Net requirements are essential for ensuring that a company has the right stock on hand, but they can be difficult to calculate.
Without accurate net requirement calculations, it’s easy to have too much or too little stock on hand. That can lead to missed sales opportunities and shortages.
Net requirement is not a product or a piece of software. It is a calculated figure inside material requirements planning: the quantity of an item you actually have to obtain, once everything you already hold or have already ordered has been taken off the gross demand.
The step in one line: gross requirements are what the plan asks for; net requirements are what is still missing after on-hand stock and scheduled receipts are applied. MRP calls that subtraction the gross-to-net calculation, and it is performed level by level down the bill of materials.
Calculate net requirements using our Online Net Requirments Calculator
Introduction
Net requirements are the requirements for an item based on its gross requirements (from forecasts, customer orders, or upper-level demand), minus stock already on hand and scheduled receipts.
We can calculate the net requirements either by looking at the immediate needs for production or from historical data.
When calculating net requirements, it is essential to consider all the components of a company’s supply chain and how they might affect one another so as not to run out of stock while waiting for an upstream supplier.
The goal is to produce enough goods to meet customer orders with minimal inventory. This process starts by calculating all the materials needed for production and then determining how much raw material or work-in-process can be produced within a given period.
Generating a new planned order for a given net requirement is usually done only after calculating the effect of rescheduling all incoming receipts to the dates required.
(A planned order is generated based on the lot size if the total is below the specified safety stock.)
Before talking about the net requirements, let us clarify our concept about a few terms. Terms are gross requirements, scheduled receipts, on-hand inventory, and the projected available balance.
The first thing a firm needs to figure out before operating is its capacity. Then, the firm can easily calculate the total input or gross requirements from this value.
The term gross refers to the total estimate of material requirements a company must put in for smooth functioning in one production cycle. The gross requirement for a company is generally fixed and predetermined.
Scheduled receipts let you receive payments according to a preset schedule. For example, you can set up your account to receive customer payments every Monday morning. It is handy if you need to budget your cash flow or have other periodic expenses.
On-hand inventory refers to the stored finished goods ready to be delivered at any time. Inventory is a broader term and refers to storing various other items or raw materials.
Companies can even stock up their inventories, anticipating a massive sale before the festive season. A company with an efficient and far-sighted inventory management and control system is always ahead of its competitors.
Net requirements planning
It is worth being clear about what this step is and is not. Netting is arithmetic, not forecasting. It does not predict what customers will want; it takes demand that has already been established, by a forecast or by real orders, and works out what still has to be obtained.
Nor is it an optimisation technique. Netting involves no statistical modelling and no linear programming: it is a subtraction applied period by period. That simplicity is deliberate, because the calculation runs across every item on every level of the bill of materials, potentially thousands of times per planning run.
Net requirements are the material required for the coming productive period after netting the added values of scheduled receipts and the on-hand inventory from the gross requirements.
We add up the orders scheduled to arrive and the material in-store and subtract them from the gross requirements.
After netting, this value is the total amount of materials we need for the next production cycle. Again, a simple net requirements formula can explain that.
Net requirements formula
Net requirements= Gross requirements- (Scheduled receipts+ On-hand inventory)
We calculate this value meticulously by looking into the scheduled receipts and on-hand stock. Hence, it is not an arbitrary value and is not fixed for every production cycle.
Now, the net requirement amount must be above a specified safety stock. After comparing the net value obtained, this value we get with the safety stock of the firm is referred to as the projected available balance.
If it is below the safety stock, an order for more raw materials and inventory is put through.
The projected available balance is the amount of stock being projected into the future. It is like the amount of stock inventory we carry to the next production cycle from the last production cycle.
If the projected available balance is
- Zero, or
- Less than zero
An order for a planned release of materials is put up. That ensures a continuous material flow into the production line.
