Role of Planning

Learning Objectives

After completing this chapter, you should be able to:

• Describe the relationships among forecasting, aggregate planning, master schedul- ing, MRP, and capacity planning.

• Show how a master schedule is developed from an aggregate plan.

• Use the method of overall factors to estimate capacity requirements based on a master schedule.

• Explain the difference between independent and dependent demand, and indicate the type of demand for which MRP is appropriate.

• Use MRP to develop planned order releases for items at all levels of the bill of materials.

• Develop a load report and load profile based on MRP output, routings, and labor standards.

• Describe the characteristics of MRP II.

9 .iStockphoto/Thinkstock

Planning for Material and Resource Requirements

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CHAPTER 9Section 9.1 Role of Planning

9.1 Role of Planning

Planning is one of the most important, yet least understood, jobs that a manager per-forms. Poor planning can hinder a company’s ability to handle unexpected occur-rences. Good planning can place a company in an extremely strong competitive position, one that prepares the organization to deal with any event. All parts of the orga- nization—marketing, operations, finance—must work together in the planning process to ensure that they are moving in harmony with one another.

The start of the planning activity is the development of a competitive strategy. In today’s extremely competitive global marketplace, organizations cannot afford to go forward without a well-planned strategy, which includes the operations function as well as every other part of the organization. The strategy is then converted into a business plan—a blue- print for implementing the strategic plan. Based on a forecast and the business plan, each part of an organization must then develop its own plans that describe how the various parts will work to implement the business and strategic plans. Forecasts of demand and other important business factors, such as costs, are vital if an organization wants to create an effective plan. This series of planning stages is shown in Figure 9.1.

Figure 9.1: Operations planning activities

Organization strategic plan

Business plan

Demand forecast

Financial plan

Operations plan

Aggregate plan

Sales plan

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CHAPTER 9Section 9.1 Role of Planning

As part of this overall planning effort, firms develop operational plans that extrapolate across dif- ferent time periods. Long-range operations planning addresses facilities and resources includ- ing the number of facilities to build, the location(s), the capac- ity, and the type of process tech- nologies. Long-range planning is often considered to be five years, but could be longer or shorter depending on the indus- try, For example, if an industry such as electric power genera- tion requires 10 years to build a facility, a 5-year plan would be too short. The industry must be able to plan far enough into the future so it can make the changes needed to respond to growth in demand.

Medium-range operations planning develops ways to utilize resources to meet customer demand. The time horizon for medium-range planning is generally from 6 to 18 months in the future, but may vary outside of this range. The decisions that are usually made as part of medium-range operations planning include the following:

• Workforce size • Operating hours of the facilities • Levels of inventory that will be maintained • Output rates for the processes

Medium-range operations plans must be well coordinated with the marketing plans and the financial plans created by the organization, because these help the firm to develop the aggregate plan. See Figure 9.1.

Aggregate planning is the combining of individual end items into groups or families of parts for planning purposes. For instance, an appliance manufacturer may begin medium- range planning by determining production rates for each broad product family, such as refrigerators, stoves, and dishwashers. The aggregated plan is a statement of planned output by product groups on a monthly basis. It provides enough information to make decisions about important operating decisions such as setting contracts for materials, hir- ing and training employees, and inventory.

.Thinkstock

The planning process begins with the creation of a competitive strategy, which is then converted into a business plan—a blueprint for implementing the strategic plan.

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CHAPTER 9Section 9.2 Master Production Schedule

Highlight: PC Manufacturing

An aggregate plan for a PC manufacturer will state the number of units it intends to produce, but it will not provide the number of each model or type the firm intends to produce. The aggregate plan will not identify the amount of memory each unit will have or the type of video card. The aggregate plan helps the company and its suppliers to plan for production over the next few weeks, months, or possibly one year. As each time period, say one month, passes, the aggregate plan is refreshed to account for more recent information about demand. A functional short-term aggregate plan will ensure that the firm and its suppliers have enough flexibility to respond to customer demand as it is reported in the very short term so that each PC has the features that customer wants. This final step involves scheduling so that the right material and the right employees with the right skills come together at the right place and time with the right equipment to make the product. This is the final, essential step when creating and executing an operational plan. It involves the creation of a master production schedule.

There must be enough flexibility in the contracts with suppliers as well as the capabili- ties of the employees and facilities so the firm can produce what the customer demands because the aggregate plan does not provide sufficient details. When actual production takes place, the appliance company must specify the number of each model to be pro- duced. For a refrigerator, the model would identify the size in cubic feet, energy efficiency, and layout (side-by-side or over-under). This more detailed plan, called the master pro- duction schedule, is based on the aggregate plan.

If sufficient quantities of required resources and materials are not available when needed, customer service will suffer. When developing a master production schedule, a company must ensure that the schedule is realistic in terms of its resource and material require- ments. This chapter explains how to develop a master production schedule, and how an organization can determine the resource and material requirements to produce the goods and services for that master production schedule. This leads to a plan that will ensure the appropriate quantity of materials and resources available at the right time and place.

9.2 Master Production Schedule

The master schedule—or master production schedule (MPS)—is based on the “aggregated” plan. The master production schedule “disaggregates the aggregate plan” because it is a specific statement of exactly what will be produced and a spe- cific date for production. The master production schedule usually states individual end items or product models. The master schedule is, therefore, a detailed extension of the medium-range operations plan, or aggregate plan.

Planning Horizons The aggregate plan is often developed for one year into the future. The master sched- ule, however, does not need to extend that far, especially because it becomes more dif- ficult to manage as time increases. As a general rule, companies use six months or less for their master schedule. However, an important rule is that the master scheduling horizon

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CHAPTER 9Section 9.2 Master Production Schedule

should be at least equal to the longest cumulative lead time of any product and its compo- nent parts. In other words, enough time must be allowed from the time a master schedule quantity is entered for all parts and raw materials to be ordered from suppliers, compo- nent parts to be manufactured, and the final product to be assembled and shipped. Oth- erwise, the master schedule will not be able to satisfy the demand for those products with long cumulative lead times.

MPS Development Process The master schedule is a statement of exactly what will be produced. It must simultane- ously satisfy the needs of sales and marketing and be feasible in terms of operations. Developing a master schedule that is close to the aggregate plan, yet still satisfies mar- keting and operations, is not an easy task. The aggregate plan was developed based on a strategy that maintained acceptable inventory and workforce levels. The master schedule should still be based on that strategy, but must now do so for individual end items. In addition, the master schedule must not place more capacity demands on any machine or work center than can reasonably be met by existing capacity. Due to the difficulties involved in developing a good master production schedule, the job is usually done by experienced individuals called master schedulers.

Maine Woods Company produces wooden toys using a labor-intensive production pro- cess relying heavily on skilled woodworkers to make most of the parts that are used for the company’s finished products. The company’s aggregate production plan is developed on a monthly basis for one year into the future. For planning purposes, the company’s 48 different products are grouped by product characteristics into three product families: wheel goods, blocks, and baby toys. It is these families that are reflected in the aggregate plan. Table 9.1 shows that plan for the wheel-goods products only.

Table 9.1: Maine Woods Co. aggregate plan, wheel-goods product group

Month Demand Forecast

Regular-Time Production

Overtime Production

Beginning Inventory

Ending Inventory

January 1,800 2,000 0 200

February 1,700 2,000 200 500

March 1,800 2,000 500 700

April 1,500 2,000 700 1,200

May 1,800 2,000 1,200 1,400

June 1,900 2,000 1,400 1,500

July 2,000 2,000 1,500 1,500

August 2,500 2,000 1,500 1,000

September 2,500 2,000 1,000 500

October 2,900 2,000 400 500 0

November 2,400 2,000 400 0 0

December 2,000 2,000 0 0

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CHAPTER 9Section 9.2 Master Production Schedule

The company has developed an aggregate plan that emphasizes maintaining a constant workforce. Due to the high skill level required of its employees, Maine Woods does not want to hire or lay off personnel. Instead, inventory is built up in anticipation of high demand during late summer and fall when the retail stores that sell Maine Woods’ toys order in preparation for Christmas. Overtime has been planned only as a necessity in October and November when no inventory will be available.

Matching the Schedule to the Plan Refer again to the Maine Woods aggregate plan shown in Table 9.1. Production exceeds demand during the early part of the year, thus increasing inventory. During that time period, the company’s objectives for the master production schedule will be to:

• Produce quantities that will match the aggregate plan • Produce each individual product in proportion to its expected demand • Schedule production so that available capacity is not exceeded

The wheel-goods product group consists of three products: tricycles, toy wagons, and scooters. Past experience indicates that orders for these items will be divided so that approximately half are for tricycles and the remaining orders are equally divided between wagons and scooters. Thus, in January, the planned production of 2,000 units should be divided so that 1,000 tricycles, 500 toy wagons, and 500 scooters are produced. The same should also be done for February and March.

