What is MRP (material requirements planning)?
When introduced in the 1960s, material requirements planning (MRP) was the “killer app,” triggering widespread adoption of business software and the computers needed to run it. Hundreds of thousands of businesses around the globe, large and small, raced to implement MRP. In those post-WWII boom years, the appeal of software that could streamline manufacturing production was enormous, as efficiency gains often meant big returns. Aided by the software’s computerized calculations, manufacturers could increase their speed of production, offer a wider variety of products, and shave costs by more accurately estimating material requirements.
In today’s hyper-competitive business environment, production efficiency is arguably even more critical. Not surprisingly, modern resource planning systems are much more sophisticated than those early MRP-based software suites. Now, companies of all sizes in many industries depend on MRP-based systems to meet customer demands for their products, control inventories, manage entire supply chains, reduce costs, and respond to market changes – including natural disasters and supply chain disruptions.
Definition of MRP: MRP is a system designed to plan manufacturing production. It identifies necessary materials, estimates quantities, determines when materials will be required to meet the production schedule, and manages delivery timing – with the goal of meeting demands and improving overall productivity.
MRP versus ERP
You could say that enterprise resource planning (ERP) is a direct descendant of MRP, or you could say that MRP is a component of ERP – and either way, you would be correct.
To explain, let’s look at the history. After inception, the next evolution of MRP involved integrating the original MRP modules – sales, inventory, purchasing, bill of materials, and production control – and combining them with finance and accounting functions. The new suite that was formed was called MRP II. After this, the software suite continued to grow and expand with new capabilities. Finally, to better describe its broader functionality, the term ERP – or enterprise resource planning software – was introduced.
Today, the planning function encompasses much more than materials, but even the newest incarnations of ERP can trace their roots directly back to MRP. And in all ERP, the original principle of MRP is still intact: identify what is needed, how much is needed, and when it is needed.
On the other hand, because ERP software contains much greater functionality than MRP, there is an equally strong argument for the second claim: MRP is indeed only a part of enterprise resource planning software.
Benefits of an MRP system
Why do companies that make products need an MRP system? Because their market success is highly dependent on their material planning, production, and inventory management abilities.
Material planning can be relatively simple and straightforward, but only when volumes are low, the number of products is limited, and there are only a few components within each product.
For complex products and higher production volumes, complex calculations are needed. The ability to forecast and plan for materials and components is critically important to the effective management of production and finished goods inventory. This planned production is an essential building block for planning and scheduling equipment and skilled personnel. Inventory is usually a major cost of doing business and one of the biggest factors in manufacturers’ profitability. Without material requirements planning, it is impossible to effectively manage inventory to have just the right amount of the right items at the right time. Having too much inventory is expensive, yet having not enough can create stock-outs, which are often the main cause of production disruptions, late shipments, added costs, and poor customer service.
Who uses an MRP system?
Although we tend to think of MRP as a function that is exclusive to manufacturers, it’s important to understand that the term “manufacturer” can be broad indeed. In the MRP sense, a manufacturer is any organisation that acquires components or materials and transforms them in some way to produce a different item that can be sold to customers. This could include:
- Warehouses that package products or assemble collections of items into “kits” or combinations for resale as a unit
- Warehouses that assemble custom configurations to order (stocking major units and optional add-ons and then putting the customised product together for shipment)
- Service providers that assemble packages of documentation, devices, consumables, or other physical items they provide to customers/clients/patients
- Office building management, hospitals, government building managers, apartment managers – for managing supplies and equipment based on forecasted use
- Restaurants that use a form of MRP to manage ingredient and supplies inventory and replenishment
How does MRP work?
A modern MRP system is a tightly integrated closed-loop system that encompasses the entire enterprise. It tracks all activity and continuously interacts with planning and scheduling systems to keep everything in line – helping the business stay focused on fulfilling customer promises and expectations.
The key MRP process steps are:
- Accurately define what needs to be produced. Engineering is responsible for creating and managing the bill of materials (BOM) for all final products and sub-assemblies. Also called a product structure, the BOM is a hierarchical model of exactly what goes into each unit. For example, the final product may have many sub-assemblies. Each sub-assembly may have two or more components and each component may have a list of parts. The BOM will describe the order in which the material will be needed, what parts are dependent on other parts, and how many of each will be required.
