Materials Requirements Planning Explained

Materials management is a foundational pillar for seamless production. MRP is a system that emerged to manage materials efficiently, planning how much and when materials are needed for production. Let's take a closer look at the concept and benefits of MRP, and see how it can help companies increase their production efficiency!

MRP systems that deliver the right materials at the right time

Why is material management important in the production process? It's because you can't make a finished product if you don't have every single part you need. Some manufacturers keep a large inventory to ensure that they never run out of materials, but this can easily lead to unnecessary waste. If this is how you've been managing your materials, it's a good idea to familiarize yourself with the concept of MRP.

Material Requirements Planning (MRP) is a planning method for efficiently using materials. It was first coined by Orlicky in the mid-1960s while working at IBM. In simple terms, MRP is about calculating what materials are needed to make a finished product. It also factors in how many materials need to be available within a given time frame.

To know what materials are needed, by how much, and by when, we first need to estimate how many finished products we will need to produce. To practice MRP, we need to create a Master Production Schedule (MPS), which is a plan for the quantity of finished products that can be produced within a specific period. Demand is forecasted based on historical data such as orders and sales.

Once you have a production plan for your finished product, it's time to create a bill of materials (BOM) and plan for material units. A bill of materials is a detailed list of all the parts that make up a finished product. Manufacturers use the bill of materials as a guide to create a demand plan for each material, which includes the quantity of the material, the date the material is needed, and how long it will take to source the material.

This process of optimizing with MPS and BOM to get the right materials at the right time is what MRP is all about. To further optimize materials management, it is essential to constantly monitor the actual production process and make improvements.

Let's take a closer look at the process of applying an MRP system through an example. Here's a computer manufacturer, A, that uses MRP for a smooth production process. They first create a plan for how many computers they need to produce per week (MPS). Based on past sales data, they decided to produce 10 computers per week.

To make one computer, the manufacturer needs one of each of the following components: motherboard, CPU, RAM, hard disk drive, and graphics card. They write these down in a bill of materials, compare it to the inventory they have on hand, and check the quantity of materials. If I need 10 motherboards but only have 3 in stock, I create an additional order for 7. Later in the production process, if the weekly demand is higher than I expected, I make sure to keep adjusting the MRP accordingly.

Helps with cost reduction, but not so much for meeting demand

MRP has a number of benefits when it comes to efficiently managing the materials you need for production, including cost savings. It reduces unnecessary costs by ordering the right amount of parts at the right time according to a systematic plan; it reduces inventory costs by optimizing the amount of materials you keep in your warehouse; and it helps you serve your customers better by ensuring that you don't delay production when you have the materials you need.

But MRP also has some drawbacks. In short, what happens when a product is renewed and the parts needed to make the finished product are changed or new ones are added, and the bill of materials is not updated with these changes? Due to the nature of MRP, which plans material requirements back to the finished product, these inaccuracies in the MPS or BOM can influence the entire production process. Furthermore, if you have an organizational culture where departmental silos don't allow for instant information sharing, MRP can lead to production delays.

In addition, MRP-based demand forecasting has the limitation that it is difficult to cope with sudden changes in demand. A method such as MRP that secures inventory in advance according to the production plan before actual demand occurs is also known as the push process. This push process has the disadvantage that it is not easy to respond flexibly when there is an error in the forecast or unexpected changes in market conditions, etc.

Therefore, today, companies are improving the efficiency of the production process by utilizing the JIT (Just in Time) system, which is a pull process that receives inventory after actual demand occurs, the MRP2 system that integrates capacity planning and production resource planning with material consumption planning, and the ERP system that conducts enterprise-wide resource planning.