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Presentation Report On

Materials Requirement Planning (MRP)

Submitted To Prof. Mukundan

Submitted By Joju Johny Roll No : 17 Operations Management MMS ( 2nd Year) BESIMSR

Material Requirements Planning (MRP)

Material requirements planning (MRP) is a production planning and inventory control system used to manage manufacturing processes. It is a planning tool geared specifically to assembly operations. The aim is to allow each manufacturing unit to tell its supplier what parts it requires and when it requires them. The supplier may be the upstream process within the plant or an outside supplier. It is probably the most widely used planning and scheduling tool in the world. MRP was created to tackle the problem of 'dependent demand'; determining how many of a particular component is required knowing the number of finished products. Most MRP systems are software-based, while it is possible to conduct MRP by hand as well. Advances in computer hardware made the calculation easy. An MRP system is intended to simultaneously meet three objectives: Ensure materials and products are available for production and delivery to customers. Maintain the lowest possible level of inventory. Plan manufacturing activities, delivery schedules and purchasing activities.

A companys goals for an MRP system probably include reducing: WIP, Raw Material and Finished Goods Inventories Order Change Resistance Expediting Delinquent Orders Material requirements planning is a technique that uses the bill of material, inventory data and a master schedule to calculate requirements for material. MRP time phases material requirements based on set backs defined by a combination of the bill of material structure and assembly lead times. The result of an MRP plan is a material plan for each item found in the bill of material structure which indicates the amount of new material required, the date on which it is required - the new schedule dates for material that is currently on order. If routings, with defined labor requirements are available, a capacity plan will be created concurrently with the MRP material plan. The user can create any number of simultaneous MRP plans using any number of master schedules for simulation purposes. In addition to demands from the master schedule, or in lieu of a master schedule, the MRP system can use time phased reorder points to generate demand over a user specified period of time.

The MRP plan can be run for any number entities (which could be physically separated inventories) and can include distributor inventories, if the system has access to this type of information. The planning process will take account of engineering changes and exhaust types of revision change and if multiple distributor inventories are being managed, the MRP / DRP process will try to balance their inventories based on a series of parameters specified by the user. The main function of material requirements planning is to guarantee material availability, that is, it is used to procure or produce the requirement quantities on time both for internal purposes and for sales and distribution. This process involves the monitoring of stocks and, in particular, the automatic creation of procurement proposals for purchasing and production. In doing so, MRP tries to strike the best balance possible between optimizing the service level and minimizing costs and capital lockup.

Information Needed for MRP


Information Obtained from MRP Planned orders: replenishment orders to be released at a future time Order release notice: notices to release planned orders Action notices: notices to expedite, de-expedite, or cancel orders, or to change order quantities or due dates Priority reports: information regarding which orders should be given priority Inventory status information Performance reports such as inactive items, actual lead times, late orders, etc.

Demand for all products. Lead times for all finished goods, Lot sizing policies for all parts Opening inventory levels Safety stock requirements Any orders previously placed but

components, parts and raw materials


which haven't arrived yet

Logic of MRP
The main purpose of Material Requirement Planning (MRP I) is to facilitate the calculation of requirements of materials and timing (Slack, 2001). To achieve this, it needs to covert three inputs namely bill of material,

inventory data and master production schedule into two main outputs namely planned order releases and reschedule notices (Lunn, 1992). As noted by Starr (1996), the MRP system is suitable for products that do not satisfy the order point policy (OPP) models, which (1) demand of the end product is independent or (2) an end product orders may be place periodically. Master Production Schedule The Master Production Schedule (MPS) is the significant input that drives the MRP system. Primarily, MPS identify the quantity of the particular products that manufacturer is going to produce. To achieve this, MPS needs combining two independent demands namely customer orders and forecasted demand. Moreover, the MPS is also considered from other issues such as key capacity constraints, inventory levels and safety stock requirement. Crucially, MPS have to ensure that raw materials are available to meet the demands (Lunn, 1992). Furthermore, MPS must not exceed the production plan or capacity plan. Two key considerations in setting up the MPS are the size of `time buckets' and the `planning horizons'. A `time bucket' is the unit of time on which the schedule is constructed and is typically daily or weekly. Turning to time frame for MPS, typically, a time bucket for MPS is one week. In addition, the minimum length of planning horizon should be equal to the longest lead time of item in process The `planning horizon' is how far to plan forward, and is determined by how far ahead demand is known and by the lead times through the operation. There are three distinct steps in preparing an MRP schedule: a) Exploding: Explosion uses the Bill of Materials (BOM). This lists how many, of what components, are needed for each item (part, sub assembly, final assembly, finished product) of manufacture. b) Netting: The next step is 'netting', in which any stock on hand is subtracted from the gross requirement determined through explosion, giving the quantity of each item needed to manufacture the required finished products. c) Offsetting: The final step is 'offsetting'. This determines when manufacturing should start so that the finished items are available when required. To do so a 'lead time' has to be assumed for the operation. This is the anticipated time for manufacturing. Bill of Material Bill of Material (BOM) is another input of MRP system, which clarifies the structure of an independent demand item (Slack et al, 2001). Generally, there are three significant types of BOM namely single level, multi

