PART-II DEPENDENT DEMAND

Section I MATERIALS REQUIREMENT PLANNING (MRP)

Section II MANUFACTURING RESOURCE PLANNING (MRP-II)

Section III CAPACITY REQUIREMENTS PLANNING (CRP)

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Introduction

WHAT IS DEPENDENT DEMAND?

It is defined as dependent if the demand of an item is directly

related to, or derived from the demand of another item or
product.

Since such demand can be calculated, and precisely determined

from the demand for those items that are its sole causes, it need
not and should not, be forecast.
An example can be given for a certain wagon or rail coach
manufacturing company. It may have to forecast how many wagons it
can sell, and when.
 Having done that, however, the manufacturing company need not
forecast the number of wheels, since each wagon needs four sets of
wheels.
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WHAT IS DEPENDENT DEMAND?......

In dependent demand, there is a material conversion

stage,
stage which creates the relationship between raw
materials, semi-finished parts, component parts,
subassemblies and assemblies.

Demand for all these inventory items is being created

internally, as a function of the next conversion stage to
take place.

Hence, MRP is the appropriate technique for determining

quantities of dependent demand item.

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What is MRP then?
MRP is a time order release system that schedules the order
for release needed dependent demand inventory items
 so that the items arrive just as they are required.

MRP enables an organization to develop realistic plans for

meeting delivering schedules of independent demand items.
items
 It does so through proper timing of order placement, is
known as “Time-Phase Requirements Planning.”

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What is MRP?....

MRP is designed to answer:

 What materials and components are needed?
 When and how many are needed to meet the specified
demand?
 What orders are to expedite, de-expedite, or cancel?

MRP is in most instant a computer based that-

 Release production & purchases orders;
 Ensure the availability of materials & components;
and
 Maintain minimum levels of dependent demand
items.

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MRP SYSTEM

MASTER PRODUCTION
SCHEDULE (MPS)

MATERIALS
REQUIREMENTS
PRODUCT
STRUCTURE FILE PLANNING (MRP) ITEM MASTER FILE

PLANNED ORDER RELEASES

Work Purchase Rescheduling

Orders Orders Notices

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MRP SYSTEM…

Inputs
 Master Production Schedule
 Bill of Materials/Product Structure File/
 Inventory Records/Item Master File/

Outputs
 Planned Order Releases:
 Work Orders
 Purchase Orders
 Rescheduling Notices

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 MRP INPUT SYSTEM
Forecasts Customer Orders

MASTER PRODUCTION SCHEDULE

(MPS)
(Indicates products to produce and when they
are needed)
Engineering Changes
Inventory Transactions

INVENTORY STATUS PRODUCT STRUCTURE

RECORDS RECORDS
(Contains on-hand balances, open (Contains Bills of Materials & show
order, lot size, lead times & safety how a product is produced)
stocks)
MATERIALS REQUIREMENTS PLANNING
(Explode BOM per MPS requirements, nets
out inventory levels, offsets lead times, &
issues reports on:
1. What to order and how many?
2. When to order?
3. What order to expedite, de-expedite, or
cancel) ?
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MRP Inputs…

A. Master Production Schedule (MPS)

Drives MRP process with a schedule of finished products.
Quantities may consist of a combination of customer
orders and demand forecasts.
forecasts
Quantities represent:
 What needs to be produced, not what can be
produced.
 End items that may or may not be finished
products.

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Inputs….

B. Product Structure File

Also known as Bill of Materials (BOM) records.
It contains information on all materials, components, or
subassemblies required to produce each end item;
 Used to derive the quantities of dependent
components required to build the end items;
The Bill of Materials-
 Is not just a simple listing of dependent demand items,
 But a structured list which describes the sequence of
steps in manufacturing the product.
 Contains the materials for the end item in levels
representing the way they are actually placed in the
manufacturing process.

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Inputs….Product Structure File

Each level in the structure represents a distinct stage of

the overall manufacturing process:
 Form the conversion of-
 raw materials into subassemblies at the lowest level,
level
 to the subsequent steps involved in building sub-
assemblies,
assemblies and
 lastly to the final assembly of the end item at the
highest level in the structure.

