Material resource planning is a structural tool that assists with cost-efficiency and productivity within companies that produce goods. Historically, MRP has been used within the manufacturing industry, but it has since expanded into a variety of business models. MRP can help a company make better-informed financial decisions when it comes to their inventory and production schedules.
If your company is considering utilizing this tool, it’s essential to understand a few key concepts before you make the leap. Learn what material resource planning is, how it works and what some of its primary benefits are to get started in your research.
MRP is a model of production that focuses on developing more effective scheduling of production-related costs, including smarter management of inventory and product output. MRP requires business leaders to closely examine production schedules and the forecasting of customer demand. This information can better inform the intervals when a company should order more supplies or inventory and produce new goods. The process is intended to help companies better understand and manage the costs associated with inventory and production. This ultimately helps them develop a more cost-efficient production structure.
A material resource plan breaks production costs down into a fixed and detailed schedule that splits the purchasing of materials or inventory into a specific timeframe. The timeframe is developed in relation to the “push” model of demand, relying on customer forecasts to develop an intelligent inventory schedule. MRP considers the probability of upcoming consumer habits to help a company decide how much of a product to produce and how much inventory to order, rather than relying solely on the historical trends of a product’s sales. This method incorporates business productivity instead of order-by-order production demand. That makes it ideal for industries that require a stable supply of product, such as restaurants, clothing retailers and grocery stores.
When Is Material Resource Planning Beneficial?
One of the primary purposes of MRP is to save companies money on production. This model targets ineffective inventory habits to eliminate overbuying and under-buying of products and materials. MRP works to cut down on product waste, overproduction or under-production of a product, and uninformed production patterns that can harm company profits. Ultimately, MRP’s goal is to help companies better manage their inventory costs, from the expenses of buying and storing unsold inventory to minimizing lost product value. MRP helps sharpen the profit margin of a company and creates a more predictable, stable pattern of supply purchasing that suits both the consumer and the company.
While MRP is useful, it requires consistent work and maintenance. To enjoy the benefits of MRP, you have to ensure your accounting is up to date and accurate. If not, MRP can go from being a useful structural tool to an endeavor that eats up time and money without producing results. You need to keep a consistent record of your inventory and your bill of materials (BOM), which tracks the number or amount of raw materials that goes into each of your products. Your company and consumer data must be current and error-free before you begin utilizing the steps of MRP.
What Are the Steps of Material Resource Planning?
MRP has three steps, as follows.
Determine Your Quantity Goal
The first step of MRP is to identify the inventory you need to order. This should take into account the amount of stock you already have, as well as any complete or committed orders and forecasted future orders. Each company will have inventory needs unique to its products, but all businesses can get forecasting values from internal company data points, including customer spending habits and other information consumers provide.
Data inputs that contribute to these calculations include:
- Customer orders (one-time and ongoing)
- Forecasted demand (assisted by forecasting software, historical patterns and current product trends)
- Bill of Materials
- Inventory records (materials on order or on-site)
- Master Production Schedule (a production plan that utilizes current demand and customer orders to develop a financial plan and schedule for staffing, inventory and production)
Identify MRP Calculations
At this stage, it’s time to consider MRP outputs, including:
- Purchase orders: A specific schedule of buying/ordering inventory from suppliers, based on the data collected during the initial steps of the MRP
- Material plan: The raw materials/components required to produce the goods, including the scheduling/quantity of these materials — materials may be organized into categories like “critical,” “expedited” and “delayed”
- Work orders: Production details of a product, including affiliated departments, the timeline for production and the required materials
- Primary and secondary reports: Primary reports include the three prior bullet points; secondary reports focus on the details of performance, data (including stable data and data exceptions/deviations) and forecasted information about inventory
Order Your Inventory
Once you’ve evaluated the calculations of the prior two steps, you should have the confidence and tools to be able to place inventory orders. This step will help with immediate orders and with the scheduling of future orders.
How Is Material Resource Planning Used in Everyday Industries?
As a forecast-based production model, MRP is most beneficial in companies that require a consistent output of products rather than an order-by-order demand structure. For example, a burger restaurant would suffer if it underproduced patties and couldn’t serve all of its customers, yet it would also lose profits if it overproduced patties and had to discard burgers at the end of the day. MRP could come in handy in helping the shop identify how much hamburger meat to have in stock, keeping managers from under- or over-ordering materials.
This is also helpful in the case of retail stores, such as Forever 21 or Dillard’s. Both stores sell large numbers of single products, such as one style of shirt or pants, to large pools of consumers. Over-ordering clothing means ending up with extra inventory that’s hard to sell (and that takes up space in an expensive warehouse), while under-ordering can leave customers frustrated and abandoning their purchase efforts. MRP can help retail stores predict customer shopping habits so they have enough inventory in stock to service their customer pools without losing profits via unsold markdowns.