MRP and Related Concepts

TLA (Three Letter Acronym) Definitions

ATP: Available to Promise
BOM: Bill of Materials
DRP: Distribution Requirements Planning
MPS: Master Production Schedule
MRP: Materials Requirements Planning
PAC: Production Activity Control
SOP: Sales and Operations Planning
1

Where Does MRP Fit?

Master Scheduling I
Controls the timing and quantity of production
for products or product families
Primary interface point for actual customer
orders
Coordinates forecasted demand and actual
orders with production activity
Serves as tool for agreement between
marketing and operations (but at a different
level than SOP)
3

Master Scheduling II
Feeds more detailed material planning
Indicates the quantity and timing (i.e., delivery
times) for a product or group of products
More detailed than SOP
weekly versus monthly
specific products versus average
must satisfy the needs of marketing
must be feasible for operations
4

Link between SOP

and MPS
Month:
Output:

January
200

February
300

March
400

January (weeks)

Push Mowers
Self-propelled
Riding

25

25
35

25

25
40

12

13

SOP

MPS
5

MPS Formulas: Definitions

ATPt = Available to promise in period t
EIt = Ending Inventory for period t (same as
projected on-hand inventory for next period)
Ft = Forecasted demand for period t
MPSt = MPS quantity available in period t
OBt = orders booked for period t

MPS Formulas:
EI t EI t 1 MPSt max(Ft , OBt )
z 1

ATPt EI t 1 MPSt OBi

i t

where z period when next positive MPSt is due

Detailed MPS for Widgets

On-hand inventory at end of October =
Month
Week

100

November

December

45

46

47

48

49

50

51

52

Forecast Demand

150

150

150

150

125

125

125

125

Orders Booked

170

165

140

120

85

45

20

Master Schedule

300

300

250

250

Notes:
Planning time fence cumulative lead time for product
What seems to be the lot-sizing rule here?
8

Projected On-Hand Inventory

On-hand inventory at end of October =
Month
Week

100

November

December

45

46

47

48

49

50

51

52

Forecast Demand

150

150

150

150

125

125

125

125

Orders Booked

170

165

140

120

85

45

20

Projected On-Hand
Inventory

230

65

215

65

190

65

190

65

Master Schedule

300

300

250

250

i.e. Projected on-hand inventory for week 47: = 65 + 300 150 = 215

Available-to-Promise
On-hand inventory at end of October =
Month
Week

100

November

December

45

46

47

48

49

50

51

52

Forecast Demand

150

150

150

150

125

125

125

125

Orders Booked

170

165

140

120

85

45

20

Projected On-Hand
Inventory

230

65

215

65

190

65

190

65

Master schedule

300

300

250

250

Available-to-Promise

65

40

120
70

230

ATP(45) = 100 + 300 (170 + 165) = 65

ATP(47) = 300 (140+120) = 40
ATP(49) = 250 (85 + 45) = 120
10

Change in Forecast Demand

On-hand inventory at end of October =
Month
Week

100

November

December

45

46

47

48

49

50

51

52

Forecast Demand

150

150

150

150

150

150

150

150

Orders Booked

170

165

140

120

85

45

20

Projected On-Hand
Inventory

230

65

215

65

165

15

115

(35)

Master schedule

300

300

250

250

Available-to-Promise

65

40

120

230

Are we in trouble yet?

11

Change in Orders Booked

On-hand inventory at end of October =
Month
Week

100

November

December

45

46

47

48

49

50

51

52

Forecast Demand

150

150

150

150

125

125

125

125

Orders Booked

170

230

140

120

85

45

20

Projected On-Hand
Inventory

230

150

125

125

Master schedule

300

300

250

250

Available-to-Promise

40

120

230

Note impact of ATP(45) and on-hand inventory projections

12

Key Points about MPS

Provides more detail than SOP
Tracks the following information:
Actual versus forecasted demand
Available-to-Promise
This gives sales information for accepting or not
accepting new orders for delivery in a given week

13

A Final View of Master Scheduling

SOP
Marketing

Operations
MPS

Rough-Cut Capacity Plan

14

Material Requirements Planning

MRP in the planning cycle
The logic of MRP
an extended example

Considerations of MRP

15

Assume that weve scheduled 500

chairs to be ready five weeks from now.

