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INVENTORY MANAGEMENT:Independent and Dependent Demand

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Production and Operations Management ­MGT613
VU
Lesson 34
MRP / ERP
Learning Objectives
Describe the conditions under which MRP is most appropriate.
Describe the inputs, outputs and nature of MRP processing.
Explain how requirements in a Master Production Schedule are translated into material
requirements for lower level items.
Discuss benefits and requirements of MRP.
MRP
Material requirements planning (MRP): Computer-based information system that translates master
schedule requirements for end items into time-phased requirements for subassemblies, components, and
raw materials.
MRP
MRP
MRP
Change
Order
Master
Planned-
schedule
order
Primary
reports
Exception reports
Bill of
Planning reports
materials
MRP
Secondary
Performance-
reports
computer
control
reports
Inventory
Inventory
records
transaction
Independent and Dependent Demand
Dependent demand: Demand for items that are subassemblies or component parts to be used in
production of finished goods. Once the independent demand is known, the dependent demand can be
determined.
Cumulative lead time: The sum of the lead times that sequential phases of a process require, from
ordering of parts or raw materials to completion of final assembly.
MPR Inputs
MRP has three Inputs
·  Master Schedule Plan
·  Bill of Materials
·  Inventor Records
Master Production Schedule
Time-phased plan specifying timing and quantity of production for each end item.
Material Requirement Planning Process
Master Schedule
Master schedule: One of three primary inputs in MRP; states which end items are to be produced, when
these are needed, and in what quantities.
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Production and Operations Management ­MGT613
VU
Cumulative lead time: The sum of the lead times that sequential phases of a process require, from
ordering of parts or raw materials to completion of final assembly.
Planning Horizon
Bill-of-Materials
Bill of materials (BOM): One of the three primary inputs of MRP; a listing of all of the raw materials,
parts, subassemblies, and assemblies needed to produce one unit of a product.
Product Structure Tree
Product structure tree: Visual depiction of the requirements in a bill of materials, where all components
are listed by levels.
Level
Chair
0
Leg
Back
1
Assembly
Assembly
Seat
Cross
Side  Cross
Back
2 Legs (2)
bar
Rails (2) bar Supports (3)
3
Inventory Records
One of the three primary inputs in MRP
Includes information on the status of each item by time period
Gross requirements
Scheduled receipts
Amount on hand
Lead times
Lot sizes
And more ...
Assembly Time Chart
Cumulative lead time: The sum of the lead times that sequential phases of a process require,
from ordering of parts or raw materials to completion of final assembly.
MRP Processing
1. Gross requirements
2. Schedule receipts
3. Projected on hand
4. Net requirements
5. Planned-order receipts
6. Planned-order releases
Updating the System
1. Regenerative system
2. Updates MRP records periodically
3. Net-change system
4. Updates MPR records continuously
MRP Outputs
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Production and Operations Management ­MGT613
VU
1. Planned orders - schedule indicating the amount and timing of future orders.
2. Order releases - Authorization for the execution of planned orders.
3. Changes - revisions of due dates or order quantities, or cancellations of orders.
MRP Secondary Reports
1. Performance-control reports
2. Planning reports
3. Exception reports
Other Considerations
Lot sizing is the Choosing of a lot size for ordering or production.
For dependant demand, managers have variety of methods available as there is no clear cut
advantage associated with anyone particular method. They can use
1. Lot for Lot Ordering.
2. Economic Order Quantity Model
3. Fixed Period Ordering
4. Part Period Model.
Lot-for-lot ordering
1. Simplest method
2. The order or run size for EACH period is set equal to demand for that period.
3. Eliminates holding costs for parts carried over to other periods.
4. Minimizes investment in inventory.
5. It involves different order sizes ( can not make use of fixed order size , standard containers
and standardized procedures) and requires a new setup for each run.
6. If set up costs can be reduced this would be ideal to approximate the minimum cost lot size.
Economic order quantity models tend to be less ideal.
Fixed Period Ordering provides coverage for some predetermined number of periods.
Rule of thumb being to order to cover a two period interval.
Part-Period Model represents an attempt to balance set up and holding costs.
The part period term refers to holding part or parts over a number of periods, e.g. if a business holds
20 parts for 3 periods this would be a 20 X 3= 60 parts period.
Economic Part Period ( EPP) is the ratio of setup costs to the cost of hold a unit for one period.
Part-Period Model
Various order sizes are examined for planning horizon and each one\s number of part period is
determined.
The one that is closet to the EPP is selected as the best lot size.
Example for Part Period Method
Use part-period method to determine order sizes for the demand schedule of a Montessori equipment
manufacturer in Karachi. The setup cost is Rs. 8000 per run for this item and unit holding cost is Rs.
