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What Does MRP Stand for? Learn All about the Supply Chain System

Are you always ordering too much or too little inventory? It can be frustrating to disrupt production or miss client deadlines due to inaccurate inventory levels. Fortunately, you can utilize IT solutions such as Material Requirement Planning to maximize productivity. This article will cover what you need to know about this software solution. Read on to discover more.

What is MRP?

Material Requirements Planning is a software-based inventory, production, and schedule management system that streamlines the manufacturing process. Firms use ERP to manage inventory, components and raw materials, orders for finished goods, and production schedules.

This system focuses on customer demand, forecasts, inventory data, and manufacturing information, such as the (BOM). The BOM highlights the components needed to manufacture a product.

This supply chain system ensures there are adequate raw materials to produce and deliver products to customers on time. The system also focuses on managing inventory levels while minimizing manufacturing costs. This manufacturing system is based on three basic steps:

  • Taking inventory of available raw materials and components

  • Identifying what additional components are required

  • Scheduling the purchase of materials

This software-based system ensures that there is enough inventory to complete the manufacturing process on time. The system streamlines operations and enhances customer service while minimizing costs.

Difference between MRP, ERP, and SAP

While these terms are used interchangeably in the manufacturing process, they differ from each other. Below is the difference between these terms.

  • Material Requirements Planning – This system manages inventory, raw materials, and schedules to streamline operations.

  • Enterprise Resource Planning – An ERP system is broader and focuses on managing various aspects of the entire firm like accounting, client relationships, inventory management, supply chain, human resource, etc.

  • System Application and Products – SAP is a type of ERP software used to manage business operations.

What is the history of Material Requirements Planning?

General Electric and Rolls Royce, computerized the manufacturing system in the early 1950s. However, these companies did not commercialize the concept.

Joseph Orlicky, an IBM engineer, officially developed Material Requirements Planning in 1964 as a response to Toyota's Production System (TPS). Black & Decker was the first firm to implement this system in 1964.

Oliver Wight then updated this system to Manufacturing Resource Planning in 1983. This new system not only focused on inventory management but also other aspects like capacity scheduling, quality management, and inventory management.

How does MRP work?

This manufacturing system aligns inventory with client demand. The software allows companies to determine the components they need to meet customer demand on time and within budget. Purchasing insufficient components can result in delayed production and dissatisfied clients.

On the other hand, when you order excess inventory, you might incur more costs and increase inventory levels. The goal of this software is to maintain low inventory levels while manufacturing products within the set timelines. The key steps include:

Determine the components you need

Create a BOM to determine what you need to create the end product. List all the components you need to manufacture your products. This includes dependent demand and independent demand items.

Understand customer demand

How many products does your client need? When does your client require the products? You can review client demand by analyzing orders and forecasts. Understanding client demand allows companies to have adequate inventory at any given time.

Create a schedule

After reviewing client demand and manufacturing components, create a schedule that aligns with demand. A manufacturing and delivery program allows companies to minimize lead time and enhance client satisfaction.

Monitor the process

Regularly monitor the process to identify errors and defects. Is the manufacturing process running smoothly or do you need to make some improvements? Determine whether you can meet deadlines within the available time.

Calculation example

Implementing this system allows companies to automate inventory calculations to achieve reordering needs quickly. Using this system, firms can determine the number of components and raw materials needed to create finished products, and the appropriate time to receive them. Here is an ideal example.

We need to deliver 100 chairs to a customer in 1 month. We already have 20 finished chairs in stock. This means we need to produce 80 more chairs. The assembly time required for 80 chairs is 1 week meaning we should begin 3 weeks to come.

Each chair requires 4 legs. To make 80 chairs, we will need 4 X 80 = 320 legs. We already have 120 legs in stock, which means we should purchase 200 more legs. The delivery time for the legs from our supplier takes 2 weeks. This means we should order in 1 week to have the legs in time for assembly.

