MATERIAL REQUIREMENTS

PLANNING
 AIMS OF THE CHAPTER
In this chapter, we still discuss material requirements planning
(MRP), which is based on the idea that we can use planned
production schedule to find the demand for materials.
MRP starts with the master schedule and then uses a bill of
materials to transform this into a timetable of required materials.
We can use this to schedule orders sent to suppliers and related
internal operations.
This chapter emphasizes on dependent demand methods where
the demand for materials is found from production plans; material
requirements planning, which explodes a master schedule to give a
timetable for supplying materials. extensions of the basic MRP
method.
 LEARNING OUTCOMES
Discuss some of the limitations of independent demand
methods
Describe the characteristic approach of material
requirements planning (MRP)
Use MRP to timetable orders and operations
Outline the benefits and problems of using MRP
Adjust MRP schedules with batching rules
Add feedback to check for capacity and other problems
Discuss some extensions to MRP, including MRP II,
distribution/logistics resource planning (DRP/LRP), and
enterprise resource planning (ERP)
 LIMITATIONS OF INDEPENDENT DEMAND METHODS
They assume that demands for items are independent. In reality, there are
many circumstances – not just raw materials for production – where there is
some mechanism linking demands.
They assume that demand is relatively stable, or follows some other pattern
that can be accurately forecast from historical figures. But historical figures may
be irrelevant to the future, or it may be difficult to identify a realistic pattern.
They assume that stock should always be available, even during periods when
there is no expected demand.
They forecast demand from historical values even when future demand can be
found with certainty from production plans or some other source.
They are not really suitable for forward planning (especially over the longer
term) as all the variables, calculations and decisions are based on fairly recent
historical values.
Variables, such as the lead time, demand and costs, are assumed to be outside
the organization’s control. In reality, they can be varied by negotiation, using
different suppliers, expediting, emergency procedures, and so on.
LIMITATIONS OF INDEPENDENT DEMAND METHODS (CONT’D)
Cost are assumed to be fixed, even though the reorder cost, for example, can
vary with the supplier, distance to travel, procedure for ordering, people involved,
etc.
Costs rely on accounting conventions and estimates. This is obvious for shortage
costs, but is also true of holding and reorder costs.
Variables such as lead time are assumed to follow known distributions, but
these can be difficult to identify.
Even if a high service level is set for all materials, a product using many
materials is unlikely to find all of them in stock at the same time. When a service
level of 99% is used for parts, a product that is made from 100 parts has a
probability of 0.99100 = 0.37 of finding all of them in stock.
Informal procedures affect operations – perhaps exerting pressure to use
expediting and emergency procedures, or keeping unofficial safety stocks.
The models accept the status quo and give no incentive or mechanism to find
improvements.
 APPROACH OF MRP
In its basic form material requirements planning (MRP) takes a
master schedule and uses this to design a detailed timetable for
ordering materials.
The master schedule shows the number of units of an item made,
typically in each week.
MRP takes this, together with a list of the materials needed for
each unit, and develops a timetable for the supply of materials.
These materials are either bought in or made internally, so the
main outputs from MRP are:
timetables to show when materials are needed
timetables to show when bought-in materials should be
ordered
timetables for operations needed to make materials internally
 MASTER PRODUCTION SCHEDULING (MPS)
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.
 MASTER PRODUCTION SCHEDULING (MPS)
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.
 MASTER PRODUCTION SCHEDULING (MPS)

Aggregate plan shows

overall quantities to
produce – without
specifying type.

