Material Requirement Planning (MRP-I):
The concept of MRP (MRP-I) was developed in 1970s to assist the manufacturing firms efficiently manage their material procurement process in order to support their production operations in a much better way. Let’s go back to Collaborative Supply Chain – II; diagram no. 3, MRP translates the independent demand (top level assembly) of MPS into component level materials or bill of material (BOM) and conveys the information to relevant purchasing group about:
- Whether to order the component level materials or not
- If yes, how much to order
- When to order
- How to order
MRP-I is a computer-based technique for determining the quantity and timing for the acquisition of dependent demand items needed to satisfy the master production schedule (MPS) requirements.
Following the strict APICS definition, MRP-I is a system that helps a manufacturer plan their purchasing and production activities, and when necessary, create the required purchase orders and production orders in time to meet customer commitments.
This leads to the great paradox of Manufacturing:
- An inventory control system helps you maintain an inventory of your materials.
- An MRP system helps you maintain no inventory of your materials.
Without an MRP system, manufacturers typically react by purchasing material they might need. With an MRP system, manufacturers purchase material they certainly need. Which do you think is a better use of limited financial resources? Many manufacturing systems combine the distinct functions of MPS (Master Production Schedule) and MRP-I into one called MRP.
It is possible to create an MPS without an MRP, but not possible to create an MRP without an MPS.
Advantages of MRP for Materials Department:
- Helps to minimize inventory levels
- Increases inventory turn
- Tracks material requirements
- Identifies shortages in inventory items
- Helps to track raw material, WIP, finished goods and partner inventories
- Helps plan the procurement schedule
- Determine the most economical lot sizes for orders
- Computes quantities needed as safety stock
- Calculates BOM and subassemblies required
- Helps plan for future facilities expansions
- On time delivery
- Customer service and responsiveness
Advantages of MRP for Finance Department:
- Minimizes inventory purchase, ordering, carrying & stock-out costs
- Reduces the amount of funds tied up in over-stock situation such as capital investment, interest, warehousing cost, insurance, taxes, risk cost, opportunity cost, labor cost etc.
- Improves cash conversion cycle
- Improves operating efficiency
- Improves profitability
- Increases the operating capital
- AR is more liquid than inventory itself
- Reduces employee theft
Disadvantages of MRP:
MRP relies upon accurate input information i.e. if a business has not maintained good inventory records with all relevant changes; it may encounter serious problems with the outputs of its MRP system. The problems could range from:
- Missing parts
- Excessive order quantities
- Schedule delays
- Missed delivery dates
- Time consuming inventory counts
- Resistance from employees as it is more disciplined approach
At a minimum, an MRP system must have standardized inventory practice across the organization, good estimates of lead-time, safety stock, and other current inventory records in order to function effectively and produce useful information.
- Ensures material availability on time
- Helps monitoring the stock
- Helps planning the reorder point
- Helps in lot size calculation (Quantity to be ordered)
- Helps scheduling the order placement
- Generates procurement proposal for purchasing and production
Material requirement planning is performed on the basis of two assumptions:
- Demand based MRP
- Consumption based MRP
Following presentation clearly defines and distinguishes between the above two:
Manufacturing Resource Planning (MRP-II):
Manufacturing Resource Planning (MRP II) is an extension to MRP I that goes far beyond planning and acquiring the materials needed for production, but every other resource related to the successful operation of a manufacturing plant, including people and machinery. The concept (MRP) unfolded from order inventory management of materials to plant and personnel planning and distribution planning, which in turn became MRP-II (Manufacturing Resource Planning). This incorporated financial accounting, human resource management functions, distribution management functions and management accounting functions. It came to globally cover all areas of enterprise mainly business and eventually came to be called ERP.
Manufacturing resources planning (MRP-II) was the ultimate application for enterprise wide automation, wherein the entire organization, starting from the sales process to the shop floor, was sought to be put online. MRP-II assumes a static nature of the enterprise and fits the systems to it. As a result, MRP-II automates the existing processes based on the existing workflow in the enterprise. The real benefit of MRP-II is that it also enables a high degree of integration with other automated processes in the organization.
Few months ago I read an article on an online magazine called Chron.com. This article characterizes MRP-II as –
“Manufacturing Resource Planning, or MRP-II, goes several steps beyond MRP-I. While MRP stopped at the receiving dock, MRP-II incorporates the value stream all the way through the manufacturing facility to the shipping dock where the product is packaged and sent to the end customer. That value stream includes production planning, machine capacity scheduling, demand forecasting and analysis modules, and quality tracking tools. MRP-II also has tools for tracking employee attendance, labor contribution and productivity”.
I recently came across this website called smetoolkit.org which has an excellent and easy to understand example of how to calculate MRP. Click here to check this out.
MRP-II is much more complicated to explain here in details. Though I will try to cover this in more details in my future posts especially while covering MRP process in SAP.