- Quantify the demand. The system calculates the required quantity and date for final products needed to meet demand. The calculation is based on the sales department’s customer orders and forecasts, minus expected on-hand inventory. True build-to-order manufacturers will primarily focus on customer orders. Make-to-stock companies emphasise forecasts while other companies use a combination of orders and forecasts for planning future production. That information feeds the master production schedule (MPS), which is the agreement between all the stakeholders on what will be produced – such as given capacity, inventory, and profitability.
- Determine the supply. Using the BOM and the MPS for all the products, the MRP run will, step-by-step, calculate the assemblies, components, and materials that must be produced or purchased over the planning period. Next, it checks the needed quantities against available inventory, called netting, to identify net shortages for each component. Using predefined parameters, such as lot sizing, it determines the proper “make or buy” quantity for each item. Finally, it calculates the proper start date for the acquisition, using either the purchase or production lead time as appropriate and sends this information to the purchasing department or production control.
Here’s what the MRP process flow looks like:
Capacity planning with MRP
Traditional MRP planning calculates material needs (production and purchase orders) using what is called the “infinite capacity” or “unconstrained-based” model – dealing with materials only and ignoring capacity issues or constraints.
However, some companies have limited capacities that constrain their ability to produce and therefore need to use a “finite capacity” model to take those limitations into account when developing the schedule. Examples of capacity constraints include production resources like ovens or painting lines, tooling, or specially trained technicians.
With traditional MRP, the material plan must be validated against capacity using a separate capacity planning tool. This two-step, iterative process can be time consuming. While this is a workable solution that represents a huge step forward for manufacturing planning, new software called advanced planning and scheduling or advanced planning systems (APS) optimises materials and capacity simultaneously to create a constraint-based plan.
Legacy versus modern MRP software
There are many benefits to a modern MRP system when compared to legacy MRP. Here are some of the important differences:
New technologies for MRP
As in the past, MRP software vendors today are taking advantage of new technologies to improve their products and offer more capabilities to users. Foremost on the list is the application of machine learning and artificial intelligence (AI) in advanced planning processes to allow the systems to develop even better plans and schedules. Machine learning-enabled planning systems continually monitor conditions and activities to develop more precise models on cause and effect – so that its future recommendations are more comprehensive, more precise, and more effective.
Another important innovation is the Industrial Internet of things (IIoT), also known as Industry 4.0. IIoT is the general term for the proliferation of inexpensive, smart, connected sensors and devices that can be used to monitor and control virtually anything and everything throughout the entire supply chain. IIoT brings vastly greater quantities of data into the planning systems that feed the AI and machine learning engines.
While not new, cloud deployment continues to add new capabilities to MRP systems, including collaboration tools that are key to today’s working styles. The cloud also offers better security, higher availability, and more reliable and sustainable systems through disciplined back-up, fail-over, and disaster recovery. Finally, in-memory databases bring unprecedented performance speed to MRP systems, for significantly faster response times.
Any MRP overview is a snapshot of a living organism. In more than a half-century of development and growth, MRP has progressed from a relatively simple and straightforward calculation to become a comprehensive, intelligent, and vital decision-support system. It offers effective, efficient, and responsive planning and management for any organisation that turns components into products to meet customer demands.
MRP is the function or software module that calculates material acquisition plans – purchase and manufacturing orders – needed to meet production plans and customer demand. When combined with supporting applications like engineering, inventory, purchasing, and production control, the software suite is called manufacturing resource planning or MRP II. In the mid-1990s, MRP II was renamed enterprise resource planning (ERP) to reflect its broadened scope and distinguish newer, more capable versions from more limited predecessors. The ERP term is still the dominant name for these systems, although some authorities are using the more general term “enterprise systems.”
The original MRP function or module is the calculation of material requirements. When combined with supporting applications, such as customer orders, inventory, engineering, purchasing, production control, finance, and accounting, the suite is called manufacturing resource planning, or MRP II. MRP has been and remains the core planning approach in nearly all modern manufacturing information systems.