Figure 9.2 shows one possible master schedule that satisfies the preceding requirements. Notice that the total production of all three products in each month matches the aggregate plan for that month. Further, production of each individual product is distributed evenly so the production facilities will not be overloaded in some weeks and under loaded in others.

Figure 9.2: Maine Woods Co. master production schedule, wheel-goods product group: Constant planned production

Month January February March

Week 1 2 3 4 5 6 7 8 9 10 11 12

Tricycle

Toy Wagon

Scooter

250 250 250 250 250 250 250 250 250 250 250 250

250 250 250 250 250 250

250 250 250 250 250 250

2,000 2,000 2,000Totals

P ro

d u

ct

The master schedule shown in Figure 9.2 could be extended across the first nine months of the year because planned production during each of those months is the same. But, in October, planned production increases to 2,400 units. To meet this increase, the difference can be spread evenly across that month, keeping each product’s proportion of the total the same as before. Figure 9.3 shows the master schedule with increased output for October.

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CHAPTER 9Section 9.2 Master Production Schedule

Figure 9.3: Maine Woods Co. master production schedule, wheel-goods product group

Month September October

Week 37 38 39 40 41 42 43 44

Tricycle

Toy Wagon

Scooter

250 250 250 250 300 300 300 300

250 250 300 300

250 250 300 300

2,000 2,400Totals

P ro

d u

ct

Accounting for Customer Orders The master schedule shown in Figure 9.3 is based on the aggregate plan and historical information about demand for each product. However, customer orders must become part of the process; otherwise, the company may be producing based on a plan that is no longer valid because demand has changed.

To show how a master schedule that takes demand into account can be developed, remove inventory buildup from the picture by concentrating on the months of November and December when inventory is not available and demand must be met from current produc- tion. The example will concentrate on just one product—the toy wagon.

Suppose it is the last week of October, and the forecasts still indicate that 600 toy wag- ons (one-fourth of 2,400) will be ordered during November and another 500 (one-fourth of 2,000) during December. We can enter this information in Figure 9.4 in the “Forecast demand” row. Actual customer orders may, however, differ from the forecast. Therefore, the next row in Figure 9.4 indicates actual orders booked. Notice how the actual number of orders received decreases farther into the future because there are fewer known orders. As the future time periods draw closer to the present, customer orders should increase, coming closer to the forecast.

Figure 9.4: Maine Woods Co. master production schedule based on demand forecast and booked customer orders for toy wagons

Month November December

Week 45 46 47 48 49 50 51 52

Forecast demand

Customer orders booked

Projected on-hand inventory

150 150 150 150 125 125 125 125

170 140 85 20

230 65 -85

300Master schedule

165 120 45 0

On-hand inventory at end of October = 100

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CHAPTER 9Section 9.2 Master Production Schedule

Problem

Refer to Figure 9.4 for Maine Woods. The projected on-hand inventory for weeks 45, 46, and 47 is calculated as follows:

WEEK 45:

1. Actual on-hand inventory from the preceding week (last week of October) is 100 units. 2. The master schedule amount for week 45 is 300. 3. There are 170 customer orders booked during week 45, which is larger than the forecast for

that week (150).

Projected on-hand inventory 5 100 1 300 2 170 5 230

WEEK 46:

1. Projected on-hand inventory from the preceding week (week 45) is 230 units. 2. The master schedule amount in week 46 is 0. 3. There are 165 customer orders booked in week 46, which is larger than the forecast for that

week (150).

Projected on-hand inventory 5 230 1 0 2 165 5 65 (continued)

Projecting On-Hand Inventory Because Maine Woods produces toy wagons only every other week, a key to meeting customer orders will be inventory. For example, notice that the company has 100 toy wag- ons in inventory at the end of October. However, customer orders for the first week of November are 170. Therefore, unless more wagons are produced, demand cannot be met. To avoid this problem, Maine Woods has already scheduled another batch of 300 wagons for production during the first week of November, as shown in Figure 9.4.

To plan additional production of toy wagons, which will be scheduled in the “Master schedule” row of Figure 9.4, it will be necessary to calculate the projected on-hand inven- tory. This is referred to as “projected” because it is only based on information currently available. As new customer orders arrive, the actual on-hand inventory each week may change.

To determine projected inventory on hand for a specific week, execute the following steps:

1. Determine the amount available to meet demand: Add either actual inventory on hand from the preceding week or projected on-hand inventory from the preced- ing week to the quantity shown in the “Master schedule” row for the week being calculated. If the master production schedule is blank, then the amount is zero.

2. Determine demand: Select the larger of forecast demand or customer orders booked. This is done for two reasons. First, actual orders may exceed the forecast. Second, additional orders could be received in the future for periods in which customer orders booked are currently less than the forecast.

3. Calculate on-hand inventory: Subtract the amount determined in step 2 from the amount in step 1. The result is the projected on-hand inventory for the week.

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CHAPTER 9Section 9.2 Master Production Schedule

Amount Available-to-Promise In addition to scheduling production to meet projected demand, it is essential to prepare for customer orders to be received at any time. The firm must be able to respond to these requests, and that is called “available-to-promise.” For example, suppose a customer has contacted Maine Woods to request 50 toy wagons to be shipped in week 46. Will the com- pany have enough toy wagons available to meet this new order plus the existing orders for weeks 45 and 46 (which are 170 and 165, respectively) for a total of 335 toy wagons?

Problem (continued)

WEEK 47:

1. Projected on-hand inventory from the preceding week (week 46) is 65 units. 2. The master schedule amount in week 47 is 0. 3. Forecast demand for week 47 is 150, which is larger than the customer orders booked for that

week (140).

Projected on-hand inventory 5 65 1 0 2 150 5 285

When projected on-hand inventory becomes a negative number, as it has in week 47, the need for more production is indicated. Thus, a master schedule quantity must be entered for week 47. The exact quantity to schedule will be determined on the basis of production capacity available, expected demand, and desired batch sizes. Following its procedure of producing toy wagons every other week, Maine Woods would plan to produce enough to meet demand for the next two weeks, which would be 300, based on the demand forecast shown in Figure 9.5. Notice that the projected on-hand inven- tory balance for week 47 has been recalculated, based on the new master schedule quantity.

Figure 9.5: Calculation of available-to-promise for November and December for Maine Woods Co.

Week 45 46 47 48 49 50 51 52

Forecast demand

Customer orders booked

Projected on-hand inventory

150 150 150 150 125 125 125 125

170 140 85 20

230 65 215

300Master schedule

165 120 45 0

65 190 65 190 65

300 250 250

65 Available-to-

promise 40 120 230

On-hand inventory at end of October = 100

Month November December

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CHAPTER 9Section 9.2 Master Production Schedule

Companies calculate an available-to-promise quantity to determine whether new orders can be accepted within a given time period. This quan- tity represents the number of units that can be promised for completion any time before the next master schedule quantity.

The available-to-promise quantity is calculated as follows:

1. In the first time period of the planning horizon, add actual on-hand inventory from the preceding time period to any master schedule quantity. Then subtract the sum of customer orders booked before the next master schedule quantity.

2. For subsequent weeks, calculate available- to-promise only for those weeks when a master schedule quantity is indicated. Subtract the sum of customer orders booked before the next master sched- ule quantity from the master schedule amount for the given week. Do not include projected on-hand inventory, as that amount could be used in preceding weeks if more orders are booked.

Problem

Referring to the Maine Woods example shown in Figure 9.5, we will determine available-to-promise quantities for November.

WEEK 45:

Actual on-hand inventory from the preceding week (end of October) 5 100. The master schedule quantity for week 45 5 300. The sum of customer orders booked before the next master schedule quantity (week 47) 5 170 1 165. The available-to-promise quantity 5 (100 1 300) 2 (170 1 165) 5 65.

WEEK 46:

There is no master schedule quantity in this week, so it is skipped.

WEEK 47:

The master schedule amount 5 300. The sum of customer orders booked before the next master schedule quantity (week 49) 5 140 1 120. The available-to-promise quantity 5 300 2 (140 1 120) 5 40. (continued)

.Comstock/Thinkstock

A firm must be able to handle customer orders that may be received at any time. If a customer requests 50 toy wagons to be shipped in a specified period of time, the company must take actions to ensure that the order is met.

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CHAPTER 9Section 9.3 Master Scheduling in Practice

9.3 Master Scheduling in Practice

The discussion of master production scheduling thus far provides basic information. In actual practice, the job is much more difficult and involved. The next section dis-cusses a few key points that are important to understand. Integration with Other Functional Areas Although the master schedule relates primarily to production, it also has significant impli- cations for marketing and finance. The number of units produced during each time period determines whether demand can be met for that time period. Further, this production will generate significant costs for labor and materials, while also determining the inflow that comes from sales. Consequently, both marketing and finance must not only be aware of the master schedule, but also must give it their approval.

Marketing and sales may have special promotions or other plans that must be reflected in the master schedule. If the trial MPS does not satisfy marketing’s requirements, then it must be redone. Meeting the various internal and external demands with available resources is what makes master scheduling so difficult.

