A material requirements planning (MRP) system works out exactly which components and raw materials a factory needs to build its products, how many of each, and when to order or make them. It does this by taking the master production schedule (MPS), exploding it through the bill of materials (BOM), and netting the result against what is already in stock or on order.
The idea at the heart of MRP is dependent demand. Demand for a finished product is independent, coming from customers and forecasts, but demand for its components is dependent: it is calculated, not forecast. If you plan to build 100 bicycles, you know you need 200 wheels. MRP does that calculation across every level of every product, then offsets each order by its lead time so parts arrive exactly when they are needed rather than sitting in stock.
This blog post will explore what MRP is, how it works, its benefits, and its limitations. It will also give steps for implementing material requirements planning software, some essential tips, and a list of available popular MRP software systems.
Definition
Material requirements planning is the calculation that turns a build plan into a materials plan. Given what you intend to produce and by when, it works out the timed schedule of component and raw-material orders needed to support that build, without carrying more inventory than necessary.
Because component demand is derived from the finished-product schedule rather than forecast on its own, MRP is called a dependent-demand system. That is what separates it from simple reorder-point stock control, which just reacts when a bin runs low.
Brief History
MRP emerged in the 1960s as a revolutionary approach to production and inventory control. Initially developed by Joseph Orlicky, an engineer at IBM, the MRP system aimed to address the challenges of managing complex manufacturing processes and controlling inventory effectively.
MRP gained significant traction in the 1970s, with software developers creating dedicated MRP systems. The concept spread across industries, becoming a standard in manufacturing and supply chain management.
Over time, MRP systems evolved, incorporating advanced features and integration capabilities.
Today, MRP has grown into a fundamental tool for optimizing production and materials planning, playing a crucial role in modern manufacturing and supply chain management.
How does it work?
MRP runs a simple netting calculation for every item, period by period. It draws on three inputs, the master schedule (or the parent item’s own orders), the bill of materials, and current inventory records, and from them works out four things for each component:
- Gross requirements: the total quantity needed in each period, exploded from the parent item through the BOM.
- Projected on hand: the stock expected to be available, counting current inventory plus any scheduled receipts (orders already placed and due to arrive).
- Net requirements: the amount by which gross requirements exceed the projected on hand, in other words the real shortfall that has to be covered.
- Planned orders: the orders MRP proposes to cover each net requirement, each one offset backwards by the item’s lead time so it arrives on time.
Run this for every item, level by level down the bill of materials, and the output is a complete, time-phased plan of what to buy, what to make, and when to start each order. The worked example below shows the calculation on a single part.
MRP Calculation Example
Here is that netting logic laid out as an MRP record for one component. The part has a lead time of one week, 20 units on hand, and one scheduled receipt of 30 already due in week 2, and it is ordered lot-for-lot (each order covers exactly one period’s shortfall).
| Week | 1 | 2 | 3 | 4 | 5 |
|---|---|---|---|---|---|
| Gross requirements | 0 | 30 | 0 | 40 | 30 |
| Scheduled receipts | 0 | 30 | 0 | 0 | 0 |
| Projected on hand (start 20) | 20 | 20 | 20 | 0 | 0 |
| Net requirements | 0 | 0 | 0 | 20 | 30 |
| Planned order receipts | 0 | 0 | 0 | 20 | 30 |
| Planned order releases | 0 | 0 | 20 | 30 | 0 |
Reading the record:
- In week 2, gross requirements of 30 are fully covered by the scheduled receipt of 30 plus stock on hand, so net requirements are zero and no new order is needed.
- In week 4, the 40 required exceeds what is on hand, leaving a net requirement of 20. MRP plans an order to receive 20 that week, and releases it a week earlier, in week 3, because of the one-week lead time.
- The planned order releases row, offset back by the lead time, is the real output. It tells purchasing or the shop floor exactly when to act.
