MRPII: A friend or a foe?

Material requirements planning (MRP) is a time-phased method of planning material requirements for components based on the requirements for higher level assemblies. Until fairly recently, MRP has been viewed as more or less, "exploding" the bill of material in order to produce valid manufacturing schedules. Currently, it is seen as device for management to control cash flow, to decrease and trim the fat from inventories. It is also helpful in making material purchases, and is instrumental in using the work force more productively than was possible a decade or so ago.

In the earlier, simplistic view, it was used primarily as an ordering methodology. The rapid developments in computer technology are a major influence in bringing it into prominence.

Despite its utility, however, MRP planning and connected programs are virtually nonexistent in smaller companies. Even in some of the larger and multinational companies there doesn't appear to be a full-scale embracement of the methodology, but what seems to be partial implementation for the most part.

A certain amount of validity an be ascribed to this apparent partial adoption of the MRP method, for the simple reason that it requires a vast investment in company time, endeavor, and complete involvement of at least a portion of the company's personnel for it to become a company wide program. Once the company decides to mount the MRP bandwagon, it is necessary to enroll all of the company into the MRP philosophy because the Master Production Schedule, which is the motor of the MRP system. It is the embodiment of the total requirements of the company based on the sales forecast actual demand, master construction schedule, inventory, and in-house capacity to produce (or build).

No matter how large or small a company is, materials planning is a function that combines production and inventory control. The prime objective of materials planning is to manage and control inventories of parts, components, semi-finished and finished parts, and raw materials that are to be used in the manufacture of products made to order or for stock. It is the overall task of planning, production, and inventory control to establish the quantity of materials required to meet and satisfy manufacturing schedules; it doesn't make too much difference whether the materials are needed for stock or order except when deadlines are approaching and the materials are not on hand in the assembly areas, the final assembly line or the area where parts and components are fabricated and stored.

One of the problems with controlling inventories is that most parts and components are fabricated in batches, usually in relatively small lot sizes. Furthermore, the demand for these materials will occur not continuously, but in intervals, for the most part. To satisfy the demand for the required quantities of materials, it is possible to calculate - based on a projection of sales figures supplied by the marketing group, and then working backwards, exploding the bill of materials for all of the finished product - in neat little groups the number of parts and components required at various intervals of time. Thus, material requirements planning has become essentially an inventory control method specifically designed to meet targeted demand. In addition, the use of computers in manufacturing has enabled the large quantities of data that are generated to be readily handled. It a for this reason that the use of the MRP concept is fairly widespread in industry practice.

The major difference between MRP and the conventional statistical ordering point methodologies used to control inventories lies largely in the fact that MRP is product, rather than part, oriented. Also, it is based on a projection of the demand for the finished product, rather than a review of the historical behavior of its component parts.

The MRP concept begins with forecasts of demand for the finished products and generates time-phased material requirements based on the bill of materials for the products. Since MRP looks at the behavior (or demand for) the whole product, rather than the erratic or spaced movement of individual parts, it is better able to predict requirements and to deal with changes in product demand.

The selection of inventory-control techniques is sometimes based on the kinds of items they manage. For example, a part is considered "independent" if it is not used in a sub-component, component, or finished product. An example of an independent part would be an item sold as a spare part. When an item or subassembly is part of a finished product, it can be said to be a dependent part when it enters into the calculation of requirements for planning purposes. The MRP concept for inventory control is, in general, based on parts having dependent demand. However, the debate over terminology is academic since provision in manufacturing schedules must be made for both kinds of parts.

Nevertheless, the selection of inventory-control methods is often based on the way in which demand characteristics for the item(s) are perceived. In the main, the statistical order point techniques assume a relatively uniform demand; however, this does not materially affect the number of items in inventory, since a relatively restrictive view makes it necessary to order the materials for replenishment when a certain minimum level is reached. If demand should suddenly slacken after a purchase or production run of the item, the company is left with a relatively large quantity of the items in stock (if the item happened to be an especially fast-moving part prior to the falloff in volume).

