Chapter 7 – Material Requirement Planning (MRP) and

Enterprise Resource Planning (ERP)

After completing this chapter, the students are able to:
a. Describe the inputs, outputs, and nature of MRP processing and
the changing role of MRP within a manufacturing organization;
b. Explain Bill of Materials;
c. Explain time-phased product structure; and
d. Describe the role of MRP in an ERP system

What Is Material Requirements Planning (MRP)?

Material Requirements Planning (MRP) is a standard supply planning system to help
businesses, primarily product-based manufacturers, understand inventory requirements
while balancing supply and demand. Businesses use MRP systems to efficiently manage
inventory, schedule production and deliver the right product—on time and at optimal cost.

How MRP works

An MRP system accelerates the manufacturing production process by determining what raw
materials, components and subassemblies are needed, and when to assemble the finished
goods, based on demand and bill of materials (BOM). It does this by asking three main
questions:
 What is needed?
 How much is needed?
 When is it needed by?

The answers to these questions provide clarity into what materials are needed, how many
and when to fulfill the required demand and help facilitate an efficient and effective
production schedule.

Why is MRP important?

MRP gives businesses visibility into the inventory requirements needed to meet demand,
helping your business optimize inventory levels and production schedules. Without this
insight, companies have limited visibility and responsiveness, which can lead to:
 Ordering too much inventory, which increases carrying costs and ties up more cash
in inventory overhead that could be used elsewhere.
 Inability to meet demand because of insufficient raw materials, resulting in lost sales,
cancelled contracts and out-of-stocks.
 Disruptions in the production cycle, delaying sub-assembly builds that result in
increased production costs and decreased output.

Manufacturing companies rely heavily on MRP as the supply planning system to plan and
control inventory, scheduling and production, but MRP is also relevant in many other
industries, from retail to restaurants, to create balance between supply and demand.
MRP Steps and Processes

The MRP process can be broken down into four major steps:

1. Identifying requirements to meet demand

The first step of the MRP process is identifying customer demand and the
requirements needed to meet it, which starts with inputting customer orders and
sales forecasts.
 Using the bill of materials required for production, MRP then disassembles demand
into the individual components and raw materials needed to complete the build while
accounting for any required sub-assemblies.

2. Checking inventory and allocating resources

Utilizing the MRP to check demand against inventory and allocating resources
accordingly, you can see both what items you have in stock and where they are—this
is especially important if you have inventory across several locations. This also lets
you see the status of items, which gives visibility into items that are already allocated
to another build, as well as items not yet physically in the warehouse that are in
transit, or on order. The MRP then moves inventory into the proper locations and
prompts reorder recommendations.

3. Scheduling production
Using the master production schedule the system determines how much time and
labor are required to complete each step of each build and when they need to
happen so that the production can occur without delay.
The production schedule also identifies what machinery and workstations are needed
for each step and generates the appropriate work orders, purchase orders and
transfer orders. If the build requires subassemblies, the system takes into account
how much time each subassembly takes and schedules them accordingly.

4. Identifying issues and making recommendations

Finally, because the MRP links raw materials to work orders and customer orders, it
can automatically alert your team when items are delayed and make
recommendations for existing orders: automatically moving production in or out,
performing what-if analyses, and generating exception plans to complete the required
builds.

Independent Versus Dependent Demand

Another way to understand inventory is to separate it into two broad categories: dependent
and independent demand. Understanding this difference is important as the entire inventory
policy for an item is based on this. Independent demand is demand for a finished product,
such as a computer, a bicycle, or a pizza. Dependent demand, on the other hand,
is demand for component parts or subassemblies. For example, this would be the
microchips in the computer, the wheels on the bicycle, or the cheese on the pizza.

The two inventory systems we discussed are used to determine order quantities for
independent demand. But how do we compute quantities for dependent demand? Quantities
for dependent demand are derived from independent demand, which we call the “parent.”
For example, we can forecast the amount of automobiles we expect to sell, then we can
derive the quantities needed of wheels, tires, braking systems, and other component parts.
For example, if a company plans to produce 200 cars in a day, it would need 800 wheels,
400 windshield wipers, and 200 braking systems. The number of wheels, windshield wipers,
braking systems, and other component parts is dependent upon the quantity of the
independent demand item from which it is derived.

