Material Planning

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Resources

• Script Part 6: Material Planning
• Exercise Questions

Note on this Note

I did not take lecture notes on Production Management. Below is an AI-generated summary of this chapter, and you’ll want to check out the resources above.

Material Requirements Planning (MRP)

Concept

Material Requirements Planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. It ensures that materials are available for production and products are available for delivery to customers, while maintaining the lowest possible material and product levels in store.

Independent vs. Dependent Demand

• Independent Demand: Demand for final products or service parts. It is forecasted or based on actual customer orders.
• Dependent Demand: Demand for raw materials, components, or sub-assemblies. It is derived directly from the demand of the parent items (final products).

ABC Classification

ABC classification can support the choice between independent and dependent MRP. C-goods (low-value, high-volume items) are often managed using order-point methods (independent MRP), whereas A-goods are meticulously planned using dependent MRP.

Product Structure and Bill of Materials (BOM)

The Bill of Materials (BOM) represents the structural breakdown of a product into its components, sub-assemblies, and raw materials.

Gozintograph

A graphical representation of the product structure showing how materials flow into sub-assemblies and final products.

• Nodes represent the items (raw materials, sub-assemblies, final products).
• Directed edges represent the “goes-into” relationship, labeled with the required quantities.

Low-Level Code

The Low-Level Code (LLC) of an item is the lowest level in any BOM at which the item appears.

• Level 0: Final products.
• Level 1: Components directly going into Level 0 products.
• Level $n$: Components going into Level $n-1$ products.

Using low-level codes ensures that the gross requirements for any component are completely calculated before its net requirements and planned orders are determined. This prevents multiple calculation passes and ensures each product is considered exactly once.

Material Requirements Planning Calculation

The MRP calculation follows a step-by-step process for each item, starting from Level 0 and moving down the low-level codes.

1. Gross Requirements

The total expected demand for an item during a period.

• For final products (Level 0):
  $\text{Gross Requirement}=\text{Primary Demand}$
• For components (Level > 0):
  $\text{Gross Requirement}=\text{Primary Demand}+\text{Secondary Demand}$
  Secondary Demand is generated by the planned production orders of the parent items.

2. Available Inventory

The inventory available to fulfill the gross requirements.
${\text{Available Inventory}}_t={\text{Physical Inventory}}_{t-1}-\text{Safety Stock}$

Physical vs. Available Inventory

Physical inventory is the actual stock on hand. Available inventory reduces this by the safety stock and any reserved inventory. Safety stock acts as a buffer against uncertainties.

3. Net Requirements

The actual amount needed to be produced or purchased to meet the demand, accounting for available inventory. Net requirements are never negative.
${\text{Net Requirement}}_t=\max (0,{\text{Gross Requirement}}_t-{\text{Available Inventory}}_t)$

4. Production / Purchase Orders

Once the net requirement is determined, an order must be placed. The timing of the order is offset by the Lead Time ($z$).

• If a net requirement exists in period $t$, the order must be released in period $t-z$.
• Lot sizing rules (e.g., lot-for-lot, fixed order quantity) determine the exact order quantity. In basic lot-for-lot sizing, the order quantity exactly matches the net requirement.

5. Physical Inventory Update

The physical inventory for the next period is updated based on production and consumption.
${\text{Physical Inventory}}_t={\text{Physical Inventory}}_{t-1}+{\text{Production}}_t-{\text{Gross Requirement}}_t$

Example Algorithm Workflow

1. Initialize: Order all products by their low-level codes (0, 1, 2, …).
2. Iterate: For each product at the current level and for each time period:
   a. Calculate Gross Requirements.
   b. Calculate Available Inventory.
   c. Determine Net Requirements.
   d. Schedule Production Orders by offsetting lead times.
   e. Explode Secondary Demand to child components based on the BOM quantities and production order timing.
3. Move to Next Level: Repeat until all items are processed.