Material Requirements Planning Managing Inventories of Items With

Material Requirements Planning Managing Inventories of Items With Dependent Demand 1

Demand Types • Dependent Demand: Demand for items that are component parts to be used in the production of finished goods • Independent Demand: Demand generated outside the system. Usually, demand for end -items or items sold individually, e. g. spare parts 2

Demand & MRP • Dependent demand should be handled differently than independent demand • Production should be planned taking into consideration the link between independent demand sub-assembly requirements • Material Requirements Planning (MRP) is the universally accepted tool for managing inventories of items with dependent demand 3

MRP Functionality • Material Requirements Planning: Planning Calculate the quantity of raw materials and sub-assemblies to produce the necessary end-item quantities (as expressed with independent demand) • Coordination of Purchase and Production Orders (or Jobs): Determine and coordinate the start times of all jobs so that end-items are completed before due dates 4

Time in MRP • In MRP systems, time is divided in fixed intervals or it is considered a continuous variable • Item requirements within a specific time interval are usually supposed to apply from the beginning of the interval 5

MRP Schematic Master Production Schedule Inventory Status Delivery data Product Structure, i. e. , Bill of Material Requirements Plan Purchasing Requirements Production Requirements 6

MRP Inputs • Master Production Schedule (MPS) – Gross Requirements (authorized) – Production Forecasts • Item Master File (BOM) • Lot Sizing Rule – Period order quantity (POQ) or (FOP) – Lot for lot (L 4 L) – Fixed order quantity (FOQ) 7

MRP Inputs • Planning Lead Time (Constant) • Inventory Status (on-hand Inventory) • Scheduled Receipts – Identifier (Purchase Order of Job number) – Due date and release date – Unit of measure and quantity 8

Item Master Data • Item master data contains: – Item code – Item description – Bill of Materials – Lot-size – Planned lead times 9

Bill of Materials The relation between an end-item and its sub-assemblies is described in the Bill of Materials (BOM). For example for end items A and B, the BOM is: BOM example for end items A & B 10

Bill of Materials • Usually, an end-item is composed of many components and sometimes it is even linked to several different BOMs • Production uses BOMs to calculate the load and material requirements at each production stage in order to produce an end-item 11

Bill of Materials • For each BOM component, a Low Level Code (LLC) is defined; this code indicates the lowest level a specific component is found • End-items have LLCs equal to zero • A group of items used only for the assembly of enditems has LLC equal to 1 • A group used for the production of items with LLC equal to 1, has LLC equal to 2 and so forth • Most commercial MRP packages integrate a BOM processor which automatically attributes the LLC to all items based on BOM data 12

Master Production Schedule (MPS) • MPS contains information about: – Gross requirements – Due dates – Purchase and production orders and scheduled receipts – On-hand inventory 13

MPS Example 14

MPS Vs. Forecasts Forecasting MPS Unit Product Families Product and sub-assemblies Time frame Month - Quarter Day, Week, Month Horizon Years Updating Month - Quarter Function General Management Weeks to months Week Planning/Production 15

On-hand Inventory • Inventory records contain information about: – Storage location – Current available quantities – Raw material inventory status – “Crib" inventory (pre-processed and stored inventory) – Sub-assembly inventory status – Allocation of reserved items to on-going processes 16

Scheduled Receipts • A scheduled receipt refers to: – For purchased items: the issuance of a purchase order and notification of the supplier – For produced items: the production routing and the issuance of a production order • As soon as the purchase/production order is issued, the scheduled order issuance is deleted and a scheduled receipt is generated 17

Lot-sizing • The lot sizing rule determines the balance between two contradicting goals: – The decrease of on-hand inventory (small lot size) – The decrease of order intervals (large lot size) • Lot size rules are used to balance the costs of high inventory levels and administration costs induced by too many orders 18

Planning Lead Time • Planning lead time (PLT) is used to determine the start time of each operation • Start time is calculated by subtracting the PLT from the due date • If PLTs were accurate, MRP would result in Justin-Time production • Usually, PLTs cannot be known a priori and most of the times they are purposely elongated 19

