Materials Requirement Planning is used by all types of manufacturing businesses to improve their supply chains and optimize inventory management. Learn how MRP systems work and why you should implement one.
Table of contents
1. What is Materials Requirement Planning?
2. Why should you use Materials Requirement Planning?
3. How does an MRP system work?
4. Where did Materials Requirement Planning come from?
7. Are there disadvantages to MRP?
What is Materials Requirement Planning?
Materials Requirement Planning is a system that helps businesses optimize their supply chain. It is a software-based system you can use to maintain and estimate inventory, as well as ensure timely production and delivery. By providing you with the exact amounts of raw materials needed for a given production task, an MRP system helps cut costs by reducing unnecessary or wasted inventory.
MRP is sometimes confused with ERP, which stands for Enterprise Resource Planning. The difference between MRP and ERP is that MRP addresses manufacturing, scheduling, and purchasing. By contrast, ERP considers many additional factors, such as accounting and human resources.
Almost any company which manufactures goods uses some form of MRP system to maximize the speed of production and delivery. By improving the precision of your supply chain, you are able to process customer orders faster and you will have higher customer satisfaction.
Why should you use Materials Requirement Planning?
Materials Requirement Planning is widely used by manufacturers for many reasons. One of the biggest benefits of an MRP system is inventory management. Inventory management issues are responsible for a large portion of lost revenue, whether it’s because of excess stock, slow turnover, or lacking good analytics.
An MRP system resolves all of that. By using data about your business to calculate exactly the amount of materials needed to meet demand, the need for guesswork and for excess stock is eliminated. These systems also calculate production schedules so that orders are completed and delivered faster, improving turnaround and customer satisfaction.
In addition to calculating material quantities, MRP also tells you the time required to complete a given task. That makes it easy for managers to create and shift workers’ schedules so that nothing is under or over-staffed. Taking away the need to spend time poring over your scheduling will save lots of time.
Introducing faster turnaround and order processing means improving your customer service. Not only will you be able to deliver orders faster, but MRP systems can also help you deliver items at a lower cost, since they optimize your inventory management. That means you can offer high quality products at lower prices, another incentive for customers to return.
All these functions are gathered in one program, meaning there’s no need to jump between several different data sources. Centralizing all the data about your business doesn’t just make it easier to access, it also makes it easier to analyze. Materials Requirement Planning allows you to see what could be improved just by clicking a button.
How does an MRP system work?
At its core, Materials Requirement Planning is all about data processing. The types of data used to generate an MRP supply chain include:
- Purchase orders
- Sales orders
- Expedited orders
- Due dates
- Marketplace demand
- Shelf life of materials
- Cost of materials
- Storage capacity
- Inventory maintenance costs
You should always make sure that you are providing your MRP software with up to date information, especially regarding raw material costs, your overall production schedule, and the status of your inventory. Once you input all of these data points into the system, it then synthesizes these factors into one master production schedule.
Materials Required Planning can be broken into 4 main steps.
The 4 main steps of MRP
- First, your MRP system will use the customer order and forecast data you input to estimate demand. That demand is translated into the types and quantities of raw materials that your business will need to fulfill orders.
- Second, the software will check your inventory status and assess whether you have enough to meet demand. It will show what you have in stock, where it is (particularly valuable if you have items in multiple locations), whether your inventory is allocated to production already, and items that have yet to arrive.
- After that, your system will finish building your MRP supply chain. Using the master production schedule you inputted, the software estimates how much time and labor are required per step in the production process. This, combined with identifying the tools and workstations needed, allows your MRP system to schedule each step in sequence.
- Finally, having all this data at its disposal allows the program to identify issues and recommend solutions. For example, you’ll automatically be notified when materials are late, and you’ll receive recommendations on how to adjust existing orders to compensate. You don’t have to act manually either; MRP systems can automatically alter production schedules.
Where did Materials Requirement Planning come from?
The concept of Materials Requirement Planning dates back to 1913, when Ford William Harris developed the concept of economic order quantity, a calculation designed to minimize the amount of inventory stored at any given time. This coincided with Henry Ford’s assembly line innovation, which made controlling supply chains easier.
Before the 1950s, such systems were manual. After that, mainframe computers became available, and companies began using them to optimize their inventory management. The system was formally named Materials Requirement Planning in the 1960s, by an IBM engineer who studied Toyota’s lean production methodology (where the Just-in-Time inventory management system originated as well).
By the 1980s, companies across the U.S. were using commercial and homegrown MRP programs. The rapid spread of MRP systems is in part because the concept was officially endorsed by the American Production and Inventory Control Society (APICS). APICS helped encourage businesses of all types to start using MRP to refine their supply chains.
In the following decades, the technology was improved and expanded. More industries began using MRP software as more functionalities were introduced. Further expansions of MRP were MRP II and DDMRP, and a new framework known as ERP was developed to cater to businesses that did not need MRP.
