## Friday, November 20, 2009

### Material Requirements Planning (MRP) - Part III

In this session we will learn how MRP is calculated using the following logic. Since MRP computed by the system, SCM person must know the logic and calculation methodology, as raw material inventory (procurement) quantity is calculated from the MRP system. Inventory Management is the one of the main function of SCM and effective control on raw material planning and procurement lead to improve the cash flow of the company.

As already seen in our earlier blog, the logic used in MRP computation are

1. Input from MPS, BOM, Inventory Status, Lead time
2. Part Explosion
4. Netting from gross by considering existing inventory
5. Lot sizing of net requirement for procurement

In the last session we have got all input data from MPS, BOM, Inventory status and lead time. Now we will explore how the logics are used.

Given below the chart 1 meant for Products level (General & Sports) data computation

The above figure show the MRP calculation at Product level. Since we are dealing with two models General and Sports cycle we have given two models calculation. The gross requirements are coming from Master Production Schedule (MPS). If you refer the MPS in my earlier blog you will notice that 100 units of General cycle (finished products) to be ready for dispatch on 7th and 200 units to be ready on 10th. Similarly for Sports cycle also, the gross requirements are coming from MPS.

Currently the cycle factory is having 10 units of General cycle and 20 units of Sport Cycle (finished products) with them i.e., on hand stocks. Now we can arrive Net Requirement by deducting on hand quantity from gross requirements. Hence the net requirement of General cycle on 7th has come down to 90 instead of 100. Similarly the net requirement of Sports cycle on 6th has come down to 180 instead of gross requirement 200. This step is known as Netting.

Let us assume on hand quantity of General cycle is 120 units instead of 10 units. Now the net requirement for general cycle on 7th is 0, as the on hand quantity 120 units is more than gross requirements of 100 units. At the end of 7th day the company still left out 20 units of General cycle without producing any General cycle. On 10th the company need to produce only 180 units against gross requirement of 200 units as they have 20 units of finished on hand.

Since the lead time for General Cycle (P1) is 2 days (refer lead time chart in my previous blog), cycle body from sub assembly 1 and wheel from sub assembly 2 should be made available 2 days (refer BOM Structure – General Cycle in my previous blog) earlier. In other words 90 unit of cycle body from sub assembly 1 and 90 units of wheel from sub assembly 2 should be made available on 5th to produce 90 units of General cycle finished product by 7th meant for dispatch. To produce 200 units of General cycle on 10th, 200 units of cycle body and wheel should be available on 8th due to 2 days lead time. In order to meet the net requirement timelines you need to release the planned order to subassembly 1 & 2 considering their manufacturing lead time. This process is called as offset by lead time.

Similarly the lead time for Sports Cycle (P2) is 3 days (refer lead time chart in my previous blog), cycle body from sub assembly 3 and wheel from sub assembly 4 should be made available 3 days (refer BOM Structure – Sports Cycle in my previous blog) earlier. In other words 180 unit of cycle body from sub assembly 3 and 180 units of wheel from sub assembly 4 should be made available on 3rd to produce 180 units of Sports cycle finished product by 6th meant for dispatch. To produce 500 units of Sports cycle on 9th, 500 units of cycle body and wheel should be available on 6th due to 3 days lead time.

So far we have considered the process at Product level (General and Sports Cycle). Now we need to look at sub assembly level requirements. For simplicity we need to consider only General cycle model i.e., sub assembly 1 & 2. If you understood the logic, you can apply this logic on any model.

Given below the chart 2 meant for sub assemblies 1 & 2 associated with General cycle product only.

Now we are moving to those sub assemblies (1 & 2) which are associated with General Cycle (product 1) only and not considering Sports Cycle model at this juncture. The Gross requirements for sub assemblies 1 & 2 are coming from Planned order release at the General cycle product level. If you refer chart 1 (General Cycle) the planned order release quantity against the period are reflected in the gross requirements of sub assemblies 1 & 2. Since there is no schedule receipt (in transit stock) and on hand quantity the gross requirement become net requirement.