Evaluate Safety stock using our Online Safety Stock Calculator
MRP calculation example
Start with 40 units on hand and no scheduled receipts. Gross requirements are 45 in week 1 and 40 in week 2. The order quantity is a fixed lot of 60.
| Week | 1 | 2 |
|---|---|---|
| Gross requirements | 45 | 40 |
| Scheduled receipts | 0 | 0 |
| Available from the previous period | 40 | 55 |
| Net requirement | 5 | 0 |
| Planned order receipt | 60 | 0 |
| Projected available balance | 55 | 15 |
Week 1. Gross requirement 45 against 40 on hand. Netting gives 45 minus 40 = a net requirement of 5 units. Without an order the balance would go to minus 5, which is the signal that an order is needed, not the net requirement itself.
The order. The net requirement is 5, but the lot size is 60, so a planned order receipt of 60 is scheduled. Available becomes 40 plus 60 minus 45 = 55. This is why net requirement and order quantity are different numbers: netting says how much is missing, the lot-sizing rule decides how much is actually ordered.
Week 2. Gross requirement 40 against 55 carried in, so the net requirement is zero and no order is released. The balance closes at 55 minus 40 = 15.
Note that a net requirement is never negative. If on-hand plus scheduled receipts already covers the gross requirement, the net requirement is zero and the surplus simply carries forward as the projected available balance.
Why is it calculated?
- You must appropriately calculate the net requirements to maintain an uninterrupted workflow, and
- To manage a stable and hazard-proof inventory management control system
Thus, the net requirements of a firm are just as necessary as the gross requirements, and they must be calculated efficiently to design an efficient production line.
FAQs
How to calculate net requirements in MRP?
MRP is a production planning system. It calculates net requirements in many different areas, including raw materials and parts on order, finished goods inventory on hand, or needed to fill customer orders.
Work in progress inventory on hand, or needed for completing current jobs while minimizing the total cost of operations over time by balancing demand with supply at each step of the process.
To calculate net requirements in MRP, calculate total requirements, including physical and virtual material demands over time.
Then use your forecasted production levels to determine how many units of each type you’ll need (i.e., on order). Then, subtract what you have on hand against the total requirement figure to get your net requirement figure; this will tell you what additional materials are needed to keep things going.
How are gross-to-net calculations processed for MRP?
In MRP, gross-to-net is the netting step, and it has nothing to do with revenue or profit. For each item in each period MRP takes the gross requirement, subtracts the quantity on hand and any scheduled receipts, and adds back any safety stock that must be preserved. Whatever remains is the net requirement.
Net requirement = gross requirement – on hand – scheduled receipts + safety stock, floored at zero.
MRP runs this level by level down the bill of materials. The net requirement at one level is offset by the item’s lead time to create a planned order release, and that release becomes gross requirement for the components on the level below, which are then netted in turn.
How can net requirements be implemented in a planning process?
Net requirements are a critical aspect of planning to ensure you have the right amount of inventory.
By subtracting what’s already available and what’s on order from the total needed, you determine exactly how much you should order to meet future demand while preventing overstocking or shortages.
How often can net requirements be determined?
The frequency of net requirements calculations depends on your business dynamics. Regular reviews are essential to adapt to changing demand patterns.
For items with stable demand, monthly or quarterly reviews may suffice.
However, for volatile items, more frequent assessments, like weekly reviews, may be necessary to keep inventory aligned with demand.
How can net requirements be employed to enhance business efficiency?
Adopting net requirements can yield improved business efficiency through the following approaches:
Minimizing inventory costs by preventing excessive stock levels.
Enhancing customer service by mitigating the occurrence of stockouts.
Streamlining the operations and reducing lead times by proactively ordering materials and products ahead of time.
Conclusion
Net requirements help accurately assess what’s needed before any manufacturing occurs.
The net requirement helps avoid overproduction, underproduction, and excess inventory costs associated with these problems. It also saves on storage space by not ordering more products than necessary.
Still, at the same time, it ensures there’s enough material available if production needs increase unexpectedly or demand increases during certain seasons or marketing campaigns.
Other benefits include improved customer service due to better forecasting, increased responsiveness to spikes in demand, and reduced lead times.