What is Material Requirements Planning (And do you need it)?

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Material Requirements Planning software can be a good solution for modern manufacturers. But how does MRP work, and how is it different from other modern manufacturing software? And most importantly, does your business actually need it?

Here, we give a breakdown of how MRP works, and compare it to MRP II, ERP and manufacturing inventory management software – so you can understand the differences and decide for yourself which is the right approach for your business.

What is MRP?

Material Requirements Planning (MRP) is a software-based practice for manufacturers that helps them juggle the different elements of the manufacturing process in order to improve efficiency and reduce costs.

In short, it lets manufacturers make better decisions around when to purchase materials, components and subassemblies, based on factors like supply and demand – as well as any savings that come from buying in bulk.

MRP helps manufacturers

MRP helps manufacturers make better decisions around when to purchase materials.

Fundamentally, MRP has been designed to enable users to understand “what do we have?” and compare it to “what do we need?”, “when do we need it?” and “what are we capable of?”

With MRP you can input and track external factors such as:

  • Predicted customer demand
  • Availability of resources
  • Supplier or customer lead times and costs
  • Delivery deadlines

And also internal factors such as:

  • Production capacity in terms of time, labour and equipment
  • Inventory levels, the shelf life of goods, and warehouse capacity
  • Bills of lading
  • Bills of materials

Armed with this information, an MRP system can predict when to purchase the right quantity of materials to produce the right amount of goods to meet customer demand at the right time.

MRP and manufacturing decisions

MRP can help you make decisions on when – and how much – to purchase.

How does MRP work?

To run MRP software effectively, you need four types of input:

1. Bill of materials

A bill of materials is a single up-to-date document that details the materials, components and subassemblies required to make each of your products.

This record of what goes into each product will help with version and quality control, and will reduce the risk of reworks or waste. An MRP system can take this information and use it to understand one of the key questions that MRP answers: “what do we need?”

2. Inventory levels

An MRP system needs to know real-time inventory levels, or as close to real-time as possible, to best understand another question: “what do we have?”

This data must include not only items currently available in your warehouse, but anything purchased or in transit, too. It should also know where that inventory is stored, how long it will last (shelf life), and what has already been reserved for production.

3. Master production schedule

A master production schedule will turn your bill of materials into a plan of action – detailing the labour, machinery and time needed for production.

An MRP system will take these factors into account when it generates its purchasing recommendations, ensuring scheduled jobs can be completed without components running out. At the other end of the scale it will also ensure production can be completed without excess stock being purchased, thereby helping the manufacturer make more efficient use of its limited resources and capital.

Here we get the answer to our third question: “what are we capable of?”

4. Customer order data + sales forecasts

Customer order data, as well as sales forecasts, are the final input that helps an MRP system answer the question: “when will we need it?”

Using historic data to predict when the peaks and troughs in your business will occur allows your MRP software to plan accordingly. This way you run less risk of ordering more materials than you require (increasing waste) or not ordering enough (causing stockouts).

MRP data

Historic sales data, as well as current Sales Orders, all inform the outputs of MRP software.

Advantages of MRP software

For some manufacturers an MRP system can dramatically simplify the complex business of production, with specific benefits including:

Smarter ordering of materials

By combining internal and external factors into a single scheduling system, MRP users find it easier to get the right materials in the right place at the right time.

This works especially well for manufacturers running on a just-in-time (JIT) model, since it helps maintain the right minimum inventory levels and order the right quantity of materials at any given time. As a result, users quickly find they reduce excess inventory and the risk of stockouts.

More efficient production

MRP can help businesses improve the efficiency of production lines and staff – both by minimising unplanned downtime, and by scheduling the maximum amount of production from the time and resources available.

Decreased costs

Of course, the net effect of the two points above is a reduction in costs. Costs associated with equipment downtime, waste, spoilage, stockouts and customer dissatisfaction can all be reduced. Plus, MRP users are less likely to hold excess inventory that ties up capital.

MRP software production levels

MRP software can help maximise production.

