Material Requirement Planning Objectives, Functions, Process, Benefits

Table of Contents:-

• What is Material Requirement Planning
• History of Material Requirement Planning
• Objectives of Material Requirement Planning
• Functions of Material Requirement Planning
• Steps in Material Requirement Planning
• Material Requirement Planning Inputs and Outputs
• Process of Material Requirement Planning
• Material Requirement Planning Procedure
• Benefits of Material Requirement Planning
• Limitations of Material Requirement Planning

What is Material Requirement Planning

In a large-scale industry, material management is essential, and the non-availability of required materials can lead to several problems, including production stoppages, damage to reputation due to unmet demand, loss of worker efficiency, and more. A well-coordinated materials management system is essential to prevent such issues and ensure a smooth production flow. Material Requirement Planning (MRP) serves as a tool that integrates all relevant stakeholders in materials management. Material Requirement Planning is a management tool that guarantees the availability of materials, components, and parts at the right time, facilitating the completion of finished products according to master production schedules.

History of Material Requirement Planning

Material Requirement Planning (MRP) was initially designed by General Electric and Rolls Royce, the makers of aero-engines, during the 1950s but was not commercialized by them. Joseph Orlicky later developed and commercialized the MRP concept in 1964 as a response to the Toyota Manufacturing Program. Black and Decker became the first company to adopt the MRP concept in 1964, with Dick Alban as the project leader. By 1975, almost 700 companies had implemented MRP, which increased to about 8000 by 1981. In 1983, Oliver Wight took MRP to the next level and developed the philosophy of Manufacturing Resource Planning (MRP II), also known as material planning. By 1989, approximately one-third of the software industry’s sales were MRP II software sold to the American sector.

Objectives of Material Requirement Planning

Material Requirement Planning is designed to enhance the inventory efficiency of a business or organization by estimating quantities of raw materials and scheduling timely deliveries. Its primary objective is to maintain sufficient inventory levels to ensure that required raw materials are available as needed.

The three primary objectives of material requirement planning (MRP) are as follows:

1. To ensure that required materials are available for manufacturing and products/goods are ready for customer delivery.

2. To maintain the lowest possible levels of material and products in the warehouse.

3. To plan production activities, delivery schedules, and purchasing activities.

Functions of Material Requirement Planning

Businesses, by adhering to a systematic framework for material planning, can organize their purchasing, inventory control, and production departments, facilitating the movement of materials around the facility. A material requirement planning (MRP) system enables companies to control the flow of materials reliably through the supply chain, even if they may not independently run a production facility. Some of the functions of the material requirement planning system include:

1. Inventory control
2. Cost containment
3. Production optimization

Inventory Management: The primary responsibility of MRP is to ensure the availability of raw materials when needed. This, in turn, helps maintain optimal inventory levels for the company, avoiding excess and shortage. Inventory control is essential as insufficient inventory leads to delays and needs, while excessive goods entail storage costs.

Cost Reduction: Effectively utilizing the MRP system brings about a significant reduction in manufacturing costs. First, it minimizes the time managers manually calculate quantities and time for each material. Second, through inventory management, MRP ensures that the company does not lose money by storing unnecessary materials.

Production Optimization: Designed to manage materials, MRP serves as a prominent tool to enhance the production process. When materials/parts/items flow through the production facility, companies can save time and decrease costs, enabling men and machines to work consistently faster.

Steps in Material Requirement Planning

MRP, a well-designed framework of processes and calculations, facilitates the transformation of operational procedures for companies. Individuals within the organization contribute to the MRP process, encompassing production, sales, purchasing, stockroom, receiving, and shipping. MRP comprises three basic steps:

i. Identification of Quantity Requirements:

• Initially determining quantities on hand, planned for production, committed to current orders, and forecasted.

ii. Performing MRP Calculations:

• Generating suggestions for materials that the company considers critical, expedited, and delayed.

iii. Completing the Orders:

• Listing and describing materials for purchase orders, manufacturing orders, and other reporting requirements.

