Any company that manufactures products knows that planning and preparation is half the battle. Having the required materials and equipment at every step helps eliminate delays and keep production running smoothly.
Material requirements planning (MRP) is a systematic way to determine the materials and components needed to manufacture a product. It removes the manual nature of traditional production planning by using software to facilitate efficient and cost-effective operations.
First adopted in the 1950s by large production companies, such as Black & Decker, General Electric, and Rolls Royce, MRP is now the industry standard for managing a company’s manufacturing activities.
What is material requirements planning?
Material requirements planning (MRP) is a system used to manage a company’s production, parts procurement, and manufacturing schedule. It utilizes planning software to answer three key production questions:
- What are the materials required?
- How many of each material is needed?
- By what date should the materials be ordered or obtained?
- What vendors are best for procuring materials?
By identifying and scheduling resources ahead of time, MRP ensures all inventory—whether raw materials, finished goods, or safety stock—is available at the time it’s needed and at the lowest possible cost.
MRP is part of a company’s overall supply chain strategy. With a reliable MRP process in place, businesses are given a clear look into their manufacturing inventory management and capacity to meet market demand.
MRP vs. Enterprise resource planning (ERP)
MRP systems focus on the materials and schedules needed to efficiently manufacture a company’s product. The system looks at factors like customer demand, inventory requirements, order lead times, production schedules, and anything related to the specific stage of the supply chain.
ERP systems, on the other hand, are applied to a wider range of business functions. While ERPs are actually based on the original MRP systems, and can also include materials planning, they give a more complete view of the company. By applying the same data collection and planning across different teams, an ERP system is used to integrate and manage the majority of a company’s day-to-day operations.
How does MRP work?
MRP uses a step-by-step process that can be adopted by most manufacturing companies. Before you begin planning your requirements, it’s best to have the following resources at hand:
- Master production schedule (MPS): This refers to the schedule or plan for a single product to be produced in a given time period, including the required processes, parts, labor, and resources required for production. The master schedule is typically based on historical sales orders and sales forecasts.
- Inventory status file (ISF): An inventory status file is a complete and updated record for every product or component in inventory, containing on-hand quantities, reorder points, safety stock levels, supplier lead times, replenishment schedules, and other relevant information on the inventory status.
- Bill of materials (BOM): A bill of materials, also called a product structure or associated list, contains all the information a manufacturer needs to produce a product. It lists all the raw materials, components, and any sub-assemblies or sub-components, as well as the quantities for each item. The materials are listed in a hierarchical format, with the top level showing the finished product and the lower levels including individual components.
4 key steps in the MRP system
Once all inventory information is collected, material requirements planning can be done by following the four major steps:
1.Determine demand and product materials
The MRP process starts by estimating customer demand for a particular product, and calculating the number of products that should be manufactured to meet the demand. This is largely informed by the company’s MPS, in addition to any other customer order data.
Based on the number of products, the BOM can then help determine the exact materials and quantities needed for the manufacturing cycle.
2.Allocate inventory
Armed with a list of final product materials, the next step is to compare your company’s on-hand inventory against what’s needed to meet the upcoming manufacturing schedule.
The ISF provides all the needed information and lets you see if any inventory is already being reordered or allocated to another product. In this step, all available materials in inventory are properly allocated and their status in the company’s inventory control system is updated.
3.Schedule production
Once all necessary materials have been allocated, the next step is to update your current master production schedule. A new list of products and materials usually requires changes to the equipment, labor, and capacity planning for each stage.
Identify what’s needed to accomplish production, and revise the schedule to run as efficiently as possible. Properly manage and track all Work In Progress (WIP) inventory, which is one of more than 200 built-in reports that comes right out of the box with QuickBooks Enterprise.
4.Monitor the process
Production is central to business operations, and any issues in the MRP can affect multiple teams and the entire supply chain. A materials resource planning system will send alerts for any delays that arise and offer contingency plans or alternative analyses to planners on how to best meet timelines.
Benefits of effective MRP
The main benefit of an effective MRP system is that products can be manufactured in an efficient, cost-effective manner. By planning for each production stage, MRP gives you a detailed understanding of each product manufactured by the company. It guarantees all the resources are available when needed, and that products can be assembled and delivered to customers faster.
In addition, MRP automates most of the manual steps in production planning.
How QuickBook Enterprise supports MRP efforts
QuickBooks Enterprise offers customizable inventory reports to see everything from inventory stock by item to inventory valuation summaries. This overview provides a quick way to see which products are in demand, which can be used to inform decision-making for upcoming production schedules. With real-time inventory tracking from raw materials to finished goods, your team will have complete visibility into total product costs.
This comprehensive inventory data is available all in one dashboard so that you can make better decisions faster. In addition, you can automatically set reorder points for inventory to minimize stock-outs or shortages and avoid rush shipping fees.
Plus, QuickBooks Enterprise enables you to streamline your manufacturing process with automated builds for all subassemblies and components required for a final assembly.
Final thoughts
Materials requirement planning is an integral system for many manufacturers, especially those dealing with several product categories and supply providers. By looking at the key factors in inventory materials and scheduling, MRP creates a clear plan for upcoming manufacturing cycles that meets demand.
MRP systems apply a focused approach and effective use of resources, enabling companies to maximize production and scale their manufacturing operations.