In the past, developing the MPS was often an iterative process, frequently involving only marketing and operations. But, with today’s emphasis on elimination of functional barri- ers, some companies have formed inter-functional teams with representatives from opera- tions, marketing, and finance. Such a team works together to develop a master schedule that meets all their needs. As a result, the schedule is completed more quickly. Further, through face-to-face discussions, each individual on the team can better understand the challenges and constraints faced by the functional areas other team members represent.

The first version is a “trial” MPS, not necessarily the final one. As Figure 9.6 indicates, after the trial master schedule is developed, a determination must be made as to whether sufficient capacity is available.

Problem (continued)

This indicates that Maine Woods can promise another 65 units to its customers for completion in week 45 or 46. The word “or” is critical because it means that there are only 65 units available across both weeks. So, Maine Woods cannot promise 65 in week 45 and 65 in week 46. The available-to- promise for week 47 or 48 is 40. Because the calculation is step two assumes that the 65 available- to-promise in week 45 or 46 are consumed, these 40 units are in addition to the 65. So, if the 65 units are used, there are still 40 units available to promise in week 47 or 48. If some of the 65 available-to- promise in week 45 or 46 are not consumed, the available-to-promise in week 47 or 48 will increase by the amount that is not used.

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CHAPTER 9Section 9.3 Master Scheduling in Practice

Figure 9.6: Iterative process for developing a master production schedule

No

Yes

Yes

Approved aggregate

plan

No

Trial master

schedule

Approved MPS

Capacity OK?

Capacity OK?

Does marketing approve?

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CHAPTER 9Section 9.3 Master Scheduling in Practice

Approaches to Change It is important to understand that these plans are not something a company can do only once each year. Planning is a continuous process that can be thought of as rolling out a scroll. As time passes, the scroll keeps getting rolled up on the end closest to the present time and unrolled at the other end, so that a new planning horizon comes into view. This concept is called rolling through time.

Forecasts far into the future are less accurate than nearer term forecasts. Thus, it may be necessary to make changes in planned production as the plan- ning horizon draws nearer. For instance, a company might find that demand for one of its prod- ucts is far exceeding the compa- ny’s forecasts. This organization would be foolish not to alter its production plans to meet the increased demand. Thus, both the aggregate plan and the mas- ter schedule will change as time passes. But, too much change can be disruptive. For example, a company might have already hired employees and bought materials to meet its production plan. Altering that plan could

mean idle employees or inventories of unused materials. Many companies “freeze” their master schedule for a certain time into the future to avoid such problems.

Freezing the master schedule means that no further changes can be made after a certain time. For instance, a company may indicate that the master schedule will be frozen for one week into the future. Thus, no changes may be made once a plan is within one week of its execution date. This is depicted in Figure 9.7. The master schedule is commonly frozen for a few weeks, although longer and shorter periods are used, depending on how easily a company can change its plans.

.Associated Press

A company may find that demand for one of its products far exceeds its forecasts. This was the case for the Furby, which was the “must have” toy for the 1998 holiday season.

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CHAPTER 9Section 9.3 Master Scheduling in Practice

Figure 9.7: Freezing the master schedule

Planned production

Week

1 2 3 4 5 6 7

Present FutureMay be changedFrozen

40 30 40 30 50

50 40

20 20 30 20 30

40 50

30 50 40 50 40 50

30

60 50 50 60 60 50 60

40

20

50 40

60 50

Item 1

Item 2

Item 3

Item 4

Accounting for Demand When developing a master production schedule for the Maine Woods Company, two approaches were used. The first was based on producing to inventory, while the second was based on producing to customer orders. In actual practice, both sources of demand must be considered. There are also other sources of demand. For example, companies that operate multiple plants often have one plant producing parts for another plant. Such orders would be identified as interplant orders. Further, many companies produce replacement parts for their products, such as starter motors for automobiles or blades for lawnmowers. These service parts requirements must also be considered. Such a process is depicted in Figure 9.8.

Figure 9.8: Recognizing all sources of demand through demand management

Interplant orders 25

150

50

200 100

75

Service parts

Bench warehouse orders

Research & development orders

5 10 5

50 50 50

5

15Marketing samples

50 50 50

5

125

20 15

100

195Total demand 205 275

75

Week

Customer demand

1 2 3 4 5 6

180 200 225

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CHAPTER 9Section 9.4 Rough-Cut Capacity Planning

Problem

Consider the production plan for Maine Woods’ wheel goods, which is given in Figure 9.2. An aggre- gate production of 2,000 units has been planned for January. When developing the master schedule of Figure 9.2, Maine Woods has converted that planned production into the detailed schedule for its three wheel-goods products—toy wagons, tricycles, and scooters.

Based on historical accounting information, each tricycle required 0.6 standard hours to produce, each toy wagon required 0.3 standard hours, and each scooter required 0.2 standard hours. This information can be used, as shown in Figure 9.9, to calculate capacity requirements for each product. The total capacity requirements can be determined by the sum of the weekly capacity requirements across all products as shown at the bottom of Figure 9.9. (continued)

9.4 Rough-Cut Capacity Planning

The aggregate plan is the first step to ensure that sufficient labor, capital, and machine time will be available to meet customer demand. But, the aggregate plan accounts for the totality of those resources, not for individual products. The technique of rough-cut capacity planning is a means of determining whether sufficient capacity exists at specific work centers to execute the master schedule, which is based on specific products.

Overall Factors The purpose of rough-cut capacity planning is to determine whether enough capacity will be available to meet the master production schedule. Many companies use the method of overall factors because of its simplicity and ease of calculation. This method relies pri- marily on historical accounting information to determine how many standard hours are required per unit of each product. Multiplying this figure by the number of units planned for production each week determines the overall capacity requirement. This requirement can then be broken down by individual work centers based on historical data.

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CHAPTER 9Section 9.4 Rough-Cut Capacity Planning

Problem (continued)

Figure 9.9: Calculation of total capacity requirements for a master schedule

Week

Master schedule (units required)

Capacity required (standard hours)

1 2 3 4

250 250

150 150 150

250 250

150

Tricycles

January

.6 standard hour per tricycle

Week

Master schedule (units required)

Capacity required (standard hours)

1 2 3 4

250 250

75 75

Toy Wagon

January

.3 standard hour per wagon

Week

Master schedule (units required)

Capacity required (standard hours)

1 2 3 4

50

250 250

50

Scooter

January

.2 standard hour per scooter

225 200 225 200Total capacity required (standard hours)

Suppose Maine Woods is concerned about the high usage of its cutting and drilling operations. Again, based on historical accounting information, 40% of all standard hours are spent on cutting and 35% on drilling. The other 25% of standard hours is used for noncritical operations that are not of concern.

This historical information can be used to estimate capacity requirements at each operation. For example, in week 1, a total of 225 standard hours is required. Of this, 90 hours (40%) will be required for cutting and 78.75 hours (35%) will be required for drilling. Figure 9.10 shows the estimated capac- ity requirements for each work center each week. (continued)

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CHAPTER 9Section 9.4 Rough-Cut Capacity Planning

Problem (continued)

Figure 9.10: Calculation of estimated capacity requirements for individual workstations

Total capacity required (standard hours)

Cutting—40% (standard hours)

Drilling—35% (standard hours)

1 2 3 4

90 90

78.75 78.75

Week

225 200 225 200

80 80

70 70

Problem

Maine Woods has 100 hours of cutting time available each week and 80 hours of drilling time. Based on Figure 9.10, sufficient capacity is available to meet the master schedule. In fact, weeks 2 and 4 have considerable excess.

However, an important customer has just asked whether an order for 75 tricycles could be completed in week 3. Although week 3 falls within the master schedule’s frozen time period, the vice-president of manufacturing has approved an override if capacity is available.

Seventy-five tricycles would require an additional 45 standard hours (75 3 0.6) in week 3. Of these additional hours, 18 (40%) would be used for cutting and 15.75 (35%) would be used for drilling. Figure 9.11 indicates the capacity requirements for cutting and drilling if this new order is accom- modated. Unfortunately, with only 100 hours of cutting time and 80 hours of drilling time, sufficient capacity will not be available. (continued)

Insufficient Capacity Once a company has estimated capacity requirements at each workstation or operation, those figures can be compared to capacity available. In some cases, excess capacity may be available, which indicates the opportunity to book more orders or decrease working hours. In other cases, however, requirements may exceed capacity available.

If insufficient capacity is available to meet the master schedule, a company can either shift some scheduled production into an earlier time period that has excess capacity, or schedule overtime, if possible. If neither of these approaches is possible, more changes may have to be made in the master schedule.