Evolution of MRP to MRP II

The original system evolved to Manufacturing Resource Planning when Oliver Wight integrated more aspects like accounting, and finance into the existing system. This new and holistic approach focused on much more than inventory management.

The new system offered improved functionalities that made operations more efficient. This system further evolved into ERP, which not only focuses on manufacturing but also on the operations of the entire company.

The ERP system integrates various aspects of a firm's operations including marketing, sales, finance, human resources, supply chain, risk management, and much more. This system allows a company to centralize and optimize work operations. ERP systems manage core business processes to maximize efficiency and productivity.

Pros and cons of MRP systems

Manufacturing software systems have several benefits and drawbacks. Discovering these pros and cons can help companies implement the systems more effectively.


Here are the advantages of implementing this manufacturing software.

Proper inventory management

This system allows companies to have better control over inventory levels. You can easily determine what components you need to manufacture products just in time to meet client demand. You don't have to incur high inventory costs or experience manufacturing delays.

Reduced lead times

Integrating this software into your manufacturing processes allows you to shorten lead times. With the system in place, you can organize your raw materials in time to meet client deadlines. Better customer service builds your reputation and helps you retain and attract more clients.

Improved workflows

Implementing manufacturing software helps you streamline operations. Companies don't need to waste time ordering components needed to manufacture products. Instead, employees organize the necessary components needed to produce goods on time.

Using this system, companies can program manufacturing activities, assign roles and responsibilities to the right team members, and deliver products on time.

Improves purchase scheduling

What do you need to manufacture your products? Integrating this system allows you to get the best value out of every purchase. You know when to replenish your inventory and by how much.

How much inventory is enough for manufacturing? Overstocking can lead to overhead costs and understocking can cause delays. This system allows you to purchase just enough components to meet client demand.

Reduced costs

Implementing this manufacturing management system can help you reduce overall inventory costs. You can easily identify the right components needed to complete the manufacturing process. This system prevents overstocking, which can result in unplanned costs.

Increased productivity

Employees need to work consistently to meet deadlines and improve customer service. The more team members put in the work, the more productive they become. Increased productivity, in turn, results in more profits and company growth.


While implementing a manufacturing system has its benefits, it also has some drawbacks. Here are some limitations.

Data accuracy

This system requires accurate data to function effectively. Such data includes client demand, inventory levels, production schedules, etc. Inaccurate data can result in costly errors that can affect your operations. When entering data, be careful and countercheck to avoid costly mistakes in the long run.

Unpredictable sales forecast

This system relies on sales forecasts to make accurate calculations. Since sales predictions can change, the end results might not be accurate. Various factors can affect sales forecasts. Try to be as realistic as possible when it comes to demand forecasting to prevent significant errors.

Rigid production schedule

This system works with a fixed schedule. It does not account for factors that might affect manufacturing. When creating your program, consider factors such as lead time from suppliers and waste calculations.

How Zensimu showcases the importance of supply chain planning solutions

Zensimu's Beer Game shows the importance of incorporating IT solutions into the manufacturing system. The game requires participants to precisely calculate what they need to reorder to complete the manufacturing process. These manual calculations often result in errors due to human nature.

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After discovering their mistakes, participants can discuss the most appropriate approach that they can use to get better results. Once participants share ideas and insights, the end result becomes less erroneous.

This game shows how a strategic approach leads to greater visibility inside the supply chain. Participants can apply concepts in an unbiased way to optimize performance. Professionals can use this game to demonstrate how implementing IT software can maximize productivity and increase efficiency.

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Implementing manufacturing software allows companies to manage manufacturing processes effectively. Supply chain systems have evolved over time to make business operations more efficient and sustainable.

Understanding the pros and cons of implementing manufacturing software can help you execute a more effective system. For more assistance, reach out to us today.

Are you coaching Supply Chain? You are at the right place!

Discover the best method to explore Supply Chain challenges with your team through our interactive and funny simulation Beer Game!

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