. . . Now
what?

16

Material Needed for a Chair

Side rails (2)

Seat
Front legs (2)

Cross bars (2)

Back supports (3)
17

Chair Structure Tree

(aka Bill of Materials)
Chair

Leg
Assembly

Legs (2)

Cross
bar

Seat

Side
rails (2)

Back Assembly

Cross
bar

Back
Supports
(3)
18

Graphic Lead-Time
Week 1

Week 2

Week 3

Week 4

Week 5

Back Support (2 weeks)

Side Rails (2 weeks)
Cross Bar (2 weeks)

Back
Assembly
(1 week)
Seats (2 weeks)

Legs (2 weeks)

Leg
Assembly

Cross Bar (2 weeks)

(1 week)

Chair
Assembly
(1 week)

19

Lead-Time Key Points

To have finished chairs at the beginning
of Week 5, we must begin production
and order materials in Week 1.
Exploding the bill of materials tells us
when to order things.
Not much we can do to adjust output of
chairs for the next 4 weeks. Why?
20

Material Requirements Planning (MRP)

We need the following inputs:
1. Bill-of-Materials (BOM)
2. Inventory records
3. Master production schedule
Well get the following outputs:
1. What items should be ordered
2. When each item should be ordered
3. How much of each should be ordered
21

The MRP Process Starts with the

MPS

End items are also known as Level 0 items

22

The Parent / Child Relationship

Where do the gross requirements come from?

Do you understand the MRP logic?
23

Going
Deeper

25

25

25

Moving from Level 1 items

to Level 2 items . . .
25

25

25

Where do the gross requirements for LEGS come from?

25

Combining Requirements: Cross

Bars
25

25

25

Note effect of
differences in
lead times and
order sizes on
the gross
requirements
for each
component

26

Impact of Longer Lead Times

We cannot do
this since the
planned order
would be in
the past.
Thus the 250
crossbars will
be delivered
late one week
to back
assembly.
What does
this do to our
chair
schedule?

25

25

25

27

Do You Understand ...

Why it is important to have an accurate
BOM and accurate inventory information?
Why do we need to freeze production
schedules?
Where do gross requirements come from?
The is the difference between planned and
scheduled receipts?

28

Other Considerations I
MRP
Feedback

Feedback
Planned Orders

Production

Suppliers
29

Other Considerations II
When do we update the system?
Capacity requirements planning using
MRP output
Pegging
Lot sizing issues
30

Recall ...

25

25

25

Look at the lumpiness of demand for legs

31

If we order lot-for-lot

25

25

25

Much smoother demand for legs, lower average inventory

32

Distribution Requirements Planning

(DRP)
Anticipates downstream demand
Uses this information, not predetermined
reorder points or periodic reviews, to
determine when to order

Computer-based software systems

needed to deal with the added
complexity
33

DRP Example I

Suppose we forecast demand for Wholesaler A for

the next 8 days (the best time horizon to use will
depend on many factors)
Based on this, we anticipate that Wholesaler A will
order on Day 3
34

DRP Example II

We extend the analysis to include Wholesaler B

Combined, we expect to see orders on Days 3 and 4
35

DRP Example III

The distributor then uses this information to plan its own

orders. In this case, suppose it takes two days for the supplier
to replenish; based on the information, the distributor would
order on Day 1
36

DRP Benefits
Helps improve customer service
Provides a better and faster understanding of
the impact of shortages and/or promotions
Helps reduce costs
Inventory
Freight
Production

Provides integration between the stages in

the supply chain
37

DRP Constraints
Accurate forecasts and inventory levels

Necessary to anticipate correctly when orders will be

placed

Consistent and reliable lead times

To ensure that orders can be placed and arrive by the

time they are needed

Nervousness

Even slight changes in demand for downstream partners

can have a significant impact on order volumes,
especially when order sizes are relatively high
38