Category Archives: Inventory Systems for Dependent Demand

Capacity Requirements Planning (CRP)

Capacity Requirements Planning (CRP)

In the previous sections of this chapter that focused on the MPS and running the MRP program. we mentioned that production capacity is usually some finite amount and obviously has limits. We also cited the interaction between the scheduler and rerunning the MRP program to obtain feasible schedule in light of thi limited capacity. In this ection we explicitly  point out how capacity i~ computed amamwhat the usual procedure is for addressing capacity constraints.

Computing Work Center Load

Each work center is generally a functionally defined center where jobs routed to it require0 the same type of work, on the same type of equipment. From the work center view. if there is adequate capacity. the problem is one of priorities:  job to do first. If there is insufficient capacity. however. the problem mu. t be resolved b: the  ch dealer, Exhibit 17.15 shows a work center that   to it. , .otc that the capacity per week was computed at the bottom of the exhibit at 161.5 hours. The jobs scheduled for the three weeks re ult in two  I and one week requiring  overcapacity.Exhibit 17.15 uses the terms utilization AM efficiency, Both or thee terms have been defined and used in a variety or ways. some conflicting. In the-, exhibit. utilization refers to  he actual time that the machines are used. Efficiency refer, to how well the machine is performing while it is being used. Efficiency is usually defined at compare-on of actual performance to a defined standard output or all engineering design rate. For in time.

MRP Computer Program

MRP Computer Program

The MRP program operates on the inventory file, the MPS. and the BOM file. It works as follows: A list of end items needed by time periods (or time "buckets") is specified by the MPS. A description of the materials and parts needed to make each item is specified in the 80M file. The number of units of each item and material currently on hand and on order are contained in the inventory file. The MRP program "works" on the inventory tile (which is segmented into time periods), while continually referring to the 80M file to compute the quantities of each item needed. The number of units of each item required is then adjusted for on-hand amounts and amounts previously ordered; the net requirements are then "offset" (setback in time) to allow for the lead time needed to obtain the material and/or to make the items. If t e MRP program being used does not consider capacity constraints. the master scheduler must manually perform some capacity balancing. Through an iterative process. the master scheduler feeds a tentative MPS into the MRP program (along with other items requiring the same resources) and the output is examined for production feasibility. The  MPS is then adjusted to try to correct any imbalances, and the program is executed again.This process is repeated until the output is acceptable. Although it would seem to be a simple  matter to have the computer simulate various schedules that take into consideration resource limitations, in reality it is usually a very large and very time-consuming problem. To further complicate the problem today, there is often not one MPS but a number of them. Firms will frequently divide the scheduling work among the schedules by assigning one master schedule for each major product line. As a result, each master scheduler must compete for limited resources for his or her own product line. As a group, however, they are trying to balance resource usage and due dates for the production system a, a whole.

Output Reports

Because the MRP program has access to the 80M file, the MPS. and the inventory records file, outputs or reports can take on an almost unlimited range of format and content. These reports are usually classified as primary and secondary output reports. (With the expansion of MRP into MRP II, many additional reports are available.)

Primary Reports Primary reports are the main or normal reports used for inventory and production control. These reports include
I. 'Planned orders to be released at a future time.
2. Order release notices to execute the planned orders.
3. Changes in due dates of open orders due to rescheduling.
4. Cancellations or suspensions of open orders due to cancellation or suspension of orders on the MPS.
5. Inventory status data

Secondary Reports Additional reports, which are optional in an MRP program. fall into the following main categories:
I. Planning reports to be used.for example. in forecasting inventory and  requirements over some future time horizon.

2. Performance reports for purposes of pointing out inactive items and is the  agreement between actual and programmed item lead times and between  and programmed quantity usage and costs, Performance reports for purposes of pointing out inactive items and  the agreement between actual and programmed item lead times and between acts  and programmed quantity usage and costs,

3. Exceptions reports that point out serious discrepancies, such as errors. out-or-r.mge situations, late or overdue orders, excessive scrap. or nonexistent parts. Exceptions reports that point out serious discrepancies, such as errors. out-or-r.mge situations, late or overdue orders, excessive scrap. or nonexistent parts.


