The Material Planning Process: Chapter 8

MRP 1:

View defines the overall planning strategy used for the material and determines how much material the company should procure.

MRP 3:

View identifies the strategy the system will use to calculate how much material is available, and it determines how the material will be produced.

MRP 2:

View identifies the times the system can use for scheduling and conveys data that the system uses to determine how to procure materials (make vs. buy)

Procurement type when a company cannot produce the materials in house

When a company does not have the material or other resources to produce materials in house, it purchases them externally. In such cases, the procurement type is set to both.

Scheduling Times: Planned delivery time and the GR processing time are used.

For externally procured materials.

Material Planning is concerned with three basic questions:

(1) What materials are required, (2) How many are required, and (3) When are they required. The inability to answer any of these questions will result in inefficiencies, lost revenues, and customer dissatisfaction.

Strategy group: Assemble-to-order (ATO)

A variation of the MTO strategy is assemble-to-order (ATO), in which an inventory of components (semifinished goods) needed to make the finished good is procured or produced to stock. The production of the finished goods is triggered by a sales order and therefore uses an MTO strategy. ATO is commonly employed in an environment in which there are a large number of possible configurations of end items.

Perform Scheduling -

After MRP determines the lot size, it performs scheduling to determine whether the material can be acquired by the required date. MRP can utilize two types of scheduling: backward scheduling and forward scheduling. The system initially uses backward scheduling and employs forward scheduling only if backward scheduling is unsuccessful. In backward scheduling, the system starts at the requirement date and subtracts the procurement time to determine the date when the procurement process must begin. The times used are the scheduling times defined in the material master, depending on the procurement type. If the procurement type in the material is in house, then the in-house production time and goods receipt times are used. In contrast, if the procurement type is external, then the purchasing department processing time, planned delivery time, and goods receipt times are used. Unlike the other times, the purchasing department processing time is not included in the material master because it is not normally material dependent. These data are defined elsewhere in the system.

Determine Procurement Proposals

After the system has completed scheduling, the next step is to determine the type of procurement proposal to generate. For materials with the procurement type of in-house, MRP always generates planned orders. Planned orders must be converted to production orders by the MRP controller. This action triggers the production process described in Chapter 6.

Procurement type for Finished and Semi-finished goods

Are typically produced in house. As a result, the procurement type for these types of materials is typically in-house production.

Procurement type for Trading Goods and Raw Materials:

Are typically purchased from vendors. Consequently, the procurement type for such materials is specified as external.

The main objective is to:

Balance the demand for materials with the supply of materials, so appropriate quantity of materials is available when needed.

BOM Selection Method:

Because several BOMs can exist for the same material, the ERP system must have a method to determine which BOM to use. The BOM selection method in the material master identifies the criteria the system should use to select the BOM. Examples of criteria are lot size and validity date.

The master data relevant to the material planning process are:

Bill of material, product routing, material master, and product group.

Excess Inventory

Buying or producing more materials than what are needed, which ties up cash until the materials are eventually used. The money tied up in inventory represents an opportunity cost to the company.

A lot size-

Is the quantity of material that is specified in the procurement proposals generated by the material planning process.

MRP technique -

Calculates requirements for a material based on it dependence on other materials. To understand the specifics of the MRP technique, we must first consider two related concepts—dependent and independent requirements.

Demand management -

Calculates revised PIRs for the materials using the PIRs from SOP (after disaggregation), actual customer orders (CIRs) from the fulfillment process, and data from the material master regarding planning strategies.

MRP Type: Common production control techniques (Consumption-based planning):

Calculates the requirements for a material based on historical consumption data. It manipulates these data to project or forecast future consumption. The company then procures materials based on this projection. Is relatively uncomplicated compared to material requirements planning. It assumes that future consumption will follow the same patterns as past consumption. In addition, it does not take into account dependencies between different materials. For example, the need for wheels depends on the need to produce bicycles. In this case, consumption-based planning is not appropriate. This is because the need for wheels is not based on its past consumption; rather, it is based on the need to make bicycles. Companies generally reserve consumption-based planning for materials of low value or significance, such as nuts and bolts.

The organizational data Relevant to the material planning process are:

Client, company code, plant, and storage location.

