Material Requirements

Planning
Dr. Everette S. Gardner, Jr.

End item

R
LT

Time

Component

LT

Raw material

LT

Time

R
LT

Time

Order point system with dependent demand

MRP

End item

Component

Time

Raw material

Time

Time

The MRP approach

MRP

The simultaneous probability

problem
When components are ordered independently with an order point
system, the probability that all will be in stock at the same time is
much lower than the probabilities for individual components
Computation:
Let Pn = Prob. that n components are
in stock simultaneously
Si = Prob. of stockout on one
order cycle for component i
Then
Pn = S1 x S2 x S3 Sn
MRP

The simultaneous probability

problem (cont.)
Example:

End Item
1

S1 = .9

S2 = .9

S3 = .9

P3 = .9 x .9 x .9 = .729

= Prob. that all 3 components will be available at any given time to

build the end item
MRP

Probabilities of simultaneous
availability of components
Number of
component items
1
2
3
4
5
6
7
8
9
10
15
20
25

Service level
90%
95%
.900
.950
.810
.902
.729
.857
.656
.814
.590
.774
.531
.735
.478
.698
.430
.663
.387
.630
.348
.599
.206
.463
.121
.358
.071
.277
MRP

Demand
forecasts and
customer orders
Aggregate
planning/
master
scheduling

Product
design
changes
Bill
of
materials

MRP
system

Mfg. orders

Inventory
records

Capacity report

Purchase
orders
Detailed
scheduling
system

Inventory
transactions

Performance/
exceptions

Purchasing
dept.

MRP inputs and outputs

MRP

Product tree vs. indented parts list

Product tree
A

B(2)

D(1)

E(3)

D(2)

Level 0

C(4)

Level 1

F(1) G(3)

Level 2

MRP

Product tree vs. indented parts list

(cont.)
Indented parts list
A
B(2)
D(1)
E(3)
C(4)
D(2)
F(1)
G(3)

MRP

Week

Lead
time

Gross Rqmts.
Planned order rls.

Gross Rqmts.
Planned order rls.

Gross Rqmts.
Planned order rls.

Gross Rqmts.
Planned order rls.

Gross Rqmts.
Planned order rls.

Gross Rqmts.
Planned order rls.

Gross Rqmts.
Planned order rls.

Quiz: MRP plan to produce 10 units

of A due in week 9
MRP

10

Problems in requirements
computations
Product structure
Recurring requirements within the planning

horizon

Multilevel items
Rescheduling open orders
MRP

11

Product structure
Bills of material are hierarchical with distinct levels
To compute requirements, always proceed down bill of
materials, processing all requirements at one level before
starting another

MRP

12

Product structure (cont.)

Example:
Truck

Level
0

Inventory O.H.
0

A. Transmission (1)

B. Gearbox (1)

15

C. Gear (1)

D. Forging Blank (1)

46

Suppose we are to produce 100 trucks. What are the net

requirements for each component?
MRP

13

Recurrence of requirements within

the planning horizon
The same item may be required for several different lots within
the planning horizon always process one lot entirely, level by
level, before starting the next.
Example: One lot of 12 trucks, followed by 2nd lot of 100
Lot 1
Lot 2
Level 1: Gross requirements
12
100

MRP

14

Multilevel items
The same item may appear at different levels on one or more BOMs
result is multiple retrievals of same record to update system.
Examples:
1
2
3

Y
A

A
A

MRP

15

Multilevel items (cont.)

Solution: Low-level coding. Lowest level an item appears is coded
on inv. record. Processing delayed until that level reached.

2
3

MRP

16

Rescheduling open orders

Tests for open order misalignment:
1. Are open orders scheduled for periods following the period in
which a net requirement appears?
2. Is an open order scheduled for a period in which
gross requirement inv. O. H. at end of preceding period?
3. Is lead-time sufficient?

MRP

17

Rescheduling open orders (cont.)

Example:
1
Gross requirements

30

Scheduled receipts
On hand

27

-3

Week
3
4

10

10

10

20

20
12

12

12

22

Most MRP systems make such schedule changes automatically.

MRP

18

Tactical questions in MRP

Regeneration vs. net change
Lot sizing

Safety stocks

MRP

19

Regeneration vs. net change

Regeneration
Complete replanning of requirements and update of inventory
status for all items

High data processing efficiency

Usually initiated by weekly update of master schedule
Net change
Daily update based on inventory transactions
More responsive to changing conditions
Requires more discipline in file maintenance
MRP

20

Lot sizing implications in MRP

The load profiles at work centers in the system depend on the lot
sizing rules used
Load profiles determine:
undertime / overtime
leadtimes
Example:
Lot size
Lot size
Pd.
Demand
Rule 1
Rule 2
1
5
5
20
2
15
15
0
3
15
15
20
4
5
5
0
(Assume 1 unit requires 1 machine hour.)
MRP

21

Machine hrs.

Lot sizing implications in MRP (cont.)

20

20

15

15

10

10

Load profile
Rule 1

Load profile
Rule 2

MRP

22

Lot sizing techniques used in MRP

systems
Lot-for-lot (L4L) most used

Economic order quantity (EOQ)

Period order quantity (POQ)

MRP

23

Lot-for-lot (L4L) example

Period

Net rqmts.

35

10

Planned order

35

10

Total

40

20

10 30

150

40

20

10 30

150

(Assume LT)

The L4L technique:

Minimizes carrying costs
Is certainly the best method for
- highly discontinuous demand
- expensive purchased items
MRP

MRP1.xls

24

EOQ example
Setup cost, S = $100
Unit price, C = $50
Holding costs, HR = .24 per annum
HP = .02 per period
Annual demand, D = 200
Q = (2DS / CHR)1/2 = 58
Period

Net rqmts.

35

10

Planned orders

58

Remnants

23

40

20

10

30

58
13

13
MRP

31

10

58
31

11

54

24

24
25

Period order quantity example

Technique:
1. Compute EOQ to determine number of orders per year
2. Divide number of periods in one year by number of orders to get
ordering interval

EOQ = 58
Number of periods in one year = 12
D = 200
200 / 58 = 3.4 (orders per year)
12 / 3.4 = 3.5 (ordering interval)
Period

Net rqmts.

35

10

Planned orders

85

4
40

Total

20

10 30

150

35

MRP

30

26

Safety stocks in MRP systems

Need for safety stocks:
Variations in demand due to end-item forecast errors and
inventory errors
Variations in supply both lead-times and quantities
Since demand is not random, traditional statistical

techniques do not apply.

Options to provide safety factors:

Fixed quantity buffer stocks
Safety lead-time
Increase gross requirements

MRP

27

Safety stocks in MRP systems (cont.)

Fixed quantity buffer stocks
Good rule of thumb: Set buffer = max. demand likely in a single
period
Never generate order solely to replenish buffer stocks

Safety time method

Simply order early

Distorts LTs and priorities
Better than buffer stocks for items with infrequent demand
Also better for purchases outside company

Increase in gross requirements

Should be done at end item level only so that
Components available in matched sets
Safety stocks are not duplicated at different levels
MRP

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