Disadvantages of MRP software

Putting a successful MRP system into place is neither easy nor risk-free. Here are some of the potential downsides to deploying Materials Requirement Planning:

It fails without good data

MRP functions on data, and the quality of the data coming out is equal to the quality going in. To ensure that MRP software produces reliable results, a user must:

  • Collect the right data
  • Store clean data in accessible locations
  • Standardise information so different datasets can be directly correlated
  • Ensure all data is accurate

Cost

While MRP is less expensive than ERP, it’s still a big investment. This sort of smart system is rarely plug-and-play, and will require a number of installation steps. Installation costs can include:

  • Cloud storage
  • Acquiring, storing and standardising relevant data
  • New hardware, like shop floor scanners or better computers
  • At least three months’ work from a software implementation firm

Disruption to processes and staff

Implementing an MRP system takes time and expertise – not just to connect systems and roll out the software – but also to train users, write new policies, and bed-in new processes. This can harm short-term productivity and increase costs until such a time as the business adapts.

Given that people are generally not enthusiastic about change, there may also be a change management cost in terms of both budget and time.

Software for managing manufacturing

There is a variety of software out there to manage your manufacturing business.

Comparing MRP vs MRP II, ERP and manufacturing inventory management

As you shop around for MRP software or related manufacturing tools, you may see software packages that seem to offer similar functionality, or that have similar names. Here, we’ll detail a few of the more common systems so you can understand the difference.

MRP vs. MRP II

MRP II is actually a different acronym – it stands for Manufacturing Resource Planning – but people often use ‘material requirements planning’ and ‘manufacturing resource planning’ interchangeably. Here we’ll refer to basic Materials Requirement Planning software as MRP I.

MRP II, as you can probably guess, is a successor to MRP I. In fact, MRP II software has largely replaced MRP I, and generally modern software providers will offer functions more in line with MRP II.

What’s the difference between Material Requirements Planning and Manufacturing Resource Planning?

MRP I and MRP II both take into account the bill of materials, master production schedule and inventory levels. You might consider this basic MRP functionality.

MRP II also takes these into account but will also typically offer:

  • Demand forecasting
  • Finance and accounting
  • Machine and personnel planning (including maintenance scheduling)
  • Quality assurance

MRP II is also often able to run its own simulations to ask ‘what if’ questions about future scenarios, and can make dynamic adjustments based on unexpected developments.

MRP vs ERP

Whereas MRP focuses on the manufacturing process, Enterprise Resource Planning is a modular software suite into which users can plug nearly any area of a business. ERP can be used to manage supply chains, customer relationships, payroll and HR, inventory, purchasing, estimates and quotes, sales, and product configuration.

One of the main benefits of an ERP is it collects diverse information into a central database, so different areas of the organisation can be directly compared. This collation of information can lead to simplified reporting, better decision making and company-wide cost reductions.

MRP vs Inventory Management

Inventory software has a lot of crossover with MRP, in that it manages stock on hand, purchasing, and sales orders – and may also manage light manufacturing. However it typically doesn’t deal with production scheduling, workforce management, or machinery.

Modern inventory management suites are also readily compatible with other software, including logistics systems, accounting platforms, CRMs and eCommerce software.

MRP software benefits

The software you choose will depend on the nature of your business

So do I need MRP, ERP, or Inventory Management?

The size, location and complexity of a business and its operations all influence which type of software is the best fit.

The right user for ERP

Companies that benefit most from an ERP tend to be corporates engaged in diverse business activities, with multiple sites, and highly complex workforce planning, production scheduling and maintenance planning needs.

ERP is a complex tool, which makes it much more expensive than MRP or inventory management software, and more complicated to set up properly. This means it’s more suitable for companies with the budget and time for such a major investment.

The right user for MRP

Businesses that use MRP tend to be smaller than those that use ERP, but are still larger than the average SME. MRP most benefits those operating multiple manufacturing lines simultaneously, and / or those with multiple manufacturing sites.

If juggling the complexity of cost-effective purchasing with efficient production planning, and machinery maintenance is something your business constantly struggles with, then MRP may be a good solution.

The right user for Inventory Management Software

At the SME level, poor inventory management is responsible for the majority of unplanned production downtime or excess waste, rather than an overcomplication of production needs. For this reason, inventory management software is often a more useful tool for SME manufacturers.

With a system like Unleashed, you can access many of the main features of MRP – like online Bills of Materials, reserving inventory for production, and supplier management and purchasing. And at the same time, you can reduce admin while better managing inventory to free up capital and reduce downtime, stockouts and waste.

More about the author:

Alecia Bland - Unleashed Software
Alecia Bland

Article by Alecia Bland in collaboration with our team of inventory management and business specialists. Alecia's background is in ancient languages. When she's not reading a book with her cat for company, you can usually find her cooking, eating or trying to make her garden productive.

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