MGMT 346 Chapter 21 Material Requirements

Which of the following would be part of the inventory status record for an item?

Lead time Last year's usage Setup Order quantity Part number Safety stock Scrap allowance Standard cost Description Cycle

General description of the MRP explosion process

*1) Requirements for level 0 items, typically referred to as end items, are retrieved from the master schedule* - these requirements are referred to as *gross requirements* by the MRP program (which are scheduled in weekly time buckets) *2) Program uses the current on-hand balance together with the schedule of orders that will be received in the future to calculate the *net requirements* - *net requirements* are the amounts needed week by week in the future over and above what is currently on hand or committed to trough an order already released and scheduled *3) Using net requirements, program calculates when orders should be received to meet these requirements* - *planned-order receipt* is the schedule of when orders should arrive *4) Because there is a lead time associated with each order, the next step is to find a schedule for when orders are actually released* - done by offsetting the planned-order receipts by the required lead time - *planned-order release* is the schedule referred to this *5) After these 4 steps have been completed for all the level zero items, the program moves 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 - additional independent demand is included in the gross requirements *7) After the gross requirements have been determined, net requirements, planned-order receipts, and planned-order releases are calculated *8) This process is then repeated for each level in the bill-of-material*

Lot-of-Lot (L4L)

*CHARACTERISTICS OF L4L LOT SIZING: 1) is the most common technique 2) sets planned orders to exactly match the net requirements 3) produces exactly what is needed each week with no inventory carried over into future period 4) minimizes carrying cost 5) does not take into account setup costs or capacity limitations - *logic of lot-for-lot says* the production quantity will exactly match the required quantity, so there will be no inventory left at the end - *since there is no inventory to carry over into the next week, there is zero holding costs for lot-to-lot - *lot-to-lot requires* setup costs each week (*causes high setup costs*) when the workcenter has a variety of items worked on each week - *is not a good model to use when* setup cost is significant or other constraints force different quantities

NOTE

- *BOTH LTC and LUC have one limitation* they are both influenced by the length of planning horizon - *if planning horizon is longer*, the lot size planned will likely cover more weeks into the future

NOTE

- *MRP is most useful* in industries where standard products are made in batches from common components and parts - *MRP* determines detailed schedules that show exactly what is needed over time

Peg Record

- *MRP programs allows the creation of* "peg records" files either separately or as part of the inventory record file - shows what subassemblies are generating the requirement for a part that we order from a supplier - file created by retracing a material requirement upward in the product structure to identify each parent item that created the demand - *pegging requirements* allows us to retrace a material requirement upward in the product structure through each level, identifying each parent item that created demand

NOTE

- *When manufacturing occurs in lots (or batches),* items needed to produce the lot are withdrawn from inventory in quantities (all at once) rather than one at a time

NOTE

- *in addition to demand for end products*, customers also order specific parts and components either as spares or for service and repair - *these demands are not usually part of master production schedule, but are rather fed directly into the material requirements planning programs at appropriate levels - *added in as a gross requirement* for that part or component

NOTE

- *modular* and *super* bills-of-materials are often referred to as *planning bills-of-materials* bc they simplify the planning process

Set Matrices (softchalk)

- *once you have drawn the low-level coded product structure tree (BOM)*, you need to organize and setup the matrices required to perform the MRP calculations. - *To begin* you will need to determine the order in which the components will be "exploded.'' - *When a BOM is exploded you always begin at the* top (level 0) of the product structure tree and then work your way down the product structure tree, moving left-to-right at each level where there is more than one component. - *Before beginning the actual calculations you should also enter all of the relevant information about the components* (1) lead time, (2) beginning inventory, (3) lot size, (4) safety stock, and (5) scheduled receipts

Time Fences

- *purpose* is to maintain a reasonably controlled flow through the production system - is a company's attempt to provide a controlled window of opportunity to make changes to the master production schedule. - *defined by management as* period of time having some specified level of opportunity for the customers to make changes TYPES OF TIME FENCES: 1) *frozen* is defined as anything from absolutely no changes in one company to only the most minor of changes in another 2) *slushy* allows changes in specific products within a product group so long as parts are available 3) *liquid* allows almost any variations in products, with provisions that capacity remains about the same and there are no long lead time items involved

Which of the following statements best characterizes an MRP system?

- A system-driven logic that allows a company to tie the production functions together from a material planning and control view.

An EOQ lot sizing technique will try to minimize which of the following costs given a fairly constant demand?

- Inventory holding - Setup

Exploding the Bill of Materials (softchalk)

- Level 0 of the product structure tree is reserved for the end item so there will only be one matrix to complete at this level. - After completing level 0, you continue to perform the MRP calculations at each successive lower level.

