behind the growth in mrp

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No. 75510

Jeffrey G. Miller and Linda G. Sprague

Behind the Growth inMaterials RequirementsPlanning



Materials requirements planning (MRP) hardlyseems a phrase to create much of a furor or evokemuch enthusiasm. But in the past few years, hun-dreds of manufacturing companies have broughtMRP systems for production/inventory control online, or are now doing so, while many more are seri-

ously considering it. APICS (the 11,000-memberAmerican Production/Inventory Control Society)has recently finished a massive crusade to informcorporate users of the benefits of MRP systems.Almost all the major computer manufacturers havedeveloped and are pushing software packages to sup-port such systems, and virtually every major indus-trial consulting firm is advising on them.

So the prospect of your running into an MRP sys-tem is growing: many of your suppliers may now beexplaining to your purchasing department changesin their delivery promising procedures because they

are on MRP; your customers may be insisting onnew ways of setting delivery schedules because theyare on MRP. And within your own company, youmay already be hearing from your manufacturingdivisions about proposals for installation of an MRPsystem, recommendations for analysis of its feasibil-

ity, requests to send members of your manufactur-ing group off to MRP seminars and workshops.

The interest is there; the question is why. Leavingaside the natural propensity of computer manufac-turers to tout new systems that use lots of computertime, there is a good reason: the cost balance inmanufacturing control is shifting . Much of the MRPlogic has always been available but, primarilybecause of high data-processing costs, its use hasbeen expensive. Now, however, computation costsare declining while inventory costs are rising. Theresult is that a sophisticated, computerized produc-tion/inventory control system is easier to justify.

Moreover, the economic situation has pushedmanufacturing control into the limelight. Unstableinterest rates, materials shortages, rising finishedgoods inventories, order cancellations, the impact ofscheduling inefficiencies on profits, and the like aremaking clear the need for tighter operational controland more rapid and flexible response to change.

Now, while these are benefits whose value fewwould question, there have been many questions

Copyright © 1975 by the President and Fellows of Harvard College. All rights reserved.

Behind the Growth in MaterialsRequirements Planning

Jeffrey G. Miller and Linda G. Sprague

SEPTEMBER–OCTOBER 1975

Jeffrey G. Miller is assistant professor of business administration

at the Harvard Business School. His interest in materials

requirements planning grew from his experience with the con-

cept in industry and is indicative of his research and teaching

activities in the general area of production inventory planning

and control. Linda G. Sprague is associate professor at the

Whittemore School of Business and Economics at the University

of New Hampshire. Her research and teaching interests include

production scheduling and capacity planning for manufacturing

as well as for community general hospitals.



84 HARVARD BUSINESS REVIEW September–October 1975

EXHIBIT I Elements of a Materials Requirements Planning System

Customers orders Forecasts

Engineering changes Inventory

transaction data

Master production

schedule:

What should be

produced?

When is it needed?

Bill of materials

file:

product structure

data

MRP package:

performs the logic

explodes requirements

offsets lead times

nets out on hand and order balances

Inventory statusfile:

on hand balance

open orders

lead times

Exception reports:

What should beordered?

What should beexpedited?

What orders shoudbe cancelled?

What should be

de-expedited?

Is the master

schedule realistic?



raised as to whether they can actually be achievedthrough an MRP system. And it is precisely thesequestions that the manager must seek to answer inlight of his or her own organization’s particularneeds. Our objective here is to provide some answersto them:

Ⅺ What is MRP?Ⅺ

What are its advantages?Ⅺ Will MRP work for your manufacturing opera-tions?Ⅺ Is MRP worth it?

What Is Materials RequirementsPlanning?

MRP is a new name applied to an old concept, butit is a concept that has come of age with currentlyavailable data processing capabilities. This synthesis

of modern computers and some old (and some new)concepts has resulted in a system that can be usedeffectively to both plan and control production andmaterials flows. The logic of MRP is based on thefact that the demand for materials, parts, and com-ponents depends on the demand for an end product.This distinction is vital since it explains both thebehavior of parts orders and, ultimately, inventories.

Dependent vs. independent demand:1 In manu-facturing it is reasonable (in fact, perhaps desirable)to want absolutely no inventory of a part for, say, tenmonths and exactly 200 each day for the next twomonths. Why? Because that exactly corresponds tothe demand for the part—the part goes into a fin-ished product that is batch assembled. This“lumpy” demand (zero for several weeks, then 1,000needed this morning) is a common fact of manufac-turing life, even when lot size economies andallowances for scrap are taken into account. Itoccurs because the demand for parts and compo-nents is directly dependent on the demand for somehigher-order assembly or manufacturing step that iscarried out in batches. For example, the demand forsteering columns on automobiles is directly depen-dent on demand for the end products—the cars

themselves.Distribution inventories, on the other hand, oftendo not experience the “lumpiness” caused by higher-order batching. This is because the demand for fin-ished goods and spare parts is independent of thedemand for other items produced in manufacturing.

