Material Requirements Planning (MRP) is a standard supply planning system to help businesses,primarily product-based manufacturers, understand inventory requirements while balancingsupply and demand. Businesses use MRP systems, which are subsets of supply chain managementsystems, to efficiently manage inventory, schedule production and deliver the rightproduct—on time and at optimal cost.
Video: What Is MRP?
How MRP Works
A Material Requirements Planning (MRP) system accelerates the manufacturing productionprocess by determining what raw materials, components and subassemblies are needed, and whento assemble the finished goods, based on demand and bill of materials (BOM). It does this byasking three main questions:
- What is needed?
- How much is needed?
- When is it needed by?
The answers to these questions provide clarity into what materials are needed, how many andwhen to fulfill the required demand and help facilitate an efficient and effectiveproduction schedule.
Why Is MRP important?
MRP gives businesses visibility into the inventory requirements needed to meet demand,helping your business optimize inventory levels and production schedules. Without thisinsight, companies have limited visibility and responsiveness, which can lead to:
- Ordering too much inventory, which increases carrying costs and ties up more cash ininventory overhead that could be used elsewhere.
- Inability to meet demand because of insufficient raw materials, resulting in lost sales,canceled contracts and out-of-stocks.
- Disruptions in the production cycle, delaying sub-assembly builds that result inincreased production costs and decreased output.
Manufacturing companies rely heavily on MRP as the supply planning system toplan and control inventory, scheduling and production, but MRP is also relevant inmany other industries, from retail to restaurants, to create balance between supply and demand.
MRP Steps and Processes
The MRP process can be broken down into four major steps:
Identifying requirements to meet demand.
The first step of the MRP process is identifying customer demand and the requirementsneeded to meet it, which starts with inputting customer orders and sales forecasts.
See AlsoMaterial Requirements Planning (MRP): How It Works, Pros and ConsS/4 HANA, On-premise Edition- what is simplified ? Part 4Material Requirements Planning (MRP): A Quick GuideSAP MRP Types Tutorial - Free SAP MM TrainingUsing the bill of materials required for production, MRP then disassembles demandinto the individual components and raw materials needed to complete the build whileaccounting for any required sub-assemblies.
Checking inventory and allocating resources.
Utilizing the MRP to check demand against inventory and allocating resourcesaccordingly, you can see both what items you have in stock and where theyare—thisis especially important if you have inventory across several locations. This alsolets you see the status of items, which gives visibility into items that are alreadyallocated to another build, as well as items not yet physically in the warehousethat are in transit, or on order. The MRP then moves inventory into the properlocations and prompts reorder recommendations.
Scheduling production.
Using the master production schedule, the system determines how much time and laborare required to complete each step of each build and when they need to happen sothat the production can occur without delay.
The production schedule also identifies what machinery and workstations are neededfor each step and generates the appropriate work orders, purchase orders andtransfer orders. If the build requires subassemblies, the system takes into accounthow much time each subassembly takes and schedules them accordingly.
Identifying issues and making recommendations.
Finally, because the MRP links raw materials to work orders and customer orders, itcan automatically alert your team when items are delayed and make recommendationsfor existing orders: automatically moving production in or out, performing what-ifanalyses, and generating exception plans to complete the required builds.
MRP Inputs
How well your MRP system works depends on the quality of the data you provide it. For an MRPsystem to work efficiently, each input must be accurate and updated. Here are some of theinputs an MRP depends on:
Demand
Including sales forecasts and customer orders. When working with predicted demand, asystem that is integrated with an enterprise-wide ERP system allows forecasting using historicalsales vs. just sales forecasts.
Bill of materials (BOM)
Keeping a single updated version of the bill of materials is essential for accuratesupply forecasting and planning. A system that’s integrated into theenterprise-wideinventory management system avoids version control issues and building againstoutdated bills, which results in reworks and increased waste.
Inventory
It’s essential to have a real-time view of inventory across the organization tounderstand what items you have on hand and which are en route or have purchaseorders issued, where that inventory is and what the inventory’s status is.
Master production schedule
The master production schedule takes all build requirements and plans machineryusage, labor and workstations to account for all outstanding work orders to becompleted.
MRP Outputs
Using the provided inputs, the MRP calculates what materials are needed, how much is neededto complete the build and when in the build process they are needed.
With this information defined, businesses can execute on just-in-time (JIT) production,scheduling production based on material availability. This minimizes inventory levels andcarrying costs, as inventory is not stored in the warehouse for future production butarrives as needed. By scheduling materials to arrive and production to begin soon after,businesses can move materials through the workflow process without delay.
The MRP lays out the plan of when materials should arrive, based on when they’re neededinthe production process, and when subassemblies should be scheduled. Using a masterproduction plan and taking into account subassembly build times minimizes materials sittingon shelves and bottlenecks in the build process.
Benefits of MRP
MRP systems allow you to plan and schedule production efficiently, making sure materials movethrough the work order quickly and helping businesses fulfill customer orders on time.
An MRP system that is integrated across an organization eliminates manual processes, such aspulling historical sales and existing inventory. You spend less time building Gantt chartsand production flows to understand when and where you need product available, which frees uptime and removes a layer of complexity.
When builds are complex and require multiple sub-assemblies within the work order, it’seasyto miscalculate timing. An MRP helps you understand all of the components that go into eachsub-assembly and how long it takes to complete each step, preventing delays in theproduction cycle and increasing production yield.
MRP Challenges
Although using an MRP solution is a far better than using spreadsheets for supply planning,it’s only as good as the data you put into it. The better a business understands anddocuments its processes, the better an MRP system can serve them.
You need to make sure you input correct inventoryavailability, time to complete a subassembly, waste calculations and lead-times fromvendors. Otherwise, your production schedule will be inaccurate—an MRPcan’t definethe production build timeline and materials required if the data isn’t accounted forin theinventory record, bill of materials and master production schedule
MRP vs. ERP
MRP systems focus specifically on planning and controlling how goods are assembled usingmultiple raw materials or components by controlling inventory, componentry and themanufacturing process.
Enterprise resource planning (ERP) systems are an offshoot of MRP systems, spurredby businesses finding a need for the same level of planning and oversight for otheroperations such as payroll, finances and supplier management. ERP systems plan for resourcesacross the entire organization, including: financial management,order management, customer relationship management, people, procurement, warehousing andfulfillment.
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