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CHAPTER 9Section 9.5 Material Requirements Planning

9.5 Material Requirements Planning

One approach that has been used in the past for material planning is to stock all items at all times (sometimes called just in case inventory control). This approach requires that huge inventories be maintained, resulting in extensive warehouse space and a large amount of money invested in that inventory. Even then, many compa- nies found that certain crucial items used in many of their products always seemed to run

Problem (continued)

Figure 9.11: Proposed master schedule requiring overtime in week 3

Tricycles

Toy Wagons

Scooters

1 2 3 4

250 250

Week

250 250 325 250

250

Cutting capacity required (standard hours)

Drilling capacity required (standard hours)

250

90 80 90 + 18 =

108 80

78.75 70 78.75 + 15.75 = 94.5

70

Maine Woods has several options, including turning down the order for week 3. One option is to schedule overtime as necessary in week 3 for cutting and drilling. The customer may be charged a higher price to cover the added cost.

Another option is shown in Figure 9.12. In this case, production for the 75 tricycles has been distrib- uted among weeks 2, 3, and 4 (35 in week 2, 5 in week 3, 35 in week 4) to utilize available regular- time capacity. In this case, all of the customer’s order could not be completed in week 3, but perhaps enough could be finished to satisfy the customer.

Figure 9.12: Proposed master schedule with changes to avoid overtime

Tricycles

Toy Wagons

Scooters

1 2 3 4

250 250

Week

250 (250 + 35)

285 (250 + 5)

255 (250 + 35)

285

250

Cutting capacity required (standard hours)

Drilling capacity required (standard hours)

250

90 88.4 91.2 88.4

78.75 77.35 79.80 77.35

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CHAPTER 9Section 9.5 Material Requirements Planning

out at the wrong time. No matter how much inventory is kept, a large demand for certain parts can deplete supplies quickly.

Independent Versus Dependent Demand Inventory can also be classified according to the type of demand it intends to serve. The type of demand determines which methods are used to manage inventory. Independent demand is demand that is not controlled directly by the company, such as demand from customers. Independent demand items usually include finished products, such as the completed tricycle or replacement parts sold to customers. Demand for such items is gen- erally independent of a company’s production plans. Chapter 10 will discuss procedures for managing this type of inventory.

Dependent demand is usually demand for an item that is gener- ated by a company’s production process. One example would be the wheels for tricycles that a company produces. Each tricy- cle has three wheels; if the com- pany plans to produce 200 tricy- cles in a given week, it will need 600 (200 3 3) wheels that week. Thus, the demand for wheels depends on the production of tricycles. To manage inventory for dependent demand items, companies often use material requirements planning (MRP).

The idea behind MRP is simple; it is like planning a meal. A few days before preparing the meal, a decision is made about what to serve. The person who will prepare the meal examines the recipe to determine what ingredients are required to make the meal, checks the pantry to determine which ingredients are on hand, and makes a list of the ingredients that need to be purchased. A trip to the store is made to secure items that are not currently in stock. The same basic approach is used in material requirements planning.

The master schedule is analogous to the menu, which states what will be served for the meal. Recall that the master schedule indicates which items and how many of each item to produce. A bill of materials is like the list of ingredients in the recipe, which tells the cook the amount required of each. The bill of materials (BOM) lists the materials needed and the quantities of each. Like the recipe, it also provides information about how the materials come together. Inventory records will show how much is on hand. From this, it can be determined which parts or materials will come up short and how much more of each item is needed.

Data Files Used by MRP For companies today, MRP is a computerized information system. As such, it requires data to provide the information needed for decision making. The three most important data require- ments of MRP are the master production schedule, bill of materials, and inventory records.

.Thinkstock

A bill of materials is like a recipe, listing the materials needed and the quantities of each. It also provides information about how the materials combine to create the final product.

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CHAPTER 9Section 9.5 Material Requirements Planning

1. Master Schedule File For MRP purposes, the master schedule is what “drives” the system and gener-

ates material requirements. As mentioned earlier, this master schedule may be at the finished-products level for companies such as Maine Woods that manufac- ture standard products. However, for companies making customized products, the master schedule may be at the level of components or subassemblies.

2. Bill of Materials File A bill of materials serves two purposes. First, it lists all the components of a

product and the quantities needed to make the product. Second, it shows the relationships among those components, which indicates product structure, or how the items fit together. For example, Figure 9.13 shows an exploded view of the tricycle produced by Maine Woods. In manufacturing the tricycle, the front wheel, its supports, the axle, and the steering column are sub-assembled before the entire tricycle is put together. Likewise, the seat and rear axle supports are sub-assembled before final assembly.

One way to indicate these subassemblies is through a product structure tree diagram, as shown in Figure 9.14. Notice that all the parts brought together at final assembly are listed together on level 1. Any parts that are components of subassemblies are listed on level 2. Connecting lines indicate which parts belong to which subassembly.

Figure 9.13: Exploded view of Maine Woods’ tricycle

One way to indicate these subassemblies is through a product structure tree diagram, as shown in Figure 9.14. Notice that all the parts brought together at final assembly are listed together on level 1. Any parts that are components of subassemblies are listed on level 2. Connecting lines indicate which parts belong to which subassembly.

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CHAPTER 9Section 9.5 Material Requirements Planning

Figure 9.14: Product structure tree for Maine Woods’ tricycle

Tricycle

Wheel Front axle

Steering column

Seat

Handle Rear axle

Front assembly

Wheels (2)

Seat assembly

Front axle

supports (2)

Rear axle

supports (2)

Level 0

1

2

An indented bill of materials is another way to provide structure to the bill of materials. A tree diagram is visually appealing, but is difficult to use in computerized MRP sys- tems. An indented bill of materials is used by MRP to provide information about product structure. Each item is identified with a level, as shown in Figure 9.14. An indented bill of materials illustrates each level indented from the one above it. Table 9.2 is the indented bill of materials for Maine Woods’ tricycle.

Table 9.2: Indented bill of materials for Maine Woods’ tricycle

Level Part no. Quantity Description

0 127 1 Tricycle

1 3417 1 Handle

1 2973 1 Rear axle

1 463 1 Front assembly

2 3987 2 Axle support (front)

2 5917 1 Wheel

2 2673 1 Front axle

2 3875 1 Steering column

1 5917 2 Wheel

1 587 1 Seat assembly

2 4673 1 Seat

2 3965 2 Axle support (rear)

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CHAPTER 9Section 9.5 Material Requirements Planning

3. Inventory File In order for MRP to work, accurate inventory records must be kept. For most

companies, this accuracy requires continually updating inventory records as items are withdrawn or added. To automate this function, many use bar codes, which are similar to the universal product codes (UPCs) you see on items at a grocery store; however, mistakes can be made despite automation. Cycle count- ing is a way to reconcile inventory records and correct errors, and many compa- nies using MRP also employ cycle counting. Using this method, a physical count of each part is made at least once during its replenishment cycle, which is the period between orders to replenish inventory.

Displaying MRP Data The objective of MRP is to ensure that the correct quantities of component parts are avail- able at the proper time to produce finished products according to the master produc- tion schedule. This section describes how that is done for items that appear immediately below the finished product in the product structure tree diagram.

The information obtained from bills of materials, inventory records, and the master sched- ule can be shown together in the diagram of Figure 9.15, which is the table commonly used to calculate and display MRP information.

Figure 9.15: Table for MRP

Gross requirements

Scheduled receipts

Projected ending inventory

Net requirements

Planned receipts

Planned order releases

The table in Figure 9.15 illustrates time periods across the top. These represent time peri- ods for planning purposes, or time buckets. The time buckets correspond to the master product schedule, which is usually set in weeks. The purpose of using these time periods is to state the total quantity requirements for component parts and materials needed dur- ing each time bucket. This process of stating requirements by time bucket is often called time phasing.

The first row in Figure 9.15 is labeled gross requirements. Gross requirements represent the total quantity needed of a particular item in each time bucket, based on the master

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CHAPTER 9Section 9.5 Material Requirements Planning

production schedule and the bill of materials, regardless of current inventory of that item. The second row, scheduled receipts, shows whether any orders for that item have been placed previously, but not yet received. Entries in this row indicate when the order should arrive and how many units should be enclosed. Projected ending inventory shows the planned number of units that should remain at the end of each time bucket after all transactions of that period are complete. If the number of units available during a period (projected ending inventory from the previous period plus receipts) is not sufficient to cover gross requirements, then the row labeled net requirements indicates the number of units the company is short. An entry in net requirements indicates that a replenishment order will need to be placed. Thus, the last two rows show planned receipts and planned order releases. The planned receipts row shows when orders must arrive in order to avoid a shortage of necessary parts or materials, as indicated by the net requirements row. The planned order releases row indicates the time periods in which those orders must be released (or placed) to arrive at the correct time. The difference between scheduled receipts and planned receipts is that scheduled receipts correspond to orders that have actually been placed sometime in the past, but not yet received. Planned receipts cor- respond to orders planned for release, but not yet released. Both scheduled receipts and planned receipts are included as units available in the MRP record.

MRP Logic The information in Figure 9.15 may be completed for each part of raw material as follows:

1. Obtain the bill of materials for the appropriate end product. 2. Begin with a level 1 item from the bill of materials. 3. Multiply the number of units of the level 1 item needed per unit of finished

product (from the bill of materials) by the master schedule quantity for each time bucket. Insert this as gross requirements for the appropriate time bucket. Ordinarily, the master schedule indicates the number of units of finished product to be produced in each time period, so the appropriate time bucket will be that same time period. In some cases, however, the master schedule indicates comple- tion of production. If so, the time period when production begins is the appropri- ate time bucket for gross requirements.

