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Material Requirement Planning (MRP) | Definition, Objectives, System, Benefits & Limitations

Material Requirement Planning (MRP)


What is Material Requirement Planning ?


Material Requirement Planning (MRP) is one of the most inclusive method towards manufacturing inventory as well as other related variables which require a productive system of inventory management. In the planning process, MRP system divides available inventory to the various items which need to be produced. The gross requirement is also used for re-evaluating the legitimacy of orders yet to be completed. The system prepares a schedule showing estimates for different items for immediate and prolonged demand.

Definition of Material Requirement Planning (MRP)


According to American Production and Inventory Control Society (APICS) :
"MRP constitutes a set of techniques that use bill of material, inventory data, and the master production schedule to calculate the requirements for materials".

Material Requirement Planning

Assumptions to Develop MRP 


Following are the main assumptions used for the purpose of developing Material Requirement Planning :

1) Integrity of File Data : 
It is assumed that the file data should be complete, accurate and properly updated for providing the MRP system useful.

2) Lead Times for Individual Items are Identified : 
It is assumed that lead times required for all the inventory objects are properly known and provided to the system. 

3) Each Inventory Item goes In and Out of Stock : 
Under MRP system, it is assumed that all the concerned inventory items are kept in the stock. It implies that manufacturing process progression will be properly monitored.

4) Timely Assembly of all the Required Components : 
For calculating the timing of item, it is assumed that all components needed for an assembly will be available at the appropriate time for completing the order in time.

5) Discrete Distribution and Use of Components Material : 
This system assumes that the exact requirements are provided. If it is stated that ten units would be required, then it is assumed that only ten units need to be kept. Materials which are kept in continuous form do not meet this criterion. This requires the system to be adapted and changed accordingly.

6) Process on which manufacturing items are depended upon : 
This implies that manufacturing orders for any inventory items are independent and are not contingent upon other orders and progress.

Objectives of Material Requirement Planning


Following are the main aims of MRP : 

1) Inventory Reduction : 
The system of MRP helps in determining the quantity of various components required. also determines the time when such components are required for meeting the pre-planned schedule. In this way, it helps in rationalizing the cost of excessive inventory.

2) Reduced Production Lead Time and Delivery Lead Time : 
MRP helps in the identification of component quantities, avail-abilities, timings and production schedule for meeting deadlines. This helps in coordinating various activities such as procurement as well as production decisions which helps in avoiding production delay. It arranges production according to due dates on customer job orders.

3) Realistic Commitments : 
MRP helps in determining the production schedule and promotes realistic delivery commitments. This leads to enhanced customer satisfaction. With the help of MRP, the production department is able to predict the likely delivery time in a better way. The system can be modified to see whether it can handle additional load by adding the order of potential new customers. It would result in more realistic date.

4) Augmented Efficiency : 
It helps in improved co-ordination between various work centres while the product passes through them. This helps in better use of different resources including human capital. The efficiency is increased as there are fewer interruptions in the process as MRP targets on having all components available at the time of schedule.

Material Requirement Planning (MRP) System


This system is used for translating the demand quantity for raw-materials into its final products. Following are the three main components of material requirement planning system :
  1. Inputs
  2. MRP processing also known as Material Flow in MRP
  3. Outputs

Figure : MRP System

Material Requirement Planning (MRP) Inputs


MRP is a processor where inputs are processed to provide a timetable for raw materials and other components. Following are the main components : 
  • Master Production Schedule (MPS)
  • Bill of Material (BOM)
  • Inventory Status File (ISF). This file offers information including replenishment lead time and inventory status.

Inputs to Material Requirement Planning (MRP)

1) Master Production Schedule (MPS) : 
This is among the three main inputs used in MRP system. This schedule shows the final products to be manufactured, their quantity and their shipping time. MRP system is contingent on this schedule for usefulness and effectiveness as it is required to determine future work load, production and inventory investment as well as delivery schedule.

