LOT SIZING IN MRP. Week Gross requirements Scheduled receipts Projected available balance Net Requirements

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LOT SIZING IN MRP The net data is subjected lot sizing Lot sizes developed can satisfy the net for one or more weeks The basic trade-off involves the elimination of one or more setups at the expense

1 LOT SIZING IN MRP The net data is subjected lot sizing Lot sizes developed can satisfy the net for one or more weeks The basic trade-off involves the elimination of one or more setups at the expense of carrying inventory longer Lot sizing problem is basically one of converting into a series of replenishment orders It generally considered in a local level; that is, only in terms of the one part and not its components Characteristics of Requirements Demand requirement does not satisfy the independent demand assumption of constant uniform demand. The are stated on a period-by-period basis (time-phased) Discrete characteristic They can be lumpy; that is, they can vary substantially from period to period and even have periods with no demand Lot sizing procedure used for one part in an MRP system has a direct impact on the gross data passed to its components parts Use of procedures other than lot-for-lot tends to increase the requirement data s lumpiness farther down in the product structure Lot-Sizing Procedure Lot-For-Lot Replenishment orders are planned as required Table 1. Example problem: Weekly net requirement schedule Week Gross Scheduled receipts Projected available balance Requirements Ordering cost = Rs 3 per order Inventory carrying cost = Rs 2 per unit per week Lead time = 1 week As planned order releases are not decided, projected available balances are not calculated MRP 2 March 211

2 Average weekly = 92.1 For the above net the lot-for-lot procedure gives the planned order releases as follows Table 2. Lot-for-lot technique Week Planned order releases The relevant cost calculation It is assumed that carrying cost is incurred for the end of the period inventory Total order cost = 11*3=Rs 33 Total carrying cost = Total cost = Rs 33 Economic Order Quantities (EOQ) EOQ procedure is generally applied to constant uniform demand Since requirement planning has discrete and lumpy demand, the EOQ procedure has to be modified The total cost equation of EOQ procedure cannot be used in requirement planning Lot size when EOQ is used = 2RC o H = = 166 units This lot size applied to the requirement planning problem in Table 1 is as follows Table 3. Economic order quantity example Week Projected available inventory Planned order releases Total ordering cost = Rs 1,8 Total inventory carrying cost = ( ) 2 = Rs 196 MRP 21 March 211

3 Total cost = Rs 376 The average weekly requirement is used for EOQ that ignores much of the other information in the schedule This results in Carrying excess inventory from week to week for example 41 units are carried over into week 8 when a new order is received Increase the order quantity in those periods where the exceed the economic lot size plus the amount of inventory carried over into the period Periodic Order Quantities (POQ) This procedure uses of fixed number of periods as lot sizes The fixed number of periods is determined as the economic time between orders This is equal to EOQ divided by mean demand rate The time between order for data in Table 1 is weeks (166/92.1=1.8) Table 4. Periodic order quantity example Week Projected available inventory Planned order releases Total ordering cost = 6*3 = Rs Total Carrying cost = ( ) 2 = Rs 14 Total cost = Rs 284 POQ allows lot sizes to vary Replenishment orders are constrained to occur at fixed time intervals, thereby ruling the possibility of combining orders during period of light product demand Part Period Balancing (PPB) This procedure attempts to balance setup and holding costs through the use of Economic Part Periods (EPP) Economic part period is the ratio of setup cost to holding cost For the data provided for the problem in Table 1, the economic part period is 15; that is, holding 15 units for one period would cost Rs 3 the exact cost of setup. The PPB procedure simply combines until the number of part periods most nearly approximates the EPP MRP 22 March 211

4 Table 5. PPB Calculation Period Combined Trial lot size (Cumulative net ) 3 1 Part periods 3, 4 2 1*1=1 3, 4, *2 = 4 3, 4, 5, *3 = 1 3, 4, 5, 6, *4 = 38 Combine periods 3 through , *1 = 18 Replenish 7 th period alone Periods 8 through 1 replenish each period requirement, as each period s subsequent period requirement is greater than EPP. As 12 th period demand is less than EPP, analyse the periodic that can be combined in 11 th period , *1=4 11, 12, *3 = 7 Table 6. Part Period Balancing Example Combine period 11 through 14 Week Projected available inventory Planned order releases Total order cost = 6*3 = Rs Total carrying cost = ( ) 2 = Rs 34 Total cost = Rs 214 PPB procedure permits both lot size and time between orders to vary Thus, in periods of low, it yields smaller lot sizes and longer time intervals between orders than occur in high demand periods MRP 23 March 211

