Operations Management / Supply Chain Management

Module 12.01 Key Concepts: Material Requirements Planning Process Steps

The Master Production Schedule is the driver and primary input to the Material Requirements Planning process.   Other key inputs include Bills-of-Material, Inventory levels and key planning parameters such as lead time, lot size, safety stock, etc.  The inputs will be shown in detail when we review the process steps in detail.  The general business process flow and the major steps involved in Material Requirements Planning are presented below.
Step 1:  Validate / Change Master Data and Master Production Schedule (MPS)

Material Requirements Planning is a very data intensive process and the old adage “Garbage In = Garbage Out” surely applies here.  If the planning parameters, inventory records and other data are incorrect then the output from MRP can lead to true disasters from a supply planning perspective.  If the Master Production schedule has not been validated (as realistic and achievable) before loading into the “live” system, then the output of Material Requirements Planning will lead to poor decisions about production / purchase order release.  We will show the mechanics of Material Requirements Planning but this is a process that cannot be handled outside of an effective Enterprise Resources Planning system.

Before commencing an MPR run, the following must occur:

  • Validate / Change MRP Planning Parameters in the Material Master (lead time, planning strategy, lot size, etc.)
  • Validate / change Bill of Material (BOM)
  • Validate / Adjust MPS in “Live” System

 

Step 2:  Run MRP

Material Requirements Planning can be run in Batch (scheduled run time) or Manual Mode.  A complete item MRP run can take significant time, depending on the complexity of the organization and the number of materials.  In general, this is scheduled for a time of day when transaction load is minimal (or operations are not occurring).  Material Requirements Planning can be run win full “regeneration” mode (all items) or “Net-Change” mode (re-planning items only if changes have occurred since last run).

 

Step 3:  Review Output from MRP Run

Modern ERP systems can be configured to allow Planner visibility of MRP results either on-line or through customized reports (on-screen, printed, or downloaded).  There are three primary outputs of Material Requirements Panning that Planners review:

  • Planned Manufacturing Orders
  • Purchase Requisitions (Planned Purchase Orders)
  • Action Messages

Action messages alert planners to: release orders, reschedule orders, delete orders, etc.

 

Step 4:  Convert Planned Orders to Production Orders or Purchase Requisitions

It is feasible to configure an ERP system to automatically convert / release orders without Planner intervention.  This is an extremely dangerous approach considering the dynamic nature of most plans and the somewhat high likelihood that data problems could occur.  Instead, the Planners must take control and use their experience and knowledge to review output and take action.  However, if the system makes recommendations that are routinely erroneous, this could indicate serious deficiencies in the Master Data and / or configuration parameters.  If this is the case, corrections should be made in the data / system rather than developing some work-around process ignoring system recommendation.

Planners typically have the option of converting Planned Orders to Firm Planned Orders (cannot be re-planned by the system); releasing Purchase Requisitions in preparation for conversion to Purchase Orders; and changing Firm Planned or Planned Manufacturing Orders to Production Orders subject to release.

 

Step 5; Validate and Release Production Orders or Purchase Orders

The following tasks are usually required for the final stage of Material Requirements Planning – release of Purchase Orders and Production Orders.  Once released, the system will show these as “Scheduled Receipts” on a specific day.  The expectation is that material will be received on that date.  Validations of manufacturing and supplier capability are critical to this step.

  • Convert Purchase Requisition to Purchase Order
  • Release and Print PO
  • Verify Material Availability
  • Verify Resource Availability (Capacity Requirements Planning)
  • Execute Process Order Release
  • Print Shop Packet and Product Labels

We will now review the detailed structure and approach to Material Requirements Planning using some simplified examples.  As mentioned above, this process will not be handled in spreadsheets or with a calculator in real-life.  However, it is important to understand the mechanics involved as these mechanics drive everything that happens in “background” within an Enterprise Resources Planning System.

Material Requirements Planning uses the Master Production Schedule, Bills of Material, inventory status of items, and system planning data to determine:

  • What is needed
  • How much is needed
  • When to order
  • Projected available inventory balance in future time Periods

Material Requirements Planning is generally considered a planning process for “Dependent Demand” Items.  However, this is directly linked to the Master Production Schedule for Independent Demand items.

The term “Dependent Demand” indicates that the demand for one item is related to the demand for another item.  Thus, given a quantity for the end item, the demand for all parts and components can be calculated.
Material Requirements Planning is expected to provide: better response to customer orders; faster response to market changes; improved utilization of facilities and labor and reduced inventory levels.   As mentioned above, the Material Requirements Planning process requires the following data:
  • Master production schedule
  • Specifications or bill of material
  • Inventory availability
  • Purchase orders outstanding
  • Lead times
The Master Production Schedule (MPS) specifies what is to be made and when.  It must be in accordance with the aggregate production plan from Sales and Operations Planning.  It considers inputs from financial plans, customer demand, engineering, and supplier performance.  As the process moves from planning to execution, each step must be tested for feasibility.
The MPS is established in terms of specific products (end items or, in the case of Assemble to Order production, critical modules.  The schedule must be followed for a reasonable length of time.  The MPS is quite often fixed or frozen in the near term part of the plan.  It is determined on a rolling schedule and is a statement of what is to be produced, not a forecast of demand.
The Master Production Schedule can be expressed in any of the following terms:
  • A customer order in a job shop (make-to-order) company
  • Modules in a repetitive (assemble-to-order or forecast) company
  • An end item in a continuous (stock-to-forecast) company

The Bill of Material (BOM) refers to a list of components, ingredients, and materials needed to make product.  It provides a product structure where items above a given level are called parents and items below a given level are called components or children.

Material Requirements Planning utilizes the Bill of Material for a process called “Explosion of Requirements”.  This is the determination of the number of components (children) are required to fulfill an order for the Parents.

Low-Level Coding is used to guide the explosion process.  An item is coded at the lowest level at which it occurs.  BOMs are processed one level at a time.

Planning Bills of Material are also used to simplify the planning process but they are not used in the MRP explosion process.  There are several types described in the text:

  • Modular Bills
–Modules are not final products but components that can be assembled into multiple end items
–Can significantly simplify planning and scheduling
  • Planning Bills
–Also called “pseudo” or super bills
–Created to assign an artificial parent to the BOM
–Used to group subassemblies to reduce the number of items planned and scheduled
–Used to create standard “kits” for production
  • Phantom Bills
–Describe sub-assemblies that exist only temporarily
–Are part of another assembly and never go into inventory
Accurate data is required for the accurate processing with Material Requirements Planning.  The old adage “Garbage In = Garbage Out” certainly fits.  This include the critical data used in the calculations: Inventory Values, Purchase Order status and Lead Times.
Accurate inventory records are absolutely required for MRP (or any dependent demand system) to operate correctly.  Generally MRP systems require more than 99% accuracy.
Outstanding Purchase Orders represent a by-product of well-managed purchasing and inventory control department.  Outstanding purchase orders must accurately reflect quantities and scheduled receipts.
Now, let’s look at a complete Materials Requirements Planning example that illustrates the process we call “Exploding the Requirements.”   We will begin with some key master data that is presented.

Lead Time is the time required to purchase, produce, or assemble an item.  For manufactured items lead time includes the sum

of the move, setup, and assembly or run times.  For purchased items lead times include the time between the recognition of a need and when its available for production.  Material Requirements Planning typically works from a backward planning perspective.  Orders are released to meet the needs of the next step.
The text authors go through a very detailed look at the Material Requirements Planning Process.  You should review this in some detail to gain an appreciation for the approach.