Material Requirements Planning (MRP): How It Works, Pros and Cons

What Is Material Requirements Planning (MRP)?

Material requirements planning (MRP) is a software-based integrated inventory and supply management system designed for businesses.

Companies use MRP to estimate quantities of raw materials, maintain inventory levels, and schedule production and deliveries.

How Material Requirements Planning (MRP) Works

MRP helps businesses and manufacturers define what is needed, how much is needed, and when materials are needed and works backward from a production plan for finished goods.

MRP converts a plan into a list of requirements for the subassemblies, parts, and raw materials needed to produce a final product within the established schedule. MRP helps manufacturers get a grasp of inventory requirements while balancing both supply and demand.

Using MRP, managers can determine their need for labor and supplies and improve their production efficiency by inputting data into the MRP scheme such as:

• Item Name or Nomenclature: The finished good title, sometimes called Level "0" on BOM.
• Master Production Schedule (MPS): How much is required to meet demand? When is it needed?
• Shelf life of stored materials.
• Inventory Status File (ISF): Materials available that are in stock and materials on order from suppliers.
• Bills of materials (BOM): Details of materials and components required to make each product.
• Planning data: Restraints and directions like routing, labor and machine standards, quality and testing standards, and lot sizing techniques.
  

MRP and Manufacturing

Manufacturers manage the types and quantities of materials they purchase strategically and cost-effectively to ensure that they can meet current and future customer demand. MRP helps companies maintain appropriate levels of inventory so that manufacturers can better align their production with rising and falling demand.

The MRP process:

• Estimates demand and required materials. After determining customer demand and utilizing the bill of materials, MRP breaks down demand into specific raw materials and components.

• Allocates Inventory of materials. MRP allocates inventory into the exact areas as needed.

• Schedules Production. Time and labor requirements are calculated to complete manufacturing and a timeline is created.

• Monitors the process. MRP automatically alerts managers of any delays and even suggests contingency plans to meet build deadlines.

History of MRP

Material requirements planning was the earliest of the integrated information technology (IT) systems that aimed to improve productivity for businesses by using computers and software technology.

The first MRP systems of inventory management evolved in the 1940s and 1950s, using mainframe computers to extrapolate information from a bill of materials for a specific finished product into a production and purchasing plan. MRP systems expanded to include information feedback loops so that production managers could change and update the system inputs as needed.

The next generation of MRP, manufacturing resources planning (MRP II), also incorporated marketing, finance, accounting, engineering, and human resources aspects into the planning process. A concept that expands on MRP is enterprise resources planning (ERP), developed in the 1990s, which uses computer technology to link various functional areas across an entire business enterprise.

Advantages and Disadvantages of MRP

MRP vs. ERP

Enterprise resource planning (ERP) is an extension of MRP systems. While MRP is a planning and control system for the resources in a company, ERP is a solution for the enterprise as a whole and an ERP system includes advanced functionality in the areas of financial, customer relationships, and sales order management.

MRP can be a stand-alone application or a piece of an ERP, a single solution that addresses all business needs, not just the scheduling of resources. It decreases any information redundancies and adds elements, like user-level security.

Benefits of an ERP system include increased efficiency, integrated information, customized reports, and higher-quality customer service,

The Bottom Line

Material requirements planning (MRP) is a software-based integrated inventory and supply management system that companies use to estimate quantities of raw materials and schedule production. By inputting information like the Master Production Schedule, Inventory Status File, and the Bill of Materials (BOM), MRP calculates the materials needed, how much are needed, and when they are needed in the manufacturing process.