Review — Chapter 21

Material Requirements Planning
in 15 Minutes

Click each question to reveal the answer. From "what is MRP?" → inputs → explosion logic → lot sizing.

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1

MRP — The "What" & "Why"

MRP answers two questions: how much to order and when to order it.

1
What is MRP, and what problem does it solve?
Material Requirements Planning (MRP) is the logic that determines how many parts, components, and materials are needed and when to order or produce them — all to support the master production schedule.

It's driven by dependent demand: once you know you're building 100 bicycles, you can calculate (not forecast) that you need 200 wheels, 100 frames, 100 seats, etc.

MRP has been installed in virtually every manufacturing firm because it's a logical, easy-to-understand approach to managing the explosion of parts needed for production.
🎓 Campus Example
Imagine your university's catering team knows they need 500 boxed lunches for graduation. Each box needs 1 sandwich, 1 chip bag, 1 cookie, 1 napkin, and 1 drink. MRP calculates exactly what to order, subtracts what's already in stock, and tells them when to place each order based on lead times. No forecasting needed — the demand is derived from the event.
2
What are the three primary inputs to MRP?
1. Master Production Schedule (MPS) — What to make and when. A time-phased plan for end items. Fed by the aggregate plan, firm customer orders, and demand forecasts.

2. Bill of Materials (BOM) — The recipe. Lists every part, component, and raw material needed, the quantities required, and the assembly sequence. Also called the product structure tree.

3. Inventory Records File — What you already have. On-hand quantities, on-order quantities, lead times, lot-size policies, and scheduled receipts.
💼 Interview tip: "MPS, BOM, and inventory records" — if an interviewer asks you about MRP inputs, these three words should roll off your tongue instantly. Think of it as: what to make, what it takes, and what you've got.
3
What is a Bill of Materials (product structure tree), and what is low-level coding?
The BOM is a hierarchical breakdown of a product into all its subassemblies and raw materials, organized by levels:

Level 0 = The finished product (e.g., a bicycle)
Level 1 = Major subassemblies (frame, wheel assembly, seat)
Level 2 = Components of those subassemblies (spokes, hub, tire)
...and so on.

Low-level coding: If the same part appears at multiple levels (say a bolt is used in both Level 1 and Level 3), it gets assigned to the lowest level where it appears. This ensures MRP calculates all requirements for that part at once, preventing errors.
🎓 Recipe Analogy
Making a burger (Level 0): Bun assembly (Level 1) + Patty assembly (Level 1). Bun assembly = bun + sesame seeds + butter (Level 2). Patty assembly = meat patty + cheese + lettuce (Level 2). If cheese also goes on another item, low-level coding puts cheese at the lowest level so all cheese needs are calculated together.
2

How MRP Works — The Explosion Logic

The step-by-step process that turns an MPS into specific order schedules.

4
Walk through the six rows of an MRP record — what does each one mean?
Each item in MRP has a time-phased grid. Here are the six key rows:

1. Gross Requirements — Total need in each period. For end items, this comes from the MPS. For components, it comes from the planned-order releases of the parent × quantity per unit.

2. Scheduled Receipts — Orders already placed (open orders) that will arrive. These are firm — they're in the pipeline.

3. Projected On-Hand — Expected inventory at end of each period = prior on-hand + receipts − gross requirements.

4. Net Requirements — What you still need after using on-hand and scheduled receipts. Only appears when projected on-hand would go negative.

5. Planned-Order Receipts — Orders MRP plans to receive (sized by lot-sizing policy). Covers net requirements and may exceed them depending on the lot-sizing rule.

6. Planned-Order Releases — Same orders, but shifted earlier by the lead time. This is when you actually place the order. These drive the gross requirements of child components.
💼 Key insight: The planned-order releases of a parent become the gross requirements of its children — that's the "explosion." This cascading logic is the heart of MRP.
5
How does MRP process level by level? (The explosion)
MRP works top-down, level by level:

Level 0 (end items): Gross requirements come from the MPS. Calculate net requirements, apply lot sizing, offset by lead time → get planned-order releases.

Level 1: Take the planned-order releases from Level 0 parents. Multiply by the quantity per assembly (from the BOM). These become gross requirements for Level 1 items. Repeat the netting and offsetting.

Level 2, 3, ...: Same cascade continues downward until you reach raw materials.

If an item has multiple parents, you sum up all the gross requirements from all parents before calculating net requirements.
🎓 Worked Concept
MPS says: make 100 shutters in Week 5.
BOM says: each shutter needs 2 frames.
Planned-order release for shutters in Week 4 (LT = 1 week) → Gross requirement for frames in Week 4 = 100 × 2 = 200 frames.
If 120 frames are on hand → Net requirement = 80 frames → Plan an order for 80 (or more, depending on lot size).
6
What's the difference between "scheduled receipts" and "planned-order receipts"?
Scheduled receipts = orders that have already been released (they're real, in-transit, on the shop floor). You can expedite them but they're committed.

