What is MRP - More Importantly, Will It Grow Your Business?
Scaling manufacturers can’t stop asking the question: What is MRP? And for good reason too. It’s a solution that could be the difference between getting stuck in the mud and growing your business to its real potential.
Manufacturing has stepped up a gear.
More and more quality crafted products are entering the market as manufacturers go direct to consumers.
Half of us have even considered starting a craft business of our own after seeing the bursts of specialty, quality crafted stores that have been popping up online.
This means that the market is moving fast, and manufacturers need the tools to go with it.
And the main tool for manufacturers in recent years has undoubtedly been MRP.
So growing manufacturers have to ask:
What is MRP (Material Requirements Planning)?
MRP, or Material Requirements Planning, is a computerized system used for production, scheduling and inventory. The terms and definitions have varied over time, but the basic principles remain the same.
Originally, they were developed to improve productivity and increase production efficiency for manufacturers.
The way they did that is by using bill of materials, inventory data and production schedules to make sure manufacturing could meet demand efficiently.
You could break the initial MRPs objectives down to:
optimizing inventory levels
production scheduling efficiently
making sure raw materials are available to demand
All sound like obvious things to do, right?
That might be the case now, but before the conception of MRP in the 60’s all of these were taken care of manually.
There would be a team of planners, that you could imagine all worked in a cellar deep underground, adjusting data and making schedules on piles of paper.
MRP changed that by allowing computers to do the hard work.
Even today the smallest of manufacturers will still at least use electronic spreadsheets to follow these principles.
But as manufacturing has developed and businesses have scaled, so too have the number of systems grown to match.
Here are the main ones:
Smart Manufacturing Software.
Though different in application, they all maintain the principles of improving productivity and efficiency.
And the one constant is that all these systems have evolved far beyond the initial applications of MRP.
Its offshoots have been advancing for decades and still do so today.
Nowadays for example, leading systems have started integrating online tools such as accounting, sales and forecasting.
Exciting times lay ahead.
Which is why it’s important to really get to know MRP and the directions in which this technology is going.
You can make sure that you choose the right MRP system for the now, whilst also staying ahead of the curve.
Looking for a complete MRP solution? Don't forget to check out our free MRP System Guide.
What is MRP in Manufacturing?
Before getting into the nitty gritty, it’s good to understand how MRP approaches manufacturing strategies.
Because, the first thing to note is that manufacturing generally works in two production workflows:
-Make to Order (MTO)
-Make to Stock (MTS)
MTO makes products after an order has been placed, whereas MTS has stock ready to meet forecasted demand.
You could say MTO reacts to an actual placed order, whilst MTS manufactures products beforehand, so they are ready to be sold on demand.
The two have often been pitted against each other: Make-to-Order vs Make-to Stock.
But any capable modern version of an MRP that makes it a priority will be able to produce with both workflows. That means you should be able to mix and match, without having to worry about choosing one over the other.
They can live in harmony with each other.
That’s important for a growing manufacturer, because it means that MRP gives you a lot of flexibility.
Let’s imagine for example that you make a range of crafted leather goods.
On the one hand you have some items like wallets and phone cases which sell regularly with little manufacturing requirements.
Then you also offer custom made handbags which take time to make and are unique to each customer.
Modern manufacturing companies need the flexibility to handle both production workflows simultaneously and effectively.
But not all MRP systems have this built into the architecture, so be aware of this while choosing the right tool for your business.
Without a proper system built for both workflows, handling MTO and MTS together would be a spreadsheet-ridden nightmare.
How does MRP work?
So, now let’s get to the juicy stuff and see how it gets done!
Firstly, with either of these workflows, you always start with the bill of materials.
That’s basically a rundown of what’s needed to make the product and the costs involved.
At the very least the components that go into a product will be displayed, but the complexity of the bill of materials depends on the software’s capabilities.
Ideally, the production costs will also be taken into account to give you accurate costing.
The bill of materials is used as the foundation for connecting inventory and production scheduling.
Because the system knows how much raw materials needs to be allocated to build a particular product, and also knows if there are enough resources available to run an operation.
That’s the foundation upon which these systems work.
Without bills of materials, MRP would be a lost puppy.
And once you have these bills of materials, you need an inventory which tracks your raw materials and final products.
That’s tracking the stock you have and ideally, a reorder point for when you need to purchase more.
This means you can make sure you have enough stock for your make-to-stock products, whilst also have enough materials to produce make-to-order products on demand.
