This is a complete guide on Material Requirements Planning (MRP). Simply put, MRP is a planning and decision-making tool used in the manufacturing or sourcing process that helps you with the following:
1. When and which production orders need to be placed
2. How big the production orders should be
3. How your inventory levels will develop over time
For the MRP tool to give you this information, you need to know the following:
1. Lead times of all components
2. Preferred safety stock in case of demand fluctuations
3. Minimum production/order sizes (MOQs)
4. Demand (forecast)
5. Current inventory levels
MRP is often integrated into ERP systems such as Exact, Microsoft Dynamics, or SAP. However, having a full-fledged ERP system or a standalone but automated MRP tool can be very expensive or not even necessary for many companies. In this article, we explain how MRP works and give you tips you can use to improve the MRP process.
Even if you have outsourced your production, MRP gives you much more control over the supply chain. Whether you work in a bakery or a technology company, implementing Material Requirements Planning (MRP) concepts can greatly benefit your business and help you save inventory costs, productions costs and even freight costs.
Table of Contents
Why do you need MRP?
Let’s start by answering the question: why do you need MRP? First of all, understanding MRP is critical for any business dealing with inventory.
MRP gives companies insight into the inventory requirements needed to meet demand during periods of stability and when there are significant fluctuations in demand due to, for example, seasonality and consumption. In addition, it helps your company optimize inventory levels and production schedules by taking into account current inventory levels, lead times, and the minimum production quantities.
Without this insight, companies have limited insight and responsiveness.
1. Lack of MRP can lead to ordering too much inventory
This can lead to:
1.1 High inventory carrying costs
1.2 High inventory waste
1.3 High inventory transportation costs
1.4 Inefficient cash flow due to cash stuck in inventory
2. Lack of MRP can lead to inability to meet demand due to insufficient raw materials
This can lead to:
2.1 Missing revenues/sales
2.2 Losing current and new customers
2.3 Additional stock risks due to losing orders
3. Lack of MRP can lead to disruptions in the production cycle
This can lead to:
3.1 High fixed costs per product due to production being idle
3.2 Irregular lead times due to constant changes in production
A lot of companies rely heavily on MRP to plan and control production, inventory, and purchase orders. As Cargors we advise our shippers to understand MRP and to use it for their benefits. It can strongly reduce your freight costs also.
How to start and implement MRP - 4 most important variables
Before implementing any MRP tool, make sure you have fully validated your input data. This is extremely crucial for any MRP tool because the quality of your input determines the quality of your output. In fact, this is the biggest challenge in MRP and if you get it right, it can give you that competitive edge you have been looking for.
In this section, you can find the 4 most important variables you need to control.
1. Build a tool to collect and improve your sales forecast
The most important variable in MRP is customer demand at the finished product level. This information determines everything and if done poorly, can lead to major consequences. Work closely with the sales department and understand what your actual demand is and how the forecast is generated. A general rule of thumb is to understand that a forecast is always wrong. So make sure you have the necessary gatekeeping in place to regularly check and update the forecast BEFORE you use it.
2. Build a tool to collect and improve the accuracy of your inventory
MRP compares demand with available inventory and safety stock. Therefore, it is important that you know the available inventory levels at any given time. Before using inventory levels in your MRP tool, make sure you have completed at least the following steps:
1. Update or book all production orders
A common mistake to avoid: make sure your bill of materials (BOM) is up to date before you book a production order. This will prevent many problems in stock discrepancies.
2. Update or book all purchase orders
3. Update or book all obsolete stock
4. Update or book all sales orders delivered
5. Transfer inventory to the appropriate warehouses
There are many other things to consider when validating inventory data. However, these few checks will help you considerably and make your MRP much better.
3. Understand, structure, and check bill of materials (BOM)
You may recognize that most last-minute problems arise from an incorrect bill of materials (BOM). Companies often assume that the bill of materials is correct and therefore miss placing production and purchase orders on time.
The main advice to avoid these problems is to keep a single updated master file, including the bill of materials. Preferably something that is integrated into the ERP system to avoid manual work.
Another piece of advice is to understand the different layers in the bill of materials. For example, take the following product:
A finished product consisting of 2 components
1. Material A
2. Material B
- Material C
- Material D
In short, in this example, you can see that the final product consists of 4 materials, where Material B is made from 2 other materials.
