134 A Modern Approach to Operations Management The inventory status information was expanded by adding data on requirements (demand) and
“availability” (the difference between the quantity required and the sum of on-hand and on-order quan- tities). Using the classic inventory status equation we can write
a + b – c = x where a = quantity on hand
b = quantity on order c = quantity required
x = quantity available (for future requirements)
The quantity required (c) would be derived from customer orders or a forecast, or a calculation of dependent demand. The quantity available (x) has to be calculated. Negative availability signifies lack of coverage and the need to place a new order.
Generally, time phasing means developing the information on timing to provide answers to questions like:
• When is the quantity on order due to come in, and is it a single order or are there more than one?
• When will the stock run out?
• When should the replenishment order be completed?
• When should it be released?
MRP calculates item demand and time-phases for all inventory.
Material Requirement Planning 135
X
Level 0 Product (truck)
A
B
C
D
E
Assembly (Transmission)
Subassembly (Gear-box)
Gear
Semi finished part (forging blank)
Raw material (Steel) Level 1
Level 2
Level 3
Level 4
Level 5
Figure 7.2. Product Structure for a Truck.
7.3.2 LOT SIZING
It is the ordering of inventory items in quantities exceeding net requirements, for the reason of economy, or convenience. In the example given above the parent items A, B, and C have been assumed to be ordered in quantities equal to the respective net requirements for these items. But in reality, the lot sizing, whereever employed, would invalidate this assumption. It is because the gross requirement for a component derives directly from the (planned) order quantity of its parent(s).
To illustrate this concept, let us modify the example such that gear C be produced with an order quantities that must be a multiple of 5 (because of some consideration in the gear machining process), the net requirement of 76 will have to be covered by a planned order for 80. This will increase the gross requirement for the forging blank D correspondingly. This computation is illustrated below:
Gear C (Parent)
Net requirement = 76 Planned-ordered release = 80
which is (76 + 4) to satisfy the condition that the order quantity should be a multiple of 5.
Forging (Component) Gross requirement = 80
Inventory = 46
Net requirement = 34
Lot sizing is a particular technique used to determine the order quantities for a given inventory item. The general rule of MRP logic states that: The mutual parent-component relationship of items on contiguous product levels dictates that the net requirement on the parent level, as well as its coverage
136 A Modern Approach to Operations Management by planned order, be computed before the gross requirement on component level can be correctly determined. An MRP system should include lot sizing as a part of the procedure.
7.3.3 Recurrence of Requirements Within Planning Horizon
The timing of end-item requirements across a planning horizon of typically, a year span or longer, and recurrence of these requirements within such a time span also affect the material requirements. The planning horizon of the MRP usually covers a time span large enough to contain multiple (recurring) requirements for a given end item which also complicate the computation of component requirements.
For the truck that is considered assuming the inventory quantities of all the component items involved are available for netting against the gross requirements generated by the lot of 100 trucks, but there may be another lot (or several) of the same end product (or of different end product using the same transmission) that precedes the one for 100, in the master production schedule. If that is the case, its net requirements must be accounted for before the net requirements for the lot of 100 can be determined.
If there is preceding lot of 12 trucks X (lot no1), the net requirement for the respective lots (retaining the lot-sizing rule for gear C) will be calculated as follows:
Lot no. 1 Lot no. 2 Transmission A
Gross requirements: 12 100
Inventory 2 0
Net requirements 10 100
Gear box B
Gross requirements: 10 100
Inventory 15 5 (available for no.2)
Net requirements: – 5 95
Gear C
Gross requirements: 0 95
Inventory 0 7
Net requirements: 0 88
Planned order 0 90
Forging blank D
Gross requirement 0 90
Inventory 0 46
Net requirement 0 44
As can be seen, the existence of a preceding lot of 12 has changed the net requirements for a lot of 100. The net requirements for the forging blank, for instance, have increased from 34 (that we have seen in derivation of gross requirement) to 44. Due to lot-sizing this increase of 10 doesn’t coincide with the increase of 12 in the end-product requirements (order in multiple of 5).
Example 7.1. An assembly of the end product, truck X with its product structure in Figure 7.2 was scheduled for week 50, component-order release dates and completion date could be calculated by successively subtracting the lead time values from 50 as shown below:
Complete order for item A ... Week 50 Minus lead time of item A ... 01 Release order for item ... 49
Material Requirement Planning 137 Complete order for item B ... 49
Minus lead time of item B ... 02 Release order for item ... 47 Complete order for item C ... 47 Minus lead time of item C ... 06 Release order for item ... 41 Complete order for item D ... 41 Minus lead time of item D ... 03 Release order for item ... Week 38
Lead time values (or procedure for determining these values based on order quantity) must be supplied to the MRP system, which stores them for use in establishing a proper alignment of requirements and planned-order data in the course of the requirements explosion. Subtracting the lead time from the date of the net requirement, i.e. positioning the planned-order release forward of the timing of the net requirement it covers is called offsetting for lead time.