Introduction
Materials Requirement Planning, commonly known as MRP, is a systematic approach used to determine what materials are required for production, how many materials are needed, and when those materials should be available.
Manufacturing organizations often produce finished products using several components and raw materials. A finished product may require hundreds or even thousands of individual parts. Purchasing these materials without proper planning can result in shortages, excess inventory, unnecessary storage costs, and production delays.
MRP addresses this problem by connecting the production schedule with material requirements.
For example, suppose TechNova manufactures 1,000 office desks. Each desk requires one desktop, four legs, eight screws, one drawer, and one set of drawer fittings. If the company plans to manufacture 1,000 desks, it needs to determine the exact quantities of each component required.
The basic requirement would be:
1,000 desktops
4,000 legs
8,000 screws
1,000 drawers
1,000 sets of drawer fittings
However, the company must go further. It needs to determine what materials are already available, what has already been ordered, how long suppliers take to deliver, and when each material is required for production.
MRP therefore transforms a production plan into a detailed materials plan.
Meaning of Materials Requirement Planning
Materials Requirement Planning is a planning system used to determine the quantity and timing of materials, components, and subassemblies required to meet production requirements.
MRP generally works backward from the planned production of finished goods.
If the finished product is required on a particular date, MRP determines when components must be available and when orders need to be placed.
For example, if a finished product is scheduled for completion on June 30 and a particular component requires 10 days to procure, the organization must ensure that the component is ordered early enough to arrive before production requires it.
MRP therefore combines what is required, how much is required, and when it is required.
Purpose of MRP
The main purpose of MRP is to ensure that materials are available when production needs them while avoiding unnecessary inventory.
MRP attempts to answer three fundamental questions:
What materials are required?
How many are required?
When are they required?
These questions allow organizations to coordinate purchasing and production activities.
A successful MRP system reduces material shortages while minimizing excessive inventory.
MRP and Inventory Management
MRP is closely connected to inventory management.
Traditional inventory management may focus heavily on maintaining stock levels and replenishing items when they fall below predetermined thresholds.
MRP takes a more demand-driven approach for dependent-demand items.
Dependent demand is demand that arises because another product is being produced.
For example, demand for automobile tires depends on the number of vehicles being manufactured.
If a factory plans to produce 500 cars and each car requires five tires, the requirement is:
500 × 5 = 2,500 tires
The demand for tires is therefore derived from the production plan.
Independent and Dependent Demand
Understanding the difference between independent and dependent demand is essential to understanding MRP.
Independent demand comes directly from customers or the external market.
For example, customer demand for finished laptops is independent demand.
Dependent demand is derived from the demand for another product.
For example, if each laptop requires one battery, the demand for batteries depends on the number of laptops being produced.
MRP is particularly useful for managing dependent-demand items.
Major Components of MRP
An MRP system generally relies on several key inputs.
The major inputs include:
- Master Production Schedule.
- Bill of Materials.
- Inventory records.
- Purchase orders.
- Production orders.
- Lead-time information.
- Planning parameters.
These inputs work together to determine material requirements.
If one of these inputs is inaccurate, MRP calculations may also be inaccurate.
Master Production Schedule
The Master Production Schedule (MPS) specifies what finished products are expected to be produced, how many units are required, and when production should occur.
The MPS is one of the most important inputs into MRP.
For example:
| Week | Product A |
|---|---|
| Week 1 | 500 units |
| Week 2 | 700 units |
| Week 3 | 600 units |
| Week 4 | 800 units |
This schedule tells the MRP system that the organization needs to produce the specified quantities during those periods.
MRP then determines the materials needed to support that production.
Bill of Materials
A Bill of Materials (BOM) is a structured list of all components, materials, and quantities required to manufacture a finished product.
For example, suppose one office chair requires:
| Component | Quantity per Chair |
|---|---|
| Seat | 1 |
| Backrest | 1 |
| Base | 1 |
| Wheel | 5 |
| Armrest | 2 |
| Screw | 12 |
If production requires 1,000 chairs, MRP can calculate the gross component requirements.
For wheels:
1,000 × 5 = 5,000 wheels
For armrests:
1,000 × 2 = 2,000 armrests
For screws:
1,000 × 12 = 12,000 screws
The BOM therefore provides the relationship between the finished product and its components.
Multi-Level Bill of Materials
Some products have several levels of components.
For example, a computer may require a motherboard.
The motherboard itself may require processors, memory sockets, capacitors, and other components.
A computer may therefore have a multi-level BOM.
MRP explodes the BOM from the finished product down through the different component levels to determine the total requirements.
