MRP in Operations Management (Material Requirements Planning)

Mate­r­ial Require­ments Plan­ning (MRP) is a plan­ning sys­tem that works out what mate­ri­als and com­po­nents a fac­tory needs, how much of each it needs and when each must be ordered or made, so that pro­duc­tion of fin­ished goods can go ahead on sched­ule. It starts from the plan for fin­ished prod­ucts and works back­wards to the parts that go into them.

MRP mat­ters because pro­duc­tion stops the moment a sin­gle part is miss­ing, yet hold­ing large stocks of every part "just in case" ties up money and space. MRP tries to give the shop floor the right mate­r­ial at the right time while keep­ing inven­tory as low as the plan allows. The approach was set out in detail by Joseph Orlicky and is now built into almost every ERP pack­age used by man­u­fac­tur­ers.

Mean­ing and objec­tives of MRP

In sim­ple words, MRP is a plan­ning sys­tem for mate­ri­als. Sup­pose a fac­tory wants to make 100 tables. It needs wood, screws, glue, pol­ish and pack­ing mate­r­ial, and it must know how much of each is required, how much is already in the store, how much must be bought and when the orders must go out. The sys­tem that answers these ques­tions sys­tem­at­i­cally is MRP.

The three ques­tions MRP answers

1. What is needed? The list of items, taken from the bill of mate­ri­als.
2. How much is needed? The net quan­tity after allow­ing for stock already held or on order.
3. When is it needed? The date each order must be released, found by off­set­ting lead time.

Main objec­tive

The main objec­tive of MRP is to ensure that mate­ri­als are avail­able for pro­duc­tion when needed, while avoid­ing unnec­es­sary excess inven­tory. It bal­ances two risks: short­age on one side and excess stock on the other. Sup­port­ing objec­tives are:

• timely avail­abil­ity of mate­ri­als and com­po­nents;
• lower inven­tory lev­els and car­ry­ing cost;
• smoother work­flow with fewer delays and fewer emer­gency pur­chases;
• clear pur­chase and work order plans;
• bet­ter coor­di­na­tion between pro­duc­tion, pur­chase and stores.

Why MRP is needed

When mate­r­ial plan­ning is poor, pro­duc­tion may stop, machines stand idle, work­ers wait, cus­tomer orders are delayed, emer­gency pur­chas­ing raises cost and, para­dox­i­cally, too much of the wrong inven­tory piles up. Con­sider a bak­ery prepar­ing 1,000 cake boxes for a fes­ti­val week. It needs flour, sugar, eggs, but­ter and boxes. If it does not cal­cu­late total require­ments, sub­tract what is in stock and time the deliv­er­ies, ingre­di­ents may run out mid-pro­duc­tion while other items spoil on the shelf. MRP is the dis­ci­pline that pre­vents this.

Inde­pen­dent and depen­dent demand

The basic idea behind MRP is depen­dent demand think­ing: start with the fin­ished prod­uct require­ment and cal­cu­late the require­ment for every­thing that goes into it.

Inde­pen­dent demand

Inde­pen­dent demand is demand for the final prod­uct, which comes from cus­tomers and must be fore­cast. Exam­ple: cus­tomers want 500 bicy­cles next month.

Depen­dent demand

Depen­dent demand is demand for parts and mate­ri­als that is derived from the plan for the final prod­uct. If one bicy­cle needs 2 wheels, 1 frame and 1 han­dle, then 500 bicy­cles need 1,000 wheels, 500 frames and 500 han­dles. Nobody needs to fore­cast wheels; they can be cal­cu­lated. MRP deals mainly with depen­dent demand, whereas tech­niques such as EOQ and reorder point were designed for inde­pen­dent demand items.

Inputs of MRP

MRP works on three core inputs: the Mas­ter Pro­duc­tion Sched­ule, the Bill of Mate­ri­als and Inven­tory Records. A fre­quent objec­tive-type ques­tion lists "prod­uct pack­ag­ing plan" as an option; it is not an input of MRP.

Mas­ter Pro­duc­tion Sched­ule (MPS)

The MPS states which fin­ished prod­ucts will be made, how many and in which time period (usu­ally weeks). For exam­ple: week 1, 200 chairs; week 2, 300 chairs; week 3, 250 chairs. The MPS is the start­ing point of MRP; it tells the sys­tem what fin­ished goods the com­pany plans to make. It is itself derived from cus­tomer orders, fore­casts and the aggre­gate pro­duc­tion plan.