MPS shows
quantities of each
type, with
information about
the production time
frame.
 SIGNIFICANCE OF MRP
The MRP approach matches the supply of materials directly to the
known demand, so there is only enough stock to satisfy this demand.
In contrast, the alternative independent demand methods keep stocks of
materials that are high enough to cover any likely demand.
An important point is that the two approaches give different patterns of
material stocks.
With MRP stocks are generally low, but rise as deliveries are made just
before production starts. Stock is then used during production and the
amount held declines until it returns to a normal, low level. This pattern is
shown in Figure 1(a).
With independent demand methods stocks are not related to production
plans, so higher levels are kept in case they are needed. These are reduced
during production, but are replenished as soon as possible, to give the
pattern shown in Figure 1(b).
An obvious benefit of MRP, then, is a lower average stock level.
Figure 1: Comparison
of Stock Levels
 USE OF MRP
MRP was originally developed for manufacturing industry.

Although it is now used more widely we will, for

convenience, stick to the original vocabulary which talks of
stocks of material (parts and components) being delivered to
make products.
MRP APPLICATION AND BENEFITS
 THE MRP PROCEDURE
MRP needs a lot of information, with three main sources being
the master schedule, the bill of materials, and inventory
records.
1. The master schedule shows the number of units of a
product to be made in each period.

2. The inventory records show the current state of the stocks.

3. The bill of materials, or parts list, is an ordered list of all

the materials needed to make a product, and also the
order in which the materials are used.
 THE BILL OF MATERIALS (BOM)
Contains the complete
product description, Often called the product
listing the materials, structure file or product
parts, and components tree because it shows how
along with the sequence a product is put together.
in which the product is
created.
The BOM
shows how
the product
is put
together.

Modular bill of materials Super bill of materials

is a buildable item that includes items with
can be produced and fractional options.
stocked as a subassembly.
THE BOM STRUCTURE - 1
THE BOM STRUCTURES - 2
THE BOM HIERARCHY
 THE BOM EXAMPLE
Suppose that a company assembles desks from one top and
four legs.
The finished product (desk) is level 0 and the items (top and
leg) that are used directly to make the finished product or the
level 0 item (desk) is level 1.
Item/Items that are directly used to make the level 1
item/items is/are level 2 and so on.
 THE BOM EXAMPLE

Figure 2: The initial BOM for a Desk

 THE MRP PROCEDURE
The master schedule shows that six desks are to be made in the week
beginning 21 June. MRP can ‘explode’ the master schedule using the bill of
materials to give details of the materials needed.

The six desks need 6 tops and 24 legs, and these have to be in stock
ready for assembly by 21 June.

These are actually the gross requirements.

We may not have to order all of these, as the inventory records may
show some already in stock, or with outstanding orders that are due to
arrive shortly.

If we subtract these from the gross requirements we get the net
requirements for materials, which are the amounts we have to order.

We need 24 desk legs by 21 June, but if we already have four in stock
and an order of 12 that is due to arrive shortly, our net requirement is for
24 − 4 − 12 = 8.
 THE MRP PROCEDURE (CONT’D)
For each material:

Gross requirements = number of units made × amount of material

for each unit
Net requirements = gross requirements − current stock − stock on
order
The next step is to find the time to place the orders.
For this we need the lead times and we place orders this lead time
before the materials are actually needed.
If we buy the legs from suppliers who give a lead time of three
weeks, we need to place orders at the beginning of June. This is
called time shifting.
 THE MRP PROCEDURE (CONT’D)
If we have no stocks of desk tops but buy them from suppliers
who give a lead time of two weeks, we have to order 6 by the 7
June. This gives the following timetable:
1 June: order 8 legs
7 June: order 6 tops
21 June: start assembly of desks

Before finalizing these orders we have to consider any other

relevant information, such as minimum order sizes, discounts,
minimum stock levels, variation in lead time, and so on.
When we take all of this into account we can get detailed
timetable for orders. This procedure is shown in Figure 3.
THE MRP PROCEDURE (CONT’D)