The relationship between independent and dependent demand is depicted in a bill of

materials (BOM), a type of visual diagram that shows the relationship between quantities. An
example is shown in the figure below. Item A is the independent demand item. All the other
items are dependent demand. The quantities that go into the final item are shown in
parentheses. Notice that two units of C are combined with one unit of B to make the final
product. Similarly, two units of D and one unit of E are combined to make one unit of B.
Figure: A Bill of Materials

Dependent demand order quantities are computed using a system called material
requirements planning (MRP), which considers not only the quantities of each of the
component parts needed, but also the lead times needed to produce and receive the items.
For example, 20 units of A means that 20 units of B are needed, as are 40 units of C;
similarly, 40 units of D and 20 units of E are needed. However, the system must also take
into account differences in lead times, as receiving D may have a different lead time than
receiving E. This means that the orders should be placed at different times. This system can
also be tied to costs of goods and can link internal and external members of the supply
chain.

MRP Inputs
How well your MRP system works depends on the quality of the data you provide it. For an
MRP system to work efficiently, each input must be accurate and updated. Here are some of
the inputs an MRP depends on:
 Demand – Including sales forecasts and customer orders. When working with
predicted demand, a system that is integrated with an enterprise-wide ERP system
allows forecasting using historical sales vs. just sales forecasts.
 Bill of materials (BOM) – Keeping a single updated version of the bill of materials is
essential for accurate supply forecasting and planning. A system that’s integrated
into the enterprise-wide inventory management system avoids version control issues
and building against outdated bills, which result in reworks and increased waste.
 Inventory – It’s essential to have a real-time view of inventory across the
organization to understand what items you have on hand and which are en route or
have purchase orders issued, where that inventory is and what the inventory’s status
is.
 Master production schedule – The master production schedule takes all build
requirements and plans machinery usage, labor and workstations to account for all
outstanding work orders to be completed.
MRP Outputs
Using the provided inputs, the MRP calculates what materials are needed, how much is
needed to complete the build and when in the build process they are needed.

With this information defined, businesses are able to execute on just-in-time (JIT)
production, scheduling production based on material availability. This minimizes inventory
levels and carrying costs, as inventory is not stored in the warehouse for future production
but arrives as needed. By scheduling materials to arrive and production to begin soon after,
businesses can move materials through the workflow process without delay.

The MRP lays out the plan of when materials should arrive, based on when they’re needed
in the production process, and when subassemblies should be scheduled. Using a master
production plan and taking into account subassembly build times minimizes materials sitting
on shelves and bottlenecks in the build process.

Benefits of MRP
MRP systems allow you to plan and schedule production efficiently, making sure materials
move through the work order quickly and helping businesses fulfill customer orders on time.

An MRP system that is integrated across an organization eliminates manual processes, such
as pulling historical sales and existing inventory. You spend less time building Gantt charts
and production flows to understand when and where you need product available, which frees
up time and removes a layer of complexity.

When builds are complex and require multiple sub-assemblies within the work order, it’s
easy to miscalculate timing. An MRP helps you understand all of the components that go
into each sub-assembly and how long it takes to complete each step, preventing delays in
the production cycle and increasing production yield.

MRP Challenges
Although using an MRP solution is a far better than using spreadsheets for supply planning,
it’s only as good as the data you put into it. The better a business understands and
documents its processes, the better an MRP system can serve them.
You need to make sure you input correct inventory availability, time to complete a
subassembly, waste calculations and lead-times from vendors. Otherwise, your production
schedule will be inaccurate—an MRP can’t define the production build timeline and materials
required if the data isn’t accounted for in the inventory record, bill of materials and master
production schedule

MRP vs. ERP

MRP systems focus specifically on planning and controlling how goods are assembled using
multiple raw materials or components by controlling inventory, componentry and the
manufacturing process.

Enterprise resource planning (ERP) systems are an offshoot of MRP systems, spurred by
businesses finding a need for the same level of planning and oversight for other operations
such as payroll, finances and supplier management. ERP systems plan for resources across
the entire organization, including: financial management, order management, customer
relationship management, people, procurement, warehousing and fulfillment.

Enterprise resource planning

ERP is a process used by companies to manage and integrate the important parts of their
businesses. Many ERP software applications are important to companies because they help
them implement resource planning by integrating all of the processes needed to run their
companies with a single system. An ERP software system can also integrate planning,
purchasing inventory, sales, marketing, finance, human resources, and more.

You can think of an enterprise resource planning system as the glue that binds together the
different computer systems for a large organization. Without an ERP application, each
department would have its system optimized for its specific tasks. With ERP software, each
department still has its system, but all of the systems can be accessed through one
application with one interface.