Where MRP Fits in the Planning Hierarchy
MRP does not work alone. It sits in the middle of the planning chain. The aggregate plan and the master production schedule decide which finished goods to build and when; MRP explodes that decision into timed component and material orders; and capacity requirements planning (CRP) then checks that the work centers actually have the hours to execute the resulting plan. MRP answers the material question, and capacity planning answers the time-and-machine question. Together they turn a sales forecast into an executable factory schedule.
Benefits
Its benefits are vast and can significantly impact any business. The system allows businesses to optimize their production process by forecasting material needs and managing inventory levels.
As a result, it can help companies minimize waste, ensure timely production, and reduce costs.
It has several benefits for manufacturers and suppliers. First, material requirements are calculated, not forecast. MRP derives exactly which components are needed and when from the master production schedule and the bill of materials.
Some of the benefits of MRP include the following:
- Efficient Inventory Management: MRP helps in maintaining optimal inventory levels, reducing excess stock, and minimizing carrying costs.
- Enhanced Production Planning: It aids in creating production schedules based on actual demand, leading to better resource allocation and production efficiency.
- Improved Customer Service: MRP ensures timely deliveries and minimizes stockouts, resulting in better customer satisfaction.
- Reduction in Lead Times: By planning material procurement in advance, lead times can be reduced, leading to faster production cycles.
- Cost Reduction: MRP optimizes resource utilization, reduces waste, and lowers production and inventory costs.
Limitations
However, it also has some limitations.
- Complex Implementation: Setting up an MRP system can be complicated and requires extensive data input and training.
- Data Accuracy: It heavily relies on accurate data, and any inaccuracies can lead to incorrect planning and costly errors.
- Inflexibility: This system may struggle to adapt to sudden changes in demand, making it less suitable for dynamic markets.
- Costly Software: The software can be expensive to purchase and maintain, especially for small businesses.
- Overemphasis on Quantities: It tends to focus on quantity and may not consider other factors like supplier reliability or quality.
- Time-Consuming: Running MRP calculations and maintaining the system can be time-consuming and resource-intensive.
- Risk of Overstocking: If not properly managed, it can lead to overstocking, tying up capital in excess inventory.
Steps for MRP Implementation
If you’re looking to implement this system in your business, there are a few key steps. You can ensure that your business has a smooth and efficient production process by following these steps.
The implementation steps are as follows:
- First, determine the type of system that is best for your business.
- Next, develop a master production schedule.
- Configure the system.
- Enter inventory information into the system.
- Review and revise the master production schedule.
- Release production orders to the shop floor.
- Perform system maintenance.
Tips to Use Successfully
Following are a few tips that can help while using systems. The following list is not specific to any particular system. However, general guidelines are applicable to most of them.
- Get the data right first. MRP is only as good as its bills of materials, inventory records, and lead times. Wrong data produces a confident but wrong plan, so fix BOM and inventory accuracy before you trust the output.
- Keep lead times honest. MRP offsets every order by its lead time, so padded or stale lead times quietly inflate inventory and throw off the timing of the whole plan.
- Choose lot sizing on purpose. Lot-for-lot minimizes inventory but means frequent orders; fixed or economic lot sizes cut ordering effort at the cost of holding more stock. Match the rule to the item.
- Work the exception messages. A good MRP run flags far more than new orders: it tells you which existing orders to expedite, delay, or cancel. Acting on those messages is where most of the value is.
- Re-run on a sensible cadence. Regenerate the plan often enough to reflect real changes in demand and supply, but not so often that the shop floor is forever chasing a plan that never settles.
List of Popular Systems
Microsoft Dynamics 365 for Manufacturing
Microsoft Dynamics 365 for Manufacturing is a comprehensive system that can handle all aspects of your manufacturing process, from material requisition to finished product shipping.
Oracle JD Edwards
It is a widely used system for medium to large businesses. It offers robust features and functionality for managing material requirements and Production operations.