Dependent Demand

- MRP is based on dependent demand - is caused by the demand for a higher-level item - *example*: tires, wheels, and engines are dependent demand for cars - *example for McDonald's*: buns, lettuce, frozen nuggets - determining the number of dependent demand items needed is a straightforward multiplication process - *ex:* if one part A takes five parts of B to make it, the five parts of A requires 25 parts of B (A is independent, B is dependent)

Inventory Records File

- MRP program accesses the "status" segment of the record according to specific time periods (called *time buckets*) - records are accessed as needed during program run - *input to the inventory records file* is inventory transactions - *includes* vendor identity, cost, and lead time - *MRP program performs its analysis from the top of the product structure downward, calculating requirements level by level - *inventory status file* is kept up-to-date by posting inventory transactions as they occur - *changes in the inventory transaction file occur* from (1) stock receipts, (2) stock disbursements, (3) scrap losses, (4) wrong parts, (5) canceled orders

Why might the master scheduler modify the master production schedule?

- Master schedule requires excessive resources - One or more work centers lacks adequate capacity

Which of the following are sources of demand for products in a material requirements planning system?

- Orders for specific components needed in repair - Inter-department transactions - Customer orders from sales personnel

What does MRP calculate and schedule?

- Parts - Raw materials - Supplies

For Ford Motor Company, which of the following items would appear on its master production schedule?

- Trucks - Cars - Vans - deals with end items (finished goods items sold to customers)

Available to Promise

- a feature of MRP systems that identifies the difference between the number of units currently included in the master schedule and the actual (firm) customer orders. - occurs when a company has more units in the master production schedule than firm customer orders - *powerful tool for* coordinating sales and production activities - this feature is used when the MPS is based on forecast demand, rather than the act demand

Lot Sizes

- are the part quantities issued in the planned order receipt and planned order release sections of an MRP schedule - *lot sizing makes the logistics* in the plant much more complicated - *are the production (or purchasing) quantities* used by the MRP system - *use of lot-sizing techniques* increases the "complexity" of running mRP schedules in a plant - *goal of an MRP lot sizing approach is to balance the* (1) setup or order costs and the (2) holding costs associated with meeting the net requirements generated by the MRP planning process - *for parts produced in-house*, lot sizes are the production quantities of batch sizes - *for parts purchased*, lot sizes are the quantities ordered from the supplier - *typically* meet part requirements for one or more periods - *low sizes techniques* deal with how to balance the setup or order costs and holding costs associated with meeting net requirements generated by MRP planning process

Lot Sizing (softchalk)

- are the part quantities issued in the planned order receipt and planned order release sections of the MRP schedule - *most lot sizing techniques deal with how to balance the* (1) setup or order costs and (2) holding costs associated with meeting the net requirements generated by the MRP planning process. *FOUR LOT SIZING TECHNIQUES:* 1) lot-for-lot (L4L) 2) economic order quantity (EOQ) 3) least total cost (LTC) 4) least unit cost (LUC)

Net Change MRP System

- calculate the impact of a change in the MRP data (the inventory status, BOM, or master schedule) immediately - are "activity" driven and requirements and schedules are *updated whenever a transaction is processed that has an impact on the item* - *net change enables* the system to reflect in real time the exact status of each item managed by the system

Master Production Scheduling

- deals with end items (finished goods items sold to customers) - is a major input to the MRP process - *If end item is quite large or expensive*, the master schedule may schedule "major subassemblies or components" - *challenge for master scheduler* is that all production systems have limited capacity and limited resources - *master scheduler makes decisions while responding to pressures from various functional areas such as:* (1) sales department (meet the customer's promised due date), (2) finance (minimize inventory), (3) management (maximize productivity and customer service, minimize resource needs), (4) manufacturing (have level schedules and minimize setup time

Bill of Materials (BOM) (softchalk)

- in the form of a product structure tree can help you understand how an end item is made. - *important that the BOM be low-level coded* which means that all identical items are placed at the lowest common level of the product structure tree

Super Bill-of-Materials

- includes items with fractional options *example* - super bill can specify 0.3 of a part, meaning that 30% of the units produced contain that part and 70% do not

Finished goods purchased by individuals external to the organization are considered what?

- independent demand items

Least Unit Cost (LUC)

- is a dynamic lot-sizing technique that adds ordering and inventory carrying cost for each trial lot size and divides by the number of units in each lot size, picking the lot size with the lowest unit cost - *advantage of the LUC method* is that it is a more complete analysis and would take into account ordering or setup costs that might change as the order size increases

Least Total Cost (LTC)

- is 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 - *the procedure to compute least total cost lot sizes* is to compare order costs and holding costs for various numbers of weeks - *correct selection is* the lot size where the ordering costs and holding costs are approximately equal - *if the ordering or setup costs remain constant*, the lowest total cost method is more attractive than the least unit cost bc it is simpler and easier to compute

Least Total Cost (LTC) Method (softchalk)

- is a dynamic lot-sizing technique that calculates the order quantity by comparing the carrying cost and the setup (or ordering) costs for various lot sizes and then selects the lot in which these are most nearly equal.

