W12868
MATERIAL REQUIREMENTS PLANNING AT A-CAT CORP.
Dr. Jitendra Sharma and Tinu Agrawal wrote this case solely to provide material for class discussion. The authors do not intend to illustrate either effective or ineffective handling of a managerial situation. The authors may have disguised certain names and other identifying information to protect confidentiality.
Richard Ivey School of Business Foundation prohibits any form of reproduction, storage or transmission without its written permission. Reproduction of this material is not covered under authorization by any reproduction rights organization. To order copies or request permission to reproduce materials, contact Ivey Publishing, Richard Ivey School of Business Foundation, The University
of Western Ontario, London, Ontario, Canada, N6A 3K7; phone (519) 661-3208; fax (519) 661-3882; e-mail cases@ivey.uwo.ca.
Copyright © 2012, Richard Ivey School of Business Foundation
Version: 2012-04-11
tC
Sunita Menon was sitting at her desk considering a perplexing problem. She was supposed to meet with
Shirish Ratnaparkhi, her operations manager at A-CAT Corp., and discuss her ideas for curbing
production costs. As a post-graduate of an inventory management course, Menon had thought of many
avenues to cut costs. June 10, 2011 was her first general meeting since she had joined the company 12
days earlier. For five days, she had been crunching numbers, trying to find some new way through the
techniques she had learned at business school. Though the task at hand had seemed very simple to her
when it was assigned, it was only during these last few days that she had come to understand the real
implications of various trade-offs. Menon now worried that this seemingly straightforward task could
result in significant profit or loss for A-CAT Corp.
COMPANY BACKGROUND
No
A-CAT Corp. (A-CAT) was a mid-sized manufacturer and distributor of domestic electrical appliances,
catering primarily to the price-sensitive rural population in India. The firm operated two medium-sized
facilities in a remote district in Vidarbha, a relatively undeveloped region in Maharashtra, one of India’s
most progressive states. Rather than compete with large-scale operations prevalent in the industry, ACAT preferred to focus on the rural segment. Management believed there was more scope for success
within this segment of the market and in the past, this belief had been proven right. A-CAT’s
manufacturing units had been in operation since 1986. Currently, the company had annual sales of
Rs6,000,000 US$120, 000 and had about 35 employees.
Do
A-CAT manufactured a wide range of electrical appliances for household use, including television signal
boosters, transformers, FM radio kits, electronic ballasts, battery chargers, voltage regulators, etc. The
company’s broad range of products catered to rural, low-income customers in and around the district.
This document is authorized for educator review use only by Hao Su, University of Maryland until Oct 2019. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860
9B12D003
BACKGROUND OF THE PROBLEM
rP
os
t
Page 2
Menon was assigned the task of preparing the operating plan for the next eight weeks for the product
P0110, which was a regular order. P0110 was an assembly of two P0X units and two P0Y units. Each
P0X unit required four P1X1 units and three P1X2 units. The final product had a unit price of Rs200.
When Menon checked the store inventory, she found 240 P0110 units already in stock. The requirement
for the first week was just 400 units, which was easily manageable based on current stock. However, the
basic problem Menon faced was not deciding how much to produce to be able to meet the requirements,
but deciding how to produce economically, taking into account the forecasted demand of the product.
Menon knew that in order to decide, she would have to depend on some techniques and systems that she
had learned as a business student.
op
yo
MATERIAL REQUIREMENTS PLANNING
The primary goal of the material requirements planning (MRP) system was to develop a detailed timephased plan for when to place purchasing orders for raw materials and to determine how much material to
order. The system’s effectiveness depended on the inventory position and policies, the bill of materials
and the demand requirements for finished goods and components.
Bill of Materials
tC
Menon prepared the bill of materials, which was a relatively simple task as there were only two
components in level one and two more in level two. The final product at the top of the structure is always
leveled zero. The level number increases as we move down the product structure. The final product P0110
has three levels of assembly. (see Exhibit 1). As P0110 was a regular product, she did not have to worry
about the design aspect. She knew that one unit of P0110 required an assembly of two P0X units and two
P0Y units. Each P0X was, in turn, assembled by putting together four units of P1X1 and three units of
P1X2.
Product Structure Diagram
No
To better explain the product structure diagram she had created, Menon included the levels zero, one and
two to indicate the three stages involved in manufacturing P0110: the product assembly department, the
sub-assembly section and the machine shop (see Exhibit 2). She added the manufacturing lead times to
the diagram required to produce the components; she tried to include the processing time, set-up time,
transit time and wait time while computing the lead times.
Do
Master Schedule
After clearly outlining the product cost structure, the next job at hand for Menon was to prepare the
master schedule. This schedule would indicate the number of P0110 units required to be assembled for
the next eight weeks. By following the pattern set in earlier master schedules and studying market
demand forecasts in detail, Menon was able to finalize a master schedule (see Exhibit 3).
This document is authorized for educator review use only by Hao Su, University of Maryland until Oct 2019. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860
9B12D003
rP
os
t
Page 3
On Hand Inventory
A-CAT had witnessed a significant decrease in sales owing to a number of factors that had occurred just
before Menon joined the company. This was reflected in higher-than-normal levels of on-hand inventory.
As a student of inventory management, Menon was able to relate this element of the problem. She
decided to align the on-hand inventory with the demand forecast and develop the method needed to
optimize production (see Exhibit 4).
Costs Associated
op
yo
With very little time at her disposal, Menon could not calculate the optimum carrying or set-up costs. She
instead went to the accounts department and collected records of the current inventory carrying and set-up
costs (see Exhibit 5).