Planned-order receipts = orders that MRP recommends but hasn't released yet. They exist only in the plan and will change if demand or inventory changes.

Think of it this way: scheduled receipts are like packages already shipped to you (tracking number exists). Planned-order receipts are items still in your shopping cart — you haven't clicked "buy" yet.
3

Lot Sizing — How Much to Order

Four approaches to deciding order quantities in MRP systems.

7
What are the four lot-sizing methods, and how do they differ?
1. Lot-for-Lot (L4L) — Order exactly what's needed, no more. Zero leftover inventory. Simple, minimizes holding cost, but may have high ordering/setup costs.

2. EOQ — Use the standard EOQ formula. Order the same fixed quantity every time. Simple but ignores the lumpy nature of MRP demand.

3. Least Total Cost (LTC) — A dynamic method. Try combining different numbers of periods' requirements into one order. Pick the combination where ordering cost and carrying cost are most nearly equal.

4. Least Unit Cost (LUC) — Also dynamic. Try combining periods, but pick the combination with the lowest total cost per unit (total cost ÷ number of units).

LTC and LUC are "dynamic" because order sizes change as demand patterns change — unlike EOQ which is always the same.
🎓 Ordering Pizza Analogy
L4L: Order exactly as many slices as people want, every time. No leftovers, but you're placing lots of small orders.
EOQ: Always order 3 large pizzas regardless of who's coming. Sometimes too much, sometimes not enough.
LTC/LUC: Look ahead at this week's and next week's parties, combine orders to balance delivery fees vs. leftover pizza costs.
8
When is lot-for-lot great, and when is it a bad idea?
Great when: Setup/ordering costs are very low and lead times are reliable. This is the JIT philosophy — produce exactly what's needed, no waste. Also produces the least carrying cost of any method since there's no excess inventory.

Bad when: Setup costs are high. If it costs $500 to set up a machine each time, ordering tiny batches every period becomes very expensive. In that case, LTC, LUC, or EOQ will consolidate orders and save on total cost.
💼 Interview tip: If asked about lot sizing, show range: "L4L is simplest and ideal for low-setup environments like JIT. When setup costs are significant, dynamic methods like LTC balance ordering and holding costs by looking across multiple periods."
9
How does MRP connect back to forecasting and S&OP?
It's a complete cascade:

Forecast (Ch 18) → Predicts aggregate demand
S&OP / Aggregate Plan (Ch 19) → Decides production rates, workforce, inventory by product family
Master Production Schedule → Disaggregates into specific products per week
MRP (Ch 21) → Explodes the MPS into specific part orders with timing

Inventory Management (Ch 20) supports this entire chain: EOQ and safety stock concepts apply to raw material ordering within MRP, and the newsvendor model handles special one-time purchasing decisions.

Bottom line: A bad forecast → bad aggregate plan → bad MPS → bad MRP. The quality of the entire system depends on every upstream step.
✓

Check Your Understanding

5 quick questions — tap to answer, get instant feedback.

1. MRP is based on what type of demand?
Independent demand
Seasonal demand
Dependent demand
Random demand
MRP is driven by dependent demand — part requirements are calculated from the parent product's production schedule, not forecasted independently.
2. The three primary inputs to MRP are the MPS, the inventory records file, and the:
Aggregate plan
Bill of Materials (BOM)
Forecast
Supplier database
The three inputs: MPS (what to make), BOM (what it takes), and inventory records (what you've got). The BOM is also called the product structure tree.
3. In MRP, the planned-order releases of a parent item become the ___ of its child components.
Gross requirements
Scheduled receipts
Net requirements
Safety stock
This is the core explosion logic: a parent's planned-order releases (multiplied by quantity per unit from the BOM) flow down as gross requirements for child items.
4. Which lot-sizing method orders exactly what's needed each period with no excess?
EOQ
Least Total Cost
Least Unit Cost
Lot-for-Lot
Lot-for-Lot (L4L) orders exactly the net requirements each period. Zero leftover inventory, but potentially high setup/ordering costs if setups are expensive.
5. LTC and LUC are called "dynamic" lot-sizing techniques because:
They use exponential smoothing
They always order the same quantity
Order sizes change as demand patterns change across time
They only work for Level 0 items
Unlike EOQ (fixed quantity every time), LTC and LUC consider cumulative needs across varying time windows, so order quantities and coverage periods change dynamically.
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