So for manufacturing, where “we want what wewant when we want it,” keeping “average” numbersof parts on hand, as we might be able to in distribu-tion, will lead to either excess inventories or theinability to produce on time. Manufacturing inven-tory control systems must incorporate the depen-dent demand concept to work effectively.

How MRP WorksExhibit I illustrates the four central elements in

an MRP system: the master production schedulethat “drives” the system, the bill of materials file,the inventory status file that provides the necessarydata, and the materials requirements planning pack-age that contains the necessary logic.

The concept of dependent demand is built into thebill of materials file. This file contains informationabout every part, including its relationship to sub-assemblies and/or finished products. Managersfamiliar with indented parts lists for assembledproducts will recognize this type of information—and will also be familiar with its value. If there isindependent demand for any part (e.g., one sold as areplacement), the file can reflect that fact in order tomaintain the distinction between dependent andindependent demand.

The inventory status file is exactly what its nameimplies, a record of the actual inventory level ofeach item and part. It also contains other importantdata, such as lead times.

The master schedule is analagous to, but not nec-essarily identical to, an assembly schedule. It indi-cates when end items (finished products) should be

assembled so that customer orders or finished goodsinventory requirements can be met. The construc-tion of a master schedule, then, requires forecasts offuture demand as well as data on current finishedgoods inventory levels or firm order commitments.

An Example

In order to understand how the logic of an MRP sys-tem works, suppose that, in accordance with a masterschedule made out for the next year, we find that wewant to deliver a yo-yo in seven weeks to a customer.

We know from the bill of materials that we will

require these parts: two wooden sides, one woodenpeg, a piece of string, and a cardboard box withprinted instructions. A check of the inventory statusfile shows that we have neither inventories nor openorders for these parts, except that we have onewooden side on hand. We know that the procure-ment lead times are: sides, five weeks; pegs, oneweek; string, one week; boxes, four weeks. And weknow that it will take one week to actually assem-ble the toy. To ship during the seventh week then,

HARVARD BUSINESS REVIEW September–October 1975 85

1. See Joseph Orlicky, Materials Requirements Planning. The New Way of Life in Production and Inventory Management (New York: McGraw-Hill, 1975), for an exposition of dependent versus independent demand.



we will need everything in time for assembly duringthe sixth.

We could easily place the orders for all these partsright now, but what would happen if we did? Wewould have string and a peg next week that would sitin inventory for five weeks. Not very important withone toy, but what if this were an order for 50,000?

So instead of ordering everything now, let’s work

back from the hypothetical delivery date. We willneed all of the components in the sixth week, so wecan simply calculate when to place our orders bysubtracting lead times. This lead-time offsetting,while netting out current inventory balances, willresult in planned orders for one wooden side nextweek, a box the following week, and the peg andstring three weeks after that. If, in turn, the sidesrequire red paint that has a three-week lead time,and no paint is on hand, we can see that our deliverywould be two weeks late. If this were the case, wecould either expedite the paint and side or negotiatefor later delivery of the yo-yos. In either event, we

would not expedite any of the other components.

Driven by Change

The reader who is familiar with PERT or criticalpath methods for controlling large projects may seesome similarity between the logic of these tools andthat of MRP. All operate by working backwardthrough time from some desired end point to deter-mine a starting time for related activities, such asordering parts. But the analogy is incomplete,because MRP involves far more than just workingbackward through time. PERT is a planning toolapplied to single projects, while MRP is a tool forplanning and controlling a great number of productsand parts that may interact with one another. Moreimportant, MRP considers not only the time dimen-sion in planning but also the current and plannedquantities of parts and products in inventories. Thepower of the MRP concept is its ability to takeaccount of the dynamics of both time and quantityfor interrelated parts and products.

The logic of MRP makes good sense, but the ques-tion inevitably arises: Why hasn’t it been donebefore? Well, it has to some extent. But unless rapid

computation is available, the principle breaks downwith anything but an extremely simple, single prod-uct. This explains why some of the older systemsthat used a bill of materials to derive (or explode)parts requirements used the concept only as a rough

planning tool for obtaining annual or monthly grossmaterial requirements. Such systems typically didnot take current inventories and open orders intoaccount, and the resulting plans were often obsoletebefore they could be implemented.

A modern MRP system extends the concept ofexplosion: it is now used in conjunction with lead-time offsetting for both planning and control pur-poses in both the long and the short run. That is,such a system can now inexpensively and rapidlyupdate order priorities weekly or even daily ifchanges in plans and expectations so dictate. Rapidcomputation is needed to explode parts require-

ments from a schedule while simultaneously refer-encing inventory files to check stock status and leadtimes, and to keep the entire plan current enough tobe useful in spite of broken schedules and late mate-rial arrivals. MRP is a tool that is driven by changerather than destroyed by it.