MRP Procedure • For each BOM level (starting from level 0), MRP performs: – Netting: Calculation of net requirements • Gross requirements are subtracted from on-hand inventory and scheduled receipts • Gross requirements for items with LLC=0 derive from MPS while for items with LLC>0 derive from previously executed MRP calculations – Lot sizing: The material requirements are divided in lots according to the lot-sizing rule used 20

MRP Procedure – Time phasing: Start times for each job is calculated by subtracting lead times from due dates – BOM explosion: Based on start times, the lot size and BOM, gross requirements are calculated for the lower LLC – Iteration: All steps are repeated until all BOM levels are processed 21

MRP Netting • Netting performs mainly two functions: – Adjust Scheduled Receipts – Calculate net requirements • MRP assumes that all Scheduled Receipts (SR) will be delivered before any other is placed • MRP assumes that gross requirements will be first met by current inventory, then by adjusting SRs and finally by placing new production/purchase orders 22

MRP Netting • Gross requirements that cannot be met by current inventory and/or adjusted SRs are net requirements • If t* is the first time bucket where SRs and current inventory cannot meet gross requirements, net requirements are calculated as follows: – Equal to zero for t< t*, – Equal to ‘negative inventory’ (It) for period t* – Equal to gross requirements (Dt) after period t* • Net requirements are used in the next level of MRP calculations (lot sizing) 23

Netting Example • Gross requirement of 15 units in week 1 can be met by current inventory and so the SR of 10 units can be delayed • In week 2, gross requirement (20) cannot be met by inventory (5) - The SR of week 1 is transferred to week 1 • The first ‘negative inventory’ is observed in week 6 - Its value represents the net requirements for this period • For weeks 6 -8, the net requirements are equal to the gross requirements PART A 1 2 3 4 5 6 7 8 Gross requirements 15 20 50 10 30 30 Scheduled receipts 10 10 15 -15 — — 15 30 2430 Adjusted SRs Projected on-hand Net requirements 20 5 100 20 100 5 55 45

Lot-sizing • After net requirements, the production lots must be determined • MRP assumes that requirements are deterministic and non-constant • Most common lot-sizing policies: – Lot-for-lot, production lot for a period equals net requirements for this period – Fixed order period (FOP) or period order quantity - This policy aims at the reduction of the number of orders by combining net requirements of adjacent periods – Fixed order quantity (FOQ) - This policy aims at the reduction of the number of orders by ordering a fixed amount of items, independent of the net requirements 25

Lot-sizing Example • Suppose the lot-sizing policy for Item A is fixed order period (for P=2 periods) • Net requirements of period 6 and 7 are combined PART A 1 2 3 4 5 6 7 8 Gross requirements 15 20 50 10 30 30 Scheduled receipts 10 10 15 -15 — — Net requirements 15 30 30 Planned order receipts 45 Adjusted SRs Projected on-hand 20 5 100 20 100 5 55 45 30 26

Time phasing • Almost all MRP packages assume that time to perform some processes is strictly predetermined although some systems allow planned lead time increase with job size • MRP treats lead times as properties of the items and sometimes of the jobs/operations but not of the shop floor • For item A, assume that the lead time to assemble it is two periods PART A 1 2 3 4 5 6 7 8 Gross requirements 15 20 50 10 30 30 Scheduled receipts 10 10 15 -15 — — Net requirements 15 30 30 Planned order receipts 45 Adjusted SRs Projected on-hand Planned order releases 20 5 100 20 100 5 55 45 45 30 30 27

BOM explosion • Based on planned order releases for Item A, gross requirements for items 100 and 200 can be calculated • As a result, for item 100, 90 units for period 4 and 60 units for period 6 are required. For item 200, 45 units for period 4 and 30 for period 6 are required. • These requirements must be added to any other requirements already generated by other higher level items (such as A) • The next step is to iterate this procedure for items at the lower BOM levels PART A Planned order releases 1 2 3 4 45 5 6 7 8 30 28