In a schematic form, a structured BOM is known as a

product structure, product tree, or Christmas tree.

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Inputs….Product Structure File

BOM- Example
A LT=4 Level 0

B(1) LT=3
C(2) LT=2
Level 1

D(1) LT=1
E(2) LT=1 Level 2

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Inputs….

C. Item Master File/Inventory Status Records/

Contain the on-hand and on-order status of each inventory item.
Checked to determine-
 What inventory will be available to meet the production
schedule and
 If more will be needed to cover requirements in a particular
period.
Gross Component Rrequirements in any time period are compared
with the available inventory (on-hand plus on-order) to determine any
need to produce or acquire it.
 On-hand:
On-hand quantities of items in inventory at the start of an
MRP planning horizon
 On-order quantities:
quantities those that are expected to become
available during a planning horizon from open work orders or
open purchase orders.
orders
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Item Master File/Inventory Status Records/ Inputs….

If available inventory is projected to be less than

requirements, MRP will recommend the item to be
ordered.

Besides, the records in the inventory status files contain

data on lead times for lead time offsetting (adjusting of
orders to take account of the lead time period)

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MRP Outputs

By referring to the inventory status records, the gross quantities

are netted by subtracting the available inventory items.
items
The actual order quantity for an item may be adjusted to:
 a suitable lot size, or
 it may simply be the net requirement.

The timing of orders is based on scheduling order releases for

the purchase of the manufacture of component parts in a
sequence.

The orders are planned far enough ahead to allow adequate time.

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MRP Outputs…

Considering when components are scheduled to be

purchased or produced and the lead times for their supply,
MRP time-phase orders by lead time offsetting or setback.

 For purchased components,

components the lead time is the time
interval between the placement of the purchase order
and its availability in inventory.
 For manufactured items,
items it is the interval between the
release of the work order and its completion.

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MRP Outputs…

MATERIALS REQUIREMENTS
PLANNING

PLANNED ORDER RELEASES

Work Orders Purchase Orders Rescheduling Notices

(WO) (PO) (RN)

MRP OUTPUT SYSTEM

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 Low Level Code
Lead Time

Item LLC Period

Lot Size LT 1 2 3 4 5
Gross Requirements Derived from MPS or planned order releases
of the parent
Scheduled Receipts On order & scheduled to be received
Projected on hand Beg. Anticipated quantity on hand at the end of the
Inv. period
Net Requirements Gross requirements net of inventory &
scheduled receipts
Planned Order Receipts When orders need to be received
Planned Order Releases When orders need to be placed to be received
on time

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Hospitals

Hospitals use MRP for scheduling surgical operations and

ensure that supplies & equipments are ready when needed
 Schedule of surgery gives the planned operations in any
period,
 The bill of materials contains information about the
equipment & resources needed for each type of surgery,
and
 Inventory file contains information about surgical
instruments, disposal materials, reusable instruments,
sterilized materials, etc.

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MRP-APPLICATION IN SERVICE INDUSTRY

Restaurants

Restaurants use MRP to schedule food and equipment.

 Menus give the meals planned for the restaurants, and
the recipes for each meal provide the bill of materials.

Universities

The Universities’ MPS show the number of students who

will be graduating from each program in each term.

The bill of material describes the courses the students

take in each term.

MRP can find the number of teachers, classrooms,

laboratories, etc

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Low Level Coding
Each item is assigned a low level code.
Low level codes are used to determine when an item is eligible
for netting & exploding.
By convention, all end items are coded as level 0 and all
components that go directly into them are level 1.
Components that go directly into level 1 item are level 2, and so
forth.
However, when a component is used on multiple end items or
appears at various levels in a single BOM, it is customary to assign it
to the lowest level at which it is used the level farthest down the
product structure on all bills of materials (lower levels are
designated by higher numbers)

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Low Level Coding…Cont.

Low level code can be determined by starting with the

lowest level of BOM and working upward.

If an item occurs at a higher level, its existence on the

lower level has already been recorded.

In this manner, a single low level code is established for

each item.
 Low level coding ensures that an item is netted
(projected available inventory is subtracted from
planned gross requirements) only after all higher level
(parent) requirements first have been established.