levels, and indented BOM. The details of materials, in single-level BOM, are presented as a single level while, in indented BOM, this information is shown as several levels (Slack etal, 2001). To sum up, bill of material enables MRP to identify that which part and how many of them is required for any particular item (Slack et al, 2001). Inventory Data Inventory data facilitate MRP system identifying inventory status so as to calculate a net requirement (Slack et al, 2001). Generally, inventory data consist of three files as follows (Slack et al, 2001): The item master file: In order to identify a particular part, the first element of the item master file is a unique part number, which is assigned to all components (Slack et al, 2001). Moreover, this file may include the stable data such as part description, the unit of measure (Slack et al, 2001) and may also contains a lead time for each particular item. The transaction file: So as to calculate the net requirement of any particular part, the MRP system needs the transaction file, which contains inventory levels of each part (Slack et al, 2001). This file, logically, calculate inventory levels by referring to all transactions such as receipts into stock, for which, the organization may have to update the transaction file periodically. The location file: The location file facilitates the MRP system locating the location of any particular part (Slack et al, 2001).

History
Prior to MRP and before computers dominated the industry, reorder-point/reorder-quantity (ROP/ROQ) type methods like EOQ had been used in manufacturing and inventory management. In the 1960s, Joseph Orlicky studied the TOYOTA Manufacturing Program and developed Material Requirements Planning (MRP), and Oliver Wight and George Plossl then developed MRP into manufacturing resource planning (MRP II).[1]. Orlicky's book is entitled The New Way of Life in Production and Inventory Management (1975). By 1975, MRP was implemented in 150 companies. This number had grown to about 8,000 by 1981. In the 1980s, Joe Orlicky's MRP evolved into Oliver Wight's manufacturing resource planning (MRP II) which brings master scheduling, rough-cut capacity planning, capacity requirements planning and other concepts to classical

MRP. By 1989, about one third of the software industry was MRP II software sold to American industry ($1.2 billion worth of software).

Features
MRP at Plant or MRP Area Level You can plan material requirements at plant level or for different MRP areas. With MRP at plant level, the system adds together stocks from all of the individual storage locations, with the exception of individual customer stock, to determine total plant stock. The requirements are combined in the planning run and procurement elements are created for these pegged requirements with unknown sources. Individual storage locations can be planned separately or be excluded from planning. In the case of material requirements planning on an MRP area level, only the stocks from the storage locations or subcontractor assigned to the respective MRP area are taken into account. Only the requirements in this MRP area are combined and procurement elements are created for them. This enables you to plan material requirements specifically for certain areas.

The scope of MRP in manufacturing


MRP helps organizations to maintain low inventory levels. It is used to plan manufacturing, purchasing and delivering activities. "Manufacturing organizations, whatever their products, face the same daily practical problem - that customers want products to be available in a shorter time than it takes to make them. This means that some level of planning is required." Companies need to control the types and quantities of materials they purchase, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few examples are given below:

If a company purchases insufficient quantities of an item used in manufacturing, or the wrong item, they

may be unable to meet contracts to supply products by the agreed date.

If a company purchases excessive quantities of an item, money is being wasted - the excess quantity ties

up cash while it remains as stock and may never even be used at all. However, some purchased items will have a minimum quantity that must be met, therefore, purchasing excess is necessary.

Beginning production of an order at the wrong time can cause customer deadlines to be missed.