This is called BOM explosion.
BOM Explosion
BOM explosion is the process of breaking a finished product into its individual components and calculating the required quantities.
Suppose one desk requires:
1 desktop
4 legs
Each leg requires 2 brackets.
If production requires 100 desks:
Desktops:
100 × 1 = 100
Legs:
100 × 4 = 400
Brackets:
400 × 2 = 800
Therefore, MRP identifies the need for 800 brackets even though the finished product’s direct BOM only lists the legs.
This illustrates why multi-level BOM structures are important.
Inventory Records
MRP must know how much inventory is already available.
Suppose the production plan requires 5,000 screws, but the warehouse already has 2,000 screws.
The organization does not need to purchase another 5,000 unless other requirements exist.
Gross requirement:
5,000
Available inventory:
2,000
Net requirement:
5,000 − 2,000 = 3,000
Therefore, the organization needs approximately 3,000 additional screws, subject to safety-stock requirements and other planning considerations.
Gross Requirements
Gross requirements represent the total quantity of an item needed before considering available inventory and other supply.
For example, if 1,000 finished products require two components each:
Gross requirement = 1,000 × 2 = 2,000 components
This represents the total requirement.
The MRP system then considers existing inventory and expected incoming supply.
Net Requirements
Net requirements represent the additional quantity that must be supplied after considering available inventory and relevant incoming supply.
A simplified calculation is:
Net Requirement = Gross Requirement − Available Supply
Available supply may include existing inventory and confirmed or planned receipts, depending on the planning rules being applied.
For example:
Gross requirement = 10,000 units
Available inventory = 3,000 units
Expected receipt = 2,000 units
Net requirement:
10,000 − 3,000 − 2,000 = 5,000 units
The organization therefore needs to plan for an additional 5,000 units.
Safety Stock in MRP
Safety stock can also influence MRP planning.
Suppose an organization requires 10,000 units for production.
It has 3,000 units in inventory and wants to maintain 1,000 units as safety stock.
The organization cannot use all 3,000 units for production because 1,000 must remain available as the safety buffer.
Available inventory for the requirement is therefore:
3,000 − 1,000 = 2,000 units
If the requirement is 10,000 units:
10,000 − 2,000 = 8,000 units
The organization may therefore need 8,000 additional units.
Lead Time in MRP
Lead time determines when materials must be ordered so that they arrive when production needs them.
Suppose a production order requires 500 motors on July 20.
The supplier’s lead time is 14 days.
The purchase order should be initiated early enough to allow the supplier to deliver the motors before July 20.
If the organization waits until July 19, the motors will almost certainly arrive too late.
MRP therefore uses lead-time information to schedule supply activities.
Lead-Time Offset
Lead-time offset means moving a planned order backward based on the time required to obtain or produce the item.
Suppose:
Finished product required = August 30
Component lead time = 10 days
The component should be available by the time production begins.
If it requires 10 days to obtain, the planned order should be scheduled sufficiently early to account for that lead time.
This is one of the key functions of MRP.
Planned Order Receipts
A planned order receipt represents the quantity of material expected or planned to become available during a particular period.
For example:
| Week | Planned Receipt |
|---|---|
| Week 1 | 1,000 |
| Week 2 | 2,000 |
| Week 3 | 1,500 |
These planned receipts are matched against expected requirements.
The organization can then determine whether additional orders are necessary.
Planned Order Releases
A planned order release indicates when an order should be initiated.
This is different from the receipt date.
Suppose a supplier needs 10 days to deliver an item.
If the material must be received on June 20, the purchase order may need to be released around June 10, subject to the supplier’s actual lead time and business-calendar considerations.
Therefore:
Order Release Date + Lead Time = Expected Receipt Date
This relationship is fundamental to MRP scheduling.
Production Scheduling
Production scheduling determines when manufacturing activities should occur.
It considers customer requirements, available materials, production capacity, labor, machines, and deadlines.
MRP supports production scheduling by ensuring that required materials are planned for availability before production begins.
There is little value in scheduling production for Monday if critical materials will not arrive until Friday.
Production and materials planning must therefore be synchronized.
Example of Production Scheduling
Suppose TechNova must produce 1,000 desks by Friday.
Each desk requires:
1 desktop
4 legs
8 screws
The company has:
1,000 desktops
2,000 legs
5,000 screws
Requirements are:
1,000 desktops
4,000 legs
8,000 screws
Therefore:
Desktop shortage = 0
Leg shortage = 2,000
Screw shortage = 3,000
Production cannot proceed fully unless the missing legs and screws are supplied.