Note if there is any schedule receipt quantity then the net requirement calculation become Gross Requirement - Schedule Receipt – On hand Quantity.

Since the lead time (refer lead time chart in my earlier blog) for sub assembly 1 is 2 days and for sub assembly is 1 day, the net requirement quantities of sub assembly 1 is offset (work backward) by 2 days. Similarly the net requirement quantities of sub assembly 2 is offset by 1 day.

Now we are moving to the final stage i.e., raw material computation. We are looking raw materials attached to sub assembly 2 i.e., Wheel (2 units), tyre/tube (2 units), pedal (2 units) and chain (1 unit). I would like you to refer BOM structure of General cycle in my earlier blog. In advertently I have not mentioned 1 unit against chain in the BOM structure of General cycle.

Given below the chart 3 meant for raw material level explosion associated with sub assembly 2 of General cycle product only.

Since we are considering raw materials for the sub assembly 2 only, the gross requirements for these raw materials are coming from Planned order release from sub assembly 2. However the gross requirement quantity are increased due to the number of units goes against each components. For example Wheel, Tyre/tube, Pedal require 2 units and chain 1 unit (refer BOM Structure), the gross requirements for these components also increased accordingly. If you notice Wheel, Tyre/tube, Pedal gross quantities are doubled as against the sub assembly 2 planned order release quantity due to 2 units of components are used as input. It is obvious cycle require 2 wheels, tyre/tube and pedals. Since 1 unit of cycle chain is required the gross quantity of chain remain same as sub assembly 2 planned order release quantity. This process is referred as Part Explosion.

The Net Requirements are computed after adjusting on hand quantity against gross requirements. The planned order release for these components are offset by ordering lead time of 5 days. The Purchase order against the suppliers are raised based on planned order release quantity of each components as per Planned order release period. Normally Purchase order quantity for components are raised against the supplier according to lot size. We will learn more about lot size in the Inventory Management session.

Now the question arise if two products General and sports cycle uses the same components (commonly used items) then the planned order release quantity for those components which are used by both products are consolidated and then Purchase order is raised to the supplier, provided Planned order release date is closely related. For example Tyre/tube raw materials are used in both General and Sports cycle model and hence one can consolidate the total requirements and raise indent to the suppliers. But Planned order release date for tyre/tube in respect of general and sports cycle vary widely, we cannot consolidate both items and place order to the suppliers. In this case we need to raise indent separately according to planned order release date.

I have explained MRP concepts with simple example.  But in reality MRP is more complex and require lot of skill set to handle.  With this we have completed MRP module and we will focus our attention to MPS, Aggregate Planning and Capacity Planning in our next blog.

1. Enjoyed your MRP series and I am looking forward to what you have planned next. I wondering if you plan on tacking a beginners guide to supply chain or a how to guide similar to the forecasting articles that you wrote earlier in the blog? i have recommended your blog to our entry level analyst who have read your work and apply the metrics to their day to day duties so thank you Krish for the excellent tool you have provided.

if possible would you be able to tackle a series on supply chain mathamatics from the basics to the advance?
Laura

2. Thanks Laura for your comments. In this blog, I intend to cover the SCM related topics forecasting, demand planning, production planning, inventory management, purchase and logistics which includes warehouse, transportation, distribution, network design and touch upon Import and Export also.

As certain topics in SCM like Forecasting, production & demand planning, inventory management, transporation model, network design involves mathematical explanation. I am taking time to write my blog to explain advance models of demand and production planning in a simple way, keeping in mind that readers (even students) should be benefited.

Pl let me know, If you have any specific view point so that I can cover the same.

Krish

3. I really appreciate your post and it was superb .Thanks for sharing information.

4. Dear Krish,

I would like to know, how we can use MRP in a non-profit firm, like a Sports accadamy, where childrens gets training in different feild of sport. The inventory includes, study material, track suites, gist items, sport equipments, etc.... how a non-profit organization can control over stock and reduce inventroy