Determining Quantity Requirements
As stated previously in this chapter, there are three primary requirements to run MRP:
• A bill of material that exists at time of planning (product structure file)
• A source of demand for item numbers contained in the product structure file
• Inventory records for each item contained in the product structure file
We will use an example environment to demonstrate how MRP uses these requirements to generate a plan. To truly appreciate the extent of that plan generation, we must use an environment with at least two product structures that have shared components between them. We will take an environment that makes two end items: FPA (finished product A) and FPB (finished product B).
Figure 2-4 depicts the product structures for FPA and FPB. The numbers in parentheses are the ratios of the component to its parent item. At the far right of the figure, the product structure level is indicated. This product structure does not yet include fixed lead times. The fixed lead times in these product structures will be revealed later.
FIGURE 2-4 Product structures for FPA and FPB
In the two product structures in Figure 2-4, we can observe that there is a common subassembly—SAA. This means that all lower-level components of SAA are also common between FPA and FPB.
When MRP is given demand for FPA and FPB, it uses the product structure file including ratios to determine quantity requirements for all components at lower levels. MRP accomplishes this through a requirements explosion. The APICS Dictionary defines requirements explosion as:
The process of calculating the demand for the components of a parent item by multiplying the parent item requirements by the component usage quantity specified in the bill of material. (p. 149)
This explosion creates dependent demand for all components throughout the product structure. The APICS Dictionary defines dependent demand as:
Demand that is directly related to or derived from the bill of material structure for other items or end products. Such demands are therefore calculated and need not and should not be forecast. A given inventory item may have both dependent and independent demand at any given time. For example, a part may simultaneously be the component of an assembly and sold as a service part. (p. 46)
Figure 2-5 shows the dependent demand requirements resulting from a demand input quantity of one each at both FPA and FPB. Dependent demand for each item is shown in the dark boxes touching each item on the right side.
FIGURE 2-5 Dependent demand requirements
Since SAA and all of its subsequent components are shared components of FPA and FPB, the gross requirement is the total amount across the two product structures. The APICS Dictionary defines gross requirements as:
The total of independent and dependent demand for a component before the netting of on-hand inventory and scheduled receipts. (p. 74)
Figure 2-6 combines the two product structures at SAA to show total gross requirements for common components. We can now see that the gross requirements for SAA and its lower-level components have been added together for dependent demand both from FPA and FPB. The example will continue with this combined product structure view.
FIGURE 2-6 Combined product structures
Determining Timing Requirements
When introduced, the MRP explosion and subsequent dependent demand generation calculations created a revolution for planning functions. The ability to calculate everything together and in relatively quick fashion promised to ensure that proper quantities of materials and components available would be synchronized to demand. But synchronization is not just about calculating gross and net quantities; another prerequisite is calculating the timing of when quantities must be available.
In order to determine this timing, now it is necessary to introduce the fixed lead times of each item into the product structure. Figure 2-7 depicts the product structure with fixed lead times for each item, shown as the white number in the dark circle next to each item. Demand for each item continues to be shown in the dark boxes touching each item on the right side.
FIGURE 2-7 Fixed lead times added to the product structure
The inclusion of these lead times will determine two critical times for each component: when the component is required for its parent and correspondingly when it should be released or ordered (for purchased items). Figure 2-8 shows the required dates and order date for each item. FPA is due at time X, and FPB is due at time Y. MRP will then back-schedule all components based on that high-level demand date and the specific lead times of all items.
If FPA has a lead time of two days, it must be started two days before time X to be ready at time X. Thus, its release date is labeled X – 2. FPB also has a lead time of two days, meaning it will need to be started two days before time Y (Y – 2). Based on the required release dates of each end item, the next level of components can be scheduled for release. If components for FPA must be ready at X – 2, then they must be released a lead time ahead of that time. ICA has a lead time of one day; thus its release date is X – 3. SAA has a lead time of four, and so its release date is X – 6.
The same logic occurs for FPB. Its due date is Y. It has a lead time of two days, and so it must be released at Y – 2. This means that the next level of components must be ready by Y – 2. If SAL has a lead time of two days, it must be released at Y – 4. SAA must be released at Y – 6. For all shared components there are required and released dates based on times X and Y.
FIGURE 2-8 Required and order dates for each component item
Each path in the product structure terminates in a purchased item and an order date for each purchased item based on its required date and respective lead time. The longest calculated path is called the cumulative lead time. The APICS Dictionary defines cumulative lead time as:
The longest planned length of time to accomplish the activity in question. It is found by reviewing the lead time for each bill of material path below the item; whichever path adds up to the greatest number defines cumulative lead time. Syn: aggregate lead time, combined lead time, composite lead time, critical path lead time, stacked lead time. (p. 38)
In our example environment the cumulative lead time for both FPA and FPB is 30 days. Cumulative lead time is the primary determinant of how far into the future forecasted demand must extend. Cumulative lead time and its impact will be discussed extensively in Chapter 3.