Material requirements planning ii (mrp ii) generally substitutes out requirements for

Recommended textbook solutions

Fundamentals of Engineering Economic Analysis

1st EditionDavid Besanko, Mark Shanley, Scott Schaefer

215 solutions

Advanced Engineering Mathematics

10th EditionErwin Kreyszig

4,134 solutions

Chemistry for Engineering Students

2nd EditionLawrence S. Brown, Thomas A. Holme

945 solutions

Advanced Engineering Mathematics

6th EditionDennis G. Zill

5,275 solutions

• Tweet

• Post

• Share

• Save

• Get PDF

• Buy Copies

• Print

Materials requirements planning (MRP) hardly seems a phrase to create much of a furor or evoke much enthusiasm. But in the past few years, hundreds of manufacturing companies have brought MRP systems for production/inventory control on line, or are now doing so, while many more are seriously considering it. APICS (the 11,000-member American Production/Inventory Control Society) has recently finished a massive crusade to inform corporate users of the benefits of MRP systems. Almost all the major computer manufacturers have developed and are pushing software packages to support such systems, and virtually every major industrial consulting firm is advising on them.

So the prospect of your running into an MRP system is growing: many of your suppliers may now be explaining to your purchasing department changes in their delivery promising procedures because they are on MRP; your customers may be insisting on new ways of setting delivery schedules because they are on MRP. And within your own company, you may already be hearing from your manufacturing divisions about proposals for installation of an MRP system, recommendations for analysis of its feasibility, requests to send members of your manufacturing group off to MRP seminars and workshops.

The interest is there; the question is why. Leaving aside the natural propensity of computer manufacturers to tout new systems that use lots of computer time, there is a good reason: the cost balance in manufacturing control is shifting. Much of the MRP logic has always been available but, primarily because of high data-processing costs, its use has been expensive. Now, however, computation costs are declining while inventory costs are rising. The result is that a sophisticated, computerized production/inventory control system is easier to justify.

Moreover, the economic situation has pushed manufacturing control into the limelight. Unstable interest rates, materials shortages, rising finished goods inventories, order cancellations, the impact of scheduling inefficiencies on profits, and the like are making clear the need for tighter operational control and more rapid and flexible response to change.

Now, while these are benefits whose value few would question, there have been many questions raised as to whether they can actually be achieved through an MRP system. And it is precisely these questions that the manager must seek to answer in light of his or her own organization’s particular needs. Our objective here is to provide some answers to them:

• What is MRP?

• What are its advantages?

• Will MRP work for your manufacturing operations?

• Is MRP worth it?

What Is Materials Requirements Planning?

MRP is a new name applied to an old concept, but it is a concept that has come of age with currently available data processing capabilities. This synthesis of modern computers and some old (and some new) concepts has resulted in a system that can be used effectively to both plan and control production and materials flows. The logic of MRP is based on the fact that the demand for materials, parts, and components depends on the demand for an end product. This distinction is vital since it explains both the behavior of parts orders and, ultimately, inventories.

Dependent vs. independent demand:1 In manufacturing it is reasonable (in fact, perhaps desirable) to want absolutely no inventory of a part for, say, ten months and exactly 200 each day for the next two months. Why? Because that exactly corresponds to the demand for the part—the part goes into a finished product that is batch assembled. This “lumpy” demand (zero for several weeks, then 1,000 needed this morning) is a common fact of manufacturing life, even when lot size economies and allowances for scrap are taken into account. It occurs because the demand for parts and components is directly dependent on the demand for some higher-order assembly or manufacturing step that is carried out in batches. For example, the demand for steering columns on automobiles is directly dependent on demand for the end products—the cars themselves.

Distribution inventories, on the other hand, often do not experience the “lumpiness” caused by higher-order batching. This is because the demand for finished goods and spare parts is independent of the demand for other items produced in manufacturing.

So for manufacturing, where “we want what we want when we want it,” keeping “average” numbers of parts on hand, as we might be able to in distribution, will lead to either excess inventories or the inability to produce on time. Manufacturing inventory control systems must incorporate the dependent demand concept to work effectively.