MRP Type: Common production control techniques are:

Consumption-based planning, materials, requirement planning12 (MRP), and master production scheduling (MRS). MRP type can also be set to "no planning," in which case the material is not included in the planning process

Material master data for the material planning

Data related to MRP and work scheduling. MRP data can be quite extensive. They are divided into four views - MRP 1, MRP 2, MRP 3, and MRP 4 - to make the data more readable. These data are relevant to both discrete and repetitive manufacturing. This is limited to data relevant to discrete manufacturing. Both MRP and work scheduling data are defined at the plant level. That is, they are specific to each plant. These data determine which strategies and techniques the company will use when planning for the materials. MRP and work scheduling data are defined at the plant level.

Demand management: Data

Demand management uses requirements data from SOP (PIRs) and the fulfillment process (CIRs). It also uses the planning strategy defined by the strategy group in the material master

Scheduling Times: In-house production time and the GR processing time are used to:

Determine procurement time for internally procured materials.

Determine Dependent Requirements

For materials produced in-house, MRP generates dependent requirements for the components that are included in the material's BOM by exploding the BOM or calculating requirements for successive levels of the BOM.

Consumption-based planning: (Forecast-based planning

Forecast-based planning uses historical data to estimate or forecast future consumption. Organizations use the forecast to determine when to order materials. The advantage of this technique over reorder point planning is that it can consider consumption patterns that are more complex than a trend line.

A bill of materials (BOM)

Identifies the materials needed to produce a finished good. In some cases a single material can have multiple BOMs. For example, a company might use different BOMs for different plants or different lot sizes. Companies also generate multiple BOMs when they update their products. For example, if GBI plans to upgrade the touring bike model with a new tire beginning January 1, then it must create a new BOM for the bike in advance with a beginning validity date of January 1. At the same time, it must set the ending validity date of the current BOM to December 31.

Determine Lot Size -

If a procurement proposal is required, the system uses the lot size procedure to determine how much material to procure. The lot size procedure is defined by the lot size key in the material master.

Stock-out

If materials are not available, the company cannot produce finished goods in a timely manner.

Strategy group: In a make-to-order (MTO)

In contrast to MTS, in a make-to-order (MTO) strategy the production of the finished goods and any needed semi-finished goods is triggered by a sales order. The company does not maintain an inventory of these materials. MTO is also referred to as sales-order-based production. In contrast to MTS, MTO is used when each product is unique. For example, if GBI introduced a line of high-end racing bikes designed specifically for individual riders, it would use MTO for these products. The bikes would not be produced until the order was received.

Scheduling Times: Common time estimates include:

In-house production time, which is the time needed to produce the material in house. Planned delivery time, which is the time needed to obtain the material if it is externally procured. GR (goods receipt) processing time, which is the amount of time required to place the received materials in storage so that they are ready for use.

Procurement type:

Indicates whether a material is produced in-house or internally (via the production process), obtained externally (via the procurement process), both, or none.

Scheduling Times: In-house production time is further divided into three time elements: (Interoperation time)

Interoperation time is the time required to move materials from one work center to another.

Master production scheduling (MPS):

Is a variation to MRP, which utilizes a process similar to MRP but focuses exclusively on the requirements for the top-level items in the BOM. Companies use MPS for the most critical finished goods to ensure that resources and capacity are available for these materials before they plan for other materials. MPS is an optional step in the planning process and is usually followed by MRP, which completes the planning process for the remaining materials.

Procurement type none:

Is appropriate for discontinued materials. At GBI, the procurement type is defined as both for finished goods, as external for trading goods and raw materials, and as in-house for semifinished goods.

The first part of the equation: The demand for materials.

Is driven by other processes. Example: Fulfillment process uses trading goods and finished goods, and the Production uses raw materials and semi-finished goods.

The outcome of the material planning process -

Is one or more procurement proposals, which can trigger either the production or the procurement process.

The second part of the equation: Supply side of the demand-supply:

Is usually the domain of the procurement and production processes. That is, materials usually are either purchased or produced.

Consumption-based planning: (Time-phased planning)

It is used in cases where vendors deliver only on specific days of the week.

A material has a dependent/independent requirement if:

Its requirement is dependent on the requirements for another material. For example, a bicycle is made of several components such as wheel assemblies and a seat. The requirement for wheel assemblies and seats is dependent on the requirement for bicycles. Therefore, wheel assemblies and seats have a dependent requirement. Typically, semifinished goods (e.g., wheel assemblies) and raw materials (e.g., seats) have dependent requirements because they are used to make other materials (finished goods or other semifinished goods). In contrast, the requirement for bicycles, a finished good, is not dependent on any other material. Instead, it is based on customer demand. Thus, bicycles, and finished goods in general, have independent requirements.

