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Material Requirements Planning (MRP) : Developed in 1970s, raw material whenever

required by any organization is managed i.e, which materials are required by company gets
stored in a database. Also, it tells about shortage of any material. Material Requirement Planning
is widely used approach for production planning and scheduling in industry. Function of MRP is
to provide material availability i.e, it is used to produce the requirement quantities on time. This
process involves monitoring of stocks and demand, leading to automatic creation of procurement
proposals for purchasing or production. Main objective of MRP is to determine which material is
required, quantity required and by when it is required. It is Factor material inventory and
emphasis on physical assets.

A set of techniques that uses bill of material data, inventory data, and the Master
Production Schedule (MPS) to calculate requirements for materials. It makes
recommendations to release replenishment orders for material. Further, because
it is time phased, it makes recommendations to reschedule open orders when
due dates and need dates are not in phase. Time-phased MRP begins with the
items listed on the MPS and determines (1) the quantity of all components and
materials required to fabricate those items and (2) the date that the components
and material are required. Time-phased MRP is accomplished by exploding the
bill of material, adjusting for inventory quantities on hand or on order, and off-
setting the net requirements by the appropriate lead times.
Simply put, MRP tells us how much of each item to order (purchase order)
and produce (work order) to meet our delivery dates. MRP also alerts the
planner when there is a problem needing attention.
How MRP Works
The MRP calculation begins with demand for finished parts, and time phases
these requirements into periods—usually days or weeks—by the due date of
each order. These are called the gross requirements for the parent items. MRP
then nets out (deducts from the gross requirement) finished parts in stock or
already scheduled for production within the appropriate time periods. The
resulting net requirements for finished parts in each time period are then
exploded down to the first level of components on the BOM, and MRP
then calculates time-phased requirements for each component at that level. It
then nets out components already in stock, on open purchase or production
orders, resulting in component net requirements at that level of the BOM for
each period. MRP continues down the BOM for all subsequent levels, per-
forming the same gross to net calculation at each level.
When it reaches the bottom level of the BOM for this part, the MRP cal-
culation proceeds to the next parent item and repeats the entire process. When
MRP is done with all the parts at all BOM levels, it totals all net requirements
for purchase and production and then time phases each part requirement
based on the standard purchase or production lead time value stored in each
item file. This means that if a particular part has a standard 10-day lead time,
the purchase or production order is issued 10 days ahead of when it is needed.
MRP then suggests the appropriate actions to the planner, who may turn these
suggestions into actual purchase orders that are sent to suppliers with expected
receipt dates and production work orders that are released to the shop floor
at the appropriate time to meet order delivery dates.
The APICS Dictionary describes several types of orders used by the MRP
engine:
• Open Orders—A released production or purchase order. Using the stan-

dard lead time, MRP calculates a scheduled receipt date.

• Planned Orders—A suggested order quantity, release date, and due date

created by the planning system’s logic when it encounters net require-

ments. MRP suggests a planned order release date and a planned order
receipt date based on the standard lead time of each item.
• Firm Planned Orders—A planned order that can be frozen in quantity

and time. The computer is not allowed to change it automatically; this is

the responsibility of the planner in charge of the item that is being
planned.6
What Is Material Requirements Planning?
Material requirements planning (MRP) is a planning and control system for inventory,
production, and scheduling. MRP converts the master schedule of production into a
detailed schedule, so that you can purchase raw materials and components. Used
mostly in the manufacturing and fabrication industries, this system is a push type of
inventory control, meaning that organizations use forecasting to determine the customer
demand for products. The manufacturing or fabrication company will forecast the
amount and type of products they will purchase, along with the quantity of materials to
produce them. They then push the products to the consumers. This contrasts with a pull
system, where the customer first places an order. The main disadvantage of a push
system is its vulnerability when sales vary. In this scenario, the forecasts become
inaccurate, which for manufacturing, cause either a shortage of inventory or an excess
of inventory that requires storage. 

Inventory is divided into two categories, independent and dependent demand.

Independent demand is a desire for finished products, such as cell phones or
automobiles, whereas dependent demand is the demand for components, parts, or
incomplete assemblies (sometimes called sub-assemblies), such as phone screens or
tires for automobiles. You determine quantities for the dependent demand by
determining quantities for the independent demand. For example, if you forecast your
independent demand for the number of completely assembled cell phones that you
expect to sell, you can forecast the quantities of your dependent demand materials,
such as your screens, processors, batteries, and antennas. These part quantities
depend on the quantity of cell phones you want to produce. This relationship between
the materials and the finished product are shown on a bill of materials (BOM) and are
calculated with MRP. 