ERP applications also allow the different departments to communicate and share information
more easily with the rest of the company. It collects information about the activity and state
of different divisions, making this information available to other parts, where it can be used
productively.

ERP applications can help a corporation become more self-aware by linking information
about the production, finance, distribution, and human resources together. Because it
connects different technologies used by each part of a business, an ERP application can
eliminate costly duplicate and incompatible technology. The process often integrates
accounts payable, stock control systems, order-monitoring systems, and customer
databases into one system.

ERP offerings have evolved over the years from traditional software models that make use
of physical client servers to cloud-based software that offers remote, web-based access.

Examples of Enterprise Resource Planning (ERP)

Men's grooming product maker Fulton & Roark successfully implemented enterprise
resource planning to better track inventory and financial data. The North Carolina company,
like many other businesses, used spreadsheets to track inventory and accounting software
to record financial data.

As the company grew, its processes lagged behind. Their antiquated inventory tracking
system did not account for changing costs, and the accounting software could not record
metrics needed for key financial statements. These breakdowns created manual processes,
which further compromised time and resources.
To eliminate unnecessary processes and centralize work, they chose the Oracle Netsuite
ERP system. Immediately, Fulton & Rourk was better able to identify accounting errors
related to inventory, eliminate costs from employing third-parties to evaluate their financial
records, and better report financial positions.

Cadbury, global confectioner and maker of the popular chocolate Cadbury egg, also
successfully implemented an ERP system. It operated thousands of systems that could not
keep pace with its rapid growth, as well as used ineffective warehouse management
systems. Previously, it implemented a failed SAP ERP system, which resulted in an
overproduction of products.
Trying its hand at enterprise resource planning again, it implemented a system that
integrated its thousands of applications, standardized processes across 16 locations, and
restructured warehouse management systems—breaking down silos for a seamless,
integrated coordination of work—to name a few.

There are many case studies that support the need for properly executed enterprise
resource planning. The system should match the needs and goals of the company.

What Are the Benefits of an ERP?

An ERP promotes the free flow of communication across an organization and results in
increased synergies between different business areas, increased efficiencies as processes
are streamlined and information is readily accessible to those that need it; and reduced costs
associated with outdated and ineffective technology. Adopting an ERP may be a costly
endeavor, but the return on investment (ROI) may be achieved quickly. Most certainly, the
benefits realized (e.g., increased productivity and reduced administrative costs) may far
outweigh the costs to introduce an ERP.

What Should an ERP System Include?

The components of an ERP system are dependent on the needs of the organization.
However, there are key features that each ERP should include. An ERP system should be
automated—to reduces errors—and flexible, allowing for modifications as the company
changes or grows. More people are mobile; therefore, the ERP platform should allow users
to access it from their mobile devices. Lastly, an ERP system should provide a means for
productivity to be analyzed and measured. Other tools can be integrated within the system to
improve a company's capabilities.

Special Considerations
An ERP system doesn't always eliminate inefficiencies within the business. The company
needs to rethink the way it's organized, or else it will end up with incompatible technology.

ERP systems usually fail to achieve the objectives that influenced their installation because
of a company's reluctance to abandon old working processes that are incompatible with the
software. Some companies are also reluctant to let go of old software that worked well in the
past. The key is to prevent ERP projects from being split into many smaller projects, which
can result in cost overruns.

The Bottomline
Enterprise resource planning (ERP) manages and integrates business processes through a
single system. With a better line of sight, companies are better able to plan and allocate
resources. Without ERP, companies tend to operate in a siloed approach, with each
department operating its own disconnected system.

ERP systems promote the free flow of communication and sharing of knowledge across an
organization, the integration of systems for improved productivity and efficiencies, and
increased synergies across teams and departments. However, moving to an ERP system
will be counterproductive if the company's culture does not adjust with the change and the
company does not review how the structure of its organization can support it.

References
Jenkins, A. (2020, July 16). What is Materials Requirements Planning? Retrieved from
Oracle Netsuite: https://www.netsuite.com/portal/resource/articles/inventory-
management/material-requirements-planning-mrp.shtml
Labarre, O. (2021, March 24). Enterprise Resource Planning (ERP). Retrieved from
Investopedia.
Sanders, N. R. (2013). Definitive Guide to Manufacturing and Service Operations, The:
Master the Strategies and Tactics for Planning, Organizing, and Managing How
Products and Services Are Produced.