Material Requirement Planning

A basic concept used in planning dependent demand is called Backward Scheduling. This is simply the process of taking the delivery date required by the customer, and working back to identify when the items needs ordering from the supplier. Material Requirement Planning (MRP) technique is generally used for all types of dependent demand. The basic concept is to have stock when it is needed and to have none the rest of the time. With dependent demand, the size and timing of the requirements are known from the next level down the supply chain. MRP can therefore gives good control. MRP is used extensively in manufacturing because there can be several levels of dependent demand in the bill of material of a product (for example, from main assemblies made of sub-assemblies which are made up from components, either purchased externally or manufactured within the company).

MRP is integrated in the computer inventory systems with sales and financial plans of the company. MRP is only able to function effectively when the following are available:

• A Master Schedule of planned supply to customers for each product, projected within the planning horizon (usually one to two years of planning horizon are adequate) to permit ordering of bought-out items, raw materials and components.

• A well-defined Bill of Material, showing purchased items and manufactured components to identify what to make and what to buy.

• Realistic Lead Times for the purchase or manufacture of all parts.

• Accurate records of all inventory items (including std. unit cost, unit of measurement, quantity on-hand, work-in-progress (WIP), backorders and due dates).

• Purchase Order Quantities and the associated Due Dates.

• Suppliers information (supplier names, unit purchase price, materials lead time)

• Safety Stock requirement, Reorder level.

• Lot-Sizing Policies for all parts (lot-for-lot ordering, economic order quantity, fixed-period ordering)

• Demand Forecasts for each inventory item, including partially or entirely firm customer orders.

• Routings (only needed in capacity requirements planning)

Read more.. on MRP Explosion Process and Functions.
 

MRP is an integrated  business planning tool but we can also use it to calculate material supply in Excel spreadsheet. Figure 8.1 shows a procedural framework of the Material Requirement Planning. It starts with Manufacturing Resource Planning (MRP II) which is a long-term planning, identifying what range of products are offered, when to introduce to market, what market focus, and inventory policy decisions (LIFO, FIFO, etc). This cascades down to the medium-range Aggregate Production Planning that is done in the corporate's Sales and Operations Planning Process. This level of planning, usually on monthly buckets, is primarily concerned with establishing production rates, work force sizes, initial inventory investment levels with "blanket" orders released to suppliers ranging from 6 to 12 months into the future.

Figure 8.1  Material Requirement Planning and the production functions framework

Master Production Schedule takes the aggregate production plan (with its implied constraints) and breaks down into a production schedule of specific family of products to be produced in specific periods (in days or weeks) at each manufacturing plants. I have seen Master Scheduler consistently using unrealistic production rates (for example, using production output rate that were in fact achieved no more than only twice in the past 12 months). This caused a lot of overtime planning at intervals when actual output are consistently in danger of not meeting weekly output target. Don't forget that, master schedule besides driving material buying ahead, is also used to provide delivery dates to customer orders.

The Backward Scheduling process starts by identifying the customer orders qty required and due dates in the Master Schedule, deciding what volume of the production output for which customers. The Master Schedule run will check for available stock. Question arises as to if there are Unrestricted On-Hand Balances, how far ahead on the schedule will the inventory on-hand balance last? If there is no stock available, then what has to be purchased and by when - the stock item itself or are there other components that are needed? An accurately structured Bill of Material (BOM) maintained in the inventory systems provides all the answers. MRP explodes through and until the last level of BOM, and provides allocation of components and raw material to each master scheduled product items. When there are inadequate components or raw materials, MRP creates Recommended Plan Orders to the scheduler or planners. In addition, information on how long or when the Planned Supply Order Quantities can be received into stock, where it will be received (the supply lead times, routings, location, bin), Inventory Records (unit of measurement, stock transfers data, physical count stock adjustment, write-off) are also needed to be input into the systems.

Here is a question of how far into the future to prepare a Master Schedule. Each item that can appear on the master schedule will have a cumulative lead time. For example, the lead time to purchase its raw materials, manufacture them into components, metal treatment process, sub-assemblies, and so on. The longest of these Cumulative Lead Times or Critical Path is the Minimum Planning Horizon for the Master Schedule.