These steps collectively contribute to streamlining processes and enhancing efficiency within the organization.

Material Requirement Planning Inputs and Outputs

MRP performs calculations based on data inputs. Master schedules, bills of materials, and inventory status records serve as inputs for MRP, while purchase orders, material plans, work orders, and reports constitute the outputs. The image given below diagrammatically represents these processes and briefly discusses them in the following paragraphs.

Inputs of MRP

After reviewing the image, one can quickly identify the following inputs required for MRP:

1. Customer orders
2. Forecast demand
3. Master production schedule (MPS)
4. Bill of material (BOM)
5. Inventory records

i. Customer Orders: Customer orders refer to specific information the organization may receive from customers, including one-offs and regular ordering patterns.

ii. Forecast Demand: This predicts the probable demand for a product or service. Essentially, forecast demand is based on historical data and present trends.

iii. Master Production Schedule (MPS): The company develops the Master Production Schedule (MPS) based on forecast demand and customer orders. The MPS is a comprehensive plan for production, staffing, or inventory. It outlines what the company will produce in a given period, relying on an accurate demand estimate. The schedule includes a list of end products, production costs, inventory costs, inventory information, supply, lot size, lead time, and development capacity.

iv) Bill of Materials (BOM): An essential input for MRP, the Bill of Materials (BOM) is one of the three primary inputs, offering a complete list of parts or components necessary for producing the final product. The BOM visually details the required quantity at each level of its parts assembly or subassembly. The product structure tree (PST) visual representation showcases all components grouped in a bill of materials. Typically designated as the “0 level,” the final product is depicted, while the image illustrates the raw material stage at the 9th level in the BOM.

v) Inventory Records: Inventory records include raw materials and completed products that are either currently in stock or have been previously ordered. An exemplary inventory record of welding electrodes from a hypothetical company is provided in the table below.

Integrity of MRP Input Data

Data integrity includes timeliness, completeness, and accuracy. Concerned individuals and machines should provide input data for MRP promptly and accurately. Incorrect data entry into the system can lead to MRP-generated false information. For MRP to give the organization and managers credible data, errors must be minimized to avoid credibility issues and the generation of unreliable plans.

Moreover, attitude, discipline, and training are pivotal in ensuring data integrity. Education of personnel within the company is crucial, with regular audits of data processing conducted to maintain data validity. Top management oversees employees’ discipline, training, and motivation handling data. Every employee handling data in the company should assume responsibility for the quality of the data they manage. The purpose of ensuring data integrity is to identify and eliminate the causes of errors.

Organizations utilizing MRP systems should incorporate self-checking, self-correcting, and auditing features. Automatic data integrity checks for input data include various types of tests:

1. Reasonableness Test: Checks for abnormal quantities or unit-of-measure discrepancies.
2. Existence Test: Verifies part numbers and transaction codes.
3. Internal Detection: Identifies negative inventory balances.
4. Diagnostic Test: Ensures prior transactions are required.
5. Purging Residences of Undetected Errors: Closes out old shop or purchase orders to eliminate undetected errors.

Outputs of MRP

After receiving input, MRP generates output, which is categorized into four main parts:

1. Purchase Orders
2. Material Plan
3. Work Orders
4. Reports

i. Purchase Orders: This is the purchasing schedule that includes the company’s order to supply the material to the supplier. It also includes details like quantities and start and finish dates.

ii. Material Plan: The master plan includes details such as materials, assembly parts, components required to finish the end product, and quantities and schedules.

iii. Work Orders: This includes the work concerned with producing the end product, providing details of the required materials, start and finish dates, and department-wise responsibilities.

iv. Reports: MRP generates two types of reports: primary and secondary reports. Primary reports include purchase orders, material plans, and work orders. Secondary reports detail performance control, data errors, deviations, and future inventory and contract predictors.