The three key questions that you must ask when planning for dependent demand are:

 What components do we need?

 How many of each component do we need?
 When do we need the components?

In determining how much material your product needs, MRP differs from consumption-
based planning (CBP). MRP logic uses information received either directly from
customers or from the sales forecast, calculating the material required based on the
dependencies of other materials. CBP calculates material requirements only via
historical consumption data. CBP does not consider the dependencies between
different materials, as it presumes that future consumption will follow the same pattern
that the historical data did. 

MRP synchronizes the flow of materials, components, and parts in a phased order
system, considering the production schedule. It also combines and tracks hundreds of
variables, including:
  Purchase orders
 Sales orders
 Shortage of materials
 Expedited orders
 Due dates
 Forecasts
 Marketplace demand
 Material
 Inventory
 Data
 Bill of material

For all companies, MRP has a few goals in common. These include making sure that
the inventory level is at a minimum, but high enough to provide for the customer need,
and that you plan all of the activities, including delivery, purchasing, and manufacturing. 

There are some terms that will come up in MRP repeatedly. Some are terms related to
MRP as a concept, and some are specific to MRP software. These terms are as follows:

 Item: In MRP, an item is the name or code number used for the event you’re
scheduling.
 Low-Level Code: This is the lowest level code of an item in the bill of materials
and indicates the sequence in which you run items through an MRP. You use
low-level code because an MRP system recognizes and connects the level that
an item appears in the product chain and uses it to plan the proper time to meet
all of the system demands.
 Lot Size: This is the quantity of units you order during manufacturing
 Lead Time (LT): This is the time you need to assemble or manufacture an item
from beginning to end. Two types of lead time are ordering lead time and
manufacturing lead time. Ordering lead time is the time it takes from  starting the
purchase  to receiving the purchase. Manufacturing lead time is the time it takes
for the company to completely manufacture a product from start to end.
 Past Due (PD): This is the time during which you consider orders behind
schedule.
 Gross Requirements (GR): You generate this MRP calculation  through
forecast scheduling using the number of produced units, the amount of required
material for each produced unit, the current stock, and the ordered stock /stock in
transit. This is the total demand for an item during a specific time period.
 Scheduled Receipts (SR): These are the open orders for products that the
company currently possesses but has not yet fulfilled.
 Projected on Hand (POH): This is the amount of inventory you’ve estimated to
be available after you meet the gross requirements. To calculate this sum, you
add the POH from the previous time period to the scheduled order receipts and
the planned order receipts and then subtract the gross requirements. (Current
POH = Previous POH + SR + POR – GR)
 Net Requirements (NR): You generate this MRP calculation through master
scheduling using gross requirements, on-hand inventory, and other quantities.
This is the actual, required quantity to be produced in a particular time period.
 Planned Order Receipts (POR): The quantity of orders during a time period that
is expected to be received. This planning for orders keeps the inventory from
going below the threshold necessary.
 Planned Order Releases (PORL): This is the amount you plan to order per time
period. This is POR offset by the lead time.
 Cumulative Lead Time: This is the greatest amount of time that it takes to
develop the product. You may calculate it by looking at each BOM and figuring
out which one takes the longest.
 Product Structure Tree: This is a visual depiction of the bill of materials,
showing how many of each part and how many sub-parts  you need to produce
the product.

 Net-Change Systems: These are systems which identify only the changes

between the new and old plan.
 Master Production Schedule (MPS): This is the schedule of finished products
that drives the MRP process. The quantities in MPS represent what you need to
produce to meet the forecast.
 Lumpiness: This is when product/material that is low or at zero suddenly spikes.
Examples of lumpy or uneven demand include the need for service parts. You
 only need service parts when an appliance breaks, so forecasting the need for
the parts may be difficult, as the demand is not continuous. 
 Time Fence: Time fences are boundaries between different MRP planning
periods. They offer the opportunity for programming changes, such as rules and
restrictions. 

What Is the Benefit of Material Requirements Planning?

You may use MRP concepts in a variety of different production environments. You may
also use them for service providers, such as job shops. Examples of production
environments include instances in which products are complex, products are only
assembled to order, or demand items are discrete and dependent. In these cases, MRP
can reduce the stored inventory, the component shortages, the overall manufacturing
cost, and, therefore, the cost to purchase. This more accurate scheduling improves your
company’s productivity by decreasing the necessary lead time, giving your customers a
higher quality of production and service. Overall, your company is more competitive in
the marketplace.

