SCM Champ: A Supply Chain Management Blog

SCM Champ: A Supply Chain Management Blog
Supply Chain Management: Its Not About Technology, Its About Economy

Sunday, July 28, 2013


Material Requirement Planning (MRP-I):

The concept of MRP (MRP-I) was developed in 1970s to assist the manufacturing firms efficiently manage their material procurement process in order to support their production operations in a much better way. Let’s go back to Collaborative Supply Chain – II; diagram no. 3, MRP translates the independent demand (top level assembly) of MPS into component level materials or bill of material (BOM) and conveys the information to relevant purchasing group about:

  1. Whether to order the component level materials or not
  2. If yes, how much to order
  3. When to order
  4. How to order
 MRP-I is a computer-based technique for determining the quantity and timing for the acquisition of dependent demand items needed to satisfy the master production schedule (MPS) requirements.

Following the strict APICS definition, MRP-I is a system that helps a manufacturer plan their purchasing and production activities, and when necessary, create the required purchase orders and production orders in time to meet customer commitments.

This leads to the great paradox of Manufacturing:

  • An inventory control system helps you maintain an inventory of your materials.
  • An MRP system helps you maintain no inventory of your materials.

Without an MRP system, manufacturers typically react by purchasing material they might need. With an MRP system, manufacturers purchase material they certainly need. Which do you think is a better use of limited financial resources? Many manufacturing systems combine the distinct functions of MPS (Master Production Schedule) and MRP-I into one called MRP. 

It is possible to create an MPS without an MRP, but not possible to create an MRP without an MPS.



Advantages of MRP for Materials Department:

  • Helps to minimize inventory levels
  • Increases inventory turn
  • Tracks material requirements
  • Identifies shortages in inventory items
  • Helps to track raw material, WIP, finished goods and partner inventories
  • Helps plan the procurement schedule
  • Determine the most economical lot sizes for orders
  • Computes quantities needed as safety stock
  • Calculates BOM and subassemblies required
  • Helps plan for future facilities expansions
  • On time delivery
  • Customer service and responsiveness

Advantages of MRP for Finance Department:

  • Minimizes inventory purchase, ordering, carrying & stock-out costs
  • Reduces the amount of funds tied up in over-stock situation such as   capital investment, interest, warehousing cost, insurance, taxes, risk cost, opportunity cost, labor cost etc.
  • Improves cash conversion cycle
  • Improves operating efficiency
  • Improves profitability
  • Increases the operating capital
  • AR is more liquid than inventory itself
  • Reduces employee theft

Disadvantages of MRP:

MRP relies upon accurate input information i.e. if a business has not maintained good inventory records with all relevant changes; it may encounter serious problems with the outputs of its MRP system. The problems could range from:

  • Missing parts
  • Excessive order quantities
  • Schedule delays
  • Missed delivery dates
  • Time consuming inventory counts
  • Resistance from employees as it is more disciplined approach

At a minimum, an MRP system must have standardized inventory practice across the organization, good estimates of lead-time, safety stock, and other current inventory records in order to function effectively and produce useful information.

  • Ensures material availability on time
  • Helps monitoring the stock
  • Helps planning the reorder point
  • Helps in lot size calculation (Quantity to be ordered)
  • Helps scheduling the order placement
  • Generates procurement proposal for purchasing and production

Material requirement planning is performed on the basis of two assumptions:

  1. Demand based MRP
  2. Consumption based MRP

Following presentation clearly defines and distinguishes between the above two: