Introduction to Manufacturing Inventory Requirements Planning Overview

Posted by Gerry Poe on June 22, 2016

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INTRODUCTION:

Manufacturing Material (Inventory) Requirements Planning (MRP) - an APICS Review; is a discussion of a major functional system, MRP, within most ERP software products. MRP operates as if it is your onboard Materials and Resource Management Ph.D. MRP is a system that knows all and tells all. That is, of course, what it can only know are data within your database included for calculations determining your gross and net requirements for materials and resources. If data are external to the system, they are excluded. You are encouraged to use your ERP system fully to gain the most value.

MRP Benefits:

  • Reduced Inventory with fewer (to no) shortages
  • Improved Customer Service
  • Improved Direct Labor Productivity
  • Reduced Purchasing Cost
  • Reduced Traffic Cost
  • Reduced Obsolescence
  • Reduced Overtime
  • Correct numbers to run the business
  • Accountability throughout the organization
  • Improved Quality of Life


The Total Manufacturing System Model:

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"Unlike many other approaches and techniques, material
requirements planning “works” which is its best recommendation." — Joseph Orlicky, 1974
(MRP, originally writen in 1975, has been superceeded by "Orlicky's Material Requirements Planning, Third Edition" by Carol Ptak and Chad Smith)

Business Plan

The plan of activities is a long-range, strategic plan for the entire enterprise and is the responsibility of top management. Topics in such a plan might include new market development, business combinations, or major restructuring. Pro forma (predicted) financial statements such as the balance sheet, income statement, and cash flow, often represent the form of the plan.

Production Plan - < Resource Plan

A production plan is predicated on the business plan and may span a period of several years in the future. It is often expressed regarding some standard manufacturing unit such as gallons, tons, pieces, or hours, depending on the nature of the business. It shows an overall level of operation for manufacture incorporating decisions regarding facilities, equipment, human resources, and raw materials, sometimes referred to separately as the resource plan. The production and resource plans, in turn, generate financial plans, or budgets, based on the overall production rate.

Master Production Schedule < Rough-Cut Capacity Plan

The master production schedule (MPS) derives from the production plan, but usually covers a shorter planning horizon, typically six months to a year or so depending on the nature of the manufacturing process. The MPS is expressed regarding actual end products and is developed in coordination with a marketing plan that predicts what is to be sold based either on a forecast, firm customer orders, or a combination of the both. At the same time, a rough-cut capacity evaluation is often included to ensure that the necessary resources, regarding personnel and equipment, are available.

Material Requirements Planning

Material requirements planning (MRP) explodes the master production schedule for both purchased and factory production orders for the components and raw materials necessary to meet the master schedule for finished products. Bills of material (BOM’s), inventory data, and planning policies are employed to guide the explosion process.

Purchasing Plan

Purchasing as a schedule of planned acquisitions uses the result of the MRP process that involves purchased components and raw materials. Supplier selection, contract negotiations, and material availability are then determined. This process is sometimes referred to as vendor requirements planning (VRP). If acquisition problems exist, or the master production schedule may have to be revised.

Executing the Purchasing Plan

The execution of the purchasing portion of the material requirements plan is the actual disbursement and follow-up of purchase authorizations. Feedback from purchasing of exceptional conditions may require rescheduling at one or more of the higher planning levels.

Capacity Requirements Planning

The output of the MRP process that involves manufactured components constitutes a tentative schedule of factory order releases. Capacity requirements planning (CRP) considers these planned orders, together with work already in process, to evaluate the availability of resources in the correct time periods to execute the plan. If there are shortfalls or imbalances in the available resources, then either the resource must be adjusted, the MRP-planned orders must be revised, or the master production schedule may have to be changed.

Executing the Factory Plan

The execution of the manufacturing portion of the planned order release schedule whereby factory orders are released, monitored, and reported is called production activity control (PAC). Feedback from production operations may require rescheduling at any of the higher planning levels.

Notice that, with the manufacturing system model; there are looping processes at several levels, especially for the execution of both the purchasing plan and the factory scheme, whereby plans may have to be revised at higher levels based on the practical realities of the acquisition and production processes. These feedbacks are often referred to as “closing the loop” in the model, and the literature of production and inventory control often makes references to closed-loop MRP systems.

The term MRP II, remember, stands for manufacturing resource planning, whereas the term MRP refers to material requirements planning. MRP is thus much more narrowly defined and is, in fact, a subset of the broader MRP II model. Additionally, MRP II embraces concepts beyond the mechanics of the total manufacturing system model, such as using financial data integrated with the production data and performing simulations using the various subsystems to evaluate different policies and schedules.

The MRP Input & Output Model: MRP has inputs from:

  • Master Production Schedule
  • Inventory Data
  • Bills of materials
  • Moreover, Planning Factors

MRP has output to:

  • Schedule of Planned Purchase Orders
  • Action Notices (purchase order action, work order action)
  • Calendar of Planned Factory Releases (Work Orders)
  • Moreover, Planing Factors

In addition to the above factors, Purchase Orders can be rescheduled or canceled, Work Orders can be rescheduled or canceled by MRP if they are setup to allow for line item date rescheduling. This is done for an environment called Just-In-Time manufacturing (JIT). JIT involves diligent partnering with your vendors and customers to allow the forward and backward schedule compliance.

