MRP
Materials Resource Planning

MRP offers strategies that make sure you have enough materials to build your product and have enough product to meet demand. Sounds easy. Make sure the factory has enough components, build a few thousand toaster ovens and ship them out to Target.

MRP ensures there’s a method to the madness. It looks to maintain a balance from the time raw materials are put on the assembly line, turned into a product and shipped out the door.

What is this balance? That we are making enough product to meet demand. And are we using our resources and labor effectively. This type of calculation is a mix of art and science.

The first MRP overview (and yes it is just an overview), relies on forecasted demand. Based on previous orders, we might say “Well last year we sold about 3,500 toaster ovens, this year will probably do about 4,200.”

Base on our estimates we put together a toaster oven production schedule. This includes everything from buying the parts, scheduling labor and how to service the customer.

If we carry too much inventory it costs us to hold that stock; in more ways than just taking up space in the warehouse.

When a company readies a product for production, planning steps are taken. Lets review two apporaches -

The following steps are based on a forecasted demand for product.

Capacity Planning : Every factory or service provider has some limit on whatever it is they produce over a given time frame. How many customers can a restaurant service during breakfast? How many footballs can a factory make in a week? How many people can fit on a city bus?

Capacity planning assumes the supply chain can only process so much. Determining how much can be processed and at what stage helps identify bottlenecks. Bottlenecks set the pace for the rest of the supply chain.

If your chicken coop produces 400 eggs per week, and Whole Foods expands its order to 3,000 eggs per month, you know where the bottleneck is. And you most likely have the solution. More chickens.

Companies usually do not want to operate at a maximum capacity. It puts too much pressure on resources and leaves little flexibility if problems should occur. Underutilization of capacity erodes profit margins. MRP looks to make sure there is enough capacity to match variations in demand.

Aggregate Planning : This stage takes a forecasted demand of goods and applies a time frame of 2 months to a little over a year of handling the process. For example: Costco places an order for 800,000 bath mats over the next 12 months. Aggregate planning figures the most effective way of fulfilling this order.

The most detail we get at this stage is how many bath mats per month should be produced & shipped.

This doesn’t mean bath mats have to be shipped every week. This week might release a shipment of 2,000. The next week may ship zero. The following week may ship 2,500. The master schedule will not only set an agenda for shipping, but any other activities required for production. Sure, it starts to get tricky; but that's why someone invented MRP software.

Short Term Schedule : Here we provide detailed timetables and sequence of events. How many people are needed, what tools, how much time is required for certain jobs, what materials are needed at each stage, etc... Basically, we have a recipe for doing a job effectively based on a forecasted demand.

This is another approach to planning the flow of materials. The previous method used forecasts. Forecasts have a way of turning out wrong. Forecasts work well if your product isn't subject to changes in technology or the fickle taste of a customer. They're also easier to use since less supporting information is needed.

Material Requirements Planning (MRP) uses actual demand. Actual demand has to come from somewhere. We use these three sources:

Master Schedule: As described above.

Bill of Materials: This is a list of all materials required to make a product. It shows all the parts and components and even the order in which the product is put together.

Inventory Records: An actual record of available materials.

Since we use actual demand levels and not a forecast we have an opportunity to manage our costs. We can adjust stock levels, foster higher stock turnover and optimize delivery time.

The disadvantage is we need information. Hey, nothing wrong in gathering information. However, the information required may not be in some central database. It could be on slips of paper, a spreadsheet, in someone's head.

MRP requires a master schedule. After all, it's based on actual demand. If the schedule is inaccurate, well you don’t have a schedule based on actual information.

It also requires information from suppliers, invoices, inventory, delivery schedules etc… The truth is, many companies may not have this information readily available.

MRP 2 takes this process several steps further. Since all supply chain functions support the product it produces, we should be able to tie all functions to the master schedule.

Delivery, product returns, warehouse management, line workers, customer service, product design....MRP2 says we can we log it all to the master schedule. Companies are implmenting MRP 2. Although it may not be feasable to tie all functions to the master schedule.

We've all heard of Just In Time. If your company is not using it, you surely remember JIT from business school. JIT aims to deliver materials directly to operations with the hope of eliminating stock.

The philosophy is: if you are holding stock, you most likely have a problem somewhere. That problem could be improper planning or miscommunication. The problem should be identified and corrected.

Problems with JIT occur when things aren’t happening like they used to. If there is a breakdown, you may not have enough to replenish inventory. JIT works best when a large number of products are produced for lengths of time.

To improve on JIT, the Japanese have also endowed us with Kanban. This is a system of using signals such as cards (Kanban) or signs that signal to replace inventory. For example, an empty pallet will not be refilled unless it has a physical symbol indicating it needs more stock.

That pallet is then replaced with a full pallet while the empty one is moved to the stock room.

Managing the flow of materials into your supply chain affects costs, storage space and customer service. An MRP strategy requires accurate record keeping. If you don’t trust the records or they’re incomplete…..a good forecast will have to do.

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