The logic of Material Requirement Planning

MRP calculation is actually simple. It sums up all the demand requirements for each stock item within each time bucket (day or week). Inventory balance is deducted from this total demand. If the inventory is sufficient to cover the demand, then the same calculation is carried out for the next period. If the inventory on-hand is insufficient, then purchase order is needed.

Closing stock balance = (Beginning stock balance + Purchase receipts) - Demand

If closing stock balance is above zero or safety stock, MRP repeats calculation for next time bucket (day or week). If closing inventory balance is below zero or safety stock level, MRP will recommend to place enough PO quantity to replenish. This netting-off process is carried out for all the periods of the top-level process first, and then it is repeated for the sub-assemblies and sub-levels of components if there is one in the bill of material. At the end of MRP run, inventory system will provide a buy list of parts of when to place purchase orders, how many, and when the order quantities must be received into stock. If there is a sub-level component structured in the BOM to be produced within the factory or in another location, MRP will also provide manufacturing plan of what to be produced, when to begin, and to be done by when.

The Logic of Master Scheduling

Earlier on I mentioned that master schedule is planned base on the aggregate production plan. A typical master schedule will show you a list of what final products are to be produced (front-end) or delivered (back-end orders fulfillment) in each week (or each day for JIT business), at which production sites or with a shared production output from different plants if there are capacity constrains. For master scheduling process to work, the scheduler converts the existing demand forecast into firm customer demand by inputting the orders on the master schedule. The logic of this is that it is assuming the forecast is to be filled up by real customer orders to the forecasted level each week. The master scheduler publicizes this demand plan and is responsible for making all the weekly schedules achievable. Table 8.1 shows an example of a master schedule with family of products, scheduled for weekly production output for 10 weeks into the future. This is a simple conventional example to demonstrate to you the logic behind master scheduling, in which modern days ERP systems are based on.

In cases when actual orders that are received in certain weeks exceed the demand forecast, it is normal practice to change and revise the master schedule. For example, product 2400A is forecasted at 3000pc in week 01, and if the total customer orders received for week 01 is, say 3500pc, that additional 500pc has to be fulfilled from the forecast in week 02. In such case when customer actual demand exceeds the forecast for the week, the master scheduler has several options to decide:

• provide a later delivery date to the customer and face a possibility of this customer canceling the order

• cancel delivery order already picked for other less important customer and re-allocate available on-hand balance to this customer

• reschedule and overload the revised forecast (this will cause panic buying and straining your suppliers' capacity plan and turnaround time)

• increasing capacity by scheduling overtime work

 The last option is usually more efficient and most recommended because the company inventory policy will usually allows some percentage of upside planning on both the finished products level (say 10%) and also on the components level (say 25%). Such practice provides material buffer as the safety stock to short-term schedule changes, and allow to cushion against the increase in real customer demand that exceeds the forecasted plan in any week. It prevents turning away the unhappy but important customers.

Table 8.1 Master Schedule

Table 8.2 Scheduling planned order release for Product 2400A base on Master Schedule (considering fixed order qty of 5000pc and lead time of 4 weeks)

Table 8.2 shows you the logic of determining when the Planned Supply Orders should be released base upon the weekly forecast in master schedule. You can download the worksheet with the formulas. Below I show you the formulas which you would have to copy down in your range of cells. Offset formula syntax is OFFSET(reference, rows, cols, height, width)

The first three columns (forecast, scheduled receipts, and stock on-hand) show the current situation, whereas the last three columns (planned order receipts, projected available, and planned order release) show what has to be done in order to meet the demand forecast. With a four-week supply lead time, the planned order release has to precede the planned order receipt by four weeks. If you have set a safety stock level, say 1000pc, the stock on-hand balance can trigger a planned order receipt at the safety stock level instead of waiting until stockout and negative stock balance. In this case, a safety stock level of 1000 would mean that the initial projected available on-hand of 500 would be too low by end of week 05. So the formula in U3 can be revised as:

=IF(AND(OFFSET(T3,5,-1,1,1)=5000,OFFSET(T3,4,0)<1000),5000,IF(OFFSET(T3,4,-1,1,1)=5000,S8,""))

Next Page >> common problems with Inventory Turns computation