MRP identifies these shortages before production begins.
Management can then purchase or produce the missing materials.
Capacity Requirements
Materials availability is only one part of production planning.
The organization must also have sufficient capacity to process the production requirements.
Capacity may include:
- Machine hours.
- Labor hours.
- Warehouse space.
- Production lines.
- Tools.
- Transportation.
- Supplier capacity.
Suppose the production schedule requires 1,000 machine hours but the factory has only 700 available hours.
There is a capacity shortage of:
1,000 − 700 = 300 hours
Management must address this gap before production can be completed as planned.
Capacity Requirements Planning
Capacity Requirements Planning, often associated with production planning systems, determines whether available production resources can support the planned workload.
If MRP determines that 10,000 units of a component are required, capacity planning must determine whether the organization has the equipment and labor required to produce or process those units.
Possible solutions to capacity shortages include:
- Overtime.
- Additional shifts.
- Subcontracting.
- Additional equipment.
- Temporary labor.
- Production rescheduling.
Resource Optimization
Resource optimization involves using available resources efficiently.
An organization should avoid situations where machines are idle while other machines are overloaded.
MRP and production scheduling can help coordinate workloads.
For example, if Machine A is overloaded while Machine B has available capacity and can perform the same operation, production may be redistributed.
This can improve utilization and reduce production delays.
Inventory Synchronization
Inventory synchronization means coordinating inventory availability with production requirements and customer demand.
Materials should arrive neither unnecessarily early nor too late.
Receiving materials too early can increase storage costs.
Receiving them too late can interrupt production.
For example, if a production line requires 5,000 components on Monday, those components should ideally be available when required rather than arriving several weeks earlier without a business reason.
MRP supports this synchronization by time-phasing material requirements.
Production Forecasting
Production forecasting estimates the quantity of goods that the organization expects to manufacture during future periods.
It is influenced by customer demand, sales forecasts, inventory policies, production capacity, and business strategy.
For example, if demand forecasting indicates that customers will require 20,000 units next quarter, production planning must determine whether the organization should manufacture 20,000 units or use existing finished-goods inventory to satisfy part of the requirement.
Production forecasting therefore links market demand with manufacturing requirements.
MRP Example
Suppose TechNova plans to produce 500 office chairs.
Each chair requires:
- 1 seat.
- 1 backrest.
- 5 wheels.
- 2 armrests.
Therefore, gross requirements are:
Seats:
500 × 1 = 500
Backrests:
500 × 1 = 500
Wheels:
500 × 5 = 2,500
Armrests:
500 × 2 = 1,000
Suppose current inventory is:
Seats = 100
Backrests = 200
Wheels = 1,000
Armrests = 300
Assume there are no incoming orders.
Net requirements become:
Seats:
500 − 100 = 400
Backrests:
500 − 200 = 300
Wheels:
2,500 − 1,000 = 1,500
Armrests:
1,000 − 300 = 700
MRP would therefore identify the additional material requirements as 400 seats, 300 backrests, 1,500 wheels, and 700 armrests.
The next step is to determine when these materials must be available and when their orders should be released based on lead times.
MRP and Procurement
MRP can generate or support recommendations for purchasing materials that cannot be produced internally.
For example, if MRP determines that 1,500 wheels are required and the company has none available, procurement must arrange their purchase.
The procurement department then considers supplier selection, pricing, quality, lead time, minimum order quantities, and delivery conditions.
MRP identifies the requirement; procurement manages the supplier acquisition process.
MRP and Production Orders
For internally manufactured components, MRP may lead to production orders rather than purchase orders.
Suppose TechNova manufactures metal frames for its chairs.
If MRP determines that 500 additional frames are required, production planning can create or schedule a production order for those frames.
Therefore, MRP can support both:
Purchase requirements for externally sourced materials.
Production requirements for internally manufactured components.
MRP and ERP Systems
Modern ERP systems integrate MRP with other business functions.
An ERP system may connect:
Sales orders
↓
Demand forecasts
↓
Master production schedule
↓
Bill of materials
↓
Inventory records
↓
MRP calculations
↓
Purchase orders / production orders
↓
Warehouse receipts
↓
Production
↓
Finished goods
This integration provides a continuous flow of information across the organization.
MRP Data Accuracy
MRP is highly dependent on accurate data.
An inaccurate BOM can cause incorrect material requirements.
Incorrect inventory balances can cause unnecessary purchases or material shortages.
Incorrect lead times can cause materials to arrive too late.
Incorrect production schedules can create unrealistic requirements.
Therefore, organizations must maintain accurate master data.
