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.
If the total is below the specified safety stock, a planned order is generated based on the lot size. The generation of a new planned order for a given net requirement is normally done only after calculating the effect of rescheduling all incoming receipts to the dates required.
Before we start talking details about the net requirements, let us clear our concept about a few terms. Terms like gross requirements, scheduled receipts, on-hand inventory, and the projected available balance.
The first thing a firm needs to figure out before it starts operating is its capacity. The total input or gross requirements can be easily calculated from this value. The term gross refers to the entire estimate of material requirements that a company needs to put in for smooth functioning in one production cycle.
The gross requirement for a company is generally fixed and predetermined.
Scheduled receipts: These are pre-ordered materials scheduled to arrive at some point in the future. If the scheduled receipt for an order is scheduled for the coming month, the materials arrive, and add on to the stock of inventory.
On-hand inventory: This refers to the stored finished goods ready to be delivered at any given moment. Inventory is a wider term and refers to the storage of various other items, or even raw materials.
Companies can even stock up their inventories anticipating a huge sale prior to the festive season. A company with an efficient and far-sighted inventory management and control system is always ahead of its competitors.
What are net requirements?
Net requirements are the amount of material required for the coming productive period, after netting the added values of scheduled receipts and the on-hand inventory, from the gross requirements.
In simple terms, we add up the orders scheduled to arrive and the material that we have in store and then subtract it from the total of the gross requirements. This value we obtain after netting is the total amount of materials we need for the next production cycle.
This can be explained by a simple 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 definitely is not fixed for every production cycle.
Now, the net requirement amount must be above a specified safety stock. This value we get after comparing the net value obtained, with the safety stock of the firm, is referred to as the projected available balance. In case 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 are carrying forward 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. This ensures a continuous material flow into the production line.
Material requirements planning calculation example
Let the on-hand inventory present at a given moment be 40, and a demand for the first week is 45. Now as the demand is more than the projected balance, the entire amount of materials is being used up along with 5 more units. This makes the projected available balance for the next week in the negative (-5). The net requirement for the next periodic cycle is (-5) +45= 40.
Now, as the projected balance is negative, a planned order is released, of 60 units which make the balance as 55. Now this week, there is a demand for 40units. This makes the projected available as 15. As the projected available is now positive, no more order needs to be released for this particular period.
Why is it calculated?
- It is essential that the net requirements be properly calculated, to maintain an uninterrupted workflow, and
- To manage a stable and hazard proof inventory control system.
Thus, the net requirements of a firm are just as important as the gross requirements, and it is important it be calculated efficiently, to design an efficient production line.
Get more definitions about net requirements and other ERP related terms here.