Following are the three main phases for dividing the main schedule : 
  • The initial phase starts with the order placed by a customer. The orders generally come with a delivery deadline.
  • The second phase involves forecasting demand. The firm generates such forecasts by using previous demand schedule, statistical tools, estimates by salesman and other sources.
  • Third phase takes care of demand for specific components. These components are used for several purposes such as repair and servicing. Since it does not show the demand for final product, this phase is omitted from master schedule.

2) Bill of Material : 
This item provides various types of useful information which may be used for redesigning process manufacturing. It provides the information for order entry. The bill of material is prepared by re positioning the engineering bill of materials in terms of the assembling process. It is used for obtaining the information which is used for production process. Good business practices recommend the use of singular group of information. It assumes that there is just one type of bill of materials. However, it is possible to have various versions. 

Following are the most common type of bills of material : 

i) Costing Bill of Materials : 
This type of bill of material shows cost information which is different from the bill.

ii) Planning Bill or Modular Bill of Materials : 
This type of bill is used in Master Production Scheduling. It offers made up grouping of various items included in the bill of materials. Such grouping helps in expressing the interaction between various features, options and variants of the items. The items are put in the same way as that the product modules. This implies that component items can be shown in the form of a group. Modules help in easy disintegration of the bill. Following are the two main purposes of modularization : 
  • It helps in removing combination of required product features. 
  • It helps in separating common parts from the unique ones.
The first objective is helpful in the process of forecasting. Second is helpful in optimizing inventory of the items which are common among the different options. There may be an option in another option. Traditionally, stock is provided using forecasts. In the absence of modularization, it is difficult to segregate different options. It also makes the process of inventory management difficult to handle. 

Model designation ensures that every existing model is included in forecasting as well as in the master schedule. It is not easy to foresee demand for any single option. But it is more difficult to forecast for combined option. It is also advisable to keep the quantity of models at minimal in every product family. Specific combinations as well as assembly schedule should also be specified. Modular bills are very valuable in situations where there are multi-model products.

iii) Phantom Bill of Materials : 
The transient assemblies may be handled using phantom bill technique. Under this plan, the transient sub-assembly is managed in the following way: 
  • Lead time is considered to be zero. 
  • Lot for lot sizing is used.
The hill of material comes with a distinct code to distinguish it as a phantom and thus eligible for special treatment.

iv) Engineering Bill of Materials : 
This type of bill contains information which is presented in as designed format. It is the master product definition.

Table : Model Engineering Bill of Materials

Level

Part #

Revision

Quantity

Unit

Description

Make/Buy

1

18456-52156

A

Parent

Ea

Adapter

Buy

2

19679-47823

K

1

Ea

Tester

Buy

2

14864-47821

D

1

Ea

Moisture tester

Make

3

12483-47849

C

3

Ea

Enclosure

Buy

2

18701-14613

C

1

Ea

Enclosure

Make

3

15494-14273

E

4

Ea

Machine screw

Buy

3

09000-16001

G

1

Ea

Cover

Buy

2

14644-38389

BB

2

Ea

Precipitator assy

Make

3

52010-55200

F

2

Ea

Element

Buy

3

57102-55200

F

2

Ea

Housing

Buy

3

98002-66600

E

8

Ea

Machine screw

Make

3

12100-24247

H

2

Ea

Precipitator

Buy


The above table shows a classic engineering bill of materials. Each such bill has a parent bill. The parent bill shows the item which needs to be completed. Every control specified in the bill is related to the parent bill. The bill provides the instructions and context to let manufacturing engineers draw manufacturing bill of materials. 

It defines the product structure in context of manufacturing level. Sub-assemblies are known as transient sub-assemblies as these are immediately consumed and should also be accounted. Phantom bills can be employed for handling these assemblies. 

