Management Research News

Fundamentals of material requirements planning

Cary M. WongBrian H. Kleiner
Article information:
To cite this document:
Cary M. WongBrian H. Kleiner, (2001),"Fundamentals of material requirements planning", Management Research News, Vol. 24
Iss 3/4 pp. 9 - 12
Permanent link to this document:
http://dx.doi.org/10.1108/01409170110782540
Downloaded on: 17 February 2017, At: 10:28 (PT)
References: this document contains references to 0 other documents.
To copy this document: permissions@emeraldinsight.com
The fulltext of this document has been downloaded 2107 times since 2006*
Downloaded by Instituto Tecnologico de Puebla At 10:28 17 February 2017 (PT)

Users who downloaded this article also downloaded:

(1986),"A Model for Material Requirements Planning Implementation", International Journal of Operations & Production
Management, Vol. 6 Iss 5 pp. 30-37 http://dx.doi.org/10.1108/eb054778
(1981),"Implementation of Material Requirements Planning: Safety Lead Times", International Journal of Operations &
Production Management, Vol. 2 Iss 1 pp. 52-61 http://dx.doi.org/10.1108/eb054675

Access to this document was granted through an Emerald subscription provided by emerald-srm:607229 []
For Authors
If you would like to write for this, or any other Emerald publication, then please use our Emerald for Authors service
information about how to choose which publication to write for and submission guidelines are available for all. Please visit
www.emeraldinsight.com/authors for more information.
About Emerald www.emeraldinsight.com
Emerald is a global publisher linking research and practice to the benefit of society. The company manages a portfolio of
more than 290 journals and over 2,350 books and book series volumes, as well as providing an extensive range of online
products and additional customer resources and services.
Emerald is both COUNTER 4 and TRANSFER compliant. The organization is a partner of the Committee on Publication Ethics
(COPE) and also works with Portico and the LOCKSS initiative for digital archive preservation.

*Related content and download information correct at time of download.

 Volume 24 Number 3/4 2001

FUNDAMENTALS OF MATERIAL REQUIREMENTS

PLANNING
by Cary M. Wong and Brian H. Kleiner

MRP has evolved as a set of logical planning techniques which better enables management to operate in a manu-
facturing environment. It is a network scheduling concept which integrates company-wide information to plan
the activities of the manufacturing function. The four relevant questions that are at the heart of MRP are: 1) What
are we going to make?; 2) What does it take to make it?; 3) What have we got?; 4) What do we have to get? This
information allows the derivation of the fundamental shortage equation. This is the basics of MRP.

MRP offered management the capability to identify the products that were actually going to be produced.
These items came from the production plan which is an extension of the material requirements plan. The mate-
rial requirements plan in turn identifies what the designated work centres and/or the factory floor, including ven-
dor, requirements are going to be over a designated period of time. The material requirements plan is a
sophisticated computer generated calculation quantifying procurements and production requirements from the
relationships of the above four reference questions. Specifically these inter-relationships are generated from the
Downloaded by Instituto Tecnologico de Puebla At 10:28 17 February 2017 (PT)

master production schedule, the inventory records and the bill of material.

Once the MRP concept was incorporated in mainstream production, the power and benefits of the master
schedule were revealed. It became apparent that managing the master schedule was the most crucial and chal-
lenging element to insure accurate and reliable data. The key to generating reliable data begins by generating vi-
able forecast requirements, which is a function of the strategic business plan. This data is then combined with the
actual demand and incorporated into the master schedule. The beauty of the MRP process lies in its ability to ac-
complish priority planning through rescheduling demand. Through these processes the master production
schedule concentrates on predictable future shortages, which is in direct contrast to concentrating on shortages
after they have occurred. This in turn reduces the order launching and expediting modes so prevalent in purchas-
ing for unplanned shortages, thus allowing overall production performance to increase.

From the above narrative it is apparent that in order to install the MRP system there are various essential re-
quirements. These include a realistic and accurate forecast, an accurate incoming and ongoing unit demand
schedule, an accurate inventory control system and an accurate bill of materials. Also, in order to calculate and
distribute usable data on a timely basis, a computer system will need to be utilised to generate the exception and
rescheduling reports. Another aspect of the essential requirements for a good MRP system is the human element;
employees must be properly educated, receptive and committed to the system in order to fully realise the poten-
tial of the MRP investment.