Figure 3: The MRP procedure

THE MRP CALCULATIONS

Figure 4: The MRP calculations

 THE EXPANSION OF THE BOM

Figure 5: The expansion of the BOM for the Desk

 EXAMPLE
MarkMobil Ltd. assembles supermarket trolleys from a main body
and four wheel assemblies. They make the body themselves from a
body kit and two handle kits. The lead times are one week for
assembling trolleys, three weeks for buying wheels, one week for
assembling the body, three weeks for buying the body kit and one
week for the handle kit. MarkMobil receive orders for 100 trolleys
to be delivered in week 8 of a production period, and 200 trolleys in
week 10. It has stocks of 20 complete trolleys, 110 bodies and 200
wheels, but no body kits (which must be bought in batches of 200)
or handles (which must be bought in batches of 400). Design a
timetable for production of the trolleys.
 SOLUTION
The BOM:

Figure 6: The BOM for the Trolley

 SOLUTION (CONT’D)

Figure 7: The MRP calculations for the problem

 SOLUTION (CONT’D)
There are no more levels of materials, and we know of no special
conditions, so we can finalize the timetable of events as:
week 4: order 120 wheels
week 5: order 200 body kits
week 6: order 800 wheels
week 7: start assembling 80 trolleys, receive 120 wheels, order 400
handle kits
week 8: finish 80 trolleys, start assembling 170 bodies, receive 200
body kits, receive 400 handle kits
week 9: start assembling 200 trolleys, receive 170 bodies, receive
800 wheels
week 10: finish assembly of 200 trolleys
 Example
The master schedule of Parsival Fabricators is designed to meet demands of 90
units of a product in week 7 of a cycle, 120 units in week 8 and 80 units in week
11.
They currently have 20 units of the product in stock, but the company always
keeps 10 units in reserve to cover emergency orders.
Each unit of the product takes two weeks to assemble from 2 units of
component B and 3 units of component C.
Each unit of component B is made in one week from 1 unit of part D and three
units of part E.
Component C is assembled in 2 weeks from two units of material F.
Lead times for D, E and F are 1, 2 and 3 weeks respectively.
Current stocks are 100 units of B, 200 of C, 80 of D, 720 of E and 200 of F.
Parsival keep minimum stocks of 40 units of D, 200 of E and 100 of F.
The minimum order size for E is 600 units, while F can only be ordered in
discrete batches of 200 units.
Outstanding orders for 20 units of D will arrive in week 4, 600 units of E will
arrive in week 5, 400 units of F will arrive in week 4, and 40 units of C will arrive
in week 6.
Design a timetable of activities for the company.
SOLUTION
SOLUTION (CONT’D)
SOLUTION (CONT’D)
SOLUTION (CONT’D)
 SOLUTION (CONT’D)
The overall timetable of activities is:
week 4: start making 60 of B and 360 of C; place orders for 240 units
of D and 400 units of F; orders arrive for 20 units of D and 800 units
of F
week 5: start making 80 of A and 240 of B; finish 60 units of B;
orders arrive for 40 units of C, 240 units of D and 600 units of E
week 6: start making 120 of A; finish 240 units of B and 360 units of
C; place order for 600 units of E
week 7: finish making 80 units of A; start making 240 of C; place
order for 160 units of D; order arrives for 400 units of F
week 8: finish 120 units of A; start making 160 units of B; orders
arrive for 160 units of D and 600 units of E
week 9: start making 80 units of A; finish 160 units of B and 240
units of C
week 11: finish 80 units of A
 Example
The master schedule of Parsival Fabricators is designed to meet demands of 90 units
of a product in week 10 of a cycle, 120 units in week 11 and 80 units in week 15. Also
80 units of part D is required in week 10.
They currently have 20 units of the product in stock, but the company always keeps
10 units in reserve to cover emergency orders.
Each unit of the product takes two weeks to assemble from 2 units of component B
and 3 units of component C.
Each unit of component B is made in one week from 1 unit of part D and three units
of part E.
Component C is assembled in 2 weeks from two units of part F.
Part F is assembled in 1 week from 1 unit of part D and one unit of part E.
Lead times for D, E and F are 1, 2 and 3 weeks respectively.
Current stocks are 100 units of B, 200 of C, 80 of D, 720 of E and 200 of F.
Parsival keep minimum stocks of 40 units of D, 200 of E and 100 of F.
The minimum order size for E is 600 units, while F can only be ordered in discrete
batches of 200 units.
Outstanding orders for 20 units of D will arrive in week 4, 600 units of E will arrive in
week 5, 400 units of F will arrive in week 4, and 40 units of C will arrive in week 6.
Design a timetable of activities for the company.
 OUTPUTS OF THE MRP
Timetables of operations needed to achieve the master schedule,
particularly times for internal production to make materials;
A timetable of orders for materials from external suppliers;

