Calculating Your MRP Correctly is Critical

Martin Pahulje - August 17, 2021

Supply chains are dependent on accurate supply and demand information to meet customer needs while maintaining a sustainable inventory. With incorrect data, supply chains will either fall short on supply or have an excess – either of which is expensive and does not maximize the value of your business. Today, supply chain planning has grown even more complex due to escalating material shortages. Missing and delayed parts are becoming a common disruption in production, yet companies are still struggling with high inventories. This indicates that something is going wrong, and many companies are looking for a solution. For this reason, many companies are utilizing MRP systems to ensure accuracy in order planning for supply and demand – but their MRP must be calculated correctly for it to be useful.

What is Material Requirements Planning?

Material requirements planning (MRP) is a system for planning and decision-making in the production process of supply chains. This system analyzes an organization's current inventory levels according to production capacity and the need to manufacture goods according to forecasts. Using MRP, supply chain planners schedule production as per bills of materials to meet demand while minimizing inventory. Using an MRP system within an enterprise resource planning (ERP) software, this inventory planning method is computerized and typically looks at requirements within a fixed period.

Essentially, an MRP system consists of three main features; a master production schedule, bill of materials (BOM), and inventory status file. The master production schedule is a statement of planning, which consists of orders, forecasts, and capacity. The BOM includes all materials and components required to make a final product. Finally, the inventory status file contains stock records that allow gross requirements to be adjusted to net requirements.

MRP systems are instrumental in decreasing factory inventory, allowing businesses to minimize inventory waste while still meeting customer demand – thus saving significantly. This system is particularly helpful in manufacturing more complex, industrial products that require many parts and materials. MRP systems achieve this by focusing on what materials are required for production and when they need to be sourced, which is highly beneficial during product customization. Additionally, MRP systems can schedule and track individual orders, whether for production or purchase, ensuring that all products and materials are accounted for.

Common Mistakes in Calculating MRP

An accurate MRP system is highly advantageous for a supply chain, but it can be detrimental if incorrect. As a growing number of supply chain shortages arise, it is more important than ever for organizations to have accurate information to plan their inventory. Unfortunately, many companies fail to match supply with demand, which may be due to an incorrect MRP calculation. To determine where errors may be occurring during MRP calculations, we will break down the process.

The first step of an MRP system is exploding, which is achieved by using the BOM to determine how many components are needed to prepare one manufacturing item. The second step is netting, where the net quantity of material is calculated by computing the difference between stock available and the overall gross requirement. Finally, the third step is offsetting. During this stage, lead time is estimated for the entire operation, which helps planners to compute the expected time for manufacturing. This step also advises planners when the manufacturing process should begin for products to be available on the promised date. So, where is the error in the process of MRP calculating?

The first error concerns lead times during the offsetting stage. As start times for production dates are calculated based on fixed lead times, they do not consider any variation in lead time. While the lead time for the same product is expected to be standard, disruptions are inevitable, and capacity utilization of resources may fluctuate, so a fixed lead time is not indefinitely feasible. If an individual product's lead time strays from the fixed lead time used in the calculation, this will result in an incorrect start time for production. As a result, products may not be manufactured by their promised time. Not only will this fail to satisfy customers, but it can also create a rippling effect of disruptions within your supply chain.

Another common error in MRP calculations is that production plans are calculated with infinite capacities. While this can work with simple production processes, such as a continuous process over an extended period of time, this is not often the case. The majority of manufacturers today have complex parallel production processes that merge and connect with one another, meaning that planning with infinite capacity is not feasible.

Due to these errors, ERP output is being used as the basis for MRP calculations using unrealistic or inaccurate start times. This results in an incorrect MRP, which can then throw off inventory planning entirely. If production begins too early or too late, it can deviate production for days, if not weeks. As a result, supply chains have an excess of unmoved inventory or fail to meet demand on time. Not only is this damaging in one instance, but it creates a cycle of incorrect inventory levels resulting in excessively high inventory while simultaneously missing crucial parts.

Many businesses fail to realize that by relying solely on MRP and ERPs, they are missing out on critical opportunities for enhancement. Fortunately, by adding optimization software to these systems, you can ensure a more accurate MRP calculation.

Best Practices in MRP Calculations

With these MRP calculating errors in mind, it’s time to make some changes. A basic ERP system does not have the capabilities necessary to calculate realistic production plans and order schedules. This system depends highly on fixed lead times and infinite capacity, so it is not feasible for most complex supply chains with multiple synchronous processes. Instead, supply chain managers must look at systems with more advanced functions.

High-performance optimization software can calculate precise production times for all production orders, which is critical for accurate MRP calculating. These production times can be accurate to the day, hour, and even minute, ensuring that production begins at the most optimal time. In addition to this, an APS and SCP system can provide optimal sequence planning for complex processes, planning for all resources, material availability and fluctuation data, and sequence optimization functions. With features such as these, you will have access to accurate and real-time scenarios, enabling you to make more informed decisions.

By combining optimization software with your MRP and ERP system, you can utilize master data consisting of work schedules, parts lists, customer and production orders, inventory levels, and purchasing plans which are imported from the ERP system into the planning system. There, the data is processed, and the optimized production planning result is exported back into the ERP system, providing you with correct information to make an accurate MRP calculation.

Without accurate data from the start, there is little chance of your MRP calculation helping you achieve an efficient production plan and balanced inventory. Fortunately, adding highly capable software to an MRP and ERP can enable you to collect and optimize data. This will allow you access to alerts to changes in inventory or lead time, providing you with accurate decision-making scenarios. With more precise scenario planning, you will have the right information to plan material requirements efficiently and precisely. As a result, you can minimize inventory while optimizing production, ensuring that you meet demand and satisfy customers.

If you want to learn more, download your guide to Transformation of Manufacturing Processes.

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