The first column of the bill shows the connection between the inventory objects. This may also show product structure. The level 0 is used for representing end product. Sub-assemblies are shown through level 1 onward. In the above given example, level 1 signifies the parent, level 2 shows the sub-assemblies and level 3 shows the components.

Column fourth shows the information about the required quantity for each of parent item. Column fifth shows the measurement units. The metrics should be used consistently. Column sixth shows the description of various items included in inventory. It may not be unique. The last column shows the sourcing schedule.

v) Pseudo Bill of Materials : 
The modularization process entails breaking down the bill of material. Many sub-assemblies may re-categorize as end products. This creates lot of end items. For the purpose of simplifying forecasting work, a pseudo bill of materials is created. The newly segregated items are gathered on the basis of options, making it easier to design a pseudo bill. The pseudo bill number shows the optional features.
Product structure is used for computing the requirement for component and raw material. Bill of materials specifies the product structure as it shows the list of various component parts as well as sub assemblies.

Bill of materials file shows all such assemblies :

The visualization of the structure related to an assembled product is done with the help of a simple product where a group of discrete components is used for making two sub-assemblies. The structure has the pyramid form where the bottom is used for feeding items at the higher level. 

For example, C₁, C2 and C3 have S₁, as their parent and P₁ is parent of S₁ and S₂. The quantity of individual items required for making a parent article is also shown. These numbers are given in parentheses below.

Product Structure for Product P₁

For example, sub-assembly S₂ requires two units of C4 and C5 each. It will also require one unit of C6. The bill of material file also contains other information such as child parent number, the effective data part number, yield percentage and other details.

3) Inventory Status File : 
This file keeps record of individual items. It helps in determining net requirements. The file also shows the inventory transactions as each transaction alters the status of the concerned item. Apart from status data, these inventory records also keep track of planning factors such as timing and size of the order. Such factors are safety stock, lead time and scrap allowance.

The lead time for items, components and raw-materials should be maintained in the inventory record file by the help of which the ordering lead time can be estimated from purchasing records and manufacturing lead time can be estimated from the process route sheets. MRP requires precise inventory data for its planning task. This is done by using a computerized inventory system which can help in keeping item master file. The file consists following of three segments : 

i) Item Master Data Segment : 
It offers item identification using part numbers. It also provides other data items such as order quantity, cost and lead time.

ii) Inventory Status Segment : 
This file offers a time and purchased record for various inventory items. Under MRP system, it is significant to know the existing level as well as future level of inventory. The segment shows the gross requirement, scheduled receipts, planned order and on-hand status.

iii) Subsidiary Data Segment : 
This gives information related to scraps, rejects, purchase orders and other things. 

These three segments provide the following information :
  • Item identification
  • Characteristics of item
  • Planning factors
  • Safety stock
  • Direction to other files

Material Requirement Planning (MRP) Outputs


This system offers a lot of information which can be employed for scheduling purpose for future time. The MRP uses these results and bill of materials to manage inventory. The major results of this system are :

1) Primary Outputs : 
It comprises of :

i) Planned Order Schedule : 
It shows the amount of each item which needs to be ordered. The purchase orders are given to supplier by the help of this schedule. The production department employ this schedule for ordering parts, assemblies and sub assemblies. It is also used for determining production as well as supply. It also helps in prioritizing the tasks.

ii) Order Release Note : 
It is used for placing the desired orders.

iii) Rescheduling Notices : 
This notice shows the change in set due date for order. For example, a big order may need to be re scheduled for making a delivery concession. It may also offer information about scrapped orders, delays and shortages.

iv) Cancellation Notices : 
This shows the cancellation of various open orders due to alteration in master production schedule. 

2) Secondary Outputs : 
This comprises : 

i) Planning Reports : 
It is the type of report which is related to future planning. It includes traces of demand resources as well as purchase commitment.

ii) Performance Reports : 
The MRP system offers various other measures such as inventory turnover ratio, stock out index and vendor ratings.

iii) Exception Reports : 
This report shows the orders with specific requirements. It also pints out inaccurate bills, errors, invalid dates and late orders.