BOM explosion MPS for item B is presented as well as current inventory for items B, 100, 300 and 500. T 1 2 3 4 5 6 7 8 Demand 10 15 10 20 20 15 15 15 PART NUMBER CURRENT SRS ON-HAND Due B 40 100 LOT-SIZING RULE LEAD TIME 0 FOP, 2 weeks 40 0 Lot-for-lot 2 weeks 300 50 2 Lot-for-lot 1 week 500 40 0 Lot-for-lot 4 weeks Quantity 100 29

BOM explosion • MRP results for item B PART B 1 2 3 4 5 6 7 8 Gross requirements 10 15 10 20 20 15 15 15 30 15 5 -15 — — Net requirements 15 20 15 15 15 Planned order receipts 35 30 30 15 Scheduled receipts Adjusted SRs Projected on-hand 40 Planned order releases 35 15 30

BOM explosion • For each unit of B, one unit of 500 is required. Thus, scheduled order releases for item B are equivalent to gross requirements for item 500. • There is no SR PART 500 Gross requirements As lead time for item 500 is 4 weeks, there is not enough time 1 2 to 3 prepare 4 25 5 units 6 before 7 week 4. 8 As a result, a planned order release is generated by 30 that it might 15 be late. MRP with 35 the warning Scheduled receipts Adjusted SRs Projected on-hand 40 -25 — — Net requirements 25 15 Planned order receipts 25 15 Planned order releases 40 5 25* 15 5 — — 31

BOM explosion • At the lower level (LLC=2) and for item 100, there are two sources of requirements: 2 units for each A and 1 unit for each 500 • There is no SR PART 100 1 2 3 Required from A Required from 500 25 15 Gross requirements 25 15 Projected on-hand 40 15 0 0 4 5 6 90 60 -90 — — Net requirements 90 60 Planned order receipts 90 60 Planned order releases 90 60 32

BOM explosion • The only item with LLC=3 is item 300. Its requirements are generated by items B and 100. • There is a scheduled receipt of 100 units on week 2. No adjusting is needed since this SR may cover the requirements for this period. PART 300 1 2 3 4 Required from B 35 30 Required from 100 90 60 Gross requirements 125 90 Scheduled receipts 100 Adjusted SRs 100 Projected on-hand 50 50 25 25 -65 5 6 — — 15 — — 65 15 Planned order receipts 65 15 65 8 15 Net requirements Planned order releases 7 15 33

BOM explosion – Summary Transaction Part Number Old Due Date or Release Date New Due Date Quantity Notice Change notice A 1 2 10 Defer Change notice Α 4 3 100 Expedite Planned order release A 4 6 45 OK Planned order release A 6 8 30 OK Planned order release B 2 4 35 OK Planned order release B 4 6 30 OK Planned order release B 6 8 15 OK Planned order release 100 2 4 90 OK Planned order release 100 4 6 60 OK Planned order release 300 3 4 65 OK Planned order release 300 5 6 15 OK Planned order release 500 1 4 25 Late Planned order release 500 2 6 15 34 OK

MRP Outputs • Planned Order Release – Part Number – Number of Units – Due date • Change Notices – Expediting (move earlier) – Deferring (making due date later) 35

MRP Outputs • Exception Reports, i. e. , discrepancies between what is expected and what will transpire: • Job count differences • Inventory discrepancies • Imminently tardy jobs 36

MRP Problems • Capacity Infeasibility – Assumption = production line with fixed lead time – Lead time does not depend upon WIP – Result = infinite capacity – Problem when production levels near capacity 37

MRP Problems • Long Planned Lead Times – Pressure to increase planned lead times – Penalties for late jobs assumed greater than excess inventories – WIP with accumulate & lead times will further increase – Irresponsive approach by production managers 38

