What is Material Requirement Planning (MRP)?
MRP (Material Requirement Planning) is an inventory management concept used to optimize inventory and minimize risks. MRP was developed in the 1960s, and has continued evolving with new technology. The concepts are used today by every manufacturing business.
What is MRP?
Material Requirement Planning is an inventory management system used for ordering and tracking the items required to manufacture a product. MRP will tell a business:
- What they need
- How much they need
- When they need it
The MRP system generates a list of the materials needed, and when the business should place the order to keep optimal inventory levels.
How MRP Works
Step 1: Determining the demand
The first step is to estimate the demand for the product. How many finished products will be ordered this month, quarter, year. This estimate helps the manufacturer maintain the proper amount of inventory. The goal is to have enough inventory to meet demand, while also avoiding the costs of carrying excess inventory.
Step 2: Calculating the material requirements
The next step is to understand what parts and materials are required to make the finished product. This typically comes from a Bill of Materials (BOM).
For example, a bicycle manufacturer would use a BOM that lists all of the raw materials, parts, subassemblies, and assemblies required to make a complete bicycle. A bicycle has a multi-level BOM that breaks down the entire bike into individual parts and materials.
Level 1: Bicylde
Level 2: Wheels, Frame
Level 3: Tires, Spokes, Rims, Handlebars, Pedal Assembly, etc.
Level 4: Tire Valve, Valve Cap, etc.
Step 3: Generating a production plan
The third step is to plan the production. When are the parts and raw materials going to be ordered and used to make the final products? How much time and labor is required to complete the orders on-time?
The Role of BOM and MPS in MRP
Ready for some more supply chain acronyms?
We briefly mentioned how the Bill of Materials is used to determine which parts and materials are required to make the final product.
An MPS is a Master Production Schedule. This is what the manufacturer uses to determine what they’re manufacturing, when, and how many.
The Bill of Materials and Master Production Schedule work together to create a realistic plan that delivers products to customers quickly and efficiently.
The BOM describes the order that each material is needed, which parts are dependent on other parts, and how many of each part is required. The MPS helps create an efficient supply chain by optimizing inventory and profitability while reducing risk.
Benefits of using MRP
MRP is designed to improve the efficiency, flexibility, and profitability of manufacturing operations.
A few of the benefits include:
- Improving production efficiency: having the right materials on-hand reduces product wait times. When you have the parts and materials, you can avoid delays and have a more effective manufacturing operation.
- Reducing inventory carrying costs: holding excess inventory increases costs. Proper MRP avoids overpaying for inventory storage and dead stock.
- Improving customer service: MRP improves customer service by decreasing late shipments, stock-outs, and long lead times.
Challenges of Implementing MRP
Proper Material Requirement Planning depends largely on having accurate and up-to-date information. Customer demand, and part and material availability can change quickly. The MRP needs to be responsive and flexible enough to adapt to changing environments.
There also needs to be good coordination and communication between different people and departments involved in the production process. Most manufacturing operations and supply chains have tons of moving parts. Good systems and effort is required to keep people on the same page.
MRP vs. ERP
MRP is focused on planning, ordering, and tracking the raw materials and components needed for the manufacturing process. ERP includes a much wider range of business functions, such as financial management, human resources, customer relationship management, and inventory management.
ERP is an integrated software suite that manages the majority of company information, while MRP is one application, or module, in that suite. Nearly every ERP system includes a basic MRP module.
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