It is a fact of life, also, that parts and components used in manufacturing are most economically produced in quantity, the larger the quantity the lower the unit price, all other things being equal. When the intermittent demand for a part is coupled with economical lot size resorting to the MRP approach- which has the capability of delaying replenishment until the need for the material actually arises- the planners can smooth out production curves and keep inventories at minimal levels without the sharp rises and falls in quantities that generally occur with statistical orderings points, especially when a low level of inventory is reached. Also, MRP planners can better handle the spikes in requirements when similar parts are required simultaneously for several products.

MRP manages inventories of parts obtaining data that indicate the end product’s required parts, the quantity of these that are to be obtained (fabricated, purchased, etc.), the sequence in which the parts are to be used or combined in assemblies, and the rate or time in which they are to be consumed. In the overall view of MRP, future demand for all end products based on marketing’s forecasted demand is the motor that drives the concept.

The primary purpose of MRP is for control; the secondary purpose is to ensure the proper flow of materials throughout the manufacturing system. The third effect of MRP is to support planning and execution of the master manufacturing schedule by processing information and generating reports. These three facets of MRP make it a tool immeasurable value for the materials management department because it deals with the flow of materials through the manufacturing process, ensuring that both raw materials and manufactured parts are available when required and in the proper quantities.

In computerizing the MRP concept, it is possible to translate the methodology, which involves a considerable number of feedback loops in order to maintain order in the system. Shop floor terminals are the important links in the system; however, terminals must be located strategically to impart the necessary data required in the MRP database. The master schedule, being the plan for production, is pivotal in its position in the network. Although you cannot say one thing is more important than another in a given system, inventory records require a remarkable degree of precision, since the balances of materials, parts, and components on hand or on order are what keep a well-run plant on target.

Since lead times for the receipt of materials from vendors must be factored into every plan, what happens to inventories in the interim between notifying the purchasing department (through the requisitioning process) to the final receipt of materials depends on how well the inventory control group really controls inventories. Lead times can really play havoc with manufacturing schedules when vendors fail to perform reliably.

Thus, it is easy to see how important the purchasing function is to MRP and materials management, since it is on of the primary tasks of purchasing to qualify suppliers and evaluate their performance. As a chain is no stronger than its weakest link, so is the dependency of each facet of the materials management organization on all members of the group. If these close relationships did not exist, the company would save money by eliminating redundancy.

MRP can be thought of as the brain that makes the manufacturing body function. The MRP planners receive inputs from many sources, the primary element being the bill of materials. As a result, it is important that engineering inputs be received to bring drawings and bills of materials up to date. Engineering design change notice should be received as soon as approved drawings are finalized.

The output of MRP consists of instructions to put the production plan into effect. It provides the purchasing department with schedules for obtaining raw materials, parts, and the like. It also gives instructions to the shop indicating what parts and components must be fabricated and assembled, in what quantities, and within what time frame.
At the first step, phase I of MRP, the normal functioning of the manufacturing process is simulated by computer. Through the simulation of the flow of materials through the plant- i.e., through all of its manufacturing processes, MRP determines the following elements:

What materials are required.
How many pieces of each part are required
How much material is required
How many component groups are required
When these materials, pieces, components, etc., are required

MAP uses the forecast of the required demand for the finished product and then explodes the bills of materials of each product to be manufactured. The objective of the manufacturing department is to produce the proper quantities of quality products- i.e., finished product and items for stock, spare parts, and components- if the plan is a made-to-stock company. In made-to-stock, the total production of the plant is based, for the most part, on marketing forecasts of the volumes required. A made-to-order plant is one in which the company will produce a product based only upon a customer order.

