What is the name for a production system in which all the needed materials and parts arrive?

Material Requirements Planning (MRP) is a standard supply planning system to help businesses, primarily product-based manufacturers, understand inventory requirements while balancing supply and demand. Businesses use MRP systems, which are subsets of supply chain management systems, to efficiently manage inventory, schedule production and deliver the right product—on time and at optimal cost.

Video: What Is MRP?

How MRP Works

A Material Requirements Planning (MRP) system accelerates the manufacturing production process by determining what raw materials, components and subassemblies are needed, and when to assemble the finished goods, based on demand and bill of materials (BOM). It does this by asking three main questions:

• What is needed?
• How much is needed?
• When is it needed by?

The answers to these questions provide clarity into what materials are needed, how many and when to fulfill the required demand and help facilitate an efficient and effective production schedule.

Why Is MRP important?

MRP gives businesses visibility into the inventory requirements needed to meet demand, helping your business optimize inventory levels and production schedules. Without this insight, companies have limited visibility and responsiveness, which can lead to:

• Ordering too much inventory, which increases carrying costs and ties up more cash in inventory overhead that could be used elsewhere.
• Inability to meet demand because of insufficient raw materials, resulting in lost sales, canceled contracts and out-of-stocks.
• Disruptions in the production cycle, delaying sub-assembly builds that result in increased production costs and decreased output.

Manufacturing companies rely heavily on MRP as the supply planning system to plan and control inventory, scheduling and production, but MRP is also relevant in many other industries, from retail to restaurants, to create balance between supply and demand.

MRP Steps and Processes

The MRP process can be broken down into four major steps:

1. The first step of the MRP process is identifying customer demand and the requirements needed to meet it, which starts with inputting customer orders and sales forecasts.

   Using the bill of materials required for production, MRP then disassembles demand into the individual components and raw materials needed to complete the build while accounting for any required sub-assemblies.

2. Utilizing the MRP to check demand against inventory and allocating resources accordingly, you can see both what items you have in stock and where they are—this is especially important if you have inventory across several locations. This also lets you see the status of items, which gives visibility into items that are already allocated to another build, as well as items not yet physically in the warehouse that are in transit, or on order. The MRP then moves inventory into the proper locations and prompts reorder recommendations.

3. Using the master production schedule, the system determines how much time and labor are required to complete each step of each build and when they need to happen so that the production can occur without delay.

   The production schedule also identifies what machinery and workstations are needed for each step and generates the appropriate work orders, purchase orders and transfer orders. If the build requires subassemblies, the system takes into account how much time each subassembly takes and schedules them accordingly.

4. Finally, because the MRP links raw materials to work orders and customer orders, it can automatically alert your team when items are delayed and make recommendations for existing orders: automatically moving production in or out, performing what-if analyses, and generating exception plans to complete the required builds.

MRP Inputs

How well your MRP system works depends on the quality of the data you provide it. For an MRP system to work efficiently, each input must be accurate and updated. Here are some of the inputs an MRP depends on:

• Including sales forecasts and customer orders. When working with predicted demand, a system that is integrated with an enterprise-wide ERP system allows forecasting using historical sales vs. just sales forecasts.

• Keeping a single updated version of the bill of materials is essential for accurate supply forecasting and planning. A system that’s integrated into the enterprise-wide inventory management system avoids version control issues and building against outdated bills, which results in reworks and increased waste.

• It’s essential to have a real-time view of inventory across the organization to understand what items you have on hand and which are en route or have purchase orders issued, where that inventory is and what the inventory’s status is.

• The master production schedule takes all build requirements and plans machinery usage, labor and workstations to account for all outstanding work orders to be completed.

MRP Outputs

Using the provided inputs, the MRP calculates what materials are needed, how much is needed to complete the build and when in the build process they are needed.

With this information defined, businesses can execute on just-in-time (JIT) production, scheduling production based on material availability. This minimizes inventory levels and carrying costs, as inventory is not stored in the warehouse for future production but arrives as needed. By scheduling materials to arrive and production to begin soon after, businesses can move materials through the workflow process without delay.

The MRP lays out the plan of when materials should arrive, based on when they’re needed in the production process, and when subassemblies should be scheduled. Using a master production plan and taking into account subassembly build times minimizes materials sitting on shelves and bottlenecks in the build process.

Benefits of MRP

MRP systems allow you to plan and schedule production efficiently, making sure materials move through the work order quickly and helping businesses fulfill customer orders on time.

An MRP system that is integrated across an organization eliminates manual processes, such as pulling historical sales and existing inventory. You spend less time building Gantt charts and production flows to understand when and where you need product available, which frees up time and removes a layer of complexity.

When builds are complex and require multiple sub-assemblies within the work order, it’s easy to miscalculate timing. An MRP helps you understand all of the components that go into each sub-assembly and how long it takes to complete each step, preventing delays in the production cycle and increasing production yield.

MRP Challenges

Although using an MRP solution is a far better than using spreadsheets for supply planning, it’s only as good as the data you put into it. The better a business understands and documents its processes, the better an MRP system can serve them.

You need to make sure you input correct inventory availability, time to complete a subassembly, waste calculations and lead-times from vendors. Otherwise, your production schedule will be inaccurate—an MRP can’t define the production build timeline and materials required if the data isn’t accounted for in the inventory record, bill of materials and master production schedule

MRP vs. ERP

MRP systems focus specifically on planning and controlling how goods are assembled using multiple raw materials or components by controlling inventory, componentry and the manufacturing process.