However, with these advantages come a few drawbacks. Foremost, MRP is only
successful if the accounting is accurate. You must keep records of inventory and BOM
changes up to date. Inaccurate input causes inaccurate output. Another potential
downside to MRP is that it can be costly. If you don’t keep the input in a timely fashion,
it can be difficult and expensive when switching over to a new system. 

Material Requirements Planning Steps and Processes

MRP works because it is a well-organized framework of processes and calculations. An
MRP system can completely transform a company’s operational procedures. Many
people within an organization contribute to the MRP process, including sales,
production, purchasing, receiving, stockroom, and shipping personnel. 

MRP consists of three basic steps: 

 Identifying the Quantity Requirements: Determine what quantity is on hand, in

an open purchase order, planned for manufacturing, already committed to
existing orders, and forecasted. These requirements are specific to each
company and each company location and change with the date.
 Running the MRP Calculations: Create suggestions for materials that you
consider critical, expedited, and delayed.
 Complete the Orders: Delineate the materials for the manufacturing orders,
purchase orders, and other reporting requirements. 
The calculations that MRP performs are based on the data inputs. As shown in the
diagram above, these data inputs include:

 Customer Orders: This refers to the specific information you receive from

customers and includes one-offs and regular ordering patterns.
 Forecast Demand: This is a prediction from the marketplace about how much
probable demand there will be for a product or service. It is based on historic
accounting and current trend analysis. 
 Master Production Schedule (MPS): Both forecast demand and customer
orders feed into the master production schedule. The MPS is a plan that a
company develops for production, staffing, or inventory. It is the production future
plan that includes the quantities you need to produce the products in a specified
time period. It also includes inventory costs, production costs, inventory
information, supply, lot size, lead time, and development capacity.
 Bill of Materials (BOM): Also called a product structure file, this includes the
details and quantities of the raw materials, assemblies, and components that
make up each end product.
 Inventory Records: These are the raw materials and the completed products
that you either have on hand or have already ordered. 

After MRP receives the input, it generates the output. There are four main outputs.
These include: 
  Purchase Orders (PO): This is the recommended purchasing schedule that
includes the order you give to suppliers to send the materials. The PO includes a
schedule with quantities and start and finish dates to meet the MPS.
 Material Plan: This details the raw materials, assembly items, and component
needs to make the end products with quantities and dates. We recommend that
you use attribute settings to set the time fences and to firm orders.
 Work Orders: This details the work that goes into producing the end product,
including which departments are responsible for what part, what materials are
necessary, and what the start and end dates are.
 Reports: MRP generates primary and secondary reports. The primary reports
include all three of the above — those that deal with production and inventory
planning and control. Secondary reports are those that detail things, such as
performance control, exception data (e.g., errors or late orders), deviations, and
predictors of future inventories and contracts.

The MRP technique can be vague at times because we call it a calculation process
without necessarily indicating how to compute the data outputs. MRP is about putting
mathematical controls into place using formulas that yield optimal results. MRP is an
optimal control problem that calculates the initial conditions, the dynamics, the
constraints, and the objective. The variables are the local inventory, the order size, the
local demand, the fixed order costs, the variable order costs, and the local inventory
holding costs. MRP comprises many methods and calculations. To find the order
quantities, you can use any number of methods. Three of the most popular are:

 Dynamic Lot-Sizing: In inventory theory, this model assumes that the demand
for product fluctuates over time. This complex algorithm generalizes the
economic order quantity model. It requires dynamic programming to perform, so
mathematicians also developed the following models.
 Silver-Meal Heuristic: This is an inventory control algorithm, also called least
period cost, that minimizes the total relevant cost per unit of time. In other words,
you use it to calculate the production quantities needed to meet the operational
requirements at the lowest cost possible. 
 Least-Unit-Cost (LUC) Heuristic: Although quite similar to Silver-Meal, LUC
chooses the period in the future based on average cost per unit rather than on
average cost per period.

What Is an ERP System?

Enterprise resource planning (ERP), called government resource planning (GRP) in the
public sector, has traditionally been a large in-house initiative that aims to streamline
both business processes and business information. When implemented properly, it is an
integrated system that provides data clarity, flexibility, and operational agility.

The foundation of an ERP solution is a shared database that acts as a central repository
of information. All relevant stakeholders access this same repository of data. Reports
are then culled from this singular, uniform system to provide transparency, efficiency,
and consistency.

