Material Requirements Planning (MRP): A Practical Guide for Manufacturers and Supply Managers
Key Takeaways
– Material Requirements Planning (MRP) is a software-based system that translates a production plan into specific material and component requirements, timing, and purchase/production orders.
– MRP works backward from a Master Production Schedule (MPS) and uses three primary inputs: the MPS, the Bill of Materials (BOM), and the Inventory Status File (ISF).
– Properly implemented, MRP reduces stockouts and lead times, lowers inventory costs, and improves production efficiency — but it depends heavily on accurate data and disciplined processes.
– MRP is focused on materials and production scheduling; Enterprise Resource Planning (ERP) systems expand that scope to financials, sales, HR and other enterprise functions.
What is MRP?
Material Requirements Planning (MRP) is an inventory and production planning methodology (and the software that implements it) that calculates what materials are needed, how many are needed, and when they must be available to meet a production schedule for finished goods. MRP “explodes” the finished-goods schedule through the BOM to derive requirements for subassemblies, components, and raw materials and then schedules purchasing or production to meet those requirements.
How MRP Works — The Process (high-level)
1. Start with demand:
– Use the Master Production Schedule (MPS) that defines how many finished units must be produced and when.
2. Explode the BOM:
– Break the finished product down into all component parts and raw materials (multi-level if needed).
3. Check inventory:
– Refer to the Inventory Status File for current on-hand, allocated, and on-order quantities.
4. Net requirements calculation:
– For each item, calculate net requirements = gross requirement – (on-hand + scheduled receipts) ± safety stock rules.
5. Lot-sizing & lead times:
– Apply ordering/production lot-sizing rules and lead times to decide when to release purchase or production orders.
6. Schedule and release:
– Generate planned orders, purchase orders, production orders, and work-center schedules.
7. Monitor and update:
– Track receipts, consumption, and exceptions; re-run MRP as demand, inventory, or lead times change.
MRP and Manufacturing — Where It Fits
– Scheduling: MRP schedules raw-material deliveries and shop-floor production so subassemblies are ready when needed.
– Inventory management: It reduces excess inventory by timing purchases/production closer to usage (supporting JIT philosophies when feasible).
– Capacity considerations: Traditional MRP focuses on material timing; capacity-constrained planning (MRP II or advanced planning and scheduling) layers in labor and machine capacity.
– Planning horizons: MRP typically operates over months to weeks for finished goods, with time buckets that may be days, weeks, or months depending on the business.
Bill of Materials (BOM) — The Backbone of MRP
– Definition: The BOM is the hierarchical list of parts, assemblies, subassemblies, and raw materials required to build a product, including quantities per parent and sometimes routing information.
– Types:
– Single-level BOM: lists direct components for one assembly.
– Multi-level BOM: includes nested assemblies and shows how components roll up to the finished product.
– Modular/phantom assemblies: used for repeatable subassemblies that aren’t stocked as separate items.
– Practical tip: Maintain “structured” and versioned BOMs (with effectivity dates) so MRP uses the correct configuration for each production period.
History of MRP
– 1940s–1950s: Early computerized inventory planning appeared on mainframes, using BOM data to plan purchasing and production.
– 1960s–1970s: Formal MRP systems emerged in manufacturing to automate materials planning.
– 1980s: MRP II (Manufacturing Resource Planning) extended MRP to include capacity, finance, and other functions.
– 1990s onward: ERP systems broadened scope further, integrating MRP/MRP II with enterprise-wide modules (sales, finance, HR, CRM).
Advantages and Disadvantages of MRP
Advantages
– Ensures materials and components are available when needed.
– Minimizes excess inventory and carrying costs.
– Reduces customer lead times and stockouts.
– Improves production efficiency and labor utilization.
– Provides planned, auditable purchasing/production activity.
Disadvantages / Limitations
– Heavy reliance on accurate and timely data (BOMs, inventory counts, lead times, demand).
– Can be costly and time-consuming to implement and maintain.
– Inflexible if inputs are inaccurate or if the business needs rapid schedule changes.
– Risk of “explosion” of orders (over-ordering) if safety stock and lot-sizing rules aren’t tuned.
– Basic MRP does not inherently model capacity constraints (unless MRP II/APS features are used).
MRP vs. ERP
– MRP: Primarily focused on materials planning, inventory, and production scheduling.
– ERP: Enterprise-level software that typically includes MRP functionality plus financials, CRM, sales order management, HR, and other modules. ERP centralizes data and reduces redundancy across functions.
– In practice: MRP can be a module within an ERP or a stand-alone system integrated with other systems.
