![]() Inventory can be reduced without damaging availability and customer service. Added together, we often find ourselves with a disappointing and aggravating increase in inventory shortly after implementing a new MRP system. Meanwhile, in a new MRP situation, we start out with some quantity of extra inventory left over from the pre-MRP (or ineffective MRP) days that will take some time to work through. If the vendor delivers in the previously quoted five days, the stock will arrive three days before it is needed and will be part of the inventory for those three days.Įven though MRP is, by its very nature, a just-in-time calculation that should, theoretically, result in zero inventory, in the real world, we add planning parameters and compensating factors to account for economic considerations, variability and schedule changes. When MRP recognizes the need for the purchased item on a given date, it will signal the buyer to release the order eight days earlier. If the vendor quotes five days, for example, the planner might enter a lead time of eight days or more in the planning file. Whatever a vendor promises for delivery lead time after receipt of an order, most buyer/planners are apt to add a bit of buffer to protect the plan from the possibility of a late delivery. The other source of extra inventory results from a different type of compensating factor: padded lead times used in the planning process. This is another major source of inventory buildup when moving to material requirements planning. Each of these compensating factors (control fields in the item planning record) will generate additional inventory to boost the chances of having ample supplies when disruptions occur or schedules change at the last minute. Planners manage variability through the use of compensating factors like safety stock, shrinkage and yield factors. Remember, too, that MRP cannot create a perfect plan because the planning parameters are set up based on normal or average conditions, and the real world is seldom stable and predictable. The result is a buildup of extra inventory. New MRP implementations tend to use general rules for lot sizing because it's just too hard to thoroughly analyze and determine the best lot-sizing rule for each item. Lot sizing can be as simple as "always order 100 at a time" or can be a sophisticated calculation that balances the cost of multiple orders compared to the cost of holding more inventory from fewer orders and, thus, having a longer holding period for stock between orders - a technique called economic order quantity.Īny lot sizing other than getting exactly what's needed when it's needed (called "discrete" or "lot-for-lot") will result in some amount of inventory. ![]() Since it is often uneconomical to make or buy a small amount or odd quantity of a particular item every day, the system uses lot-sizing rules (also called order policies) to come up with the optimum recommendation. Why does material requirements planning bring in too much inventory too soon? Once the calculation identifies the exact quantity needed and the date it is needed by, the next two steps in the calculation create the recommended order size and timing. It will take some time to use up the extra inventory and recognize what is truly surplus - unneeded - and dispose of it or write it off. The sad reality is that the system will often bring in too much inventory too soon (learn more about this below), while the company still holds quantities of unneeded inventory left over from before MRP was planning the right quantities of the right items at the right time. This is because the system now anticipates the need before the shortage occurs, and the recommendation will bring in the needed inventory "just in time" to avoid the shortage. Most often, MRP does improve company performance by reducing shortages. ![]() How material requirements planning affects inventory Many do see these results, but not right away, and often not to the extent that they might have hoped. ![]() Theoretically, companies moving to MRP or implementing a new version of MRP should experience lower overall inventory levels, while at the same time, improving availability (thus preventing shortages). Material requirements planning is inherently an inventory optimization system, meaning that its recommendations will result in the proper (that is, minimum) amount of inventory required to avoid shortages, given the information and conditions. ![]() Finally, MRP creates the recommended replenishment (purchase and production) orders needed to eliminate the shortages. Using demand and the bill of materials, MRP calculates the items (materials) that are needed every day, checks projected availability from inventory records and determines where shortages are expected. Material requirements planning (MRP) is the main calculation engine that forms the heart of ERP for manufacturers. ![]()
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