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Material requirements planning (MRP) is a production planning and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, while it is possible to conduct MRP by hand as well.
An MRP system is intended to simultaneously meet three objectives:
Prior to MRP, and before computers dominated industry, Reorder_point/reorder-quantity (ROP/ROQ) type methods like EOQ (Economic Order Quantity) had been used in manufacturing and inventory management. In 1964, as a response to the TOYOTA Manufacturing Program, Joseph Orlicky developed Material Requirements Planning (MRP). The first company to use MRP was Black & Decker in 1964, with Dick Alban as project leader. In 1983 Oliver Wight developed MRP into manufacturing resource planning (MRP II). Orlicky's book Material Requirements Planning has the subtitle The New Way of Life in Production and Inventory Management (1975). By 1975, MRP was implemented in 700 companies. This number had grown to about 8,000 by 1981. In the 1980s, Joe Orlicky's MRP evolved into Oliver Wight's manufacturing resource planning (MRP II) which brings master scheduling, rough-cut capacity planning, capacity requirements planning, S&OP in 1983 and other concepts to classical MRP. By 1989, about one third of the software industry was MRP II software sold to American industry ($1.2 billion worth of software).
Independent demand is demand originating outside the plant or production system, while dependent demand is demand for components. The bill of materials (BOM) specifies the relationship between the end product (independent demand) and the components (dependent demand). MRP take as input the information contained in the BOM.
The basic functions of an MRP system include: inventory control, bill of material processing, and elementary scheduling. MRP helps organizations to maintain low inventory levels. It is used to plan manufacturing, purchasing and delivering activities.
"Manufacturing organizations, whatever their products, face the same daily practical problem - that customers want products to be available in a shorter time than it takes to make them. This means that some level of planning is required."
Companies need to control the types and quantities of materials they purchase, plan which products are to be produced and in what quantities and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Making a bad decision in any of these areas will make the company lose money. A few examples are given below:
MRP is a tool to deal with these problems. It provides answers for several questions:
MRP can be applied both to items that are purchased from outside suppliers and to sub-assemblies, produced internally, that are components of more complex items.
The data that must be considered include:
There are two outputs and a variety of messages/reports:
Messages and Reports:
First problem with MRP systems - the integrity of the data. If there are any errors in the inventory data, the bill of materials (commonly referred to as 'BOM') data, or the master production schedule, then the output data will also be incorrect ("GIGO": Garbage In, Garbage Out). Data integrity is also affected by inaccurate cycle count adjustments, mistakes in receiving input and shipping output, scrap not reported, waste, damage, box count errors, supplier container count errors, production reporting errors, and system issues. Many of these type of errors can be minimized by implementing pull systems and using bar code scanning. Most vendors in this type of system recommend at least 99% data integrity for the system to give useful results.
Second problem - systems is the requirement that the user specify how long it will take for a factory to make a product from its component parts (assuming they are all available). Additionally, the system design also assumes that this "lead time" in manufacturing will be the same each time the item is made, without regard to quantity being made, or other items being made simultaneously in the factory.
A manufacturer may have factories in different cities or even countries. It is not good for an MRP system to say that we do not need to order some material, because we have plenty thousands of miles away. The overall ERP system needs to be able to organize inventory and needs by individual factory, and inter-communicate the needs in order to enable each factory to redistribute components, so as to serve the overall enterprise.
This means that other systems in the enterprise need to work properly, both before implementing an MRP system and in the future. For example, systems like variety reduction and engineering, which makes sure that product comes out right first time (without defects), must be in place.
Production may be in progress for some part, whose design gets changed, with customer orders in the system for both the old design, and the new one, concurrently. The overall ERP system needs to have a system of coding parts such that the MRP will correctly calculate needs and tracking for both versions. Parts must be booked into and out of stores more regularly than the MRP calculations take place. Note, these other systems can well be manual systems, but must interface to the MRP. For example, a 'walk around' stock intake done just prior to the MRP calculations can be a practical solution for a small inventory (especially if it is an "open store").
The other major drawback of MRP is that takes no account of capacity in its calculations. This means it will give results that are impossible to implement due to manpower or machine or supplier capacity constraints. However this is largely dealt with by MRP II.
Generally, MRP II refers to a system with integrated financials. An MRP II system can include finite / infinite capacity planning. But, to be considered a true MRP II system must also include financials.
In the MRP II (or MRP2) concept, fluctuations in forecast data are taken into account by including simulation of the master production schedule, thus creating a long-term control. A more general feature of MRP2 is its extension to purchasing, to marketing and to finance (integration of all the functions of the company), ERP has been the next step.
Bill of material - The best practice is to physically verify the bill of material either at the production site or by un-assembling the product.
Cycle count - The best practice is to determine why a cycle count that increases or decreases inventory has occurred. Find the root cause and correct the problem from occurring again.
Scrap reporting - This can be the most difficult area to maintain with any integrity. Start with isolating the scrap by providing scrap bins at the production site and then record the scrap from the bins on a daily basis. One benefit of reviewing the scrap on site is that preventive action can be taken by the engineering group.
Receiving errors - Manual systems of recording what has been received are error prone. The best practice is to implement the system of receiving by ASN from the supplier. The supplier sends an ASN (Advanced Shipping Notification). When the components are received into the facility, the ASN is processed and then company labels are created for each line item. The labels are affixed to each container and then scanned into the MRP system. Extra labels reveal a shortage from the shipment and too few labels reveal an over shipment. Some companies pay for ASN by reducing the time in processing accounts payable.
Shipping Errors - The container labels are printed from the shipper. The labels are affixed to the containers in a staging area or when they are loaded on the transport.
Production reporting - The best practice is to use bar code scanning to enter production into inventory. A product that is rejected should be moved to an MRB (material review board) location. Containers that require sorting need to be received in reverse.
Replenishment - The best replenishment practice is replacement using bar code scanning, or via pull system. Depending upon the complexity of the product, planners can actually order materials using scanning with a min-max system.
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In 2011, the third edition of "Orlicky's Planning" introduced a new type of MRP called "Demand Driven MRP"(DDMRP). The new edition of the book was written, not by Orlicky himself (he died in 1986) but by Carol Ptak and Chad Smith at the invitation of McGraw Hill to update Orlicky's work.
Demand Driven MRP is a multi-echelon formal planning and execution technique with five distinct components:
These five components work together to greatly dampen, if not eliminate, the nervousness of traditional MRP systems and the bullwhip effect in complex and challenging environments. In utilizing these approaches, planners will no longer have to try to respond to every single message for every single part that is off by even one day. This approach provides real information about those parts that are truly at risk of negatively impacting the planned availability of inventory. DDMRP sorts the significant few items that require attention from the many parts that are being managed. Under the DDMRP approach, fewer planners can make better decisions more quickly. That means companies will be better able to leverage their working and human capital as well as the huge investments they have made in information technology.
DDMRP has been successfully applied to a variety of environments including CTO (Configure to Order), MTS (Make to Stock), MTO (Make to Order) and ETO (Engineer to Order). The methodology is applied differently in each environments but the five step process remains the same. DDMRP is a significant innovation in material planning and synchronization that leverages knowledge from Theory of Constraints (TOC), traditional MRP & DRP, Six Sigma and Lean with a breakthrough innovation.
The well-known methods to find the order quantities are as following :