1

MRP and Related Concepts

TLA (Three Letter Acronym) Definitions

ATP: Available to PromiseBOM: Bill of MaterialsDRP: Distribution Requirements PlanningMPS: Master Production ScheduleMRP: Materials Requirements PlanningPAC: Production Activity ControlSOP: Sales and Operations Planning

2

Where Does MRP Fit?

SOP

MPS

MRP

Vendor OrderManagmentPAC

Tactical Capacity Planning

Production, Order Fulfillment, Cushions

Material Quantities and Timing

Supply Chain Management and PDCA

Production Management and PDCA

3

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)

4

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

5

Link between SOP and MPS

Month: January February MarchOutput: 200 300 400

Push Mowers 25 25 25 25Self-propelled 35 40Riding 12 13

January (weeks) 1 2 3 4

SOP

MPS

6

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

7

MPS Formulas:

dueisMPSpositivenextwhenperiodzwhere

OBMPSEIATP

OBFMPSEIEI

t

z

tiittt

ttttt

1

1

1 ),max(

8

Detailed MPS for Widgets

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

On-hand inventory at end of October = 100

Month November December

Week 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 0

Master Schedule 300 0 300 0 250 0 250 0

9

Projected On-Hand Inventory

On-hand inventory at end of October = 100

Month November December

Week 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 0

Projected On-Hand Inventory 230 65 215 65 190 65 190 65

Master Schedule 300 0 300 0 250 0 250 0

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

10

Available-to-Promise

ATP(45) = 100 + 300 – (170 + 165) = 65ATP(47) = 300 – (140+120) = 40ATP(49) = 250 – (85 + 45) = 120

On-hand inventory at end of October = 100

Month November December

Week 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 0

Projected On-Hand Inventory 230 65 215 65 190 65 190 65

Master schedule 300 0 300 0 250 0 250 0

Available-to-Promise 65   40   70   230  120

11

Change in Forecast Demand

Are we in trouble yet?

On-hand inventory at end of October = 100

Month November December

Week 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 0

Projected On-Hand Inventory 230 65 215 65 165 15 115 (35)

Master schedule 300 0 300 0 250 0 250 0

Available-to-Promise 65   40   120   230  

12

Change in Orders Booked

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

On-hand inventory at end of October = 100

Month November December

Week 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 0

Projected On-Hand Inventory 230 0 150 0 125 0 125 0

Master schedule 300 0 300 0 250 0 250 0

Available-to-Promise 0   40   120   230  

13

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

14

A Final View of Master Scheduling

SOP

MPS

Marketing Operations

Rough-Cut Capacity Plan

15

Material Requirements Planning

• MRP in the planning cycle

• The logic of MRP

– an extended example

• Considerations of MRP

16

Assume that we’ve scheduled 500 chairs to be ready five weeks from now.

. . . Now what?

17

Back supports (3)

Side rails (2)

Front legs (2)

Cross bars (2)

Seat

Material Needed for a Chair

18

Chair Structure Tree(aka “Bill of Materials”)

Chair

LegAssembly

Seat Back Assembly

Legs (2) Crossbar

Siderails (2)

Crossbar

BackSupports

(3)

19

ChairAssembly

BackAssembly

LegAssembly

(1 week)

(1 week)

(1 week)

Back Support (2 weeks)

Legs (2 weeks)

Side Rails (2 weeks)

Cross Bar (2 weeks)

Cross Bar (2 weeks)

Seats (2 weeks)

Week 5Week 4Week 3Week 2Week 1

Graphic Lead-Time

20

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?

21

Material Requirements Planning (MRP)

We need the following inputs:1. Bill-of-Materials (BOM)2. Inventory records3. Master production schedule

We’ll get the following outputs:1. What items should be ordered2. When each item should be ordered3. How much of each should be ordered

22

End items are also known as “Level 0” items

The MRP Process Starts with the MPS

Chairs Lead Time = 1 week

1 2 3 4 5 6 7MPS Due Date 0 0 0 0 500 400 400Start Assembly 0 0 0 500 400 400 0

Week

23

Where do the gross requirements come from?Do you understand the MRP logic?

The “Parent / Child” Relationship

ChairsLT = 1 week

1 2 3 4 5 6 7MPS Due Date 0 0 0 0 500 400 400Start Assembly 0 0 0 500 400 400 0

SeatLT = 2 weeksMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 0 0 0 0 0 0 0 0Net Requirements 500 400 400Planned Receipts 500 400 400Planned Order 500 400 400

Week

Week

Going Deeper…

ChairsLT = 1 week

1 2 3 4 5 6 7MPS Due Date 0 0 0 0 500 400 400Start Assembly 0 0 0 500 400 400 0

SeatLT = 2 weeksMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 0 0 0 0 0 0 0 0Net Requirements 500 400 400Planned Receipts 500 400 400Planned Order 500 400 400

Leg AssemblyLT = 1 weekMinimum Order = 1000 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 25 0 0 0 525 125 725 725Net Requirements 475 275Planned Receipts 1000 1000Planned Order 1000 1000

Back AssemblyLT = 1 weekMinimum Order = 250 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled Receipts 250Projected On Hand 0 0 250 250 0 100 200 200Net Requirements 250 400 300Planned Receipts 250 500 500Planned Order 250 500 500

Week

Week

Week

Week

25 25 25

25

Where do the gross requirements for LEGS come from?

