Lecture 32

Revision:Material Requirement PlanningMaintenance and Reliability

Books• Introduction to Materials Management, Sixth Edition, J. R. Tony Arnold, P.E., CFPIM, CIRM, Fleming

College, Emeritus, Stephen N. Chapman, Ph.D., CFPIM, North Carolina State University, Lloyd M. Clive, P.E., CFPIM, Fleming College

• Operations Management for Competitive Advantage, 11th Edition, by Chase, Jacobs, and Aquilano, 2005, N.Y.: McGraw-Hill/Irwin.

• Operations Management, 11/E, Jay Heizer, Texas Lutheran University, Barry Render, Graduate School of Business, Rollins College, Prentice Hall

Objectives

• Material Requirement Planning• Nature of Demand• Inputs to MRP• Bill of Material• Planned Orders• Net requirement plan• MRP and JIT• Lot sizing techniques• Maintenance and reliability• Reliability• Product failure rate• Providing redundancy• Maintenance cost• Total productive maintenance

Material Requirement Planning

• Material Requirements Planning is a system to calculate requirements for dependent demand items

• It establishes a schedule (priority plan) showing the components required at each level of the assembly and, based on lead times, calculates the time when these components will be needed

• It is a system to avoid missing parts for the end item

Material Requirements Planning

Material Requirements Planning Process

• We need to determine– What to order– How much to order– When to order

• This will involve– Lead times– Bills of material– Inventory Status– Planning data

Nature of Demand

• Two Types of Demand– Independent

• Is not related to the demand for any other product and must be forecast

• Master production schedule (MPS) items are independent demand items

– Dependent• Is directly related to other items or end items• Such demand should be calculated and need not and should

not be forecast

Nature of Demand

Independent Demand(Forecast)

Dependent Demand(Calculated)

Table

Legs(4)

Ends(2)

Sides(2)

Top(1)

HardwareKit (1)

Item #206

Item #433

Item #711

Item #025

Item #822

If you have an order for 23 Tables, what components would you need to produce them?

• Two Major Objectives– Determine Requirements

• What to order• How much to order• When to order• When to schedule delivery

– Keep Priorities Current• It must be able to add and delete, expedite, delay, and

change orders based upon present priorities

Objectives of MRP

Linkages with Other Manufacturing Planning and Control Functions

BusinessPlan

ProductionPlan

MPS

PC and Purchasing

MRP

Planning

Execution

• The MRP is driven by the MPS; it is concerned with the components needed to make the end items. • The MRP in turn drives, or is input to, productioncontrol (PC) and purchasing

• Four Major Inputs:– Master Production

Schedule– Inventory Records– Planning Data– Bills of Material

Inputs to the MRP System

MRP

MPS

PlanningData

Bill ofMaterial

InventoryStatus

• Master Production Schedule (MPS)– The MPS provides information on planned and scheduled

orders for end items (how much is wanted and when)

• Inventory Status– Inventory status provides information on what is already

available. Inventory records include the status of each item, including amounts on order and on hand and the location

Inputs to the MRP System

• Bills of Material– Bills of material describe components and the quantity of each needed to

make one unit

• Planning Data– Planning data include lot size, lead time, scrap factors, yield factors, and

safety stock

• The Computer– Computers are needed because they are fast , accurate, and have the

ability to store and manipulate data and produce information rapidly

Inputs to the MRP System

Bill of Material“a listing of all the subassemblies, intermediates, parts, and raw

materials that go into making the parent assembly showing the quantities of each required to make an assembly”

APICS Dictionary, 8th edition, 1995

• The bill of material shows all the parts required to make one of the item

• Each part or item has only one part number

Bills of Material

• Parent–Component Relationship– An assembly is considered a parent, and the items that comprise it are

called its component items.

Bills of Material

Table

Legs(4)

Ends(2)

Sides(2)

Top(1)

HardwareKit (1)

Item #206

Item #433

Item #711

Item #025

Item #822

Parent

Component

• The multilevel bill is made up of subassemblies. The subassemblies reflect the way manufacturing plans to build the product.

• The lowest items on the bill are usually purchased parts.• All parts and subassemblies have unique numbers.• By convention, the final assembly is considered level zero.

Levels down the bill are numbered consecutively.

Bills of Material

• The multilevel bill is a collection of single-level bills. Each single-level bill shows the parts to make one parent.

• To reduce storage space and to make maintenance easier, the computer stores single-level bills only.

• Items can be both parents of components and components of other parents.