MRP II and DDMRP
Though MRP is the core of most automated manufacturing strategies, these days more and more companies use MRP II and DDMRP. These systems derive from MRP, but simply incorporate more factors in their analyses.
MRP II, which stands for Manufacturing Resource Planning, is an extension of MRP systems. It adds several functions to the framework, addressing logistics, financial, and marketing capabilities. By including the human resources present in your business, MRP II systems provide a more realistic picture of your output capacity.
MRP II supply chain management follows the same 4 steps that MRP does. But because it also takes into account time spent on quality assurance, future demand for product, and work capacity of your machines, the production schedule it returns is more specifically tailored to your business.
A second extension of MRP is Demand Driven Material Requirements Planning (DDMRP). Instead of orienting inventory management only around how much material is needed for production, DDMRP considers what happens when demand forecasts are inaccurate.
Using DDMRP in your business will further reduce the amount of unnecessary inventory you stock. First, the system will identify which items are most critical to production (e.g., which are most often used). Those are the items that the system makes sure to always have stocked. Then, those strategic items are directed to various projects along the supply chain to prevent material shortages.
Whereas MRP fixes inventory at a specific level based on demand estimates, DDMRP adjusts the amount stocked according to real-time changes in customer and market demand. That means you’re protected from overstocking as well as shortages.
MRP versus ERP
Another often-used system which can streamline your company’s operations is Enterprise Resource Planning (ERP). Where Materials Requirement Planning and MRP II look primarily at tangible production and materials management, ERP incorporates every element of your business.
ERP systems address inventory management and supply chains like MRP systems do, but they also fine-tune day-to-day operations. They commonly include HR capabilities and accounting programs that automate routine processes such as updating accounts and logging employee attendance.
ERP also helps businesses deliver better customer service. The software makes it easier to develop personalized customer care practices, and to implement customer loyalty programs. By cataloging every issue that customers request help with, the system can help you address those issues faster and suggest solutions.
Like MRP, ERP is based on a singular, constantly updated pool of data, and you can improve the functionality of your ERP system the more data you give it. It introduces centralized planning and improves access to information, so that everyone from CEOs to assembly line workers can see and add to the data.
Though providers and offers vary, ERP systems include five core components. These are:
- Finance and accounting
- Human resources
- Logistics and manufacturing
- Supply chain management
- Customer service management
ERP systems almost always include far more than just these 5 functionalities. The reason companies opt for ERP instead of MRP is the wider range of use cases. If you are considering adopting an ERP system at your business, the essentials to look for are:
- One central database. A single point of contact for everyone at the company and a pool of information that is consistently available helps improve visibility of operations and get everyone on the same page.
- Analytics and reporting. ERP systems are able to provide insight into every part of your business, and deliver detailed, automated reports on a regular schedule.
- Visual representation of data. In addition to analytics and text-based reporting, having graphs and charts illustrating performance is invaluable.
- Automation. Any good ERP system will be able to automate repetitive tasks and save you considerable time.
- A simple and consistent UI. One of the biggest barriers to ERP (or MRP) implementation is that these systems often look complex and a clear interface makes ERP more navigable.
- Ease of integration with other programs. Your chosen ERP system should work well with whatever other services your business uses.
- Support for new technologies. Artificial intelligence, machine learning, and advanced security software are in use across more industries and in charge of more tasks, and a good ERP system should be able to work in tandem with them.
- Multinational support. You should be able to use the software no matter what language, currency, or regulations apply in your country.
Are there disadvantages to MRP?
All systems have their advantages and disadvantages, and Materials Requirement Planning is no exception. Your MRP system will only work as well as the data you provide it. To get the most out of the software, you’ll need to input as many existing figures as you can find, as well as consistently record updates to those figures.
Implementation can be quite costly. You are not only paying for the software and the license, but also for any equipment needed that your business does not already have, such as computers which can run MRP programs. There is also a relatively high time cost, since you will have to tailor whichever program you choose to fit the needs of your business. Your staff will also need to be trained so they can use MRP effectively.
It is possible that adopting MRP could make your business less flexible. This is because, with a prearranged production schedule that is based on static demand forecasting, you may not be prepared to react in emergency situations. You can reduce this drawback by introducing DDMRP, so that your supply chain responds to changes in demand.
Not all MRP providers are equal. In addition to different pricing, it is important to check which functionalities specific software packages offer. If your business relies on manufacturing, make sure your chosen MRP solution was designed for manufacturers.
When you’re implementing MRP, Lumiform can help. Building a working supply chain is all about data, and Lumiform makes collecting that data simple.
Easily note down your inventory with an inventory management form, track sales effectively with a simple order template, or get a head start on quality assurance.