In summary, the MRP system formalised and integrated various production and strategic requirements while
quantifying usable output in an efficient manner. With all the wonders and fascinations of this new revolution
major changes have evolved over time. This is the topic that we will now address: the evolution of MRP II.

Manufacturing Resource Planning II

MRP II has been termed or referred to as Closed Loop MRP. This concept has evolved from the trial and error
application of MRP in the functional production world. The Closed Loop MRP system is depicted on next page
in Figure 1.

Through the evolution process, capacity restraints became incorporated as a function of MRP II. MRP II ac-
knowledges the fact that if the production facility cannot physically meet the requirements generated by the mas-
ter schedule, due to capacity constraints, the plan has lost its validity. This additional dimension allows
management to evaluate and ascertain whether or not the plan is viable.

A major technical development that revolutionised MRP II is the integration of the whole company. Through
this holistic approach MRP II has become the game plan for manufacturing, marketing, technical support and fi-
nance; and as such the whole company now is able to generate and use one set of data. This gives management far
more capacity than ever before and eliminates redundancy and duplication of efforts within organisations (i.e.,
the financial function can now use the numbers generated by manufacturing).

9
 Management Research News

Figure 1. Closed Loop Diagram

Production
Planning
Master Production
Scheduling
Material Requirements
Planning
Capacity Requirements
Planning
Realistic ?
Executing
Capacity Plans
Executing
Material Plans

The ideas generated for the MRP model translate into the basic theme of improved productivity through effi-
cient resource utilisation. This development encompasses several identifiable variables which we will now clar-
ify.
Downloaded by Instituto Tecnologico de Puebla At 10:28 17 February 2017 (PT)

Reduced Inventory: Monetary productivity is increased when inventory levels are reduced to minimum shelf
requirements. This increased cash capacity allows the corporation to invest in other financing activities to maxi-
mise shareholder objectives. MRP allows manufacturing to produce more of the right things at the right time,
which should translate into inventory reduction.

Improved Customer Service: Customer service levels also positively increase with the implementation of
MRP. This is a reflection of meeting scheduled delivery dates, increased productivity of the direct sales force
(i.e., being able to concentrate on selling vs. researching late shipments, etc...) and overall improved customer
satisfaction.

Improved Direct Labour Productivity: One of the most dramatic improvements in manufacturing since the in-
troduction of MRP has been in the direct labour area. When scheduling is done properly, manpower can be allo-
cated to producing the product desired. Production products are purchased, received and distributed efficiently;
and the ever present emergency tactics are eliminated. This is all a result of having the right material available at
the right time.

Reduced Purchased Costs: In an efficiently run MRP system, purchase orders and requisitions are not utilised
for production vendors. Yearly agreements are negotiated with these specified vendors and augmented with
weekly vendor scheduled requirements reports. This allows purchasing agents to spend more time on sourcing
new vendors, negotiating cost reductions, standardising products, etc... These efforts should translate into mate-
rial cost reductions. In conjunction with a reduction in purchasing cost, there should be a direct reduction in ma-
terial purchased costs due to better scheduling and timing of procurements; it has been estimated that the
national average reduction in these costs runs at five per cent.

Reduced Traffic Costs: Much of the reduction in traffic cost has to do with air freight costs. When scheduling
is inadequate additional costs are incurred to air freight product to customers and/or air freight production mate-
rial to the plant to satisfy manufacturing needs. These delays and/or customer dissatisfactions impact productiv-
ity, and eventually these additional costs are passed on to the customer in the form of higher prices.

Reduced Obsolescence: Change comes with the territory and that is what MRP is geared to. Engineering
changes can be timed to coincide with on hand inventory quantities. With good planning and scheduling, exist-
ing inventory supplies and components can be depleted before engineering modifications and changes are im-
plemented. This type of co-ordination can significantly reduce obsolescences of existing inventory.

Reduce overtime: When planning and scheduling activities accurately forecast demand, productivity is en-
hanced. The manufacturing floor knows in advance what output is required and these activities can be scheduled
to insure that production requirements are satisfied. This reduces expediting orders and decreases the need for
overtime.

