Mastering Material Requirements Planning and Location Strategy

Material Requirements Planning (MRP)

Understanding Dependent Demand

Dependent demand occurs when the demand for one item is directly related to the demand for another. MRP (Material Requirements Planning) is the primary technique used to manage this, utilizing:

• Bill-of-Materials (BOM)
• On-hand inventory data
• Expected receipts (purchase orders)
• Master Production Schedule (MPS)

Benefits of MRP

• Better response to customer orders
• Faster response to market changes
• Improved utilization of facilities and labor
• Reduced inventory levels

Key MRP Components

• MRP Schedule: Specifies production requirements in accordance with the aggregate production plan. It must be fixed in the near term and followed consistently.
• BOM: A comprehensive list of components, ingredients, and materials required for production.
• Lead Times: The time required to purchase, produce, or assemble an item.
• Outstanding Purchase Orders: Accurate records of quantities and scheduled receipts.
• Allocation: Units in inventory assigned to specific future production but not yet issued.
• Safety Stock: A buffer maintained to account for imperfections in BOMs, inventory records, and production quantities.
• Finite Capacity Scheduling: A method that recognizes actual capacity limits.

Enterprise Resource Planning (ERP)

ERP systems allow for the automation and integration of business processes. They provide real-time information, share common data, and coordinate operations from supplier evaluation to customer invoicing.

Location Strategies

The primary objective of location strategy is to minimize costs while maximizing benefits regarding the firm's physical location.

Factor-Rating Method

This popular method allows for a wide variety of qualitative and quantitative factors:

1. Develop a list of critical success factors.
2. Assign a weight (%) to each factor.
3. Develop a scale for each factor.
4. Score each location for each factor.
5. Multiply the score by the weight for each factor.
6. Recommend the location with the highest total score.

Locational Break-Even Analysis

A cost-volume analysis method used for industrial locations:

1. Determine fixed and variable costs for each location.
2. Plot the costs for each location.
3. Select the location with the lowest total cost for the expected production volume.

Formula: Total Cost = Fixed Cost + (Variable Cost × Volume)

Center-of-Gravity Method

: Finds location of distribution center that minimizes distribution costs. Assumes that costs is directly proportional to distance and volume shipped.