100 per period.
Data
PERIODS
1
2
3
4
5
6
7
8
DEMAND
60
40
20
2
30
-
70
50
CUMULATIVE 60
100 120
122
152
152
222
272
DEMAND
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Production and Operations Management ­MGT613
VU
·STEP I : First compute EPP which is 8000/100=80
PERIODS
Part  Cumulative
Period when
Lot
Extra
Multiplied
Periods
Part
order is
Size
Inventory
by
Periods
placed
carried
Periods
carried
60
0
0
0
0
1
100
40
1
40
40
120
20
2
40
80
122
2
3
6
86
5
30
0
0
0
0
Our calculations show that we need to order 122 units to be available at period 1 and 100 units
should be ordered available at period 5.
The effect of lumpy demands set in period 5 and period 8.
Benefits of MRP
Low levels of in-process inventories
Ability to track material requirements
Ability to evaluate capacity requirements
Means of allocating production time
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Table of Contents:
  1. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT
  2. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Decision Making
  3. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Strategy
  4. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Service Delivery System
  5. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Productivity
  6. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:The Decision Process
  7. INTRODUCTION TO PRODUCTION AND OPERATIONS MANAGEMENT:Demand Management
  8. Roadmap to the Lecture:Fundamental Types of Forecasts, Finer Classification of Forecasts
  9. Time Series Forecasts:Techniques for Averaging, Simple Moving Average Solution
  10. The formula for the moving average is:Exponential Smoothing Model, Common Nonlinear Trends
  11. The formula for the moving average is:Major factors in design strategy
  12. The formula for the moving average is:Standardization, Mass Customization
  13. The formula for the moving average is:DESIGN STRATEGIES
  14. The formula for the moving average is:Measuring Reliability, AVAILABILITY
  15. The formula for the moving average is:Learning Objectives, Capacity Planning
  16. The formula for the moving average is:Efficiency and Utilization, Evaluating Alternatives
  17. The formula for the moving average is:Evaluating Alternatives, Financial Analysis
  18. PROCESS SELECTION:Types of Operation, Intermittent Processing
  19. PROCESS SELECTION:Basic Layout Types, Advantages of Product Layout
  20. PROCESS SELECTION:Cellular Layouts, Facilities Layouts, Importance of Layout Decisions
  21. DESIGN OF WORK SYSTEMS:Job Design, Specialization, Methods Analysis
  22. LOCATION PLANNING AND ANALYSIS:MANAGING GLOBAL OPERATIONS, Regional Factors
  23. MANAGEMENT OF QUALITY:Dimensions of Quality, Examples of Service Quality
  24. SERVICE QUALITY:Moments of Truth, Perceived Service Quality, Service Gap Analysis
  25. TOTAL QUALITY MANAGEMENT:Determinants of Quality, Responsibility for Quality
  26. TQM QUALITY:Six Sigma Team, PROCESS IMPROVEMENT
  27. QUALITY CONTROL & QUALITY ASSURANCE:INSPECTION, Control Chart
  28. ACCEPTANCE SAMPLING:CHOOSING A PLAN, CONSUMER’S AND PRODUCER’S RISK
  29. AGGREGATE PLANNING:Demand and Capacity Options
  30. AGGREGATE PLANNING:Aggregate Planning Relationships, Master Scheduling
  31. INVENTORY MANAGEMENT:Objective of Inventory Control, Inventory Counting Systems
  32. INVENTORY MANAGEMENT:ABC Classification System, Cycle Counting
  33. INVENTORY MANAGEMENT:Economic Production Quantity Assumptions
  34. INVENTORY MANAGEMENT:Independent and Dependent Demand
  35. INVENTORY MANAGEMENT:Capacity Planning, Manufacturing Resource Planning
  36. JUST IN TIME PRODUCTION SYSTEMS:Organizational and Operational Strategies
  37. JUST IN TIME PRODUCTION SYSTEMS:Operational Benefits, Kanban Formula
  38. JUST IN TIME PRODUCTION SYSTEMS:Secondary Goals, Tiered Supplier Network
  39. SUPPLY CHAIN MANAGEMENT:Logistics, Distribution Requirements Planning
  40. SUPPLY CHAIN MANAGEMENT:Supply Chain Benefits and Drawbacks
  41. SCHEDULING:High-Volume Systems, Load Chart, Hungarian Method
  42. SEQUENCING:Assumptions to Priority Rules, Scheduling Service Operations
  43. PROJECT MANAGEMENT:Project Life Cycle, Work Breakdown Structure
  44. PROJECT MANAGEMENT:Computing Algorithm, Project Crashing, Risk Management
  45. Waiting Lines:Queuing Analysis, System Characteristics, Priority Model