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Recently, Phil Harris, the production control manager at Brunswick, read an article on time-phased requirements planning. He was curious about how this technique might work in scheduling Brunswick’s engine assembly operations and decided to prepare an example to illustrate the use of time-phased requirements planning.

Phil’s first step was to prepare a master schedule for one of the engine types produced by Brunswick: the Model 1000 engine. This schedule indicates the number of units of the Model 1000 engine to be assembled each week during the last 12 weeks and is shown on the next page. Next, Phil decided to simplify his requirements planning example by considering only two of the many components needed to complete the assembly of the Model 1000 engine. These two components, the gear box and the input shaft, are shown in the product structure diagram shown below. Phil noted that the gear box is assembled by the Subassembly Department and subsequently is sent to the main engine assembly line. The input shaft is one of several component parts manufactured by Brunswick needed to produce a gear box subassembly. Thus, levels 0, 1, and 2 are included in the product structure diagram to indicate the three manufacturing stages involved in producing an engine: the Engine Assembly Department, the Subassembly Department, and the Machine Shop.

Download the blank xls below, and try to complete the MRP details according to the case. For question 3, regarding Least Total Cost lot sizing, the trick is to experiment with different order sizes. Without this consideration, MRP will simply order exactly what quantity is needed to fulfill net requirements, for a given time bucket. However, if you consider the cost of placing an order, and the cost of carrying inventory, it may be less expensive to order a larger quantity (if inventory carrying is not too expensive), or it may be better to order more often with smaller order sizes, if inventory carrying is too expensive.

BOM or Product Structure
Engine
Crankcase
Q1 – Minimize Inventory
Engine MPS
1
2
3
4
15
5
7
10
Gear Box
Gross Rqts
Proj Inv (17 BI)
Sched Rcpts
Net Rqts
Planned Order Release
Input Shaft
Gross Rqts
Proj Inv (40 BI)
Sched Rcpts
Net Rqts
Planned Order Release
Q2 – Cost Considerations
Gear Box
Setup = $90/order
Inventory Carrying = $2/unit/period
Input Shaft
Setup=$45/order
Inventory Carrying = $1/unit/period
Gear Box ordering cost
Inventory carrying cost
Total cost
Input Shaft ordering cost
Inventory carrying cost
Total cost
Total Cost of Plan
#VALUE!
Gear Box
(1) (LT 2)
Input Shaft
(2) (LT 3)
5
6
7
8
15
20
10
9
10
11
12
8
2
16
Q3 – Determine a Plan that Minimizes Cost
Engine MPS
1
2
3
4
15
5
7
10
5
6
7
8
15
20
10
Gear Box
Gross Rqts
Proj Inv (17 BI)
Sched Rcpts
Net Rqts
Planned Order Release
Input Shaft
Gross Rqts
Proj Inv (40 BI)
Sched Rcpts
Net Rqts
Planned Order Release
Since Order Costs are significant – try combining orders (as computed from the first schedule)
Gear Box ordering cost
Inventory carrying cost
Total cost
Input Shaft ordering cost
Inventory carrying cost
Total cost
Total Cost of Plan
$0
9
10
11
12
8
2
16
Because learning changes everything.®
Chapter 21
Material Requirements Planning
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Enterprise Resource Planning (ERP) and Material
Requirements Planning (MRP)
ERP: a computer system
that integrates application
programs in accounting,
sales, manufacturing, and
the other functions in a firm
© McGraw Hill
MRP: a means for
determining the number
of parts, components,
and materials needed to
produce a product
2
Understanding Material Requirements Planning
Material requirements planning (MRP): the logic that ties
production functions together from a material planning and
control view
• MRP has been installed almost universally in manufacturing
firms
• Even small ones
A logical, easily understood approach to the problem of
managing the parts, components, and materials needed to
produce end items
• How much of each part to obtain?
• When to order or produce the parts?
© McGraw Hill
3
Dependent Demand
Dependent demand drives the MRP system
Dependent demand is caused by the demand for a higherlevel item
• Cars need tires
• Planes need wings
Determining the number of dependent demand items needed
is essentially a straightforward multiplication process
• If one Part A takes five parts of B to make it, then five parts
of A require 25 parts of B
© McGraw Hill
4
Where MRP Can Be Used
MRP is most valuable in industries where a number of
products are made in batches using the same productive
equipment
MRP is most valuable to companies involved in assembly
operations and least valuable to those in fabrication
MRP does not work well in companies that produce a low
number of units annually
• Better handled using project management
© McGraw Hill
5
Industry Applications and Expected Benefits of MRP
Expected
Benefits
Industry Type
Examples
Assemble-to-stock
Combines multiple component parts into a finished product,
which is then stocked in inventory to satisfy customer demand.
Examples: watches, tools, appliances.
High
Make-to-stock
Items are manufactured by machine rather than assembled from
parts. These are standard stock items carried in anticipation of
customer demand. Examples: piston rings, electrical switches.
Medium
Assemble-to-order
A final assembly is made from standard options that the
customer chooses. Examples: trucks, generators, motors.
High
Make-to-order
Items are manufactured by machine to customer order. These
are generally industrial orders. Examples: bearings, gears,
fasteners.