MRP Problems • Constant Lead Times – Pessimistic values (inflation) to “secure” due-dates • System Nervousness – Small change in MPS leads to large change in Planned Releases – Strange effects, e. g. : Decrease in demand may result in a feasible MRP Plan to become infeasible!!! 39

MRP Problems • Nervousness example – Two parts, A & B – Part A: • Lead Time of two weeks • Fixed Order Period (five weeks) – Part B (1 required for each Part A): • Lead Time of four weeks • Fixed Order Period (five weeks) 40

MRP Problems • Nervousness example (continued) 41

MRP Problems • Nervousness can be reduced by: – Different lot-sizing rules for different BOM levels • FOQ for end items • FOQ or L 4 L for intermediate BOM levels • FOP for the lowest levels 42

MRP Problems • Nervousness can be reduced by: – Proper use of lot-sizing rules • E. g. , in L 4 L magnitude of change no larger than MPS – Freezing the early part of the MPS (Frozen Zones) – Time Fences (gradual freezing) – Firm Planned Orders (not allowed to change early PO) 43

MRP Problems • Revisit the example – nervousness eliminated! 44

MRP ΙΙ • Infeasible plans, long planned lead times, system nervousness jeopardize the successful execution of MRP • In order to confront these problems, additional functionalities have been added to the main MRP procedure • These functionalities were implemented in a wider information system known as Manufacturing Resource Planning or MRP II 45

MRP II • Manufacturing Resource Planning • Additional Functions: – Demand Management – Forecasting – Rough-cut Capacity Planning – Capacity Requirements Planning – Dispatching – Input and Output Control 46

MRP II 47

MRP ΙΙ hierarchy Long term planning • Long term planning includes: – resource planning – aggregate planning – forecasting • The planning horizon length for long term planning is usually from six months to five years • The re-planning interval usually varies from once a month to once every six months • Detail level is low. Usually, long term planning deals with families of products 48

MRP ΙΙ hierarchy Forecasting • The forecasting functionality aims at future demand prediction • Long term forecasts are very important since they determine availability, general production planning and staff requirements • Short-term forecasting transforms a long term forecast for a family of products to short-term forecast for individual products • Both functions belong to the demand management 49 module at the medium term planning level

MRP ΙΙ hierarchy Resource planning • Resource planning is the procedure during which capacity requirements are calculated during medium term planning • Decisions like infrastructure expansion or the purchase of new facilities belong to resource planning • Future resource availability can be forecasted through resource planning • This data is then entered to the aggregate planning level 50

MRP ΙΙ hierarchy Aggregate planning • Aggregate planning is used to determine: – – – Production levels Staffing level (human resources) Inventory levels Overtime Anything concerning medium term production planning • Detail level is usually one month and aggregate planning deals with families of products • Optimization methods like linear programming are frequently used to aid aggregate planning 51

Medium term planning • Main functions of production planning • Includes: – demand management – rough-cut capacity planning – master production scheduling – material requirements planning – capacity requirements planning 52

Medium term planning Demand management • Demand management is about ‘translating’ aggregate long term forecasts in detailed forecasts by also taking into account individual customer orders • Based on this function, a set of real customer orders and a forecast of anticipated orders are created • As time goes by, anticipated orders must be replaced by actual customer orders 53

Medium term planning Available to promise (ATP) • Demand management is finalized with a technique known as Available to Promise-ATP • This function allows the planner to know which MPS orders are already linked to customer orders and which are available for the fulfillment of new customer needs • If the ATP function is coupled with a feasible MPS (in terms of resource availability) the realistic due date assignment is simplified • If more than anticipated orders are placed so as lead times become very large, then additional capacity (e. g. overtime) might be required • If incoming orders are less than anticipated, sales might want to offer discounts or some other motivations to stimulate demand • In each case, the forecast and most likely, the aggregate plan must 54 be revised

Medium term planning Production planning • Master production schedule uses forecasts along with confirmed production orders from the demand management module and by using the total resource availability limits, develops a plan at the highest level of planning detail • Consequently, master production schedule contains the quantities of orders for each time bucket for each component with independent demand, for each planning date 55

