How Materials Requirement Planning Can Help Improve Your Inventory Management Process
Materials requirement planning, or MRP for short, is the term for a computerized system that helps businesses manage the inventory control, production schedule, and purchasing schedule of manufactured products. Previously, between the 1910s and early 1960s, manufacturers worked along the economic order quantity (EOQ) method, which is MRP’s immediate predecessor. However, this system was not without its hitches.
By adhering strictly to EOQ’s protocols, each new production cycle would only begin when a manufacturer’s inventory hit zero. What’s more, inventory holding costs were typically calculated per unit instead of per batch. This would result in two significant problems: longer lead times needed to jumpstart the production cycle and heftier amounts of cash required to maintain a sizeable inventory.
It was only in 1964 that the modern MRP as we know it came to be. Though created by engineer Joseph Orlicky for the Toyota Manufacturing Program, MRP first saw widespread use in the headquarters of Black & Decker, another top manufacturer. Today, more than fifty years since its inception, MRP infrastructure continues to be of great help to companies. So is your own organization in need of that extra boost from MRP?
If the answer is yes and you’re thinking of investing in new MRP software for your company, here’s everything you need to know to smoothen the transition. What follows below is a guide to how MRP works, how MRP improves inventory management and related processes, as well as some last tips on implementing materials requirement planning on your own.
How MRP Works: The Source Data, the Process, and the Output
Any discussion on MRP begins with the three basic things that users require of it. These include estimates of what, how much, and when the resources are needed. To answer these questions, the MRP process works backwards and a schedule of finished goods is parsed or broken down. This is all to end up with an exhaustive list of components and materials.
There are also three sources from which an MRP derives information. The first is what is called a bill of materials (BOM), which in turn contains a breakdown of raw materials, component parts, assemblies, and sub-assemblies. The second is a file of inventory records, while the third is a master schedule of production.
Once the MRP has all three of these at its disposal, it can produce two types of output for a manufacturer: a recommended production schedule and a recommended purchasing schedule. Such documents add order and precision to the difficult tasks of keeping, ordering, and purchasing product components. It’s quite amazing that an MRP can streamline thousands of data entries to address three simple concerns: what materials to order, how much of it to have on hand, and when each production cycle should be expected to begin.
MRP’s Key Benefits for Your Company’s Inventory Management, Purchasing, and Production
There are several ways that an MRP can guide a company through its most complex inventory-, purchasing-, and production-related processes. Here are some relevant examples:
- An MRP will compile all the data needed to implement both production and purchasing schedules. The system can handle different pieces of information such as purchase orders, sales orders, shortages, due dates, projected marketplace demand, and expedited orders. In short, the MRP can interpret all these data points and turn them into consolidated, easy-to-understand insights for manufacturers.
- The MRP will ensure that there are available materials in your inventory to commence production. It may seem like it’s simple to keep track of all materials that are on hand. But the bigger a manufacturer gets, the harder it will be for them to pin down the exact amounts. Thankfully, the MRP will be able to track what’s actually in stock versus what hasn’t been acquired. This way, a manufacturer will have everything accounted for come production time.
- An MRP will shear off excess inventory costs by keeping on-hand quantities optimally low. In manufacturing, it’s good to have the smallest possible amount of what you need. Beyond preventing spoilage or wastage of material; this also minimizes holding costs, which would otherwise stack up if you maintain too many stocks on hand.
- The MRP helps dictate accurate, trouble-free, and timely schedules. The best thing that any MRP will be able to do for your company is give you optimum control of your time. Indeed, you’ll have a better estimate of when you can place orders, when you can receive them, when to set aside money for inventory, and when to commence production once your lineup of materials is complete. In turn, this minimizes any possible delay in meeting your customers’ demands and ensures that your company keeps its good reputation.
Conclusion
New users of state-of-the-art MRP tools must know some vital things about them. Primarily, you want to remember that they require a significant financial investment and they will only work as well as what’s on their base records. This means that maximum accuracy cannot be achieved with the MRP alone. The company must also take care to update its BOM, master schedules, and inventory files.
It’s true that MRP systems cost money, but they’ll also yield a noticeable return on investment. Overall, the price of an MRP pales in comparison to the various errors you’ll be avoiding altogether. These can include inaccurate or delayed schedules, wastage, scarcity, steep inventory costs, and lower expectations from customers.
Would-be adopters of MRP would do well to listen to Orlicky, the technology’s chief progenitor. As he once said, never forecast what you can calculate. Here’s to hoping that whatever MRP tools you end up with will keep you accurate, organized, well-stocked, and competitive.
