MRP in Manufacturing

Shop-1Material planning or Material requirements planning (MRP) systems are designed to meet three objectives:

  • ensure that materials are available to meet production schedules and products are available for delivery to customers,
  • keep the inventory of stored raw materials and products low as possible,
  • plan manufacturing, delivery schedules and purchasing activities for best efficiency.

Before computerization began to dominate production management this kind of planning was done by hand using reorder point (ROP) and reorder quantity (ROQ) formulas.
The reorder point is a formula to decide when to order so that stocks don’t go to zero when manufacturing has to start. It’s a simple function, if certain simplifying conditions are met ROP can be stated as Reorder Point = Normal consumption during lead-time + Safety Stock.
Reorder quantity is a formula to determine how much inventory should be left when a new order is placed. The formula was worked out in 1913 by engineer Ford W. Harris. Harris determined that the longer ordering is postponed, the lower the cost (he found this to be an asymptotic function approaching zero). Yet, the longer materials are held in stock, the higher the cost (he found this to be a linear increasing function). He worked out a formula for the point where the sum of these two costs reached a minimum if some simplifying conditions are met. There have been many variations of the formula looks, but it looks something like: DQ = Square root (2 ((annual usage in units) (order cost))/”annual carrying costs per unit”).
In 1964, before computers really became part of industrial planning, academic scholar Joseph Orlicky wrote his ground-breaking book, Material Requirements Planning which summarized the economic formulations behind the discipline of MRP. The book became a kind of bible for the industry. Black and Decker became the first company to adopt MRP principles in practice but the number of manufacturing companies adopting MRP methods quickly grew. In 1983, MRP software began to appear until by 1989 MRP software amounted to about one-third of all the software sold to the industry.
The basic functions in current MRP software include inventory control, bill of materials processing, and elementary scheduling. The basic outputs are recommended production schedules, recommended purchasing schedules including purchase order support, and rescheduled notices which may call for canceling, increasing, delaying or speeding up existing orders.
LBSI – Long Business Systems sells, installs, trains and customizes SAP Business One ERP Software, specializing in medium-sized businesses.  To learn more about the MRP capabilities of the SAP Business One system, contact us.

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