Low
Engineer-to-order
Items are fabricated or assembled completely to customer
specification. Examples: turbine generators, heavy machine
tools.
High
Process
Includes industries such as foundries, rubber and plastics,
specialty paper, chemicals, paint, drug, food processors.
Medium
Exhibit 21.1
© McGraw Hill
6
Master Production Scheduling
The master schedule deals with end items and is a major
input to the MRP process
All production systems have limited capacity and limited
resources
• The aggregate plan provides the general range of
operation; the master scheduler must specify exactly what
is to be produced
To determine an acceptable feasible schedule to be released
to the shop, trial master production schedules are tested
using the MRP program
© McGraw Hill
7
Duties of Master Scheduler
Include all demands
Never lose sight of the aggregate plan
Be involved with customer order promising
Be visible to all levels of management
Objectively trade off manufacturing, marketing, and
engineering conflicts
Identify and communicate all problems
© McGraw Hill
8
The Aggregate Plan and the Master Production Schedule
for Mattresses
Aggregate production plan shows overall quantities to
produce
• Does not specify type
Master production schedule shows quantities of each type,
with information about the production time frame
Exhibit 21.2
© McGraw Hill
Access the text alternative for slide images.
9
Master Production Schedule
Master production schedule (MPS): the time-phased plan
specifying how many and when the firm plans to build each
end item
• Aggregate plan specifies production on a monthly or
quarterly basis
• MSP identifies exact models on a period-by-period bases
• Period is usually weekly
Further down the disaggregation process is the material
requirements (MRP) program
MRP calculates and schedules all raw materials, parts, and
supplies needed to make the mattress specified by the MPS
© McGraw Hill
10
Time Fences
Flexibility within a master production schedule depends on
several factors
• Production lead time
• Commitment of parts and components to an end item
• Relationship between customer and vendor
• Amount of excess capacity
• How willing management is to make changes
Time fences maintain a controlled flow
Time fences: periods of time having some specified level of
opportunity for customer to make changes
© McGraw Hill
11
Master Production Schedule Time Fences
Frozen: Changes to production plan not allowed
Slushy: Limited changes to production plan allowed
Liquid: Any changes to production plan allowed
Exhibit 21.3
© McGraw Hill
Access the text alternative for slide images.
12
Available to Promise
Some firms use a feature known as available to promise for
items that are master scheduled
Identifies the difference between the number of units
currently included in the master schedule and firm customer
orders
• Master schedule shows production of 100 items
• Of those, 65 have already been sold
• The remaining 35 (100 to 65) are available to promise to
another customer
This can be a powerful tool for coordinating sales and
production activities
© McGraw Hill
13
Material Requirements Planning System Structure
The MPS states the number of items to be produced during
specific time periods
A bill-of-materials file identifies the specific materials used to
make each item and the correct quantities of each
The inventory records file contains data such as the number
of units on hand and on order
MRP expands the production schedule into a detailed order
scheduling plan for the entire production sequence
© McGraw Hill
14
Overall View of the Inputs to and Reports from an MRP
Program
Exhibit 21.4
© McGraw Hill
Access the text alternative for slide images.
15
Demand for Products
Product demand for end items comes primarily from two
main sources
1. Customers: specific orders placed by either external or
internal customers
2. Aggregate production plan: the firm’s strategy for
meeting demand in the future, implemented through the
master production schedule (MPS)
Customers also order specific parts and components either
as spares or for service and repair
• These demands are not usually part of the master
production schedule
• They are added in MRP as a gross requirement for that
part or component
© McGraw Hill
16
Bill of Materials (BOM)
Contains the complete product
Often called the product structure file or
description, listing the materials, parts,
product tree because it shows how a
and components along with the
product is put together
sequence in which the product is created
The BOM shows
how the product
is put together
Modular bill of materials is a buildable
item that can be produced and stocked
as a subassembly
© McGraw Hill
Super bill of materials includes items
with fractional options
17
Bill-of-Materials (Product Structure Tree) for Product A
Exhibit 21.5A
© McGraw Hill
Access the text alternative for slide images.
18
Parts List in an Indented Format and in a Single-Level
List
Indented Parts List
Single-Level Parts List
A
A
B(2)
C(3)
B(2)
D(1)
B
D(1)
E(4)
E(4)
C(3)
F(2)
C
G(5)
F(2)
H(4)
G(5)
H(4)
Exhibit 21.5B
© McGraw Hill
19
Low-Level Coding
Level 0 in the independent demand item
Lower levels (higher numbers) refer to components and raw
materials
In low-level coding, all identical items are placed at the same
level of the bill-of-material
• This makes it a simple matter for the computer to scan
across each level and summarize the number of units of
each item required (see Figure 21.6 B in the next slide)
• Another way of looking at low level code for an item is the
lowest level at which an item appears in the bill-ofmaterials as in Figure 21.6 A on the next slide.
© McGraw Hill
20
Product L Hierarchy in (A) Expanded to the Lowest Level
of Each Item in (B)
Exhibit 21.6
© McGraw Hill
Access the text alternative for slide images.