MRP vs. MPS

MRP calculates requirements for all levels of the BOM. MPS only calculates requirements for the first level items in the BOM. Requirements for all levels below the finished good are dependent on material at the next higher level.

Materials Requirements Planning: Data

Master data used in the MRP step include material master, material BOM and—optionally—the routing. Material BOMs are used to determine dependent requirements.

Scheduling Times -

One task that must be performed by the planning process is to estimate the time needed to procure the necessary materials. This calculation is based on estimates of the time required to complete the various tasks that are included in the material master and the product routing. Common time estimates include:

Scheduling Times: In-house production time is further divided into three time elements: (Processing time)

Processing time is the time required to complete operations in the work centers.

Exploding the BOM

The MRP technique is used to calculate and plan requirements for materials at all levels of the BOM. This procedure is known as: exploding the BOM.

Scheduling Times: In-house production time is further divided into three time elements: (Setup time)

Setup time is the time required to set up the work centers used in production.

Scheduling Times: In-house production time is further divided into three time elements:

Setup, processing, and interoperation.

Strategy group -

Specifies the high-level planning strategy used in production. Production planning strategies fall into three broad categories: make-to-stock, make-to-order, and assemble-to-order.

MRP Type:

Specifies the production control technique used in planning.

Strategy group: In the make-to-stock (MTS)

Strategy customer orders are fulfilled from an existing inventory of finished goods. The MTS strategy is usually employed by firms that produce a high volume of identical products. This strategy reduces the time required to fill customer orders because there is no need to wait until the materials are produced. In addition, it enables the company to produce goods at a constant rate and in optimum lot sizes, regardless of customer demand.

The work scheduling:

View contains data that determine production time such as setup, tear-down, and processing time.

Disaggregation -

The SOP step creates sales and production plans at the product group level. After this step has been completed, the plans must be translated into plans for the finished goods in the product group hierarchy. This process step is called disaggregation.

Disaggregation: Data

The data used in the disaggregation step include product group data, the production plan from SOP, and user input (Figure 8-15). The system uses the proportion factors from the product group to compute the disaggregated values for each member of the product group. Recall that product group members are other product groups or, at the lowest level, materials. The user provides parameters that determine how the plan is disaggregated

Disaggregation: Task

The essential task in this step is to translate the plans generated in the SOP step for product groups into plans for the materials contained in those groups. Disaggregation can be completed for the entire product group hierarchy or for one or more levels of the hierarchy. Further, either the production plan or the sales plan can be disaggregated. Thus, a variety of options are available at this step. Disaggregate the production plan to one or more levels or down to the material level. Disaggregate the sales plan down to the next level in the product group. The disaggregated plan is the sales plan for the next level and is used to calculate a production plan, as explained in the SOP step. Then, continue to the material level. Disaggregate the sales plan down to the material level, and calculate the production plan for each material.

Materials Requirements Planning:

The final step in the material planning process is MRP, which calculates the net requirements for materials and creates procurement proposals—to make or buy the necessary materials—that ensure that the organization will have sufficient material available to cover its requirements. A variety of activities can affect material availability in the different processes as illustrated in the following list: Procurement: purchase requisitions, purchase orders, and goods receipts Fulfillment: sales orders, deliveries, and goods issues Production: planned orders, production orders, material reservations, and goods receipts and issues These activities are called MRP elements, and they are used in the MRP step to calculate net requirements and to generate procurement proposals. Net requirements utilize all of the relevant MRP elements to calculate the quantities in the procurement proposals. We explain the net requirement calculation later in this section.

Process: The material planning process

The first step in the process is often sales and operations planning (SOP). SOP is a forecasting and planning tool that businesses use to enter or generate a sales forecast, specify inventory requirements, and then generate an operations plan. SOP typically involves finished goods. Therefore, the operations plan is, in effect, a production plan for these materials. The plan generated by SOP is called a rough-cut plan because the planning is usually at a highly aggregated level and is not very precise.

Check Planning File -

The first task in MRP is to determine which materials must be planned. Any change to an MRP-relevant material generates an entry in the planning file. Examples of relevant changes are changes to the scheduling times in the material master and changes to MRP elements such as inventory levels, purchase requisitions, and purchase orders. The materials in the planning file are coded so that finished goods are planned first, followed by components in the BOM for the finished goods, and so forth. Individual raw materials at the bottom of a BOM hierarchy are planned last.