SAP Production Planning (PP)
PP is part of SAP enterprise resource planning. With PP, companies can create detailed production plans that consider the availability of resources, the requirements of customers, and the capacities of manufacturing facilities.
PP also helps companies optimize their production processes by predicting how changes in one area affect other production areas. For example, suppose a company adds a new product to its lineup.
PP can help show how much more production capacity you will need. Of course, it would be best if you had this in a place close to the people who want it.
Plex Manufacturing Cloud
It is a comprehensive system that helps you plan and control the flow of materials through your production process. It gives you the ability to optimize inventory levels and improve production efficiency. It is a cloud-based system, so you can access it from any device with an internet connection.
MFG Pro
MFG Pro is a system that helps you manage your inventory and production. It is a comprehensive solution integrating manufacturing, distribution, and accounting operations into a single system. MFG Pro enables you to plan production, schedule jobs, track material usage, etc.
QAD Manufacturing Cloud
It is a comprehensive system that helps you plan and control the flow of materials through your production process. It gives you the ability to optimize inventory levels and improve production efficiency.
MRP in manufacturing
When a company begins manufacturing a product, it first determines the necessary materials and components for the product. This process is known as material requirements planning (MRP). MRP involves creating a parts list for the product and then ordering the necessary materials to produce the product.
To create an accurate parts list, the company must first determine the bill of materials (BOM) for the product. The BOM lists all of the individual components that make up the product. The company then creates a schedule for producing the product, which includes ordering times and quantities for each component.
The company uses this schedule to order the necessary materials and components for the product. Once the components arrive, the company can begin manufacturing the product.
Input and outputs
MRP runs on three core inputs: the master production schedule (what to build and when), the bill of materials (what each product is made of), and inventory records (what is on hand and already on order). Forecasted demand, supplier lead times, and lot-sizing rules feed the calculation as well.
MRP produces three kinds of output. First, planned order releases: the purchase and production orders needed to cover demand, each with a quantity and a start date. Second, dependent requirements for every lower-level component, pegged to the parent order that created them so the plan stays traceable. Third, action and exception messages: the reschedule, expedite, and cancel alerts that tell planners where the plan needs attention.
Components
The components of material requirements planning (MRP) are:
- Bill of materials (BOM): A list of the components that make up a product, along with the quantity of each component needed to produce one unit of the product
- Master production schedule (MPS): A schedule that shows how much product needs to be produced and when it needs to be produced
- Inventory levels: The amount of each component on hand and how much is needed to meet the demand from the MPS
- Lead time: The time it takes to produce a component or finish a product
- Lot size: The number of components or products that are produced at one time
Relationship and Difference Between MRP and ERP
There are several interconnections between Materials resource planning and ERP in the domain of manufacturing and supply chain management. MRP often functions as a subset within ERP, with seamless integration.
Both systems rely on common data, encompassing bills of materials, inventory levels, production schedules, and demand forecasts, ensuring consistent and accurate decision-making.
However, they differ significantly in scope and functionality
MRP
(Material Requirement Planning)
- It specializes in material planning and inventory management, generating purchase orders and production schedules to meet demand.
- It is operationally focused and primarily used by production and inventory management teams.
- It is typically employed by manufacturers with a primary focus on production planning and inventory control.
ERP
(Enterprise Resource Planning)
- It is a comprehensive system that extends beyond MRP.
- It manages various business functions, including finance, HR, sales, manufacturing, and supply chain, serving as a central system for decision-makers across the organization.
- It can accommodate a wide range of industries and business sizes, from small enterprises to large corporations. It is designed to support complex business processes and integrated management, allowing for a holistic view of organizational operations and facilitating cross-functional decision-making.
Relationship and Difference Between MRP and DRP
In the domain of supply chain management, both (MRP) and Distribution Resource Planning (DRP) have unique roles contributing significantly to its efficient operation.