21
The Inventory Status Record for an Item in Inventory
Basic
information
describing
the item
Information
about part
availability
Additional
information
that may be
useful
Exhibit 21.7
© McGraw Hill
Access the text alternative for slide images.
22
MRP Explosion Process 1
1. The requirements for end items are retrieved from the master schedule
•
These are referred to as “gross requirements” by the MRP program
2. On-hand balance and schedule of orders are used to calculate the “net
requirement”
3. Net requirements data are used to calculate when orders should be
received to meet these requirements
4. Planned order releases are generated by offsetting to allow for lead
time
© McGraw Hill
23
MRP Explosion Process 2
5. Move to level 1 items
6. Gross requirements for each level 1 item are calculated from the
planned-order release schedule for the parents of each level 1 item
7. Net requirements, planned-order receipts, and planned-order releases
are calculated as described in steps 2 to 4
8. Repeat for all items in bill-of-materials
© McGraw Hill
24
An Example Using MRP
Ampere, Inc., produces a line of electric meters installed in
residential buildings
Meters are of two basic types for different voltage and
amperage ranges
• Some subassemblies are sold separately for repair or for
changeovers
The problem is to determine a production schedule to identify
each item, the period it is needed, and the appropriate
quantities
The schedule is then checked for feasibility, and the
schedule is modified if necessary
© McGraw Hill
25
Future Requirements – Meters A and B and
Subassembly D
Month
Meter A
Known
Forecast
Meter B
Known
Forecast
Subassembly D
Known
Forecast
3
1,000
250
410
60
200
70
4
600
250
300
60
180
70
5
300
250
500
60
250
70
Trial Master Schedule
Access the text alternative for slide images.
© McGraw Hill
26
Product Structure and Inventory Data
Item
On-Hand Inventory
Lead Time (Weeks)
Safety Stock
A
50
2
0
B
60
2
0
C
40
1
5
D
200
1
20
Exhibits 21.10A and 21.11
© McGraw Hill
On Order
10 (Week 5)
100 (Week 4)
Access the text alternative for slide images.
27
MRP Planning Schedule
Exhibit 21.12
© McGraw Hill
Access the text alternative for slide images.
28
Example 21.1: MRP Explosion Calculations
Week
1
2
3
4
5
6
7
8
VH1-234
34
37
41
45
48
48
48
48
VH2-100
104
134
144
155
134
140
141
145
VH1-234
VH2-100
Light Socket
85
358
425
200 (the production lot
400 (the production
500 (the purchase
size)
lot size)
quantity)
Lead time
1 week
1 week
3 weeks
Safety stock
0 units
0 units
20 units
On hand
Q
© McGraw Hill
29
Example 21.1: VH1-234
WEEK
ITEM
1
2
3
4
5
VH1-234 Gross requirement
34
37
41
45
48
48
48
48
51
14
173
128
80
32
184
136
Q = 200
Scheduled receipts
LT = 1
Projected available balance
6
7
8
OH = 85 Net requirements
27
16
SS = 0
200
200
Planned order receipts
Planned order releases
© McGraw Hill
200
200
30
Example 21.1: VH2-100
WEEK
ITEM
VH1-100
Gross requirement
Q = 400
Scheduled receipts
LT = 1
Projected available balance
1
2
3
4
5
6
7
8
104
134
144
155
134
140
141
145
254
120
376
221
87
347
206
61
OH = 358 Net requirements
24
53
SS = 0
400
400
Planned order receipts
Planned order releases
© McGraw Hill
400
400
31
Example 21.1: Socket
WEEK
ITEM
1
Socket
Gross requirement
Q = 500
Scheduled receipts
500
LT = 3
Projected available balance
905
2
3
4
600
305
305
305
5
6
400
200
405
205
OH = 425 Net requirements
95
SS = 20
500
Planned order receipts
Planned order releases
© McGraw Hill
7
8
205
205
500
32
Lot Sizing in MRP Systems
Determination of lot sizes in an MRP system is a complicated
and difficult problem
Lot sizes: the part quantities issued in the planned order
receipt and planned order release sections of an MRP
schedule
Will look at four
1. Lot-for-lot (L4L)
2. Economic order quantity (EOQ)
3. Least total cost (LTC)
4. Least unit cost (LUC)
© McGraw Hill
33
MRP Data for Lot-Sizing Problem
Cost per item
$10.00
Order or setup cost
$47.00
Inventory carrying cost/week
0.5%
Weekly net requirements:
1
2
3
4
5
6
7
8
50
60
70
60
95
75
60
55
© McGraw Hill
34
Lot-for-Lot
Sets planned orders to exactly match the net requirements
Produces exactly what is needed each week with none
carried over into future periods
Minimizes carrying cost
Does not take into account setup costs or capacity limitations
© McGraw Hill
35
Lot-for-Lot Run Size for an MRP Schedule
(6)
Setup Cost
(7)
Total Cost
(cumulative)
$0.00
$47.00
$ 47.00
0
0.00
47.00
94.00
70
0
0.00
47.00
141.00
60
60
0
0.00
47.00
188.00
5
95
95
0
0.00
47.00
235.00
6
75
