MRP Inventory Management

Manufacturing can be a highly detailed, highly complex process that requires specific planning. Material Requirement Planning (or MRP) is an inventory system that is computer based and used to manage the manufacturing process. It is designed to assist in the scheduling and filling of orders for raw materials that are manufactured into finished products.

What Does MRP Do?

The main objective of MRP is to manage dependent demand items. These are the raw materials and unfinished goods used in the manufacturing process. Raw materials must be kept as inventory stock. As they are used, stock must be replenished through re-ordering. MRP fulfills three mains functions:

  1. MRP makes sure that dependent demand items on kept in stock.
  2. MRP maintains the optimal level of inventory that is most cost effective for a company.
  3. MRP is used to purchase new stock, deliver finished products, and plan the daily manufacturing processes.

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What makes MRP effective is that it works backward from a plan for producing finished products in order to develop the amount of raw materials that a company needs. How this works is MRP breaks down inventory requirements into separate stages. This helps to manage production and keep it flowing at an even level. It also helps to keep inventory costs to a minimum.

The drawback is that MRP systems can be expensive to implement and the costs can be quite high, offsetting the amount of money that a company could save in inventory costs. Larger companies that produce large volumes of finished products may find it beneficial but the same may not be true for smaller companies. Plus, for MRP to produce accurate results, you need to have accurate data. Information such as orders, bills, item numbers, and records must be accurate or the results will be off.

History of MRP

The roots for MRP have been around since the early 1950’s. MRP is one of the predecessors for Enterprise Resource Planning (or ERP), a computer software system that is widely used to link a company’s entire infrastructure together.

MRP was especially popular during the 1980’s. Manufacturers needed better resources to manage their processes and inventory requirements. Manufacturing managers realized that computers could keep track of inventory quicker and with more accurate results. Mainframe computers that ran on custom software were built that could extract information from a list of raw materials and create a production plan.

As MRP proved successful, it was eventually used to include information feedback loops so that managers could modify the inputs into the system for better production results.

Inputs For MRP

To get results, you have to input information into the MRP system. There are three main sources of information for input: a bill of sale for materials, a master schedule, and an accurate record of existing inventory.

The bill of sale for materials is a list that contains all of the raw materials, components, subcomponents, and other materials needed to complete the finished product. The bill is usually arranged into separate sections so that companies can see what materials are used for each stage of production. This helps to determine the amount of materials needed.

A master schedule is a production plan that covers all aspects of the manufacturing process. The schedule states the amount of finished products that can be produced and the time frame in which they can be finished. Master schedules do not take into account available inventory. They only cover how many finished products are needed.

The record of existing inventory lists how much inventory is already available. This is useful for determining how much, if any, additional inventory is needed to fulfill production orders.

Advantages and Disadvantages of MRP

MRP has several benefits as well as drawbacks. As for benefits, MRP helps managers with the following:

  • Keep inventory levels to a cost-effective minimum
  • Keeps track of inventory that is used
  • Tracks the amount of material that is required
  • Set  safety stock levels for emergencies
  • Determine the best lot sizes to fulfill orders
  • Set up production times among the separate manufacturing stages
  • Plan for future needs of raw materials

However, MRP also has its share of drawbacks. They are:

  • Information used as input must be accurate. Inaccurate information can result in misplanning, overstock, understock, or lack of appropriate resources.
  • The master schedule must be accurate in order to provide appropriate lengths of time for production.
  • MRP systems can be costly and time-consuming to set up.
  • There may be problems with employees who, before MRP, were not disciplined in their record keeping. Also, some departments may hoard raw materials for their own use.

What Is MRP II?

The original MRP system was eventually expanded to the planning for all company resources used in manufacturing. This new system was called Manufacturing Resource Planning (or MRP II). With the success of MRP, manufacturing companies realized the same principles could be used to schedule and plan other areas. While MRP dealt mostly in raw materials, MRP II was concerned with areas such as human resources, financing, marketing, and engineering.