Bill of Mate­ri­als (BOM)

The BOM is a com­plete list of all parts, sub-assem­blies and raw mate­ri­als needed to make one unit of the fin­ished prod­uct, with the quan­tity of each. For one study table the BOM may list 10 kg of wood, 20 screws, 1 bot­tle of glue and 1 pol­ish pack; for 100 tables MRP mul­ti­plies these to get 1,000 kg of wood, 2,000 screws, 100 bot­tles of glue and 100 pol­ish packs. When drawn as a dia­gram, the BOM becomes a prod­uct struc­ture tree with the fin­ished prod­uct at level 0 and its com­po­nents at lev­els 1, 2 and so on.

Inven­tory records

Inven­tory records (the inven­tory sta­tus file) show for every item how much is on hand, how much is already on order (sched­uled receipts), how much is reserved or allo­cated to other jobs, and there­fore how much is actu­ally free to use. They also hold the lead time, lot-size rule and safety stock of each item. If the com­pany needs 500 han­dles and 200 are free in stock, it only needs to arrange 300 more.

How MRP works: step by step

1. Start with the MPS. Take the quan­tity and due week of each fin­ished prod­uct.
2. Explode the BOM. Mul­ti­ply par­ent quan­ti­ties by the quan­tity per par­ent to get the gross require­ments of each com­po­nent, level by level.
3. Net against inven­tory. Sub­tract stock on hand and sched­uled receipts to get net require­ments.
4. Apply a lot-siz­ing rule. Decide the order quan­tity, for exam­ple lot-for-lot (order exactly the net require­ment), fixed order quan­tity or EOQ.
5. Off­set for lead time. Move each planned order receipt back by the item's lead time to find the week in which the order must be released.
6. Pass require­ments down. The planned order releases of a par­ent become the gross require­ments of its chil­dren, and the cycle repeats.

The basic net­ting rela­tion­ship is:

$$\text{Net requirement} = \text{Gross requirement} - \text{On-hand stock} - \text{Scheduled receipts}\ (+\ \text{Safety stock, if any})$$

A neg­a­tive result sim­ply means no new order is needed in that period. So MRP is not about total need; it is about the actual addi­tional need.

Lead time in MRP

Lead time is the gap between releas­ing an order (pur­chase or pro­duc­tion) and receiv­ing or com­plet­ing it. Because mate­ri­als must arrive before pro­duc­tion needs them, MRP uses lead time to fix the release date. If lead time is ignored, orders arrive late, pro­duc­tion stops and the sched­ule fails.

Worked exam­ple: MRP net­ting for a bicy­cle

Sup­pose a small bicy­cle assem­bler has the prod­uct struc­ture shown above. The MPS requires 100 bicy­cles in week 6 and 150 bicy­cles in week 8. Lot-for-lot order­ing is used and there is no safety stock. Inven­tory data are:

Step 1: bicy­cle (level 0)

Gross require­ments are 100 in week 6 and 150 in week 8. The 20 bicy­cles on hand cover part of week 6:

$$\text{Net}_{6} = 100 - 20 = 80, \qquad \text{Net}_{8} = 150 - 0 = 150$$

With a one-week lead time, assem­bly orders must be released in week 5 (80 units) and week 7 (150 units).

Step 2: frames (level 1)

Each bicy­cle order release cre­ates a frame require­ment in the same week: gross require­ments are $1 \times 80 = 80$ in week 5 and $1 \times 150 = 150$ in week 7.

$$\text{Net}_{5} = 80 - 30 = 50, \qquad \text{Net}_{7} = 150$$

With a two-week lead time, frame pur­chase orders are released in week 3 (50) and week 5 (150).

Step 3: wheels (level 1)

Gross require­ments are $2 \times 80 = 160$ in week 5 and $2 \times 150 = 300$ in week 7. Avail­able stock by week 5 is the 40 on hand plus the 50 arriv­ing in week 3, that is 90.

$$\text{Net}_{5} = 160 - (40 + 50) = 70, \qquad \text{Net}_{7} = 300$$

With a one-week lead time, wheel orders are released in week 4 (70) and week 6 (300).

Sum­mary MRP record for wheels

This is the essence of MRP: the pur­chase depart­ment now knows exactly what to buy (frames and wheels), how many (50 and 150 frames; 70 and 300 wheels) and when to place each order.