Calculate Net Requirement -

The next step is to determine whether there is a need to procure the material. This step is accomplished by performing a net requirements calculation, which takes into account all of the relevant MRP elements to determine whether a shortage of materials exists. If more materials are needed, then procurement proposals are generated to meet the shortfall. The trigger for this calculation and the choice of the calculation method depends on the MRP type specified in the material master. If the MRP type is consumption-based planning, then the net requirements calculation determines the available stock according to the following formula: Available stock = Plant stock + Receipts

Outcomes

The outcome of SOP is one or more versions of the production plan. There are no financial implications and no material movements. Consequently, no FI, CO, or material documents are created.

Disaggregation: Outcomes

The outcome of the disaggregation step is PIRs for each planning period (e.g., week or month). These requirements are then transferred to demand management. The figure indicates that the plan for the product group deluxe touring bikes is disaggregated to the three materials in the group as material-plant specific PIRs. These data are then transferred to demand management.

Demand management: Outcomes

The outcomes from demand management are PIRs for each material included in planning. These PIRs represent requirements for the materials for specific quantities and specific dates. They are then used by the MRP step. There are no financial implications and no material movements associated with demand management, so no FI, CO, or material documents are created.

Demand management: Task

The primary task in demand management is to create revised PIRs for materials. Which procedure a company uses to calculate these requirements depends on the production planning strategy defined by the strategy group in the material master. vals.

A basic materials planning process -

The process begins with sales and operations planning (SOP), which uses strategic revenue and sales objectives established by senior management to create specific operations plans. The demand management step translate these plans into requirements for individual materials. Requirements specify how many of the materials are needed and when they are needed. These requirements are then used by the materials requirements planning (MRP) step to generate the final procurement proposals for all materials. These proposals trigger the production or procurement processes that make or buy the needed materials. Ultimately the company uses these materials to execute the fulfillment process.

Tasks -

The tasks in the sales and operations planning step include creating the sales plan, specifying inventory requirements, and creating a production plan. Sales: This row contains the sales plan. Production: This row contains the production plan, which is usually calculated by the system. Stock level: This row contains inventory levels, which are generated by the system when the production plan is calculated. Target stock: Desired stock (inventory) levels are entered in this row. Day's supply: Day's supply is the number of days the organization can expect to cover sales using only existing inventory. This number is calculated by dividing inventory by sales per workday in the period. The number of workdays is specified when the system is initially configured. This row is calculated by the system. Target day's supply: The desired day's supply is entered in this row. The sales plan is entered first. Data for the sales plan can be obtained from a variety of sources: A sales plan based on desired levels of profitability can be imported from profitability analysis, which is one of the processes in management accounting.

Consumption-based planning: (Reorder Point)

They order materials when the stock level reaches a predetermined level

Consumption-based planning: (Replenishment Lead Time)

To prevent stock levels from going below the safety stock level, the company must receive a supply of materials by the time the stock level reaches the safety stock level (point A in the figure). It takes some time for an order to be processed and for the shipment to be received. The time gap between placing an order—the reorder date in the figure—and receiving the materials—the delivery date in the figure is called.

MRP 4:

View contains data that the system uses to select the correct BOM.

Consumption-based planning: (Safety Stock)

Which is the minimum desired level of inventory. The term stock is often used as a synonym for inventory. A company typically maintains a safety stock to avoid this situation (Stock out). The material planning process monitors stock levels to prevent them from falling below the safety stock. The safety stock is specified in the material master.

Additional costs -

are related to the cost of storage, insurance, and the risk of obsolescence. In addition, the value of some materials, such as a computer components like memory and hard drives, can decrease rapidly. Thus, the longer the materials remain in storage, the more money the company loses.

Data -

the data utilized in the sales and operations step. The most critical data are a sales plan, existing inventory levels, and inventory requirements. Existing inventory levels can be transferred from inventory and warehouse management.

SALES AND OPERATIONS PLANNING -

the elements of the sales and operations planning step. SOP is triggered when the organization wishes to revise its production plan. Most organizations perform this task at scheduled intervals depending on their planning process. For example, an organization may require quarterly reviews of sales forecasts and production plans. SOP may also be triggered by unexpected events such as changes in the overall economic outlook. For example, the financial crisis of 2008 caused many companies to revise their sales forecasts downward and reduce their production levels accordingly. SOP uses data from a variety of sources to produce a production plan.