75
0
0.00
47.00
282.00
7
60
60
0
0.00
47.00
329.00
8
55
55
0
0.00
47.00
376.00
(1)
Week
(2)
Net
Requirements
(3)
Production
Quantity
(4)
Ending Inventory
1
50
50
0
2
60
60
3
70
4
(5)
Holding Cost
Exhibit 21.13
© McGraw Hill
36
Economic Order Quantity
Calculate reorder quantity based on EOQ
EOQ was not designed for a system with discrete time
periods such as MRP
The lot sizes generated by EOQ do not always cover the
entire number of periods
2DS
EOQ =
H
© McGraw Hill
37
Economic Order Quantity Run Size for an MRP Schedule
Week
Net
Requirements
Production
Quantity
Ending Inventory
1
50
351
2
60
3
Holding Cost
Setup Cost
Total Cost
301
$15.05
$47.00
$62.05
0
241
12.05
0.00
74.10
70
0
171
8.55
0.00
82.65
4
60
0
111
5.55
0.00
88.20
5
95
0
16
0.80
0.00
89.00
6
75
351
292
14.60
47.00
150.60
7
60
0
232
11.60
0.00
162.20
8
55
0
177
8.85
0.00
171.05
Exhibit 21.14
© McGraw Hill
38
Least Total Cost
Least total cost method (LTC): a dynamic lot-sizing
technique that calculates the order quantity by comparing the
carrying cost and the setup costs for various lot sizes and
then selects the lot in which these are most nearly equal
Influenced by the length of the planning horizon
© McGraw Hill
39
Least Total Cost Run Size for an MRP Schedule
Weeks
Quantity Ordered
Carrying Cost
50
110
180
240
335
410
470
525
75
135
190
$ 0.00
3.00
10.00
19.00
38.00
56.75
74.75
94.00
0.00
3.00
8.50
1
1 to 2
1 to 3
1 to 4
1 to 5
1 to 6
1 to 7
1 to 8
6
6 to 7
6 to 8
Order Cost
Total Cost
$47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
$ 47.00
50.00
57.00
66.00
85.00
103.75
121.75
141.00
47.00
50.00
55.50
Week
Net
Requirements
Production
Quantity
Ending Inventory
Holding Cost
1
50
335
285
2
60
0
3
70
4
1st order
Least total cost
2nd order
Least total cost
Setup Cost
Total Cost
$14.25
$47.00
$ 61.25
225
11.25
0.00
72.50
0
155
7.75
0.00
80.25
60
0
95
4.75
0.00
85.00
5
95
0
0
0.00
0.00
85.00
6
75
190
115
5.75
47.00
137.75
7
60
0
55
2.75
0.00
140.50
8
55
0
0
0.00
0.00
140.50
Exhibit 21.15
© McGraw Hill
40
Least Unit Cost
Least unit cost method: a dynamic lot-sizing technique
It adds ordering and inventory carrying cost for each trial lot
size and divides by the number of units in each lot size
It then picks the lot size with the lowest unit cost
© McGraw Hill
41
Least Unit Cost Run Size for an MRP Schedule
Weeks
Quantity Ordered
Carrying Cost
50
110
180
240
335
410
470
525
60
115
$ 0.00
3.00
10.00
19.00
38.00
56.75
74.75
94.00
0.00
2.75
1
1 to 2
1 to 3
1 to 4
1 to 5
1 to 6
1 to 7
1 to 8
?
7 to 8
Order Cost
Total Cost
Unit Cost
$47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
$ 47.00
50.00
57.00
66.00
85.00
103.75
121.75
141.00
47.00
49.75
$0.9400
0.4545
0.3167
0.2750
0.2537
0.2530
0.2590
0.2686
0.7833
0.4326
1st order
Least unit cost
2nd order
Least unit cost
Week
Net
Requirements
Production
Quantity
Ending Inventory
Holding Cost
Setup Cost
Total Cost
1
50
410
360
$18.00
$47.00
$ 65.00
2
60
0
300
15.00
0.00
80.00
3
70
0
230
11.50
0.00
91.50
4
60
0
170
8.50
0.00
100.00
5
95
0
75
3.75
0.00
103.75
6
75
0
0
0
0
103.75
7
60
115
55
2.75
47.00
153.50
8
55
0
0
0
0
$153.50
Exhibit 21.16
© McGraw Hill
42
Choosing the Best Lot Size
Using the lot-for-lot method, the total cost for the eight weeks
is $376.00
EOQ total cost is $171.05
Least total cost method is $140.50
Least unit cost is $153.50
The lowest cost was obtained using the least total cost
method of $140.50
If there were more than eight weeks, the lowest cost could
differ
© McGraw Hill
43
Summary 1
An ERP system integrates application programs in accounting,
sales, manufacturing, and the other functions in a firm
MRP is the logic that calculates the number of parts, components,
and other materials needed to produce a product
• MRP is most useful in industries where standard products are
made in batches from common components and parts
The MPS is a plan that specifies what will be made by a
production system in the future
• It is a plan for meeting all the demands for the end items
The MRP system uses three sources of information: (1) demand,
(2) BoM, and (3) inventory status
© McGraw Hill
44
Summary 2
The MRP system produces schedules for each item it
manages
The logic used by MRP is often referred to as explosion
calculations
Lot sizes are the production (or purchasing) quantities used
by the MRP system
• Lot-for-lot is the simplest case
Lot-size techniques are used to balance the fixed and
variable costs that vary according to the production lot size
© McGraw Hill
45
Practice Exam 1
1.
