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Imagine you’re cooking your favorite meal for dinner — but halfway through, you realize that you’re missing one of the key ingredients. Annoying, right?
It’s even more annoying when it happens in your business’s manufacturing process. Running out of a particular component or production inventory item not only stalls production, but can lead to backorders, lost sales, and a breakdown of your supply chain workflows.
Luckily, a good material requirements planning system (or MRP) can prevent these kinds of problems. Many businesses rely on MRP software to keep production inventory at optimal levels, minimize holdings costs, optimize production planning, and ultimately streamline their supply chain management.
In this article, we’ll delve into what material requirements planning is, why it’s important for retailers, the features to look for in a MRP system, and how inventory management best practices can improve it.
What is material requirements planning (MRP)?
Material requirements planning is a software or system that businesses use to determine production inventory requirements for the manufacturing process.
Essentially, an MRP system helps businesses understand:
- Which raw materials it needs to create its end products
- How much of those materials are required to produce the quantity of end products that will meet customer demand
- When those materials are needed
With this knowledge, a business can optimize its production inventory management for efficiency, and set the rest of its supply chain up for success.
Why is material requirements planning important for retailers?
Whether you order finished inventory from manufacturers or produce your product yourself, material requirements planning matters for retailers.
To produce sellable products, you’ll need to have the right amount of production inventory — but achieving that balance can be tricky. Too much production inventory, and your business’s inventory holdings costs increase unnecessarily; too little, and you cannot manufacture enough end items to meet customer demand.
MRP software makes it easier to achieve that balance. By providing visibility into production inventory levels, MRP enables manufacturers and retailers to:
- Better plan inventory procurement (i.e., determine exactly what manufacturing components to reorder, how many it should reorder, and when to reorder them)
- Always have sufficient production inventory on hand to create enough finished products to meet customer needs, and pivot quickly to respond to shifts in demand
- Schedule the manufacturing process
- Streamline the overall supply chain
- Cut down inventory holding costs
Even if your retail business acquires finished inventory from an outside manufacturer, whether or not your manufacturer uses an MRP can impact your bottom line.
When a manufacturing process is smooth and well-stocked with production inventory, the business it serves is less likely to experience disruptions and delays due to stockouts. This helps to reduce lead time while speeding up fulfillment, which makes for a positive customer experience that encourages repeat purchasing.
What are the main features of an MRP system?
While the specific requirements of an MRP system may vary depending on your business’s unique needs, there are a few staple features that every MRP system should include. Here are some of the most important capabilities to look for in your MRP system.
The entire MRP process begins with demand forecasting, and works backwards to determine how much production inventory is needed.
A good MRP system should help you create accurate demand forecasts that tell you exactly which final products you should invest in, so you can quickly calculate what component parts, labor, machinery, and time you’ll need to manufacture them.
“Spikes in order volume can happen at any time, so knowing that our 3PL partner is able to manage huge peaks in business and fulfill thousands of orders in a short time if needed is priceless. With ShipBob, we’re not afraid of going viral! We’re not afraid of blowing up, because we know that ShipBob will be able to handle surges in demand.”
Juliana Brasil, Director of Operations at Food Huggers
MRPs store and reorganize your company’s unique production inventory data to make it easier for you to manage. The end result is clean, visible data that your business can use to simplify the manufacturing process.
MRP systems should require you to input the following information for each finished product or unique SKU:
- Bill of materials
- Lead time
- Shelf life
- Notes on labor, machinery, and quality control required
- Amount of each necessary production inventory component currently in inventory
Timing procurement and scheduling production for all of your SKUs is difficult — but an MRP system should make it easier. The right MRP tracks inventory levels so that you know the best reorder point for each piece of production inventory, and can help you factor in transportation lead times and current inventory levels to time replenishment perfectly.
MRP systems help you organize master production schedules across all of your SKUs, giving you a comprehensive view of labor, machinery, and activity requirements for every piece of finished inventory you manufacture.