Material Requirements Planning (MRP) softchalk

- is a process used to determine the quantity and timing of orders for dependent demand items - *demand items are* those items whose demand depends on the demand for higher-level items - is essentially a computer software program - is best used by manufacturers who produce in lots or batches *inputs for the MRP process are* 1) the bill of materials (BOM) file 2) master production schedule (MPS) 3) the inventory records file *outputs for the MRP process are* 1) primary reports - include: planned order releases for inventory and production control 2) secondary reports - include: exception reports, planning reports, and reports for performance control.

Master Production Schedule (MPS)

- is a time-phased plan specifying how many and when the firm plans to build each end item - is a plan that specifies what will be made by a production system in the future - *items scheduled in the MPS* are referred to as "end items" and represent the products that drive the requirements for the MRP system - *is a plan for meeting all the demands for the end items*, including (1) customer demand, (2) demand for replacements, and (3) any other demands that might exist - *example* the aggregate plan for a furniture company may specify the total volume of mattresses it plans to produce over next month or next quarter - *MPS does the next step* and identifies the exact size of the mattresses and their qualities and style - *MPS specifies* all the mattresses sold by the company - *MPS states* the period by period (weekly) how many and when each of these mattress types is needed

Least Unit Cost (LUC) Method (softchalk)

- is also a dynamic lot-sizing technique that adds ordering and inventory carrying cost for each trial lot size and divides by the number of units in that lot size, then choosing the lot size with the lowest unit cost.

Bill-of-Materials (BOM)

- is the complete product description, listing the materials, parts, and components, and also the sequence in which the product is created - *BOM file* is one of the three main inputs to the MRP program (other two are master schedule and inventory records file) - *input to the bill-of-materials file* is engineering design changers - is often called the *product structure file* or *product tree* bc it shows how a product is put together - *contains information to identify* each item and quantity used per unit of the item of which it is a part - *files often list parts* using indented structure, helping clearly identify each item and manner in which it is assembled bc each indentation signifies the components of the item

Explosion Process

- is the process of calculating the exact requirements for each item managed by the system (material requirements planning program) - *working from the top level downward in the bill-of-materials, requirements from the parent items are used to calc the requirements for component items - *consideration is taken* of current on-hand balances and orders that re scheduled for receipt in future - *explosion calculations* are performed each week or whenever changes have been made to the master schedule

Modular Bill-of-Materials

- is the term for a buildable item that can be produced and stocked as a subassembly - is a standard item with no options within the module - many end items that are large and expensive are better scheduled and controlled as modules (subassemblies) - *advantageous to schedule subassembly modules when*the same subassemblies appear in different end items - *use of a modular bill-of-material* simplifies the scheduling and control and makes it easier to forecast use of different modules - *benefit* in using a modular bills is that if the same item is used in a number of products, then total inventory investment can be minimized

Lumpiness

- means that the requirements tend to bunch or lump rather than having an even dispersal - *results* from the multiplication of calculating dependent demand, the requirements of dependent demand items tend to become more and more "lumpsy" as we go farther down into the product creation sequence.

Low-Level Coding

- occurs when all identical parts occur at the same level for each end product, so the total number of parts and materials needed for a product can be computed easily

Material Requirements Planning (MRP)

- the logic for determining the number of parts, components, and materials needed to produce a product - *ties* the production functions together from a material planning and control view - *three sources of information for the MRP:* (1) inventory records, (2) master schedule, (3) bill-of-material - *MRP is logical, easily understandable approach* to problem of determining the number of parts, components and materials needed to produce each end item - *provides* the schedule specifying when each of these items should be ordered or produced - *MRP systems tend to work best in companies where* a number of products are made in "batches" using the same productive equipment - *MRP is most valuable to companies involved* in assembly operations - *MRP is least valuable to companies involved* in (1) make-to-order fabrication, (2) companies that produce a low number of units annually, or (3) companies producing complex, expensive products requiring advanced research and design

NOTE

- the logic used by MRP is often referred to as explosion calculations bc the requirements shown in the MPS are "exploded" into detailed schedules for each item managed by the system

MRP system determines

- the production schedule to identify each item - the period when the schedule is needed and the appropriate quantities

Economic Order Quantity (EOQ) Model

- this model explicitly balances setup and holding costs - EOQ model requires either fairly constant demand or safety stock must be kept to provide for demand variability - *uses* an estimate of total annual demand, the setup or order cost, and the annual holding cost - *EOQ was not designed for* a system with discrete time periods such as MRP - *EOQ assumes* that parts are used continuously during the period - *lot sizes generated by the EOQ model* DO NOT always cover the entire number of periods

MRP Calculations (softchalk)

- to determine the planned order releases for components, the process of *"exploding" the bill of materials* must be performed

In which of the following product manufacturing scenarios, would MRP provide high benefit?