For the most part, companies manufacture product for stock; however, the MRP procedure remains virtually the same regardless of the operating philosophy. Therefore, a time-phased master schedule is prepared so that the desired quantities of finished stock can be produced. This mater schedule usually has the following components:

Demand forecasts
Customer orders
Finished product stock requirements
Spare parts requirements
Parts and components for inventory
Stock orders for smoothing production curves

Since the master schedule is time-phased, it shows the quantity of required production in each fixed interval of time; sometimes the length of the period can be a day, or week(s), or month(s). The time taken up by the complete scheduling period is called the planning horizon. The planning horizon is the time devoted to the entire scheduling period; therefore, the planning horizon for the master schedule must be sufficiently lengthy to extend from the beginning of the manufacturing cycle, where data is first entered into the planning procedure, to the end of the cycle, where the finished product results. Therefore, lead times for procurement and manufacturing , assembly, and so on must be considered so that all the materials that are required can be planned for and made available at the requisite intervals of time, right up to the point where the finished product is turned off the production line and packaged.

The bill of materials for each finished product is the single, most important input to the MRP system. There is one bill of materials for each end product, and it is the summation of all of the bills of materials that comprise the master schedule. Unfortunately, scheduling methods vary considerately, as any manufacturing manager can attest, and while the basis of any manufacturing production program is its scheduling function, scheduling is more art than science. Also, process planning and scheduling will stand or fall on the basis of the quality of the people who fulfill these tasks. The training, maturity, and experience level of process planners and schedulers are important criteria for personnel in these areas.

Gross requirements, which have been developed from the end product's master schedule, and exploded bill of materials. Sometimes it might exceed actual requirements since, as it often happens, there might be a residual inventory of parts and components in stock or on order. Therefore, in order to determine net requirements, these quantities must be deducted from the gross requirements.

It is worth noting that the lead times for on order parts are carefully adhered to, and where necessary the MRP concept will show where expediting or rescheduling activity is required. In addition, if certain parts are not required until later in the schedule, then minor adjustments can be made that might save carrying some inventories for weeks and sometimes even months. This is an additional cost benefit of MRP that makes it an attractive tool for materials management. Other advantages are that it enables planners to keep current with the real-time requirement for materials (parts and components), and it establishes priorities for meeting scheduled events in the master schedule.

Another use for MRP is to generate work orders and purchase orders, which are used by the planners to make certain that parts are available at the prescribed time to satisfy all of the net-requirement commitments that have been scheduled.

It is important to note, also, that the quantities used for planned orders generated by the MRP system concept are not particularly a function of net material requirements, but are based on lot sizes which are established by a number of varying criteria. And is not the least of which the cost of carrying the inventory. Thus, among the criteria are the following elements:

Cost of ordering Ordering frequency should be minimized because it costs money to generate the paperwork and process the material from the supplier through receiving, inspection, and storage for each shipment. Packaging Lot size sometimes can determine the manner in which parts and components are packaged. Availability of resources Since capital is tied up in inventory, the question often asked is how much money should be tied up in this type of inventory. If the number of different parts is large then large quantities of capital might be expended needlessly in large lot sizes. Warehousing space How much space is available for the required parts and components, and what sort of turnover is really necessary, or required, to permit the inventory to be warehoused?

Some parts require setup charges in the way of tooling and fixturing. Although it is usually not a major factor in the decision process concerning lot size, it might add an unwanted element of cost, especially when the setup requires new tooling and the like.

When considering lot size in an MRP installation, it must be understood that the classic economic order quantity and fixed ordering quantity approaches are based on the implication that demand will be continuous, rather than intermittent as it is in most MRP applications.

The net requirements of the master schedule is developed for the first level components. It is suggested that by carrying this concept further, in a similar direction, all of the multiple levels of the many bills of materials representing a complete product line could be exploded and represented on the master schedule. The purpose is to give as complete a set of operating instructions as possible so that the plant in its several departments could take timely action to see that all the material movements require a time-phased environment to achieve the targeted objectives of the company.

This then is the basic output of the MRP concept: to schedule lot-sized orders in an economical manner to satisfy net requirements for parts, components, and raw materials over a fixed planning horizon. For this purpose, the master schedule when expanded to cover all of the bills of materials, is both informative and instructive because it becomes an operating tableau of the enterprise when the following data is supplied:

What is required and when
What is on order
What are the net or residual parts, components, etc.
What is planned and when
What is available and when
When parts and components are to be released

The MRP output then provides a set of operating directives for the production control, inventory control, and purchasing departments, which can take any or all of the following forms:
It can release planned orders to purchasing or production control
It can cause purchasing and production control to issue expediting orders
It can reschedule existing orders to different periods
It can change the quantity, or cancel existing orders

It is possible to categorize MRP into two types of systems, depending on the methods used for updating net requirements: regenerative MRP, and net change MRP.

