Balancing supply and demand is the key to optimization for most industries. However, understanding just how much supply is needed to meet the demand can be tricky. Too little inventory will result in poor customer satisfaction due to stock-outs while too much will result in additional holding expenses.
This is where material resource planning, a method that has traditionally been used in the manufacturing business industry, can give businesses an advantage.
What is Material Resource Planning (MRP)?
Material resource planning or MRP is a method of planning and controlling inventory, production, and scheduling. MRP includes evaluating different business activities through the lens of customer demands. The goal is to manage company resources in a more effective and cost-efficient way.
This practice breaks down the production schedule into a more detailed process to better manage the purchasing of materials, supplies, and stock. Forecasting methods are used to predict upcoming customer demands and inventory ordering is adjusted accordingly.
MRP is considered to be a push style of inventory control rather than a pull style, which centers on a customer order. Instead, MRP is suited for industries such as retail or food service, where having a steady supply of stock on hand to meet customer demand is crucial.
Inventory is divided up into two types - independent and dependent. Independent inventory refers to finished items, like a cell phone. Dependent refers to the parts needed to create the finished item, such as a smartphone screen. Businesses determine the necessary quantities of dependent inventory based on the market demand for the independent items.
MRP is different from consumption-based planning, as it does not base calculations purely on historical data. Rather, MRP calculations are done using either sales forecast data or information obtained directly from customers. The goal is to keep inventory levels as low as possible while still having enough to meet customer demand. When done well, MRP should help keep the flow of production running smoothly.
3 Steps of the MRP Process
Material requirements planning methods can be used for a variety of business activities including production settings and service settings.
One of the primary goals is to reduce the inventory costs for companies, which covers both the stored costs of keeping supplies on-site as well the purchasing costs by reducing overspending on supplies. Ultimately, the aim is to improve productivity and customer service. In turn, this will increase the competitive edge of a business.
The processes and calculations included in the MRP method are the keys to maintaining a harmonious balance within the warehouse. It is important to note that many different departments contribute to an accurate MRP calculation including sales, purchasing, and stockroom employees, among others.
There are three general steps involved in MRP-
1. Determining the Desired Quantity
Businesses should have an accurate knowledge of how much stock is already on-site, how much has been reordered, how much has already been committed to customers, and the forecasted inventory levels. This step involves gathering data such as customer order details, which includes all information received from shoppers as well as their purchasing patterns.
2. Conducting the MRP Calculations
This is the key stage where inputs create outputs, which helps businesses make the best inventory decisions. Outputs resulting from MRP calculations include a recommended purchasing schedule designed to meet demand, a material plan that outlines the dependent inventory required, work orders, and primary and secondary reports.
3. Making the Necessary Orders
Based on the calculations, the business should be in a position to determine what orders need to be made. With MRP, scheduling future orders should also become easier.
Calculations that are conducted through the MRP process rely on various data inputs including-
- Orders From Customers - This data is based on direct information given by customers. It can include one-time orders or regular and ongoing orders.
- Forecasted Demand - By using historical information and current trends, businesses can project the estimated demand for a specific product or service. This aspect is made easier through the use of forecasting software, which can automate the data collection and calculation steps.
- MPS/Master Production Schedule - The MPS is developed by using the projected demand and customer orders. This is a plan for production that covers elements like staffing and inventory. It will also include how much material is needed to build the number of products required within a certain time period. Other information that may be outlined in the MPS includes inventory cost, production cost, inventory information, supply, lead time, and development capacity.
- Bill of Materials (BOM) - A file that includes details and quantities of raw materials as well as any components that are needed to create an end product.
- Inventory Records - A listing of the raw materials or end products that are located on-site or have been ordered.
Once this information has been incorporated into the MRP, an output is created. There are four types of outputs. They include-
- Purchase Orders (PO) - A proposed purchasing schedule. It will include order forms to be sent to suppliers. Within the PO there will be a schedule along with quantities, start dates and finish dates designed to complete the MPS.
- Material Plan - A detailed plan that lists raw materials, any assembly items, and components that are required to build end products. It will also include quantities and dates.
- Work Orders - This output will include details of the work required for producing the end product. If required, it can include a breakdown of which department is responsible for each part, all the materials needed as well as the start and end dates.
- Reports - There are two types of reports output by the MRP. One is the primary report, which includes all of the previous outputs that cover production, planning and control of inventory. Secondary reports cover areas like performance control and deviations, as well as predictions of future inventories and contracts.
Preparing to meet demand with supply is a challenging balancing act. However, with a good understanding and application of material resource planning
, companies will be better equipped to forecast demand and make accurate production schedules.