Term used for a computer system that integrates application programs for the
different functions in a firm
2.
Logic used to calculate the needed parts, components, and other materials
needed to produce an end item
3.
This drives the MRP calculations and is a detailed plan for how we expect to
meet demand
4.
Period of time during which a customer has a specified level of opportunity to
make changes.
5.
This identifies the specific materials used to make each item and the correct
quantities of each.
6.
If an item is used in two places in a bill-of-materials, say level 3 and level 4,
what low-level code would be assigned to the item?
7.
One unit of part C is used in item A and in item B. Currently, we have 10 As,
20 Bs, and 100 Cs in inventory. We want to ship 60 As and 70 Bs. How many
additional Cs do we need to purchase?
© McGraw Hill
46
Practice Exam 2
8.
These are orders that have already been released and are to arrive in the
future.
9.
This is the total amount required for a particular item.
10. This is the amount needed after considering what we currently have in
inventory and what we expect to arrive in the future.
11. The planned-order receipt and planned-order release are offset by this
amount of time.
12. These are the part quantities issued in the planned-order release section of
an MRP report.
13. The term for ordering exactly what is needed each period without regard to
economic considerations.
14. None of the techniques for determining order quantity consider this important
noneconomic factor that could make the order quantity infeasible.
© McGraw Hill
47
Because learning changes everything.
www.mheducation.com
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
®
Because learning changes everything.®
Chapter 21
Material Requirements Planning
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Enterprise Resource Planning (ERP) and Material
Requirements Planning (MRP)
ERP: a computer system
that integrates application
programs in accounting,
sales, manufacturing, and
the other functions in a firm
© McGraw Hill
MRP: a means for
determining the number
of parts, components,
and materials needed to
produce a product
2
Understanding Material Requirements Planning
Material requirements planning (MRP): the logic that ties
production functions together from a material planning and
control view
• MRP has been installed almost universally in manufacturing
firms
• Even small ones
A logical, easily understood approach to the problem of
managing the parts, components, and materials needed to
produce end items
• How much of each part to obtain?
• When to order or produce the parts?
© McGraw Hill
3
Dependent Demand
Dependent demand drives the MRP system
Dependent demand is caused by the demand for a higherlevel item
• Cars need tires
• Planes need wings
Determining the number of dependent demand items needed
is essentially a straightforward multiplication process
• If one Part A takes five parts of B to make it, then five parts
of A require 25 parts of B
© McGraw Hill
4
Where MRP Can Be Used
MRP is most valuable in industries where a number of
products are made in batches using the same productive
equipment
MRP is most valuable to companies involved in assembly
operations and least valuable to those in fabrication
MRP does not work well in companies that produce a low
number of units annually
• Better handled using project management
© McGraw Hill
5
Industry Applications and Expected Benefits of MRP
Expected
Benefits
Industry Type
Examples
Assemble-to-stock
Combines multiple component parts into a finished product,
which is then stocked in inventory to satisfy customer demand.
Examples: watches, tools, appliances.
High
Make-to-stock
Items are manufactured by machine rather than assembled from
parts. These are standard stock items carried in anticipation of
customer demand. Examples: piston rings, electrical switches.
Medium
Assemble-to-order
A final assembly is made from standard options that the
customer chooses. Examples: trucks, generators, motors.
High
Make-to-order
Items are manufactured by machine to customer order. These
are generally industrial orders. Examples: bearings, gears,
fasteners.
Low
Engineer-to-order
Items are fabricated or assembled completely to customer
specification. Examples: turbine generators, heavy machine
tools.
High
Process
Includes industries such as foundries, rubber and plastics,
specialty paper, chemicals, paint, drug, food processors.
Medium
Exhibit 21.1
© McGraw Hill
6
Master Production Scheduling
The master schedule deals with end items and is a major
input to the MRP process
All production systems have limited capacity and limited
resources
• The aggregate plan provides the general range of
operation; the master scheduler must specify exactly what
is to be produced
To determine an acceptable feasible schedule to be released
to the shop, trial master production schedules are tested
using the MRP program
© McGraw Hill
7
Duties of Master Scheduler
Include all demands
Never lose sight of the aggregate plan
Be involved with customer order promising
Be visible to all levels of management
Objectively trade off manufacturing, marketing, and
engineering conflicts
Identify and communicate all problems
© McGraw Hill
8
The Aggregate Plan and the Master Production Schedule
for Mattresses
Aggregate production plan shows overall quantities to
produce
• Does not specify type
Master production schedule shows quantities of each type,
with information about the production time frame
Exhibit 21.2
© McGraw Hill
Access the text alternative for slide images.
