Page 69 - Orlicky's Material Requirements Planning

50 PART 2 Concepts

An MRP system, narrowly defined, consists of a set of logically related procedures,
decision rules, and records (alternatively, records may be viewed as inputs to the system)
designed to translate a master production schedule into time-phased net requirements
and the planned coverage of such requirements for each component inventory item need-
ed to implement that schedule.
An MRP system replans net requirements and coverage as a result of changes in
either the master production schedule, inventory status, or product composition. In the
process of planning, an MRP system allocates existing on-hand quantities to item gross
requirements and reevaluates the validity of the timing of any outstanding (open) orders
in determining net requirements.
To cover net requirements, the system establishes a schedule of planned orders for
each item, including orders, if any, to be released immediately, plus orders scheduled for
release at specified future dates. Planned order quantities are computed according to one
of several lot-sizing rules specified by the system user as applicable to the item in ques-
tion. In its entirety, the information on item requirements and coverage that an MRP sys-
tem generates is called the material requirements plan.
Order point is part-based without respect to any relationships of parts to each other,
whereas MRP is product-oriented. Order point uses data on the historical demand behav-
ior of an inventory item in isolation from all other items. MRP, a radically different
approach, ignores history in looking toward the future, as defined by the master produc-
tion schedule, and works with data specifying the relationship of components (the BOM)
that make up a product.
In the face of two alternative approaches to manufacturing inventory management,
the question naturally arises as to which of them is preferable. Which of them will yield
better results under what circumstances, and what is the principal criterion of their
applicability? This is the conventional choice available to companies. Are they really
mutually exclusive? Part 4 offers an alternative.

Dependent Versus Independent Demand
Orthodox inventory analysis and classification techniques are designed ostensibly to
determine the most desirable treatment of a given inventory item or group of items. They
examine various attributes of the individual items, such as cost, lead time, and past
usage, but none of them takes into account the most important attribute, namely, the
nature of demand. Yet it is the nature (or source) of demand that provides the real key to
inventory control technique selection and applicability. The fundamental principle that
should serve as a guideline to the applicability of either an order-point or MRP system is
the concept of dependent versus independent demand.
Demand for a given inventory item is termed independent when such demand is
unrelated to demand for other items—when it is not a function of demand for some other
inventory item. Independent demand must be forecast unless there is sufficient order
backlog to cover the planning and execution lead times.