In the regenerative MRP update, there is a periodic explosion of the entire master schedule using multilevel bills of materials for all end products to create new planned orders and instruction for actions to be taken in order to maintain the master schedule on target. In the net-change MRP philosophy, only specific changes to the master schedule or the status of individual parts, materials, or components are exploded in particular bills of materials.

Regenerative and net change systems give virtually the same results; however, there are important differences in methods. The frequency of planning, making changes, and planning again is relatively high for the net change system. On the other hand, planning frequency is fairly limited when the regenerative method is employed. When net change is used, planning response to changes is faster, although net change systems generally require follow-up to periodically purge the system of bad data. If the company's data processing capabilities are relatively weak, then this is a fairly good reason not to embark on an MRP net change system for updating the master schedule.

MRP is, by and large, a philosophy of operating a manufacturing enterprise, rather than a mechanical system or device that is plugged into a computer network like a canned program. The same thing applies to just-in-time (J.l.T.) manufacturing. It is not a concept that is easily assimilated; the whole mind-set of a company must be changed to accept the philosophy, and a great deal of preliminary work must be accomplished by a dedicated staff. In this manner MRP parallels the extensive preparation required for installing a J.l.T. system. Also, it is a company wide approach that is relentless in its adherence to certain principles and ground rules, since it usually requires a radical change in the company's approach to manufacturing.

Preparatory activities, prior to installation of the MRP system, require a complete analysis of the company’s strengths and weaknesses in such important areas as identifying customer demand and forecasting based on marketing information and strategy; gauging the marketing department's ability to detect shifts in customer demand and its reliability to determine the time interval and the quantity of such changes in customer intentions. In addition, customer service goals are important considerations. For example, how soon after receiving a customer order or after determining that a product will be fabricated should a customer receive the items or should it be ready for distribution.

Response times for customer service, spare parts reaction time or readiness, and the like pose other restraints and conditions with which the MRP team must be completely in accord. Also, the MRP team should consider the number of stocking points for inventory required to provide adequately for the lowest possible response time for both end product and service parts. Then, again, there is the question of in-plant inventory location and quantity and the necessary investment capital required to maintain all inventories regardless of whether they are in-plant or at customer service facilities. Above, all, the team must define the level of customer support to be achieved, and ensure inventory record accuracy.

Next, the materials management department must analyze work-process flow in conjunction with the planners and the manufacturing engineering staff. During the review of engineering standards and work performance standards, the industrial engineering department should work closely with manufacturing and materials management to establish a frame of reference, which should permit subsequent evaluation of the effectiveness of the MRP program as it progresses.

This is a relatively important phase of the preplanning function for establishing MRP in the plant because you want to be able to look back periodically and see how well you are doing. Without the historical benefit of these benchmarks, you tend to lose the perspective of past performance. Then again, if real improvements in manufacturing and materials-handling operations are being made, it helps to program to gain company wide acceptance and sustain the support from top management, which is required for the continuance of the program.

Another way of stating this area of concern is to call it the precision of inventory records. Precision, and a high degree of it, is an absolute requirement for the successful implementation of an MRP program. MRP, by and of itself, cannot cure inaccuracies in inventory; quite the contrary because it will exacerbate the negative effects of these errors. As an example, if inventory quantities are too high, there will be a failure to order materials when required. Conversely if the records are on the negative side, an oversupply of items will be ordered. Subsequently, failures of is type will produce erroneous gross-to-net requirements in the master schedule, and the MRP system will collapse. If inventory record-keeping is not very precise, then expediters and other inventory-control personnel will begin to handle shortages outside the system. This procedure would have a snowballing effect, which would ultimately destroy the whole purpose of the effectiveness of MRP as a manufacturing tool.