A Simple MRP Example

To demonstrate how the various element. of an MRP y. tern are integrated.  e present a simple problem to demon .trate how quantities arc calculated. lead times are offset, and  order releases and receipts are established,

Bill of Materials (Product Structure Tree) File

Suppose that we want to produce Product T. which consists of two parts U. three parts V, and one part Y. Part U. in turn. is made of one part Wand two parts X. Part V is made of two parts Wand two part Y. Exhibit 17. tl shows the product structure tree for Product T.

Inventory Records File

Next, we need to consider the lead times needed to obtain these items, that is. either to produce the parts internally or to obtain them from an outside vendor. Assume that the lead time to make the part and their respective on-hand inventories and scheduled receipts are as follows:


MRP System Structure

MRP System Structure

The MRP system most closely interacts with the MPS schedule, the bill of materials file. the  inventory records file, and the output reports. Exhibit 17.6 shows a portion of Exhibit 15.1in Chapter J 5 with several additions. Note that capacity is not addressed here. nor are there any feedback loops to higher levels. We discuss these elements later in this chapter under MRP II and capacity requirements planning. Each facet of Exhibit 17.6 is subsequently explained in more detail. but essentially the MRP system works as follows: Forecasted sales and firm orders for products are used to create  an MPS. which states the number of items to be produced during specific time periods.A bill of materials file identifies the specific materials used to make each item and the correct uantities of each. The inventory records file contains data such as the number of units  on hand and on order. These three sources-(a) the MPS, (b) the bill of materials file. and 'wi(e) the inventory records file-become the data sources for the MRP program.


essentially expands or "explodes" the MPS into a detailed order scheduling plan for the entire production sequence

Demand for Products

As stated earlier. the demand for end item is primarily derived from two sources: The first  is known customers who have placed specific orders. such as those generated by sales personnel,or from interdependent transactions. These orders usually carry promised delivery dates. There is no forecasting involved in these orders-we simply add them up. The second source is forecasted demand. These are tae normal independent-demand orders; the forecasting  models presented in Chapter 9 can be used to predict the quantities. The demand fom both the known customers and the forecast demand are used as inputs for developing the MPS.

Available-to-Promise When a firm manufactures products to meet a projected sales  forecast, the MPS also can provide information on the quantities and dates when specificproducts and models will be available for delivery. The quantities and delivery dates of these products that have not been previously committed are often referred to as availableto- promise ..As an illustration, a firm has scheduled to. build 100 units of a given product during the first week of February, of which 35 are to meet specific customer orders and the remaining 65 are to meet forecasted customer orders. However, at a given point in time, for example, the third week in January. the marketing department has already taken orders for 40 of the 65 that are to be built to forecast. This leaves 25 units that are available-to-promise . for delivery during that week.

Demand for Spare Parts and Supplies In addition to the demand for end products, customers also order specific parts and components as spare parts to provide for service and repair. These demands for items less complex than the end product are not usually part of the MPS; instead, they are fed directly into the MRP program at their appropriate levels. That is, they are added in as a gross requirement for that part or component

Bill of Materials File
The bill of materials (BOM) file contains the complete product description, listing not only the materials, parts, and components but also the sequences in which the product is created. The BOM file is often referred to as the product structure or product tree file because it shows how a product is put together. It identifies each item and thequantity used per unit of the item in which it is used. To illustrate this, consider the prduct tree for Product A, as  hown in Exhibit 17.7. Product A consists of two units of Part B and three units of Part C.   Part B consists of one unit of Part D and four units of Part E. Each Part C consists of two units of Part F. five units of Part G. and four units of Part H. In the past, BOM files often have listed subassemblies and part as indented files. This clearly identifies each item and  the manner in which it is assembled because each indentation signifies the components ofthe item. A comparison of the indented files in Exhibit 17.8 with the item structure in Exhibit 17. 7 shows the ease of relating the two displays. From a compute standpoint, however, storing items in indented parts lists is very inefficient. To compute the amount of each i tem nee ed at the lower levels, each item would have to be expanded ("exploded") and  summed. A mor  efficient procedure is to store parts data in a single-level explosion. Thatis. each item and component is listed showing only its parent and the number of units.


needed per unit of its parent. This avoids duplication because it includes each assembly only once. Exhibit 17.8 shows a comparison between the single-level list and the indented l ist for Product A.A data element (called a pointer or locator) also is contained in eac  file to identify the parent of each part and allow a retracing upward through the process.