Some lessons from this:
1. Make sure you have all the materials you manage in the bill of materials
2. Make sure you have the materials in the right order
Expert tip: Always try to minimize the workload by having your suppliers do more. In this example, materials C and D can be purchased by the supplier of material B. That way, you don’t have to manage that anymore.
4. Focus on safety stock levels in MRP
If you were to ask us what is the most ignored variable in the MRP process, then obviously the answer would be safety stock (buffer stock). As you may know, forecasts are often wrong and highly fluctuating. To manage fluctuations in forecasts or supply interruptions, it is important to understand and manage your safety stock levels. Some tips on what to do and what not to do when determining safety stock levels:
What TO DO when working with safety stock in MRP
1. Measure the inaccuracy of the demand forecast
2. Measure your KPIs such as average days in stock
3. Use mathematical formulas to define safety stocks
What NOT TO do when working with safety stock in MRP
1. Never build too much safety stock
2. Never use safety stock to mask a lack of competence in planning
3. Build too little safety stock and take big risks as a result
In short, what is the best strategy for determining the level of safety stock? The answer is that there is no one-size-fits-all answer. The safety stock strategy really depends on various factors such as lead time, lead time variability, service levels, availability of materials, number of suppliers, etc.
Cargors general advice is:
1. Monitor your safety stock levels.
If you see an increase in the consumption of your safety stock then it may be time to increase the levels. On the other hand, if you see a decrease or that the safety stock is always stable, it might be time to reduce the safety stock.
2. Never put too much safety stock
Companies always have a tendency to establish more safety stock than necessary. The general rule should be: always try to reduce the level of safety stock. This will improve your cash flow position, reduce inventory costs, improve product quality and shelf life, etc. Instead, focus on analyzing why safety stock is needed and how to reduce the risk by, for example, finding another supplier and shortening the lead time.
Possible disadvantages of using MRP
As mentioned earlier, the benefit of MRP really depends on the data input. Poor input will lead to poor output. Therefore, it is important to focus on your data input. In addition, always try to avoid the following pitfalls:
1. Building up too much inventory
Update MRP regularly and always keep an eye on demand. If demand drops, always look at options to cancel orders or delay deliveries. Be proactive and think in terms of solutions.
2. Using wrong demand forecasting without demand validations
Challenge sales colleagues and make inaccuracy in demand forecast visible with the goal of improvement. The supply chain is often the gatekeeper and aware of actual orders. Use and share this insight.
3. Using MRP without the proper training
MRP requires training and should not be applied blindly. A good MRP tool in the wrong hands can lead to major consequences such as misplaced purchase orders, late orders, wrong purchased items, wrong purchased and booked quantities. These are just a few examples.
4. MRP is a static tool that needs constant attention
It takes time to fully automate an MRP system that is reliable. In the meantime, always keep an eye on inputs and outputs. An MRP tool may advise you to place certain orders that may not be needed due to changes in demand that have not yet been incorporated into the forecast. As a planner, be up-to-date and better than the MRP tool. Always validate the output before using it.
Terminology used in MRP
Here you will find some terms which are often used in MRP.
1. What is a stock-keeping unit (SKU) or item in MRP?
This can be a name or number of a product that is kept in stock. MRP is done on SKU level.
2. What is a lot size in MRP?
This is the minimum quantity that you can purchase or produce.
3. What is safety stock in MRP?
This is the amount of stock you need or want to keep in order to manage fluctuations in demand and supply disruptions.
4. What are gross requirements in MRP?
This is the total demand in a certain period of time.
5. What are the net requirements in MRP?
This is the total demand minus the stock and outstanding orders. It is the actual quantity that needs to be produced in order to meet the demand in a certain period of time.
6.. What is lead-time in MRP?
It is the time between the initiation and completion of the production or purchase process.
Conclusion on MRP
MRP is great planning and decision-making tool applied by thousands of companies. By using it properly, companies can reduce out-of-stock issues significantly. However, always be careful because this tool is heavily dependant on the data you put in.
Use MRP with the goal to reduce your inventory levels, safety stock levels, and production inefficiencies. Avoid having too much stock to hide inefficiencies in planning and purchasing. Work closely with sales colleagues and aim to become more proactive.
In case you have any questions or need more advice then please let us know.
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