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Low Level Coding…Cont.

MRP keeps accumulating (gross) requirements for an item

until it arrives at the lowest level at which the item
resides.

The MRP process begins by netting, lead time offsetting,

and exploding the requirements for all level 0 items.

It then proceeds to all level 1 items and repeats the

procedure.

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Low Level Coding….

Example 1 Determine the low level code for each item in the product structure below;

X
W

F G

A B C

H B

D E

C J
D E

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Low Level Coding Example 1 …. SOLUTION

End item W has levels 0, 1, & 2 while end item X has levels 0, 1, 2,
& 3.

Components B, C, D, & E are common to both end items.

Starting with the end item with the most levels, low level codes are
assigned a low level code or 3.

Proceeding to the next lowest level, (level 2) for all end items,
components B, D, E, & H are found.
 Since components D & E already have low level codes, they are ignored
and components B & H are assigned a low level code of 2.

Proceeding to the next lowest level (level 1) for all end items,
components A, B, C, F, & G are found.
 Since B & C already have low level codes, they are ignored and
components A, F, & G are assigned a low level code of 1.

The remaining items W & X are end items, so they are assigned a
low level code of 0. The results are tabulated below:
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Low Level Coding Example 1 …. SOLUTION

Item Low level Code Level Code Item

C 3 0 W, X
D 3 1 A, F, G
E 3 2 B, H
J 3 3 C, D, E, J
B 2
H 2
A 1
F 1
G 1
W 0
X 0

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A thorough understanding of the MRP matrix and component
computations is necessary before MRP can be mastered.

1st step is to determine if a sufficient quantity of the item will be

available at the beginning of period 1 to satisfy its gross
requirements.
 If the gross requirements in period 1 minus the summation of
projected-on-hand inventory in the previous period & scheduled
receipts in period 1 are negative or zero, no additional units are
needed.
 i.e. there are no net requirements for the period and the absolute
quantity is the projected -on-hand for period 1.
 If the subtraction results in a positive number, it becomes the
net requirement for
f the period.

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MRP COMPUTATIONS…

Whenever net requirements exist in a period, there will

also be a planned order receipt for the same period.
period
The size of the planned order receipt is dictated by the lot
sizing policy for the item.
 With Lot-for-Lot (L4L) ordering, planned order receipts
equal the net requirements.

The planned order release equals the planned order

receipt offset for the lead time.

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MRP COMPUTATIONS…

The projected-on-hand quantity when there are net

requirements is simply the difference between the planned
order receipts and the net requirements.
 Thus, the last calculation for a period is the
determination of the projected-on-hand inventory for
the period.

Once the projected-on-hand quantity is obtained, the

process is repeated for the next time period until the end
of the time horizon.

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MRP COMPUTATIONS…

Planned order release quantities in MRP may be lot size or

identical to the net requirements for a given period.

Ordering the same quantity as the net requirements is called

Lot-for-Lot (L4L) ordering.

Safety stock

Safety stocks can be used with MRP, but they are not
considered available for regular use.

Safety stock is recommended at the end item level but not

the component level in MRP.

The need for safety stock components is reduced by MRP

since it calculates the exact quantities & when they are
needed.

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MRP COMPUTATIONS…

Example 2 Suppose 100 units of product A must be available

in period 8. If no stock is on-hand or an order was placed,
determine when to release orders for each component shown
below and the size to each order.

A
LT=4
Level 0

B(1) C(2)
LT=3 Level
LT=2
1

D(1) E(2)
LT=1 Level 2
LT=1

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Example 2 Cont… solution
 By simple computation, the quantity requirements of each component are:

Component B: (1)(number of A’s) = 1(100)= 100

Component C: (2)(number of A’s) = 2(100)= 200
Component D: (1)(number of C’s) = 1(200)= 200
Component E: (2)(number of C’) = 2(200)= 400

Table MRP Plan for 100 Units of product A in Period 8

Lea 1 2 3 4 5 6 7 8
d Ite
Tim m
e
Gross Requirements 100
4 A
Planned Order Release 100

Gross Requirements 100

3 B
Planned Order Release 100

Gross Requirements 200

2 C
Planned Order Release 200

Gross Requirements 200

1 D
Planned Order Release 200

Gross Requirements 400

1 E
Planned Order Release 400

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MRP COMPUTATIONS…Example 2 Cont… solution

The time elements for all the items must be considered.

