEM Bicycle PERIOD: Rqmt On Hand Due In POR >> Rqmt On Hand Due In POR > 50 4300 4300 4300 50 >> >> >> >> 25 >> 50 >> >> 25 1 2 3 4 5 6 7 8 25

Net Requirement

Planned Order Release

Spoke

Rqmt On Hand Due In POR

MIT Center for Transportation & Logistics ESD.260

18

Chris Caplice, MIT

Item Bicycle

Period: GR OH NR POR

8 25 25

25 50 50 50 4300 4300 4300 50 50 50 25 25 25 25 25 25 50 50 50 20 20 30 20 20 50 20 30

W heel

Level 0
Spoke Tire

GR OH NR POR GR OH NR POR GR OH NR POR

Level 1

Crank Asm

GR OH NR POR

Sprocket

Level 2
Crank

GR OH NR POR GR OH NR POR

What is missing?
MIT Center for Transportation & Logistics ESD.260

Pedal

GR OH NR POR

19

Ordering Plan

Chris Caplice, MIT

Two Issues
How do we handle capacity constraints? How do we handle uncertainty?

MIT Center for Transportation & Logistics ESD.260

20

Chris Caplice, MIT

Approach: Optimization (MILP)

Decision Variables:
Qi = Quantity purchased in period i Zi = Buy variable = 1 if Qi>0, =0 o.w. Bi = Beginning inventory for period I Ei = Ending inventory for period I

Data:
Di = Demand per period, i = 1,,n Co = Ordering Cost Chp = Cost to Hold, $/unit/period M = a very large number.

MILP Model
Objective Function: Minimize total relevant costs Subject To: Beginning inventory for period 1 = 0 Beginning and ending inventories must match Conservation of inventory within each period Nonnegativity for Q, B, E Binary for Z
MIT Center for Transportation & Logistics ESD.260

21

Chris Caplice, MIT

Approach: Optimization (MILP)

Min TC = CO Z i + CHP Ei
i =1 i =1 n n

Objective Function

s.t. B1 = 0 Bi Ei 1 = 0 Ei Bi Qi = Di MZ i Qi 0 Bi 0 Ei 0 Qi 0 Z i = {0,1} i = 2,3,...n i = 1, 2,...n i = 1, 2,...n i = 1, 2,...n i = 1, 2,...n i = 1, 2,...n i = 1, 2,...n

22

Beginning & Ending Inventory Constraints Conservation of Inventory Constraints Ensures buys occur only if Q>0 Non-Negativity & Binary Constraints

MIT Center for Transportation & Logistics ESD.260

Chris Caplice, MIT

MRP: Example

MRP: Example

MRP: Example

MRP: Example

I Tighten blnalng

MRP: Example
I

Notes: Solves the End Items and the Components models separateltc What is the impact? insight? who n 7

Handling Uncertainty
Safety Stock

Add to existing stock levels Where would this be applied?

Safety Times

Pad the planned lead times Where would this be applied?

MIT Center for Transportation & Logistics ESD.260

28

Chris Caplice, MIT

Optimal Lead Time Padding

Let: t t' Tp Q v r Cd = Delivery Time, a random variable = Forecasted Delivery Time = Standard Deviation of the Forecast Error = Padded Lead time = t' + k = Lot Size in units = Unit Cost = Holding Cost per unit per time period = Shortage Cost per time period
Tp

TC[T p ] = rvQ( T p - t)P[t ] +

t=0

t=T p+1

C (t - T
d

)P[t ]

CSL =
MIT Center for Transportation & Logistics ESD.260

Cd C d + rvQ
29
Chris Caplice, MIT

Optimal Lead Time Padding

Tp Tp + C dtP[t ] C d T pP[t ] TC[T p ] = rvQT pP[t ] rvQtP[t ] t=T +1 t=0 t=0 t=T p+1 p
Tp dTC[T p ] ( 0 ) + ( 0 ) C d T pP[t ] = 0 = rvQ P[t ] t=T +1 dTp p t=0

rvQ ( Prob[ NoStockout ]) ( C d ( Prob[ Stockout ]) ) = 0 rvQ ( CSL *) = Cd (1 CSL *)

CSL =
MIT Center for Transportation & Logistics ESD.260

Cd C d + rvQ
30
Chris Caplice, MIT

Optimal Lead Time Padding

Example:
v r rv Cd = = = = $5.00/unit 36% annual .005 dollars/unit/day $500 per day CSL* = k* = Tp* = Q = 1000 units t' = 10 days = 3 days (t ~ normal)

MIT Center for Transportation & Logistics ESD.260

31

Chris Caplice, MIT

Benefits of MRP
Lower Inventory Levels

Able to better manage components Increased visibility Relationships are defined and explicit Allows for coordination with MPS Due to increased visibility Input needs are explicitly modeled Plans are integrated
32
Chris Caplice, MIT

Fewer Stock outs

Less Expediting

Fewer Production Disruptions

MIT Center for Transportation & Logistics ESD.260

Shortcomings of MRP
MRP is a scheduling, not a stockage, algorithm

MRP does not address how to determine lot size

Replaces the forecasting mechanism Considers indentured structures Does not explicitly consider costs Wide use of Lot for Lot in practice

MRP systems do not inherently deal with uncertainty

MRP assumes constant, known leadtimes

User must enter these values by item by production level Typical use of "safety time rather than "safety stock

MRP does not provide incentives for improvement

By component and part and production level But lead time is often a function of order size and other activity Requires tremendous amount of data and effort to set up Initial values are typically inflated to avoid start up issues Little incentive to correct a system that works
33
Chris Caplice, MIT

MIT Center for Transportation & Logistics ESD.260

MRP: Evolution of Concepts

Simple MRP

Focus on "order launching Used within production not believed outside Focus on production scheduling Interacts with the MPS to create feasible plans Focus on integrated financial planning Treats the MPS as a decision variable Capacity is considered (Capacity Resource Planning) Common, centralized data for all areas Implementation is costly and effort intensive Forces business rules on companies
34
Chris Caplice, MIT

Closed Loop MRP

MRP II [Manufacturing Resource Planning]

Enterprise Resource Planning Systems

MIT Center for Transportation & Logistics ESD.260

Questions? Comments? Suggestions?