Imagine a company that produces electronic equipment such as stereos and TVs. There are several models, sizes, powers, but many components and raw materials are common for various models. To satisfy future demand, how many components should be in inventory in each period? When should each part be ordered? And how many units of each? The answer to these questions is given by the material requirements planning (MRP).
What is MRP?
From the production plan, which determines the quantity to produce of each item, the MRP should indicate when and how much to order (or produce) of each component (or raw material) to satisfy the production planning.
The MRP requires three key information as inputs:
1. The master production plan, to know which and how many products to be manufactured;
2. The bill of materials, to know which are the components of each product;
3. The inventory levels of each item.
What is a bill of materials (BOM)?
The bill of materials is a structured list that indicates, for each finished product, the quantity required of each raw material, component, or subassembly.
The items required for a finished product show a dependent demand, that is, their requirement is calculated as a function of the quantity of the finished products. It is the MRP role to take this list into account to determine the purchasing plan for each item.
For example, to produce a table we need one top and four legs. To produce 10 tables, we will then need 10 tops and 40 legs. The MRP should show us when and how many of these components should be available.
Calculating lot sizes
We cannot always buy or produce parts with the desired volume or in the quantities indicated by the MRP. There are cases where we must buy bigger or smaller lots, according to several criteria. Below we will see three lot-sizing methods: lot-for-lot, fixed order quantity, and economic order quantity.
1. Lot-for-lot method: using this lot-sizing technique, we order precisely what is required for the production. This is not always possible, as the supplier can impose restrictions (see below). In addition, if the fixed costs of an order are high, this technique will be very expensive as it will make several orders (one per period).
However, if the fixed costs of an order are null, this technique is the best possible as it ensures that we keep no inventory. In other words, the use of this technique results in a just-in-time system!
2. Fixed order quantity method: sometimes the supplier imposes that the orders must be placed in lots of a fixed quantity. For example, the product can be shipped in boxes of 50 units each. If you need only 40 units, you will have to buy 50. You need 55 units, you must buy 100! Often, this technique results in inventories over time.
3. Economic order quantity method: this technique of lot-sizing is based on computing the economic order quantity (EOQ).
As is the case when the economic order quantity is calculated, we make some assumptions, and the more reality differs from those assumption, the worse the result will be. Some of these assumptions indicate that a demand must be constant, and that it is often not the case when using MRPs to control production.
Big data and further integration
When more data is available (and we live in the era of big data!), MRPs can be enriched from other sources such as purchasing, production scheduling, capacity planning, inventory, warehouse management, etc. Extra information that can be extracted from the system include scraps, packaging waste, effluent, carbon emissions, among others.
The more integration there is, the richer the data and the results that can be obtained. Welcome to the era of integrated logistics!