Material Requirements Planning (MRP) is implemented on the basis of various basic concepts, defined implicitly. These are:
- Independent vs. Dependent demand
- Lumpy demand
- Lead time
- Common use items
- Time phasing
Independent Demand vs. Dependent Demand
Independent demand for an item is not related to the demand for another or a function of the demand of another inventory item. Such a demand cannot be derived or calculated from the demand of another, and so they need to be forecasted.
Dependent demand for an item is directly linked to or is derived from the demand of another item, and as such called vertical dependency when the demand is to build a subassembly or a product, and called horizontal dependency in case of an attachment or the owner’s manual shipped with the item in a majority of manufacturing firms. Here, the total inventory volume is in raw materials, parts and components and subassemblies – each of them subjected to demand dependency. As such demand can be measured and determined precisely from the demand for the items of its sole causes; it should not and need not be forecasted, except the demand for the final product which needs to be forecasted. However, the raw materials or part components need not be forecasted individually. The MRP is ideal technique to determine the requirement for dependent items.
Lumpy Demand
Manufacturing is often done intermittently in lots or models of one or the other kind. The components or parts of a finished product are only required during the manufacturing of the product. Therefore, there could be huge demands for inventory occasionally and none at other times, which makes the demand ‘lumpy’. When the demand comes in large gaps, it is called lumpy demand. MRP plays a great role in dealing with lumpy demand-driven inventory situations.
Lead Time
The lead time of a particular activity is the time that should be allowed to execute that activity from start to finish. For instance, the lead time in manufacturing activity is divided into ordering and manufacturing lead time. Ordering lead time indicates the time required from initiating the purchase requisition to the receipt of the item from the vendor. If the item being raw material is stocked by the vendor, the ordering lead time would be considerably short. If the item is manufactured by the vendor, the lead time would be significant, say several months. On the other hand, manufacturing lead time indicates the time required to process the portion through the series of machines mentioned on the route sheet. It comprises both the operation time as well as the non-productive time to be allowed. In case of MRP, lead times determine initiation dates for the assembly of final products and sub-assemblies to order raw materials and produce component parts. Various individual lead times of inventories making up to the product, is another factor that influences the requirements for materials. Since the component item order needs to be completed before the parent item order could be started, the back-to-back lead times of the order that the four items will consume, can be added up to identify the cumulative lead time.
Common Use Items
In case of manufacturing of products, one raw material is generally used to manufacture more than one type of component. For instance, finished product X is to be manufactured and for which component A is needed, which further requires component B, component B requiring other three components of which C needs D and D needs E, which could be a raw material. The end item E is also needed to produce N, S and T, and therefore, E manufactures two varied components of the finished product X. The MRP is responsible for collecting these common use items from varied products to influence economies in ordering raw materials and manufacturing components.
Time Phasing
This signifies adding time schedule to material inventory position by recording and storing details on either planning periods or particular dates, with which the relevant quantities are linked. These details could be expanded by incorporating data on demand and availability of materials. You can make use of the classic inventory status equation, as follows:
a + b – c = x
Where, ‘a’ is available quantity, ‘b’ is quantity on order, ‘c’ is quantity required and ‘x’ is quantity available for future use. ‘c’ can be derived from customer orders or future forecasts or calculation of dependent demand. ‘x’ needs to be calculated.
If ‘a’ is negative, it shows low coverage and the need to place a new order. Time phasing usually means developing the time details to answer the following:
- Time due on quantity on order (‘b’), and if it is a single or multiple order
- Time when there could be shortage of stock
- Time when the replenishment order should be completed
- Time when the order should be released
MRP helps in calculating the item demand and time phasing for the inventory.