Material Requirements Planning in the Logistics Chain


Implementation Options The main function of material requirements planning is to guarantee material availability, that is, it is used to procure or produce the requirement quantities on time both for internal purposes and for sales and distribution. This process involves the monitoring of stocks and, in particular, the automatic creation of procurement proposals for purchasing and production. Process Flow 1. 2. Sales and Distribution take requirements as concrete customer requirements from the market In Demand Management, sales are planned in advance via a sales forecast. The result is the independent requirement, that is, the requirement for the finished product, tradable assemblies, trading goods and replacement parts. This result triggers material requirements planning. 3. In order to cover these requirements, MRP calculates procurement quantities and dates as well as plans the corresponding procurement elements. The procurement element in the planning run is the planned order or, for external procurement, the purchase requisition. Both procurement elements are internal planning elements that can be changed, rescheduled or deleted at any time. 4. If a material is produced in-house, the system also calculates the dependent requirements, that is, the quantity of components required to produce the finished product or the assembly, by exploding the BOM. If a material shortage exists, planned orders are created at every BOM level to cover requirements. 5. The system then converts these planned procurement elements into exact procurement elements: production orders for in-house production and purchase orders for external procurement.

6.

The progress of the order for materials produced in-house is controlled by using the production order. The production order contains its own scheduling procedures, capacity planning and status management. Cost accounting is also carried out via the individual production order.

7. 8.

Materials that are procured externally trigger the purchasing procedure. In this case, you must have chosen suitable vendors or you must have drawn up outline agreements. The quantities made available by production or by external procurement are placed in stock and are managed by Inventory Management.

Various functions in the SAP System are planned, controlled and coordinated centrally for several areas.

Consumption-Based Planning
As the name suggests, consumption-based planning procedures use past consumption data (historical data) to calculate future requirements with the help of the material forecast or static planning procedures. Consumption-based planning procedures have no reference to the master plan. The net requirements calculation is triggered when stock levels fall below a reorder point or by forecast requirements calculated from past consumption data. The advantage of this type of planning is that it is easy to use and you do not require extensive data. The MRP procedures supported in consumption-based planning are: a) Reorder Point Planning In reorder point planning, procurement is triggered when the sum of plant stock and firmed receipts falls below the reorder point. The reorder point should cover the average material requirements expected during the replenishment lead time. The safety stock exists to cover both excess material consumption within the replenishment lead time and any additional requirements that may occur due to delivery delays. Therefore, the safety stock is included in the reorder level. b) Forecast-Based Planning

Forecast-based planning is also based on material consumption. Like reorder point planning, forecastbased planning operates using historical values and forecast values and future requirements are determined via the integrated forecasting program. However, in contrast to reorder point planning, these values then form the basis of the planning run. The forecast values therefore have a direct effect in MRP as forecast requirements. The forecast, which calculates future requirements using historical data, is carried out at regular intervals. This offers the advantage that requirements, which are automatically determined, are continually adapted to suit current consumption needs. The forecast requirement is reduced by the material withdrawal so that the forecast requirement quantity that has already been produced is not included in the planning run again. c) Time-Phased Planning If a vendor always delivers a material on a particular day of the week, it makes sense to plan this material according to the same cycle, in which it is delivered. Materials that are planned using the time-phased planning technique are provided with an MRP date in the planning file. This date is set when creating a material master and is re-set after each planning run.

Why certain business are highly critical of their MRP systems


The MRP system is the excellent idea. However, in practice, the organization may find that the benefits from implementing the MRP system are too small compared to the investment. Generally, there are a number of issues related to disadvantages of MRP systems. Cost: The first significant disadvantage of MRP systems is that it needs a large capital investment. Firstly, the organization has the directly costs related to the project implementation e.g. investing in hardware and software, which is a fundamentally requirement of MRP system. Moreover, there are some indirectly costs such as increasing of salaries and maintenance. Finally, the organization has to encounter the hidden costs, which cannot foresee at the developing and design state.

Uncertainty with software: Nowadays, there are a number of MRP software packages in the existing market. Their performance is considerably excellent. However, in particular, the software package usually does not consolidate with the organization infrastructures and strategies. In practice, the software provider usually supplies a customization for the particular customer which may lead to an increasing of the direct costs as mentioned above. Moreover, if the company have not researched and investigate the MRP solution before purchasing, the core module of the software may be not appropriate. Furthermore, as noted by Grindley (1995), the outsourcing solution may lead to a failing to translate business or operation strategies because of poor coordination. Finally, modifying the MRP software may slowdown the project, increase a number of bugs, and increase difficulties for upgrading software (Koch, 2002).