Dependent Demand: (manufacturing inventories)

Dependent demand is based on material requirements that are predictable. Such as assemblies, subassemblies, fabricated components, purchased components, and raw materials. As such, should be planned and managed using and MRP system.

Independent Demand: (distribution inventories)

Independent demand is based on material requirements that are not predictable. Such as retail, wholesale goods, manufactured finished goods, service and replacement parts, maintenance, repair, and operating (MRO) supplies. As such, these inventories may be planned and managed using conventional stock models.

Horizontal and Vertical Dependencies

In addition to being dependent regarding the type of demand placed on them, manufacturing inventories also exhibit dependencies in another significant manner. The apparent dependence between the parent assembly or product and its components is called vertical dependency. The need to produce 1500 wagons, for example, requires that 6000 tires be available at the time wagon assembly begin. However, not only do components and assemblies depend on their parent products and assemblies (vertical dependent), they also depend on another (horizontal dependency).

For example, if three assemblies and six components are required to assemble an end-product, all nine must be available at the same time to perform the final assembly. If just one of the components or assemblies is going to arrive a week late, then the final assembly cannot begin on time but will also be a week late. Moreover, if the final assembly will not begin for another week, then all other assemblies and components are not needed for another week either. Thus, the need (or priority) for each item is dependent on each of the others.

Formulas and Calculation Table Example Elements and Results

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This is a sample of manufacturing environments. MRP and CRP are not necessarily the best priority and capacity planning tools for all situations. An important aspect of understanding the tools is also to understand their applicability in various situations. Although the actual range of manufacturing processes varies significantly over a broad business base, it is possible to differentiate certain major classifications as in one-of-a-kind manufacturing, job shop manufacturing, repetitive manufacturing, and flow shop manufacturing.

Both MRP and CRP were initially conceived to apply to primarily the intermittent production environment, sometimes referred to as job shop production. In the one-of-a-kind type manufacture, network planning and control such as the program evaluation and review technique, (PERT) and the Critical Path Method (CPM) are more logical choices. MRP can be adapted for repetitive manufacturing. However, CRP is not applicable to repetitive types of manufacture and must be replaced with assembly line balancing methods (capacity load leveling and work center balancing) since the concept of work centers does not often apply. Moreover, finally, in flow manufacturing, neither MRP nor CRP is typically selected as planning tools since capacity is largely determined by the construction of the physical plant and the choice of materials is limited.

Material Movements Impacting MRP

Inventory Receipts, Adjustments, and Issues:

This section discusses inventory transactions and their importance in the manufacturing cycle. The transactions presented here are all journalized to the General Ledger, cause an audit record of change, have documents printable for each process, and are reportable via standard reports or with a report writer.

Inventory Receipts:

Inventory receipts are done to affect the quantity of stock on hand by accepting a purchase order or work order, an amount of items at a specified cost from a vendor or inter-company work in process. This process takes place at least once per day, or as many as are required to capture all items to stock for maintaining no less than 95% stock on hand accuracy at all times.

Inventory Adjustments:

Inventory adjustments are used to vary the stock quantity or cost. This will be done periodically, as in the case of a stock take process (doing an inventory count), or making cost modifications because of differences in the book value and actual cost of stock on hand.

Inventory Issues:

Inventory issues are processed so that materials are physically moved from the warehouse to the production floor for consumption within the manufacturing process.

Stock Transfers

Transfers are done so as to track stock activity, required in another warehouse, or physical location is maintained with accuracy.

Inventory Cost Modifications

Cost modifications performed to correct the unit cost of an item(s) that was incorrect costing by a previous action taken against the item(s).i.e.: Year end or month end inventory adjustments that correct overstated or understated costing within the inventory system.

With these basics in mind, we need to consider that 100% of all materials and 100% of all operations be correct. All stock on hand, on order, and allocated must be accurate. To accurately define operations, Cost Centers, Work Centers, Machines, Tool Sets, and employees, must be established. All materials and processes must determine scrap analysis for proper costing, consumption, and forecasting and purchasing accuracy.

All company divisions must be properly established for the “system” to be effective. All General Ledger integration (postings to G/L) must be defined. Where applicable, areas of common inventory identified and expensed.

Summary

MRP is a method of scheduling both purchases and manufactured planned orders. The proposed manufacturing orders are then submitted for further analysis with respect to capacity and balance using CRP. The MRP method is the preferred method for controlling orders and inventories for dependent demand items, where the demands tend to be discontinuous and lumpy. Items subject to dependent demand include raw materials, component parts, subassemblies, and assemblies, collectively referred to as manufacturing inventories. The MRP and CRP techniques are most appropriate for job shop type of manufacture although MRP may be adapted for use in repetitive and some process environments as well.


If you are interested in a more thorough review of this information, we have an ebook that we use for training teams.  Access the ebook here >

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Image courtesy of www.wordle.net

Topics: APICS, Manufacturing, ERP System

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