How Does Material Requirement

Planning Work?
Material requirements planning software forms an essential part
of inventory management. As long as raw materials are available,
these could help develop finished goods. If they are more than
required, other producers in the same niche or industry can use
them.
Ideally, the demand and supply chain remains in sync when there
are sufficient stocks. However, when there is an excess of final
products produced and made available, it gets wasted. On the other
hand, if stocks are short on supplies, customers are likely to switch
to other brands. Loss of customers can result in loss of business.
Therefore, it is crucial to have adequate stock or inventory to meet
demand and keep the supply chain running smoothly.
MRP helps the producer analyze various factors to prepare the
demand forecasts. It calculates the inventory, schedules the
production, and ensures that finished products reach the right place
at the right time and at the lowest possible cost. In other words, it
allows the company to understand the type, quantity, and delivery
of a given product to fulfill the consumer’s needs.

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Examining existing inventory levels and the manufacturing capacity

of a unit is critical to production. The first stage in the process is to
determine what to manufacture to develop the inventory. MRP then
examines the current market demand to determine the volume. The
next step is to figure out quantities of raw materials and
components required to produce finished goods. Finally, the unit
plans the production (based on the bill of materials), cost, and
delivery of products. Overall, it leads to efficient production and
inventory optimization while satisfying the demand.
 MRP Inputs, Objectives, And
Benefits
Inputs for
Objectives Benefits
Production

Keeping the material and Reduced inventory

Product type component levels as low as and overhead
feasible costs

Making raw materials

Quantity and Improved production
readily available for
delivery cycle
production

Scheduling manufacturing, Sufficient stocks to

Inventory status
distribution, and purchases meet the demand

Stock shelf life Reduced lead times

Customer
Bill of materials
satisfaction

Production plan

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Material Requirement Planning

Examples
Let us consider the following material requirements planning
examples to get an in-depth insight into the concept:
Example #1
Sharon, the proprietor of a clothing store, creates and sells a wide
range of clothes. In a short time, her shop became well-known
among the local ladies. However, when she began accepting online
orders, operating the store became more difficult. Despite her best
efforts, she could not deliver the products on time as she struggled
to keep track of the demands. As a result, she produced more
similar clothes based on the variety of demand resulting in excess
production and further losses.

Her friend Lisa, who was more into using technology to solve
business challenges, suggested using the material requirements
planning system. Sharon did so and prepared a bill of materials to
understand the type, quantity, and delivery time. The computerized
system did all computations and let her know how to maintain the
demand and supply chain.

Example #2
MRP enables firms to make well-informed decisions about inventory
management, production planning, and delivery of finished goods.
Using an outdated system, however, may cause manufacturing
issues during supply chain disruptions.

For instance, the COVID-19 epidemic halted the import of raw

materials and components, affecting the manufacture of products
worldwide. As a result, manufacturers have little choice but to
switch to advanced software or integrate modern functions to deal
with such incidents. One method is to optimize raw material
management and leverage diverse systems to cut costs while
developing responsive supply chains.

Pros and Cons

 Here are a few advantages and disadvantages of the material
requirements planning process:

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Pros
 Assesses the volume beforehand
 Balances the demand and supply chain
 Enhances the productivity
 Guarantees customer satisfaction
 Helps in product customization
 Maintains inventory levels
 Turns complex manufacturing processes into simple
 Minimizes overhead costs
 Delivers products on time
 Prevents wastage of inventories and stocks
 Provides a time estimate for production and distribution
 Reduces lead times

Cons
 Expensive to deploy and complicated to use
 Incorrect data can provide inaccurate demand estimate
 Needs proper training and regular maintenance
 Requires accurate data
 Wrong inputs can delay production and shipment

Frequently Asked Questions

(FAQs)
What does material requirements planning mean?
Material requirements planning is a digitally controlled inventory
management system that enables manufacturers to compare
existing raw materials with production capacity based on demand
projections. After which, they can plan and schedule the production
and distribution of finished goods. Its main advantage is to help
businesses avoid excess inventory and boost productivity.

What are the basic steps of MRP?

The basic steps of MRP are as follows:
– Determining the product type
– Calculating demand and setting volume
– Identifying required raw materials and components
– Checking existing inventory levels
– Examining the manufacturing capacity
– Planning production
– Scheduling delivery

How does MRP help?

MRP assists the producer in analyzing several parameters to
develop demand forecasts. It enables a company to understand the
type and quantity of a specific product, estimate inventory, schedule
manufacturing, and ensure that finished goods arrive at the
appropriate location at the right time and at the lowest possible
cost to meet the market demand.