4. Enter any scheduled receipts of the item, based on lead time and orders previ- ously released, in the appropriate time buckets.

5. Determine how many units should be in inventory at the start of the first time bucket. Enter this number in the square to the left of the first time bucket.

6. Perform the following steps for each time bucket, beginning with the first, until the end of the planning horizon is reached. Add projected ending inventory from the preceding time bucket to scheduled receipts for the present period. If this total equals or exceeds gross requirements for the present period, go to step a. If not, go to step b. a. If gross requirements in the time bucket being planned are less than or equal

to the sum of projected ending inventory from the preceding time bucket and scheduled receipts for the current time bucket, enter the difference as projected ending inventory in the current period. Leave net requirement blank, and repeat this step for the next time bucket.

b. If gross requirements are greater than the sum of projected ending inventory from the preceding time bucket and scheduled receipts for the current time

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CHAPTER 9Section 9.5 Material Requirements Planning

bucket, enter the difference as net requirements. Leave projected ending inven- tory blank for the present time period until the following sub-steps have been performed. i. For any period in which net requirements appear, plan an order release and

corresponding receipt to cover the net requirement. (This ordering approach is termed lot-for-lot. Net requirements from several periods may be com- bined into one planned order release using other lot sizing methods.)

ii. Subtract net requirements from planned receipts, and enter the total as pro- jected ending inventory for the current time bucket. Proceed to step a for the next time bucket.

Problem

Consider the Maine Woods Company. The bill of materials for tricycles, shown in Table 9.2, indicates the front assembly (part #463) is a level 1 item. The inventory file for this item shows 100 units are expected to be in inventory at the end of December. Production lead time, the time it takes to receive front assemblies after more are ordered into production, is two weeks. An order for 500 front assem- blies was released earlier and is scheduled for receipt during week 1 of January. Using the master schedule for tricycles of Figure 9.12, determine planned order releases for front assemblies. The production for weeks 5 and 6 is set at 250 units each.

Step 1. The bill of materials (Table 9.2) indicates one front assembly is needed for each tricycle.

Step 2. Front assemblies are a level 1 item, so begin planning with them.

Step 3. The master production schedule during weeks 1 through 6 is shown at the top of Figure 9.16. Because one front assembly is needed for each tricycle, and the master schedule shows units to be produced during each week, the gross requirements for front assemblies in each week will be the same as the master schedule quantities of tricycles.

Step 4. The scheduled receipt of 500 units is entered for week 1.

Step 5. The 100 front assemblies projected to be in inventory at the end of December are entered in the projected ending inventory box to the left of week 1.

Step 6. Week 1: Gross requirements in week 1 are less than projected ending inventory from the previous week, plus scheduled receipts for week 1. The difference is entered as projected ending inventory for week 1, as shown in Figure 9.16.

(100 1 500) 2 250 5 350

Week 2: Gross requirements in week 2 are less than projected ending inventory from week 1. Pro- jected ending inventory for week 2 is:

350 2 285 5 65,

as shown in Figure 9.17. (continued)

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CHAPTER 9Section 9.5 Material Requirements Planning

Problem (continued)

Figure 9.16: MRP for front assemblies

Gross requirements

Front Assemblies Week

Master Schedule Week

Scheduled receipts

Projected ending inventory

Net requirements

Planned receipts

Planned order releases

350

500

250 285 255 285 250 250

250 285 255 285 250 250

1 2 3 4 5 6

1 2 3 4 5 6

100

Figure 9.17: Partially completed MRP: Front assemblies

Gross requirements

Week

Scheduled receipts

Projected ending inventory

Net requirements

Planned receipts

Planned order releases

350

190

65 0

190

190

500

250 285 255 285 250 250

1 2 3 4 5 6

100

(continued)

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CHAPTER 9Section 9.5 Material Requirements Planning

Problem (continued)

Week 3: Gross requirements in week 3 are greater than projected ending inventory from week 2 by 190 units. This difference is entered as net requirements for week 3.

1. An order for week 3 net requirements must be planned for receipt in week 3. Because the lead time is two weeks, the order must be planned for release in week 1 (week 3 minus 2 weeks lead time 5 week 1).

2. The planned receipts for week 3 are 190 units, and net requirements are 190 units. Therefore, the projected ending inventory for week 3 will be zero.

Weeks 4 through 6 are completed in the same way, producing the results shown in Figure 9.18.

Figure 9.18: Completed MRP: Front assemblies

Gross requirements

Week

Scheduled receipts

Projected ending inventory

Net requirements

Planned receipts

Planned order releases

350

190

65 0

190 285 250 250

285 250 250

0

285 250 250

0 0

190

500

250 285 255 285 250 250

1 2 3 4 5 6

100

In this example, the planned order releases were determined for front assemblies, which are a level 1 item. The gross requirements for all level 1 items will be determined from the master production schedule. But items that are level 2 in the bill of materials will be used in making level 1 items. Thus, their gross requirements will be determined from planned order releases for level 1 items, not from the master schedule. For example, the front assemblies that were just planned using MRP are a level 1 item. However, the front axle supports used in that assembly are level 2. Therefore, the gross requirements for front axle supports will be determined by the planned order releases for front assemblies, as shown in Figure 9.19. (continued)

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CHAPTER 9Section 9.5 Material Requirements Planning

Coordinating Purchasing Many times, one particular part or subassembly will be used in more than one product. In such cases, the gross requirements for that part must take into account all planned pro- duction of products or subassemblies that use that part.

Problem (continued)

Figure 9.19: MRP for a level 2 item: Front axle supports

Gross requirements

Level 2

Level 1

Planned order releases

Front Axle Supports*

Front Assemblies Week

Scheduled receipts

Projected ending inventory

Net requirements

Planned receipts

Planned order releases

*2 axle supports per front assembly Lead time = 1 week

160

500

380 570 500 500

0 0 0

410 500 500

410 500 500

410 500 500

190 285 250 250

1 2 3 4 5 6

40

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CHAPTER 9Section 9.5 Material Requirements Planning

Problem

The front wheel in the Maine Woods tricycle is exactly the same as the two rear wheels. However, the front wheel is part of a subassembly, while the rear wheels are not. Furthermore, the wheels on Maine Woods’ scooter are also the same as the wheels used on its tricycle. Therefore, gross require- ments for wheels (part #5917) will be the sum of planned order releases for tricycle front assemblies (Figure 9.18) plus the master schedule quantities for tricycles (Figure 9.12), multiplied by two, and scooters (Figure 9.12), also multiplied by two, as shown in Figure 9.20.

Figure 9.20: Combining demand from multiple sources and levels

Gross requirements

Wheels – part #5917* Week

Scheduled receipts

Projected ending inventory

Net requirements

Planned receipts

Planned order releases

551,410

2,0002,000**

2,000

190 + 2(250) = 690

285 + 2(285) + 2(250) = 1,355

250 + 2(255) = 760

250 + 2(285) + 2(250) = 1,320

1,295 1,975

705 25

2,000 2,000

1 2 3 4

Front Assemblies Planned order releases

Week

190 285 250 250

1 2 3 4

Tricycles* Master Schedule

Week

250 285 255 285

1 2 3 4

Scooters* Master Schedule

Week

*2 rear wheels per tricycle *2 rear wheels per scooter

250 250

1 2 3 4

100

**Lead time = 2 weeks & Minimum order quantity = 2,000

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CHAPTER 9Section 9.6 Extensions of MRP

MRP Coordinates Purchasing and Operations The output from MRP is a schedule of planned order releases. There are two types of orders. A shop order authorizes production to make certain component parts or subas- semblies. A purchase order is an authorization for a vendor to supply parts or materials. If the orders request component parts or subassemblies made by the company itself, then a shop order will be released. If the planned order release is for a part or raw material that is purchased from an outside vendor, then a purchase order will be released.

The operations part of a company is usually the department responsible for running MRP. Thus, operations are aware that the release of a shop order means that a certain part or component should be started in production because a need will exist for it sometime in the near future. Because operations generated the shop order release, they will be aware that it is a valid order and that it should be produced in the quantity indicated. Pur- chase orders are usually handled by a purchasing or procurement department. If the order releases generated by MRP are to be carried out, then the purchasing department must be aware of what the MRP system is doing and trust in the output it generates. Close coordi- nation between the operations and purchasing departments is essential.