Out­puts of MRP

The pri­mary out­puts are planned pur­chase orders and planned work orders; these two are the out­put com­po­nents usu­ally named in exam ques­tions. MRP also gen­er­ates resched­ul­ing notices.

Pur­chase orders

Instruc­tions to buy mate­ri­als from sup­pli­ers, for exam­ple "buy 1,000 screws, due by next Mon­day".

Work orders

Instruc­tions to make com­po­nents inter­nally, for exam­ple "pro­duce 500 metal brack­ets in the machine shop in week 4".

Resched­ul­ing notices

Mes­sages sug­gest­ing that an exist­ing order be advanced, delayed, can­celled or changed in quan­tity because demand or sup­ply has changed.

Sec­ondary out­puts

Many sys­tems also pro­duce excep­tion reports (late orders, items below safety stock), plan­ning reports for future inven­tory needs and per­for­mance reports that com­pare planned with actual lead times and costs.

MRP I and MRP II

MRP I (mate­r­ial require­ments plan­ning) focuses only on mate­ri­als: what, how much and when. MRP II (man­u­fac­tur­ing resource plan­ning), devel­oped and pop­u­larised by Oliver Wight, widens the scope. It links the mate­r­ial plan with capac­ity require­ments plan­ning, shop-floor con­trol, pur­chas­ing, and the finan­cial and mar­ket­ing plans so that the whole busi­ness works from one set of num­bers. It also adds "what if" sim­u­la­tion. ERP later extended the same inte­gra­tion to all busi­ness func­tions.

MRP and other func­tions

MRP and pur­chas­ing

MRP tells pur­chas­ing what to buy, how much and when, so buy­ing is based on planned sig­nals rather than guess­work. This improves sup­plier coor­di­na­tion, order tim­ing and stock con­trol. Ordi­nary pur­chas­ing is often reac­tive, buy­ing only when a short­age is noticed; MRP is planned and proac­tive.

MRP and inven­tory con­trol

Because orders fol­low actual pro­duc­tion needs, MRP avoids over­stock­ing, under­stock­ing, ran­dom buy­ing and unnec­es­sary stor­age cost.

MRP and pro­duc­tion con­trol

MRP ensures mate­ri­als are ready accord­ing to the pro­duc­tion plan. With­out it, sched­ules fail, machines stand idle and deliv­ery dates are missed.

Advan­tages of MRP

• Bet­ter mate­r­ial avail­abil­ity: mate­ri­als are planned in advance, so short­ages fall.
• Lower inven­tory: items arrive close to when they are used, reduc­ing work-in-progress and raw mate­r­ial stocks.
• Bet­ter pro­duc­tion plan­ning: mate­r­ial tim­ing is coor­di­nated with the sched­ule.
• Bet­ter pur­chase plan­ning: buy­ers get clear, time-phased guid­ance.
• Bet­ter coor­di­na­tion: pro­duc­tion, pur­chase, stores and inven­tory work from one plan.
• Lower cost: reduced car­ry­ing cost, emer­gency pur­chase cost, idle machine cost and delay cost.
• Respon­sive­ness: the plan can be re-run quickly when the MPS changes.

Lim­i­ta­tions of MRP

• Depends on accu­rate data: a wrong BOM or wrong stock record gives wrong orders ("garbage in, garbage out").
• Depends on a sta­ble sched­ule: fre­quent MPS changes make the plan unsta­ble, a prob­lem called sys­tem ner­vous­ness.
• Lead time assump­tions may fail: unex­pected sup­plier delays can upset the plan.
• Needs coor­di­na­tion and dis­ci­pline: depart­ments must share accu­rate, timely infor­ma­tion.
• Not enough by itself: basic MRP ignores capac­ity, and suc­cess also depends on labour, machines, main­te­nance and qual­ity.
• Cost of imple­men­ta­tion: soft­ware, train­ing and data clean-up require invest­ment.

Con­di­tions for suc­cess­ful MRP

• an accu­rate and real­is­tic mas­ter pro­duc­tion sched­ule;
• a cor­rect, up-to-date bill of mate­ri­als for every prod­uct;
• updated inven­tory records with high record accu­racy;
• reli­able lead time data;
• dis­ci­plined record keep­ing and a sta­ble plan­ning sys­tem;
• coor­di­na­tion between pro­duc­tion, pur­chase, stores and sales;
• top man­age­ment sup­port and trained users.