Medium term planning Production planning • For most enterprises, order quantities are given in the end-item level. However, for some cases it is more practical to group end-items to product families. • Such an example is automotive industries where the exact type and specification of a vehicle are determined in the last stage, during its final assembly. • In these cases, a final assembly plan determines when end-items are produced while MPS is used to determine the models to be produced. • A basic input for this type of planning is item’s super -bill which is a description for the various options of each model. 56

Medium term planning Rough-cut capacity planning • Rough-cut capacity planning (RCCP) is used to provide a fast estimation of whether critical production resources are adequate for a given MPS • Generally, RCCP uses a bill of resources for each MPS item • Bill of resources is a database of the critical resource requirements for producing one unit of an end-item • Apart from the end-item itself, resource requirements include all requirements for lower level items in order to produce one end-product 57

RCCP Example • For example, let item A be produced by using A 1 and A 2. Product A requires 1 h in resource 21 while A 1 and A 2 require 0. 5 h and 1 h respectively • As a result, the bill of resources of item A would indicate that item A requires 2. 5 h at resource 21 in order to be produced • Also let item B that requires 2 h at resource 21 in order to be produced (with no lower level items) PROCESS CENTRE PART A PART B 21 2. 5 2. 0 WEEK 1 2 3 4 5 6 7 8 Part A 10 10 10 20 20 10 Part B 5 25 5 15 10 25 15 10 58

RCCP Run WEEK 1 2 3 4 5 6 7 8 Part A (hour) 25 25 25 50 50 25 Part B (hour) 10 50 10 30 20 50 30 10 Total (hour) 35 75 35 80 70 100 8 O 35 Available 65 65 Over(+)/under(-) 30 -10 30 -15 -5 -35 -15 30 • After running RCCP, it is obvious that in some periods, resource availability is inadequate while in others it is more than enough • It depends on the production manager to act accordingly aiming at the reduction of this fluctuation; the choices are: – Adjust MPS by changing due dates – Adjust resource availability by adding resources or by using overtime or some sort of outsourcing for various stages of the production process 59

Medium term planning RCCP • RCCP does not perform offsetting. As a result, periods used must be long enough so as end-items can be produced (from raw materials to end product) in one single period. • Moreover, RCCP supposes that requirements can be performed without taking into account actual shop floor status. Hence, what can be really produced is frequently overestimated. • RCCP does not perform netting. While this is acceptable for end items, it creates many problems when there are many common items among end products and work-inprogress level is high. 60

Medium term planning CRP • Capacity Requirements Planning (CRP) is a more detailed (in comparison to RCCP) check of whether resources are adequate for a given production schedule. • Necessary CRP inputs include: – – All planned order releases Current work-in-progress Routing information Lead times and capacity for all resources • CRP does not optimize resource allocation but performs a process also known as infinite forward loading: – It forecasts finish times of each job for all resources by using predetermined constant lead times. – It then calculates the forecasted load of each resource for all periods – All loads are then compared to actual resource availability – Overloads are not confronted. The system just informs the production manager for the potential overload. 61

CRP Example • Suppose a resource with a lead time of three days and capacity of 400 units per day. • At the beginning of the current day, 400 units were just released, 500 units had been released for one day and 300 units had been released for two days. • The planned order releases for the next five days are: DAY 1 2 3 4 5 Planned order releases 300 350 400 350 300 62

CRP Example • By using the three day lead time, we can calculate when items will leave this specific resource • If more than 400 units are calculated to leave the resource, then the resource will be considered overloaded for this specific period. • In the resource utilization graph: – During the first day, total load is 300 (300 units already entered into the resource) – During the second day, the load is 500 indicating an overload. This load comes from orders already entered into the system 63