9
Master Production Schedule
Master production schedule (MPS): the time-phased plan
specifying how many and when the firm plans to build each
end item
• Aggregate plan specifies production on a monthly or
quarterly basis
• MSP identifies exact models on a period-by-period bases
• Period is usually weekly
Further down the disaggregation process is the material
requirements (MRP) program
MRP calculates and schedules all raw materials, parts, and
supplies needed to make the mattress specified by the MPS
© McGraw Hill
10
Time Fences
Flexibility within a master production schedule depends on
several factors
• Production lead time
• Commitment of parts and components to an end item
• Relationship between customer and vendor
• Amount of excess capacity
• How willing management is to make changes
Time fences maintain a controlled flow
Time fences: periods of time having some specified level of
opportunity for customer to make changes
© McGraw Hill
11
Master Production Schedule Time Fences
Frozen: Changes to production plan not allowed
Slushy: Limited changes to production plan allowed
Liquid: Any changes to production plan allowed
Exhibit 21.3
© McGraw Hill
Access the text alternative for slide images.
12
Available to Promise
Some firms use a feature known as available to promise for
items that are master scheduled
Identifies the difference between the number of units
currently included in the master schedule and firm customer
orders
• Master schedule shows production of 100 items
• Of those, 65 have already been sold
• The remaining 35 (100 to 65) are available to promise to
another customer
This can be a powerful tool for coordinating sales and
production activities
© McGraw Hill
13
Material Requirements Planning System Structure
The MPS states the number of items to be produced during
specific time periods
A bill-of-materials file identifies the specific materials used to
make each item and the correct quantities of each
The inventory records file contains data such as the number
of units on hand and on order
MRP expands the production schedule into a detailed order
scheduling plan for the entire production sequence
© McGraw Hill
14
Overall View of the Inputs to and Reports from an MRP
Program
Exhibit 21.4
© McGraw Hill
Access the text alternative for slide images.
15
Demand for Products
Product demand for end items comes primarily from two
main sources
1. Customers: specific orders placed by either external or
internal customers
2. Aggregate production plan: the firm’s strategy for
meeting demand in the future, implemented through the
master production schedule (MPS)
Customers also order specific parts and components either
as spares or for service and repair
• These demands are not usually part of the master
production schedule
• They are added in MRP as a gross requirement for that
part or component
© McGraw Hill
16
Bill of Materials (BOM)
Contains the complete product
Often called the product structure file or
description, listing the materials, parts,
product tree because it shows how a
and components along with the
product is put together
sequence in which the product is created
The BOM shows
how the product
is put together
Modular bill of materials is a buildable
item that can be produced and stocked
as a subassembly
© McGraw Hill
Super bill of materials includes items
with fractional options
17
Bill-of-Materials (Product Structure Tree) for Product A
Exhibit 21.5A
© McGraw Hill
Access the text alternative for slide images.
18
Parts List in an Indented Format and in a Single-Level
List
Indented Parts List
Single-Level Parts List
A
A
B(2)
C(3)
B(2)
D(1)
B
D(1)
E(4)
E(4)
C(3)
F(2)
C
G(5)
F(2)
H(4)
G(5)
H(4)
Exhibit 21.5B
© McGraw Hill
19
Low-Level Coding
Level 0 in the independent demand item
Lower levels (higher numbers) refer to components and raw
materials
In low-level coding, all identical items are placed at the same
level of the bill-of-material
• This makes it a simple matter for the computer to scan
across each level and summarize the number of units of
each item required (see Figure 21.6 B in the next slide)
• Another way of looking at low level code for an item is the
lowest level at which an item appears in the bill-ofmaterials as in Figure 21.6 A on the next slide.
© McGraw Hill
20
Product L Hierarchy in (A) Expanded to the Lowest Level
of Each Item in (B)
Exhibit 21.6
© McGraw Hill
Access the text alternative for slide images.
21
The Inventory Status Record for an Item in Inventory
Basic
information
describing
the item
Information
about part
availability
Additional
information
that may be
useful
Exhibit 21.7
© McGraw Hill
Access the text alternative for slide images.
22
MRP Explosion Process 1
1. The requirements for end items are retrieved from the master schedule
•
These are referred to as “gross requirements” by the MRP program
2. On-hand balance and schedule of orders are used to calculate the “net
requirement”
3. Net requirements data are used to calculate when orders should be
received to meet these requirements
4. Planned order releases are generated by offsetting to allow for lead
time
© McGraw Hill
23
MRP Explosion Process 2
5. Move to level 1 items
6. Gross requirements for each level 1 item are calculated from the
planned-order release schedule for the parents of each level 1 item
7. Net requirements, planned-order receipts, and planned-order releases
are calculated as described in steps 2 to 4
8. Repeat for all items in bill-of-materials
© McGraw Hill
24
An Example Using MRP
Ampere, Inc., produces a line of electric meters installed in
residential buildings
Meters are of two basic types for different voltage and
amperage ranges
• Some subassemblies are sold separately for repair or for
changeovers
The problem is to determine a production schedule to identify
each item, the period it is needed, and the appropriate
quantities
The schedule is then checked for feasibility, and the
schedule is modified if necessary
© McGraw Hill
25
Future Requirements – Meters A and B and
Subassembly D
Month
Meter A
Known
Forecast
Meter B
Known
Forecast
Subassembly D
Known
Forecast
3
1,000
250
410
60
200
70
4
600
250
300
60
180
70
5
300
250
500
60
250
70
Trial Master Schedule
Access the text alternative for slide images.