How MRP Works

Exhibit I illustrates the four central elements in an MRP system: the master production schedule that “drives” the system, the bill of materials file, the inventory status file that provides the necessary data, and the materials requirements planning package that contains the necessary logic.

Exhibit I Elements of a Materials Requirements Planning System

The concept of dependent demand is built into the bill of materials file. This file contains information about every part, including its relationship to subassemblies and/or finished products. Managers familiar with indented parts lists for assembled products will recognize this type of information—and will also be familiar with its value. If there is independent demand for any part (e.g., one sold as a replacement), the file can reflect that fact in order to maintain the distinction between dependent and independent demand.

The inventory status file is exactly what its name implies, a record of the actual inventory level of each item and part. It also contains other important data, such as lead times.

The master schedule is analagous to, but not necessarily identical to, an assembly schedule. It indicates when end items (finished products) should be assembled so that customer orders or finished goods inventory requirements can be met. The construction of a master schedule, then, requires forecasts of future demand as well as data on current finished goods inventory levels or firm order commitments.

An Example

In order to understand how the logic of an MRP system works, suppose that, in accordance with a master schedule made out for the next year, we find that we want to deliver a yo-yo in seven weeks to a customer.

We know from the bill of materials that we will require these parts: two wooden sides, one wooden peg, a piece of string, and a cardboard box with printed instructions. A check of the inventory status file shows that we have neither inventories nor open orders for these parts, except that we have one wooden side on hand. We know that the procurement lead times are: sides, five weeks; pegs, one week; string, one week; boxes, four weeks. And we know that it will take one week to actually assemble the toy. To ship during the seventh week then, we will need everything in time for assembly during the sixth.

We could easily place the orders for all these parts right now, but what would happen if we did? We would have string and a peg next week that would sit in inventory for five weeks. Not very important with one toy, but what if this were an order for 50,000?

So instead of ordering everything now, let’s work back from the hypothetical delivery date. We will need all of the components in the sixth week, so we can simply calculate when to place our orders by subtracting lead times. This lead-time offsetting, while netting out current inventory balances, will result in planned orders for one wooden side next week, a box the following week, and the peg and string three weeks after that. If, in turn, the sides require red paint that has a three-week lead time, and no paint is on hand, we can see that our delivery would be two weeks late. If this were the case, we could either expedite the paint and side or negotiate for later delivery of the yo-yos. In either event, we would not expedite any of the other components.

Driven by Change

The reader who is familiar with PERT or critical path methods for controlling large projects may see some similarity between the logic of these tools and that of MRP. All operate by working backward through time from some desired end point to determine a starting time for related activities, such as ordering parts. But the analogy is incomplete, because MRP involves far more than just working backward through time. PERT is a planning tool applied to single projects, while MRP is a tool for planning and controlling a great number of products and parts that may interact with one another. More important, MRP considers not only the time dimension in planning but also the current and planned quantities of parts and products in inventories. The power of the MRP concept is its ability to take account of the dynamics of both time and quantity for interrelated parts and products.

The logic of MRP makes good sense, but the question inevitably arises: Why hasn’t it been done before? Well, it has to some extent. But unless rapid computation is available, the principle breaks down with anything but an extremely simple, single product. This explains why some of the older systems that used a bill of materials to derive (or explode) parts requirements used the concept only as a rough planning tool for obtaining annual or monthly gross material requirements. Such systems typically did not take current inventories and open orders into account, and the resulting plans were often obsolete before they could be implemented.

A modern MRP system extends the concept of explosion: it is now used in conjunction with lead-time offsetting for both planning and control purposes in both the long and the short run. That is, such a system can now inexpensively and rapidly update order priorities weekly or even daily if changes in plans and expectations so dictate. Rapid computation is needed to explode parts requirements from a schedule while simultaneously referencing inventory files to check stock status and lead times, and to keep the entire plan current enough to be useful in spite of broken schedules and late material arrivals. MRP is a tool that is driven by change rather than destroyed by it.