Moving from “Level 1” itemsto “Level 2” items . . .

Leg AssemblyLT = 1 weekMinimum Order = 1000 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 25 0 0 0 525 125 725 725Net Requirements 475 275Planned Receipts 1000 1000Planned Order 1000 1000

LegsLT = 2 weeksMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 0 2000 0 2000 0 0Scheduled ReceiptsProjected On Hand 0 0 0 0 0 0 0 0Net Requirements 2000 2000Planned Receipts 2000 2000Planned Order 2000 2000

Week

Week

25 25 25

26

Combining Requirements: “Cross Bars”

Note effect of differences in lead times and order sizes on

the gross requirements

for each component

Leg AssemblyLT = 1 weekMinimum Order = 1000 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 25 0 0 0 525 125 725 725Net Requirements 475 275Planned Receipts 1000 1000Planned Order 1000 1000

Back AssemblyLT = 1 weekMinimum Order = 250 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled Receipts 250Projected On Hand 0 0 250 0 0 100 200 200Net Requirements 250 400 300Planned Receipts 250 500 500Planned Order 250 500 500

CrossbarsLT = 2 weeksMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 0 1250 500 1500 0 0Scheduled ReceiptsProjected On Hand 0 0 0 0 0 0 0 0Net Requirements 1250 500 1500Planned Receipts 1250 500 1500Planned Order 1250 500 1500

Week

Week

Week

25 25 25

27

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?

Leg AssemblyLT = 1 weekMinimum Order = 1000 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 25 0 0 0 525 125 725 725Net Requirements 475 275Planned Receipts 1000 1000Planned Order 1000 1000

Back AssemblyLT = 2 weeksMinimum Order = 250 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled Receipts 250Projected On Hand 0 0 250 0 0 100 200 200Net Requirements 250 400 300Planned Receipts 250 500 500Planned Order 250 500 500

CrossbarsLT = 2 weeksMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 250 1500 500 1000 0 0Scheduled ReceiptsProjected On Hand 0 0 0 0 0 0 0 0Net Requirements 250 1500 500 1500Planned Receipts 250 1500 500 1500Planned Order 250 1500 500 1000

Week

Week

Week

25 25 25

28

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?

29

Other Considerations I

Planned Orders

Feedback Feedback

Production Suppliers

MRP

30

Other Considerations II

• When do we update the system?

• Capacity requirements planning using MRP output

• “Pegging”

• Lot sizing issues

31

Recall ...

Look at the “lumpiness” of demand for legs

Leg AssemblyLT = 1 weekMinimum Order = 1000 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 25 0 0 0 525 125 725 725Net Requirements 475 275Planned Receipts 1000 1000Planned Order 1000 1000

LegsLT = 2 weeksMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 0 2000 0 2000 0 0Scheduled ReceiptsProjected On Hand 0 0 0 0 0 0 0 0Net Requirements 2000 2000Planned Receipts 2000 2000Planned Order 2000 2000

Week

Week

25 25 25

32

If we order “lot-for-lot”

Much smoother demand for legs, lower average inventory

Leg AssemblyLT = 1 weekMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 0 0 500 400 400 0Scheduled ReceiptsProjected On Hand 25 0 0 0 0 0 0 0Net Requirements 475 400 400Planned Receipts 475 400 400Planned Order 475 400 400

LegsLT = 2 weeksMinimum Order = 1 1 2 3 4 5 6 7Gross Requirements 0 0 950 800 800 0 0Scheduled ReceiptsProjected On Hand 0 0 0 0 0 0 0 0Net Requirements 950 800 800Planned Receipts 950 800 800Planned Order 950 800 800

Week

Week

25 25 25

33

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

34

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

DRP Example I

Wholesaler A

ROP = 50, Q = 200 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8Forecast Demand 20 20 20 20 20 20 20 20Ending Inventory 85 65 45 225 205 185 165 145 125Expected Order 200

35

We extend the analysis to include Wholesaler B Combined, we expect to see orders on Days 3 and 4

Wholesaler A

ROP = 50, Q = 200 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8Forecast Demand 20 20 20 20 20 20 20 20Ending Inventory 85 65 45 225 205 185 165 145 125Expected Order 200

Wholesaler B

ROP = 75, Q = 200 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8Forecast Demand 14 14 14 14 14 14 14 14Ending Inventory 108 94 80 66 252 238 224 210 196Expected Order 200

Total Orders 200 200

DRP Example II

36

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

Wholesaler A

ROP = 50, Q = 200 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8Forecast Demand 20 20 20 20 20 20 20 20Ending Inventory 85 65 45 225 205 185 165 145 125Expected Order 200

Wholesaler B

ROP = 75, Q = 200 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8Forecast Demand 14 14 14 14 14 14 14 14Ending Inventory 108 94 80 66 252 238 224 210 196Expected Order 200

Distributor

Q = 400 Day 1 Day 2 Day 3 Day 4 Day 5 Day 6 Day 7 Day 8Total Expected Orders 200 200Ending Inventory 50 50 50 250 50 50 50 50 50Planned Receipts 400Planned Orders 400

DRP Example III

37

DRP Benefits

Helps improve customer service Provides a better and faster understanding of

the impact of shortages and/or promotions

Helps reduce costs InventoryFreightProduction

Provides integration between the stages in the supply chain

38

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