CRP Drawbacks • CRP assumes that processing time is irrelevant to the resource load even if the latter one is above capacity. As a result, calculating load after an overloaded period might not be accurate. • Typically, CRP does not forecast accurately the load in periods close to the current date. • Another CRP drawback is that it just indicates overloads without proposing a solution to this problem • A major inconsistency of CRP is that, just like MRP, supposes infinite resource availability. This assumption stems from the ‘constant lead time’ assumption which is not linked to resource load. 64

Medium term planning Material Requirements Planning • Material requirements planning (MRP) functionality is exactly the same with the typical MRP. • As already mentioned, MRP creates a job pool which is consists of planned order releases. • Finally, these requirements are released to the shop floor through a process called job release. 65

Short term planning • Plans that were processed during the long and medium term planning functions, are then executed by short term control functions. • These function are: – Job release – job dispatching – input/output production control 66

Short term planning Job Release • The job release function converts the planned order release to schedule receipts • One of job release’s most important functions is allocation • When some products are composed of common materials, there might be a conflict in case of inadequate material supply • Job release might rationally organize such conflicts 67

Short term planning Job Release • For example, suppose there are two planned order releases (POR) that both require item A and there is not enough inventory of item A for both of them • Moreover, the first POR requires item B of which there is enough inventory while the other POR requires item C the inventory of which is inadequate • The Job release function will proceed with the release of the first POR since there is enough inventory for all of its stages • A shortage notification would be created for the second POR which would remain in the job pool until sufficient inventory existed for all production stages 68

Short term planning • As soon as a production or purchase order is released, the prompt completion must be monitored. Moreover, the final quantity and quality must comply with initial specifications. • Purchase orders can be tracked. Production orders are controlled through two functions: – shop floor control (SFC) with two sub-functions: • job dispatching • input/output control – production activity control (PAC) 69

Short term planning Job Dispatching • Job Dispatching deals with the rules that determine the operation sequence in a resource. These rules should: – Respect due dates – Keep resource utilization high – Reduce production times 70

Job Dispatching Rules • One of the simplest rules is also known as the shortest process time (SPT) rule. Based on SPT, operations are ordered in such a way that orders with shortest processing are executed first. – SPT use decreases mean production times and increases resource utilization - Mean due date is also very good – SPT does not perform very well when there are operations with long processing times • An alternative to SPT is SPTx where the next operation to be performed is the one with the shortest processing time unless an operation has been queued for more than x time units. 71

Job Dispatching Rules • If all jobs have almost the same size and routings are consistent, a good dispatching rule is the earliest due date (EDD) rule. According to this rule, the operation which is closer to its due date is performed first. • EDD performs well under the assumptions mentioned above but generally it does not perform better than SPT. • The least slack rule: The slack of an operation is defined as its due date minus the remaining processing time (including setups). The highest priority operation is the one with the least slack. 72

Job Dispatching Rules • The Least slack per remaining operation rule: This rule is similar to the least slack rule but the slack is divided with the number of jobs that are not scheduled yet. The smaller this ratio is, the higher the priority of the job. • The Critical ratio (Cr) rule: According to this rule, operations are scheduled based on the ratio (due date – current date)/processing time remaining. If: – Cr >1, the job will most likely finish early. – If Cr <1, the job might finish late – If Cr <0, the job is already late 73

Short term planning Input/Output Control • Input/Output production control was introduced at first as a method to keep lead times under control. I/O control functions in the following way: – WIP level is checked at all resources – If WIP is above a predefined level, the amount of released orders is too high and must be reduced – If WIP is below a predefined level, the amount of released orders is too low and must be increased – If WIP is in between the low and high level thresholds, the amount of released orders is acceptable • Reductions and increases of released orders must be performed by altering the MPS 74

Short term planning Input/Output Control • I/O control is an efficient way to control job release in respect to capacity. However, after WIP levels have increased, the system is most likely out of control. • This is why pull systems often perform better than push systems like MRP, MRP II and ERP. – While push systems control releases (through MPS) by measuring WIP levels, pull systems measure WIP and production activity on a more frequent basis. – As a result, pull systems do not allow WIP levels to become exceedingly high and indicate potential problems 75 fairly quick