Bills of Material

Bills of Material

• Low-Level Coding and Netting - A component may reside on more than one level in a bill of material– The low-level code is the lowest level on which a part resides in all bills

of material. Every part has only one low-level code.– Low-level are determined by starting at the lowest level of a bill of

material and, working up, recording the level against the part. If a part occurs on a higher level, its existence on the lower level has already been recorded.

– Once the low-level codes are obtained, the net requirements for each part can be calculated.

• Uses for Bills of Material– Product Definition– Engineering Change Control– Service Parts– Planning– Order Entry– Manufacturing– Costing– Etc.

• Maintaining bills of material and their accuracy is extremely important

Bills of Material

Bills of Material

List of components, ingredients, and materials needed to make product

Provides product structure Items above given level are called

parents Items below given level are called

children

BOM Example

B(2) Std. 12” Speaker kit C(3)

Std. 12” Speaker kit w/ amp-booster1

E(2)E(2) F(2)

Packing box and installation kit of wire, bolts, and screws

Std. 12” Speaker booster assembly

2

D(2)

12” Speaker

D(2)

12” Speaker

G(1)

Amp-booster

3

Product structure for “Awesome” (A)

A

Level

0

BOM Example

B(2) Std. 12” Speaker kit C(3)

Std. 12” Speaker kit w/ amp-booster1

E(2)E(2) F(2)

Packing box and installation kit of wire, bolts, and screws

Std. 12” Speaker booster assembly

2

D(2)

12” Speaker

D(2)

12” Speaker

G(1)

Amp-booster

3

Product structure for “Awesome” (A)

A

Level

0

Part B: 2 x number of As = (2)(50) = 100Part C: 3 x number of As = (3)(50) = 150Part D: 2 x number of Bs

+ 2 x number of Fs = (2)(100) + (2)(300) = 800Part E: 2 x number of Bs

+ 2 x number of Cs = (2)(100) + (2)(150) = 500Part F: 2 x number of Cs = (2)(150) = 300Part G: 1 x number of Fs = (1)(300) = 300

Bills of Material

Modular BillsModules are not final products but

components that can be assembled into multiple end items

Can significantly simplify planning and scheduling

Bills of Material

Planning Bills (Pseudo Bills)Created to assign an artificial parent to

the BOMUsed to group subassemblies to

reduce the number of items planned and scheduled

Used to create standard “kits” for production

Bills of Material

Phantom BillsDescribe subassemblies that exist only

temporarilyAre part of another assembly and never

go into inventory

Low-Level Coding Item is coded at the lowest level at which it

occurs BOMs are processed one level at a time

Lead Times, Exploding, and Offsetting

• Lead time: The time from when an order is placed until the part is ready for use.

• Exploding: Multiplying the parent requirements by the usage quantity through the product tree

• Offsetting: Placing the requirements in their proper time periods based on lead times

A

B C

D E

LT: 1 wk

LT: 2 wk LT: 1 wk

LT: 1 wk LT: 1 wk

Planned Orders

• Planned Order Receipt– That quantity planned to be received at a future date as a

result of a planned order release.• Planned Order Release

– Planned order releases are just planned; they have not been released. Orders for material should not be released until the planned order release date arrives.

• The planned order release of the parent becomes the gross requirement of the component.

Releasing Planned Orders

• Releasing Planned Orders– Check availability of components– Create shop packet or purchase requisition– Allocate components to that order– Release planned order, creating a scheduled receipt

Using the Material Requirements Plan

• The computer can perform all calculations and create planned order releases, but it does not (usually) issue purchase or manufacturing orders or reschedule open orders. Computer software can create exception messages and suggest types of action.

Using the Material Requirements Plan

• On the basis of action and exception messages, the planner can release planned orders, reschedule existing orders in or out, or change quantities. In addition, the planner works with other planners, master production schedulers, production activity control, and purchasing to solve problems as they arise.

Material Planner’s 3 Types of Orders

– Planned orders - calculated and controlled by the software

– Released orders - scheduled receipts; releasing is the responsibility of the planner

Determining Net Requirements

Starts with a production schedule for the end item – 50 units of Item A in week 8

Because there are 10 Item As on hand, only 40 are actually required – (net requirement) = (gross requirement - on- hand inventory)

The planned order receipt for Item A in week 8 is 40 units – 40 = 50 - 10

Determining Net Requirements

Following the lead time offset procedure, the planned order release for Item A is now 40 units in week 7

The gross requirement for Item B is now 80 units in week 7

There are 15 units of Item B on hand, so the net requirement is 65 units in week 7

