It is tough. Material Requirements Planning (MRP) is one of the most challenging areas. In today’s article, we will cover the basics including the following:
- What MRP is
- MRP Inputs and Outputs
- Practical Example with chocolate candy
MRP Essentials
MRP is the secret recipe that helps manufacturers plan materials, production, and inventory with precision.
To make this concept easy to digest and because I’m a chocolate lover, let’s explore MRP through the delicious world of chocolate production—from heart-shaped chocolate candies to hot chocolate preparation.
In essence, MRP allows manufacturers to have the right materials, in the right quantities, at the right time to meet production needs.
It helps answer three critical questions:
- What materials are needed?
- How much is needed?
- When is it needed?
Think of a chocolate factory.
MRP ensures you don’t run out of cocoa during Valentine’s Day or overproduce chocolate bars that might go stale.
The Inputs of MRP
Some time ago, I posted an infographic on LinkedIn showing the inputs and outputs of MRP with an example about orange juice. It is the image on this blog post.
I also created a short video about inputs and outputs of MRP using hot chocolate as an example. You can watch the one-minute video here.
This time, I will use our chocolate candy for the explanations.
Here are the key ingredients or inputs:
1. Open Purchase Orders (POs)
These are orders placed but not yet delivered.
For instance, if you’ve ordered cocoa beans from Ghana and sugar from Brazil, MRP tracks these to plan production accurately.
Example:
You have 2,000 lbs of cocoa beans arriving next week and 1,000 lbs of sugar expected in three days. MRP uses this data to schedule chocolate production accordingly.
2. Master Production Schedule (MPS)
MPS outlines what needs to be produced and when.
Example:
Your schedule might say: “Produce 5,000 chocolate bars and 2,000 hot chocolate mix packets by February 1st.”
3. Bill of Materials (BOM)
The BOM is like a recipe.
It lists all the raw materials and components required to produce a product.
Example: To make a batch of 1,000 hot chocolate mix packets, you need:
- 1,000 lbs cocoa powder
- 600 lbs sugar
- 400 lbs milk powder
4. On-Hand Inventory
This tracks the current stock levels.
Example:
You check and see you have 600 lbs of cocoa powder but need 1,000 lbs. MRP triggers a reorder if needed, considering lead time.
5. Lead Time
Lead time is how long it takes from placing an order until receiving it.
Example:
Cocoa beans take 21 days to arrive. MRP ensures you order by November 1st if you need them by February 1st.
6. Safety Stock
This is extra inventory to manage uncertainties like delays or increased demand. In supply chain, we are used to deal with variability.
Example:
You always keep an extra 200 lbs of sugar to avoid production delays.
7. Reorder Point
This is the inventory level at which a new order is triggered.
Example:
If sugar consumption is 50 kg per day, with a 7-day lead time, and you maintain 100 kg of safety stock, MRP sets the reorder point at:
(50 × 7) + 100 = 450 kg
When sugar inventory hits 450 kg, MRP triggers a reorder.
The Outputs of MRP
Once MRP blends these inputs, like a mixer churning hot chocolate, it provides actionable outputs:
1. Projected Ending Inventory
This estimates the inventory at the end of a period.
Example:
If you start with 2,000 lbs of cocoa powder, plan to use 1,500 lbs, and expect a delivery of 1,000 lbs, the projected ending inventory is:
2,000 – 1,500 + 1,000 = 1,500 lbs
2. ETA (Estimated Time of Arrival)
MRP provides arrival dates for materials.
Example:
MRP shows that cocoa beans ordered on November 1st will arrive by January 22nd, ensuring production readiness.
3. Runout Dates
These dates predict when inventory will be depleted if usage continues as expected.
Example:
If cocoa powder is consumed at 200 lbs per day and you have 1,000 lbs left, the runout date is in five days.
4. Material Shortages
MRP alerts you about potential shortages.
Example:
It signals a milk powder shortage when a planned production run requires 600 lbs, but only 500 lbs is available.
5. Excess Inventory
MRP helps identify excess stock.
Example:
If demand for dark chocolate bars dropped after Valentine’s Day, MRP highlights 2,000 unsold bars.
6. Production Orders
These orders provide instructions to produce specific products.
Example:
MRP generates a work order: “Produce 3,000 milk chocolate bars with nuts by January 15th.”
It is critical to get the inputs right for the right outcomes. MRP is not easy. There are many complexities behind it. However, an effective MRP can provide the business with a competitive edge.