You always got your stock of wallets to sell, whilst having the materials available to sow your customers favourite line of poetry into their handbag strap (if that is their hearts desire).
And finally, there is the master production schedule.
That’s where you monitor operations and the priorities in which they need to be completed. It doesn’t matter if you’re making to stock or making to order, a quality modern MRP handles both.
The systems job here is to help you run smooth, efficient operations on the front lines.
So, those are the absolute bare bones of an MRP.
How much further a system takes you is dependent on which one you choose.
Smart Manufacturing Software for example, can take your production schedule to the next level by allowing you to drag and drop to prioritize orders.
The material stock is booked to production based on the priorities in the schedule, which would otherwise be very complex to do.
That allows you to react to customer demand in real time.
But that’s just the tip of the iceberg.
There is an entire ocean of possibility with MRP systems, which go beyond the mere realms of manufacturing.
To really understand the limitations and prospects of this kind of software we need take a step back in time.
What is MRP II (Manufacturing Resource Planning)?
Time for a quick history lesson.
You might think hippies, the Vietnam war or the age of the sideburn.
But in the manufacturing world it was the year that MRP was born.
Material Requirements Planning.
A man named Joseph Orlicky, who did not have sideburns, developed a model which would become the blueprint for MRP. That year Black and Decker implemented the first version of this, and they’re still going strong today.
Later in 1975 he published a book “Material Requirements Planning: The New Way of Life in Production and Inventory Management” which sold over a hundred thousand copies in a short period of time.
Homemade and commercial MRP systems popped up in their hundreds over the next few years until...
...the 80’s, when sideburns were replaced by mullets and synthpop.
It’s not clear which of the above inspired manufacturers, but this was the time that they decided it was time to step it up on a notch. And the MRP II was born.
So, what is MRP II?
MRP II is an acronym which, in contrast with its predecessor, means Manufacturing Resource Planning. These systems decided to integrate original MRP systems with other business applications.
This meant offering:
-Advanced demand forecasting;
-Machine capacity scheduling;
-Quality assurance; and
Nowadays you might find it difficult to find an MRP system which doesn’t at least have some of these elements.
Scaling manufacturing companies for example don’t always require advanced demand forecasting or machine capacity scheduling.
New technologies have also had their effects on this phenomenon.
For example, specialized accounting software packages available on the market today have allowed some MRP systems to exclude the accounting module and instead integrate with existing accounting solutions.
But frankly, MRP II has effectively replaced MRP I due to the simple fact that most systems now offer more than just the core features of MRP I.
MRP II is even a bit of a confusing term in itself, because it is essentially an extension of a system which it has basically replaced.
So as far as anyone wanting to get an MRP is concerned, you can safely assume that what you get today is going to be MRP II.
Mindboggling isn’t it?
MRP vs ERP
When it comes to implementing the right system for a company a lot comes down to scale.
That means looking at how many employees you have, how many products you have, how complex the products are, how complex your production process is etc.
That’s where the question comes:
What is MRP software, in terms of the limits of application?
MRP is considered a stand-alone application which can work independently from other areas of the business, having just been focused on manufacturing and a few outside areas.
Huge corporations though, have massive amounts of data to work with, so it makes a lot more sense to have systems which can handle that.
And they can also use systems that bring this data together across departments to reduce massive miscommunications. What would be a minor error to a small business could be monumental to a corporation.
That’s why the 90’s, with its Walkmans and Tamagotchis, also brought with it the ERP.
Otherwise known as Enterprise Resource Planning, ERP came about by developing on MRP to take on more responsibility for the big businesses.
ERP contains MRP but it also includes areas such as:
Supply chain management;
Project management; and
Obviously, this sounds like a great idea. Putting multiple core business aspects into one basket which sorts out your entire company.
The advantages are clear: less data issues, more security, clear communication.
And these systems were, and still are, mostly tailor made for each company to be able to achieve these goals.
As a result, they are incredibly complex and specific to the needs of a business.
That does mean though, that they are expensive pieces of software to implement. It’s one of the reasons that MRP still has a place, because smaller manufacturers cannot afford to pay 75000 to 750000 dollars a year.
That’s to include not just the software itself, but also other ongoing expenses. There needs to be training for new users, maintenance, communications with software developers to update the ERP to match the changing needs of the company.
A significant side effect of this is also that changing systems is almost impossible without some major financial and logistical considerations.
It would be like having a heart transplant.
Changing up the organ that breathes life into your entire business.
So, in the long run some corporations can find themselves slowing down as their systems are so entrenched that they cannot expand into newer areas of technology, like cloud-based systems and online integrations.
