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.

Key Takeaways

  • 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.
  • Advantages of the MRP process include the assurance that materials and components will be available when needed, minimized inventory levels, reduced customer lead times, optimized inventory management, and improved overall customer satisfaction.
  • Disadvantages to the MRP process include a heavy reliance on input data accuracy (garbage in, garbage out), the high cost to implement, and a lack of flexibility when it comes to the production schedule.

How Material Requirements Planning (MRP) Works

MRP is designed to answer three questions: 

  1. What is needed? 
  2. How much is needed?
  3. 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 needed to produce the final product within the established schedule.

In other words, it's basically a system for trying to figure out the materials and items needed to manufacture a given product. MRP helps manufacturers get a grasp of inventory requirements while balancing both supply and demand.

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.

Steps of Material Requirements Planning (MRP)

The MRP process can be broken down into four basic steps:

  1. Estimating demand and the materials required to meet it. The initial step of the MRP process is determining customer demand and the requirements to meet it. Utilizing the bill of materials—which is simply a list of raw materials, assemblies, and components needed to manufacture an end product—MRP breaks down demand into specific raw materials and components.
  2. Check demand against inventory and allocate resources. This step involves checking demand against what you already have in inventory. The MRP then distributes resources accordingly. In other words, the MRP allocates inventory into the exact areas it is needed.
  3. Production scheduling. The next step in the process is simply to calculate the amount of time and labor required to complete manufacturing. A deadline is also provided.
  4. Monitor the process. The final step of the process is simply to monitor it for any issues. The MRP can automatically alert managers for any delays and even suggest contingency plans in order to meet build deadlines.

Material Requirements Planning (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 Material Requirements Planning (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.

Advantages and Disadvantages of Material Requirements Planning (MRP)

There are several advantages to the MRP process:

  • Assurance that materials and components will be available when needed
  • Minimized inventory levels and costs associated
  • Optimized inventory management
  • Reduced customer lead times
  • Increased manufacturing efficiency
  • Increased labor productivity
  • Increased overall customer satisfaction

Of course, there are also disadvantages to the MRP process:

  • Heavy reliance on input data accuracy (garbage in, garbage out)
  • MRP systems can often be difficult and expensive to implement
  • Lack of flexibility when it comes to the production schedule
  • Introduces the temptation to hold more inventory than needed

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.

MRP FAQs

What Is MRP?

Material requirements planning (MRP) is a system that helps manufacturers plan, schedule, and manage their inventory during the manufacturing process. It is primarily a software-based system.

MRP's objective is threefold:

  1. Make sure raw materials are available for production when required
  2. Maintain the lowest possible material and component levels
  3. Plan and schedule manufacturing activities

How Does MRP Benefit a Business?

MRP benefits a business in the following ways:

  • Ensures that materials and components are available when they're needed
  • Inventory levels are optimized and associated costs are minimized
  • Manufacturing efficiency is improved significantly
  • Customer satisfaction is increased due to reduced lead times

What Are the Inputs of MRP?

The three basic inputs of an MRP system are the master production schedule (MPS), inventory status file (ISF), and bill of materials (BOM).

The MPS is simply the quantity and timing of all end goods to be produced over a specific time period. MPS is estimated through customer orders and demand forecasts.

The ISF contains important real-time information on a company's inventory. It lets managers know what they have on hand, where that inventory is, and the overall status of the inventory.

The BOM is a detailed list of raw materials, components, and assemblies required to construct, manufacture or repair a product or service.