5 Although this procedure can produce low-cost plans, it may miss the minimum cost, since it does not evaluate all possibilities for ordering material to satisfy demand in each week of the schedule All these procedures can be used in general for purchasing as well as manufacturing lot sizing. Next procedures are particularly suitable for lot sizing of purchase when purchase discounts exists Purchasing Discount Problem Table 7. Example purchase discount problem Week Gross Scheduled receipts Projected available balance Requirements Order cost = Rs 1 Inventory carrying cost = Rs2/period/unit Base price = Rs 5/unit Discount price = Rs 45/unit Discount quantity = Rs 35 units All unit discount schedule As planned order releases are not decided, projected available balances are not calculated Least Unit Cost Steps Requirements are accumulated through an integral number of periods until the quantity to be ordered is sufficient to qualify for the discount price Also are accumulated for ordering quantity exactly equal to the discount quantity Determine whether the discount should be accepted on the basis of the least unit cost criterion Unit cost = (Ordering cost + Carrying cost + purchase price) divided by order quantity MRP 24 March 211

6 Table 8. Least Unit Cost calculation Trial periods combined Trial Lot size (Cumulative Requirements) Cumulative cost in Rs Cost per unit *5= , *5= ,4, *5= ,4,5, *45= ,4,5,5 * *45= Combine periods 3,4,5 and part of 6 th period requirement to form lot size This procedure has to be repeated for lot sizing of the requirement of remaining periods Least Period Cost or Minimum Cost per Period or Silver_Meal Approach Lowest cost per period is the criterion for lot sizing Cost per period = (Ordering cost + Inventory carrying cost + Purchase price) divided by number of period included Table 9. Least period cost example Trial periods combined Trial Lot size (Cumulative Requirements) Cumulative cost in Rs Cost per period *5= , *5= ,4, *5= ,4,5, *45= ,4,5,5 * *45= ,4,5,6, *45= ,4,5,6,7, *45= ,4,5,6,7,8, *45= * is equal to.46 period Look-Ahead Feature Combine the of period 3 to 8 form lot size After the initial lot size has been determined, look-ahead feature performs a check to see whether the cost of carrying an additional period s requirement (or the remainder of a period whose are split) is less than the cost of the setup required to supply the period s in a separate order. MRP 25 March 211

7 BUFFERING CONCEPTS Buffering methods are used to protect against uncertainties Buffering is not the way to make up for a poorly operating MRP system Categories of Uncertainty Types Timing Quantity Demand Requirements shift from One period to another Requirements for more or less than planned Fig. 1 Categories of uncertainty in MRP systems Sources Supply Orders not received when due Orders received for more or less than planned Table 1. Examples of the four categories of uncertainty week Demand timing: Projected Actual Supply timing: Planned receipts Actual receipts Demand quantity: Projected Actual Supply quantity: Planned receipts Actual receipts Two basic ways to buffer uncertainty in an MRP system Safety stock and Safety lead time Safety stock and lead time buffering 13 Order quantity = 5 units, Lead time = 2 periods No buffering used Gross Scheduled receipts 5 Projected available balance Planned order releases Safety stock = 2 units Gross Scheduled receipts 5 Projected available balance Planned order releases 5 MRP 26 March 211

8 Safety lead time = 1 period Gross Scheduled receipts 5 Projected available balance Planned order releases 5 Safety lead time is the preferred technique when uncertainty in timing exists Safety stock is preferred under conditions of quantity uncertainty Other Buffering Mechanisms Rather than living with uncertainty, an alternative is to reduce it to an absolute minimum In fact, this is one of the objectives of MPC systems Some examples: Uncertainty transmitted to the MRP system can be reduced with the following method Increasing demand forecasts accuracy and developing effective procedures for transmitting demand for products into master schedules Freezing the master schedule for some time period achieves reduction in uncertainty Developing an effective priority system for moving parts and components through the shop reduces the uncertainty in lead times Procedure that improve the accuracy of the data in the MRP system reduce uncertainty regarding on-hand inventory levels Aspects of JIT manufacturing reduce lead time, improve quality, and decrease uncertainty Another way to deal with uncertainty in MRP system is to provide for slack in the production system in one way or another Production slack is created by having additional time, labour, machine capacity, and so on over what is specifically needed to produce the planned amount of product This extra production capacity could be used to produce an oversized lot to allow for that lot s shrinkages through the process The slack also could be used for production of unplanned lots or for additional activities to speed production through the shop Providing additional capacity in the shop allows to accommodate greater quantities than planned in a given time period or expedite jobs through the shop But slack costs money NERVOUSNESS MRP system nervousness is commonly defined as significant changes in MRP plans, which occur even with only minor changes in higher-level MRP records or the master schedule MRP 27 March 211