Enterprise resource planning (ERP) systems are an offshoot of MRP systems, spurred by businesses finding a need for the same level of planning and oversight for other operations such as payroll, finances and supplier management. ERP systems plan for resources across the entire organization, including: financial management, order management, customer relationship management, people, procurement, warehousing and fulfillment.

All this production doesn’t happen by magic. Much of an operation manager’s time is spent planning the production process. Think about hosting a large party for your parents’ anniversary. The first thing you have to do is find a location that is large enough to accommodate all the people you will be inviting. Once you have identified the location, you then need to visit the site and decide how it will be laid out. Where should the tables and chairs go, where will you set up refreshments, and what about a gift table? Once you’ve decided on the layout, then you need to start making a list of the materials you’ll need for the party. This includes everything from plates, cups, and napkins to hiring a DJ and a caterer. Lastly, based on the number of guests, you’ll need to calculate how much of everything—food, drinks, etc.—to order.

Operations managers engage in similar planning, but they use different terminology to describe the different parts of the plan. In production planning, the components are facility location, facility layout, materials-requirement planning (MRP), and inventory control.

Facility Location

Of all the pieces of the planning puzzle, facility location is the most strategic and critical. Once you build a new manufacturing facility, you have made a substantial investment of time, resources, and capital that can’t be changed for a long time. Selecting the wrong location can be disastrous. Some of the key factors that influence facility location are the following:

• Proximity to customers, suppliers, and skilled labor
• Environmental regulations
• Financial incentives offered by state and local development authorities
• Quality-of-life considerations
• Potential for future expansion

The next step, after planning the production process, is deciding on plant layout—how equipment, machinery, and people will be arranged to make the production process as efficient as possible.

Facility Layout

The primary aim of facility layout is to design a workflow that maximizes worker and production efficiency. Facility layout is complex because it must take into account the available space, the work processes, the delivery of components and parts, the final product, worker safety, and operational efficiency. A poorly laid-out production facility creates inefficiencies, increases costs, and leads to employee frustration and confusion.

The four most common types of facility layout are process, product, cellular, and fixed position.

Process Layout

A process layout aims to improve efficiency by arranging equipment according to its function. Ideally, the production line should be designed to eliminate waste in material flows, inventory handling, and management. In process layout, the work stations and machinery are not arranged according to the production sequence. Instead, there is an assembly of similar operations or similar machinery in each department (for example, a drill department, a paint department, etc.)

Product Layout

In a product layout, high-volume goods are produced efficiently by people, equipment, or departments arranged in an assembly line—that is, a series of workstations at which already-made parts are assembled.

In the following video, Jansen, a Swiss steel maker, describes how the company’s offices were designed to maximize the productivity and creativity of its engineers:

Cellular Layout

A cellular layout is a lean method of producing similar products using cells, or groups of team members, workstations, or equipment, to facilitate operations by eliminating set-up and unnecessary costs between operations. Cells might be designed for a specific process, part, or a complete product. The goal of cellular manufacturing is to move as quickly as possible and make a wide variety of similar products with as little waste as possible. This type of layout is well suited for single-piece and one-touch production methods. Because of increased speed and minimal handling of materials, cells can result in great cost and time savings and reduced inventory.

Fixed Position

It is easy to move marshmallow candies around the factory while you are making them, but what about airplanes or ships? For the production of large items, manufacturers use fixed-position layout in which the product stays in one place and the workers (and equipment) go to the product. To see an excellent example of fixed-position layout, watch the following video that shows how Boeing builds an airplane.

After the facility location has been selected and the best layout has been determined, the next stage in production planning is to determine our material requirements.

Material-Requirements Planning (MRP)

Material-requirements planning (MRP) is a production planning, scheduling, and inventory control system used to manage manufacturing processes. Most MRP systems are software-based, but it is possible to do MRP by hand, as well.

An MRP system is intended to meet the following objectives simultaneously:

• Ensure that materials are available for production and products are available for delivery to customers
• Maintain the lowest possible material and product levels in store
• Plan manufacturing activities, delivery schedules, and purchasing activities

Some manufacturing firms have moved beyond MRP systems and are now using enterprise resource planning (ERP) systems. ERP systems provides an integrated and continuously updated view of core business processes using shared databases maintained by a database management system. ERP systems track business resources—cash, raw materials, production capacity—and the status of business commitments—orders, purchase orders, and payroll. The applications that make up the system share data from and between various departments (e.g., manufacturing, purchasing, sales, accounting, etc.). ERP facilitates information flow between all business functions and manages connections to outside stakeholders.

Even with the implementation of highly integrated planning software, operations managers still need to plan for and control inventory.

Just-in-Time (JIT) Manufacturing

Just-in-time (JIT) manufacturing is strategy that companies employ to increase efficiency and decrease waste by receiving goods only when they are needed in the production process, thereby reducing inventory costs. In theory, a JIT system would have parts and materials arriving on the warehouse dock at the exact moment they are needed in the production process. To make this happen, manufacturers and suppliers must work together closely to prevent just-in-time from becoming just-isn’t-there. Operations managers must accurately forecast the need for materials, since even the slightest deviation can result in a slowdown of production.