Frankly though, these are not downsides which can dissuade a corporation from having an ERP. An ERP is a necessity for businesses that work across nations and have huge amounts of resources to handle.
And in fact, leading ERP providers are now also catching up and moving to the cloud anyway, understanding that they can innovate faster this way.
As an example, take a look at the two big daddy ERP system providers, which provide over half of the total market share – Oracle and SAP.
Both now offer cloud-based solutions, which were initially utilized by MRP.
That says a lot about which is the innovator out of MRP and ERP.
But it’s only natural considering the vast scale of ERP systems.
And though they might be lumbering behind slightly, they offer such huge scope of features for large businesses that they are a major force in the industry.
So ultimately, what is MRP and ERP?
The limits of MRP and ERP are quite clearly defined, centred mostly in the sheer scale of companies that need heavy data-handling software.
Once a company reaches a level where they need mass cross-department integration to keep up with their manufacturing is where ERP comes in strong.
Whereas MRP is generally considered to take on the aspects closest to manufacturing itself, not necessarily as foundation for the entire business.
But the interesting thing to note is that it’s the Smart Manufacturing Software that are leading the way of innovation.
And the future is looking quite different to what it did before...
The New Age: Smart Manufacturing Software
So, what is MRP software going to do next for manufacturers?
It seems that for large manufacturers ERP is the only option available. But smaller manufacturers are starting to diversify their avenues as the industry changes.
The trend has been that manufacturers are now moving closer to consumers than before.
Their sales channels have become more direct, as a result of e-commerce platforms like Shopify and marketplaces like Etsy.
Consumers want more personalised products, and the facts back it up. 31% of consumers want their products to be more personalised than they already are, so the direction is clear.
Here are some examples of cool online stores that embody what’s happening here:
Each of these stores offers quality products that are going straight from the hands of the maker to the homes of the consumer.
They’re clearly well-crafted, and you can feel the love that’s gone into making them.
As a result of this trend of speciality manufacturer, it has made a lot more sense for MRP to also incorporate e-commerce more directly into their systems.
Cloud-based systems allow for inventory integration with Shopify or other e-commerce platforms, so that sales become part of the entire system.
Which is why in some ways MRP is becoming a bit of a vague and redundant term with new innovations such as Smart Manufacturing Software leading the way.
The limits are being tested.
And the capability of MRPs to incorporate other elements of business through online integrations is forming an exciting new vacuum.
This means that they are expanding into areas like accounting and sales, but not necessarily areas like human resources.
You could say these systems are following the footsteps of ERP, in terms of widening their business features.
The difference is that they are focussing on the bits most vital to manufacturers so that the system remains easy to implement and cheaper as well.
These are areas like accounting that are managed through software integrations often already in use by a business looking for an MRP solution.
Katana Smart Manufacturing Software for example implements Shopify as a sales channel.
That way sales and manufacturing become one workflow, and there’s no need for a business to have to manage these elements separately, reducing manual work and increasing efficiency.
This looks like beginning of a new age for MRP, and it can only get more and more sophisticated as the marketplace comes into its own.
The Future of MRP
So, we come back to the beginning, what is an MRP system nowadays?
At its most foundational level it’s still the same as it was back in the age when sideburns were fashionable.
The core aims and objectives remain the same: to improve productivity and efficiency in manufacturing.
But the application has now moved far beyond that, especially when we look at manufacturing.
Scanning the breadth of MRP examples and solutions on the market will quickly reveal that.
Now the considerations have gone into the broader business applications of MRP. The question is, what more can these systems do to streamline your entire business?
Optimal inventory management doesn’t start and end with stock levels. It needs real time costing and up to date bill of materials to be accurate.
Order fullfilment doesn’t just start and end with the inventory and production. It ends with delivering to the customer through online sales channels.
Purchasing doesn’t end with the materials at your door, it ends when the accounts have been done and the cost of goods sold calculated.
That’s why MRP systems are moving closer to cloud-based models which can take care of these business elements through online integrations.
The term MRP is still evolving today, moving much further from what it was originally applied to.
Smart Manufacturing Software for example, is taking MRP and expanding it with the key elements required for scaling manufacturers that sell online. In the same way that ERP is doing this for large scale businesses.
With manufacturers getting closer to consumers through e-commerce and the like, this seems to be the model for the future.
In fact, you could say there is an MRP III on the horizon.
Except it won’t be called that. It’s already a confusing enough term as it is.