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7 Min. Read

What Is MRP (Material Requirements Planning)?

What Is MRP (Material Requirements Planning)?

There’s lots to know and understand when it comes to your business operations. And, if your small business is in the manufacturing industry then there can be even more to stay on top of. Do you know the current raw materials and components that you have on hand to complete your finished products?

What about inventory levels? Do you know if you have too much, too little or if you need to reorder more? Are your scheduling and production processes able to stay ahead of your need to purchase new materials? If you aren’t entirely sure, using material requirements planning (MRP) can help you get ahead.

So, what exactly is MRP and how does it work? Let’s take a closer look.

Here’s What We’ll Cover:

What Is MRP?

How Does MRP Work?

What Are the Benefits of MRP?

Are There Important Terms to Understand with MRP?

Key Takeaways

What Is MRP?

In the manufacturing industry, MRP is a way for you to plan and control all your inventory, production and scheduling needs. It’s a way to help convert your master schedule of production into more of a detailed schedule. This lets you know when you need to do certain things such as purchase raw materials or components.

MRP acts almost like a push type of inventory control. Basically, this means that you can use forecasting to help determine the customer demand for your products. You will be able to determine the overall amount and type of products that you need to purchase. Plus, the total quantity of the materials needed to produce those products.

Traditionally, most MRP systems worked with more of a pull- type of production system instead of a push type. But with the evolution of software and technology, MRP systems can support any number of production workflows.

For example, MRP systems can now allow a manufacturer that’s growing to be more flexible with their production lines. And production workflows can range from Make to Order (MTO), Make to Stock (MTS) and Assemble to Order (ATO). An MRP system can allow you to alter your production speeds depending on the different challenges that come up. You can have a better flow of material, inventory management and production plans.

How Does MRP Work?

In the past, MRP systems helped to automate certain areas and help meet your customer demand as efficiently as possible. This was done by following the bills of material (BOM), which outline a few different details.

Typically, a bill of materials would detail things like:

  • Any raw materials, subassemblies or components that were used
  • The quantity of those items
  • The total cost
  • Any operational steps that were included

Today, MRP systems use inventory data along with your master production schedule. By doing this, you can calculate exactly how much raw material you need and how much you will use during the manufacturing process.

The inventory on your bill of materials gets classified as independent demand or dependent demand.

Independent Demand

This relates to your finished goods since the total amount you require gets determined by different factors. These can include things like market demand, forecasted demand and your sales history.

Dependent Demand

This relates to the items that you need to create your finished goods, which can include any raw materials or components. It’s worth noting that the demand for these items is going to depend on what is needed to make the next component on your bill of materials.

Another important factor to consider is how an MRP system can track lead time. When it comes to lead time, there are two common types that manufacturers need to know and understand.

The first is material lead time, which is the ordering and the delivery time of your materials. The second is manufacturing lead time, which is the time it takes to make your product and then get it to your customer.

What Are the Benefits of MRP?

There are several benefits to implementing an MRP system in your manufacturing processes. It will help make sure that you have the right inventory available to complete production at the lowest cost possible. By doing this, MRP improves the flexibility, efficiency and profitability of your operations.

MRP gets used to help your workers become more productive and you can improve the overall quality of your products. Plus, your material and labour costs will be as low as possible. You can be better prepared to handle an increase in demand for your product and avoid any production delays or inventory stockouts.

This helps to make sure that you don’t lose customers and you can continue to grow revenue. MRP systems are also going to help the flow of materials, parts and components become more synchronized. Here are some more variables that MRP can help track:

  • Sales orders
  • Purchase orders
  • Expedited orders
  • Due dates
  • Shortage of materials
  • Marketplace demand
  • Forecasts
  • Data
  • Material

Are There Important Terms to Understand with MRP?

You might have already seen some common terms come up with MRP. Some are related to the overall concept for MRP and some are more related to the type of software you’re using. Either way, here are some of the most important terms to know and understand.

Item. This is the code number or name you use for scheduling.

Lot Size. This is how many units you need to order throughout manufacturing.

Lead Time. This is the total amount of time you need to manufacture your item from start to finish.

Low-Level Code. This relates to the sequence in which your items are going through MRP. It’s the lowest level code for an item on your bill of materials.

Past Due. This relates to any orders that are behind schedule.

Gross Requirements. This is the total demand for your product or item over the course of a specific time period.

Scheduled Receipts. These are any open orders you have that haven’t been fulfilled yet.

Net Requirements. This is the required quantity that needs to get produced within a certain time.

Projected on Hand. This is the total amount of inventory that you estimate to be available after you meet gross requirements.

Planned Order Receipts. This is the total number of orders you expect to receive during a certain time period.

Planned Order Releases. This is how much you need to order in a certain time period.

Cumulative Lead Time. This is the maximum amount of time that it’s going to take for you to develop and manufacture your product.

Master Production Schedule. This is the number of products that you need to produce in order to meet your forecast.

Net-Change Systems. These are systems that identify any changes in your planning.

Key Takeaways

MRP works well because it’s an organized way of understanding your processes. Plus, it incorporates everyone that can contribute to improving your processes. From sales, production, purchasing, receiving and shipping.

There are three basic steps to take with MRP:

  • Identify quantity requirements. You need to try and determine how much quantity you have in certain areas. These areas can include what you have on hand, in an open purchase order or already committed to an existing order.
  • Executing MRP calculations. This is a way for you to create suggestions for any materials that might be delayed, expedited or critical to your production.
  • Complete and fulfil your orders. Provide the materials for your manufacturing orders, purchase orders and any other needs.

MRP systems can be used in a variety of production environments. These can include complex products, assembled to order products or certain demand items. In this case, MRP will help reduce your stored inventory and manufacturing costs.

This allows you to generate an accurate schedule that will improve worker productivity and decrease lead time. Your customers will receive quality products and incredible service throughout the entire process. Plus, you can generate better sales forecasts and understand your inventory requirements.

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