Material requirements planning (MRP) is a production planning and inventory control system used to manage manufacturing processes. Smaller organizations often use spreadsheet programs such as Excel to simulate MRP instead of application software which is programmed to perform the necessary functions.
The Scope of MRP in Manufacturing
The essential functions of MRP systems include inventory control, bill of materials processing and elementary scheduling. MRP helps organizations maintain only the minimum amount of inventory levels necessary. It is used to plan manufacturing, purchasing and delivering activities. Companies need to control the types and quantities of materials they purchase, plan which products are to be produced, and in what quantities, and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Inadequate planning of these issues affects company cash flow, profitability and customer satisfaction.
Perhaps the most significant indicator of a company’s financial health and management capabilities is its level of inventory in relation to its sales revenue. Inventory “turns” (revenue divided by the average cost of inventory maintained) measures how efficiently the supply chain system of the company is working with regard to ordering parts and components to make end products “just in time” to meet customer order delivery requirements.
- If a company purchases insufficient quantities of an item used in manufacturing (or the wrong item) it may be unable to meet contract obligations to supply products on time.
- If a company purchases excessive quantities of an item, money is wasted - the excess
quantity ties up cash while it remains as stock and may never even be used at all due to
obsolescense.
- Beginning production of an order at the wrong time can cause customer deadlines to be
missed.
MRP system is a tool to deal with these challenges. It provides answers for several questions:
- What items are required?
- How many are required?
- When are they required?
MRP can be applied both to items that are purchased from outside suppliers and to sub- assemblies, produced internally, that are components of more complex items. The data that must be considered include:
- The end item (or items) being created. This is sometimes called Independent Demand, or Level "0" on BOM (Bill of materials).
- How much is required at a time.
- When the quantities are required to meet demand.
- Shelf life of stored materials.
- Inventory status records. Records of net materials available for use already in stock (on
hand) and materials on order from suppliers.
- Bills of materials. Details of the materials, components and sub-assemblies required to
make each product.
- Planning Data. This includes all the constraints and directions to produce the end items. This includes such items as: Routings, Labor and Machine Standards, Quality and Testing Standards, Pull/Work Cell and Push commands, Lot sizing techniques (i.e. Fixed Lot Size, Lot-For-Lot, Economic Order Quantity), Scrap Percentages, and other inputs.
Outputs
There are two outputs and a variety of messages/reports:
- First there is the "Recommended Production Schedule" which lays out a detailed
schedule of the required minimum start and completion dates, with quantities, for each step of the Routing and Bill Of Material required to satisfy the demand from the Master Production Schedule (MPS).
- Second is the "Recommended Purchasing Schedule." This lays out both the dates that the purchased items should be received and the dates that the Purchase orders, or Blanket Order Release should occur to match the production schedules.
Messages and Reports:
- Purchase orders. An order to a supplier to provide materials.
- Reschedule notices. These recommend cancelling, increasing, delaying or speeding up
existing orders.
Making MRP work
- The major challenge with MRP software is the integrity of the data. If there are any
errors in the inventory data, the [bill of materials] (commonly referred to as 'BOM') data, or the master production schedule, then the data will also be incorrect (AKA "GIGO": Garbage In, Garbage Out). Data integrity is also affected by inaccurate cycle count adjustments, mistakes in receiving input and shipping output, scrap not reported, waste, damage, box count errors, supplier container count errors, production reporting errors, and system issues. Many of these types of errors can be minimized by implementing pull systems and using bar code scanning. Most MRP vendors recommend at least 99% data integrity for the system to give useful results.
- Another major problem with MRP systems is the requirement that the user specify how long it will take a factory to make a product from its component parts (assuming they are all available). Additionally, the system design also assumes that this "lead time" in manufacturing will be the same each time the item is made, without regard to quantity being made, or other items being made simultaneously in the factory.
- A manufacturer may have factories in different cities or even countries. The overall ERP system needs to be able to organize inventory and needs by individual plant, and then optimize production and movement of components (or materials) between each one in order to serve the overall enterprise.
- To execute MRP properly means that other systems in the enterprise need to work properly. For example systems like quality control makes sure that product comes out right first time (without defects) must be in place.
- Production may be in progress for a part, whose design gets changed, with customer orders in the system for both the old design, and the new one, concurrently. The overall system must be able to code parts such that the MRP will correctly calculate needs and tracking for both versions. Parts must be booked into and out of stores regularly to do the MRP calculations.
- The other major drawback of MRP is that takes no account of capacity in its calculations. This means it will give results that are impossible to implement due to manpower or machine or supplier capacity constraints. However this is largely dealt with by MRP II which does take capacity constraints into account.
- In the MRP II, fluctuations in forecast data are taken into account by including simulation of the master production schedule, thus creating a long-term production plan. A more general feature of MRP II is its extension to other business applications such as CRM, business intelligence, marketing and finance (integration of all the functions of the company). This has become known as ERP, Enterprise Resource Planning.
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