Operations Management / Supply Chain Management

Module 12.02 Key Concepts: MRP Structure and Management

In this Section we will review some of the key master data elements and discuss the general management of the MRP Process.

Safety stock is generally used to protect from variation / uncertainty of demand and / or supply.  BOMs, inventory records, purchase and production quantities may not be perfect (although, in fact they should be).  Consideration of safety stock may be prudent to protect from these inaccuracies as well.   However, safety stock for these purposes should be minimized and ultimately eliminated.  Safety stock is typically built into projected on-hand inventory from a planning perspective.

Lot Size represents a critical MRP data element and there are many different techniques used to set parameters for lot sizing:

Lot-for-lot techniques drive planning to order just what is required for production based on net requirements.  If 5 units are required then 5 units are planned to be ordered.  This may not always be feasible in all cases although selection of lot-for-lot is beneficial from inventory cost perspective.  If setup costs are high, lot-for-lot can be expensive.  Also, suppliers will often not provided the option for a lot-for-lot approach.
Economic order quantity (EOQ) can be used but EOQ expects a known constant demand and MRP systems often deal with unknown and variable demand.  Therefore, EOQ is usually not utilized to a great extent.
Fixed Order Quantities can be used if required for production orders (feasible lot size) or standard approach with suppliers.  If a fixed lot size is set at 50 units then Net Requirements will result in Planned Orders in multiples of “50”.
Dynamic lot sizing techniques can be used to balance lot size and setup costs.  This is done through fairly sophisticated simulation models designed to optimize certain parameters – for example: least total cost, or least unit cost, or least period cost.
In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change.  In practice, this results in system nervousness and instability.  Lot-for-lot should be used when
low-cost setups can be achieved.  Lot sizes can be modified to allow for scrap, process constraints, and purchase lots.  Therefore, lot-sizing should be used with care as it can cause considerable distortion of requirements at lower levels of the BOM.  When setup costs are significant and demand is reasonably smooth, POQ or EOQ should give reasonable results.

MRP dynamics facilitates replanning when changes occur in inventories or demand plans or master data.  System nervousness can result from too many changes.  From a management perspective, time fences can be used to put limits on re-planning.   A technique called “Pegging” links each item to its parent and by using this technique, planners can provide an effective analysis of changes.

It is important to understand that MRP has several limitations:

  • MRP does not do detailed scheduling–it plans
  • Works best in product-focused, repetitive environments
  • Requires fixed lead time and infinite size time buckets

Material Requirements Planning has evolved over the years to what is now called MRP II with the addition of Closed-Loop MRP and Capacity Planning.  These are all elements included in modern day Enterprise Resources Planning systems.

Material Requirements Planning II recognizes the fact that requirement data can be enriched by other resources. It is generally called MRP II or Material Resource Planning.  Outputs can include scrap, packaging waste, effluent, carbon emissions, etc.  The data is used by purchasing, production scheduling, capacity planning, inventory, and warehouse management.  So, MRP II brings in the cross-functional nature of the planning processes.
Closed-Loop MRP brings in the link between the plans and the ability to meet those plans.  Are our plans feasible?  This is the question that Closed-Loop MRP is intended to address.
Capacity analysis is used to determine (at a detailed planning level) if there is sufficient capacity in Work Centers to meet the Material Requirements plans.  The process is called Capacity Requirements Planning.  It extracts feedback from the MRP system and coverts this to Load reports that show resource requirements for work centers.  If there is an imbalance between needed capacity and available capacity, planners are challenged to take action to move work between work centers to smooth the load or bring it within capacity – or find some other solution.  If not the the plans will need to change.  Some common approaches are summarized below and an example follows:
  • Overlapping: Sends part of the work to following operations before the entire lot is complete.  This reduces lead time.
  • Operations splitting: Sends the lot to two different machines for the same operation.  This results in shorter throughput time but increased setup costs.
  • Order or lot splitting:  Involves breaking up the order into smaller lots and running part earlier (or later) in the schedule.