If the computational power is there, MRP canplan, release, and control orders so that materialsarrive when they are needed. The system integratesthe concept of dependent demand (embodied in theBOM file), the principle of lead-time offsetting (withthe MRP package itself), the principle of inventorybalancing, and high-speed computation. The result

is a manufacturing planning and control systemwhose objectives are inventory minimization anddelivery schedule maintenance.

What Are the Advantages?

The rapid update capability of computers, coupledwith the MRP logic and the appropriate data, makesit possible for managers to cope intelligently with thethousands of changes that inevitably occur betweenthe planning and execution of primary tasks.

Keeping priorities straight. Consider, for example,a machine breakdown that throws a component twoweeks off schedule, ultimately affecting an end-prod-uct delivery by two weeks. Because of the delayeddelivery date, there is no reason to hurry along othercomponents as planned. (They would probably justshow up two weeks early and needlessly sit in inven-tory.) Instead, these related components could bede-expedited (due dates relaxed by two weeks).

You’ve heard of expediting a needed part to get itin a hurry. Have you ever heard of anyone de-expe-diting a part when it no longer is urgently needed?

MRP provides the ability to change, and keeps prior-ities straight.De-expediting and expediting to keep priorities

straight has three important effects: (1) it frees uptime and capacity for other jobs if the item is pro-duced internally, (2) it prevents the “hurry up andwait” syndrome that is all too common in manufac-turing operations and that is responsible for much ofthe excess in-process and raw materials inventoriesfound in industry, and (3) it can result in rescheduled




vendor deliveries for purchased parts, thus reducingpurchased materials inventories.

Keeping inventories low. Correct priorities cancut average lead times, and lower lead times meanlower in-process inventories. For example, a majororiginal equipment manufacturer (OEM) decreasedaverage lead times from 16 weeks to 12 weeks witha corresponding 25% inventory level decrease. This

was possible because, as in most fabrication/assem-bly companies, the actual time to produce a productamounted to only a small fraction of the time it wason the shop floor; the bulk of the time was con-sumed waiting for other parts and materials to catchup. With correct priorities provided by MRP, theneeded parts are available at the same time. Lesswaiting means less lead time means less inventory.

It is possible to lower inventories in other ways aswell, as the following example shows. A major tele-vision manufacturer was faced with substantialwriteoffs every year because engineering designchanges appeared so frequently that they could not

be phased into production in time to prevent themanufacture of obsolete parts. MRP, with itsreliance on a bill of materials file that reflectedplanned engineering changes, allowed the manufac-turer to time these changeovers to coincide with thedepletion of obsolete parts and thus to decreasewriteoffs substantially.

Early warning. Since an MRP system functionsessentially as a simulation of manufacturing activ-ity, it can also be used to examine the feasibility ofmeeting delivery dates before promises are made.Should a component go so far off schedule that itcannot be expedited back on, the affected end-prod-

ucts can be identified well in advance, thus permit-ting you to warn your customers of impendingproblems.

Long-range planning. Finally, besides being aneffective method for controlling materials in theshort run, these planning systems have also provedto be important in budgeting and long-range plan-ning. A major electric utilities equipment supplier,for instance, uses the bill of materials, the inventoryfiles, and an annual schedule to simulate variousannual production plans and derive budgeting infor-mation. The same company uses MRP to plan man-power needs, facilities capacity, and major purchasecommitments for several years—a clear advantage ofan MRP “model” of manufacturing operations.

Will MRP Work for You?

Our experience shows that, while MRP has uni-versally applicable elements, its ultimate success is

intimately related to some important aspects of youroverall manufacturing operations, which must becarefully analyzed. It is not a question of whether itsbasic logic applies—in most cases, it does. The ques-tion is how you can best incorporate this logic intoyour own manufacturing system, given (1) its keycontrol variables, and (2) its key production/inven-tory tasks. Others have detailed the importance of

developing a well-thought-out manufacturing pol-icy, and this question refers to just that. The answerprovides the background for an analysis of whatMRP can and cannot do for you.

Let us use three general examples to illustratesuch an analysis:

1. Company A is a basic assembly operation.Almost all parts and subassemblies are purchasedexternally; there are long production runs of a fewmodels; the finished goods inventory is kept in anextensive distribution system.

2. Company B is a general machine shop.

Products are made to order and customer specifica-tion; there are complex flows in manufacturing; andthere are large in-process inventories.

3. Company C is a fabrication/assembly opera-tion. Most parts are manufactured in a generalmachine shop and assembled in small quantities tocustomer order and specification.

