Some of the issues which deserve consideration in any comprehensive treatment of MRP (material requirement planning) are:
2. Safety stock.
3. Scrap allowances.
5. Cycle counting.
7. Time fence.
The above issues are discussed below:
EOQ â€“ Economic Order Quantity
EBQ â€“ Economic Batch Quantity
Lot-sizing: The MRP system generates planned order releases, which trigger purchase orders for outside suppliers or production orders (or work orders) for in-house production departments. As certain costs such as the set-up cost (or ordering cost) and holding cost (or inventory carrying cost) are associated with each order, it is necessary to consider the trade-off between these two types of costs and take decision regarding how much to order (i.e. batch size/lot-size) A question that would be examined is whether there is some economic lot-size (EOQ or EBQ) that should be purchased or produced as the case may be. In production, a minimum lot-size is sometimes established to reduce the set-up cost per unit produced. Such minimum lot-sizes may cause excessive inventory, if it exceeds very much the net requirement of a period and followed by periods with no requirements, which is counter to the benefit of the MRP system.
Various methods of lot-sizing are:
(a) Lot-for-lot ordering (LFL) in which order quantity equals the net requirements for a given period. Separate orders are released for each periodâ€™s net requirement.
(b) EOQ technique in which the order quantity is larger than a single periodâ€™s net requirement so that, ordering cost and holding costs balance out.
(c) Requirements may be batched until they reach some arbitrary minimum order size. If the requirement exceeds this minimum, the requirement will determine the order size.
(d) The lot size may be determined by the period order quantity (POQ) technique.
Period order quantity. (POQ) = No. of weeks per year/No. of orders per year = N/D/Q weeks
D = Annual demand (units).
Q = Economic order Qty (EOQ)
N= Number of weeks per year.
The ordering policy is to order the net requirements of the number of periods is equal to the POQ.
(e) The lot size can be chosen to approximately balance ordering and holding costs. One method of doing this is known as part-period method or part-period algorithm (PPA). This is a simple approach to the lot-size selection when a series of requirements which are not necessarily uniform, are to be batched into orders so that the total cost will be near the minimum. This method does not provide an optimal lot-size (i.e. EOQ) but it approaches optimality by attempting to make holding cost for a lot, nearly equal to the ordering cost for the lot.
Unlike the EOQ model, the part period algorithm method may select a different quantity to be ordered each time the order is to be placed. The PPA assumes that an order will be scheduled in the first period in which, there is a net requirement. The requirement for the next period is added into this order, if the cost holding these units until they are used, is less than the cost of receiving them as a separate order. Requirements for future periods continue to be added to the lot until the total holding cost for the lot comes as close as possible to the order cost without dividing a periodâ€™s requirement.
Safety stock: There are divergent views by MRP users regarding whether safety stock should be used in MRP systems or not. One side of argument supporting the use of safety stock is that, it performs the function of avoiding excessive stock-outs caused by uncertain lead times and daily demands. On the other hand, those who oppose the use of safety stocks in MRP, argue that, safety stock is not required because MRP systems adapt to changing conditions that affect demand and lead times.
The use of safety stock can be justified only by the sources of uncertainty, present during lead times. Safety tock is normally maintained for end items which have independent demand. For lower-level items such as raw material and parts, the uncertainty of demand is adequately controlled, because the demand is a dependent demand which is set by the MPS. However, uncertainties may be present during lead times because of uncertainty of the lead time and the uncertainty of demand that occurs because of changes in the MPS. Keeping some safety stock can be justified for raw materials, parts and other low-level items, although at significantly reduced levels.
Scrap allowances: The bill of materials explosion could include multiplication by a factor (more than one) to make allowances for the usual scrap loss in manufacturing an item.
Pegging is a technique which enables the planner to trace from a work load in a work centre back through its higher-level assemblies to determine, what end item in the MPS caused the load. Single level pegging is used often, which simply tells immediately higher-level parent of a component. When material plans are disrupted, pegging helps to identify which components are affected by such disruptions. Pegging shows the level-by-level linkages among components and their time-phased status in MRP records.