9.6 Extensions of MRP

The discussion of MRP thus far has focused on the basics, often referred to as “little MRP.” It is important to understand how MRP can be extended to make it more use-ful and applicable to areas of the business beyond operations. Capacity Requirements Planning As mentioned previously, the master schedule is developed from the aggregate plan. Thus, the master schedule can provide much more exact measures of the capacity requirements than the aggregate plan can. As the master schedule is developed, rough-cut capacity planning is used to check capacity requirements against capacity availability. Rough-cut capacity planning does not take into account lead-time offsetting, or the amount ahead of time that component parts must be made to meet the master schedule for end items. MRP can form the basis for much more detailed capacity calculations because MRP performs lead-time offsetting when it generates planned order releases. For parts made in-house, the planned order releases generated by MRP indicate exactly when certain parts must be made and in what quantity. Those planned order releases will initiate a series of produc- tion requirements on the machines and equipment used to produce those parts and subas- semblies. These demands consume a portion of capacity of the machines and equipment. Using a routing sheet, which indicates the sequence of machines or work centers through which a part must pass during processing and the labor standards, it is possible to deter- mine capacity requirements at each operation.

Figure 9.21 shows planned order releases for tricycle axle supports, along with infor- mation contained in the routing sheet for that part. In each week, the run time on each machine is multiplied by the order quantity for that week and then added to set-up time to get capacity requirements. This procedure is done for each work center and each week.

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CHAPTER 9Section 9.6 Extensions of MRP

Figure 9.21: Capacity requirements planning for tricycle axle supports

Planned order releases

Tricycle Axle Supports

Week

1 2 3 4

410 500 500

Cut

Drill

Capacity Requirements (Standard Hours)

Week

1 2 3 4

.2 + .1(410) =

41.2

.2 + .1(500) =

50.2 50.2

.1 + .02(410) =

8.3

.1 + .02(500) =

10.1 10.1

Routing Sheet and Labor Standards

Process Setup Time

Cut Drill

Run Time per Unit

.1 hr.

.02 hr. .2 hr. .1 hr.

The information generated in Figure 9.21 is only for one part. Many other parts would also generate capacity requirements at the same work centers. By adding together all the capacity requirements for each work center in each week, a total figure for capacity requirements will be generated. The total capacity requirements placed on a work cen- ter during a given time period are called the load. The output of capacity requirements planning (CRP) is usually in the form of a load report, or load profile, which is a graphi- cal representation of the load on each work center by time period. An example of a load report is shown in Figure 9.22.

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CHAPTER 9Section 9.6 Extensions of MRP

Figure 9.22: Drill work center load report

1

100

75

50

25

0 2 3 4 5 6

Week

P er

ce n

ta g

e o

f ca

p ac

it y

Closed-Loop MRP Capacity requirements planning is of significant benefit in ensuring that a company’s plans are realistic and can be implemented. However, MRP can only project what should happen if demand is as forecasted on the master production schedule. In reality, machines may break down, deliveries from suppliers may be delayed, or some other calamity may occur. If these events are not reflected back in the MRP plan, then that plan will be invalid.

Closed-loop MRP provides feedback about the execution of production plans. By track- ing what actually happens on the shop floor and then reflecting that information in the MRP record, plans can be kept valid. Instead of “launching” orders with no information about completion, closed-loop MRP provides the feedback loop necessary to keep infor- mation up to date.

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CHAPTER 9Section 9.6 Extensions of MRP

Manufacturing Resource Planning (MRP II) Many companies have found that material requirements planning can greatly improve their operations through better planning. MRP also forces companies to better coordinate the activities of operations, marketing, and purchasing. The master schedule will have implications for finance, personnel, workforce requirements, and purchases of materials. A company must be sure that its operations plan fits appropriately with the business plan. All functional areas must base their activities on the plan. To do that, an extension of MRP has been developed called manufacturing resource planning.

Manufacturing resource planning, or MRP II, as it is commonly called to differentiate it from material requirements planning (MRP), is a way of tying all parts of an organiza- tion together to build on the strategic plan. The strategic plan is an overall blueprint that specifies the company’s objectives and how it plans to reach them. The operations func- tion will develop its own goals and plans to help achieve the corporate objective, as will the marketing, finance, and all other departments of the organization. The actions of one functional area, however, will have an impact on the other areas. For instance, if market- ing plans a promotional effort that will greatly increase sales, then operations must be ready and able to produce enough product to meet that increased demand. Hiring more employees or buying additional equipment, which will, in turn, have a major impact on the financial area, may be necessary. Because the operations activity is such an integral part of any organization, it can be especially vulnerable to the actions taken by other departments, and will have a large influence on other areas of the company through its actions.

Planned orders can also provide information about expected expenditures. Purchase order releases can be used to estimate future payments to suppliers. Shop order releases will generate needs for machine time and labor, so that they can also be used to estimate future expenses. Before the development of MRP II, companies used cost accounting pri- marily as a way to determine success after the fact. It was a way to find out what it had cost to do what was already done.

MRP II can change the way companies operate. By generating cost projections, it is pos- sible to plan for production costs ahead of time and then compare actual costs to these projections. Any major deviations can be spotted and investigated. A related advantage with MRP II is that it can be used to answer what-if types of questions. Using MRP II, a company can estimate the effect of a supplier cost increase and develop strategies to address it, instead of trying to respond after the fact. Figure 9.23 shows how MRP II con- nects all parts of the organization.

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CHAPTER 9Section 9.6 Extensions of MRP

Figure 9.23: MRP II

Material requirements

planning

Strategic plan

Medium-range operations plan

Bill of materials file

Master schedule

Capacity loading

Forecast

Personnel Marketing

Inventory file

Finance

Engineering

MRP in Service Organizations Although MRP was originally developed for manufacturing companies, it can also be applied to service organizations. Instead of the master schedule representing goods to be produced, it can represent services to be provided.

For example, an airline’s master schedule could show the number of flights from different cities each week. In this case, the materials required to provide that service include fuel for the airplanes, meals for the passengers, and other related items. Likewise, hospitals can develop a master schedule showing the number of different types of surgeries each week.

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CHAPTER 9Section 9.6 Extensions of MRP

Materials required include various surgical supplies. This is a variant of MRP, known as hospital require- ments planning (HRP).

Although some surgeries are emer- gencies, many others are scheduled in advance. Historical information about emergency surgeries can be combined with those that are sched- uled to develop a master schedule. MRP can then be used to convert the master schedule into requirements for medical equipment, instruments, supplies, operating rooms, and staff. Houston’s Park Plaza Hospital has used this approach to improve man- agement of expensive inventory.

Distribution Requirements Planning (DRP) In the retail setting, the MRP approach has been applied so widely that a variant of MRP, called distribution requirements planning (DRP), has been developed. In this way, the MRP planning logic is applied to requirements for retail outlets or warehouses.

Distribution networks often consist of local outlets or service centers that are supplied from local distribution centers. In turn, these distribution centers may be fed by a regional or national warehouse. By thinking of each level in the distribution network as a level in a bill of materials, it is possible to see that orders placed by the service centers will generate gross requirements at the regional warehouses. Figure 9.24 shows an example of distribu- tion requirements planning.

Giant Food Company, a supermarket chain, uses DRP as part of its ECR (efficient con- sumer response) approach to supply chain management. DRP allows the company to con- nect its POS (point-of-sale) information from stores to inventory levels throughout the supply chain, making that information available to all supply chain partners. DRP then “pulls” items through the system based on customer demand, facilitating one of the basic ideas behind ECR.

.Thinkstock

When airlines create a master schedule they also compile a list of materials needed to provide that service such as fuel for the airplanes and snacks for the passengers.

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CHAPTER 9Section 9.6 Extensions of MRP

Figure 9.24: Distribution requirements planning

Forecast demand

Week

Dallas Service Center

Scheduled receipts

Projected ending inventory

Planned receipts

Planned order releases

50

1,000

750 350 950

600 300

1,000

1,000

400 400

31 32 33 34

650

Gross requirements

Week

Southwest Regional Warehouse

Scheduled receipts

Projected ending inventory

Planned receipts

Planned order releases

500 0

500

900

1,000

1,500

1,000

31 32 33 34

100

Week

Phoenix Service Center

550 250

500 500

400

500

250 300 350 450

450

500 500

31 32 33 34

300

Role of Management Information Systems in Planning MRP is usually calculated on a computer because of the large volume of computations that must be performed and because much of the information, such as bills of material and inventory records, is stored on computerized databases. MRP II, by including more organizational functions within its scope, further increases the need for computerized information. As a result, companies very often use computerized information systems for operations planning and control activities. One such system and the data files that it works with are shown in Figure 9.25. Enterprise resource planning (ERP) uses a single integrated database for the entire organization. In this way, each part of the organization is connected, and efforts to break down barriers within the organization are facilitated.

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CHAPTER 9Section 9.6 Extensions of MRP

Figure 9.25: Information system for managing and controlling operations

Meeting production

targets

Cost performance

Quality performance

Update inventory

Shop floor controls

Equipment preparation

Material procurement

Requirements planning

Production planning

Customer order

management

Inventory file

Update customer

open orders

Machine history

maintenance and reliability

Production scheduling

Customer open order

file

Bill of material

file

Inventory file

Tool availability

file

Orders for parts from

suppliers file

Equipment uptime and maintenance history file

Labor availability

file

Routings of parts

file

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CHAPTER 9Case Studies

Chapter Summary

• The production planning process leads from an aggregate plan to a master sched- ule to MRP.

