What is material requirements planning (MRP)? | MRP vs ERP | SAP (2024)

When introduced in the 1960s, material requirements planning (MRP) was the “killer app,” triggering widespread adoption of business software and the computers needed to run it. Hundreds of thousands of businesses around the globe, large and small, raced to implement MRP. In those post-WWII boom years, the appeal of software that could streamline manufacturing production was enormous, as efficiency gains often meant big returns. Aided by the software’s computerized calculations, manufacturers could increase their speed of production, offer a wider variety of products, and shave costs by more accurately estimating material requirements.

In today’s hyper-competitive business environment, production efficiency is arguably even more critical. Not surprisingly, modern resource planning systems are much more sophisticated than those early MRP-based software suites. Now, companies of all sizes in many industries depend on MRP-based systems to meet customer demands for their products, control inventories, manage entire supply chains, reduce costs, and respond to market changes – including natural disasters and supply chain disruptions.

You could say that enterprise resource planning (ERP) is a direct descendant of MRP, or you could say that MRP is a component of ERP – and either way, you would be correct.

To explain, let’s look at the history. After inception, the next evolution of MRP involved integrating the original MRP modules – sales, inventory, purchasing, bill of materials, and production control – and combining them with finance and accounting functions. The new suite that was formed was called MRP II. After this, the software suite continued to grow and expand with new capabilities. Finally, to better describe its broader functionality, the termERP – or enterprise resource planning software– was introduced.

Today, the planning function encompasses much more than materials, but even thenewest incarnations of ERPcan trace their roots directly back to MRP. And in all ERP, the original principle of MRP is still intact: identify what is needed, how much is needed, and when it is needed.

On the other hand, because ERP software contains much greater functionality than MRP, there is an equally strong argument for the second claim: MRP is indeed only a part of enterprise resource planning software.

Why do companies that make products need an MRP system? Because their market success is highly dependent on their material planning, production, and inventory management abilities.

Material planning can be relatively simple and straightforward, but only when volumes are low, the number of products is limited, and there are only a few components within each product.

For complex products and higher production volumes, complex calculations are needed. The ability to forecast and plan for materials and components is critically important to the effective management of production and finished goods inventory. This planned production is an essential building block for planning and scheduling equipment and skilled personnel. Inventory is usually a major cost of doing business and one of the biggest factors in manufacturers’ profitability. Without material requirements planning, it is impossible to effectively manage inventory to have just the right amount of the right items at the right time. Having too much inventory is expensive, yet having not enough can create stock-outs, which are often the main cause of production disruptions, late shipments, added costs, and poor customer service.

Although we tend to think of MRP as a function that is exclusive to manufacturers, it’s important to understand that the term “manufacturer” can be broad indeed. In the MRP sense, a manufacturer is any organization that acquires components or materials and transforms them in some way to produce a different item that can be sold to customers. This could include:

• Warehouses that package products or assemble collections of items into “kits” or combinations for resale as a unit
• Warehouses that assemble custom configurations to order (stocking major units and optional add-ons and then putting the customized product together for shipment)
• Service providers that assemble packages of documentation, devices, consumables, or other physical items they provide to customers/clients/patients
• Office building management, hospitals, government building managers, apartment managers – for managing supplies and equipment based on forecasted use
• Restaurants that use a form of MRP to manage ingredient and supplies inventory and replenishment

A modern MRP system is a tightly integrated closed-loop system that encompasses the entire enterprise. It tracks all activity and continuously interacts with planning and scheduling systems to keep everything in line – helping the business stay focused on fulfilling customer promises and expectations.

The key MRP process steps are:

1. Accurately define what needs to be produced.Engineering is responsible for creating and managing the bill of materials (BOM) for all final products and sub-assemblies. Also called a product structure, the BOM is a hierarchical model of exactly what goes into each unit. For example, the final product may have many sub-assemblies. Each sub-assembly may have two or more components and each component may have a list of parts. The BOM will describe the order in which the material will be needed, what parts are dependent on other parts, and how many of each will be required.
2. Quantify the demand.The system calculates the required quantity and date for final products needed to meet demand. The calculation is based on the sales department’s customer orders and forecasts, minus expected on-hand inventory. True build-to-order manufacturers will primarily focus on customer orders. Make-to-stock companies emphasize forecasts while other companies use a combination of orders and forecasts for planning future production. That information feeds the master production schedule (MPS), which is the agreement between all the stakeholders on what will be produced – such as given capacity, inventory, and profitability.
3. Determine the supply.Using the BOM and the MPS for all the products, the MRP run will, step-by-step, calculate the assemblies, components, and materials that must be produced or purchased over the planning period. Next, it checks the needed quantities against available inventory, called netting, to identify net shortages for each component. Using predefined parameters, such as lot sizing, it determines the proper “make or buy” quantity for each item. Finally, it calculates the proper start date for the acquisition, using either the purchase or production lead time as appropriate and sends this information to the purchasing department or production control.

Here’s what the MRP process flow looks like:

Diagram of the MRP process

Traditional MRP planning calculates material needs (production and purchase orders) using what is called the “infinite capacity” or “unconstrained-based” model – dealing with materials only and ignoring capacity issues or constraints.

However, some companies have limited capacities that constrain their ability to produce and therefore need to use a “finite capacity” model to take those limitations into account when developing the schedule. Examples of capacity constraints include production resources like ovens or painting lines, tooling, or specially trained technicians.

With traditional MRP, the material plan must be validated against capacity using a separate capacity planning tool. This two-step, iterative process can be time consuming. While this is a workable solution that represents a huge step forward for manufacturing planning, new software called advanced planning and scheduling or advanced planning systems (APS) optimizes materials and capacity simultaneously to create a constraint-based plan.

As in the past, MRP software vendors today are taking advantage of new technologies to improve their products and offer more capabilities to users. Foremost on the list is the application ofmachine learningandartificial intelligence(AI) in advanced planning processes to allow the systems to develop even better plans and schedules. Machine learning-enabled planning systems continually monitor conditions and activities to develop more precise models on cause and effect – so that its future recommendations are more comprehensive, more precise, and more effective.

Another important innovation is the Industrial Internet of things (IIoT), also known asIndustry 4.0. IIoT is the general term for the proliferation of inexpensive, smart, connected sensors and devices that can be used to monitor and control virtually anything and everything throughout the entire supply chain. IIoT brings vastly greater quantities of data into the planning systems that feed the AI and machine learning engines.

While not new,cloud deploymentcontinues to add new capabilities to MRP systems, including collaboration tools that are key to today’s working styles. The cloud also offers better security, higher availability, and more reliable and sustainable systems through disciplined back-up, fail-over, and disaster recovery. Finally,in-memory databasesbring unprecedented performance speed to MRP systems, for significantly faster response times.