Low-Level Coding If all identical parts occur at the same level for each end product.  the total number of parts and materials needed for a product can be easily computed. However.consider Product L shown in Exhibit 17.9a. Notice that Item N in Product B. for example. occur both as an input to L and as an input to M. Item therefore needs to be lowered to level 2 (Exhibit 17.9b) to bring all the Ns down to their lowest common level. Th s is referred to as low-level coding. When all identical items are placed at the same level. it becomes a simple matter for the computer to scan across each level and summarize the number of units of each item required. Similarly, Items Sand T are lowered to level 4.

Inventory Records Filee
The inventory records file in a computerized system can be quite lengthy. Each item in inventory  i carried as a eparate file, and the range of details carried about an item is almostlirnitle . lthough Exhibit 17.10 is from an earlier ver ion of MRP, it shows the variety of information contained in the inventory records files. The MRP program accesses the status   egment of the file according to specific time periods (called time buckets in \IRP <lang). These files are acce e as needed during the program run.


The MRP program performs its analysi from the top of the product structure downward, exploding requirements le.•el by level. There are times, however, when it is desirable - to identify the parent item that caused the materials requirement. The MRP program allows  the creation of a peg record file either separately or as part of the inventory record file.Pegging requirements allows us to retrace a materials requirement upward in the product structure through each level, identifying each parent item that created the demand. Inventory Transactions File The inventory statu file is kept up to date by posting inventory transactions as they occur. These changes are a result of stock receipts and disbursements, 'crap and obsolescence losse . wrong parts, canceled orders, and so forth




Those firms that have achieved excellence in implementing MRP are designated Class A companies. Usted below are -
several Class A companies and the benefits they have achieved



to job runs that alternate output products and do not include continuous processes such as petroleum or steel.
As you can see in the exhibit, MRP is most valuable to companies involved in assembly operations and least valuable to those in fabrication. Another factor that affects the. degree of benefit gained from an MRP system is the number of level in the product. The greater the number of levels, the greater the benefit of MRP. One more point to note: MRP typically does not work well in companies that produce a  low number of units annually. This is especially true for companies producing complex expensive products requiring advanced research  nd design. Under such circumstances, experience has shown that lead times tend to be too long and too uncertain. and the product configuration too complex for MRP to handle. These types of companies need the control features that network scheduling techniques offer. and thus would be better off using project scheduling methods (covered previously in Chapter .

Benefits of an MRP System

Benefits of an MRP System

Manufacturing companies with more than S I0 million in annual sales are most likely to  have some form of a computerized MRP system. A computerized system is necessary because of the sheer volume of materials, supplies, and components that are part of expanding product lines, and the speed that firms need to react to constant changes in the system. When firms switched from existing manual or computerized systems to an MRP system, they realized many benefits, including .

• More competitive pricing.
• Lower selling price.
• Lower inventory levels.
• Improved customer service.
• Faster .response to market demands.
• Increased flexibility to change the master schedule.
• Reduced setup and tear-down costs.
• Reduced idle time. In addition, the MRP system
• Gives advanced notice so managers can see the planned schedule before the orders are actually released.
• Tells when to de-expedite as well as expedite.
• Delays or cancels orders.
• Changes order quantities.
• Advances or delays order due dates.
• Aids capacity planning.

In converting to an MRP system, many firms claimed as much as-lf) percent reductions in inventory investment. (See OM in Practice Box.)

Where MRP Can Be Used

Where MRP Can Be Used
MRP is being used in a variety of industries with a job-shop environment (meaning that a  number of products are made in batches using the same production equipment). The list inExhibit 17.5 includes process industries, but note that the processes mentioned are confined .