In the past, many functions have shared the total responsibility of materials control and management in a manufacturing organisation. Each function tended to develop its own set of system, procedures and techniques.
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But today, the situation is fast changing; evolving into an integrated control and movement system that is being based on increased computer use.
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Thus, with the advent of easy computer availability, a different approach to manufacturing inventory management is being made possible, which is called as Materials Requirement Planning (MRP) or simply, Materials Planning System (MPS).
This is basically a planning tool, which is based on sales forecast used in the production schedule. Whether production schedule is based on historical past sales data or market forecast, it takes into account the changes in the demand for the end products.
The demand for the end products is independent, as also some service parts and some other higher order assemblies sold direct to customers. Other requirements of materials, components and parts have dependent demands based on end products, which are quantitatively expressed in the production schedule.
Inventory investment can reduce the risk of occasional stock-outs. In other words, in inventory investment decision there is a matter of choice between the service level desired and additional investment versus risk of stock-out and a compromise had to be reached.
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In order to avoid the risk of stock-out, additional investment in the form of Buffer or Safety Stock was introduced. This again result in aggregate inventory, thus leaving the inventory control theory open to question as a management control system and mechanism which aims to minimise total cost, again increases the additional cost burden of investment in safety stock and inventory carrying.
The order point and order quantity formula (EOQ) is in fact application of mathematical method to solve an item-wise inventory problem by manipulation of data. Now, however, with better data processing facilities available, inventory control is not being looked at so much as a mathematical-statistical problem.
In MRP, safety stock at the item level disappears and the EOQ, that assumes a fairly constant demand with some minor fluctuations, need not be calculated for discrete demands for most of the dependent demand inventory items.
The recognition of the fact that ‘time’ is a more important element with respect to delivery and materials availability as per schedule rather than quantity, gives this planning tool a new meaning by eliminating carrying cost altogether. Carrying cost, which is computed in practice arbitrarily, is not important here.
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Thus, where the inventory control problem is simply a logistical problem in a manufacturing plant as contrasted to a process industry or continuous batch production, this system can be profitably used.
However, the idea is not entirely new. It was being used previously for job-lot production or custom-built order. What is, however, new is the availability of quick information and data processing facility, which the computer has now provided. Yet, much of the basic tenets of traditional inventory control theory still remain valid in many cases.
However, the MRP System uses the Master Production Schedule as its basis, and then it proceeds to consider materials requirement through a three-tier sub-systems approach. There are planning, execution ‘and control, the three basics of any management control system. The working mechanism is simple. The fig. 5.1 shows the essential elements of an MRP System:
The basic assumption in inventory control theory for an item held in stock are as follows:
1. That the fluctuations is actual practice can be presented through some standard pattern of statistical distribution (namely, Binomial, Poisson or Normal distribution) which then can be used for Buffer or Safety Stock calculation.
2. That the demand for the item is independent of other demands.
3. That the demand for the item is fairly continuous, which fluctuates about a constant average or mean.
4. That the order quantity can be calculated in isolation using mathematical formula like the EOQ.
5. That a standard forecasting technique, such as moving average, weighted moving average or exponential smoothing technique will reasonably forecast the demand with some fluctuations, except in cases of seasonal variations or a trend upward or downward for other unassignable causes of variations.
6. That orders are placed for the supply of the item without any conditional requirement of the supply of other items in inventory and, therefore, there is no need to coordinate the order with other orders.
Whereas in the MRP System, these assumptions are invalid and the following assumptions are made:
1. That the demand does not fluctuate about an average or mean, although some safety measure may be needed to provide for the slack.
2. Thai orders for dependant items or a single end product must be coordinated on a time-phase basis.
3. Those standard forecasting techniques do not apply, in as much as they are devices to smoothen out discrete data into a continuous series.
4. That the demand for the item is dependent on the end product and each demand has dependency likewise on other component parts or sub-assemblies.
5. That the demand is discontinuous and discrete in nature and occurs at intervals with reasonable accuracy.
In theory, at least, total operating cost is minimised. But some simplifying assumptions are made: That no interaction occurs between items affecting cost. This may be true in case of bought-out items, but not in case of work-in-progress in stock units in a manufacturing plant.
It also assumes that delivery schedules are tight and order calculations can be made from broken parts, list of bills of materials using Master Production Schedule as its basis, generally over a period of a quarter of a year or six months, and which then can be repeated over and over again.
In sharp contrast, the traditional inventory control theory does not distinguish between maintaining a stock of materials and flow of materials and it presupposes that the only way to improve upon the flow of materials is an increase in inventory.
However, the basic tool of MRP System depends upon isolating independent demand from dependant demand. It then uses the followings for order processing and calculation:
(a) Lead-time:
For all products, parts and materials.
(b) Master Production Schedule:
A schedule showing the quantities of which products are due to be completed in what period.
(c) Details of Stocks held in inventory and on order:
For all products during a particular time.
(d) Bills of Materials, Product Structure and Parts List:
Details of materials and parts required making those products; thus, sequencing the orders based on information, now held on disks as a material database of a computer, the planner proceeds to achieve what he actually wants to achieve. It can be used in conjunction with Order Point or Replenishment System of Inventory Control. In fact, many items, such as MRO (Maintenance, Repair and Operation) and other items in inventory will be found to have independent demand, for which the system is not suitable.