The MRP output is as good as the correctness of these three main inputs.

Factors Influencing Material Requirement Planning


Following are the main factors which influence MRP :

1) Production Plans : 
Material planning plays an important part in production planning. It shows which material needs to be made and which needs to be outsourced. Material requirement changes in accordance with the number of units to be produced. Once the final output is determined, the quantity of each part may be calculated by multiplying the number of units.

2) Installed Capacity of the Plant : 
The plant capacity is an important factor for determining the number of units which may be manufactured Different plants have different production capacity. Material planning is directly. connected to the capacity of the plant. The production plan should be within the limits of capacity of the plant.

3) Market Demand : 
It is another important factor which should be kept in mind while designing a production strategy. The demand of the item may be continuous or discrete like for electronic rice maker. In some cases, it may be seasonal like woolen clothes. Different plans are required for different schedules.

4) Nature of the Market : 
This factor also affects material planning. It is significant to determine whether the market is seller driven or buyer driven. If the seller is in position to command the market, then it is a seller's market. In this case, the seller is not concerned about over stocking. Material planning is simple in such cases.
In cases, where market is full of competitors then market capacity as well as production capacity may be more than the aggregate market demand. This is known as buyer's market as a buyer can influence the market easily.

5) Political Situation : 
The market is influenced by political situation in a country. For example, US-Iraq war created demand for relief material and arms and ammunition.

6) Organizational Resources : 
The different organizational resources have an impact on materials, which is also one of the various resources of the organization. If the organization faces shortage of labour, then production is not possible. Therefore, it is important to consider all the resources required for the production process. Material planning is a difficult aspect as it has a bearing requirement of material.

7) Transportation of Materials :
The transportation is also important as getting material items in time for production is essential. Lead time should not be too long as it necessitates the need of safety stock.

8) Reliable Delivery Schedule : 
The delivery schedule should be reliable for proper planning. If there is any delay, then it may have long term impact on production schedule. It is important to properly evaluate vendor's performance.

9) Reliable Records and Store-keeping :
It should be ensured that all the records are up to date It may not be true in many cases where the physical stock is lower than the quantity in the stock orders. If there is discrepancy in the record keeping, then it is difficult to keep the proper schedule.

Importance of Material Requirement Planning


Following are the main advantages or benefits of MRP :

1) Reduces Work-in-Progress : 
MRP helps in keeping right products in the optimum quantity. making them available at the required time. It reduces the amount of WIP to be maintained.

2) Priority Benefits : 
The system helps in assigning priority to the materials. The orders are placed on the decided dates. Whenever there is a change, a new due date is calculated.

3) Proper Use of Capacity : 
With proper planning, an effective schedule for various resources cant be drawn.

4) Miscellaneous Benefits :
  • It helps in better customer service.
  • Reduces lead time.
  • Reduces overdue order
  • Optimizes finished goods inventory, components and raw-material. 
  • Increase in productivity.
  • Increases inventory turnover. 
  • It is also helpful in controlling production. 
  • Offers better response to fluctuation in demand.

Limitations of Material Requirement Planning


Following are the main limitations or disadvantages of MRP : 

1) Depends on Data : 
The incorrect data such as wrong lead time or manufacturing time leads to inaccurate MRP system.

2) Causes over-dependence : 
This method is difficult to compute and causes over dependence. It may lead to failure on account of inaccuracies. 

3) Unreliable Inventory Data : 
This system relies on accurate data. If the data is not accurate then results are not reliable either.

4) Causes Inaccuracy in MPS : 
The correct execution of this system depends on a valid master production schedule. Any kind of inaccuracy may cause the failure of MRP.

5) Requires Discipline : 
This system requires perseverance :
  • For maintaining correct stock records.
  • For reporting completed orders and jobs.
  • To ensure reporting of all relevant events.

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