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Managing Your Materials Requirements

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With the advent of technology, manufacturing companies have found themselves in stiffer competitive grounds competing in terms of reduced costs and better quality. One cost item that companies continuously try to reduce is inventory cost. Several manufacturing techniques have been introduced to address this, one of which is the concept Materials Requirements Planning (MRP). The implementation of MRP became popular in the 1970s and the 1980s and is slowly being implemented by manufacturing companies even in the developing countries. Recent developments showed even the possibility of implementing this side by side with the Just-in-Time manufacturing philosophy.

What is Material Requirements Planning (MRP)?

Materials Requirements Planning (MRP) also known as MRP I, little MRP, mrp, or the original MRP is a set of techniques that takes the Master Production Schedule and other information from inventory records and product structure records as inputs to determine the requirements and schedule of timing for each item.

Based on a master production schedule, a material requirements planning system:

•  Creates schedules identifying the specific parts and materials required to produce end items

•  Determines exact numbers needed

•  Determines the dates when orders for those materials should be released, based on lead times

Where is MRP applicable?

This inventory management system is appropriate for items that have a dependent demand (the demand for the subassemblies, components and parts that are not forecasted independently but are derived from the demand of the finished product).

It is also applicable for industries that offer a variety of finished products where the customer is allowed to choose among many different options. It is also most appropriate when the manufacturing environment is complex and uncertain.

What are the inputs to MRP?

How can MRP achieve its objectives? What philosophy drives it? The MRP system can be viewed as a manufacturing information system. The MRP system uses the information that relates a manufactured product to its components and current information in the status of components to project the number of each component required to support planned future production.

The basic inputs to run the MRP process are described below:

•  Master production schedule (MPS) of end products - The MPS drives the MRP system. It specifies the specific quantities of end items to be produced by a particular time period. The end items may be finished products or the highest -level assemblies from which these products can be built.

The MPS represents production output and not demand as such there would be situations when demand may not be exactly the same as the MPS. The MPS may therefore consist of the customer orders and the demand forecasts. The MPS therefore presents the quantities that need to be produced and not what can be produced.

•  Bills of materials (BOM) – The BOM shows the relationship of the components or sub-assemblies with the main product in terms of the quantity needed per product and the lead time involved to source such component. 

•  Inventory status file – presents the number of parts on hand and in transit.

•  Lead time – the time the parts are expected to arrive (if the part is externally sourced) or expected to be assembled (if the part is internally manufactured) from the time the order was set.

How does MRP work?

There are two important questions to ask here. How much of an item is needed? When is an item needed to complete a specified number of units, in a specified period of time? The MRP process involves the following steps:

•  Develop a master production schedule for the end item (this is the output of the aggregate / production planning). The MPS is adjusted accordingly, as follows:

  1. Determine the gross requirements for a particular item.
  2. Determine the net requirements and when orders will be released for fabrication or subassembly.

Net Requirements = Total Requirements – Available Inventory

Net Requirements = (Gross Requirements + Allocations) – (On Hand) + Scheduled Receipts

•  Create schedules identifying the specific parts and materials required to produce the end items. The bill of materials will be useful here.

•  Determines the exact numbers needed.

•  Determines the dates when orders for those materials should be released, based on lead times.

What are the outputs of MRP?

The basic outputs of the MRP system are the planned orders from the planned order release row of the MRP matrix which details the timing and the quantity of subassemblies, parts and raw materials used to plan purchasing and manufacturing actions.

Specifically, these outputs include:

•  Purchase orders - sent to outside suppliers

•  Work orders - to be released to the shop floor for in-house production

•  Action notices or rescheduling notices - issued for items that are no longer needed as soon as planned or for quantities that may have changed

What are the benefits of MRP?

The MRP is a framework for providing useful information for decision makers. The key to realizing the benefits from any MRP system is the ability of the inventory planner to use the information well. The specific benefits of MRP include the following:

•  Increased customer service and satisfaction

•  Improved utilization of facilities and personnel

•  Better inventory planning and scheduling

•  Faster response to market changes and shifts

•  Reduced inventory levels without reduced customer service

The MRP is also a very powerful tool since it takes into consideration changes in certain assumptions especially under uncertain conditions, especially when the inputs to the MRP system change because of the following realities in the production area:

•  Delays in scheduled receipts;

•  Changes in planned order sizes because of capacity constraints;

•  Changes in gross requirements which dictate changes in lot sizes at sub-component levels;

•  Unavailability of raw materials for one sub-component which negates the need for a fellow subcomponent as both must be ready for the parent production;

•  Utilization of same parts at different levels indicating the need to restructure the bill of materials; and

•  Presence of price discounts or some other features which makes it advisable to purchase more than the anticipated need.

Example: Libiran Furniture  

Libiran Furniture assembles dining room tables using bought-in parts of four legs and a top. These have lead times of two and three weeks, respectively. Assembly takes a week. The company receives orders for 20 tables to be delivered in week 5 of a planning period and 40 tables in week 7. It has current stocks of 2 complete tables, 40 legs and 22 tops. When should the company order parts?

•  Libiran's production schedule for dining room tables is shown below. This gives the “gross requirements” for level 0 items - which are tables.

•  Subtracting the stocks of the finished tables gives the net requirements. Then allowing a week for assembly gives the start times shown in the following assembly plan. The “scheduled receipts” show the number of units that become available in a week.

LEVEL 0 - Dining Room Tables

Requirements

Week

1

2

3

4

5

6

7

Gross Requirements

 

 

 

 

20

 

40

Opening Stock

2

2

2

2

2

 

 

Net Requirements

 

 

 

 

18

 

40

Start Assembly

 

 

 

18

 

40

 

Scheduled Receipts

 

 

 

 

18

 

40

•  To find the gross requirements for the Level 1 items (legs and tops), note that in week 4, there is a net requirement of 18 tables, which translates into a GR of 72 legs and 18 tops.

•  Similarly, the gross requirements for the other parts are:

  • Legs: 18x4 = 72 in week 4 and 40 x 4 = 160 in week 6
  • Tops: 18 in week 4 and 40 in week 6

•  Subtracting stock on hand from these gross requirements gives the net requirements. To make sure the parts arrive on time, they must be ordered in advance - that is, 2 weeks for legs and 3 weeks for tops.

LEVEL 1 – Legs

Requirements

Week

1

2

3

4

5

6

7

Gross Requirements

 

 

 

72

160

 

Opening Stock

40

40

40

40

 

 

Net Requirements

 

 

 

32

 

160

 

Start Assembly

 

32

 

160

 

 

 

Scheduled Receipts

 

 

 

32

 

160

LEVEL 1 – Tops

Requirements

Week

1

2

3

4

5

6

7

Gross Requirements

 

 

 

18

 

40

 

Opening Stock

22

22

22

22

4

4

 

Net Requirements

 

 

 

 

 

36

 

Start Assembly

 

 

36

 

 

 

 

Scheduled Receipts

 

 

 

 

 

36

 

WHEN SHOULD PARTS BE ORDERED?

  • Week 2: Order 32 legs
  • Week 3: Order 36 tops
  • Week 4: Order 160 legs and assemble 18 tables
  • Week 6: Assemble 40 tables

The example on Libiran Furniture was adapted from the furniture example in Waters (1996), pages 435-437.

 

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