Enterprise resource planning plays a key role in computer-integrated manufacturing

(CIM), which relies on automated systems, software, sensors and computer-controlled
machines to manufacture products. ERP has evolved from pure manufacturing systems
to integrate with accounting, human resources, purchasing, ordering, and cost
accounting.

The roots of ERP go back to 1913, when an engineer named Ford Whitman Harris saw
a need for greater efficiency and developed a production scheduling model called
economic order quantity (EOQ). This paper-driven precursor to process planning
remained the industry standard until 1964, when Joseph Orlicky developed materials
requirements planning (MRP), and toolmaker Black + Decker became the first company
to adopt an MRP solution that combined EOQ concepts with a mainframe computer.

Rapid software adoption in the 1980s led to integration capabilities that expanded
functionality to include scheduling, bill of materials (BOM), and purchasing functions tied
to corporate financial reporting. Encompassing considerably more manufacturing
processes, manufacturing and resource planning (MRP II) replaced MRP as the
standard for data management and efficiency planning. When the systems expanded
beyond manufacturing processes to include human resources and accounting, they
were recast as enterprise resource planning.

What is the Difference Between Enterprise Resource

Planning and Enterprise Resource Management?
Enterprise resource planning can be confused with other management systems such as
enterprise resource management (ERM), enterprise performance management (EPM),
and customer relationship management (CRM). Here are the benefits and features of
each.

 Enterprise Resource Planning: ERP tracks your resources, materials, and

transactions. It provides all the data about how your company operates in real
time. Use ERP systems to operate your business.
 Enterprise Resource Management: ERM lets you manage access for all your
software systems. Typically this includes the ability for staff to sign in to multiple
software systems with a single username and password, as well as let you
control who has access to software systems.
 Enterprise Performance Management: EPM software takes the ERP data and
helps you monitor and analyze your organization’s performance. Use EPM for
planning, forecasting, evaluating, and decision-making. It helps you strategically
manage your organization’s overall performance through modeling and analytics.
  Customer Relationship Management: Most ERP solutions include many CRM
tools to help you understand your customers better. For example, you can track
contacts and the purchase order history of your customers. CRMs, however,
typically provide deeper insights into the sales pipeline and funnel, whether it
relates to sales or to services for your customers. Many CRMs also help you
organize and track your marketing efforts and time spent on converting leads into

How Does ERP Work?

To accommodate the diverse needs of buyers, vendors offer on-premise, hosted, and
cloud-based solutions to meet organizational implementation goals. Most ERP systems
are based on a modular platform that vertically integrates elements — from the payroll
and staffing requirements of an HR department to procurement and warehousing
capacity, sales and marketing, contract lifecycle management (CLM), and
administration.

ERP modules are designed for many business processes, such as inventory control and
finance, and can be bundled together for your business. The benefit of an ERP solution
is that the modules have a consistent look and feel, so everyone from the back office to
the front office to the production floor has the same experience. These modules are
integrated to ensure you have a shared system of data and workflows, as well as
standardized business processes.

One of the numerous goals of an ERP system is to lower operational costs by

eliminating redundant systems and tasks, improving workflow, enhancing efficiency, and
encouraging cross-functional collaboration and communication. ERP systems also
furnish the reports that reveal opportunities for insight, growth, and planning. An ERP
system integrates modules into a consistent infrastructure and typically features the
following:

 Modules ranging from distribution and supply-chain management to human

resources and payroll to project management and finance
 Ability to capture transactional data, using radio frequency identification (RFID)
scanners, readers, and tills
 “Clean” data that avoids duplication and offers a standard source for all your
business decisions
 Data services that provide interfaces or functionality for your customers, vendors,
and staff
 Real-time data and dashboards for key metrics
 Specialized data and analytics that track trends and ROI on your marketing
efforts
 Advanced planning and scheduling (APS) systems
 A shared or common database with standardized data
 A consistent look and feel for all modules in the ERP system, reducing training
time, and improving staff performance
  A services knowledge base or vendor forum, offering community support among
all the customers using a particular ERP system

ERP began as a tool for manufacturing, but has been adopted by industries that provide
services as well as finished goods. A strong ERP system combines integration, real-
time operational support, and a centralized database. That centralized database will
possess modern conveniences such as dashboards, cross-functional operations
reporting, and instant views of the organization as an entire, integrated unit. However, a
centralized database poses one risk: It can open the company to the threat of losing
sensitive information in the event of a security breach.