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.

1 comment:

  1. Great, in-depth discussion on material requirements planning! There are a lot of things businesses have to consider when planning the quantity and quality of raw materials required to meet production goals.