MRP
(Material Requirement Planning)
- It is to prioritize the planning and supervision of essential raw materials and commodities, ensuring streamlined production and inventory operations.
- It relies on data related to production requirements, inventory levels, and bills of materials.
- It concentrates primarily on production and material management, ensuring the availability of necessary materials for manufacturing processes.
DRP
(Distribution Resource Planning)
- It focuses primarily on supply chain logistics, aiming to efficiently manage the transportation of finished goods from production or storage sites to distribution centers, retailers, or end customers.
- It works with data such as sales forecasts, order information, distribution center inventory, and transportation logistics.
- It is dedicated to optimizing the distribution network, ensuring the timely and cost-effective delivery of finished products to customers.
While MRP and DRP often operate in conjunction, integrated within an overarching Enterprise Resource Planning (ERP) framework, they serve distinct purposes.
This integration ensures seamless collaboration between material planning and distribution planning, streamlining the overall supply chain.
FAQs
What are MRP systems?
These systems are automated inventory management solutions that use material requirement data to determine how much material you need. In addition, MRP II introduced the idea that materials are required with production schedules.
What is the Material Requirements Planning system in SAP?
In SAP, it calculates the need for materials and components to meet planned production demands. The MRP run in SAP produces a material requirements plan, a schedule for each manufacturing order, and a planned delivery date.
What is the difference between material requirements planning and manufacturing resource planning (MRP II)?
Manufacturing resource planning is the broader, closed-loop successor to material requirements planning. Both handle dependent demand; what MRP II adds on top of the material plan is capacity, scheduling, and finance. Manufacturing resources planning includes capacity planning, production scheduling, and purchasing features. MRP II is used in larger organizations that have complex manufacturing processes.
Can I still use material requirements planning if my business is small?
Yes, it can be used by businesses of all sizes. However, smaller companies may find it more challenging to implement due to its comprehensive nature.
Is material requirements planning the same as inventory management?
No, MRP is a computerized production and inventory management solution that determines material needs based on a master production schedule. On the other hand, more administrative inventory management includes material storage and recordkeeping activities.
What is the difference between material requirements planning and production planning?
Material requirements planning is an automated inventory management solution that determines material needs based on a master production schedule. On the other hand, production planning organizes the work needed to produce a product.
What is the inventory status file?
The inventory status file is a report that shows the current stock levels of materials and components. This report determines whether materials or components are available to meet production needs.
How often should I run material requirements planning?
There is no one-size-fits-all answer to this question. However, it should be run as frequently as your material needs change, typically every few days or weeks.
What is a material master?
A material master describes materials used in production and includes item description, purchase information, and cost. In SAP terminology, the material master is known as a “material.”
How to calculate dependent demand in MRP?
You calculate it rather than forecast it. Multiply the planned quantity of the parent item by the number of that component each parent needs, as listed in the bill of materials. If you plan to build 100 bikes and each bike uses 2 wheels, the dependent demand for wheels is 100 multiplied by 2, or 200. MRP repeats this multiplication down every level of the BOM.
What is the Master Production Schedule in MRP?
A production plan shows how much of a product is needed and when. It tells when to make the product. The MPS is created by considering the forecast demand for products and the lead times for producing those products.
The MPS is used to create the production schedule, which tells workers when to produce each product. The production schedule tells you how much each product needs to be made and what resources are required. This information helps ensure that the correct number of products is made and that the right resources are available when they are needed.
Conclusion
Material requirements planning is the step that turns a production schedule into an executable buying and building plan. By exploding the master schedule through the bill of materials and netting it against stock, it works out exactly what to order, how much, and when, so parts arrive as they are needed rather than early and expensive or late and disruptive.
Its accuracy depends entirely on the data behind it, and its material plan only becomes a workable factory schedule once capacity is checked alongside it. Get both right, and MRP remains, sixty years on, one of the most useful ideas in manufacturing.
Reference