If the computational power is there, MRP can plan, release, and control orders so that materials arrive when they are needed. The system integrates the concept of dependent demand (embodied in the BOM file), the principle of lead-time offsetting (with the MRP package itself), the principle of inventory balancing, and high-speed computation. The result is a manufacturing planning and control system whose objectives are inventory minimization and delivery schedule maintenance.

What Are the Advantages?

The rapid update capability of computers, coupled with the MRP logic and the appropriate data, makes it possible for managers to cope intelligently with the thousands of changes that inevitably occur between the planning and execution of primary tasks.

Keeping priorities straight. Consider, for example, a machine breakdown that throws a component two weeks off schedule, ultimately affecting an end-product delivery by two weeks. Because of the delayed delivery date, there is no reason to hurry along other components as planned. (They would probably just show up two weeks early and needlessly sit in inventory.) Instead, these related components could be de-expedited (due dates relaxed by two weeks).

You’ve heard of expediting a needed part to get it in a hurry. Have you ever heard of anyone de-expediting a part when it no longer is urgently needed? MRP provides the ability to change, and keeps priorities straight.

De-expediting and expediting to keep priorities straight has three important effects: (1) it frees up time and capacity for other jobs if the item is produced internally, (2) it prevents the “hurry up and wait” syndrome that is all too common in manufacturing operations and that is responsible for much of the excess in-process and raw materials inventories found in industry, and (3) it can result in rescheduled vendor deliveries for purchased parts, thus reducing purchased materials inventories.

Keeping inventories low. Correct priorities can cut average lead times, and lower lead times mean lower in-process inventories. For example, a major original equipment manufacturer (OEM) decreased average lead times from 16 weeks to 12 weeks with a corresponding 25% inventory level decrease. This was possible because, as in most fabrication/assembly companies, the actual time to produce a product amounted to only a small fraction of the time it was on the shop floor; the bulk of the time was consumed waiting for other parts and materials to catch up. With correct priorities provided by MRP, the needed parts are available at the same time. Less waiting means less lead time means less inventory.

It is possible to lower inventories in other ways as well, as the following example shows. A major television manufacturer was faced with substantial writeoffs every year because engineering design changes appeared so frequently that they could not be phased into production in time to prevent the manufacture of obsolete parts. MRP, with its reliance on a bill of materials file that reflected planned engineering changes, allowed the manufacturer to time these changeovers to coincide with the depletion of obsolete parts and thus to decrease writeoffs substantially.

Early warning. Since an MRP system functions essentially as a simulation of manufacturing activity, it can also be used to examine the feasibility of meeting delivery dates before promises are made. Should a component go so far off schedule that it cannot be expedited back on, the affected end-products can be identified well in advance, thus permitting you to warn your customers of impending problems.

Long-range planning. Finally, besides being an effective method for controlling materials in the short run, these planning systems have also proved to be important in budgeting and long-range planning. A major electric utilities equipment supplier, for instance, uses the bill of materials, the inventory files, and an annual schedule to simulate various annual production plans and derive budgeting information. The same company uses MRP to plan manpower needs, facilities capacity, and major purchase commitments for several years—a clear advantage of an MRP “model” of manufacturing operations.

Will MRP Work for You?

Our experience shows that, while MRP has universally applicable elements, its ultimate success is intimately related to some important aspects of your overall manufacturing operations, which must be carefully analyzed. It is not a question of whether its basic logic applies—in most cases, it does. The question is how you can best incorporate this logic into your own manufacturing system, given (1) its key control variables, and (2) its key production/inventory tasks. Others have detailed the importance of developing a well-thought-out manufacturing policy, and this question refers to just that. The answer provides the background for an analysis of what MRP can and cannot do for you.

Let us use three general examples to illustrate such an analysis:

1. Company A is a basic assembly operation. Almost all parts and subassemblies are purchased externally; there are long production runs of a few models; the finished goods inventory is kept in an extensive distribution system.

2. Company B is a general machine shop. Products are made to order and customer specification; there are complex flows in manufacturing; and there are large in-process inventories.

3. Company C is a fabrication/assembly operation. Most parts are manufactured in a general machine shop and assembled in small quantities to customer order and specification.

