What Is Material Requirements Planning (MRP)?
Material requirements planning (MRP) is a computer-based inventory management system designed to improve productivity for businesses. Companies use material requirements-planning systems to estimate quantities of raw materials and schedule their deliveries.
How MRP Works
MRP is designed to answer three questions: What is needed? How much is needed? When is it needed?" MRP works backward from a production plan for finished goods, which is converted into a list of requirements for the subassemblies, component parts, and raw materials that are needed to produce the final product within the established schedule.
By parsing raw data—like bills of lading and shelf life of stored materials—this technology provides meaningful information to managers about their need for labor and supplies, which can help companies improve their production efficiency.
MRP Systems: Background
Material requirements planning was the earliest of the integrated information technology (IT) systems that aimed to improve productivity for businesses by using computers and software technology. The first MRP systems of inventory management evolved in the 1940s and 1950s. They used mainframe computers to extrapolate information from a bill of materials for a specific finished product into a production and purchasing plan. Soon, MRP systems expanded to include information feedback loops so that production managers could change and update the system inputs as needed.
The next generation of MRP, manufacturing resources planning (MRP II), also incorporated marketing, finance, accounting, engineering, and human resources aspects into the planning process. A related concept that expands on MRP is enterprise resources planning (ERP), which uses computer technology to link the various functional areas across an entire business enterprise. As data analysis and technology became more sophisticated, more comprehensive systems were developed to integrate MRP with other aspects of the manufacturing process.
- Material requirements planning (MRP) is the earliest computer-based inventory management system.
- Businesses use MRP to improve their productivity.
- MRP works backward from a production plan for finished goods to develop inventory requirements for components and raw materials.
MRP in Manufacturing
A critical input for material requirements planning is a bill of materials (BOM)—an extensive list of raw materials, components, and assemblies required to construct, manufacture or repair a product or service. BOM specifies the relationship between the end product (independent demand) and the components (dependent demand). Independent demand originates outside the plant or production system, and dependent demand refers to components.
Companies need to manage the types and quantities of materials they purchase strategically; plan which products to manufacture and in what quantities; and ensure that they are able to meet current and future customer demand—all at the lowest possible cost. MRP helps companies maintain low inventory levels. Making a bad decision in any area of the production cycle will cause the company to lose money. By maintaining appropriate levels of inventory, manufacturers can better align their production with rising and falling demand.
Types of Data Considered by MRP
The data that must be considered in an MRP scheme include:
- Name of the final product that's being created. This is sometimes called independent demand or Level "0" on BOM.
- What and when info. How much quantity is required to meet demand? When is it needed?
- The shelf life of stored materials.
- Inventory status records. Records of net materials available for use that are already in stock (on hand) and materials on order from suppliers.
- Bills of materials. Details of the materials, components, and sub-assemblies required to make each product.
- Planning data. This includes all the restraints and directions to produce such items as routing, labor and machine standards, quality and testing standards, lot sizing techniques, and other inputs.