• The master schedule is a more detailed version of the aggregate plan that includes production for individual end products and the specific week in which the production will take place.

• The method of overall factors uses historical information to make a rough-cut capacity requirements estimate from the master schedule.

• Material requirements planning (MRP) uses the master schedule, bills of materi- als, and inventory records to plan orders for subassemblies and parts.

• Capacity requirements planning uses routing sheets and labor standards to develop time-phased estimates of capacity requirements based on planned order releases.

• Manufacturing resource planning (MRP II) provides cost information and other data that can be shared throughout the organization.

Case Studies

Able Electronics Company Mike Lanier, production manager for the Able Electronics Company, has just sat through another frustrating meeting with the company’s marketing manager, Pam Brandt. Pam has been receiving complaints from customers that their orders are not being delivered on time. Mike had to admit that the company’s on-time delivery record of 53% was not very good. But Mike felt that it was partly the fault of Able’s salespeople. In their efforts to make a sale, the company’s salespeople often promised delivery within a period of time that they knew would be difficult, if not impossible, for production to meet. Many times, these orders were for special, customized products that required different parts or differ- ent processes than Able used on its standard products.

Able Electronics produces printed circuit boards and other electronic components that are sold to companies that use them to make a range of products from computer hardware to televisions and radios. In the past, the company has produced some 2,000 fairly standard products. However, the competitive electronics business has increasingly required that Able be willing to customize its products to customer needs as foreign competition has picked up the business in standardized products by offering much lower prices than Able. Able now makes a total of approximately 3,600 different products, although only about 300 different components are used.

To meet this increased demand for customized products, Able has started increasing its levels of component-parts inventory. This has helped somewhat, but the company’s inven- tory investment has increased drastically from $824,000 to $1,243,000 during the past year. This has also been partly due to efforts to increase the finished-goods inventory for stan- dard products, which would allow the company to meet standard orders from inventory, freeing up more time to make special orders. Unfortunately, that has not worked. In fact, the on-time record for special orders has worsened.

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CHAPTER 9Case Studies

At one time, the company had considered using MRP, but that idea was abandoned because Able thought that, with the large number of different products it made, devel- oping a master schedule would be next to impossible. Now Mike Lanier wonders if he shouldn’t reconsider.

1. How might MRP help Able deal with some of its problems? 2. What approach could Able use to overcome the problem of master scheduling for

customized products? 3. How would master scheduling improve the salespeople’s ability to give custom-

ers more realistic delivery dates? 4. What aspects of MRP would be most useful to Able?

Space Age Furniture Company The Space Age Furniture Company manufactures tables and cabinets to hold microwave ovens and portable televisions. These products are made in various sizes and with various features, but all follow basically the same production and assembly operations. However, two of these products—the Saturn microwave stand and the Gemini TV stand—have a part (no. 3079) that requires machining on a special lathe used only for making that part. At present the machine is run by Ed Szewczak, a machinist who also operates other machines in Space Age’s shop. Once set up and started, the lathe can run nearly unattended. How- ever, the machinist must be present (even if not actually attending the machine) any time one of the machines, including the lathe, is in operation. At present, Ed works a regular 40-hour week. However, due to the workload for producing part 3079, it has been neces- sary to schedule frequent overtime for him in order to finish the necessary parts on time.

Coral Snodgrass, operations manager for Space Age, has just heard from Ed’s foremen that Ed is becoming unhappy about so much overtime. As Coral knows, Ed has been with the company a long time and is an excellent, reliable employee. Skilled machinists with Ed’s experience and employment record are extremely difficult to find. Coral wonders what can be done to alleviate this problem.

Recently, Space Age began using an MRP system that has helped reduce inventories greatly and improve on-time deliveries. In fact, Space Age carries no finished-goods inventory. Instead, everything in the master schedule is being produced for customer orders, so all products are shipped almost immediately. Previously Space Age had estimated that it cost $1.25 per week to store each Gemini and $1.50 per week to store each Saturn that wasn’t shipped immediately. The master schedule for producing these two items for the next six weeks is shown below.

Master Schedule

Week

1 2 3 4 5 6

Gemini 600 400 700 500 400 600

Saturn 300 400 400 600 300 300

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CHAPTER 9Discussion Questions

The part in question, 3079, is used in two different subassemblies: no. 435, which is used in the Gemini TV stand, and no. 257, which is used in the Saturn microwave stand. One of part 3079 is used in each subassembly, and one of each subassembly is used in each of the final products.

Part 3079 may be produced in any quantity since the lathe that makes it is not used for anything else. However, both of the subassemblies are produced using the same equip- ment. To minimize change over time, Space Age has decided that these subassemblies should be made in minimum quantities of 1,000 at a time, although there is no problem with capacity on the equipment that makes them. In fact, an order for 1,000 of subassem- bly 435 is due to be received in week 1, as is an order for 1,000 of subassembly 257. Lead time for both these subassemblies is one week, and no inventory is expected to be on hand for either part at the beginning of week 1. There is not any on-hand inventory of part 3079, and there are no orders in process.

Ed Szewczak earns $22 per hour and gets a 50% premium for any overtime work. When- ever part 3079 is made, there is no set-up time, but processing takes 0.03 hour per unit. It costs $0.25 per week to hold any of these parts over from one week to the next. The cost of holding each subassembly in inventory is $0.75 per unit per week.

1. What options are open to Coral to address this problem? 2. How would reducing the minimum quantity of subassemblies help? 3. What are the costs of carrying excess items in inventory at each stage? 4. What is the trade-off between overtime costs and inventory costs?

Discussion Questions

1. Define the following terms: a. Rough-cut capacity planning b. Time bucket c. Lead-time offsetting d. Freezing the master schedule e. Available-to-promise

2. Explain how a restaurant could use MRP. In what ways would its use in a restau- rant differ from its use in a manufacturing organization?

3. Describe the information generated by MRP II and how it could be used by the following departments in a company: a. Personnel b. Finance c. Marketing d. Engineering

4. Explain how MRP can decrease a company’s inventory while improving its cus- tomer service level.

5. Discuss the relationship between MRP and MRP II. 6. Why is it important for an organization to plan and allocate resources? 7. Define the following terms:

a. Bill of materials b. Net requirements

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CHAPTER 9Problems

c. Gross requirements d. Scheduled receipts e. Planned receipts

8. Why are there separate lines for planned receipts and scheduled receipts in the MRP table?

9. Describe how capacity requirements planning differs from rough-cut capacity planning.

10. What information is needed for capacity requirements planning, and how is that information obtained?

11. The time you have available for studying is a limited resource. For the next week, develop a load profile that compares the time you have available (capacity) with the time you should devote to studying for all your courses. What are your options if capacity is exceeded?

12. In what units might the capacity of a hotel be expressed, and what options are available if it is expected that capacity will be exceeded?

13. What are some things a company can do when rough-cut capacity planning indi- cates insufficient capacity to meet the master schedule?

14. How is the master production schedule modified for computerized MRP? 15. How does closed-loop MRP maintain the validity of a production plan?

Problems

1. The aggregate plan for Brookline Clothing Company indicates 3,750 men’s pants are to be produced during March. Of these, 20% are style 493. Assuming there are five weeks of production in March, develop a master schedule for style 493 men’s pants if they are produced in a batch of 250.

2. A certain company has forecast demand during the first nine weeks of the year as 350 units per week for product A. Projected inventory of product A at the end of December is 800 units. If product A is produced in batches of 1,000, determine the master schedule and the available-to-promise quantities, based on the following customer orders booked:

Week

1 2 3 4 5 6 7 8 9

300 400 375 325 300 280 300 250 200

3. The Evans Sporting Goods Company has developed an aggregate plan to pro- duce 5,000 units of its wood-products group during April. Baseball bats make up 80% of this product group, based on past sales. At the end of March, the com- pany expects to have 800 bats available in inventory. Customer orders booked in the five weeks of April are as follows:

April Week

1 2 3 4 5

900 875 850 745 720

If bats are produced in batches of 2,000, develop a master schedule, assuming fore- cast demand is expected to be uniformly distributed throughout the month.

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CHAPTER 9Problems

4. A company has the following master schedules for two of its products:

Product A Week

1 2 3 4 5 6 7 8

240 300 350 350 400 300 300 400

Product B Week

1 2 3 4 5 6 7 8

500 450 400 400 300 350 500 500

Both products must be processed on the same critical machine. Product A requires 0.2 hour of time on this machine per unit, and product B requires 0.1 hour per unit. The machine is available 120 hours per week. Use rough-cut capacity planning to determine whether sufficient capacity will be available on the machine. Suggest possible ways that any capacity shortage may be solved.

5. The Ernie and Winnie Public Accounting Company has only two employees (Ernie and Winnie). Ernie is available 30 hours per week for auditing and 20 hours per week for tax preparation. Winnie is available 10 hours per week for auditing and 30 hours per week for tax preparation. Each audit requires five hours, and each tax preparation requires two hours. The company has received requests to perform the following audits and tax preparations each week during the next month.

