Material Requirement Planning (MRP) - Basics

Material Requirements Planning, is an effective inventory planning tool. Computerized MRP dates to the early 1960’s.Joseph Orlicky wrote the classic work on MRP in 1975. The customer’s highest priority is timely delivery of useable material. One method to accomplish this is by having large piles of inventory to buffer demand changes and process variability. Even though this may provide economies of scale, most entrepreneurial businesses cannot afford this significant investment in inventory. A better method is to control the process of material delivery and minimize variability. Optimizing the use of critical financial resources can mean the difference between success and bankruptcy for many businesses.

To begin exploration of material requirements planning, a basic understanding of inventory is required. Inventory types are:-

Raw Materials; Work in process; Semi finished goods; Finished goods; Distribution inventories; Maintenance; Repair and Operational supplies (MRO).

On-hand inventory balances are the starting point for MRP calculations. Only when the initial inventory record is accurate can MRP effectively provide accurate information to the users.

The increased percentage of material cost has justifiably intensified interest in the effective management of inventory, which can spell the difference between success and failure for a business. For example, look at the difference in a product with only a 10% improvement in the material cost:

 

	Before Improvement (in Rs.)	After Improvement (in Rs.)
Selling Price	100.00	100.00
Material Cost	45.00	40.50
Labour Cost	7.50	7.50
Overhead	22.50	22.50
Total COGs	75.00	70.50
Profit	25.00	29.50
Profit Increase		+ 18%

The small 10% decrease in material cost yields on 18% increase in profits

Successful Implementation of a MRP system costs money. However, the benefits of successful implementation exceed the costs. An effective MRP implementation will quickly return the initial financial investment and improve overall cash flow. Results used to justify the purchase and implementation costs include improved customer service, better on time delivery, reduced inventory, higher productivity, revenue growth and improved profit. Since MRP reports by exception, managers need respond only to exceptions and conditions outside the norm.

MRP is a straightforward computer programme that makes mathematical calculations. The programme uses existing inventory data, determines total requirements for each item, compares it to what is already on hand and calculates what needs to be ordered. The objective of the MRP is to provide the right part, at the right time.

A Master Production Schedule (MPS) is required to drive the MRP system. The master schedule is a statement of what is planned to be completed by defining quantities and timing for each parent item. The bills of material define the components for each parent. The two items together are critical to calculate the parts requirements. The master schedule answers the question of how much and when. The bill of materials answers the question of what. MRP uses these two inputs to calculate how much, what and when.

Further Reading : “Manufacturing Management” By Moor F.G.