Link Between Manufacturing and Distribution

For Company A, where a few products are assembled to stock in long production runs, MRP seems a natural. The assembly or master schedule can be used with a bill of materials and inventory file to explode requirements and offset lead times for purchased parts and subassemblies.

But consider the key production/inventory control tasks for this organization. Factory cycle times and in-process inventories are likely to be almost nonexistent. In-process inventory control, though important, is not the key task in this case. Inventories are more likely to be concentrated in the distribution system. Hence, Company A’s key production/inventory tasks focus on planning intermediate-term (three to twelve months) production while controlling distribution system inventories and purchase orders. Its key control variables are the avoidance of stockouts at distribution centers, the smoothness of production rates, and the maintenance of a supply of purchased components for the assembly lines to avoid shutdowns.

If MRP is to be used effectively in this kind of manufacturing environment, it must interface well with distribution. The master schedule is important since it links the current stock position at distribution centers with the assembly schedules. Moreover, the master schedule in this case incorporates the intermediate-term production plan by which the manager can smooth peaks and valleys in production levels.

By exploding as well as time-phasing components requirements from this master schedule, an MRP system can give purchasing the information it needs to control its acquisitions. MRP can then maintain priorities as schedules change, stockouts threaten, and deliveries slip. But here its focus is on distribution, production smoothing, and purchasing as the key tasks and control variables of the system. This focus in turn requires, of course, that the organization have a well-developed and rapid distribution and purchasing communications system.

Shop Floor Control

Company B provides a substantially different view of MRP’s usefulness. Given the general machine shop’s piece-part, make-to-order environment, management must be able to promise realistic due dates to customers, coordinate the design, manufacturing, and engineering functions with production, and schedule the flow of material and work from one machine center to another. Its important control variables are likely to be the percentage of deliveries made on time, the level of in-process inventories, the length of time between customer orders and delivery time, and the utilization of machines and manpower.

But, in contrast to Company A, Company B’s manufacturing (in-process) inventory and scheduling control is a critical activity. In fact, most of Company B’s inventories are likely to be in-process inventories. Consequently, a reporting and scheduling system must be available in the shop so that production can proceed in accordance with the priorities obtained from the MRP system. Keeping priorities straight here means making maximum use of available capacity. The MRP and shop floor control systems must be carefully coordinated and integrated to be useful.

In this kind of environment an MRP system can also perform two other important functions. First, by offsetting lead times for material requirements, it can help determine realistic due dates for customers. There is little payoff in promising the delivery of a part in 10 weeks if it takes 15 weeks to acquire the necessary materials. Second, it can help control the acquisition of this material. By updating the receipts of materials and other new information, purchasing personnel can quickly focus on the priorities of these items and expedite and de-expedite materials accordingly. Moreover, with such a system it becomes immediately apparent when materials will arrive too late to meet a due date, and management can notify customers early or make other arrangements.

Buffer Stocks and Work Center Priorities

The previous examples illustrate the important role the MRP concept can play in many types of companies. However, there are few in which it has made as great an impact as in the ubiquitous fabrication/assembly type of operation typified by Company C. From a historical perspective, this is easy to understand.

Fabrication/assembly companies, characterized by a general machine shop for fabricating parts and components that are used in downstream assembly operations, have frequently separated these two widely divergent kinds of processes with large buffer inventories. These inventories have served two purposes: to segregate the management of the two kinds of manufacturing for organizational and technical reasons, and to ensure enough of the many parts required to keep assembly operations supplied and to process orders in time.

But these buffer inventories were usually controlled by classical reorder point methods that assumed that the demands for individual components were independent of one another and of the demand for assembled items; and they never have been. The result has been large inventories and a great deal of intraorganizational struggle anyway, because the assembly department has constantly interfered with fabrication activities to get all the parts it needed to complete an assembly. For many such companies, a computer-based MRP system has become the answer. But, as before, the special requirements of fabrication/assembly operations mean that the way it has become the answer for them differs from that found to be suitable for others.