MRP is the function or software module that calculates the need for materials and recommends production and purchasing activity (orders) to satisfy those demands. MRP planning is the process of exercising those calculations to develop a plan. MRP is a core part of nearly all integrated information management systems for manufacturers, called enterprise resource planning or ERP.
The master schedule, or more properly the master production schedule (MPS), is a build plan for sellable products, consisting of planned production quantity, start date, and due date. The master schedule represents the manufacturing activity needed to meet net demand. Net demand is customer orders, forecasts, or a combination of these minus available inventory.
Demand-driven MRP (DDMRP) is a variation of material requirements planning. It incorporates many elements of Theory of Constraints (ToC), Kanban (from JIT and the Toyota Production System), and other modern manufacturing management ideas to improve distribution planning. DDMRP focuses on triggered replenishment of materials through the network using buffer inventory levels and replenishing them when they fall below defined target.
Predictive MRP (pMRP) is an enhancement to the DDMRP solution that helps predict capacity load issues. This allows the planner to evaluate possible scenarios early in the planning stage. This insight into capacity issues helps in the final decision to make the product or buy the product or materials.
Supply chain planning is a general term that includes all the planning activity needed to make the right quantities of the right products at the right time to satisfy demand. Supply planning includes master scheduling, MRP, resource planning, capacity planning, and advanced planning systems as appropriate.
Demand is the quantity and timing of customer orders and forecasts. All planning and execution (activity) within a manufacturing organisation is aimed at meeting demand. Demand planning and demand management are the processes and applications that accept, recognise, and handle demand information. The demand planning function develops forecasts for future demand while working with manufacturing and material planning to position the organisation for meeting that future demand. Demand management can also work with marketing, sales, and distribution to understand the sources and influences on demand and administer programmes to shape demand to improve sales and better use available resources.
APS is one of the terms used to identify modern planning engines that incorporate advanced logic, like optimisation, to create a feasible plan for materials and capacity simultaneously. APS, being a somewhat nebulous term, can also include supply chain planning functions and applications like demand planning and management, distribution planning, and finite scheduling, among others. The common characteristic is the employment of heuristics, optimisation, modelling, and other sophisticated calculation engines.
A bill of materials (BOM) is a structured definition of the relationships between items, such as products, assemblies, parts, and units, and the materials, parts, and components they contain. BOMs are customarily described in terms of direct parent-component relationships that can be chained into multi-level bills. BOMs are also referred to as “product structures.”
Basic MRP systems are limited to planning material requirements based on fixed assumptions – like standard lead times. When a work order is planned, the recommendation is to start the work order a specified number of days (the standard lead time) before the due date. It is assumed that more than enough capacity is always available – which is known as the infinite capacity assumption.
Basic MRP plan generation is followed by a separate capacity planning process that will detect and report any scheduling conflicts, such as planning multiple jobs to run on the same machine at the same time. Users must resolve these resource conflicts manually, outside of the planning system. However modern planning engines, like advanced planning systems or APS, plan material and capacity simultaneously, thereby recognising the finite nature of capacity.
The Theory of Constraints (ToC) is an idea from the world of physics that was brought into manufacturing management by Eli Goldratt in his book The Goal (1984). The ToC posits that production can never proceed any faster than the slowest resource (machine or work centre) in the plant, therefore effective management must focus solely on exploiting and elevating that bottleneck. An entire production management approach built on this basic assumption with many visual tools involved in the execution has been incorporated into some ERP/MRP systems to improve scheduling and workflow.
Just-in-time (JIT) is a simplified name for the Toyota Production System – a production management approach developed by Japanese automakers in the 1980s that relies heavily on standard work (rigid processes with little room for variation), high quality, and manual, visual controls (Kanban). The approach was popularized in the West by the book The Machine That Changed the World by Womack, Jones, and Roos (1990). Once thought to be incompatible with MRP, many MRP systems today incorporate electronic (and physical) Kanban for in-plant inventory replenishment. Note that the term JIT can be applied to any system or strategy aimed at bringing in materials just before they are needed, thereby reducing inventory. In essence, MRP, MRP II, ERP, APS, DDMRP, and virtually all manufacturing planning and control systems are JIT.
SAP Insights Newsletter
Gain key insights by subscribing to our newsletter.