DILEMMA
Do
No
tC
After collecting all the necessary data and working on the task for five days, Menon reached different
solutions by applying different techniques. For every lot-sizing technique that she applied, she reached a
different answer. Finally, she decided to send all of her work to a colleague who was skilled in operations
management; Menon was now waiting desperately for his call before she received the receptionist’s nod
to enter the boardroom for her meeting with her operations manager.
This document is authorized for educator review use only by Hao Su, University of Maryland until Oct 2019. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860
9B12D003
rP
os
t
Page 4
Exhibit 1
BILL OF MATERIAL
PART
NO
QTY
LEVEL
LEAD
TIME
1
P0110
1
0
2
2
POX
2
1
1
3
POY
2
1
1
4
P1X1
4
2
1
5
P1X2
3
2
1
ON HAND
INVENTORY
LOT
SIZES
240
613
500
1,226
340
1,839
500
2,452
600
1,839
op
yo
ITEM
NO
Source: A-CAT Corp. and case authors.
Exhibit 2
PRODUCT STRUCTURE DIAGRAM
tC
P0110
P0X
P1X2
P1X1
No
P0Y
Source: A-CAT Corp. and case authors.
Exhibit 3
MASTER SCHEDULE
1
2
3
4
5
6
7
8
WEEKLY NET
REQUIREMENTS
400
350
300
450
300
450
225
525
Do
WEEK
Source: A-CAT Corp. and case authors.
This document is authorized for educator review use only by Hao Su, University of Maryland until Oct 2019. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860
9B12D003
Exhibit 4
rP
os
t
Page 5
INVENTORY LEVELS OF COMPONENTS
ITEM
INVENTORY
P0110
240
P0X
500
P0Y
340
P1X1
500
600
op
yo
P1X2
Source: A-CAT Corp. and case authors.
Exhibit 5
COSTS ASSOCIATED
ITEM
COST PER UNIT (RS)
SET UP COST (RS)
200
500
65
400
35
350
P1X1
05
430
P1X2
15
400
P0110
P0X
tC
P0Y
Do
No
Inventory carrying cost = 0.5 per cent.
Source: A-CAT Corp. and case authors.
This document is authorized for educator review use only by Hao Su, University of Maryland until Oct 2019. Copying or posting is an infringement of copyright. Permissions@hbsp.harvard.edu
or 617.783.7860
Homework 1
1. Southeastern Bell stocks a certain switch connector at its central warehouse for supplying field
service offices. The yearly demand for these connectors is 14,500 units. Southeastern estimates its
annual holding cost for this item to be $25 per unit. The cost to place an order from the supplier is
$75. The cost of the connector is $5 per unit. The company operates 300 days per year, and the lead
time to receive an order from the supplier is 3 working days.
a) What is the economic order quantity? (round your response to the nearest whole number)
b) What is the total holding cost? (round your response to the nearest whole number)
c) What is the total ordering cost? (round your response to the nearest whole number)
d) What is the total cost excluding purchase cost? (round your response to the nearest whole
number)
e) What is the total cost including purchase cost? (round your response to the nearest whole number)
f) What is the reorder point? (round your response to the nearest whole number)
g) The supplier required that the products must be purchased in multiples of 50 (i.e., 50, 100, 150,
200, 250, 300 …). How many products should be ordered at a time to minimize total costs while
meeting supplier requirements?
Page 1 of 8
2. Read the case Material Requirements Planning at A-Cat Corp. and Exhibits 1-3 below (ignore the
Exhibits in the case).
Exhibit 1. Product Structure Diagram
P0110
P0X
P1X1
P0Y
P1X2
Exhibit 2. Bill of Materials
Part
No.
Quantity Level
Lead
Time
Week 1
Scheduled
Receipts
On-Hand
Inventory
Lot Size
Minimum
P0110
1
0
2 weeks
600 units
240 units
600 units
P0X
2
1
1 week
1,000 units
750 units
1,000 units
P0Y
2
1
1 week
1,000 units
1,200 units
500 units
P1X1
4
2
1 week
3,000 units
2,450 units
1,500 units
P1X2
3
2
1 week
2,000 units
3,250 units
2,000 units
Exhibit 3. Master Production Schedule
Week
1
2
3
4
5
6
7
8
Weekly Requirements 400 350 300 450 300 450 225 525
Page 2 of 8
a) Complete the Product Structure Diagram and MRP tables for all items.
Product Structure
P0110 ( )
LT = ( )
P0X ( )
LT = ( )
P1X1 ( )
LT = ( )
Level ( )
P0Y ( )
LT = ( )
P1X2 ( )
LT = ( )
Level ( )
Level ( )
Material Requirements Planning
(Hint: You should use the values in Exhibit 3 for the “Gross Requirements” of the end item P0110.)
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P0110
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Page 3 of 8
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P0X
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P0Y
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Page 4 of 8
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P1X1
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P1X2
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Page 5 of 8
b) Redo the MRP tables given that we change “Lot Size Minimum” to “Lot Size Multiples” in
Exhibit 2.
Material Requirements Planning
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P0110
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Page 6 of 8
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P0X
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P0Y
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Page 7 of 8
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P1X1
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Level
Item
MRP
Past Due W1 W2 W3 W4 W5 W6 W7 W8
Gross Requirements
Scheduled Receipts
Projected-On-Hand
Net Requirements
( )
P1X2
( )
Planned Order Receipts
Planned Order Releases
Lead Time =
Lot Size =
(min. or multi.)
Safety Stock = 0
Page 8 of 8