Some MRP systems even allow you to set deadlines for different stages of the build process, so that the overall production timeline is maintained. This way, different stages of the supply chain are completed on time and function seamlessly with minimal disruptions.
One of the most crucial functions of a material requirements planning system is helping you plan your procurement and sourcing.
Your MRP system should provide you with a detailed list of materials (and accompanying amounts) that you need to maintain optimal inventory levels. You can then plan your purchases accordingly by considering other factors like production lead times and minimum order quantities.
For example, if the production lead time is usually long, you may need to start reordering raw materials right away — even if you still have sufficient stock on hand.
Material requirements planning systems also help you keep track of all production inventory you have in stock. With software to monitor details such as varying shelf lives and inventory turnover, it is much easier for a business to manage their raw materials inventory over time and improve inventory control.
A material requirements planning system gives you a central place to monitor the cost of procuring and manufacturing goods. With proper cost reporting, you can make informed decisions related to product pricing. In addition, you may also be able to identify areas in which you can minimize costs.
MRP process explained in 5 steps
Here are the four key steps that make up the material requirements planning process.
Step 1: Create your bill of materials (or BOM)
Before you can even get your MRP system up and running, you’ll need to create your company’s bill of materials.
A bill of materials is just a hierarchical list of all the final products (or independent demand items) and the raw materials, components, and sub-assemblies needed to create them (or dependent demand items), as well as the quantities required.
The BOM provides the data that an MRP needs to function. Thus, to get your MRP system to work, you’ll first need to input your BOM data correctly into your MRP.
From there, as long as your BOM hierarchy is accurate, the MRP will take care of tracking material and component levels, identifying which components are dependent on other components, and calculating what items in what quantities are needed by what date for the manufacturing process to go smoothly.
Step 2: Set goals and estimate demand
The MRP process works backwards from anticipated demand. This means it takes the amount of a product that you expect to sell in a given time period, and breaks that number down to calculate how much of each raw material or component you’ll need to create that amount of finished product.
To estimate customer demand, start by looking at your sales forecasts and customer orders. Which products have sold well in the past, regardless of season? Usually, you will want to invest more heavily in inventory that’s going to sell quickly, and less heavily in less popular inventory.
Next, consider other factors that could influence demand, such as:
- Customer segments
- Types of goods
Step 3: Check current inventory
In your demand estimation, you should also factor in how many units of finished inventory you already have. Tracking your inventory and checking demand against the inventory you currently have in stock prevents you from ending up with excess material that doesn’t get sold.
Your MRP system should give you visibility into inventory levels across multiple channels and locations, and help you identify which resources are available to use, which are already assigned to a manufacturing process, and how best to allocate production inventory overall.
Step 4: Start production
Next, it’s time to schedule and begin your production.
You’ll need to use the MRP’s master schedule for production to calculate the amount of time and labor needed for each step of the manufacturing and assembly process. For builds that require subassemblies, you’ll also need to account for the time taken to complete each subassembly.
During this step, you’ll also need to identify the workstations, machinery, and equipment needed for different stages of the production process. Based on this, you can then generate the necessary purchase orders and work orders.
Using all this information, you can determine the completion deadline for each step of the manufacturing and assembly process, and prepare a schedule accordingly so that production is carried out seamlessly and without delay.
Step 5: Identify and troubleshoot setbacks
Once production is underway, continue monitoring the MRP process to quickly identify any issues or setbacks that could delay production and fulfillment.
Some MRPs will instantly alert you of any procurement or production delays, and even make recommendations for actionable contingency plans, perform what-if analyses, and automatically move production as needed to help you meet your production deadlines.
Is an MRP system necessary?
Whether or not an MRP is a must-have depends on the unique needs of your business. As such, it’s important to carefully weigh the pros and cons to better assess the value of an MRP system in your overall operations management.
