5.2 Material Requirements Planning (MRP)

Material Requirements Planning: Purpose and Benefits

Material Requirements Planning (MRP) is a system that answers three fundamental questions for manufacturers: What materials do we need? How many do we need? When do we need them? It works by combining information about product structures, current inventory, and production schedules to generate a time-phased plan for ordering and producing every component.

MRP matters because modern products can have hundreds or thousands of components, each with different lead times and suppliers. Trying to coordinate all of that manually leads to either excess inventory (wasting money) or stockouts (halting production). MRP automates that coordination.

Core Concepts and Functionality

• MRP manages manufacturing by linking production planning, scheduling, and inventory control into one system
• The system ensures materials and components are available when production needs them, and that finished products are ready for customer delivery
• By calculating exactly what's needed and when, MRP reduces inventory levels without risking shortages, which frees up working capital
• For products with multi-level structures (a finished product made of subassemblies, which are made of individual parts), MRP traces requirements down through every level automatically

Operational Improvements

• Customer service improves because production stays on schedule, leading to more reliable delivery dates
• Inventory costs drop across all three categories: raw materials, work-in-progress (WIP), and finished goods
• Production efficiency increases when materials arrive aligned with the production schedule rather than too early (taking up space) or too late (causing delays)
• Cross-department coordination gets easier because purchasing, production, and sales all work from the same data
• Fewer stockouts and production delays result from more accurate forecasting of material requirements

Enhanced Decision Making and Planning

• MRP supports data-driven decisions by replacing guesswork with calculated material and timing requirements
• When demand shifts or a supplier is late, the system can recalculate and suggest adjustments to the production plan
• Capacity planning improves because MRP provides visibility into future material and resource needs before they become urgent
• Supplier relationships benefit from more accurate and timely order placements, since you can share forecasted needs in advance

Constructing and Interpreting MRP Tables

An MRP table is a grid that tracks one item's inventory status and ordering plan across multiple time periods (usually weeks). Each row captures a different piece of information, and reading across the columns shows how that information changes over time.

Structure and Components of MRP Tables

Every MRP table starts with header information for the item: its description, lead time (how long it takes to receive or produce), lot size (minimum or fixed order quantity), and safety stock (buffer inventory you always want on hand).

The rows of the table, from top to bottom:

1. Gross Requirements — total demand for the item in each period, combining both independent demand (customer orders) and dependent demand (demand generated by parent items)
2. Scheduled Receipts — orders that have already been placed and are expected to arrive in a specific period
3. Projected On-Hand Inventory — the expected inventory at the end of each period, calculated by taking the previous period's on-hand, adding scheduled receipts and planned order receipts, then subtracting gross requirements
4. Net Requirements — the shortfall after accounting for on-hand inventory and scheduled receipts; if projected on-hand covers demand, net requirements are zero
5. Planned Order Receipts — the quantity planned to arrive in a period to cover net requirements (adjusted for lot sizing rules)
6. Planned Order Releases — the same quantity as planned order receipts, but shifted earlier by the lead time to show when the order must be placed

Reading and Analyzing MRP Tables

• MRP data is sometimes displayed as Gantt charts to visually show the production schedule and material flow over time
• The time-phased layout makes it straightforward to spot potential shortages (where projected on-hand drops below safety stock) or excess inventory (where on-hand builds up unnecessarily)
• Look at the planned order releases row first when making purchasing or production decisions; that row tells you what action to take now

Using MRP Data for Decisions

• Watch projected on-hand inventory for periods where it approaches zero or dips below safety stock
• Review planned order releases to coordinate purchasing and shop floor scheduling
• Net requirements reveal true material needs after existing inventory and incoming orders are accounted for
• Use the time-phased view to prepare for demand spikes or periods where supply might be tight

Calculating MRP Requirements and Releases

Net Requirements Calculation

The core formula:

$\text{Net Requirements} = \text{Gross Requirements} - \text{Projected On-Hand Inventory} - \text{Scheduled Receipts}$

If the result is zero or negative, you don't need to order anything that period. If it's positive, you have a shortfall to cover.

Steps for calculating across the table:

1. Start with the on-hand inventory from the previous period
2. Add any scheduled receipts arriving this period
3. Subtract this period's gross requirements
4. If the result falls below your safety stock level, the difference becomes your net requirement
5. Apply your lot sizing rule to determine the actual order quantity:
   • Lot-for-lot (L4L): order exactly the net requirement
   • Fixed order quantity (FOQ): order a predetermined amount (e.g., always order 100 units, even if you only need 60)
   • Period order quantity (POQ): combine net requirements for a set number of future periods into one order

Planned Order Receipts and Releases

Once you know the order quantity from the lot sizing step:

1. Place the quantity in the Planned Order Receipts row in the period when you need it
2. Offset that quantity backward by the item's lead time and place it in the Planned Order Releases row
3. For example, if you need 200 units in Week 6 and lead time is 2 weeks, the planned order release goes in Week 4

This offset is what makes MRP "time-phased." You're not just figuring out how much to order; you're figuring out when to place the order so it arrives on time.

Additional Calculation Factors

• Pegging traces a component's demand back to the specific parent item or customer order that created it, which helps when you need to prioritize
• Scrap and yield rates should be factored in. If a process has a 5% scrap rate, you need to order more than the net requirement to end up with enough good units
• Capacity constraints matter because MRP calculates material needs without checking whether you have enough machine time or labor; you may need to adjust planned releases to avoid overloading resources
• Rolling horizon planning means you continually update MRP calculations as new information comes in (updated forecasts, actual orders, supplier changes), rather than running the plan once and sticking to it

Inputs and Outputs of MRP Systems

Critical Inputs

MRP requires three primary inputs to function. Without accurate data in all three, the system's outputs will be unreliable.

1. Master Production Schedule (MPS) — the production plan for finished goods, specifying what to produce, how many, and when. This is the starting point that drives all MRP calculations.
2. Bill of Materials (BOM) — a hierarchical list showing every component and subassembly needed to build one unit of a finished product. The BOM defines parent-child relationships between items and specifies quantities per assembly.
3. Inventory Records — current on-hand quantities and any scheduled receipts for every item in the BOM. These must be kept accurate (often through cycle counting) or MRP will order too much or too little.

Supporting data includes:

• Item master data with lead times, lot sizes, and safety stock levels for each component
• Demand forecasts and customer orders that feed into the MPS and help determine gross requirements

Key Outputs

• Planned order releases — the primary action output, telling planners when and how much to order for each item
• Exception reports — flags for problems that need human attention, such as late orders, orders that can't be completed on time, or capacity conflicts
• Detailed material and production schedules — period-by-period plans that guide day-to-day operations on the shop floor and in purchasing
• Performance reports — metrics like inventory turnover and on-time delivery rates that help management evaluate how well the system is working
• Supplier schedules — forward-looking communication to vendors about upcoming material needs, which supports better supply chain coordination

Using MRP Outputs for Improvement

• Review exception reports regularly to catch recurring problems (a supplier that's consistently late, a component with frequent shortages) and address root causes
• Track KPIs from performance reports, such as inventory turnover ratio and fill rate, to measure whether MRP is delivering real improvements
• Use detailed schedules to balance workloads across resources and smooth out production flow
• Share supplier schedules proactively; vendors who can see your future needs are better positioned to meet them and may offer better terms