The above table creates a material requirement plan based on:
 the product structure of A, the demand for A, the knowledge of
how A is made, and the time needed to obtain each component.

It shows which items are needed, how many are needed, and
when they are needed to complete 100 units of A in period 8.
Planned order releases of the parent item are used to determine
gross requirements for its component items.
Planned order releases generate requirements in the same time
period for its lower level components.
 i.e. A component’s gross requirements time period is the
planned order release period of its parent.

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MRP COMPUTATIONS

Example 3 For the MRP table below, indicate the projected-

on-hand, the planned order receipts, and the planned order
releases. The lead time is two periods, and the lot size is the
Period
same as the net requirements (lot size=1)
PD 1 2 3 4 5 6 7 8
Gross 5 10 18 0 10 6 0 1
Requirements 4

Scheduled 20
receipts

Projected-on- 20
hand

Net
requirements

Planned order
receipts

Planned order POM BY Asmamaw A./PhD/ 02/11/25 34

MRP COMPUTATIONS Example 3 – Solution
Period

P 1 2 3 4 5 6 7 8
D
Gross 5 10 18 0 1 6 0 14
Requirements 0

Scheduled 20
receipts

Projected-on- 2 15 25 7 7 0 0 0 0
hand 0

Net - - - - 3 6 14
requirements

Planned order 3 6 14
receipts

Planned order 3 6 1
releases 4
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Example 4 (Self-Exercise) ???
 In example 3 above, if the lot size is equal to 15 units
instead of L4L,
L4L solve the MRP and which solution is better
for you?

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Financial and marketing functions are tied to operation function
in MRP II.

Production and finance work together to ensure availability of

desired resources to meet the production requirement

Marketing and plant people update sales forecast and master

schedules

MRP II provides a convenient vehicle for coordinating the efforts

of manufacturing, finance, marketing, engineering and personnel
departments towards the common business plan.

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Defining Capacity
Capacity is the amount of work that can be done in a period of time.

It is usually stated in standard hours of week.

It must be determined at plant, department, and work center levels.

CRP & Capacity Planning Process

It creates a load profile and determines the capacity available

It translates the released & planned orders into capacity required,

Sum up capacities required for each work center and Identifies
under-loads & over-loads, resolve the differences between available
capacities and required.

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CRP.. Cont. (Self-Reading)

CRP is a tool for:

 Determining capacity that is available and required
 Alleviating bottleneck work centers

CRP verifies the available capacity that may help the

planners and to meet the capacity requirement for MRP

Inputs are: Planned order releases, Routing file and

Open orders file.

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 CRP SYSTEM

MRP Planned Order

Releases

Capacity
Open Orders
Routing File Requirements
Planning File

Load Profile For

Each Machine
Center

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Definition
Planned Order Releases: information from the MRP which
tells when you should start the order so that it can be
completed on time.

Routing File: information that details the requirement of

equipment & labor to complete the order as needed in
the required time frame.

Open Orders File: information regarding the orders that are

currently started and need to be completed.

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Increasing Load:
1. Acquire more work (make items normally purchased or
subcontracted)
2. Pull work ahead that is scheduled for later time periods
(release orders early)
3. Increase Lot size
4. Increase MPS
5. Reduce normal capacity
1. Eliminate shifts or reduce length of shift worked
2. Reassign personnel temporarily

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Reducing Load:

1. Eliminating unnecessary requirements

2. Rerouting jobs to alternative machines, workers, or work

centers

3. Splitting lots between two or more machines

4. Increasing normal capacity through:

a. Add extra shift
b. Schedule over time and weekend
c. Add equipment and/or personnel

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Reducing Load:

5. Reducing load via:

a. Subcontracting work
b. Reduce Lot size
c. Reduce the MPS

6. Increasing efficiency of the operation

7. Pushing work back to later time periods

8. Revising master schedule

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