Defining Materials Requirement Planning and Its Importance in Your Inventory System

To the credit of storeowners, retailers, and manufacturers worldwide, you are part of an industry that is always evolving. The marketplace has flourished at a considerable rate since the time of antiquity when goods and services were first exchanged. Now, in the digital age, one can expect a process like materials requirement planning (MRP) to give them an edge in manufacturing, delivering, and storing their goods.

To those yet unfamiliar with the term, MRP is a computerized system that businesses can deploy for the production planning, scheduling, and inventory control of the products that they manufacture. The rationale behind such a system is simple: to determine inventory needs in advance, and to produce goods in accordance with a forecast for their demand.

Want to know how such a system could work to your benefit? Here’s a guide on the role of materials requirement planning, how inventory systems have evolved in light of MRP, and how a business like yours can adapt the MRP for your inventory management.

A Brief History of MRP

Before the retail and manufacturing sectors became dependent on computerization, they largely depended on a method called economic order quantity (EOQ). EOQ was invented by Ford W. Harris in 1913, and it saw wide use for five decades. But many commercial establishments had to deal with the following limits of the method: product delivery was only possible when the full inventory reached zero, fixed costs were placed on each unit no matter how many were ordered, and holding costs were also typically issued per unit—all of which placed considerable financial burden on the owners.

But in 1964, the first iteration of what we now know as the MRP system was developed by Joseph Orlicky to enhance the operations of the Toyota Manufacturing Program. Another big name in manufacturing, Black & Decker, was the first company to use the MRP. Orlicky remains an authority on the subject, having authored Material Requirements Planning: The New Way of Life in Production and Inventory Management.

The new computerized system has since worked wonders for those who use it, notably in the tasks of scheduling and capacity requirements. When one looks at the mechanisms that drive MRP, however, vast improvement is the logical outcome.

What Does MRP Entail?

MRP commences in three steps, which are: (1) taking inventory of the materials and components at hand; (2) identifying what exactly is needed, and; (3) determining schedules for production and purchase. This is no small feat for a system engaging a complex body of data, which comprises the following:

• Data on the end items, or the items to be created;
• Data on the number of items needed on the shelf to satisfy demand;
• Data on the shelf life of individual items;
• Data on the business’s current inventory status, and;
• Data on the production details for routing, estimated materials in excess, and the like.

The MRP makes its computations based on info from what is called the bill of materials (BOM). This BOM lists all materials and specific quantities needed to manufacture the product. In addition, it can identify such materials as falling under independent demand (which comes from outside the business’s plant or production system) or dependent demand (which is for the components).

Once the MRP gleans what it needs to from the BOM, it comes up with either of these two outputs: a recommended production schedule or a recommended purchasing schedule. Either way, it fulfills its objectives to keep materials available for production: to maintain the lowest material and production levels possible, as well as to efficiently plan the business’s manufacturing activities, delivery schedules, and purchasing activities.

Applications of MRP to Inventory Systems in the Modern Business Climate

To demonstrate how well MRP could work for your inventory system, let’s see how it applies in this example. Imagine that you are the owner of a supermarket with its very own bakeshop. Business comes in not only for the products on your shelf, but also for the buttery cakes, fudgy brownies, and chewy semi-sweet chocolate chip cookies you sell in your bakery section. Imagine, too, that orders for these three end items pile up during the Christmas season because they make for ideal Christmas gifts. How would you keep up with the demand?

For sure, there are three unwanted outcomes in the situation:

• If your bakery lacks the materials to hit the target amount of pastries, then you stand to fail the obligations set on you by your customers before you even start production.
• If you have an excess of materials, then you risk losing money and wasting precious food.
• If there’s a hiccup in your production schedule, then you’ll miss your customer deadlines and you’ll decrease the trust in your bakery.

The MRP will help you calculate a feasible amount of material to produce with, help you manage the shelf lives of different products, and come up with a delivery schedule that meets everyone’s needs. Don’t limit the idea to the case illustrated above, though—MRP can be applied to other types of retail as well, from food and beverage to clothing and handicrafts.

MRP is just one example of how the technology works in our service—but it is up to you to choose MRP, or similar systems upgrades, to improve and modernize your business.