Process of Material Requirement Planning

The core part of the MRP system is the mechanism that transforms input data into output. This systematic transformation of inputs to results follows sequential steps:

1. Explosion,
2. Netting,
3. Offsetting, and
4. Lot sizing.

During the explosion, the system simulates the disassembly of parts of end products. In the netting process, gross requirements are adjusted for on-hand inventory or quantity on order. This adjustment is made at every level of the Bill of Materials and for each time bucket. In offsetting, the system calculates the timing of the order released. The production lead time and supplier delivery time cancel an order release to meet net requirements. Finally, lot sizing is the step in which the system determines the batch size to be purchased.

A detailed explanation of each step is provided in the image below.

Exploding: This step utilizes the Bill of Materials (BOM). In this process, components and their requirements for each item are listed. Generally, BOMs are characterized by the number of levels they are involved in, followed by the structure of assemblies and subassemblies. The first level is represented by the Master Production Schedule (MPS) and is ‘exploded’ down to the final group. Thus, several finished products are exploded to determine the required items at the final assembly stage.

Netting: The next step is ‘netting,’ in which any stock on hand is subtracted from the gross requirement determined through the explosion. This process yields the quantity of each item needed to manufacture the required finished products.

Offsetting: In determining the batch size to be purchased or produced, offsetting involves calculating the timing of the order released. To meet net requirements, the production lead or supplier delivery time offsets an order release.

Lot Sizing: Lot sizing is the step in which the batch size to be purchased or produced is determined.

Material Requirement Planning Procedure

The Master Production Schedule procedure reinforces the independent demands of forecasts and customer orders to determine the requirements of the finished products in each time bucket. After netting the on-hand and on-order inventory and offsetting the lead time, the procedure determines the production schedule for the end products. Additionally, it determines the Available-to-Promise (ATP).

Now, the MRP procedure incorporates the MPS to determine the requirements of lower-level components (LLC) and raw materials. It estimates the gross requirements (GR) of parts by selecting the planned order releases (POR) of the parents through a single-level Bill of Materials (BOM) explosion. The procedure then calculates net requirements by subtracting on-hand inventory and scheduled receipts in each time bucket. After considering lot size, it converts net requirements into planned order receipts.

Lead-time offsetting shifts planned order receipts backward and derive the POR, which is the MRP result of the current item. The MRP procedure moves forward to explode the POR and obtain the gross requirements of its components. The procedure is repeated until the POR of all things is determined. The flow chart of the MRP procedure describes the process in the image.

Benefits of Material Requirement Planning

The MRP system prioritizes materials based on need and updates these priorities regularly. Consequently, materials are ordered at the right time, and whenever changes occur, the MRP system revises due dates and schedules with minimal delays. As a result, MRP ensures having the right components in the correct quantity at the right time, minimizing unnecessary in-process inventory without shortages. Planning anticipated material requirements also enables the effective utilization of facilities, machinery, and workforce resources. The benefits of MRP include:

1. Reduction in finished goods inventory, in-process inventory, raw materials, components and parts, and safety stock.
2. Reduction in lead time.
3. Reduction in past due orders.
4. Advantage due to prioritization.
5. Quick response to changes in demand.
6. Improved customer service.
7. Increased productivity.
8. Increased inventory turnover.
9. Effective utilization of capacity, machinery, and workforce.
10. Good control over the production department.

Limitations of Material Requirement Planning

Limitations of Material Requirement Planning are as follows:

1. There should be a proper master production schedule (MPS). Any inaccurate forecasts or sudden changes in demand may result in inaccuracies in the MPS.

2. The bill of material and inventory status must be computerized to prevent manipulations.

3. Errors in external lead time (at suppliers) or internal lead time (at manufacturing) cause wrong MRP calculations.

4. MRP has an overdependence on outputs due to a highly computational-intensive approach. Any inaccuracy leads to the failure of MRP to a large extent.

5. The MRP system requires reliable data; otherwise, the MRP system will become a mess.

6. MRP is more materials management-oriented but should be a manufacturing or assembly-oriented product structure.

7. The success of the MRP system requires:

1. Maintenance of accurate stock records.
2. Timely and Correct reporting system about the completion of assignments and orders.
3. Integration of all concerned with MRP.

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