Material Requirements Planning (MRP) is implemented on the basis of various basic concepts, defined implicitly. These are:
- Independent vs. Dependent demand
- Lumpy demand
- Lead time
- Common use items
- Time phasing
Independent Demand vs. Dependent Demand
Independent demand for an item is not related to the demand for another or a function of the demand of another inventory item. Such a demand cannot be derived or calculated from the
demand of another, and so they need to be forecasted.
Dependent demand for an item is directly linked to or is derived from the demand of another item, and as such called vertical dependency when the demand is to build a subassembly or a product, and called horizontal dependency in case of an attachment or the owner’s manual shipped with the item in a majority of manufacturing firms. Here, the total inventory volume is in raw materials, parts and components and subassemblies – each of them subjected to demand dependency. As such demand can be measured and determined precisely from the demand for the items of its sole causes; it should not and need not be forecasted, except the demand for the final product which needs to be forecasted. However, the raw materials or part components need not be forecasted individually. The MRP is ideal technique to determine the requirement for dependent items.
Lumpy Demand
Manufacturing is often done intermittently in lots or models of one or the other kind. The components or parts of a finished product are only required during the manufacturing of the product. Therefore, there could be huge demands for inventory occasionally and none at other times, which makes the demand ‘lumpy’. When the demand comes in large gaps, it is called lumpy demand. MRP plays a great role in dealing with lumpy demand-driven inventory situations.
Lead Time
The lead time of a particular activity is the time that should be allowed to execute that activity from start to finish. For instance, the lead time in manufacturing activity is divided into ordering and manufacturing lead time. Ordering lead time indicates the time required from initiating the purchase requisition to the receipt of the item from the vendor. If the item being raw material is stocked by the vendor, the ordering lead time would be considerably short. If the item is manufactured by the vendor, the lead time would be significant, say several months. On the other hand, manufacturing lead time indicates the time required to process the portion through the series of machines mentioned on the route sheet. It comprises both the operation time as well as the non-productive time to be allowed. In case of MRP, lead times determine initiation dates for the assembly of final products and sub-assemblies to order raw materials and produce component parts. Various individual lead times of inventories making up to the product, is another factor that influences the requirements for materials. Since the component item order needs to be completed before the parent item order could be started, the back-to-back lead times of the order that the four items will consume, can be added up to identify the cumulative lead time.
Common Use Items
In case of manufacturing of products, one raw material is generally used to manufacture more than one type of component. For instance, finished product X is to be manufactured and for which component A is needed, which further requires component B, component B requiring other three components of which C needs D and D needs E, which could be a raw material. The end item E is also needed to produce N, S and T, and therefore, E manufactures two varied components of the finished product X. The MRP is responsible for collecting these common use items from varied products to influence economies in ordering raw materials and manufacturing components.
Time Phasing
This signifies adding time schedule to material inventory position by recording and storing details on either planning periods or particular dates, with which the relevant quantities are linked. These details could be expanded by incorporating data on demand and availability of materials. You can make use of the classic inventory status equation, as follows:
a + b – c = x
Where, ‘a’ is available quantity, ‘b’ is quantity on order, ‘c’ is quantity required and ‘x’ is quantity available for future use. ‘c’ can be derived from customer orders or future forecasts or calculation of dependent demand. ‘x’ needs to be calculated.
If ‘a’ is negative, it shows low coverage and the need to place a new order. Time phasing usually means developing the time details to answer the following:
- Time due on quantity on order (‘b’), and if it is a single or multiple order
- Time when there could be shortage of stock
- Time when the replenishment order should be completed
- Time when the order should be released
MRP helps in calculating the item demand and time phasing for the inventory.
Problems with MRP systems
- Integrity of the data. If there are any errors in the inventory data, the bill of materials (commonly referred to as ‘BOM’) data, or the master production schedule, then the output data will also be incorrect (“GIGO”: garbage in, garbage out). Data integrity is also affected by inaccurate cycle count adjustments, mistakes in receiving input and shipping output, scrap not reported, waste, damage, box count errors, supplier container count errors, production reporting errors, and system issues. Many of these type of errors can be minimized by implementing pull systems and using bar code scanning. Most vendors in this type of system recommend at least 99% data integrity for the system to give useful results.
- Systems require that the user specify how long it will take for a factory to make a product from its component parts (assuming they are all available). Additionally, the system design also assumes that this “lead time” in manufacturing will be the same each time the item is made, without regard to quantity being made, or other items being made simultaneously in the factory.
- A manufacturer may have factories in different cities or even countries. It is not good for an MRP system to say that we do not need to order some material, because we have plenty of it thousands of miles away. The overall ERP system needs to be able to organize inventory and needs by individual factory and inter-communicate the needs in order to enable each factory to redistribute components to serve the overall enterprise. This means that other systems in the enterprise need to work properly, both before implementing an MRP system and in the future. For example, systems like variety reduction and engineering, which makes sure that product comes out right first time (without defects), must be in place.
- Production may be in progress for some part, whose design gets changed, with customer orders in the system for both the old design, and the new one, concurrently. The overall ERP system needs to have a system of coding parts such that the MRP will correctly calculate needs and tracking for both versions. Parts must be booked into and out of stores more regularly than the MRP calculations take place. Note, these other systems can well be manual systems, but must interface to the MRP. For example, a ‘walk around’ stock intake done just prior to the MRP calculations can be a practical solution for a small inventory (especially if it is an “open store”).
- The other major drawback of MRP is that it fails to account for capacity in its calculations. This means it will give results that are impossible to implement due to manpower, machine or supplier capacity constraints. However this is largely dealt with by MRP II. Generally, MRP II refers to a system with integrated financials. An MRP II system can include finite or infinite capacity planning. But, to be considered a true MRP II system must also include financials. In the MRP II (or MRP2) concept, fluctuations in forecast data are taken into account by including simulation of the master production schedule, thus creating a long-term control. A more general feature of MRP2 is its extension to purchasing, to marketing and to finance (integration of all the functions of the company), ERP has been the next step.
