The Basics of MRP (Material Requirement Planning) Systems

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What is an MRP system?

MRP can stand either for Material Requirements Planning or Manufacturing Resource Planning. In this post, we will focus on the Material Requirements Planning, and leave the more complete and complex Manufacturing Resource Planning topic for another post (it includes planning not only of materials, but also of other resources such as labor and finances). So MRP, when considering only the material portion of it, is a system meant to assist inventory management tasks by comparing current stock levels and upcoming supplies with current and upcoming demands, in order to ensure demands are met on time.

A little bit more about demand

Demand can be independent or dependent. An independent demand is usually a demand coming from customers (external and internal), such as a sales order or a sales forecast. A dependent demand is generated by an independent demand through a bill of materials.

For example, if I’m selling cupcakes, a sales orders for 200 cupcakes will generate an independent demand for a quantity of 200 units of the item ‘cupcake’. Assuming I’m lazy and I use a ready-to-bake mix to which I just need to add water, then my cupcakes’ bill of materials (the ingredients in the recipe) would need 1 bag of ready-to-bake mix and 0.5 L of water for each batch of 20 cupcakes. So in this case, my sales order of 200 cupcakes is generating dependent demands for 200/20=10 bags of ready-to-bake mix and 200/20*0.5L=5L of water.

If I wanted to complexify things a bit, I could pretend that I subcontract my ready-to-bake mix to a local bakery, but provide them some ingredients, like berries. In this case the sales orders would generate dependent demands of ready-to-bake mix, water and berries, with quantities depending on the independent demand’s quantity (200) and the quantities on the bill of materials for the cupcakes and the ready-to-bake mix. Each independent demand can thus generate many dependent demands for parts by drilling down the bill of materials structure, which can have many levels.

It is important for an MRP system to consider both types of demands – dependent and independent – or else manufacturing activities (internally or externally) could be scheduled without a plan to ensure sufficient stock for parts which can lead to negative consequences.

A little bit more about supply

Supply comes from two sources: it is either manufactured in-house or purchased externally. When purchased externally, there are 2 options: either we purchase the item as provided by the supplier, or we may provide some (or all) required parts to the supplier, and then we pay for the supplier to produce the item for us (subcontracting). Subcontracting is sometimes referred to as tolling agreements. In such cases, the supplier is called a toller, due to the fee they charge (tolling fee) for the use of raw material provided by their owner to manufacture finished goods (that will belong to the owner). It is important to know whether an item is manufactured or purchased, because this information will affect the different types of supply generated by an MRP system. Manufactured items need work orders to be released to the shop floor while purchased or subcontracted items need purchase orders to be sent to suppliers.

What does the MRP system do exactly?

An MRP system would compare your current stock to see if it can match existing demand. If there is a gap, it then browses your upcoming supplies to see if they could meet the gap. If they meet the gap, then there is no need to generate more supply. However, supply doesn’t only need to meet demand based on quantity. It must also meet the demand’s due date. So when the MRP finds a supply to meet a demand, it then checks if the supply will be received in time to meet the demand. If it doesn’t, then the customer will not receive the order on time unless we take action:

If the item is manufactured in-house, we could put some pressure on the shop floor to reorganize jobs or work overtime in order to prioritize the job that will meet the demand.

If the item is purchased, we could put some pressure on the vendor to deliver the item faster, either by accelerating their manufacturing or by using a faster shipping method.

In both cases, the aim is to adjust the supply chain to meet the demand. However, this is not always possible. Sometimes, the only thing we can do is to manage the customer’s expectations, and let them know that we have to push their due date.

Another use case for the MRP is when the demand isn’t met by neither current stocks nor existing supplies. In that situation, the MRP suggests new supplies for the item, based on the appropriate quantity and due date. The MRP will not create a new supply if the demand can be met by existing supply, as it is very unlikely that a new work order or purchase order would be fulfilled faster than an existing one.

Now that you know the basics, you can understand the value of an MRP system that works. It is crucial to your business to keep track of the data relative to the material requirements in order to streamline processes and prepare for growth and success. At Big Bang, we highly recommend Rootstock ERP for your MRP needs. Curious whether this solution is right for you? Reach out to us and get your free assessment.

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