© McGraw Hill
26
Product Structure and Inventory Data
Item
On-Hand Inventory
Lead Time (Weeks)
Safety Stock
A
50
2
0
B
60
2
0
C
40
1
5
D
200
1
20
Exhibits 21.10A and 21.11
© McGraw Hill
On Order
10 (Week 5)
100 (Week 4)
Access the text alternative for slide images.
27
MRP Planning Schedule
Exhibit 21.12
© McGraw Hill
Access the text alternative for slide images.
28
Example 21.1: MRP Explosion Calculations
Week
1
2
3
4
5
6
7
8
VH1-234
34
37
41
45
48
48
48
48
VH2-100
104
134
144
155
134
140
141
145
VH1-234
VH2-100
Light Socket
85
358
425
200 (the production lot
400 (the production
500 (the purchase
size)
lot size)
quantity)
Lead time
1 week
1 week
3 weeks
Safety stock
0 units
0 units
20 units
On hand
Q
© McGraw Hill
29
Example 21.1: VH1-234
WEEK
ITEM
1
2
3
4
5
VH1-234 Gross requirement
34
37
41
45
48
48
48
48
51
14
173
128
80
32
184
136
Q = 200
Scheduled receipts
LT = 1
Projected available balance
6
7
8
OH = 85 Net requirements
27
16
SS = 0
200
200
Planned order receipts
Planned order releases
© McGraw Hill
200
200
30
Example 21.1: VH2-100
WEEK
ITEM
VH1-100
Gross requirement
Q = 400
Scheduled receipts
LT = 1
Projected available balance
1
2
3
4
5
6
7
8
104
134
144
155
134
140
141
145
254
120
376
221
87
347
206
61
OH = 358 Net requirements
24
53
SS = 0
400
400
Planned order receipts
Planned order releases
© McGraw Hill
400
400
31
Example 21.1: Socket
WEEK
ITEM
1
Socket
Gross requirement
Q = 500
Scheduled receipts
500
LT = 3
Projected available balance
905
2
3
4
600
305
305
305
5
6
400
200
405
205
OH = 425 Net requirements
95
SS = 20
500
Planned order receipts
Planned order releases
© McGraw Hill
7
8
205
205
500
32
Lot Sizing in MRP Systems
Determination of lot sizes in an MRP system is a complicated
and difficult problem
Lot sizes: the part quantities issued in the planned order
receipt and planned order release sections of an MRP
schedule
Will look at four
1. Lot-for-lot (L4L)
2. Economic order quantity (EOQ)
3. Least total cost (LTC)
4. Least unit cost (LUC)
© McGraw Hill
33
MRP Data for Lot-Sizing Problem
Cost per item
$10.00
Order or setup cost
$47.00
Inventory carrying cost/week
0.5%
Weekly net requirements:
1
2
3
4
5
6
7
8
50
60
70
60
95
75
60
55
© McGraw Hill
34
Lot-for-Lot
Sets planned orders to exactly match the net requirements
Produces exactly what is needed each week with none
carried over into future periods
Minimizes carrying cost
Does not take into account setup costs or capacity limitations
© McGraw Hill
35
Lot-for-Lot Run Size for an MRP Schedule
(6)
Setup Cost
(7)
Total Cost
(cumulative)
$0.00
$47.00
$ 47.00
0
0.00
47.00
94.00
70
0
0.00
47.00
141.00
60
60
0
0.00
47.00
188.00
5
95
95
0
0.00
47.00
235.00
6
75
75
0
0.00
47.00
282.00
7
60
60
0
0.00
47.00
329.00
8
55
55
0
0.00
47.00
376.00
(1)
Week
(2)
Net
Requirements
(3)
Production
Quantity
(4)
Ending Inventory
1
50
50
0
2
60
60
3
70
4
(5)
Holding Cost
Exhibit 21.13
© McGraw Hill
36
Economic Order Quantity
Calculate reorder quantity based on EOQ
EOQ was not designed for a system with discrete time
periods such as MRP
The lot sizes generated by EOQ do not always cover the
entire number of periods
2DS
EOQ =
H
© McGraw Hill
37
Economic Order Quantity Run Size for an MRP Schedule
Week
Net
Requirements
Production
Quantity
Ending Inventory
1
50
351
2
60
3
Holding Cost
Setup Cost
Total Cost
301
$15.05
$47.00
$62.05
0
241
12.05
0.00
74.10
70
0
171
8.55
0.00
82.65
4
60
0
111
5.55
0.00
88.20
5
95
0
16
0.80
0.00
89.00
6
75
351
292
14.60
47.00
150.60
7
60
0
232
11.60
0.00
162.20
8
55
0
177
8.85
0.00
171.05
Exhibit 21.14
© McGraw Hill
38
Least Total Cost
Least total cost method (LTC): a dynamic lot-sizing
technique that calculates the order quantity by comparing the
carrying cost and the setup costs for various lot sizes and
then selects the lot in which these are most nearly equal
Influenced by the length of the planning horizon
© McGraw Hill
39
Least Total Cost Run Size for an MRP Schedule
Weeks
Quantity Ordered
Carrying Cost
50
110
180
240
335
410
470
525
75
135
190
$ 0.00
3.00
10.00
19.00
38.00
56.75
74.75
94.00
0.00
3.00
8.50
1
1 to 2
1 to 3
1 to 4
1 to 5
1 to 6
1 to 7
1 to 8
6
6 to 7
6 to 8
Order Cost
Total Cost
$47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
$ 47.00
50.00
57.00
66.00
85.00
103.75
121.75
141.00
47.00
50.00
55.50
Week
Net
Requirements
Production
Quantity
Ending Inventory
Holding Cost
1
50
335
285
2
60
0
3
70
4
1st order
Least total cost
2nd order