Where MRP is most use­ful

MRP is espe­cially help­ful where prod­ucts have many com­po­nents, pro­duc­tion is planned in advance in batches, inven­tory must be con­trolled care­fully and demand for parts depends on the final prod­uct. Typ­i­cal users are auto­mo­bile mak­ers, fur­ni­ture fac­to­ries, elec­tron­ics assem­blers and machin­ery pro­duc­ers. In a fur­ni­ture fac­tory with an order for 200 desks, each need­ing 15 kg of wood, 30 screws and 1 pol­ish pack, MRP cal­cu­lates 3,000 kg of wood, 6,000 screws and 200 pol­ish packs, sub­tracts stock, checks the due date, allows for sup­plier lead times and gen­er­ates the pur­chase and work orders. For sim­ple, sin­gle-level prod­ucts with steady demand, reorder point sys­tems may be enough.

Key terms

Mas­ter Pro­duc­tion Sched­ule (MPS)

A time-phased plan of which fin­ished prod­ucts will be made, in what quan­tity and when.

Bill of Mate­ri­als (BOM)

A struc­tured list of all com­po­nents and quan­ti­ties required to make one unit of a prod­uct.

Inven­tory records

The file show­ing on-hand stock, sched­uled receipts, allo­ca­tions, lead times and lot sizes for each item.

Gross require­ment

The total quan­tity of an item needed in a period before con­sid­er­ing avail­able stock.

Net require­ment

The addi­tional quan­tity needed after sub­tract­ing on-hand stock and sched­uled receipts.

Sched­uled receipt

An order already placed that is due to arrive in a given period.

Lead time off­set­ting

Mov­ing a planned receipt back by the lead time to find when the order must be released.

Lot-for-lot

A lot-siz­ing rule that orders exactly the net require­ment of each period.

Work order

An inter­nal instruc­tion to pro­duce a com­po­nent or prod­uct.

Pur­chase order

An exter­nal instruc­tion to buy mate­r­ial from a sup­plier.

Com­mon ques­tions

What are the three inputs of MRP?

The mas­ter pro­duc­tion sched­ule, the bill of mate­ri­als and the inven­tory records. A prod­uct pack­ag­ing plan is not an input.

What are the out­puts of MRP?

The main out­puts are planned pur­chase orders and planned work orders, sup­ported by resched­ul­ing notices and excep­tion, plan­ning and per­for­mance reports.

Why is MRP suited to depen­dent demand?

Demand for com­po­nents can be cal­cu­lated exactly from the fin­ished prod­uct sched­ule and the BOM, so fore­cast­ing each part sep­a­rately is unnec­es­sary and less accu­rate.

How is net require­ment cal­cu­lated?

Net require­ment equals gross require­ment minus on-hand stock minus sched­uled receipts, plus any safety stock the firm wants to keep. If the answer is zero or neg­a­tive, no new order is needed.

What is the dif­fer­ence between MRP I and MRP II?

MRP I plans mate­ri­als only. MRP II plans all man­u­fac­tur­ing resources, adds capac­ity plan­ning and feed­back, and links pro­duc­tion with finance and mar­ket­ing.

What hap­pens if the BOM is wrong?

Every require­ment cal­cu­lated from it will be wrong, lead­ing to short­ages of some items and sur­plus of oth­ers. BOM accu­racy is there­fore a pre­con­di­tion for MRP.

Ref­er­ences

1. Orlicky, J. (1975) Mate­r­ial Require­ments Plan­ning. McGraw-Hill.
2. Wight, O. W. (1981) MRP II: Unlock­ing Amer­i­ca's Pro­duc­tiv­ity Poten­tial. CBI Pub­lish­ing.
3. Heizer, J., Ren­der, B. and Mun­son, C. Oper­a­tions Man­age­ment: Sus­tain­abil­ity and Sup­ply Chain Man­age­ment. Pear­son.
4. Steven­son, W. J. Oper­a­tions Man­age­ment. McGraw-Hill Edu­ca­tion.
5. Chary, S. N. Pro­duc­tion and Oper­a­tions Man­age­ment. McGraw-Hill Edu­ca­tion (India).

Related read­ing

• EOQ in Oper­a­tions Man­age­ment (Eco­nomic Order Quan­tity)
• Work Study in Oper­a­tions man­ag­ment
• Method Study in Oper­a­tions Man­age­ment