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
3. Offset by lead time
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.

Wednesday, November 18, 2009

Material Requirements Planning (MRP) - Part II

In this blog spot we will learn about lead time along with few more concepts and then proceed with practical example to understand the MRP computation methodology.

Lead time is one of the basic input to MRP. MRP system is concerned with two types of Lead Time i.e., Ordering Lead time and Manufacturing Lead time. Ordering lead time deals with procurement of components. In our example Maruti company places order for 4000 units of tyres and tubes from Bridgestone company. Bridgestone takes 7 days to supply the tyres and tubes from the date of receiving purchase order from Maruti, the ordering lead time is 7 days.

There are certain components which are produced within the company and the process takes time. This refers as manufacturing lead time. In our example Maruti produces 1000 units of Alto model car. The doors of the car are manufactured in the Maruti plant itself. The company procure steel and make 4 doors according to the Alto model in their plant. This sub assembly process involves cutting steel sheet then make doors . This entire door making process takes some time and this referred as Manufacturing lead time. The manufacturing process will be carried out in lot batches.

Lead time are critical input to MRP system and if any inaccurate data will hamper the production schedule. Manufacturing lead time can be established by observing the process time on regular basis and keep update record periodically. But ordering lead time is the critical as it depends on our supplier. In our above example if Bridgestone company take 10 days to deliver 4000 units of tyres and tubes against the normal 7 days delivery time the production of Maruti Alto model will be held up for three days. Hence one has to exercise appropriate control over ordering lead time to run MRP system smoothly.

Now let us see MRP calculation with simple cycle manufacturing example. Let us take an Hero cycle company for example and assume that they are manufacturing only two models of cycle i.e., general, sports and try to understand the MRP computation method. Let us consider the inputs to MRP system.

Master Production Schedule (MPS) – It contains

a) What end products are to be produced ?
b) How many of each products ?
c) When the products are ready for dispatch ?

Given below the sample MPS format

The above format contain information like 200 units of sports cycle to be made available on 6th of the months and 500 units of sports cycle by 9th. Similarly 100 units of General cycle to be available on 7th and 200 units by 10th. The MPS gives direction to production department what are the products to be products with exact quantity by what period. Please note that time period could be day, week, fortnight etc.

Bill of Material (BOM) – Sample BOM structure is given below.

The General Cycle model require two sub assemblies i.e., 1unit of assembled cycle body and 1 unit of assembled wheel to produce one unit of final product. These two sub assemblies are manufactured at the cycle factory and hence it has manufacturing lead time.

Sub assembly of cycle body require 1 unit of handle bar, cycle frame, seat as components. Whereas Sub assembly of wheel requires 2 units of wheels, tyre and tubes, pedals and 1 unit of chain as components. These components are procured from different suppliers and hence it has ordering lead time.

In case of Sports cycle Gear unit is the additional component in the sub assembly of cycle body.

One must remember any engineering changes affecting the product structure must be incorporated in to the BOM file. Since we have taken simple example for MRP computation, the BOM look so simple. If you take Maruti Alto BOM it will be so complex due to lot of sub assembly line and 1000 of components involved to make one unit.

Inventory Status :  Now let us focus our attention to Initial Inventory status report for raw material Handle bar.

Generally, Inventory status report generate from computerized Inventory Master file. Each items in the inventory file should have lead time (manufacturing or ordering) associated with that. So far we have given Inventory status report for one component Handle Bar alone. In the above example the company has 50 units of handle bar as opening stock and getting 100 additional units from the suppliers on 3rd. Hence on 3rd the company is having 150 units of handle bar .

The company will have inventory status report for all components like gear, tyre & tubes etc. The information available in inventory file should be accurate otherwise it will affect the MRP and Production planning.

Lead time details are given below for manufacturing (assembly) and ordering (raw materials).

The above table require little bit of explanation and one may require to refer BOM structure of General and Sport cycles. The final product P1 to be assembled from sub assembly 1 & 2 and it take 2 days to produce General cycle. Similarly final product P2 to be assembled from sub assembly 3 & 4 and it take 3 days to produce Sports cycle.

Sub assembly 1 (S1) take 2 days to assemble general cycle frame from raw materials (R1, R2 & R3) and similarly sub assembly 2 (S2) take 1 day to assemble general cycle wheel from raw materials (R4, R5, R6, R7).

Sub assembly 3 (S3) take 2 days to assemble Sport cycle frame from raw materials (R8, R9 & R10,R11) and similarly sub assembly 4 (S4) take 2 days to assemble general cycle wheel from raw materials (R12, R13, R14, R15).

In the above example we are getting components and assembled the same for final product. In this model we are not manufacturing any thing. For example we are getting cycle frame from suppliers directly. Instead if we get steel tube from the suppliers and manufacture cycle frame separately by cutting steel tube, shape it and weld it in our factory this involves another sub routine process. Hence manufacturing lead time is eliminated in this process.

For simplicity we assume, Ordering lead time for all raw materials / components are 5 days. In other words if we place order for any component, the supplier take 5 days to deliver the product. In real scenario the ordering lead time for each component differ.

Now we got the all inputs (MPS, BOM, Inventory Status, Lead time). In the next session we will see how to compute MRP using the logic as explained in previous blog.

Thursday, November 12, 2009

Material Requirements Planning (MRP) - Part I

In this session we will look into Material Requirements Planning (MRP). MRP is computerized system to compute the raw materials (components) net requirements in order to meet the production plan. In simple words MRP is managing the raw materials inventory. Before explaining MRP let us understand few concepts which are associated with this.