Changes to previous orders – whenever the master schedule is

revised, or any other changes are made, the MRP schedules have to
be updated. The MRP system can report changes to order
quantities, cancelled or changed orders, changes of due dates, and
so on;
Exceptions – if the MRP system cannot deal automatically with
some unusual circumstances it will report these as needing
management action. Typical problems include infeasible schedules,
late orders, overloaded capacity, excess scrap, requests for non-
existent parts, shortage, and so on;
 OUTPUTS OF THE MRP (CONT’D)
Performance reports – which show how well the system is
working, including measures for investment in stocks, inventory
turnover, costs and number of shortages;
Planning reports – which give information for longer-term
planning decisions, including capacity requirements and achievable
objectives;
Records of inventory transactions – keeping accurate records of
current stocks, planned positions and monitoring progress.
 PROBLEMS WITH MRP
In contrast to the advantages, there are also some problems with
MRP.
The most obvious is the amount of information and calculation
that it needs.
MRP starts with a detailed master schedule, so it cannot be used
if:
there is no master schedule
the master schedule is not designed far enough in advance
the master schedule is inaccurate, not showing what actually
happens
plans are changed frequently
 INCREASING FLEXIBILITY OF THE MRP
An organization can increase flexibility of the MRP by keeping
some safety stocks, or regularly updating of the MRP schedule. The
updating can be done in two ways:

First, have a complete MRP run every period, typically every week.

This is ‘regenerative MRP’ and has the advantage of regularly

taking into account all new information.
On the other hand, it has the disadvantage of needing a lot of
processing and perhaps giving major changes.
 INCREASING FLEXIBILITY OF THE MRP (Cont’d)
Second, update the schedules when there are changes.

This is ‘net change MRP’ which can be a limited run to show the
effects of changes.
This updating is done more frequently (typically daily) and has the
advantage of reducing the amount of processing by only
recalculating and reporting changes from previous periods.
On the other hand, it has the disadvantage of allowing frequent
changes that can make the process seem ‘nervous’.
 DISADVANTAGES OF THE MRP
Reduced flexibility to deal with changes
Needs a lot of detailed and reliable information
 Involves a lot of data manipulation
Systems can become very complex
Assumes that lead times are constant and independent of the
quantities ordered
Ignores the order in which materials are really made and assumes
that they are made in the order specified by the bill of materials
Using MRP to schedule the production of parts can give poor
results
The lot sizes suggested by MRP can be inefficient
MRP may not recognize capacity and other constraints
Can be expensive and time-consuming to implement
 Adjusting the MRP Schedule
In the calculations that we have described, we placed an order
exactly to cover the net requirement in a period.
This would often suggest a series of frequent, small orders –
perhaps with an order every period – which are inconvenient and
expensive.
It might be better to combine several of these small orders into a
few larger batches. This is called batching or lot sizing, and there are
four common approaches.
 BATCHING ORDERS
Lot-for-lot – where order quantity exactly match to the net
requirement suggested by MRP for each period. This is the method
we have used so far. It minimizes the amount of stock, but can give
high ordering, set-up and administration costs.
Fixed order quantity – where an order size is determined that is
convenient, and always order this same amount. This might be a
truckload, a container load, an economic order quantity, or some
other convenient size.
Periodic orders – where the order quantity combine the net
requirements over some fixed number of periods, and place regular
orders for different quantities. An organization might, for example,
place an order every month. Working to such a regular timetable
gives the benefits of simplicity and making operations routine.
 BATCHING ORDERS
Batching rules – which use some specific procedure to calculate
the best pattern of orders. Typically they look for the combination
of orders that gives the minimum overall cost.
 EXAMPLE
An MRP schedule gives the following pattern of demand for an item.
If the reorder cost is £150 and the holding cost is £2 a week, find the
costs of different batching policies over the 10 weeks.