Pros of an MRP system
An MRP system ensures that you have all the materials and components necessary for manufacturing, which yield the subsequent benefits:
- Increased efficiency in the production system
- Reduced risk of errors as a result of automating manual tasks
- Shorter customer lead times, which increase customer satisfaction
- Less over-ordering, high holding costs, and inventory obsoletion
- Optimized inventory levels, reducing stockouts
- Better timed replenishment
- More accurate cost tracking and reporting
Cons of an MRP system
There are a few drawbacks to MRP systems that one should consider:
- Input data must be accurate for the MRP to deliver good outputs
- MRPs can be complicated and expensive to implement
- Less flexibility for exceptions or unexpected variables
MRP vs ERP explained
While both material requirements planning systems and enterprise resource planning (ERP) systems play a crucial role in helping you plan your resources, their scopes are different.
MRP systems focus specifically on manufacturing resource planning — that is, planning and managing the resources involved in the manufacturing process.
Because they are focused on manufacturing, MRP systems are mostly used by manufacturing companies, though retailers that manufacture their own products can use them as well.
ERP systems, on the other hand, plan and manage resources for multiple organizational functions, including finance, accounting, payroll, sales, operations, manufacturing, supply chain, supplier management, and much more.
Businesses use ERP systems to maintain resource visibility across departments, and to streamline the resource management process for the whole company.
How proper inventory management improves material requirements planning: Next steps
Because MRP systems rely heavily on the quality of the data you input, you may need a separate inventory management system in place to help you get as accurate a picture of your inventory as possible.
Real-time inventory visibility is essential to knowing exactly where your inventory is located, what’s available in stock, how much of it is available, and what’s in transit to your warehouse. With that visibility and information, you’ll be better equipped to reorder the right raw materials at the right time in the right quantities.
ShipBob’s proprietary software comes with powerful inventory management capabilities that provide this real-time visibility into your inventory across channels and locations. Our analytics tool tracks inventory and sales KPIs for you to use in your demand forecasts, and helps you calculate reorder points for each SKU. You can even set up automatic reorder notifications to time replenishment perfectly and prevent stockouts.
“ShipBob’s analytics tool is really cool. It helps us a lot with planning inventory reorders, seeing when SKUs are going to run out, and we can even set up email notifications so that we’re alerted when a SKU has less than a certain quantity left. There is a lot of value in their technology.”
Oded Harth, CEO & Co-Founder of MDacne
ShipBob is also here for your business after manufacturing is complete. Our outsourced logistics solution lets you hand off DTC and B2B fulfillment to experts — meaning we’ll handle warehouse receiving and storage at any of our dozens of fulfillment centers, and pick, pack, and ship your orders as they come in.
With optimized outbound logistics, you’ll see orders processed more efficiently and fulfilled more accurately. You can allocate your time to focus on other aspects of your business (like your MRP system!) so that you can scale your business with ease.
Want to learn more about managing inventory through ShipBob? Click the button below to get started.
Material requirements planning FAQs
Here are answers to some of the top questions about material requirements planning.
What is the importance of material requirement planning?
Material requirements planning is a key part of building a streamlined, efficient manufacturing process. MRP systems help you make sure you have all the raw materials and components necessary for manufacturing products.
This in turn allows a manufacturer or retail business to maintain its production schedule, streamline its production process, reduce customer lead times, and improve customer satisfaction.
What are the types of MRP?
MRP is just one type of resource planning system. MRP systems are not to be confused with enterprise resourcing planning (ERP) systems, which manage resources across multiple departments and functions (as opposed to just manufacturing).
What are some common MRP challenges?
MRP systems tend to be a bit inflexible with exceptions and unexpected variables, and they rely heavily on the accuracy of data input. They can also be complex and expensive to implement.
How can ShipBob help with material requirements planning?
ShipBob provides you with a robust inventory management system that gives you real-time visibility into your inventory movement. Through your dashboard, you can optimize your inventory planning with updated on-hand inventory status and set reorder points for each SKU.
What comes after MRP is completed?
After MRP is completed, a business must monitor the manufacturing process, receive finished goods at their warehouse, and store the inventory so that it can be picked and packed later on in the order fulfillment process.