A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

Determining Net Requirements

A planned order receipt of 65 units in week 7 generates a planned order release of 65 units in week 5

The on-hand inventory record for Item B is updated to reflect the use of the 15 items in inventory and shows no on-hand inventory in week 8

This is referred to as the Gross-to-Net calculation and is the third basic function of the MRP process

Net Requirements Plan

The logic of net requirements

Available inventory

Net requirementsOn hand

Scheduled receipts+– =

Total requirements

Gross requirements Allocations+

Gross Requirements Schedule

A

B C

5 6 7 8 9 10 11

40 50 15

Lead time = 4 for AMaster schedule for A

S

B C

12 138 9 10 11

20 3040

Lead time = 6 for SMaster schedule for S

1 2 3

10 10

Master schedulefor B

sold directly

Periods

Therefore, these are the gross requirements for B

Gross requirements: B 10 40 50 2040+10 15+30=50 =45

1 2 3 4 5 6 7 8Periods

Safety Stock

BOMs, inventory records, purchase and production quantities may not be perfect

Consideration of safety stock may be prudent Should be minimized and ultimately eliminated Typically built into projected on-hand inventory

MRP Management

MRP is a dynamic system Facilitates replanning when changes

occur System nervousness can result from too

many changes Time fences put limits on replanning Pegging links each item to its parent

allowing effective analysis of changes

MRP and JIT

MRP is a planning system that does not do detailed scheduling

MRP requires fixed lead times which might actually vary with batch size

JIT excels at rapidly moving small batches of material through the system

Finite Capacity Scheduling

MRP systems do not consider capacity during normal planning cycles

Finite capacity scheduling (FCS) recognizes actual capacity limits

By merging MRP and FCS, a finite schedule is created with feasible capacities which facilitates rapid material movement

Small Bucket Approach

1. MRP “buckets” are reduced to daily or hourly The most common planning period (time bucket)

for MRP systems is weekly

2. Planned receipts are used internally to sequence production

3. Inventory is moved through the plant on a JIT basis

4. Completed products are moved to finished goods inventory which reduces required quantities for subsequent planned orders

5. Back flushing based on the BOM is used to deduct inventory that was used in production

Lot-Sizing Techniques

Lot-for-lot techniques order just what is required for production based on net requirements May not always be feasible If setup costs are high, lot-for-lot can be

expensive

Economic order quantity (EOQ) EOQ expects a known constant demand

and MRP systems often deal with unknown and variable demand

Lot-Sizing Techniques

Part Period Balancing (PPB) looks at future orders to determine most economic lot size

The Wagner-Whitin algorithm is a complex dynamic programming technique Assumes a finite time horizon Effective, but computationally

burdensome

Lot-for-Lot Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35 35 0 0 0 0 0 0 0 0 0

Net requirements 0 30 40 0 10 40 30 0 30 55

Planned order receipts 30 40 10 40 30 30 55

Planned order releases 30 40 10 40 30 30 55

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

Lot-for-Lot Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35 35 0 0 0 0 0 0 0 0 0

Net requirements 0 30 40 0 10 40 30 0 30 55

Planned order receipts 30 40 10 40 30 30 55

Planned order releases 30 40 10 40 30 30 55

Holding cost = $1/week; Setup cost = $100; Lead time = 1 week

No on-hand inventory is carried through the systemTotal holding cost = $0

There are seven setups for this item in this planTotal setup cost = 7 x $100 = $700

EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35 35 0 43 3 3 66 26 69 69 39

Net requirements 0 30 0 0 7 0 4 0 0 16

Planned order receipts 73 73 73 73

Planned order releases 73 73 73 73

Holding cost = $1/week; Setup cost = $100; Lead time = 1 weekAverage weekly gross requirements = 27; EOQ = 73 units

EOQ Lot Size Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35 35 0 0 0 0 0 0 0 0 0

Net requirements 0 30 0 0 7 0 4 0 0 16

Planned order receipts 73 73 73 73

Planned order releases 73 73 73 73

Holding cost = $1/week; Setup cost = $100; Lead time = 1 weekAverage weekly gross requirements = 27; EOQ = 73 units

Annual demand = 1,404Total cost = setup cost + holding costTotal cost = (1,404/73) x $100 + (73/2) x ($1 x 52 weeks)Total cost = $3,798Cost for 10 weeks = $3,798 x (10 weeks/52 weeks) =

