What is Material Requirements Planning (MRP)?

By - October 26, 2021

In the age where technology is at the forefront of supply chain transformation, organizations are now, more than ever, emphasizing the need to maintain a strong level of visibility and control over inventory processes. One way technology can be leveraged to optimize inventory is through master planning. It analyzes demand forecasts to determine what needs to be produced and what production capacities are available. But while planning for finished goods is one aspect, planning for the raw materials needed to produce those finished goods is another. That is where material requirements planning (MRP) comes in. Data such as bill of materials/formula setups, current on-hand levels, inventory transactions, and the master production schedule helps determine the raw material requirements to fulfill customer demand. MRP is the perfect tool for ensuring the availability of materials, while reducing the risk of shortages and driving down inventory levels.

What risks are organizations exposed to without MRP?

Organizations that do not use a formal MRP process can be exposed to several pain points that lead to higher levels of risk.

  • Managing demand forecasts outside of ERP software is labor-intensive and leaves significant room for error due to manual data entry and inefficient modes of sharing information such as email or word of mouth.
  • Cross-functional collaboration is minimized since the process is typically owned by a sole function, causing information silos and limited visibility amongst other functional areas.
  • Keeping up with inventory re-order points externally is time-consuming and further increases the risk of error.
    • This requires manual calculations incorporating several factors like daily demand, lead times, and safety stock policies.
  • The bullwhip effect, which involves the distortion of demand up the supply chain, is amplified without a centralized planning system.
    • Risk of material shortages is increased due to functional silos combined with the lack of real-time data for more informed decision-making.
    • Reduced visibility results in more changeovers and lower fill rates, as well as shorting important customers.
  • Fearing shortages, organizations often carry larger amounts of inventory than needed, resulting in increased carrying costs, tied-up cash, and risk of spoilage.

Utilizing MRP software is an integral part of aligning supply chain/inventory strategies with overall business goals. Two solutions many organizations are turning to are just-in-time (JIT) and safety stock policies.

Just-in-time (JIT)

A JIT strategy for raw materials helps achieve a continuous flow of inventory on an “as needed” basis. The accuracy of demand and forecasts is key for successful execution, which requires a balance between having enough inventory on-hand and reducing inventory costs. Because this strategy emphasizes carrying the minimum required inventory, it is crucial that forecasts are updated throughout the year to account for changes in customer requirements and the overall business landscape. Forecasts can be imported directly into modern MRP software, like Microsoft Dynamics 365 for Finance and Supply Chain. They can also be integrated with technologies like artificial intelligence and machine learning to provide enhanced insights, such as analyzing various scenarios to predict the effects of demand fluctuations on inventory levels. If changes are made to demand forecasts, the software can even dynamically recalculate net requirements for items to address those changes. Furthermore, lead times for certain materials can be configured accordingly, and buffers can be placed throughout the supply chain to mitigate risk.

Safety stock

Safety stock policies help organizations ensure they are carrying the optimal amount of inventory to account for fluctuating demand and potential disruptions. MRP software can be used to establish minimum and maximum inventory levels for certain items, thereby automating the purchasing process upon hitting those levels. Organizations can also automate replenishment by configuring periodic order intervals or policies based on actual demand. Warehouse-specific policies can be set up, as well, by considering lead times and minimum/maximum order quantities.

How can organizations benefit from MRP?

Leveraging MRP software helps unlock value in the supply chain by harnessing the power of data. It allows key personnel to not only know which materials are needed, but also when and why they are needed, providing them with the visibility to purchase only the required quantities at the right time. Therefore, more focus can be placed on value-added tasks due to the reduction of manual processes and associated overhead costs. Taking it a step further, MRP works perfectly in conjunction with production scheduling to ensure customer demand is fulfilled in a timely manner and the raw materials to do so are readily on-hand. Data involving incoming purchases, planned production, and current on-hand levels that comes from MRP software is crucial to ensure production runs are optimally scheduled, which will be discussed further in the next article.

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