Inventory Management

Material Requirements Planning

Lecture 10 ESD.260 Fall 2003
Caplice

Assumptions: Basic MRP Model

Demand
Constant vs Variable Known vs Random Continuous vs Discrete Instantaneous Constant or Variable (deterministic/stochastic) Independent Correlated Indentured

Discounts

Lead time

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
One vs Many

Continuous vs Periodic

Capacity / Resources

Number of Items

Unlimited vs Limited
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Traditional Management

Purchasing

Production

Marketing

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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
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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]
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Which make the following assumptions . . .

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Cycle Stock with a Fixed Lot Size

Co= $500, Ch=25%, Cp= $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
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Chris Caplice, MIT

Fixed Lot Size with Intermittent Demand results in . . .

600

On Hand Inventory

400

200

Can we do better?
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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

Rear Wheel

Handlebars

Shaft Seat Cover

Rim Axle Spoke Tire Tube Sprocket

Bar Gooseneck Grip

Note that each item, sub-assembly, component etc. might feed into multiple end products
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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:

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

How should I manage my inventory for screws?

Co=$0.25, Cp=$0.01, Ch=25%, D = 800*12=9600 units LT = 1 week, d =~192 units
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Chris Caplice, MIT

Push versus Pull Systems

Simple Example
Following standard EOQ?
Order ~1400 (~every other month) What would the Inv On Hand look like?

Use a (Q,R) System?

So, since = 350, pick k=3 R=192 + (3)350 = 1242

Other methods?

Push vs Pull Systems

Push MRP
initiates production in anticipation of future demand

Pull JIT
initiates production as a reaction to present demand
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Material Requirements Planning

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

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Material Requirements Planning

Primary Questions
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

Information Requirements

MRP Process

Master Production Schedule Product Indenture Structure Inventory Status Ordering Data Requirements Explosion Net from Gross Requirements Requirements Time Phasing Planned Order Release
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Example: Bike Co.

Bicycle

Wheel

Crank Assembly

Spoke Tire

Sprocket Crank Pedal

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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 Lead Time 2 1 3 2 1 4 3 3

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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

GR OH NR POR

Gross Requirement On Hand

Spoke

GR OH NR POR

Tire

GR OH NR POR

Net Requirement Planned Order Release

Crank Asm

GR OH NR POR

Sprocket

GR OH NR POR

Crank

GR OH NR POR

Pedal

GR OH NR POR

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The MRP Plan for the Bicycle

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

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Chris Caplice, MIT

The MRP Plan for the Bicycle

ITEM Bicycle PERIOD: Rqmt POR >> Wheel Rqmt POR Spoke Rqmt POR Tire Rqmt POR Crank Asm Rqmt POR Sprocket Rqmt POR Crank Rqmt POR Pedal Rqmt POR 30 50 50 25 50 25 25 50 25 4300 50 50 4300 >> >> >> >> 25 >> 50 >> >> 1 2 3 4 5 6 7 8 25

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Two Issues
How do we handle capacity constraints? How do we handle uncertainty?
Safety Stock
Add to existing stock Where would this be applied?

Safety Times
Pad the planned lead times Where would this be applied?

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Optimal Lead Time Padding

Let: t t' Tp Q Cp Chp Cd
Tp

= 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

TC[T p ] = C hp Q( T p - t)P[t ] +
t=0

t=T p+1

C d (t - T p )P[t ]

SL =
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Cd C d + C hp Q
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Chris Caplice, MIT

Optimal Lead Time Padding

Example:
Cp Ch Chp Cd = = = = $5.00/unit 36% annual .005 dollars/unit/day $500 per day Q = 1000 units t' = 10 days = 3 days (t ~ normal)

SL* = (500/(500+5)) = 0.99 K* = 2.33 Tp* = 10 + (2.333) = 17 days

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MRP: Consider Capacity Restrictions

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MRP: Consider Capacity Restrictions

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MRP: Consider Capacity Restrictions

Introduce binding constraint

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MRP: Consider Capacity Restrictions

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Chris Caplice, MIT

MRP: Consider Capacity Restrictions

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Chris Caplice, MIT

Benefits of MRP
Lower Inventory Levels
Able to better manage components Increased visibility

Fewer Stock outs

Relationships are defined and explicit Allows for coordination with MPS

Less Expediting
Due to increased visibility

Fewer Production Disruptions

Input needs are explicitly modeled Plans are integrated
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Chris Caplice, MIT

Shortcomings of MRP
MRP is a scheduling, not a stockage, algorithm MRP does not address how to determine lot size 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 Does not explicitly consider costs Wide use of Lot for Lot in practice Replaces the forecasting mechanism Considers indentured structures

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
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MRP: Evolution of Concepts

Simple MRP
Focus on "order launching Used within production not believed outside

Closed Loop MRP

Focus on production scheduling Interacts with the MPS to create feasible plans

MRP II [Manufacturing Resource Planning]

Focus on integrated financial planning Treats the MPS as a decision variable Capacity is considered (Capacity Resource Planning)

Enterprise Resource Planning Systems

Common, centralized data for all areas Implementation is costly and effort intensive Forces business rules on companies
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Chris Caplice, MIT