From the course: Inventory Management Foundations

Materials requirements plan

From the course: Inventory Management Foundations

Materials requirements plan

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- The Material Requirements Plan or MRP not only helps you manage your inventory it actually defines the specific inventory needed to make your finished products. Once you determine how many products you will make this year, the material requirements plan calculates and schedules all raw materials, components and subassemblies needed to create your final product and meet your customer orders. The MRP is a combination of three inputs. First is the bill of materials or BOM. This is the recipe to make the final product telling you what items are required and how many of each. The BOM also specifies the production sequence so you know which items are needed first. In this example, you cannot assemble C until you first make two of the D components. Your final product is normally made up of materials, components, and subassemblies in this manner. This is a very simple example. As you can imagine, the bill of materials for an automobile or a jet airliner is quite complex. The second input is the lead time for each item in the bill of materials. Lead times specify the time required to make or purchase each item of material, component or subassembly. This tells you when to order needed parts and in some cases we'll influence how much you order at one time. Components with long lead times usually have a higher safety stock simply because it takes so long to receive the item. The third input is the inventory record. Inventory records show how many items are on hand and how many are on order helping you to determine how many items need to be ordered now so you can meet the production schedule. So the material requirements plan helps you determine what materials need to be ordered to allow you to start production in time to meet the promised delivery date to your customer. I've attached a handout to show you how the material requirements plan fits into the overall inventory control system. The MRP schedule is a very complex document and it is constantly updated as inventories and requirements change. Thankfully, most companies produce their plan with the help of computer software specifically designed to manage this dynamic situation. Clearly, this process drives the entire factory. Material requirements planners play a critical role in the success of operations management within every organization. You don't just manage your company's inventory, you define it.

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