$730

PPB Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35

Net requirements

Planned order receipts

Planned order releases

Holding cost = $1/week; Setup cost = $100; Lead time = 1 weekEPP = 100 units

PPB Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35

Net requirements

Planned order receipts

Planned order releases

Holding cost = $1/week; Setup cost = $100;EPP = 100 units

2 30 02, 3 70 40 = 40 x 12, 3, 4 70 402, 3, 4, 5 80 70 = 40 x 1 + 10 x 3 100 70 1702, 3, 4, 5, 6 120 230 = 40 x 1 + 10 x 3

+ 40 x 4

+ =

Combine periods 2 - 5 as this results in the Part Period closest to the EPP

Combine periods 6 - 9 as this results in the Part Period closest to the EPP

6 40 06, 7 70 30 = 30 x 16, 7, 8 70 30 = 30 x 1 + 0 x 26, 7, 8, 9 100 120 = 30 x 1 + 30 x 3 100 120 220+ =

10 55 0 100 0 100Total cost 300 190 490

+ =+ =

Trial Lot SizePeriods (cumulative net Costs

Combined requirements) Part Periods Setup Holding Total

PPB Example

1 2 3 4 5 6 7 8 9 10

Gross requirements 35 30 40 0 10 40 30 0 30 55

Scheduled receipts

Projected on hand 35 35 0 50 10 10 0 60 30 30 0

Net requirements 0 30 0 0 0 40 0 0 0 55

Planned order receipts 80 100 55

Planned order releases 80 100 55

Holding cost = $1/week; Setup cost = $100; Lead time = 1 weekEPP = 100 units

Lot-Sizing Summary

For these three examples

Lot-for-lot $700EOQ $730PPB $490

Wagner-Whitin would have yielded a plan with

a total cost of $455

Lot-Sizing Summary

In theory, lot sizes should be recomputed whenever there is a lot size or order quantity change

In practice, this results in system nervousness and instability

Lot-for-lot should be used when low-cost JIT can be achieved

Lot-Sizing Summary

Lot sizes can be modified to allow for scrap, process constraints, and purchase lots

Use lot-sizing with care as it can cause considerable distortion of requirements at lower levels of the BOM

When setup costs are significant and demand is reasonably smooth, PPB, Wagner-Whitin, or EOQ should give reasonable results

Maintenance and Reliability

Strategic Importance of Maintenance and Reliability

Failure has far reaching effects on a firm’s Operation Reputation Profitability Dissatisfied customers Idle employees Profits becoming losses Reduced value of investment in plant and

equipment

Maintenance and Reliability

The objective of maintenance and reliability is to maintain the capability of the system while controlling costsMaintenance is all activities involved in

keeping a system’s equipment in working order

Reliability is the probability that a machine will function properly for a specified time

Important Tactics

Reliability1. Improving individual components

2. Providing redundancy

Maintenance1. Implementing or improving preventive

maintenance

2. Increasing repair capability or speed

Maintenance Strategy

Employee Involvement

Information sharingSkill trainingReward systemEmployee empowerment

Maintenance and Reliability Procedures

Clean and lubricateMonitor and adjustMake minor repairKeep computerized records

Results

Reduced inventoryImproved qualityImproved capacityReputation for qualityContinuous improvementReduced variability

Reliability

Improving individual components

Rs = R1 x R2 x R3 x … x Rn

where R1 = reliability of component 1R2 = reliability of component 2

and so on

Overall System ReliabilityR

elia

bili

ty o

f th

e sy

stem

(pe

rcen

t)

Average reliability of each component (percent)

| | | | | | | | |

100 99 98 97 96

100 –

80 –

60 –

40 –

20 –

0 –

n = 10

n = 1

n = 50n = 100n = 200n = 300

n = 400

Rs

R3

.99

R2

.80

Reliability Example

R1

.90

Reliability of the process is

Rs = R1 x R2 x R3 = .90 x .80 x .99 = .713 or 71.3%

Product Failure Rate (FR)

Basic unit of measure for reliability

FR(%) = x 100%Number of failures

Number of units tested

FR(N) = Number of failuresNumber of unit-hours of operating time

Mean time between failures

MTBF =1

FR(N)

Failure Rate Example

20 air conditioning units designed for use in NASA space shuttles operated for 1,000 hoursOne failed after 200 hours and one after 600 hours

FR(%) = (100%) = 10%220

FR(N) = = .000106 failure/unit hr220,000 - 1,200

MTBF = = 9,434 hrs1.000106

Failure Rate Example

20 air conditioning units designed for use in NASA space shuttles operated for 1,000 hoursOne failed after 200 hours and one after 600 hours

