Material Requirements Planning (MRP) is a business-planning technique that caused a revolution within manufacturing companies when it was introduced in the early 1960s. At its core is a computer algorithm that is capable of processing large amounts of data. It is still widely-used today – in fact many companies could not survive for long without it. MRP is one of the main reasons why computer systems are so prevalent in today's businesses.
MRP in perspective
The aim of any manufacturing business is to buy stuff (raw materials), turn it into something of greater value (the product), and sell this on for a higher price. In this way a profit can be made.
Making to Forecast
Although this might seem straightforward at first glance, there is an inherent problem faced by most suppliers. Customers - those people who buy products - don't like waiting around. They expect to be able to buy the product now. This is a problem because it takes time to manufacture things. Suppliers have traditionally circumvented this problem by buying materials in advance, stocking them in warehouses, and building items based on what they think the customers will buy (a forecast). And so, the idea is that when the customer comes in looking for a widget, it is waiting on a shelf, nicely packaged and presented, and ready to be moved out of the door within a few minutes. Happy customer, happy supplier, or so the theory goes.
But is the supplier really happy? Because the supplier is now dependent on forecasting the future he runs a risk, just the same as the risk you would run by betting on a horse. The forecast has to be sufficiently accurate, because if it is not, he might run out of finished products early, resulting in disappointed customers.
The Inventory Management Headache
Suppliers may attempt to solve this problem by buying enough raw material items ahead of time to prevent them from running out. But how much raw material is needed? Certainly, you could just keep buying far more raw material than you ever required, but this only causes more problems. If you buy too much of something, then you might not sell it all, and you will never get any money for items that don't sell. You also have to build extra warehouse space and hire people to look after all the stuff that's sitting on the shelves going nowhere fast, and you may eventually end up selling it off cheap or just scrapping it. It's a costly way of doing business1.
It would be much better for suppliers if they only had to buy 'just enough' stock. But how much is 'just enough'? For many manufacturing companies before the 1960s, this was a major concern. There was no easy way of solving this problem. Most companies relied on excess stocks, seat-of-the-pants estimates, and prayed that they had enough materials to build their items.
A Manufacturing Revolution
Enter MRP. This was introduced in the US in 1960 by Dr Joseph Orlicky2, a Czech-American engineer working with IBM. The idea was simple - obvious, in fact - but it had profound implications for the world of manufacturing. By linking product demand to raw material supply, and letting a computer do the calculations, it would be possible to only buy what was required, at the latest possible opportunity, while ensuring that the customer forecast was met in its entirety. MRP would enable inventories to plummet, resulting in significantly increased profitability for manufacturers. The idea caught on like wildfire. IT systems became part of the infrastructure of manufacturing companies throughout the world. A revolution had been born which continues to this day.
How MRP works
There are a lot of flavours of MRP around, many of which are extraordinarily complex, but the basic premise is relatively straightforward. MRP reads in information on the products, the raw material items that comprise it, the customer demand, and the stock of all the items to determine how much is needed and when it is required by. To develop a very basic MRP plan, you need:
- a forecast of what products need to be made in the next few months (also known as a Master Production Schedule).
- a recipe which tells you which materials are used, in what quantities, to build each product (also known as a bill of material).
- the time required to obtain or manufacture all products and materials (the lead times).
- the maximum amount that can be processed at any one time (the batch size).
- the on-hand stock balance of all your products and materials (also known as the inventory balance).
A Widget Problem
Say you sell widgets, and you expect your customers to buy 60 widgets in five days time3. Your widget is made of two types of raw material parts – a hood and a handle. To make the widget, you need two hoods and three handles4. You can build 20 Hoods and 30 Handles in one day5. You can build 15 Widgets in any day from this. You currently have 20 widgets, 30 hoods and ten handles stocked in your warehouse6.
MRP first calculates what you really need by subtracting your current stocks from the overall requirement. So, you need to build 40 widgets7, and this in turn will require the manufacture of 50 hoods8, and 110 handles9. MRP then divides the requirement by the batch size, to calculate the total lead-time required. For example, you cannot build all 40 widgets in one day, as the maximum amount possible is 15. So, it will take three days in total to build all widgets. MRP also calculates that it will take three days to build the hoods, and four days to build the handles. The complete worked example is below.
|Item||Stock||Day 1||Day 2||Day 3||Day 4||Day 5|
So, to ensure that we have enough widgets in five days time, we need to start work on the handles today (for simplicity, it was assumed that we had enough raw materials available to make the hoods and handles in the first place). It sounds logical enough, but consider that MRP might need to do such calculations for thousands10 of parts over hundreds of days, where the forecast (and every thing else) is continually changing.
Real World MRP
MRP systems can perform much more complicated real-world calculations involving complex bills of material, real customer orders, maximum stocking quantities, bottlenecks, detailed production sequences, and breakage factors, to mention a few. In addition, such systems need to be able to recalculate frequently in order to cope with regular changes in demand. Needless to say, this is not work you can easily carry out on a pocket calculator.
Small companies can probably accomplish much of their planning on a spreadsheet, but large multinational companies may require a vast, interconnected computer system to do all the necessary calculations, taking into account different warehouses, shipping locations and manufacturing plants around the globe.
The End Result
The effect is that you only need to buy your raw materials and build your products at the latest possible time. MRP systems help to keep stocks low and to recognise quickly that there are supply problems at the earliest possible time. Companies benefitting from MRP typically need lower stocks and fewer warehousing facilities to conduct their business. They make better use of their cash, maintain (or improve) their levels of quality and can be more profitable due to lower overall costs.
MRP II – Manufacturing Resource Planning
MRP was so successful that people began to see new applications for the technique. In 1981, Oliver Wight pioneered the concept of Manufacturing Resource Planning or MRP II, where all the activities of a manufacturing company, including sales, purchasing, maintenance, HR, engineering, etc. could be linked to the MRP system, resulting in a powerful business management system. Integrated MRP II systems started to appear in the 1980s. They were the progenitors of modern ERP (Enterprise Resource Planning) systems, which extended the concept to all types of businesses, including banking, healthcare, retailing, exploration and government.