Over its roughly fifty-year lifespan, Material Requirements Planning (MRP) has been established as one of the most powerful and influential innovations in manufacturing technology.
Introduced and popularized by Joseph Orlicky through his book Material Requirements Planning (MRP): The New Way of Life in Production and Inventory Management, MRP builds upon the recognition that there are two fundamental types of demand faced by a manufacturing organization: “independent,” which businesses routinely attempt to forecast, and “dependent,” which, through MRP, businesses can simply calculate.
In the first half of the 20th century, and before Orlicky published his insights, practitioners struggled to forecast their requirements for all goods, but demand for raw materials, parts, and components needed to assemble finished goods seemed to present a particular challenge: demand for these semi-finished goods was frequently “lumpy.”
On its surface, “lumpy” demand seems to be unpredictable. Stores or warehouses might go for days, weeks or months seeing no withdrawals of inventory, then suddenly large quantities are pulled by the factory for use in assembly. Forecasting demand for such items was virtually impossible, and businesses who tried routinely ran out of stock of certain items at the very worst of times, while inventory surpluses accumulated for other items.
Orlicky saw that lumpy demand patterns were frequently displayed by parts and components that were needed for subsequent assembly of finished goods. Demand for these parts depended upon the number of finished goods that were planned for manufacture. By defining a recipe, or bill of materials for each end item or finished good that was scheduled to be assembled, we could better understand that requirements for all components could be calculated rather than forecast.
Therefore, the first major business benefit accrued to companies that implemented MRP was an obvious one: the company no longer had to try (and most often fail) to forecast demand for thousands of individual parts, components, and subassemblies. By focusing resources upon forecasting demand for finished goods (independent demand items), and properly maintaining a Master Production Schedule (MPS), bills of material, lead times, and inventory records, MRP could perform the thousands of calculations needed to derive appropriate net requirements.
In all but the very simplest of business models, MRP calculations are very resource-intensive. In a practical sense, they cannot be done manually. Even computerized spreadsheet software is inadequate. MRP software allows the computations to be done at high speed and regenerated on a frequent basis. Often, MRP regenerates requirements on a disciplined weekly schedule. Results, in the form of suggested order quantities from suppliers or production orders from the factory, can be presented to the Buyer / Planner every Monday morning. Recalculating requirements manually could not be done with this frequency.
Using robust MRP software, integrated into a company’s S&OP or ERP system, provides a company with a second significant benefit: priorities are kept current. Commercial realities mean that demand for components will change daily. The supply situation varies frequently as well. MRP enables fast response to changes and promotes an agile production strategy.
The third benefit of MRP relates to its positive impact on inventory management. Given the high levels of forecast error suffered by manufacturing organizations in the past, companies elected to cover for their lack of foresight by accumulating safety stock. Significant investments in safety stock were needed to provide protection against the uncertainty of demand. Naturally, carrying more inventory than is absolutely necessary adds no value from the customer’s point of view. Of course, it is often called one of the Seven Wastes by Lean practitioners.
By processing requirements quickly and efficiently, using well-established logic, MRP systems are able to present reliable and timely requirements to the MRP Buyer / Planner. Parts and components are procured “just in time” and in the precise quantities that are needed. MRP works to dramatically reduce the accumulation of unnecessary inventory while ensuring that parts that are required are in stock at the right time.
A feature of many MRP systems is an output called “Exception Messaging.” Exception codes will alert MRP Buyers / Planners to situations where taking action on a planned order is particularly urgent. Open order diagnostics will present orders that are timed to arrive either too early or too late, requiring revisions to due dates to reflect current factory priorities. Past due orders can be flagged to the planner, for subsequent action. Urgencies and emergencies are therefore identified quickly.
MRP, then, acts like a huge and sophisticated calculator. It uses the BOM, inventory records, lead times, and requirements for finished goods (from the Master Production Schedule) to compute the net requirements for every part, component, and subassembly needed to make the finished product. Its output is a series of purchase requirements or production orders, that must be launched in order to acquire the materials necessary to meet the production plan.
But the influence of MRP reaches far beyond that. MRP is a critical tool in helping manufacturing stay current with priorities. It supports an agile, quick-response strategy, quickly adapting to changes to demand and supply week-to-week and day-to-day. By using current requirements and available inventory data, it avoids procurement of unneeded inventory and promotes timely purchasing of real requirements. And finally, it draws attention to situations that threaten the company’s commitment to high levels of customer service, through its diagnostic capabilities. As a key component of a disciplined Sales and Operations Planning system, MRP can deliver numerous benefits to companies that translate into efficiency, agility, and competitive advantage.
Contact us if you would like to learn how DemandCaster can help you end the chaos and reap the benefits of an agile, supply chain planning process.