skip to Main Content

MRP and Inventory Management

Inventory Optimization & Management  
03/18/2009

Most companies use Material Requirement Planning (MRP) software or an MRP module of an ERP to plan and manage the purchasing and scheduling of materials based on a demand plan or forecast. It is time phased and can manage large numbers of materials and bill of materials to ensure the right components are ordered and on hand to support a production scheduling software.

Yet, MRP systems cannot do everything. Materials Managers have to ensure that the data tables are maintained, which can be non-trivial and the real make or break of how effective a MRP is:

  • The Bill of Materials has to be up to date. These are not static documents. Specifications change resulting in changes of suppliers, this information must be accurate.
  • The lead times for all component and supplier locations must be up to date including the transit times. Shipping times, lanes, and carriers are always changing, suppliers are changing, and sometimes their location as well.
  • Forecasts or demand plans must be constantly updated and every effort should be taken to make them as accurate as possible. This is incredibly critical in MTS environments, but it is crucial in MTO scenarios as well, because you may still need to pre-build to level load the factories in preparation for peak shipping seasons.

All of the above data is critical in their own rights, but they also contribute to the calculations of re-order points and Economic Order Quantities (EOQs) for all finished goods and materials. MRP systems do not, in general, calculate and evaluate re-order points and EOQs and if they do, they might not be using the calculations best suited for ones particular business.

How often should you recalculate the inventory parameters? This depends on the growth or decay of the business in general. It depends on the volatility of the business environments. Consider the past few years. We have seen:

  • A dramatic shift of material and finished goods sourcing to Asia adding dramatically to the lead times for these materials. The mean lead time most certainly grows but in many cases the standard deviation of the lead time will increase as well. Not adjusting often enough for this will result in stock outs and poor customer service.
  • A steady decline in sales for at least the past two quarters. In many cases, the decline has been 25-45% in sales. You need to react as quickly as possible to this to avoid having too much inventory and yet be ready to react in the other direction when the recovery comes.

MRP systems are not suited for these kinds of tasks. Some companies do these calculations and evaluations themselves in home grown software or spreadsheets. Others use a third party software specifically designed to size and calculate the inventory parameters on a rolling basis and populating the MRP with re-orders points and EOQs over the next six months or one year.

The bottom line is that MRP systems are very good and may be the central engine for managing inventory and ensuring customer service. But, MRP systems require good data to run effectively and this includes the periodic recalculation of re-order points and EOQs often best done by a specialty software module.

Related Articles

6 Questions that will Improve Your Capacity Planning Strategy

Capacity planning has always been a core strategic process in the manufacturing industries' quest to meet the demand of customers in a timely and efficient manner. Having accurate insight into your plant’s production capacity within specific durations of time while [...]

Are you effectively managing your inventory?

Inventory management is essential in today's industries.  Poor inventory management can lead to a lot of problems such as too much inventory, disorganization, or low product turnover. Avoiding these issues can save your business time and money.  CGN said, "Fast paced [...]

What every beginner warehouse owner should know

There are a few strategies and techniques that every new warehouse owner should be aware of. On the top of that list is inventory management! After all, inventory is the reason we have warehouses.  While it might seem like common [...]

Should you be using inventory optimization software?

Should you be using inventory optimization software? Which types of businesses would benefit from it? The answer is probably and most of them. Tech Target said, “Companies implement and use inventory optimization software because they realize that inventory, although necessary, [...]

Calculating Safety Stock: Simpler Might Not be Better

What is safety stock? Safety stock is the extra stock you maintain to mitigate the risk of running out of raw materials or finished goods due to uncertainties in supply or demand. The purpose of safety stock is to ensure [...]

Nine Factors That Influence Inventory Planning and Optimization

Inventory planning is hard to do. As supply chain complexity continues to expand, it’s getting more and more difficult to reach and sustain optimal inventory levels. Regardless of the level of difficulty, however, inventory must be managed, and the rewards [...]

Make the Transition to Inventory Forecasting Software

Maintaining the right amount of inventory is key to keeping up with the ebb and flow of customer orders. But what level is the “right” level? If a company doesn’t have enough product on hand, it may miss too many [...]

The Importance of Effectively Managing Raw Materials Inventory

In today’s world, the system of vendors, activity, and data required to source, produce, and deliver products to customers is increasingly complex. And the supply chain represents the steps required to make this happen. But as product companies extend their [...]

Effective warehouse and inventory management tips

Warehouse inventory management is one thing that can have a big impact on productivity. All Things Supply Chain put together a list of 9 ways you can better manage your inventory. First things first, plan your space. As they said, [...]

The Future of Inventory Management: Five Predictions

For many companies, inventory management is where all the elements of the supply chain converge. Inventory may be seen as the bloodstream of any competitive business. Its unobstructed flow is critical to the well being of any organization that trades [...]
Subscribe to our Blog
Back To Top