Namaskar friends. Welcome to session 58 in
our course on Operations Management. And currently we are discussing the last week of our discussion
as all of you know that it is a 12 week course; and currently we are in the 12th week of discussion
related to our course on Operations Management. As you are aware in the last week of our focus
is on some advancements in the area of operations management and we are learning the various
tools and techniques which help us in better managing our operations or in better management
of our operations. We have already seen the concept of J I T that is JIT as well as the
concept of Kanban. Today, we are going to start our discussion
on materials requirement planning which is an important part of operations management.
And if you remember in our previous week, our complete focus was on materials management
only. And we have seen that, what is the objective, scope, responsibilities of the materials management
department. Then we have seen the classification of materials based on ABC classification or
VED classification. We have seen that we can classify the materials in any organization
based on the value of these materials or components or parts or based on the usage of these parts.
Then we have seen that how much we must order? When we must order? What must be our ordering
cycle? Then we have seen the production quantity model through which we have seen that the
material may not be arriving at our premises all at once, but we may have a production
run through which we are receiving the material every day. So that was our basic summary of
what we have already covered. But these days there are software available, there are advanced
methods available which help the organizations in the better management of the materials.
So, as we see in today’s session, the materials requirement planning that is MRP, we are going
to plan our materials in a better manner, so that we are able to take advantage of the
computational methods that are available at our discretion these days. So, with the help
of integrated systems, we can manage all the materials in an organization at a single place
or in other words we can say that there can be a central management system which can manage
the complete supplies, the usage of the material within an organization.
So, instead of doing the things manually and doing the calculations of economic order quantity
using mathematical formula to calculate the economic order quantity, we can use a system
which will automatically trigger the orders that whenever the material or the quantity
level goes beyond the reorder point, it will automatically trigger an email or an SMS to
the supplier that we require this much quantity within a lead time of this much this many
days or this many weeks. So that type of automated material management systems are these days
available. And one of such systems is the materials requirement planning system which
we are trying to understand in today’s session. So, our primary aim is to understand that
what is materials requirement planning, what will be the inputs to this system, what will
be the output from this system, and how any organization can make use of the MRP system.
So, the complete discussion on MRP we have divided into two sessions. So, we are going
to cover the materials requirement planning. The first part we are going to cover today
and the next part we are going to cover in the next session. So, let us start our discussion and try to
understand the very definition of the concept of materials requirement planning. So, on
your screen, you can see that materials requirement planning is determining the number of parts,
components and materials needed to produce a product. For example, you can take maybe
any simple product and you can see that what are the materials that are required for making
that product. Simply we can take the example of a household
wooden chair. So, if we take the example of a chair we require certainly wood for making
the chair of the carpenter will require raw wood, for making the chair then he will require
certain nails certain adhesives, then he may require certain tools that will be required
for making the chair. So, here we will break down the complete product into the individual
components and these components will be planned by the system that when which component must
be available in order to ensure the timely manufacturing of the product that in our case
can be a wooden chair. So, the example of a wooden chair can be used
to explain the concept of MRP that you need to have wood this much quantity of wood. So,
if you want to give a back support or maybe a cushion at the back you require the cushioning
material also. If you want to have a colored cloth, you require a colored cloth also on
top of the cushion. So, whatever are the materials that are going to go into the product that
will be planned in a very, very systematic manner, the orders will be placed automatically,
the material will be received before it is required in the assembly process. So, once
again I am reading the definition that I that is given the very first sentence that explains
materials requirement planning. So, the materials requirement planning is determining the number
of parts, components, materials needed to produce a product.
So, first thing is we need to know that what is required to manufacture the product. MRP
provides time scheduling information specifying when each of the materials parts and components
should be ordered or produced. So, we are going to use the time domain also that if
we require the product to be ready by 30th of September we need to do the offsetting
that when the individual components that are required to be assembled for making the product
must be ready. From there we will offset that when the materials that are going to be used
for making these components must be ordered. So, that they sub components can be produced
by a deadline and then finally, these sub components are assembled together to make
the product by September 30th 2017. So, this will give us all the timeline that
what must have must happen in order to ensure the completion of the manufacturing process
by the due date. So, here this will be automatically triggering the different points or the different
checkpoints in order to ensure the timely delivery, before delivery I must say the timely
order of the materials and then ensure the timely delivery of the materials, then the
timely conversion of these materials into the final product.