Week 1 2 3 4

Number of audits requested 5 8 10 9

Number of tax preparations requested 10 8 9 7

Identify possible problems that may occur if each employee’s auditing and tax preparation times are fixed. Can excess time for one activity be used for another activity? Why or why not?

6. Referring to your answer in Problem 3, historical information shows that two standard hours are required to produce each baseball bat. Further, 60% of all standard hours for wood products have been for lathe time and 40% for finish- ing. Estimate the standard hours required in each operation to produce the bats scheduled in Problem 3.

7. Referring to Problem 6, suppose 2,000 standard hours of lathe time and 1,500 standard hours of finishing time are available each week. Determine whether suf- ficient capacity will be available each week. If not, suggest ways to meet demand with available capacity.

8. Central Eye Hospital has scheduled the following number of cataract surgeries during each of the next four weeks. Each cataract surgery requires the use of five pairs of surgical gloves. These gloves are ordered from a supplier in quantities of 1,000 pairs at a time. Ordering lead time is two weeks. Inventory records indicate

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CHAPTER 9Problems

that there will be 200 pairs of gloves in inventory at the start of week 1. An order for 1,000 more is expected to arrive during week 1.

Week 1 2 3 4

Surgeries Scheduled

30 60 55 60

Use MRP to schedule planned order releases for gloves.

9. A company that manufactures furniture produces a particular type of coffee table. As you may guess, each coffee table has four legs. The production lead time for these legs is two weeks. Inventory records show that 2,500 of these legs will be available as on-hand inventory at the beginning of week 32. An order for 2,500 legs has already been released and is scheduled to arrive in week 33. These legs may be produced in any quantity. Use MRP to schedule planned order releases.

Master Schedule—Coffee Tables

Week

32 33 34 35 36 37

500 400 450 300 450 400

10. A company that makes canned soups has developed the following master sched- ule for its 12-ounce cans of vegetable beef soup:

Master Schedule—12 oz. Vegetable Beef Soup

Week

12 13 14 15 16 17

1,200 1,500 600 900 2,000 1,500

Each 12-ounce can of vegetable beef soup requires seven ounces of beef broth. The company currently has 9,000 ounces of beef broth that will be available in week 12. Production lead time for beef broth is one week. Each ounce of beef broth requires three ounces of beef bones. These bones are ordered from a supplier in multiples of 32,000 ounces (2,000 pounds) and have a lead time of two weeks. There will be 30,000 ounces on hand at the beginning of week 12, and another 32,000 ounces are scheduled for receipt during week 13. Develop planned order releases for beef bones.

11. Referring to Problem 10, suppose that the supplier of beef bones has called to indicate that the delivery of 32,000 ounces for week 13 has been delayed until week 14. How do you need to alter the master schedule for production of vegeta- ble beef soup to compensate for this change if it is uneconomical to produce less than 100 cans of soup at a time?

12. An electronics manufacturer makes a product designated as 5400. Each 5400 is assembled from one of each of two subassemblies, A38 and B493.

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CHAPTER 9Problems

Subassembly A38 requires two of part 1438 and two of component 1297. Component 1297 in turn is made from one of part 6438 and five fasteners num- bered 4217. Subassembly B493 consists only of two units of part 1395 and four fasteners numbered 4217. a. Draw a tree diagram indicating the structure of product 5400. b. Using low-level coding, at what level would fastener 4217 be coded in the

BOM? c. Develop an indented bill of materials for product 5400.

13. Referring to Problem 12, the master schedule for product 5400 is as shown below.

Master Schedule—5400s

Week

43 44 45 46 47

2,000 2,400 3,000 2,300 2,300

a. Determine gross requirements for A38 and B493 in each week. b. Suppose that in addition to the information provided, the MRP system’s item

master file indicates the following lead times, and the inventory data file indi- cates the current amounts on hand and the scheduled receipts shown below. Develop planned order releases for parts 1438 and 1395.

Item Lead Time (Weeks)

On-Hand Week 42 Scheduled Receipts

Quantity Week

A38 2 3,000 3,000 44

B493 1 3,000

1438 1 3,000

1297 1 4,500

1395 3 4,000 10,000 44

4217 2 60,000

6438 1 5,000

c. Using the preceding information, develop planned order releases for all parts and fasteners.

14. Referring to Problem 9, suppose the master schedule for coffee tables is altered, so that 500 tables are planned for production in week 33. Change the planned order releases for table legs accordingly.

15. The Skillful Machining Company makes two different parts, and both require milling. The planned order releases for these parts are shown below, alongside

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CHAPTER 9Key Terms

aggregate planning Medium-range opera- tions planning. A first rough-cut approxi- mation at determining how existing resources of people and facilities should be used to meet projected demand.

available-to-promise The number of units in a master schedule not yet committed to customer orders.

bill of materials (BOM) The document that describes the type and quantity of each component part needed to build one unit of a product.

capacity requirements planning (CRP) A process for estimating total capacity that will be required at each work center or machine, based on the master schedule and MRP.

closed-loop MRP A variation of MRP in which feedback about execution of pro- duction plans is provided so MRP can be updated to reflect reality.

cycle counting A procedure in which inventory of an item is counted at least once during an order cycle.

the mill time required by each. If the milling machine is available 60 hours per week, develop a load profile for the milling machine in each week.

Week

Planned order releases

1 2 3 4 5 6

Part A 100 50 300 50 100

Part B 200 200 100 200 100

Setup (Hrs./Batch) Run (Hrs./Unit)

Part A 1 0.3

Part B 2 0.2

16. The Davis Auto Center has scheduled the following numbers of transmission repairs on each day for the coming week. Each transmission repair requires two hours of transmission specialist time and four hours of general mechanic time. The company has one transmission specialist who works eight hours per day and two general mechanics who each work eight hours per day. Develop load profiles for the transmission specialist and the general mechanics.

Transmission Repairs Scheduled

Monday Tuesday Wednesday Thursday Friday

1 3 2 2 3

Key Terms

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CHAPTER 9Key Terms

dependent demand The demand (usu- ally for components or raw materials) that depends on production of a finished product.

distribution requirements planning (DRP) A system for determining the quantity of products needed within the distribution system. DRP uses forecasts of customers’ orders to estimate the quantity of materials to have available at the distri- bution centers.

freezing the master schedule A policy that prevents changes in the master sched- ule within a certain time period from the present.

gross requirements In MRP, the total demand for an item during a time bucket.

indented bill of materials A bill of mate- rials in which components are indented from the item in which they belong.

independent demand The demand (usu- ally from the consumer) for a part or prod- uct that is not dependent upon a produc- tion plan.

load The total capacity requirements placed on a machine or work center during a specified period of time.

load profile A graphical representation of the load on a machine or work center over time; also known as load report.

long-range operations planning Activi- ties that are planned to occur five years or more in the future. It involves resources such as facilities, people, and equipment that are needed to produce the goods and services.

load report See load profile.

lot-for-lot An order release and cor- responding receipt that covers the net requirement.

lot sizing methods Net requirements from several periods that are combined into one planned order release.

manufacturing resource planning (MRP II) An integrated decision support system that connects departments such as engi- neering, finance, personnel, manufactur- ing and marketing via a computer-based dynamic simulation model. MRP II works within the limits of an organization’s pres- ent production system and with known orders and demand forecasts.

master production schedule (MPS) A specific statement of exactly what, usually individual end items or product models, will be produced in each time period. Usu- ally these time periods are weeks, although they may be days or even hours.

medium-range operational plan- ning Activities planned between six months and 18 months ahead. It involves how existing facilities are used to satisfy demand.

method of overall factors A procedure for rough-cut capacity planning that uses historical accounting data to estimate the number of standard hours required per unit.

net requirements The additional number of units required in MRP during a time bucket after inventory and scheduled receipts have been considered.

planned order release An order to either the shop or a supplier, planned to be released for a given amount during a time bucket in MRP.

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CHAPTER 9Key Terms

planned receipts In MRP, a quantity expected to be received in a given time bucket based on an order that is planned, but not yet released.

product structure The way in which the component parts and subassemblies are used to build the product.

purchase order An authorization for a vendor to supply parts or materials.

rolling through time A planning anal- ogy that conceptualizes time as a scroll. As time passes, the scroll is rolled up on the end at the right and unrolled at the other end.

rough-cut capacity planning Used to determine whether sufficient overall production capacity will exist to meet the master production schedule.

routing sheet A document used in manu- facturing to indicate the sequence of opera- tions, machines, or work centers that a part or product must follow.

scheduled receipts In MRP, a quantity for which an order has already been released and which is planned for receipt during a given time bucket.

shop order An order for more parts to be produced in a company’s own fabrication facilities.

time bucket A period of time, usually one week, in which demand and requirements are grouped for master scheduling and material requirements planning.

time phasing The process used in mate- rial requirements planning for determining requirements by time period.

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