Least total cost
Setup Cost
Total Cost
$14.25
$47.00
$ 61.25
225
11.25
0.00
72.50
0
155
7.75
0.00
80.25
60
0
95
4.75
0.00
85.00
5
95
0
0
0.00
0.00
85.00
6
75
190
115
5.75
47.00
137.75
7
60
0
55
2.75
0.00
140.50
8
55
0
0
0.00
0.00
140.50
Exhibit 21.15
© McGraw Hill
40
Least Unit Cost
Least unit cost method: a dynamic lot-sizing technique
It adds ordering and inventory carrying cost for each trial lot
size and divides by the number of units in each lot size
It then picks the lot size with the lowest unit cost
© McGraw Hill
41
Least Unit Cost Run Size for an MRP Schedule
Weeks
Quantity Ordered
Carrying Cost
50
110
180
240
335
410
470
525
60
115
$ 0.00
3.00
10.00
19.00
38.00
56.75
74.75
94.00
0.00
2.75
1
1 to 2
1 to 3
1 to 4
1 to 5
1 to 6
1 to 7
1 to 8
?
7 to 8
Order Cost
Total Cost
Unit Cost
$47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
47.00
$ 47.00
50.00
57.00
66.00
85.00
103.75
121.75
141.00
47.00
49.75
$0.9400
0.4545
0.3167
0.2750
0.2537
0.2530
0.2590
0.2686
0.7833
0.4326
1st order
Least unit cost
2nd order
Least unit cost
Week
Net
Requirements
Production
Quantity
Ending Inventory
Holding Cost
Setup Cost
Total Cost
1
50
410
360
$18.00
$47.00
$ 65.00
2
60
0
300
15.00
0.00
80.00
3
70
0
230
11.50
0.00
91.50
4
60
0
170
8.50
0.00
100.00
5
95
0
75
3.75
0.00
103.75
6
75
0
0
0
0
103.75
7
60
115
55
2.75
47.00
153.50
8
55
0
0
0
0
$153.50
Exhibit 21.16
© McGraw Hill
42
Choosing the Best Lot Size
Using the lot-for-lot method, the total cost for the eight weeks
is $376.00
EOQ total cost is $171.05
Least total cost method is $140.50
Least unit cost is $153.50
The lowest cost was obtained using the least total cost
method of $140.50
If there were more than eight weeks, the lowest cost could
differ
© McGraw Hill
43
Summary 1
An ERP system integrates application programs in accounting,
sales, manufacturing, and the other functions in a firm
MRP is the logic that calculates the number of parts, components,
and other materials needed to produce a product
• MRP is most useful in industries where standard products are
made in batches from common components and parts
The MPS is a plan that specifies what will be made by a
production system in the future
• It is a plan for meeting all the demands for the end items
The MRP system uses three sources of information: (1) demand,
(2) BoM, and (3) inventory status
© McGraw Hill
44
Summary 2
The MRP system produces schedules for each item it
manages
The logic used by MRP is often referred to as explosion
calculations
Lot sizes are the production (or purchasing) quantities used
by the MRP system
• Lot-for-lot is the simplest case
Lot-size techniques are used to balance the fixed and
variable costs that vary according to the production lot size
© McGraw Hill
45
Practice Exam 1
1.
Term used for a computer system that integrates application programs for the
different functions in a firm
2.
Logic used to calculate the needed parts, components, and other materials
needed to produce an end item
3.
This drives the MRP calculations and is a detailed plan for how we expect to
meet demand
4.
Period of time during which a customer has a specified level of opportunity to
make changes.
5.
This identifies the specific materials used to make each item and the correct
quantities of each.
6.
If an item is used in two places in a bill-of-materials, say level 3 and level 4,
what low-level code would be assigned to the item?
7.
One unit of part C is used in item A and in item B. Currently, we have 10 As,
20 Bs, and 100 Cs in inventory. We want to ship 60 As and 70 Bs. How many
additional Cs do we need to purchase?
© McGraw Hill
46
Practice Exam 2
8.
These are orders that have already been released and are to arrive in the
future.
9.
This is the total amount required for a particular item.
10. This is the amount needed after considering what we currently have in
inventory and what we expect to arrive in the future.
11. The planned-order receipt and planned-order release are offset by this
amount of time.
12. These are the part quantities issued in the planned-order release section of
an MRP report.
13. The term for ordering exactly what is needed each period without regard to
economic considerations.
14. None of the techniques for determining order quantity consider this important
noneconomic factor that could make the order quantity infeasible.
© McGraw Hill
47
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