So, in these two sentences we have tried to highlight the overall picture of materials
requirement planning. That materials requirement planning is determining the number of parts,
components and materials needed to produce a product number one. And number two provides
time scheduling information specifying when each of the materials parts and components
must be ordered or produced. As per the APICS dictionary MRP constitutes a set of techniques
that use bill of material, inventory data and the master production schedule to calculate
the requirements for materials. Now, some of you may be wondering that it
is a very complicated definition or maybe there are number of words that we do not know
in this definition, yes, true, some of the words may be new as for example, the bill
of material. So, we are going to understand what do we mean by bill of material. All of
you know the inventory data in week 11, we have used the one-word inventory; quite comprehensively
you know that what is inventory, what makes up the inventory and what do we mean by inventory
data, what is the service level, what is the safety stock, I think all this we have covered
in week 11. So, this inventory data is not new to you,
but yes the master production schedule may be new, maybe because we have covered this
I think in week 9, we have seen that, what is a master production schedule that also
we have covered in one of the sessions. So, we need these three inputs. We need master
production schedule, we need the inventory data, we need the bill of materials. So, all
these three are the inputs to the materials requirement planning MRP.
So, once we have these three data or these three inputs, the master production schedule
will give us certain outputs, outputs will be primary outputs as well as the secondary
outputs that we will cover in the course of our discussion today as well as in the next
session. So, but basically in order to use MRP we require three types of inputs, and
all these three types of inputs are given on your screen that is the bill of materials,
the inventory data as well as the master production schedule.
So, now you can yourself imagine why this is required. The master production schedule
will give us the time deadlines or the timeline of manufacturing of the individual components
which finally have to be assembled into the final product, which machine is going to operate
or who is going to be operating that particular machine all that will be there in the master
production schedule. In the inventory data, we will have what is our inventory level available,
what is the you can say q that is usually we call the order quantity available with
us, what is the demand rate, how we are using our inventory, what is our safety stock, when
is the next order going to arrive at our premises all that will be the inventory data that is
what is the current status of materials available with us that will be our inventory data.
And the bill of materials is the first and the foremost thing that we must have. The
bill of materials will give us that what is required suppose I have taken an example of
a wooden chair, for a wooden chair how much wood is required, how many nails are required,
how much adhesive is required, how much cushion material is required, how much meter of cloths
is required, so all that will be the bill of materials data. So, we will try to understand
all these three inputs one by one that is what is bill of material, what is inventory
and what is the master production schedule and how these will influence the overall materials
requirement planning system. Now, material requirement planning system
we are going to discuss based on a master production schedule. So, one thing already
all of us know and we have already discussed it in week 9. Based on the master production
schedule a material requirement planning system, what it will do? Master production schedule
is already available with us. So, what will MRP do? It creates schedules
identifying the specific parts and materials required to produce the end items. Now, end
item is our final product. So, we have to use certain specific parts and materials that
will go into our final product. So, MRP will create the schedules that once the final product
has to be made, when the individual parts must be ready, when the sub assemblies must
be ready, so that by the deadline our final product is ready.
So, MRP will create schedules identifying the specific parts and materials required
to produce the end item. Determines the exact unit numbers needed. Then determines the dates
when orders for those materials must be released based on the lead times. So, now, once we
input based on the forecasted demand, based on the orders by the customer, if we input
that this many number of products have to be produced by 31st of December 2017, the
system will calculate that what is the requirement of the individual parts and components that
need to be assembled for making the final product. When they must be ready, and in order
to make these materials what is the raw material required, when an order must be placed for
this material, so that when we start the manufacturing of the individual parts and component we have
the raw material available with us. So, offsetting will be done from the deadline.
So, deadlines in this example that I have taken is 31st December 2017. And prior to
that all back calculations will be done, and the system will automatically trigger the
invoice or maybe an order to the suppliers that you have to supply the material by this
and this date, then the manufacturing of that particular component will start. And finally,
this component will be assembled by the other component or assembled with the other component
to finally, make our product or consignment or our may be the overall package ready for
delivery. So, the MRP system, we can say will help us
in creating or identifying the schedules for material procurement, material usage then
production, also it is going to help us as you have seen that it determines the exact
unit numbers needed, it will also determine that day it will determine the dates when
orders for those materials must be released based on the lead time.
So, lead time is that today if we order for our material, it may arrive at our organization
after 10 days. So, the 10 day will be the lead time for that material. So, this also
we will try to understand that what is a lead time and what is a manufacturing lead time.
So, it will help us to automatically control our materials management system, so that we
are at ease controlling the other aspects, the materials management part will be taken
care by the MRP system. Now, this is the MRP inputs on your screen
you can see. From where will the system get an idea that how many parts have to be produced.
