MRP

MRP – the calculation that decides what a factory orders, and when

MRP explained from the ground up: why component requirements should be calculated rather than guessed, what a bill of materials is, and a full worked calculation from order to order date – gross, net and lead time offsetting.

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What this covers

The insight the whole method rests on
The three inputs
The bill of materials, and what an explosion is
A calculation from start to finish
Working backwards from the delivery date
Lot sizing, and why you rarely order the exact requirement
From MRP to MRP II to ERP

What this covers (cont.)

What the method cannot do

The insight it all rests on

Before MRP, most factories managed component stock the way a shop manages its shelves: look at consumption, work out an average, reorder when the level falls below a reorder point.

Two kinds of demand, two completely different methods

Independent

Must be forecast

The finished goods the customer buys
Nobody can know for certain how many will sell
You build an estimate from history and the market
Example: how many bookcases will we sell in week 8?

Dependent

Should be calculated

The components that go into the finished goods
The requirement follows from the plan with certainty
Forecasting it throws away information you already have
Example: 100 bookcases require exactly 400 shelves

This is the whole revolution, and it is easier to underrate than to grasp. If you are going to build 100 bookcases, you know you need 400 shelves. Forecasting shelves is therefore meaningless – you already have the answer. Forecasts belong in one place in the chain: at the very outer edge, where the customer is. Everything inside is arithmetic.

The three inputs

MRP is not a mystery. It is a calculator with three inputs, and the answer can never be better than those three.

What the calculation needs

The production scheduleWhat is to be finished, how much, and in which week. The master production schedule.
The bill of materialsWhat the finished item consists of, in what quantities, and at what levels.
Inventory recordsWhat you already hold, what is on order, and the lead time for each item.

The third point is where most implementations actually fail. The calculation is trivial; knowing what is really on the shelf is the hard part. If the stock figures are wrong, MRP produces wrong orders with complete confidence – which is worse than having no plan, because nobody doubts it.

The bill of materials, and what an explosion is

The bill of materials is the recipe, but with levels. A bookcase consists of parts, and some of those parts consist of other parts.

Bill of materials for one bookcase

Level	Item	Quantity	Lead time
0	Bookcase (assembled)	1	1 week
1	Side panel (made in-house)	2	2 weeks
2	Board (bought in)	1 per side panel	3 weeks
1	Shelf (bought in)	4	2 weeks
1	Screw (bought in)	24	1 week

To explode the bill of materials is to multiply your way down it, level by level. 100 bookcases become 200 side panels, which in turn become 200 boards. The word sounds dramatic, but it only describes one number at the top becoming many numbers below – and how fast the count grows once the bill has several levels.

The calculation, from start to finish

Now we do the whole thing. 100 bookcases are to be delivered in week 8. In stock you have 20 side panels, 50 shelves and 1,000 screws. No boards.

The full calculation

Item	Gross	In stock	Net	Needed week	Ordered week
Bookcase	100	0	100	8	7
Side panel	200	20	180	7	5
Board	180	0	180	5	2
Shelf	400	50	350	7	5
Screw	2400	1000	1400	7	6

Follow one row at a time. 100 bookcases require 200 side panels, but 20 are in stock, so 180 must be made. Those 180 require 180 boards – not 200, because the 20 side panels you already hold contain their boards already. It is the netting that saves you 20 boards, and that is an easy mistake to make by hand.

The answer, and why it surprises

Look at the last column. The boards have to be ordered in week 2.

A delivery in week 8 is in practice decided in week 2.

The arithmetic: 3 weeks for the boards, plus 2 weeks to make the side panels, plus 1 week of assembly. Six weeks in total.
It is the longest path through the bill of materials that decides, not the sum of all the parts. The screws have a one-week lead time and are ordered in week 6 – they are never the problem.
The consequence: if a rush order arrives in week 5, delivering in week 8 is physically impossible, however hard anyone pushes. The answer is in the bill of materials, not in willingness to try.
And that is why MRP is more than a shopping list: it tells you which promises you can actually make.

Lot sizing

In the example we ordered the exact net requirement: 350 shelves, 1,400 screws. In reality you rarely do.

Why you deviate from the requirement

Order the exact requirement

Minimum inventory

No surplus capital tied up
No parts left sitting
But: many small orders
And: full price per unit

Order in lots

Fewer, larger orders

Screws come in boxes of 500, not 1,400 loose
Discounts at higher volumes
Fewer changeovers in production
But: more stock, and more tied-up capital

Note what happens to the ordering pattern here: lot sizes mean orders no longer resemble consumption. That is exactly the mechanism behind the bullwhip effect, seen from inside the factory. MRP does not solve that problem – it is one of the sources of it.

From MRP to MRP II to ERP

The method grew in two clear steps, and the names confuse because the letters look alike.

Three generations

MRP – materialsOrlicky, 1960s and 70s. Answers what to order and when. Looks only at materials.
MRP II – manufacturing resourcesOliver Wight, 1983. Brings in capacity, machines, people and money. Manufacturing Resource Planning – same initials, bigger question.
ERP – the whole businessPlanning becomes one module among many, alongside finance, purchasing, sales and HR.

It is worth noting that MRP did not go away. The calculation in the table above still runs, every night, inside any ERP system that manages production. It has simply acquired many layers of interface on top. What happens when the ERP has to talk to the warehouse system is covered in its own episode.

What the method cannot do

Finally the honest caveat, because MRP rests on two assumptions that are both untrue.

Two assumptions, and what they cost

Assumption	Reality
Fixed lead time	Lead times vary with how busy things are. A workshop running full takes longer – but MRP uses the same number regardless.
Unlimited capacity	Classic MRP never asks whether the machine has time free. It produces the plan and does not notice that it is impossible. That is precisely what MRP II was meant to fix.

Add a third problem, which practitioners call nervousness: a small change to the production schedule can overturn hundreds of order dates further down the bill of materials. Move the delivery by one week and everything below moves with it. That is the same family as the bullwhip effect – a small movement at the top, large swings further down.

What is worth taking with you

That component requirements should be calculated, not guessed. Forecasts belong at the outer edge of the chain, where the customer is.

Key points

The core insight: component requirements should be calculated, not forecast.
MRP needs three things – a production schedule, a bill of materials and inventory records.
Explosion means multiplying your way down the bill of materials, level by level.
Net requirement is gross requirement minus what you already hold.

Key points (cont.)

Lead time offsetting means working backwards from the date the customer needs the goods.
The longest path through the bill of materials decides how early you must start.
MRP assumes fixed lead times and unlimited capacity. Both are untrue.

Questions this answers

What is MRP?
What is the difference between dependent and independent demand?
What is a bill of materials, and what does exploding it mean?
How do you calculate what to order?
What is lead time offsetting?
What is the difference between MRP, MRP II and ERP?

Questions this answers (cont.)

What are the weaknesses of MRP?

Sources

Joseph Orlicky – Material Requirements Planning: The New Way of Life in Production and Inventory Management (1975)
Material requirements planning – overview article

Spørretimen

Read the whole thing at

www.sporretimen.no/en/episodes/mrp-produksjonsplanlegging/