- trucks - appliances - motors

Inputs to a MRP computer program

1) *master production schedule* states the number of items to be produced during specific time periods 2) *bill-of-material* file identifies the specific materials used to make each item and correct quantities of each 3) *Inventory records* file contains data such as the number of units on hand and on order 4) Three sources, (1) master production schedule, (2) bill-of-materials file, (3) inventory records file, become the data sources for the material requirements program

Two Sources of Product Demand for end items

1) Firm Customer Orders Known Customers Who Have Placed Specific Orders - such as those generated by sales personnel or from interdepartmental transactions - orders usually carry promised delivery dates - no forecasting involved in these orders (simply add them up) 2) Aggregate Production Plan - reflects the firm's strategy for meeting demand in the future - is implemented through the detailed master production schedule

To ensure good master scheduling, the master scheduler must

1) Include all demands from product sales, warehouse replenishment, spares, and interplant requirements 2) Never lose sight of the aggregate plan 3) Be involved with customer order promising 4) Be visible to all levels of management 5) Identify and communicate all problems *issues a master scheduler must consider* 1) never lose sight of the aggregate plan 2) trade-off manufacturing, engineering and marketing conflicts 3) be involved with customer order promising

Four Lot-Sizing Techniques

1) Lot-for-Lot (L4L) 2) Economic Order Quantity (EOQ) 3) Least Total Cost (LTC) 4) Least Unit Cost (LUC) - *holding costs in lot-sizing techniques* are charged only to ending inventory for the period, NOT to the average inventory as in the EOQ model - *lot-size techniques are used to* balance the fixed costs and variable costs that vary according to the production lot size

Flexibility within a Master Production Schedule depends on several factors (time fences)

1) production lead time 2) commitment of parts and components to a specific end item 3) relationship between the customer and vendor 4) amount of excess capacity 5) reluctance or willingness of management to make changes

MRP record contains

1.* gross requirements* - are the total amount required for a particular item - can be from external customer demand and from demand calculated due to manufacturing requirements *2. scheduled receipts* - represent orders that have already been released and that are scheduled to arrive as of the beginning of the period - an event becomes a schedule receipt when the paperwork on an order has been released *3. projected available balance* - is the amount of inventory expected as of the end of a period - *calculated by* (projected available balance from the last period) - (gross requirements from this period) + (scheduled receipts and planned order receipts) - *in period zero* projected available balance is on-hand inventory - safety stock *4. net requirements* - is the amount needed when the *projected available balance* plus the *scheduled receipts* in a period are not sufficient to cover the *gross requirement* *5. planned order receipts* - is the amount of an order that is required to meet a net requirement in the period *6. planned order release date - is the planned order receipt offset by the lead time

Industry Applications and Expected Benefits of MRP

INDUSTRY TYPE: 1) *Assemble-to-Stock* EXAMPLE: - combines multiple components parts into a finished product, which is then stocked in inventory to satisfy customer demand - (ex: watches, tools, appliances) EXPECTED BENEFIT: High INDUSTRY TYPE: 2) *Make-to-Stock* EXAMPLE: - items are manufactured by machine rather than assembled from parts. - these are standard stock items carried in anticipation of customer demand - (ex: piston rings, electrical switches) EXPECTED BENEFIT: Medium INDUSTRY TYPE: 3) *Assemble-to-Order* EXAMPLE: - a final assembly is made from standard options that the customer chooses - (ex: trucks, generators, motors) EXPECTED BENEFIT: High INDUSTRY TYPE: 4) *Make-to-Order* EXAMPLE: - items are manufactured by machine to customer order - These are generally industrial orders - (ex: barings, gears, fasteners) EXPECTED BENEFIT: Low INDUSTRY TYPE: 5) *Engineer-to-Order* EXAMPLE: - items are fabricated or assembled completely to customer specifications - (ex: turbine generators, heavy machine tools) EXPECTED BENEFIT: High INDUSTRY TYPE: *Process* EXAMPLE: - includes industries such as foundries, rubber and plastics, specialty paper, chemicals, paint, drug, food processors EXPECTED BENEFIT: Medium

At any point in time, an MRP system can reference the ____ for instantaneous parts availability to help meet gross requirements.

inventory records file

Offsetting the planned-order receipts by the required lead time creates the planned-order _______

release

In an attempt to save ______ costs, the inventory generated with the larger lot sizes needs to be stored.

setup