So, it will be from the sales forecast. So, sales forecast is one important thing that
is an important part. Then the customer order, so we have two inputs for the master production
schedule. So, master production schedule will have the input that how many units have to
be produced. And therefore, I have addressed I have highlighted this point earlier also
that all the things that we are discussing in operations management are interrelated
to each other. How these are interrelated? If you remember
we have already discussed the concept of sales forecasting. What are the different methods
of sales forecasting? If you remember we have seen that there are qualitative methods of
sale for sales forecasting, there are quantitative methods of sales forecasting. So, those forecasting
methods will be helpful here. Once we identify that what is the exact amount of product or
exact number of products that we have to produce, based on that the master production schedule
will create a schedule that when the manufacturing must start in order to achieve the deadline
of manufacturing a particular product. So, we always work with deadlines in the company.
So, or in the organization here the MPS will take the input from sales forecast or it may
also get the input from the direct customers, based on that the master production schedule
will create a schedule. So, you can see the sales forecast is something
where we are not directly interacting with the customers, but there can be companies
which directly book orders from the customer. So, that is I think a better method of our
forecasting. So, if we know what we have to produced based on that we have our MPS system
that is a planning or a system or a schedule that will plan the manufacturing of our product
or the timeline will be fixed by the master production schedule as we have seen in our
previous discussion during week 9. So, first input is the master production schedule.
Second input is as you can see the inventory status file. So, if you remember as per the
APICS dictionary we have seen that there are three inputs to the materials requirement
planning. First one is as per our diagram here we can see the one is the master production
schedule, the input to the MRP system. Then inventory status file is another input to
the MRP system. And the bill of materials is another input to the MRP system.
So, in our APICS dictionary, the definition we have seen that three inputs are there.
Another as per that definition the inputs were the master production schedule, the inventory
data as well as the bill of materials. So, here again these three inputs have been depicted
graphically that master production schedule is one input, but master production schedule
has further inputs that is a sales forecast and the customer’s order.
Based on that we have the master production schedule which is an input to the MRP system.
Then inventory status file will give us the exact amount of materials available, what
is a safety stock all that data will be available in the inventory status file. And bill of
materials will be that what exactly are the materials required. So, MRP system then will
give us the timeline the order when the order must be placed, how much must be the order,
so all that thing that we calculated in the previous week using the EOQ model, using the
production quantity model, those things will be automated in the MRP system, things will
be automatically triggered depending upon the level of inventory available in the organization.
So, bill of material we will try to understand this with the help of a diagram in our subsequent
slides today. We will see that what is a bill of material. So, for any product whatever
is the individual requirement of parts and components will comprise the bill of material
or will be a part of the bill of material. And once we have these three inputs, MRP system
will generate output. And that output would be very helpful for the organizations to manage
their operations. So, inputs we have tried to understand.
Now, let us see the individual inputs, because I have explained in abstract manner that what
is bill of materials, what is inventory data, what is master production schedule. But now
let us see them one by one that what individual input to the MRP system is and better we better
understand the concept that if we know that we have to implement an MRP system we must
know that what type of information we must have as an input, so that to take advantage
of the versatility, take advantage of the maybe the system that will help us in the
better management of our operation. So, let us take the first input as we have
seen the master production schedule. So, it is a list of items, indicating end products
to be produced. This contains item name, quantity to be produced and the timings of completing
the production. So, you can see that master production schedule will give us the following
information which will be used by the master which will be used by the materials requirement
planning system. So, it is a list of items, indicating end products.
So, what we have to produce that will be in the master production schedule. This contains
the item name that is maybe the company name or the code. Quantity to be produced, if you
remember in the previous diagram we have seen that sales forecasting is an input to the
master production schedule, so that quantity the number of products to be produced can
come from the sales forecast or directly from the customer orders. Quantity to be produced
and the timing for completing the production as I have taken an example that December 31st
2017 may be the due date for completing the production of a particular item, so that completion
date must be known and how much we have to produce that must be known.
Based on the estimations of product demand that is sales forecast, so that we have already
seen in the previous diagram that master production schedule will take its input from sales forecasting
or from the customer’s order. So, two things are important here in this slide. One thing
is that we need to know the number or the quantity that is going to be produced. And
the other thing that is when that product has to be delivered or when that quantity
has to be shipped or has to be delivered to our customer. So, here we can see just one example of master
production schedule for products P6 and P8. So, there are two products this is a code
for the product that is P6, another product is P8. So, we can see in the rows we have
product 6, product 8 and then September, this is a week’s 1, 2, 3 and 4 weeks where we
can see. In week 1 product 8 is required in the quantity 40; and in week 2, product 6
is required in the quantity 70. And in last week of September, both are required in 100
and 60 quantities each; 100 for product 6, and 60 for product 8. So, this is maybe a
kind of master production schedule weekly demand or weekly production requirement is
mentioned here that what is the exact requirement for the product 6 and product 8 in the weekly
basis for the month of September. Now, this is a first input that is master
production schedule which will go into the MRP system. The second input is the bill of
materials file. What is the third input, I think very quickly I have asked so all of
you must know that there are three inputs basically for a MRP system, first one is master
production schedule, second one is the bill of materials and third one is the inventory
status file. So, bill of materials file you can see it provides a list of materials and
their quantities required to produce the end items.