The 3 Main Inputs for MRP
1. Master Production Schedule (MPS)
– What finished products are to be produced, in what quantities, and when.
2. Bill of Materials (BOM)
– Multi-level breakdown of components and required quantities per finished unit.
3. Inventory Status File (ISF)
– Current inventory levels, allocated stock, open purchase/production orders, scrap, and lead times.
How MRP Benefits a Business (measurable outcomes)
– Lower inventory carrying costs (fewer days of inventory).
– Fewer stockouts and backorders (improved service levels).
– Shorter lead times through better scheduling.
– Improved shop-floor throughput and labor productivity.
– Better purchasing discipline and reduced rush orders.
– Better visibility into future material needs for supplier negotiation.
Outputs of an MRP System (typical)
– Planned orders (suggested purchases/productions by date and quantity).
– Order releases (actual purchase orders or work orders issued).
– Rescheduling notices (advances or delays for existing orders).
– Exception reports (items needing attention: late orders, shortages, excesses).
– Inventory status updates and projected on-hand reports.
– Capacity and load reports (if integrated with capacity planning modules).
Practical Steps to Implement MRP — A Checklist with Actionable Steps
1. Prepare and clean data
– Audit and validate BOMs (versions, quantities, units of measure).
– Reconcile inventory records with physical counts; correct discrepancies.
– Standardize item master data (part numbers, descriptions, lead times, costs).
2. Define planning policies
– Set safety stock rules, reorder points (if used), and service level targets.
– Choose lot-sizing rules (EOQ, fixed lot, lot-for-lot, minimum/maximum).
– Define lead times (supplier, manufacturing, setup) and whether they are fixed or variable.
3. Configure the system
– Map item relationships and lead times; input BOMs and routing if available.
– Set time buckets (daily, weekly, monthly) and planning horizon.
4. Integrate related systems
– Connect MPS, purchasing, warehouse, shop-floor data collection, and optionally ERP financials.
– Ensure automated updating of receipts, consumption, and demand changes.
5. Simulate and validate
– Run pilot simulations on a subset of items or product families.
– Validate outputs with production planners and buyers; calibrate lot-sizing and safety-stock.
6. Pilot and train
– Pilot in a controlled environment; provide training for planners, buyers and production supervisors.
– Document standard operating procedures for MRP runs, exception handling, and overrides.
7. Go-live and monitor
– Move to full production, run MRP on a regular cadence (daily/weekly).
– Monitor exception reports and supplier performance; adjust parameters as needed.
8. Continuous improvement
– Regularly review lead times, master schedule accuracy, BOM changes, and inventory turns.
– Implement root-cause analysis for frequent exceptions and stock issues.
KPIs to Monitor with MRP
– Inventory turns (COGS / average inventory)
– Days of inventory on hand (DOH)
– On-time delivery to customers
– Supplier on-time delivery rates
– Stockout frequency and backorder levels
– Planned vs. actual production adherence
– Expedited order frequency and cost
Common Pitfalls and How to Avoid Them
– Poor data quality: conduct regular audits, version-control BOMs, and reconcile inventory.
– Unrealistic lead times: gather historical supplier and production lead-time data and update regularly.
– Overly complex lot-sizing: start simple; tune lot-sizing rules based on SKU volume and cost trade-offs.
– Ignoring capacity constraints: combine MRP with capacity planning (MRP II or APS) when capacity is a bottleneck.
– Lack of change control: implement clear processes for engineering changes and BOM updates.
Simple Example (illustrative)
– Demand: 100 finished widgets due week 6.
– BOM: 1 widget requires 2 subparts A and B.
– On-hand: 50 subpart A in inventory; no scheduled receipts.
– Net requirement for subpart A = (100 × 2) – 50 = 150 units.
– Apply lead time and lot-size rule to schedule purchase/production releases so 150 A are available in the week(s) they are needed.
The Bottom Line
MRP is a foundational planning approach that turns a production plan for finished goods into concrete, timed requirements for components and raw materials. When paired with accurate data, disciplined processes, and appropriate lot-sizing and lead-time policies, MRP reduces inventory costs, shortens lead times, and improves operational predictability. Its effectiveness depends on rigorous data management, integration with other business systems (often via ERP), and regular review and tuning.
Source
– Investopedia, “Material Requirements Planning (MRP)” — Ellen Lindner. https://www.investopedia.com/terms/m/mrp.asp
If you want, I can:
– Provide a one-page MRP implementation checklist tailored to your company size (small, mid-market, enterprise).
– Build an example MRP calculation spreadsheet template (with BOM explosion) for a sample product. Which would be most useful?