FR(%) = (100%) = 10%2

20

FR(N) = = .000106 failure/unit hr2

20,000 - 1,200

MTBF = = 9,434 hr1

.000106

Failure rate per trip

FR = FR(N)(24 hrs)(6 days/trip)FR = (.000106)(24)(6)FR = .153 failures per trip

Providing Redundancy

Provide backup components to increase reliability

+ x

Probability of first

component working

Probability of needing second

component

Probability of second

component working

(.8) + (.8) x (1 - .8)

= .8 + .16 = .96

Redundancy Example

A redundant process is installed to support the earlier example where Rs = .713

R1

0.90

0.90

R2

0.80

0.80

R3

0.99

= [.9 + .9(1 - .9)] x [.8 + .8(1 - .8)] x .99

= [.9 + (.9)(.1)] x [.8 + (.8)(.2)] x .99

= .99 x .96 x .99 = .94

Reliability has increased

from .713 to .94

Maintenance

Two types of maintenancePreventive maintenance – routine

inspection and servicing to keep facilities in good repair

Breakdown maintenance – emergency or priority repairs on failed equipment

Implementing Preventive Maintenance

Need to know when a system requires service or is likely to fail

High initial failure rates are known as infant mortality

Once a product settles in, MTBF generally follows a normal distribution

Good reporting and record keeping can aid the decision on when preventive maintenance should be performed

Computerized Maintenance System

Output Reports

Inventory and purchasing reports

Equipment parts list

Equipment history reports

Cost analysis (Actual vs. standard)

Work orders– Preventive

maintenance– Scheduled

downtime– Emergency

maintenance

Data entry– Work requests– Purchase

requests– Time reporting– Contract work

Data Files

Personnel data with skills, wages,

etc.

Equipment file with parts list

Maintenanceand work order

schedule

Inventory of spare parts

Repair history file

Maintenance Costs

The traditional view attempted to balance preventive and breakdown maintenance costs

Typically this approach failed to consider the true total cost of breakdowns Inventory Employee morale Schedule unreliability

Maintenance Costs

Total costs

Breakdown maintenance costs

Cos

ts

Maintenance commitment

Traditional View

Preventive maintenance costs

Optimal point (lowestcost maintenance policy)

Maintenance Costs

Cos

ts

Maintenance commitment

Full Cost View

Optimal point (lowestcost maintenance policy)

Total costs

Full cost of breakdowns

Preventive maintenance costs

Maintenance Cost Example

Should the firm contract for maintenance on their printers?

Number of Breakdowns

Number of Months That Breakdowns Occurred

0 2

1 8

2 6

3 4

Total: 20

Average cost of breakdown = $300

Maintenance Cost Example

1. Compute the expected number of breakdowns

Number of Breakdowns

Frequency Number of Breakdowns

Frequency

0 2/20 = .1 2 6/20 = .3

1 8/20 = .4 3 4/20 = .2

∑ Number of breakdowns

Expected number of breakdowns

Corresponding frequency= x

= (0)(.1) + (1)(.4) + (2)(.3) + (3)(.2)

= 1.6 breakdowns per month

Maintenance Cost Example

2. Compute the expected breakdown cost per month with no preventive maintenance

Expected breakdown cost

Expected number of breakdowns

Cost per breakdown= x

= (1.6)($300)

= $480 per month

Maintenance Cost Example

3. Compute the cost of preventive maintenance

Preventive maintenance cost

Cost of expected breakdowns if service contract signed

Cost of service contract

=

+

= (1 breakdown/month)($300) + $150/month= $450 per month

Hire the service firm; it is less expensive

Increasing Repair Capabilities

1. Well-trained personnel2. Adequate resources3. Ability to establish repair plan and priorities4. Ability and authority to do material planning5. Ability to identify the cause of breakdowns6. Ability to design ways to extend MTBF

How Maintenance is Performed

Operator Maintenance department

Manufacturer’s field service

Depot service(return equipment)

Preventive maintenance costs less and is faster the more we move to the left

Competence is higher as we move to the right

Total Productive Maintenance (TPM)

Designing machines that are reliable, easy to operate, and easy to maintain

Emphasizing total cost of ownership when purchasing machines, so that service and maintenance are included in the cost

Developing preventive maintenance plans that utilize the best practices of operators, maintenance departments, and depot service

Training workers to operate and maintain their own machines

Establishing Maintenance Policies

SimulationComputer analysis of complex

situationsModel maintenance programs before

they are implementedPhysical models can also be used

Expert systemsComputers help users identify problems

and select course of action

End of Lecture 32