Again referring back to our example of production of a chair or manufacturing of a wooden chair,
what are the individual components or parts required to manufacture the wooden chair will
comprise of the bill of material along with their quantities. So, it provides a list of
materials and their quantity is required to produce the end items. It contains the list
of finished products, material needed for each finished products in units, assembly
structure sub-assemblies parts and material. So, bill of material will give us maybe everything,
for example, for making a table we require suppose four screws and four nuts, everything
four screws, four nut everything will be mentioned in the bill of material. What will be the
tabletop, how many legs the table will have, what will be the material of the leg, all
that will be mentioned suppose we are manufacturing a table. So, all individual parts and component
along with their quantity will be mentioned in the bill of material file.
Bill of material file is revised every time there is a change in the product design or
specification. So, as soon as we changed the design, for example, we are initially manufacturing
a table with three legs or a three legged wooden table we are manufacturing as soon
as we change the design to four legs, our bill of material file has to change because
now we have four legs a tabletop maybe the dimensions of the tabletop may change, and
therefore, the material requirement for the tabletop as well as an additional leg will
change. So, therefore, the bill of material file has to be revised whenever there is a
design modification. So, by now we know that what is the master production schedule, how
it looks like, what is the bill of materials file that we can try to understand with the
help of this example. Here, you can see suppose we have to produce
or manufacture product A. So, we have sub-assembly 1, sub-assembly 2, sub-assembly 3. And these
sub assemblies are further made up of component X and Y, again X and Z, Y and Z, and there
is one component Y that directly goes into product A.
So, here we know that there are three sub assemblies, each sub-assembly what is the
material requirement or what type of material is required, and in what quantity it is required.
So, here we can see for each product A, X is required in two numbers; Y is required
in three numbers and Z is required in two numbers. So, this way we can see that we have
to always keep our bill of materials file ready in order to ensure that our master or
our materials requirement planning system functions properly.
Then the third input is the inventory status file. So, three inputs are there for any materials
requirement planning system to work efficiently; two inputs already we have seen the master
production schedule and the bill of materials file, the last one is the inventory status
file. It provides a computerized record of each
material, physically held in the system. So, it is a computerized inventory management
file that gives an idea about the inventory level available within the organization. There
will be only one inventory status for individual material, even if it is used at different
levels of production or in different end products. So, every material will have single status
only. This material may be required in two or three different products but the level
of material required that is the quantity of material available in the factory or in
the premises will be same, and it will be managed centrally. So, again I am reading
I think there may be some confusion; there will only be one inventory status for every
material. So status is suppose, 525 components of part
B are available. So, that 525 accounts for 525 parts irrespective of that whether this
part is being used in three different products or five different products, 525 is the central
number available within the organization, even if it is used at different levels of
production or in different end products. So, that in the level has to be centrally the
same. Now, the inventory status file usually indicates
the material code, it indicates the material name, inventory on-hand that is physically
available with us, inventory on-order that is ordered but yet to arrive at our premises,
and customer order for the items. So, suppose there is a demand for a particular item within
the organization that data also the inventory status file must be able to update and that
will be used by our materials requirement planning system for performing the planning
operation of the materials that what is the current status of the materials that are physically
available, how much have been ordered all this will be the input to the MRP system to
plan for the future that how and when based on the master production schedule, what materials
will be required, when they will be required so that the production runs continuously.
So, basically we will have three inputs to any materials requirement planning system
and three inputs we have discussed I think in detail. We know that we must have the master
production schedule as an input, we must have the bill of materials as an input, and we
must have the inventory status file as an input to the MRP system. And if we are able
to accurately provide the information required by the MRP system, our system will be able
to help us to better manage our procurement process, better manage our usage process,
better manage our manufacturing or operations within the organization which will lead to
an improvement in the overall productivity as well as the operations will be managed
more efficiently and effectively without any stoppages or undue breakages in the overall
process, because of the lack of materials or the stock out of materials.
So, with this we come to the close of today’s session. In our next session, we will start
our discussion from what where we are leaving today. We will try to understand that what
are the outputs of the MRP system and we will also try to see that how the MRP system works,
and what are the advantages and limitations of the MRP system.
Thank you.
