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MRP and Inventory Management

Inventory Optimization & Management

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.

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