10
 Volume 24 Number 3/4 2001

Having the numbers to run the business: When manufacturing has accurate reliable numbers, financial fig-
ures can be derived from the manufacturing data. This eliminates fudge factors and expending valuable em-
ployee time duplicating efforts. A great example of co-ordinating efforts is in the inventory control area. Many
companies today have gone to a cycle counting technique for controlling inventory. This is a sampling technique
where randomly specified inventory is counted and adjusted daily. If these records are certified as accurate, there
is no need for the annual physical inventory, a very unproductive effort. Thus, if the manufacturing numbers are
right, they can be utlised for the accounting numbers.

Having accountability throughout the organisation: Accountability implies measurement, and measurement
requires a valid plan. Without a valid plan, performance measurements are meaningless; there are no quantifi-
able tools available to gauge performance. MRP II allows valid schedules to be produced, allowing performance
measurements to exist and accountability to meet the plan can exist throughout the organisation.

Improved quality of life: Once people can start working together toward a common goal, the game plan,
there is a lot less adversary relationships, a great deal more satisfaction when the product is going out the door,
and people can see the results of the efforts that they are making. This equates to an improved quality of life.

We have elaborated on many of the benefits that can be achieved if a MRP system is incorporated. The central
theme of this process is a formalised scheduling system. MRP II co-ordinates the activities of the entire organisa-
Downloaded by Instituto Tecnologico de Puebla At 10:28 17 February 2017 (PT)

tion and builds unity among common goals. If the fundamental activities of production are accomplished, the or-
ganisation will be enhanced with increased productivity.

Practical Examples of MRP II in Industry

Ilsco: Installed a MRP system and has since been experiencing 30 per cent less inventory.

Di-Arco: Experienced proficiencies by moving product through shipping evenly throughout the month. In
1976 they shipped 78 per cent of their product in week 4. In 1981 they shipped approximately 25 per cent of their
product every week of the month.

Prior to MRP, the crunch was responsible for some things being missed in the rush, such as manuals, docu-
mentation, etc. Getting the last machines out meant working excessive overtime. Now our employees can go
home, morale is better, and quality is improved. Basically, now everyone cares, and they are taking the time to do
it right.

Hill-Rom: The shipping rate at month end for this corporation used to exceed the rate at the beginning of the
month by 30 to 50 per cent. Now, with MRP, the variance does not exceed 5 per cent.

Hewlett Packard: One of the most powerful benefits of an integrated MRP and financial system is that you
can predict the impact of changes and operations performance on the financial aspects of the business. We can
say that in our first year our shipping plan technique predicted the product mix so well that production cost at
standard came out within one per cent of the projection.

American Sterilizer: Before MRP, the percentage of orders delivered to customers on the first date promised
was 70 to 72 per cent. Now it runs between 90 and 97 per cent.

Conclusion

Manufacturing Resource Planning (MRP II) has evolved out of Material Requirements Planning (MRP) into a
company game plan. It has been demonstrated that efficient use of these tools can dramatically increase the level
of professionalism in conducting manufacturing businesses. This professionalism gives organisations a com-
petitive advantage by reducing inventory costs and integrating a holistic corporate attitude.

References

Bragg, Daniel J.; Han, Chan K. 1982. Material requirements planning and purchasing. Journal of Purchasing
and Materials Management. V.18, Summer, pp.17-22.

Davis, Charles H.; Raafat, Feraidoon; Safizadeh, M. Hossin. 1983. Production and inventory information proc-
essing; Journal of Small Business Management, V.21, July, pp.25-35.

11
 Management Research News

Morris, Gregory D.L. 1989. Material requirements: planning needed. Chemical Week, V.145, October, p.20+

Penlesky, Richard J.; Berry, William L.; Wammerl ov Urban. 1989. Open order due date maintenance in MRP
systems. Management Science, V.35, May, pp.571-584.

Schmidt, Thomas G.; Berry William L.; Vollmann, Thomas E. 1984. An analysis of capacity, planning proce-
dures for a material requirements planning system. Decision Sciences. V.15, Fall, pp.522-41.

Tatikonda, Lakshmi U.; Tatikonda, Rao J. What are the critical success factors of MRP? Management Ac-
counting, V.70, May, p.34.
Downloaded by Instituto Tecnologico de Puebla At 10:28 17 February 2017 (PT)

12