Material requirements planning (MRP)

Wootinun Sung-Ong December 2002

1. The historical development of MRP systems up to todays ERP systems

Nowadays, Enterprise Resource Planning (ERP) systems become a significant tool enhancing the business performance such as production lead-time, supply chain management. In 1972, five managers from IBM left the company to establish a new company, with the ERP vision, called SAP (Systems, Applications and Products) (Cedillo). Today, with 33% share of market, SAP is the leader in ERP software market. Turning to Oracle, it has not been in the market for a long time compared to SAP, but, with its strong database systems, Oracle gains 15% market share. The third supplier is People Soft, which is holding 8% market share. The last player is JD Edwards, which is focusing on customer relation management. (Source: http://www.du.edu/~atanner/ keyplayers.htm) Figure 1 Key players in ERP software market
45 40 35 % of market share 30 25 20 15 10 5 0 SAP Oracle People Soft JD Edwards Others

(Source: adapted from http://www.du.edu/~atanner/ keyplayers.htm)

Wootinun Sung-Ong December 2002

The development of ERP is based on Materials Requirements Planning (MRP I). The original MRP concept was introduced since 1960s. The MRP facilitates the organization calculating the required quantity of particular part, which need in production (Slack et al, 2001). During 1980s and 1990s, the idea of MRP I was expanded to manufacturing resource planning (MRP II) which include other business issues such as financial and marketing (Slack et al, 2001). As noted by Slack (2001), the founder of modern MRP is Oliver Wight, with associating with Joseph Orlicky. Accordingly, the concept of MRP has been developed to the Enterprise Resource Planning (ERP). As noted by Koch (2002), the most significant issue for ERP is not resource or planning as its acronym, but enterprise. It expands the concept of MRP II so as to include other business function such as human resource, marketing, and financial. Moreover, it also integrates the e-commerce and electronic data interchange (EDI) technology enhancing the organisation performance. As a result, information can flow through an industry chain. Figure 2 Materials requirements planning (MRP I) schematic
Customer orders Forecasted demand

Master production schedule (MPS)

Bill of materials (BOM)

Materials Requirements Planning (MRP)

Inventory records

Purchase orders

Materials plans

Work orders

Source: Slack et al. (2001)

Wootinun Sung-Ong December 2002 2

2. Logic of MRP
The main purpose of Material Requirement Planning (MRP I) is to facilitate the calculation of requirements of materials and timing (Slack, 2001). To achieve this, it needs to covert three inputs namely bill of material, inventory data and master production schedule into two main outputs namely planned order releases and reschedule notices (Lunn, 1992). As noted by Starr (1996), the MRP system is suitable for products that do not satisfy the order point policy (OPP) models, which (1) demand of the end product is independent or (2) an end product orders may be place periodically. Figure 3 Inputs into the master production schedule
Known orders Forecast demands Key capacity constraints

Sister plant demand Master Production Schedule

Inventory levels

R&D demand

Spares demand

Exhibition/ promotion requirement

Safety stock requirements

Source: Slack et al. (2001) Master Production Schedule The Master Production Schedule (MPS) is the significant input that drives the MRP system. Primarily, MPS identify the quantity of the particular products that manufacturer is going to produce. To achieve this, MPS needs combining two independent demands
Wootinun Sung-Ong December 2002 3

namely customer orders and forecasted demand as shown in figure 2 (Bedworth, 1991). Moreover, the MPS is also considered from other issues such as key capacity constraints, inventory levels and safety stock requirement as shown in figure 3 (Slack et al, 2001). Crucially, MPS have to ensure that raw materials are available to meet the demands (Lunn, 1992). Furthermore, MPS must not exceed the production plan or capacity plan. Turning to time frame for MPS, typically, a time bucket for MPS is one week. In addition, the minimum length of planning horizon should be equal to the longest leadtime of item in process. Bill of Material Bill of Material (BOM) is another input of MRP system, which clarifies the structure of an independent demand item (Slack et al, 2001). As defined by the American Production and Inventory Control Society (APICS), a bill of material is: a listing of all of the subassemblies, intermediates, parts, and raw materials that go into a parent assembly showing the quantity of each required to make an assembly (Starr, 1996). Generally, there are three significant types of BOM namely single level, multi levels, and indented BOM (Starr, 1996). The details of materials, in single-level BOM, are presented as a single level while, in indented BOM, this information is shown as several levels (Slack et al, 2001). Figure 4 Different shapes of product structure Type A-shape T-shape V-shape X-shape Number of products small large large large Number of materials large small small large Advantages economic of scale cost reduction, customisation customisation economic of scale, customisation Source: Slack et al. (2001)

