MRP systems for manufacturers: the ultimate guide

What is an MRP system?

MRP, or material requirements planning systems, are tools for calculating the raw materials, sub-assemblies, and components a manufacturer needs to create a product.

MRP systems perform this task following three steps:

1. Monitoring the current level of raw materials and components on hand
2. Understanding which inventory is low and needs reordering
3. Scheduling the production or purchasing of those materials

When it comes to answering the question of what MRP software is and how it works, that’s it in a nutshell. However, although it appears to be this way, MRP systems aren’t considered lean production and are considered by many practitioners to be antithetical. But that doesn’t mean they don’t go hand-in-hand!

So that’s the general definition of an MRP, but what does it mean in manufacturing?

What is MRP in manufacturing?

An MRP system for manufacturers is a piece of software used to automate production, scheduling, and inventory.

Though this definition, especially for MRP systems in manufacturing, has changed over time since there have been big strides in technological advancements in this area. Traditionally, MRP systems used to be considered a pull production system. However, as the software and technology improved, capable MRP systems became able to support all types of production workflows:

• Make-to-order (MTO)
• Make-to-stock (MTS)
• Assemble-to-order (ATO)

That means the MRP systems of today allow growing manufacturers to be flexible with their production lines and change their production speed depending on the different challenges they encounter.

So, we’ve already touched upon this a little bit. But how exactly does an MRP system work in manufacturing?

How does MRP work?

The way earlier MRP system iterations automate these areas and meet demand efficiently is by following the bill of materials (BOMs) of a manufacturers product, which details:

• The raw materials, subassemblies, and components used
• The quantity of these items
• Total costs
• Operational steps

The BOMs will highlight the relationship of the items that go into making your product as either parent or child. As the parent item, the finished goods are at the top of the hierarchy.

But, the MRPs of today use inventory data and your master production schedule (MPS) to automatically calculate how much material you need and how much your manufacturing process will use. However, back to inventory types, as the inventory items within your BOM are classified as one of two things:

• Independent demand
• Dependent demand

Dependent demand

These are the items you need to make your finished goods — the raw materials and the components. The demand for these items will depend on how much is needed to make the next-level component in the BOM hierarchy.

Independent demand

This is essentially your finished goods, as the amount you need is all determined by several factors such as:

• Market demand
• Sales history
• Forecasted demand

To help manufacturers track and manage all these dependencies and figure out how many items are needed by the specific dates within the master production schedule, most turn to MRP systems to achieve this task.

Another element of understanding what an MRP system is is how they track lead time. There are two common types of lead time manufacturers concern themselves with, and that’s:

• Material lead time — The ordering and delivery time of materials
• Manufacturing lead time — The time it takes to make finished goods and ship them to the customer

Material requirements planning systems automatically estimate these lead times for you by using the information provided with your BOM and MPS.

Why is an MRP system important?

Now that you know MRP system meaning and everything there is to know about MRPs, let’s delve into why it’s important for manufacturing businesses (especially direct-to-consumer manufacturers) to get set up with an MRP.

But, firstly, what is the purpose of adopting an MRP system into your business?

Well, the goal of MRP systems is to:

• Minimize manufacturing lead times
• Optimize inventory levels
• Maximize service levels to boost business efficiency

An MRP system will give your business the real-time visibility you need to see inventory requirements to meet demand, help you maintain optimal inventory levels, and design the best production schedules. Without these functions, your business is going to be playing catch up from having the adopt manual systems instead, such as inefficient Excel spreadsheets, which will lead to issues such as:

• Ordering too many raw materials that will increase carrying costs and tie up capital from overstocking
• Stockouts from underordering materials and components will make you miss deadlines and driveaway sales
• Create bottlenecks and cause disruptions, increasing your manufacturing costs and decreasing your output

At first, handling your production planning and scheduling will be fine as you’re just starting out. But as companies begin to grow and start manufacturing on a larger scale, many turn to MRP systems, not just in manufacturing but in over industries too, to create a perfect balance between supply and demand.

A scenario of the importance of MRP systems in manufacturing

Let’s imagine you’re a bicycle manufacturer. Your MRP system basically performs like an inventory management system which will streamline your production schedules and help you place orders for your dependent demand. A bicycle manufacturer needs to keep track of multiple dependent demand items, including aluminum pipes, tires, seats, bicycle gears, etc.