Week 1 2 3 4 5 6 7 8 9 10

Demand 20 10 20 25 0 15 10 20 0 30
 SOLUTION
We can compare the costs of four different approaches to batching.
The stock patterns for these are shown in Figure 8. The average
stock in each period is the average of the opening and closing
values.
 SOLUTION (CONT’D)

Figure 8: Comparison of batching rules

 Cost Calculations
Lot-for-lot - Eight deliveries and an average stock level of 7.5 units
give a total cost of 8 × 150 + 75 × 2 = £1,350.

Fixed order quantity - The average demand is 15 units a week, so a

useful approach is to calculate the economic order quantity as √(2 ×
150 × 15/2) = 47.4, and round this up to 48. Then four deliveries and an
average stock of 25.3 units give a total cost of 4 × 150 + 253 × 2 =
£1,106.

Periodic - If we assume a regular order once every 4 weeks, we get

three deliveries and an average stock of 25 units, giving a total cost of 3
× 150 + 250 × 2 = £950.

Batching rule - Using the rule we derived in Chapter 4 with 2 × RC/HC

= 2 × 150/2 = 150 gives three deliveries and a total cost of 3 × 150 + 170
× 2 = £790.
 CLOSED-LOOP MRP
Combining several smaller orders for an item into fewer, larger ones
can reduce costs, but they make the demand for following levels of
materials even more sporadic.
This effect might be particularly severe when several products use
the same materials, when MRP systems will link the different products
and generate combined orders, but give very sporadic results.
Operations and procurement have to deal with this and they can
meet new problems.
A supplier, for example, might have limited capacity and prefer level
demand. They may not be able to cope with the peaks and troughs of
sporadic demand unless they get adequate warning.
It is obviously best to anticipate potential problems with bottlenecks
during the planning stage, and then schedules and capacity can be
adjusted before the plans are finalized.
 CLOSED-LOOP MRP (CONT’D)
To solve the problem, we introduce feedback between capacity
planning and MRP. This is most useful when:

Proposed plans would break some capacity constraint; then

the MRP system detects the overload and initiates early
rescheduling. In this way, the MRP system takes an active part in
capacity planning.
Operations are interrupted; the control system detects this
and updates the master schedule. But it must work with the
MRP system to see what production is feasible with the
materials available. Now MRP forms part of the control system.
 CLOSED-LOOP MRP (CONT’D)
Systems with this kind of feedback are called closed-loop MRP.

The initial MRP run gives schedules for the supply of materials,
and these are translated into required capacities.
If available capacity cannot meet the demand, the system makes
changes by adjusting capacity to meet the higher demand,
rescheduling to make demand fit into the available capacity, or
some compromise between these two.
 EXTENSIONS TO MRP
If an organization finds that the timing of deliveries is unreliable, it
can add a safety time and order materials some time before they
are actually needed.
If quality is a problem, it can add some safety stock to replace
materials that do not meet quality standards.
 If materials are cheap, it can use some minimum order size.