9 Changes can involve the quantity or timing of planned orders or scheduled receipts The example given below shows how the changes caused by a relatively minor shift in the master schedule is amplified by use of the periodic order quantity lot-sizing procedure MRP system nervousness example Consider the MRP records of items A and B. Item B is a child of A. Item A POQ = 5weeks Lead time = 2 weeks Week Gross Scheduled receipts Projected available balance Planned order releases 14 5 Component B POQ = 5 weeks Lead time = 4 weeks Week Gross 14 5 Scheduled receipts 14 Projected available balance Planned order releases 48 There is a change in second week requirement of A which is reduced by one unit. The modified record based on second-week requirement change: Item A POQ = 5 weeks Lead time = 2 weeks Week Gross Scheduled receipts Projected available balance Planned order releases 63 Component B POQ = 5 weeks Lead time =4 weeks Week Gross 63 Scheduled receipts 14 Projected available balance Planned order releases 47 Nervousness creating activities (minor changes) include planned order released prematurely or an unplanned quantity, unplanned demand, shifts in MRP parameter values, and use of some lot sizing techniques MRP 28 March 211

10 A nervous system is one where small changes at higher levels induce large changes at lower levels Reducing MRP System Nervousness First approach is to reduce causes of changes to the MRP plan Introduce stability into master schedule through freezing and time fences Reduce the incidents of unplanned demands by incorporating spare parts forecasts into MRP record gross Follow the MRP plan with regard to the timing and quantity of planned order releases Control the introduction of parameter changes Second guideline involves selective use of lot-sizing procedures That is, if nervousness still exists after reducing the preceding causes, we might use different lot-sizing procedures at different product structure levels One approach is to use fixed order quantities at the top level, using either fixed order quantities or lot-for-lot at intermediate levels, and using periodic order quantities at the bottom level Third guideline use firm planned orders in MRP records Nervousness in the MRP plan VS Nervousness in the execution of MRP system plans If the system users see the plans changing, they may make arbitrary or defensive decisions leads to aggravated changes in plans in lower level One way to deal with execution issue is simply to pass updated information to system users less often An alternative is simply to have intelligent and educated users Scrap Allowance (Safety Margin) Shortages result when items produced are unsuitable to fill the net requirement; this is called yield loss Yield loss rate is determined from rates for defects, scrap, and damaged goods To account for yield loss, the planned order release amount (Q) is computed as Where, NR Q = 1 L NR requirement quantity MRP 29 March 211

11 L Average yield-loss rate If NR = 3 units and L = 2 %, Then Q = 36 units The difference 6 units is the scarp allowance The yield loss should be accounted in the planned receipt Shortages from yield loss can also be handled with Safety Stock (SS) Eg: If Q is a fixed order quantity (FOQ), an SS of at least the quantity required L is FOQ ( 1 L) If LFL lot sizing is used and the NR amount is variable, then the SS must be large enough to offset yield losses for the largest anticipated NR quantity As L represents an average yield loss, the planned order quantity adjusted for L will sometime fall short of the NR quantity If scrap losses occur, they must be planned for and buffered, and tight control can lead to performance improvements MRP 3 March 211

Lot-Sizing in MRP. Lot Sizing in MRP IE 376 PRODUCTION INFORMATION SYSTEMS. Course Notes Lecture #3 Lot sizing in MRP Systems

Lot-Sizing in MRP. Lot Sizing in MRP IE 376 PRODUCTION INFORMATION SYSTEMS. Course Notes Lecture #3 Lot sizing in MRP Systems PRODUCTION INFORMATION SYSTEMS Course Notes Lecture #3 Lot sizing in MRP Systems Bilkent University Lot-Sizing in MRP Lot-size is the quantity ordered/produced at one time Large lots are preferred because: