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Materials requirement planning

What Is Materials Requirement Planning?

Materials requirement planning (MRP) is a system for calculating the materials and components needed to manufacture a product. This software-based integrated inventory and supply management system is a foundational element within Operations Management, designed to ensure that businesses have the right quantity of raw materials and sub-assemblies available at the right time to meet production demands59, 60. A core function of MRP is to define what materials are needed, how much is needed, and when they are needed, working backward from a production plan for finished goods.

MRP systems help companies manage their inventory management, production, and supply chain processes efficiently57, 58. By providing a structured approach to identifying and scheduling material requirements, materials requirement planning aims to optimize production flows and minimize costs associated with excess inventory or shortages56.

History and Origin

Before the advent of computerized systems, manufacturing relied on manual methods for managing materials, often leading to excessive inventories or inefficiencies. The concept of Material Requirements Planning was born out of the need to manage complex manufacturing processes more effectively55. Early inventory management systems using mainframe computers emerged in the 1940s and 1950s54.

However, the modern form of materials requirement planning gained prominence in the 1960s. Joseph Orlicky, an IBM engineer, is widely credited with developing and formalizing the first MRP system53. Influenced by the "just-in-time" philosophy of the Toyota Production System, Orlicky implemented the first MRP system at Black & Decker in 1964 with the aid of an IBM 1401 computer50, 51, 52. This marked a significant departure from previous manual processes, focusing on ensuring material availability, maintaining low inventory levels, and planning manufacturing and purchasing activities49. Orlicky's work was detailed in his influential 1975 book, Material Requirements Planning: The New Way of Life in Production and Inventory Management48. Throughout the 1970s, MRP systems saw widespread adoption, with organizations like APICS (now ASCM) playing a crucial role in standardizing MRP practices45, 46, 47. Joseph Orlicky's contributions were pivotal in shaping the evolution of computerized materials management44.

Key Takeaways

  • Materials requirement planning (MRP) is a system used to determine the quantities and timings of raw materials and components needed for manufacturing.
  • It operates by taking inputs such as the Master Production Schedule, Bill of Materials, and inventory data.
  • MRP helps minimize inventory levels, reduce customer Lead Time, and increase manufacturing efficiency.
  • The system can be complex and relies heavily on the accuracy of input data for effective operation.
  • MRP evolved into more comprehensive systems like Manufacturing Resource Planning (MRP II) and ultimately Enterprise Resource Planning (ERP).

Formula and Calculation

The core of materials requirement planning involves a calculation often referred to as "netting" or "explosion" of requirements. While there isn't a single, universal "formula" in the traditional sense, the process follows a logical sequence to determine net material needs. The fundamental calculation for a specific component's net requirement at a given time is:

Net Requirements=Gross Requirements−On-Hand Inventory−Scheduled Receipts\text{Net Requirements} = \text{Gross Requirements} - \text{On-Hand Inventory} - \text{Scheduled Receipts}

Where:

  • Gross Requirements: The total demand for a component at a specific time, driven by the Master Production Schedule for higher-level assemblies or end products, and considering Demand Forecasting.
  • On-Hand Inventory: The quantity of the component currently available in stock.
  • Scheduled Receipts: The quantity of the component expected to arrive from a supplier or from internal production orders that are already planned or released.

Once the net requirements are determined, the system calculates "Planned Order Releases" by offsetting the net requirements by the Lead Time required to procure or manufacture the component. This ensures materials are available when needed for the next stage of production.

Interpreting the Materials Requirement Planning

Interpreting the output of a materials requirement planning system involves understanding the planned orders and action messages it generates. The primary goal is to ensure that Raw Materials and components are available when production needs them, while simultaneously maintaining optimal inventory management levels43.

A well-functioning MRP system will indicate when to place purchase orders for external components and when to release production orders for internally manufactured sub-assemblies. It provides a time-phased plan, showing quantities needed by specific dates42. For instance, if the system forecasts a need for 100 units of a particular part in week 5, and considering a two-week Lead Time for that part, the MRP system would generate a planned order release in week 3. Deviations from this plan, such as unexpected demand spikes or supplier delays, trigger "action messages" that alert planners to make necessary adjustments to orders or schedules. Effective interpretation allows for proactive decision-making, helping to avoid stockouts or excessive inventory.

Hypothetical Example

Consider a small furniture manufacturer, "Custom Comfort," that produces custom-made office chairs. To build a "Deluxe Ergonomic Chair," Custom Comfort needs the following components, as detailed in its Bill of Materials:

  • 1 Seat Assembly
  • 1 Backrest Assembly
  • 1 Base Assembly (includes casters)
  • 5 Screws (for attaching seat to base)

Let's focus on the "Seat Assembly." The Master Production Schedule indicates a demand for 100 Deluxe Ergonomic Chairs in Week 4.

Week 1:

  • Gross Requirement for Seat Assembly: 100 units (derived from the 100 Deluxe Ergonomic Chairs needed in Week 4).
  • On-Hand Inventory (Seat Assembly): 20 units.
  • Scheduled Receipts (Seat Assembly): 0.
  • Lead Time for Seat Assembly production: 2 weeks.

Using the MRP calculation:
Net Requirements = 100 (Gross) - 20 (On-Hand) - 0 (Scheduled Receipts) = 80 Seat Assemblies.