Wootinun Sung-Ong December 2002

Turning to the shape of the product structure, Slack point out that there are four shapes of product structure as shown in figure 4 (Slack et al, 2001) To sum up, bill of material facilitate MRP application checking the components for each item that is going to be produced. In other words, it enables MRP to identify that which part and how many of them is required for any particular item (Slack et al, 2001). Inventory Data Inventory data facilitate MRP system identifying inventory status so as to calculate a net requirement (Slack et al, 2001). Generally, inventory data consist of three files as follows (Slack et al, 2001): The item master file In order to identify a particular part, the first element of the item master file is a part number, which is assigned to all components (Slack et al, 2001). This number is unique for each part. In practice, they may be only numbers or the combination of numbers and alphabets. Moreover, this file may include the stable data such as part description and the unit of measure (Slack et al, 2001). Finally, in many case, this file also contains a leadtime for each particular item. The transaction file So as to calculate the net requirement of any particular part, the MRP system needs the transaction file, which contains inventory levels of each part (Slack et al, 2001). This file, logically, calculate inventory levels by referring to all transactions such as receipts into stock. Consequently, this may cause an inaccuracy of the result compared to a reality. As a result, in practice, the organization may have to update the transaction file periodically. The location file The location file facilitates the MRP system locating the location of any particular part (Slack et al, 2001). In some case, inventories may be stored in a fixed location, so they are easy to be found and managed. However, by using this approach, the organization may have a poor utilisation of a location (Lunn, 1992). Alternatively, the organization

Wootinun Sung-Ong December 2002

may store their component randomly so as to utilise their space (Slack et al, 2001). In this case, the location file may become significant issue because one particular component may be stored in many places. Further, the organization may take an advantage from random location by implementing a first-in-first-out method, which ensures that the inventory is picked in order of its time in warehouse (Slack et al, 2001). Figure 5 The MRP netting process
Level 0 Master production schedule

Inventory file

Works order for level 0 parts

Level 1 Bill of materials Inventory file

Works and purchase orders for level 1 parts

Level 2 Bill of materials Inventory file

Works and purchase orders for level 2 parts

Source: Slack et al. (2001)

Wootinun Sung-Ong December 2002

MRP calculation In calculation, the MRP system uses these three inputs (MPS, BOM, and Inventory Data) to establish planned order releases and reschedule notices (Lunn, 1992). In practice, the MRP perform the calculation by using the logic as shown in figure 5 (Slack et al, 2001).

3. Why certain business are highly critical of their MRP systems

The MRP system is the excellent idea. However, in practice, the organization may find that the benefits from implementing the MRP system are too small compared to the investment. Generally, there are a number of issues related to disadvantages of MRP systems. Cost The first significant disadvantage of MRP systems is that it needs a large capital investment. Firstly, the organization has the directly costs related to the project implementation. For instance, the organization has to invest in hardware and software, which is a fundamentally requirement of MRP system. Moreover, there are some indirectly costs such as increasing of salaries and maintenance. Finally, the organization has to encounter the hidden costs, which cannot foresee at the developing and design state. For example, regards implementation of MRP system, the organization has to spend the capital in activities such as training, testing, customization, consultants, post depression and replacing people (Cedillo). Accordingly, regards the industry competitive forces, the organization may encounter the intensification of competitive rivalry because these high fixed costs lead to a high exit barriers for all rivals (Ward and Peppard, 2002). For instance, the organization, which decided to implement MRP system, usually competes in that particular market in a long term. Uncertainty with software Nowadays, there are a number of MRP software packages in the existing market. Their performance is considerably excellent. However, in particular, the software package usually not consolidates with the organization infrastructures and strategies. In practice,