Company C’s fabrication/assembly operation must simultaneously complete the key tasks of both the assembly operation (like Company A’s) and the general machine shop operation (like Company B’s). In other words, it must simultaneously be responsive to stockouts and customer due dates, keep assembly operations supplied, and maintain priorities and schedule equipment in the fabrication area. To accomplish this, MRP must serve as the link between fabrication and assembly, as well as between assembly and distribution.

The master schedule serves, as before, to link assembly and distribution, but a fabrication shop floor control system is the link between fabrication and assembly. The shop floor control system accomplishes this by translating the master schedule, via MRP, into priorities that can be used to determine which parts will be worked on at a particular work center. In some companies, “capacity requirements planning” is a second link between fabrication and assembly. This is a technique that can project fabrication shop loads from the master schedule and can also help determine labor requirements, subcontracting needs, or equipment needs.

In fabrication assembly operations, MRP and associated systems allow a company to maintain the separation between two different types of processes, but they also allow such a company to substitute current and timely information from a centralized source for large intraorganizational inventories.

Is MRP Worth It?

Unfortunately, determining the value of MRP is not easy, because the answer depends on your starting point. For one thing, the benefits of the system depend on how well your current production control system is working. The costs depend on the stage of development of your current manufacturing control system as well as on the skills and attitudes of the people in your organization.

To illustrate, a $5 million fabrication/assembly company implemented a simple MRP system in six months with a small computer, the part-time efforts of the factory superintendent, and one (the only) systems analyst in data processing. Another company, which has sales in excess of $20 million and which both fabricates and assembles similarly complex products, is just now reaping the benefits of an integrated MRP-based production control system after five years of stop-and-start evolutionary effort on MRP and associated systems, a new, larger computer, and a great deal of data processing support.

Is the point that smaller companies or smaller manufacturing departments can use MRP more effectively and efficiently than larger ones? We think not. More likely, the anomaly stems from the differences between the level of skills, the adequacy of related systems, and the organizational support available in the two companies.

The first company had two skilled and dedicated people to design and implement the system; the second did not and had to hire them from outside and develop them from within. The first company had a reasonably good, though informal, shop floor control and reporting system; the second had to develop such a system from scratch. The first company benefited from good relationships among foremen, workers, engineers, and marketing personnel; the second did not consult these people in their original design of the system, experienced organizational problems in implementing it, and had to restart with an extensive training and selling program. The first company had accurate bills of material and the organizational commitment and mechanisms to keep them up to date; the second had to develop the bills and convince people that accurate record keeping was an important part of their job.

Realistic Expectations

Clearly, these companies started with different sets of skills, support systems, and levels of organizational commitment. And just as clearly, what was essentially a routine job for one was a major long-term effort for the other. Their experiences show the necessity of beginning with a realistic set of expectations about what it will take and how long it will take to implement such a system.

What results can you expect? On the one hand, if your current production control system is resulting in extremely high inventories and/or poor delivery performance, the net result of an MRP installation is likely to be very rewarding. For example, one company recorded a 12% reduction in finished inventories, a work-in-process inventory reduction of 30%, and a 35% increase in their number of on-time deliveries. But this company had some serious problems to begin with.

On the other hand, if industry and internal standards indicate that your performance is good, the results of an MRP system may not be as dramatic. But a lack of dramatic results can itself be deceiving. For instance, one large company adopted MRP during a period of explosive sales growth that resulted in pressures on its capacity. Even though its inventories did not go down (they actually increased), its turnover remained at about the same level. It is unlikely that this company’s old production control system would have withstood these strains.

The interest generated by the MRP concept is indicative of the promise this type of control system offers. The realization of its potential for your organization, however, depends upon an analysis of the way it must be focused. Moreover, since implementing such a system can include problems that belie the simplicity of its underlying logic, it is essential that management formulate realistic expectations about its associated costs and benefits.

1. See Joseph Orlicky, Materials Requirements Planning. The New Way of Life in Production and Inventory Management (New York: McGraw-Hill, 1975), for an exposition of dependent versus independent demand.

A version of this article appeared in the September 1975 issue of Harvard Business Review.

What is the purpose of material requirement planning MRP )?

What is MRP and MRP II how they are related?

What are the differences between MRP and MRP II?

What is a key feature of materials requirements planning MRP )?