Time: Obviously, the MRP system is a long-term strategy (Starr, 1996). An average time for implementation process is approximately 12-18 months (Cedillo). Additionally, the organization may find that they still need some periods of times so as to configure and improve the implemented MRP system.

Training: Generally, when the MRP system has been implemented, it would make a significant change to an existing operation system (Cedillo). For example, from traditional operation that each department evaluates their own information, with the MRP system, the entire organization may have to rely on the central database system to enhance an information flow. Therefore, one of the critical success factors for MRP implementation is to ensure that education and training is employed to the organization (SM Thacker & Associates).

Involvement and Acceptance: As noted by Bettini (1996), the most significant issue for successfully implementing MRP system is not the choice of software but the involvement of people. He also point out that, typically, 80% of total implementation costs are spent on hardware and software, while generating only 20% of profits. In contrast, the remaining 20% of investment, which is used for preparing organization, generates other 80% profits. The reason is that MRP system cannot generate a high performance if it lack of people involvement. Only technical people or software provider cannot raise its performance. Also, it needs a top management commitment.

Problems with MRP systems


1. The major problem with MRP systems is the integrity of the data. If there are any errors in the inventory data, the bill of materials (commonly referred to as 'BOM') data, or the master production schedule, then the outputted data will also be incorrect. 2. Another major problem with MRP systems is the requirement that the user specify how long it will take a factory to make a product from its component parts (assuming they are all available). Additionally, the system design also assumes that this "lead time" in manufacturing will be the same each time the item is made, without regard to quantity being made, or other items being made simultaneously in the factory. 3. A manufacturer may have factories in different cities or even countries. It is no good for an MRP system to say that we do not need to order some material because we have plenty thousands of miles away. The overall ERP system needs to be able to organize inventory and needs by individual factory, and intercommunicate needs in order to enable each factory to redistribute components in order to serve the overall enterprise. 4. Production may be in progress for some part, whose design gets changed, with customer orders in the system for both the old design, and the new one, concurrently. The overall ERP system needs to have a system of coding parts such that the MRP will correctly calculate needs and tracking for both versions. Parts must be booked into and out of stores more regularly than the MRP calculations take place. 5. The other major drawback of MRP is that takes no account of capacity in its calculations. This means it will give results that are impossible to implement due to manpower or machine or supplier capacity constraints. However this is largely dealt with by MRP II. Generally, MRP II refers to a system with integrated financials. An MRP II system can include finite / infinite capacity planning. But, to be considered a true MRP II system must also include financials. In the MRP II (or MRP2) concept, fluctuations in forecast data are taken into account by including simulation of the master production schedule, thus creating a long-term control. A more general feature of MRP2 is its extension to purchasing, to marketing and to finance (integration of all the function of the company); ERP has been the next step.

The historical development of MRP systems up to todays ERP systems


Nowadays, Enterprise Resource Planning (ERP) systems become a significant tool enhancing the business performance such as production lead-time, supply chain management. In 1972, five managers from IBM left the company to establish a new company, with the ERP vision, called SAP (Systems, Applications and Products) (Cedillo). Today, with 33% share of market, SAP is the leader in ERP software market, Oracle gains 15% market share and the third is People Soft, which is holding 8% market share. The last player is JD Edwards, which is focusing on customer relation management. The development of ERP is based on Materials Requirements Planning (MRP I). The original MRP concept was introduced since 1960s. The MRP facilitates the organization calculating the required quantity of particular part, which need in production (Slack et al, 2001). During 1980s and 1990s, the idea of MRP I was expanded to manufacturing resource planning (MRP II) which include other business issues such as financial and marketing (Slack et al, 2001). Accordingly, the concept of MRP has been developed to the Enterprise Resource Planning (ERP). As noted by Koch (2002), the most significant issue for ERP is not resource or planning as its acronym, but enterprise. It expands the concept of MRP II so as to include other business function such as human resource, marketing, and financial. Moreover, it also integrates the e-commerce and electronic data interchange (EDI) technology enhancing the organisation performance. As a result, information can flow through an industry chain.

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