Wootinun Sung-Ong December 2002

the software provider usually supplies a customization for the particular customer. Nevertheless, these may lead to an increasing of the directly costs as mentioned above. Moreover, if the company have not researched and investigate the MRP solution before purchasing, the core module of the software may be not appropriate. Furthermore, as noted by Grindley (1995), the outsourcing solution may lead to a failing to translate business or operation strategies because of poor coordination. Finally, modifying the MRP software may slowdown the project, increase a number of bugs, and increase difficulties for upgrading software (Koch, 2002). Time Obviously, the MRP system is a long-term strategy (Starr, 1996). An average time for implementation process is approximately 12-18 months (Cedillo). Additionally, the organization may find that they still need some periods of times so as to configure and improve the implemented MRP system. Accordingly, as MRP require high investment and need a long period of time, the organization may encounter financial problems such as negative cash flow and poor liquidity. Additionally, there is no doubt that the business environment change frequently, hence the MRP system should be able to adapt to these changes. In practice, many companies realize that adjusting the MRP system is not a simple and straightforward task. In some case, they may decide to outsource this task to the software provider. However, the company may encounter inflexibility problem because of outsourcing. Training Generally, when the MRP system has been implemented, it would make a significant change to an existing operation system (Cedillo). For example, from traditional operation that each department evaluates their own information, with the MRP system, the entire organization may have to rely on the central database system to enhance an information flow. Therefore, one of the critical success factors for MRP implementation is to ensure that education and training is employed to the organization (SM Thacker & Associates). As employees know what they are doing, they can help and enhance the MRP system

Wootinun Sung-Ong December 2002

performance. In contrast, if the MRP system is driven by poor skill users, the organization may encounter an inaccuracy of the result. However, these activities may require a high investment and a period of time. Moreover, sometimes it is difficult to change the way people perform a task especially when people have done some particular tasks for a long time. Involvement and Acceptance As noted by Bettini (1996), the most significant issue for successfully implementing MRP system is not the choice of software but the involvement of people. He also point out that, typically, 80% of total implementation costs are spent on hardware and software, while generating only 20% of profits. In contrast, the remaining 20% of investment, which is used for preparing organization, generates other 80% profits. The reason is that MRP system cannot generate a high performance if it lack of people involvement. Only technical people or software provider cannot raise its performance. Also, it needs a top management commitment. As the MRP system is a long-term resource, it should involve the business strategy. Moreover, the MRP system needs an acceptance from staff in organization since it needs an excellent flow of information.

References Bedworth, D.D. et al. (1991). Computer-integrated design and manufacturing. United States: McGraw-Hill Inc. Bettini, P. (1996). The People/Software Equation. [online]. Available from: http://www.ollie.com/articles/psequation.pdf [Accessed: 11 December 2002] Cedillo, O. Enterprise Resource Planning. [online]. Available from: http://www.du.edu/~atanner/index.htm [Accessed: 10 December 2002] Gates, B. (1999). Business @ The Speed of Thought. England: Clays Ltd, St Ives plc Koch, C (7/2/02) The ABCs of ERP. [online]. Available from: http://www.cio.com/research/erp/edit/erpbasics.html [Accessed: 12/12/02] Lunn, T. and S. Neff (1992). MRP: Integrating Material Requirement and Modern Business. United of America: Richard D. Irwin, Inc.

Wootinun Sung-Ong December 2002

Slack, N., S. Chambers and R. Johnston (2001). Operation Management. (3rd Edition). Essex: Peason Education Limited. SM Thacker & Associates. Enterprise Resource Planning. [online]. Available from: http://www.smthacker.co.uk/MRP2.htm [Accessed: 11 December 2002] Starr, K. Martin (1996). Operation Management: A Systems Approach. United state: Boyd & Fraser. Ward, J. and J. Peppard (2002). Strategic Planning for Information Systems. (3rd Edition). Sussex: John Wiley & Sons Ltd.

Wootinun Sung-Ong December 2002

10