Important data elements include item numbers, units of measure, BOM quantities, lead times, inventory balances, supplier information, and production parameters.
MRP in Business Central
In Microsoft Dynamics 365 Business Central, planning functionality supports material and supply planning by considering demand, inventory, supply, planning parameters, and manufacturing information where manufacturing functionality is used.
Items can be configured with planning-related parameters such as replenishment methods, lead times, reorder policies, and other planning settings.
Manufacturing organizations can use production BOMs and production orders to define and manage component requirements.
Planning calculations can then help identify supply requirements and proposed actions.
For a functional consultant, it is important to understand that successful MRP implementation is not simply about activating a planning feature. The consultant must ensure that item master data, BOMs, inventory records, lead times, locations, planning parameters, and business processes are correctly configured.
Benefits of MRP
MRP can provide several important benefits.
It reduces the likelihood of material shortages.
It helps minimize unnecessary inventory.
It improves production planning.
It supports procurement scheduling.
It improves visibility of future material requirements.
It helps coordinate multiple levels of a product’s BOM.
It supports better use of production resources.
It can improve customer service by helping organizations meet production deadlines.
It also provides management with better visibility of future supply requirements.
Limitations of MRP
MRP is not perfect.
Its effectiveness depends heavily on data accuracy.
If demand forecasts are incorrect, material requirements may also be incorrect.
If supplier lead times are unrealistic, planned orders may arrive too late.
If inventory records are inaccurate, MRP may recommend unnecessary purchases.
MRP can also become complex when products have large multi-level BOMs and highly variable demand.
Therefore, organizations must regularly review planning parameters and operational data.
MRP and Just-in-Time
MRP and Just-in-Time (JIT) are related but different approaches.
MRP focuses heavily on planning material requirements based on production schedules and demand.
JIT aims to minimize inventory by receiving materials close to the time they are needed.
An organization may use principles from both approaches.
For example, MRP can determine when components are required, while supplier relationships and JIT practices can help ensure those components arrive close to production time.
The appropriate approach depends on the organization’s products, suppliers, demand patterns, and risk tolerance.
Common MRP Problems
Several problems can reduce MRP effectiveness.
Poor BOM maintenance can result in incorrect requirements.
Incorrect inventory balances can cause shortages or excess purchases.
Long or unreliable supplier lead times can disrupt planned schedules.
Changes in customer orders can make existing production plans obsolete.
Unexpected machine breakdowns can reduce production capacity.
Poor communication between departments can also cause planning problems.
Effective MRP therefore requires continuous coordination between sales, production, procurement, warehouse operations, and finance.
Best Practices for MRP
Organizations should maintain accurate BOMs.
Inventory records should be regularly reconciled with physical stock.
Supplier lead times should reflect actual performance.
Production schedules should be reviewed when demand changes.
Planning parameters should be updated when business conditions change.
Critical materials should receive appropriate safety-stock consideration.
Capacity constraints should be considered before committing to production schedules.
MRP recommendations should also be reviewed by responsible personnel rather than being accepted automatically without consideration of business circumstances.
Key Takeaways
Materials Requirement Planning is a systematic approach for determining what materials are required, how much is required, and when those materials are required for production.
MRP is particularly useful for managing dependent demand.
The major inputs to MRP include the Master Production Schedule, Bill of Materials, inventory records, lead times, and supply information.
The Master Production Schedule determines what finished products are expected to be produced and when.
The Bill of Materials identifies the components and quantities required to manufacture a finished product.
BOM explosion breaks finished products into their component requirements.
Gross requirements represent the total material requirements before considering available supply.
Net requirements represent the additional supply needed after considering available inventory and relevant incoming supply.
Lead times determine when materials must be ordered or produced.
Planned order receipts represent when materials are expected to become available, while planned order releases indicate when orders should be initiated.
MRP supports production scheduling by ensuring that required materials are planned for availability.
Capacity planning ensures that machines, labor, equipment, and other resources can support the planned workload.
Inventory synchronization ensures that materials arrive at the right time rather than unnecessarily early or too late.
Production forecasting connects expected market demand with manufacturing requirements.
MRP can support both purchasing and internal production requirements.
The effectiveness of MRP depends heavily on accurate BOMs, inventory records, lead times, planning parameters, and production information.
In an ERP system such as Business Central, MRP-related planning can connect demand, inventory, production, purchasing, and warehouse processes.
Ultimately, MRP enables an organization to move from simply asking “How much inventory do we have?” to asking the more important planning questions: “What materials will we need, how many will we need, and exactly when must they be available so that production can proceed without unnecessary inventory?”