In a manufacturing industry there are two types of inventory, i.e., Finished Goods (Saleable items) Inventory and Raw material Inventory. Finished Goods Inventory through which company earns revenue and Raw materials Inventory are components required to produce the desired finished goods. For example, in Maruti Suzuki company Zen, Esteem, Alto are finished goods and by producing and marketing these products the company earn revenue, whereas tyre, tube, Steel to make body, AC, glass for windows, seat, paint etc are raw materials which goes into product to make different models of car. To procure these raw materials the company incurs expenditure.

Let us understand the demand pattern of Finished Goods and Raw Materials. Finished Goods demand pattern are decided through forecast or estimation and to the extent of firm order. For example an Institution (government hospital) places an order of 1 Lac strips of paracetamol tablets on monthly basis for one year to a pharmaceutical company is considered as Firm order. The pharmaceutical company is legally bind to supply this tablet to institution on monthly basis, apart from regular sales to end consumers. Other than firm order the finished goods sales to consumers are decided by the forecast method. The estimate or forecast quantity are decided by the external factor like consumer behavior, price, government regulations, competition etc. For example Indian Government policy to curb tobacco sales has prompted ITC Company who is major player in cigarette business to divert their business to consumer durables and other business line. Since the demand pattern for finished goods are decided by external environment and difficult to exercise control over them, termed as “Independent Demand”.

In case of raw materials demand pattern can be derived from production plan and  it is termed as “Dependent Demand”.

For example Maruti Suzuki company decided to produce 1000 units of Alto model cars (finished goods) during Dec’09 based on forecast. Even the Maruti company cannot assure that it can sell all 1000 units of Alto model produced during a given month due to external factor (independent demand) as explained above. If Hyundai company (competitor to Maruti) provide discount of Rs. 25,000 to their Santro model (similar to Maruti Alto model) then the demand for Alto model will go down and it may end up with selling 600 units during the given month leaving 400 units of Alto model cars as pipeline stocks (unsold inventory) to be sold in the subsequent months.

Whereas components (raw materials) for these 1000 units of Alto cars can be decided easily. We all knew a car has 4 wheels, tyres and tubes (assuming there is no stepny) and one can easily say the maruti company require 4000 units of wheels, tyres and tubes to produce 1000 units of Alto model apart from other components. As discussed in our earlier blog by using “Bill of Material (BOM)” meant for Maruti Alto model, we can derive the component requirements precisely for these 1000 units of Maruti Alto model. Hence raw materials demand pattern is considered as “Dependent Demand”. Raw material demand pattern is influenced by production plan.

BOM – Specifies the product structure. How many components /subassemblies required to make the final product and how are they related to each other. You can recall, BOM is similar to recipe in cooking process which contains required quantity of each ingredient (item / components) along with preparation (routing) method.

As explained in the previous blog, to prepare the Masala tea, the tea shop owner require ingredients (components) tea powder, milk, water, sugar and masala powder. The shop owner can procure all these ingredients from the shop to prepare masala tea. In case if he feel like to make masala powder by himself instead of getting the ready made powder from shop then he need to procure ingredients of masala and initiate another process of preparing the masala powder, other than masala tea prepartion process. Now the masala tea making process involve one more sub routine process i.e., to make masala powder. This sub routine process in production terminology termed as sub-assembly process.

Let us explain this through practical illustration. Dell computer manufacture who planned to produce 10,000 units of desk top. For this they can get all components like CPU, Hard disk, CD Drive, Monitor etc from different vendors and assemble the desktop. This process involves only assembling the different components in sequential steps (routing) to make desk tops. In case if they decide to produce monitor then it involve additional sub process ie they need to procure raw materials for monitor and assemble (sub assembly) it separately. The sub assembled monitor will go as input in main assembly to make desk top. We will learn more about BOM in a separate blog.

Now the question arise from where, you will get the quantity to be produced (i.e., 1000 units of Maruti Alto model). This data come Master Production Schedule (MPS) for end items. MPS will provide the details like how many units of final products you would like to have in different period. i.e., a) what end products to be produced b) how many of each products to be produced and c) when the products are ready for shipment. We will learn more about MPS in subsequent session.

So far we have seen MPS and BOM are necessary input to MRP. Along with MPS & BOM, existing inventory (opening stock) records of raw materials (not finished goods details) are needed, in order to place net requirement to the suppliers. For example Sony Ericson mobile company is planning to produce 50000 units of mobile with camera 4.0 mega pixel model. For this the company need to produce 50000 mobile camera unit with 4.0 mega pixel capacity. If the company is already having inventory of 10000 units of camera with 4.0 mega pixel, it need to produce only 40000 units only after adjusting the existing inventory. Assume that company over looked the existing inventory and produce 50000 units of camera with 4.0 mega pixel and the existing inventory will carry forward for future requirement. Due to rapid change in technology the demand for 4.0 mega pixel has reduced and demand for new model with 5.0 mega pixel started increasing. Now the company cannot produce and sell 4.0 mega pixel model due to poor demand and hence existing 10000 units become obsolete and the amount invested on these 4.0 mega pixel camera unit cannot be recovered. Hence raw material inventory record with correct details is very important input to MRP process.

Now we will explore more complex situation. So far we have discussed about Maruti Alto one particular model production plan for a given month. But in reality the company would like to produce 1000 units each of other models like Esteem, WagonR, Dezire, Zen for a given month. That means the total demand for all model cars are 5000 units. Let us assume tyres and tubes used in all models are same. In other words tyres and tubes commonly used items across all models. Now the question is how MRP is computed for commonly used items like tyres and tubes. We will learn this in the next session.

Let us see the logic used in MRP computation. They are

1. Input from MPS, BOM, Inventory Data, Lead time

2. Part Explosion

3. Offset by lead time

4. Netting from gross by considering existing inventory

5. Lot sizing of net requirement for procurement

We will learn lead time and logic and terminology used in MRP with practical example in the next blog.