We begin by developing a bill of materials (BOM). The BOM identifies the components, describes them, and indicates the number required in the production of one unit of the final product. From the BOM, we develop a material structure tree. Let’s say that demand for product A is 50 units. Each unit of A requires 2 units of B and 3 units of C. Now, each unit of B requires 2 units of D and 3 units of E. Furthermore, each unit of C requires 1 unit of E and 2 units of F. Thus, the demand for B, C, D, E, and F is completely dependent on the demand for A. Given this information, a material structure tree can be developed for the related inventory items (see Figure 6.12).

The structure tree has three levels: 0, 1, and 2. Items above any level are called parents, and items below any level are called components. There are three parents: A, B, and C. Each parent item has at least one level below it. Items B, C, D, E, and F are components because each item has at least one level above it. In this structure tree, B and C are both parents and components.

Note that the number in the parentheses in Figure 6.12 indicates how many units of that particular item are needed to make the item immediately above it. Thus, B(2) means that it takes 2 units of B for every unit of A, and F(2) means that it takes 2 units of F for every unit of C.

After the material structure tree has been developed, the number of units of each item required to satisfy demand can be determined. This information can be displayed as follows:

• Part B: $2\times \text{number of A'}s=2\times 50=100$

• Part C: $3\times \text{number of A'}s=3\times 50=150$

• Part D: $2\times \text{number of B'}s=2\times 100=200$

• Part E: $3\times \text{number of B'}s+1\times \text{number of C'}s=3\times 100+1\times 150=450$

• Part F: $2\times \text{number of C'}s=2\times 150=300$

Figure 6.12 Material Structure Tree for Item A

Thus, for 50 units of A we need 100 units of B, 150 units of C, 200 units of D, 450 units of E, and 300 units of F. Of course, the numbers in this table could have been determined directly from the material structure tree by multiplying the numbers along the branches times the demand for A, which is 50 units for this problem. For example, the number of units of D needed is simply $2\times 2\times 50=200$ units.

Once the materials structure tree has been developed, we construct a gross material requirements plan. This is a time schedule that shows when an item must be ordered from suppliers when there is no inventory on hand or when the production of an item must be started in order to satisfy the demand for the finished product at a particular date. Let’s assume that all of the items are produced or manufactured by the same company. It takes one week to make A, two weeks to make B, one week to make C, one week to make D, two weeks to make E, and three weeks to make F. With this information, the gross material requirements plan can be constructed to reveal the production schedule needed to satisfy the demand of 50 units of A at a future date. (Refer to Figure 6.13.)

The interpretation of the material in Figure 6.13 is as follows: If you want 50 units of A at week 6, you must start the manufacturing process in week 5. Thus, in week 5 you need 100 units of B and 150 units of C. These two items take 2 weeks and 1 week to produce. (See the lead times.) Production of B should be started in week 3, and production of C should be started in week 4. (See the order release for these items.) Working backward, the same computations can be made for all the other items. The material requirements plan graphically reveals when each item should be started and completed in order to have 50 units of A at week 6. Now, a net requirements plan can be developed given the on-hand inventory in Table 6.9; here is how it is done.

Using these data, we can develop a net material requirements plan that includes the gross requirements, on-hand inventory, net requirements, planned order receipts, and planned order release for each item. It is developed by beginning with A and working backward through the other items. Figure 6.14 shows a net material requirements plan for product A.

The net requirements plan is constructed like the gross requirements plan. Starting with item A, we work backward determining net requirements for all items. These computations are done by referring constantly to the structure tree and lead times. The gross requirements for A are 50 units in week 6. Ten items are on hand, and thus the net requirements and planned-order receipt are both 40 items in week 6. Because of the one-week lead time, the planned order release is 40 items in week 5. (See the arrow connecting the order receipt and order release.) Look down column 5 and refer to the structure tree in Figure 6.13. Eighty $\left(2\times 40\right)$ items of B and $120=3\times 40$ items of C are required in week 5 in order to have a total of 50 items of A in week 6. The letter A in the upper-right corner for items B and C means that this demand for B and C was generated as a result of the demand for the parent, A. Now the same type of analysis is done for B and C to determine the net requirements for D, E, and F.

So far, we have considered only one end product. For most manufacturing companies, there are normally two or more end products that use some of the same parts or components. All of the end products must be incorporated into a single net material requirements plan.

In the MRP example just discussed, we developed a net material requirements plan for product A. Now, we show how to modify the net material requirements plan when a second end product is introduced. Let’s call the second end product AA. The material structure tree for product AA is as follows:

Let’s assume that we need 10 units of AA. With this information, we can compute the gross requirements for AA:

• Part D: $3\times \text{number of AA'}s=3\times 10=30$

• Part F: $2\times \text{number of AA'}s=2\times 10=20$

To develop a net material requirements plan, we need to know the lead time for AA. Let’s assume that it is one week. We also assume that we need 10 units of AA in week 6 and that we have no units of AA on hand.

Now, we are in a position to modify the net material requirements plan for product A to include AA. This is done in Figure 6.15.

Look at the top row of the figure. As you can see, we have a gross requirement of 10 units of AA in week 6. We don’t have any units of AA on hand, so the net requirement is also 10 units of AA. Because it takes one week to make AA, the order release of 10 units of AA is in week 5. This means that we start making AA in week 5 and have the finished units in week 6.

Because we start making AA in week 5, we must have 30 units of D and 20 units of F in week 5. See the rows for D and F in Figure 6.15. The lead time for D is one week. Thus, we must give the order release in week 4 to have the finished units of D in week 5. Note that there was no inventory on hand for D in week 5. The original 10 units of inventory of D were used in week 5 to make B, which was subsequently used to make A. We also need to have 20 units of F in week 5 to produce 10 units of AA by week 6. Again, we have no on-hand inventory of F in week 5. The original 5 units were used in week 4 to make C, which was subsequently used to make A. The lead time for F is three weeks. Thus, the order release for 20 units of F must be in week 2. (See the F row in Figure 6.15.)

This example shows how the inventory requirements of two products can be reflected in the same net material requirements plan. Some manufacturing companies can have more than 100 end products that must be coordinated in the same net material requirements plan. Although such a situation can be very complicated, the same principles we used in this example are employed. Remember that computer programs have been developed to handle large and complex manufacturing operations.

In addition to using MRP to handle end products and finished goods, MRP can be used to handle spare parts and components. This is important because most manufacturing companies sell spare parts and components for maintenance. A net material requirements plan should also reflect these spare parts and components.