MRP

What it means

MRP, material requirements planning, is a method of planning material needs. From the production plan, bills of materials that say which parts a product consists of, and stock levels, it calculates which materials and components must be ordered or made, in what quantity and when, so that production can run to plan.

The calculation works down from the finished product: if the company must make 100 tables with four legs each, it needs 400 legs; stock and orders in transit are deducted and, allowing for the lead time, an order date results. Modern systems add planning of machine and labour capacity.

MRP is now part of most ERP systems. Its extended version, MRP II, also covers finance and planning of the whole production. The quality of the result depends entirely on accurate inputs: master data, bills of materials, lead times and stock levels.

How it works in practice

For manufacturers MRP replaces ordering “by feel” and reduces both material shortages and unnecessary stock. When introducing it, we recommend first cleaning up bills of materials and stock records, because a system with bad data will simply repeat the errors faster.

Part of the setup is safety stock, order sizes and rounding rules, such as a supplier’s minimum pack or the economic order quantity. With stable production, MRP can also support a just in time approach.

From an accounting and finance perspective, MRP is a valuable data source for cash flow planning: it shows when and how much the company will buy. Linking it with stock records and the books also simplifies valuing inventory and work in progress.

What to watch out for

The most common mistake is outdated stock or bills of materials. If stock in the system does not match reality, MRP will suggest ordering what is already on the shelf or fail to order what is missing. Regular counts and discipline in recording movements are therefore essential.

The second mistake is blindly following the system’s suggestions. MRP calculates from the data it has and knows nothing of a planned product change, a supplier outage or a competitor’s promotion. A planner should review and adjust the suggestions rather than confirming them automatically.