Simple rules of this kind have been developed to deal with many
different problems. They might raise costs, but this price is worth
paying to guarantee uninterrupted operations – especially when
inflexibility is a continuing problem with MRP.
 EXTENSIONS TO MRP (Cont’d)
MRP might be applied in other types of organizations than
manufacturing organizations.
It might be more difficult to apply MRP in service organizations as
these organizations usually do not have detailed master schedules
to define production/service operations.
Nonetheless, many services have successfully adopted MRP.
Hospitals, for example, use MRP to schedule surgical operations
and make sure that supplies and equipment are ready when
needed.
They design a master schedule of planned surgical operations; the
bill of material contains information about the facilities, equipment
and resources needed for each type of surgery.
The inventory file contains information about theatres, staff,
surgical instruments, disposable materials, reusable instruments,
and so on.
 EXTENSIONS TO MRP (Cont’d)
In the same way, hotels, universities, airlines, football clubs,
conference organizers, film companies, and a whole range of other
services now use the principles of MRP.
We have seen how closed-loop MRP adds feedback to avoid
potential problems with capacity but it really does much more than
this.
With capacity requirements planning it becomes a way of
extending the MRP approach further into an organization.
It extends MRP beyond the basic purchase of materials, and into
more central areas of production and capacity planning.
The next moves in this direction were again originated by
manufacturers, and have been brought together under the umbrella
of manufacturing resource planning.
 Manufacturing Resource Planning
MRP gives schedules for the arrival of materials needed by
operations, and closed-loop MRP makes sure that there is
enough capacity actually to supply these materials.
But materials are only one resource. As well as scheduling
materials, organizations have to schedule people, equipment,
facilities, finances, logistics, and any other resource that they
use.
Surely we can use the same MRP approach for these other
resources.
 Manufacturing Resource Planning (Cont’d)
We start with MRP schedules for the delivery of materials, and
hence the timing of operations within the organization to supply the
materials.
When we know the timetables for these operations, we can use
them to schedule all the equipment needed.
When we have timetables for the equipment, we can use them to
schedule the people who work on them.
When we have timetables for the people, we can use them to
schedule other facilities, such as catering and transport.
We can go even further than this. If we know when we are getting
deliveries, we can schedule transport; looking at the finished goods,
we can plan delivery to customers and distribution.
This integrated system for scheduling resources is resource
requirements planning.
 Manufacturing Resource Planning
In principle, there is no reason why we should limit the use of this
MRP approach to scheduling basic resources.
Eventually, we would have a completely integrated system that
would use the master schedule as the basis for planning all the
activities within an organization (resource scheduling, finance,
logistics, marketing, human resource management, etc.).
This is the aim of manufacturing resource planning or MRP II.

It connects schedules for all activities back to the master

schedule.
 Working with Other Organizations
The systems we have described so far are all used within an
organization.
But the benefits of integration along the supply chain is huge.

This allows organizations in a supply chain to improve their overall

performance by co-operating, exchanging information and
coordinating their operations.
So, the next extensions to MRP is the coordination of the
operations of different organizations within a supply chain. This is
the basis of Enterprise Resource Planning (ERP).
 ERP
ERP uses the characteristic approach of MRP, but now focuses on
the whole supply chain. It extends MRP beyond a single
organization, to include suppliers and customers.
Suppose that a manufacturer ran its own MRP and found that its
master schedule needed 100 units of some materials at the
beginning of May.
If its MRP system is linked to the supplier’s system, the supplier
can now start scheduling activities to make sure these materials are
ready in time.
Then the supplier, in turn, could link its system to its own
suppliers, and so move backwards through the supply chain,
creating an integrated planning system.
ERP obviously relies on complete trust between organizations,
and a free flow of information. This is relatively easy to organize,
using the internet, digital communication, and e-commerce.
 Developing Stages of MRP
Starting with material requirements planning, where the schedules
for materials are found from the master schedule
 Adjustments to MRP to allow for batching, safety stocks, combined
orders, etc.
Closed-loop MRP including feedback to make sure that the proposed
schedule is feasible and presents no major problems
Resource requirements planning extends the MRP approach to other
resources
Distribution resource planning schedules the flow of materials
through a supply chain
Manufacturing resource planning extends the approach to include
other functions within an organization
Enterprise resource planning extends the approach to other
organizations in the supply chain
THE END