An MRP system steps up by being able to answer questions automatically and immediately to help you know when you can initiate a production run, such as:

• The components you need in terms of inventory
• The quantity you’ll need
• When the components are needed

For the bicycle manufacturer, the MRP system matches the flow of materials and, in the order they follow along the manufacturing route, depending on the availability of the preceding dependent demand. This allows the manufacturer to understand what’s missing, the lead time for each product, and any bottlenecks forming on your production line.

How to choose the right system

Here are the key factors you should consider when choosing the right system for your manufacturing business. Until recently, manufacturers had been stuck between a rock and a hard place. On the one hand, was the choice of working with overly complex webs of inefficient Excel spreadsheets, and on the other were the expensive ERP systems of the big players.

It’s not been an easy ride.

Thankfully there are now affordable ERP and MRP systems available to meet the needs and budgets of growing manufacturers. These systems can offer benefits ranging from optimal inventory control to better production planning strategies. That doesn’t mean that all the systems on the market are worth your time, though.

Here are seven key factors you should consider when choosing the right MRP for your manufacturing business.

1. Taking control of your inventory should be a priority

A good MRP keeps track of your stock. An exceptional MRP gets your inventory to optimal levels. What you want is software that will provide live inventory control to guide you in purchasing at the ideal times. This way, the benefits of achieving optimal inventory are twofold:

1. Excess stock is reduced, which cuts carrying costs
2. You won’t run out of stock, so there will be no more delayed deliveries

That means you need to look for software that manages raw materials and products, sets reorder points for when they are low, and can make stock adjustments in real time. If all these features are present, you’re onto a winner.

2. Strong production planning capabilities are key to MRP

Production planning processes and resources is a two-sided coin — both heads and tails must be balanced to achieve maximum efficiency.

One side of the coin is finding an MRP to help you schedule your operational and human resources. This means that your teams are focused and do not get overwhelmed, while your machinery won’t be double-booked. Scheduling tasks for your team might not be something you expect from an MRP, but human resources are as critical to your operations as your material resources.

The other side of the coin is prioritizing your productions.

Smart production scheduling software allows you to rank manufacturing jobs while automatically considering the material availability. Make sure that both sides are covered. That way, you can save money by keeping an efficient schedule and are also able to make changes to your production according to demand.

3. Find software that gives you accurate costing

One of the most desirable features of MRPs is production cost reporting, and there’s a good reason too. Keeping track of your costs can be mission impossible using spreadsheets, especially if the cost of raw materials is not consistently stable. Finding the right MRP can help you gain accurate costing, allowing you to make better pricing decisions based on actual product margins.

There are two key aspects to look for:

1. The capability to create multilevel product recipes with sub-assemblies
2. Product recipes that track manufacturing costs as well as the cost of materials

Having both elements will give you a complete and up-to-date bill of materials so you can sell products at the right price.

4. Get a complete order fulfillment cycle

MRP systems should make your life easier. The more elements your order management system covers, the better. Look for software that makes sales, production, and inventory one seamless flow. This will maximize the system’s use and reduce the amount of work you have to do as more features will be automated.

MRP systems with a complete order fulfillment cycle will give you the flexibility to make-to-order or make-to-stock, depending on your manufacturing needs.

So, if you have a dedicated sales team, they can use these tools to create orders themselves. On top of that, they will know the completion dates without having to be in constant communication with your production team. The perfect solution is a system that integrates your entire workflow from a single platform.

5. Look for the important integrations

Most scaling manufacturers use multiple online services to meet their needs, whether it be for accounting or sales. Ideally, you want to find software that integrates with popular e-commerce platforms like Shopify or WooCommerce and accounting software like QuickBooks Online or Xero. That’s going to make a critical difference to the manufacturing seller, as it means that you have full visibility of stock, production, and sales.

6. Friendly face matters

One of the beauties of having an MRP system is that it can be used by different team members while reducing miscommunications. That’s why you want software that’s understandable by everyone who uses it. Whether you’re someone that uses it every day or only needs to check on things once in a while, the interface should be friendly enough to be accessible to both.

This might seem superficial, but the reality is that if a system looks simple, then there’s probably been effort put in to make it easy to use as well. It will greatly reduce anxiety amongst employees if you go for a modern, intuitive solution rather than a mind-numbing program that looks like it jumped out of the ’90s.

7. Cloud-based software is where it’s at

As well as it being user-friendly, you also want your software to be accessible anywhere by anyone.

Cloud manufacturing software means that anyone in the business, including yourself, can have full visibility no matter where they are. Let’s say your production manager goes away for a week-long conference. As long as they have internet access, their trip will not disrupt your business workflow. Remote work is on the rise, and this solution gives your team the flexibility to work away from the office.