This article will discuss the basics of Net Requirements Planning.

In MRP, net requirements are the difference between a company’s planned demand and its available capacity.

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.

Introduction

Net Requirements

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 different 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 on hand. This process starts by calculating all of the materials needed for production and then determining how much raw material or work-in-process can be produced within a given period.

The generation of 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 needs to 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 payments from customers every Monday morning. This is a handy feature 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 given moment.

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

The main problem in this industry today is that companies have not been able to keep up with supply and demand trends due to being unable to accurately predict what customers want from one year to the next.

One solution is implementing net requirements planning, which utilizes statistical analysis techniques like linear programming models.

Net Requirements Plan

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 we have in store and then subtract it 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.

MRP calculation example

 Let the on-hand inventory present at a given moment be 40, and a demand for the first week is 45.

As the demand exceeds the projected balance, the entire amount of materials are being used up with five more units.

That makes the projected available balance for the next week negative (-5). The net requirement for the next periodic cycle is (-5) +45= 40.

As the projected balance is negative, a planned order is released of 60 units that make the balance 55.

Now, this week, there is a demand for 40units. That makes the projected available as 15. As the projected availability is now positive, no more order needs to be released for this particular period.

Why is it calculated?

  1. It is essential that the net requirements be properly calculated, to maintain an uninterrupted workflow, and
  2. To manage a stable and hazard-proof inventory 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, start by calculating total requirements – this includes both physical and virtual material demands over time. Then use your forecasted production levels to determine how many units of each type you’ll need on hand at any given time (i.e., on order). From there, subtract out 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 right now.

How are gross to net calculations processed for MRP?

Gross to net calculations is processed by subtracting the cost of goods sold (COGS) from the company’s revenue. This calculation results in the company’s net income, which is then used to calculate the company’s earnings per share (EPS).
We can simplify the calculation further by dividing COGS by revenue. This division results in the gross margin percentage, a key metric used by companies to measure their profitability. The higher the gross margin percentage, the more profitable a company is.

Conclusion

Net requirements help provide an accurate assessment of what’s needed before any manufacturing takes place.

The net requirement helps avoid overproduction and 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.

Here are some other benefits: improved customer service due to better forecasting, increased responsiveness to spikes in demand, reduced lead times.