Since the lead time is 2 weeks, to have 80 seat assemblies ready by Week 4, Custom Comfort's MRP system would generate a "Planned Order Release" for 80 Seat Assemblies in Week 2. This signals the internal production department to start manufacturing the seat assemblies in Week 2 so they are ready by Week 4 for the final assembly of the chairs. The system would then "explode" the Bill of Materials for the seat assembly to determine the requirements for its sub-components (e.g., foam, fabric, frame) and repeat the MRP process for those items, considering their respective lead times and current Raw Materials inventory.

Practical Applications

Materials requirement planning is primarily applied in manufacturing and production environments to streamline Production Planning and Supply Chain Management41. Its practical applications include:

  • Optimized Inventory Levels: MRP helps businesses maintain optimal Inventory Management by precisely calculating material needs, thereby reducing excess stock and associated holding costs, or preventing costly stockouts that disrupt production39, 40. Businesses employing MRP systems have reported significant reductions in inventory costs38.
  • Enhanced Production Scheduling: By providing a detailed plan of what materials are needed and when, MRP enables more accurate Capacity Planning and scheduling of production activities. This leads to smoother operations and improved Operational Efficiency36, 37.
  • Reduced Lead Times: MRP systems help synchronize material procurement and production, allowing companies to meet customer demands more quickly and reduce overall lead times from order to delivery35.
  • Improved Communication and Collaboration: The system integrates data across various departments, such as purchasing, production, and sales, fostering better communication and a unified approach to planning34. The ASCM provides resources on understanding MRP principles and practices for effective application33.
  • Cost Control: By minimizing waste from excess inventory, optimizing resource allocation, and improving efficiency, MRP contributes directly to better Cost Control and overall profitability for manufacturing businesses31, 32.

Limitations and Criticisms

While materials requirement planning offers significant benefits, its implementation and effectiveness can face several limitations and criticisms:

  • Data Accuracy Dependency: MRP systems are highly reliant on accurate and up-to-date input data, including the Bill of Materials, Master Production Schedule, and Inventory Management records30. Inaccurate data can lead to erroneous material requirements, production delays, or excess inventory, undermining the system's utility28, 29.
  • Lack of Flexibility: Traditional MRP systems can be rigid. They operate on a "push" system, where materials are pushed through production based on forecasts, which may not account for real-time fluctuations in demand or unexpected operational issues26, 27. This can lead to difficulties in adjusting quickly to changes in customer orders or supplier disruptions.
  • Initial Investment and Complexity: Implementing an MRP system often requires a significant upfront investment in software, hardware, and employee training24, 25. The complexity of configuring and maintaining the system can also be a challenge, particularly for smaller businesses or those lacking in-house expertise22, 23.
  • Ignoring Capacity Constraints: Early MRP systems primarily focused on material availability and did not inherently consider production Capacity Planning. This meant that while materials might be available, the machinery or labor might not be sufficient to meet the planned production schedule, leading to bottlenecks21. Modern systems, particularly MRP II and Enterprise Resource Planning (ERP), address this limitation20.
  • System Nervousness: Minor changes to the Master Production Schedule or inventory records can sometimes trigger significant, unnecessary adjustments throughout the entire materials requirement planning system, a phenomenon known as "system nervousness"19. This can lead to frequent re-planning and instability. TechTarget elaborates on some of these limitations, noting the potential for increased inventory costs if companies hold more inventory than necessary due to inaccurate forecasts17, 18.

Materials Requirement Planning vs. Enterprise Resource Planning

Materials requirement planning (MRP) and Enterprise Resource Planning (ERP) are distinct yet related systems within the realm of business management software. MRP is specifically designed for manufacturing companies to manage and control Raw Materials, components, and sub-assemblies required for Production Planning16. It primarily focuses on answering "what," "how much," and "when" materials are needed for production15. MRP systems ensure materials are available for production, maintain minimal inventory levels, and plan manufacturing and purchasing activities.

ERP, on the other hand, is a much broader and more comprehensive software system that integrates all core business processes across an entire organization14. While ERP systems evolved from MRP and Manufacturing Resource Planning (MRP II)12, 13, they extend far beyond manufacturing to include modules for finance, human resources, sales, Logistics, customer relationship management, and more10, 11. An ERP system provides a unified database and a single source of truth for information across departments, aiming to streamline operations and enhance decision-making enterprise-wide8, 9. Essentially, MRP can be a standalone application or a module within a larger ERP system, whereas ERP encompasses a holistic solution for all business needs, not just resource scheduling for manufacturing. SAP, for example, is a prominent developer of ERP software7.

FAQs

What are the main objectives of Materials Requirement Planning?

The main objectives of materials requirement planning are to ensure that materials and components are available when needed for production, to maintain the lowest possible material and product levels in inventory, and to plan manufacturing activities, delivery schedules, and purchasing activities efficiently6.

What inputs are required for an MRP system?

An MRP system typically requires three main inputs: the Master Production Schedule (which outlines the production plan for finished goods), the Bill of Materials (which details all components needed for each product), and Inventory Management records (showing current stock levels and scheduled receipts)4, 5.

How does MRP help reduce costs?

MRP helps reduce costs by minimizing excess Raw Materials and Work-in-Process inventory, thereby lowering holding and storage expenses3. It also improves Operational Efficiency in Production Planning and procurement, reducing waste and the need for costly last-minute orders or expedited shipping1, 2.