The composition of bill of materials has the undeniably important task of describing the contents and structure of the end product. It is for his reason that MRP program requires complete accuracy in this regard, which means that all bills must be brought up to date with deletions and additions- i.e., engineering and design changes, and changes in quantity. Helpful to the MRP plan, also, would be the identification of the level of use of each part and a note as to whether or not it is used in more than one level of manufacturing. The use of a low-level code for each part would inform the MRP practitioner of the lowest level that the part is found in any of the bills of materials. This has future MRP significance because the use of a low-level code would decrease processing time and eliminate many of the errors that might slip in during the explosion for regeneration or the net change procedure by eliminating the repetitious explosion and order planning of multiple-use parts, components, or subassemblies.

Since MRP represents a very powerful adjunct to the materials management philosophy, it is important to emphasize the part that the master schedule plays in the MRP concept. The master schedule is the very heart of MRP, and as such it must be sustained with accurate data that will make it as complete as possible so that it adequately represents the manufacturing objectives of the company. In the course of purifying- that is, extracting erroneous information from the master schedule- it would be well to observe the GIGO adage from the computer world: i.e., garbage in, garbage out.

One of the purges to be performed on the master schedule is to weed out the production of nonessential or superfluous parts that might exceed the actual capability of the plant. Another area of concern to the MRP practitioner is the production of end products that do not appear on the master schedule. Such work has the upsetting effect of distorting machine loading and will in time, play havoc with any attempt to adhere properly to a time-phased net requirements schedule.

In addition to these defects, another potentially dangerous condition is the reliance upon planning horizons that are of insufficient duration to permit the proper lead times for both fabricated and purchased parts and components that will accommodate items with exceptionally long lead times. Other difficulties that might arise with the master schedule are the ways in which schedule changes are handled, especially when there are lead times in the involved changes that cannot be absorbed readily by the schedule because if shortened performance intervals.

Being forewarned is being prepared to take all of the corrective measures required to place meaningful data into the MRP master schedule during the preparatory preplanning stages of the MRP installation. Therefore, it is necessary to identify and correct all the weaknesses and potential problems in the plant’s manufacturing and materials management operations as a preparatory first step. It cannot be expected, of course, that the implementation of an MRP system is a pancreas that will solve all of the plant’s manufacturing problems; however, the symptoms that will be apparent if there is a real need for the MRP installation can be condensed as follows:

If the manufacturing department experiences frequent stock-out situations, which in turn produces a periodic frenzy of expediting actions both in manufacturing operations where a great deal of overtime labor hours are expended, and in purchasing where overtime may, or may not, be necessary.

If inventory dollars start increasing at a too rapid pace, indicating that inordinate quantities of safety stocks are being as a cushion for poor planning and inventory, or production control practices.
If customer complaints concerning poor deliveries are on the increase.
If either direct or indirect labor costs are growing at ratios faster than the output of the plant can support.

The practitioner who is attempting to justify the installation of an MRP system should be well versed in areas of manufacturing engineering and inventory and production control in order to present the benefits of MRP convincingly to top management. In the first place, if there is a certain dissatisfaction that upper management might have with the plant’s performance for instance, a return of equity that is somewhat disappointing, or that has experienced slippage over the past few years, then they might want to revamp their manufacturing operations after an exhaustive review of all manufacturing systems. The manufacturing analysis might point out the benefits that can be obtained by the installation of MRP.

The installation of an MRP task group have as it charter following targets:
Reduce inventory costs (freeing capital and permitting it to be used to reduce debt, or to earn interest)
Improve customer service
Reduce manufacturing costs
reduce indirect labor costs
Improve purchasing performance

Support for the change to a materials management type of organization often comes from the person or persons who consider themselves the best possible candidates for the job of materials manager. Unfortunately, making as sweeping a change as an integrated materials management department requires a tremendous amount of corporate clout, and many candidates or proponents gauge the political temperature and decide to put together their organizations in small bite-sized chunks. This situation might occur even when proponent gains the ear of some senior official, say on vice-presidential level, does his/her homework, and prepares a brilliant dissertation on the many advantages that will accrue to the company following adoption of the concept.

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