Definition

material requirements planning (MRP)

Contributor(s): David Essex

Material requirements planning (MRP) is a system for calculating the materials and components needed to manufacture a product. It consists of three primary steps: taking inventory of the materials and components on hand, identifying which additional ones are needed and then scheduling their production or purchase.

Why is MRP important?

MRP is one of the most widely used systems for harnessing computer power to automate the manufacturing process.

IBM engineer Joseph Orlicky developed MRP in 1964 after he studied the Toyota Production System, which was the model for the lean production methodology. Power toolmaker Black & Decker built the first computerized MRP system that same year, according to several sources.

It's important to note, however, that MRP and lean production are not the same and are considered by some practitioners to be antithetical, though some say MRP can help with lean production. MRP is considered a "push" production planning system -- inventory needs are determined in advance, and goods produced to meet the forecasted need -- while lean is a "pull" system in which nothing is made or purchased without evidence of actual -- not forecasted -- demand.

Orlicky's ideas spread rapidly throughout the manufacturing sector after the 1975 publication of his book, Material Requirements Planning: The New Way of Life in Production and Inventory Management, and by the early 1980s, there were hundreds of commercial and homegrown MRP software programs.

Orlicky died in 1986. A second edition of the book, updated by George Plossl, was released in 1994.The current version, Orlicky's Material Requirements Planning, Third Edition is a 2011 update by consultants Carol Ptak and Chad Smith. It adds advice on how to use MRP to run a "demand-driven" planning process that uses actual sales orders, rather than the typical MRP method of a sales forecast, to calculate material requirements. Called demand-driven material requirements planning (DDMRP), this newer "pull" approach is controversial and viewed by some as a violation of important principles established by Orlicky.

How does MRP work?

MRP uses information from the bill of materials (BOM), inventory data and the master production schedule to calculate the required materials and when they will be needed during the manufacturing process.

The BOM is a hierarchical list of all the materials, subassemblies and other components needed to make a product, along with their quantities, each usually shown in a parent-child relationship. The finished good is the parent at the top of the hierarchy.

The inventory items in the BOM are classified as either independent demand or dependent demand. An independent demand item is the finished good at the top of the hierarchy. Manufacturers determine its amount by considering confirmed orders and examining market conditions, past sales and other indicators to create a forecast, then decide how many to make to meet the expected demand.

Dependent demand items, in contrast, are the raw materials and components needed to make the finished good. For each of these items, demand depends on how many are needed to make the next-highest component in the BOM hierarchy.

MRP is the system most companies use to track and manage all of these dependencies and to calculate the number of items needed by the dates specified in the master production schedule.

Lead time -- the period from when an order is placed and the item delivered -- is another key concept in MRP. There are many types of lead times. Two of the most common are material lead time (the time it takes to order materials and receive them) and factory or production lead time (how long it takes to make and ship the product after all materials are in). Customer lead time denotes the time between the customer's order and final delivery. The MRP system calculates many of these lead times, but some are chosen by the operations managers and entered manually.

MRP is useful in both discrete manufacturing, in which the final products are distinct items that can be counted -- such as bolts, subassemblies or automobiles -- and process manufacturing, which results in bulk products, including chemicals, soft drinks and detergent, that can't be separately counted or broken down into their constituent parts.

Multilevel bill of materials (BOM)

MRP vs. ERP

An extension of MRP, developed by management expert Oliver Wight in 1983 and called manufacturing resource planning (MRP II), broadened the planning process to include other resources in the company, such as financials, and added processes for product design, capacity planning, cost management, shop-floor control and sales and operations planning, among many others.

In 1990, the analyst firm Gartner coined the term enterprise resource planning (ERP) to denote a still more expanded and generalized type of MRP II that took into account other major functions of a business, such as accounting, human resources and supply chain management, all of it managed in a centralized database. Both MRP and MRP II are considered direct predecessors of ERP.

ERP quickly expanded to other industries, including services, banking and retail, that did not need an MRP component. However, MRP is still an important part of the ERP software used by manufacturers.

Comparing typical features of MRP vs. MRP II vs. ERP

Benefits of MRP

The primary objective of MRP is to make sure that materials and components are available when needed in the production process and that manufacturing takes place on schedule. Additional benefits of MRP are:

  • reduced customer lead times to improve customer satisfaction;
  • reduced inventory costs;
  • effective inventory management and optimization -- by acquiring or manufacturing the optimal amount and type of inventory, companies can minimize the risk of stock-outs, and their negative impact on customer satisfaction, sales and revenue, without spending more than necessary on inventory; and
  • improved manufacturing efficiency by using accurate production planning and scheduling to optimize the use of labor and equipment.

Proponents of MRP and DDMRP say these approaches help companies better match supply to demand. This achievement, in turn, can reduce product costs and increase revenues as customer demand is fully met and no revenue opportunities are lost from missed ship dates or inventory shortfalls.

Disadvantages of MRP

MRP has drawbacks, including:

  • Increased inventory costs: While MRP is designed to ensure adequate inventory at the required times, companies can be tempted to hold more inventory than is necessary, thereby driving up inventory costs. An MRP system anticipates shortages sooner, which can lead to overestimating inventory lot sizes and lead times, especially in the early days of deployment before users gain the experience to know the actual amounts needed.
  • Lack of flexibility: MRP is also somewhat rigid and simplistic in how it accounts for lead times or details that affect the master production schedule, such as the efficiency of factory workers or issues that can delay delivery of materials.
  • Data integrity requirements: MRP is highly dependent on having accurate information about key inputs, especially demand, inventory and production. If one or two inputs are inaccurate, errors can be magnified at later stages. Data integrity and data management are thus essential to effective use of MRP systems.

To address these shortcomings of MRP, many manufacturers use advanced planning and scheduling (APS) software, which uses sophisticated math and logic to provide more accurate and realistic estimates of lead times. Unlike most MRP systems, APS software accounts for production capacity, which can have a significant impact on availability of materials.

This was last updated in February 2020

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How would it be possible for material requirements planning to be demand-driven?
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It might be possible. 
Assumptions:
1. Company takes weekly orders. 
2. Resources are easily available.

If the company follows a policy that orders for the next week say week 23 needs to be placed latest by Friday of week 22, the company would have one day's time to get the resources and a clear picture of what is the exact order. In this way, it would be almost 90-95% Demand-Driven MRP system as orders after friday won't be considered for week 23. 

What are your views on this Margaret?
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MRP is software solution which helps manufacturing firms to calculate the total amount of materials required, the time at which they are required and the optimum quantities required in a more precise manner. It also provides firms with the ability of comparing forecasts with the actual data, while at the same time it also helps in performing performance analysis leading toward boosting efficiency of the existing processes. Whereas, an ERP is a complete business software that integrate and automates all the system across the organization which enables core business processes to run in a more smooth and efficient manner. ERP covers various aspects including CRM, accounting, procurement,risk management, supply chain operations and project management. 

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