Link Between Manufacturing and Distribution

For Company A, where a few products are assem-bled to stock in long production runs, MRP seems anatural. The assembly or master schedule can beused with a bill of materials and inventory file toexplode requirements and offset lead times for pur-chased parts and subassemblies.

But consider the key production/inventory con-trol tasks for this organization. Factory cycle timesand in-process inventories are likely to be almostnonexistent. In-process inventory control, thoughimportant, is not the key task in this case.Inventories are more likely to be concentrated in thedistribution system. Hence, Company A’s key pro-duction/inventory tasks focus on planning interme-diate-term (three to twelve months) production

while controlling distribution system inventoriesand purchase orders. Its key control variables are theavoidance of stockouts at distribution centers, thesmoothness of production rates, and the mainte-nance of a supply of purchased components for theassembly lines to avoid shutdowns.

If MRP is to be used effectively in this kind ofmanufacturing environment, it must interface wellwith distribution. The master schedule is importantsince it links the current stock position at distribu-




tion centers with the assembly schedules. Moreover,the master schedule in this case incorporates theintermediate-term production plan by which themanager can smooth peaks and valleys in produc-tion levels.

By exploding as well as time-phasing componentsrequirements from this master schedule, an MRPsystem can give purchasing the information it needs

to control its acquisitions. MRP can then maintainpriorities as schedules change, stockouts threaten,and deliveries slip. But here its focus is on distribu-tion, production smoothing, and purchasing as thekey tasks and control variables of the system. Thisfocus in turn requires, of course, that the organiza-tion have a well-developed and rapid distributionand purchasing communications system.

Shop Floor Control

Company B provides a substantially different viewof MRP’s usefulness. Given the general machine

shop’s piece-part, make-to-order environment, man-agement must be able to promise realistic due datesto customers, coordinate the design, manufacturing,and engineering functions with production, andschedule the flow of material and work from onemachine center to another. Its important controlvariables are likely to be the percentage of deliveriesmade on time, the level of in-process inventories,the length of time between customer orders anddelivery time, and the utilization of machines andmanpower.

But, in contrast to Company A, Company B’smanufacturing (in-process) inventory and schedul-ing control is a critical activity. In fact, most ofCompany B’s inventories are likely to be in-processinventories. Consequently, a reporting and schedul-ing system must be available in the shop so that pro-duction can proceed in accordance with thepriorities obtained from the MRP system. Keepingpriorities straight here means making maximum useof available capacity. The MRP and shop floor con-trol systems must be carefully coordinated and inte-grated to be useful.

In this kind of environment an MRP system canalso perform two other important functions. First, by

offsetting lead times for material requirements, itcan help determine realistic due dates for customers.There is little payoff in promising the delivery of apart in 10 weeks if it takes 15 weeks to acquire thenecessary materials. Second, it can help control theacquisition of this material. By updating the receiptsof materials and other new information, purchasingpersonnel can quickly focus on the priorities of theseitems and expedite and de-expedite materials accord-ingly. Moreover, with such a system it becomes

immediately apparent when materials will arrive toolate to meet a due date, and management can notifycustomers early or make other arrangements.

Buffer Stocks and Work Center Priorities

The previous examples illustrate the importantrole the MRP concept can play in many types of

companies. However, there are few in which it hasmade as great an impact as in the ubiquitous fabri-cation/assembly type of operation typified byCompany C. From a historical perspective, this iseasy to understand.

Fabrication/assembly companies, characterizedby a general machine shop for fabricating parts andcomponents that are used in downstream assemblyoperations, have frequently separated these twowidely divergent kinds of processes with large bufferinventories. These inventories have served two pur-poses: to segregate the management of the two kindsof manufacturing for organizational and technical

reasons, and to ensure enough of the many partsrequired to keep assembly operations supplied andto process orders in time.

But these buffer inventories were usually con-trolled by classical reorder point methods thatassumed that the demands for individual compo-nents were independent of one another and of thedemand for assembled items; and they never havebeen. The result has been large inventories and agreat deal of intraorganizational struggle anyway,because the assembly department has constantlyinterfered with fabrication activities to get all theparts it needed to complete an assembly. For manysuch companies, a computer-based MRP system hasbecome the answer. But, as before, the specialrequirements of fabrication/assembly operationsmean that the way it has become the answer forthem differs from that found to be suitable for others.

Company C’s fabrication/assembly operationmust simultaneously complete the key tasks of boththe assembly operation (like Company A’s) and thegeneral machine shop operation (like Company B’s).In other words, it must simultaneously be respon-sive to stockouts and customer due dates, keepassembly operations supplied, and maintain priori-

ties and schedule equipment in the fabrication area.To accomplish this, MRP must serve as the linkbetween fabrication and assembly, as well asbetween assembly and distribution.

The master schedule serves, as before, to linkassembly and distribution, but a fabrication shopfloor control system is the link between fabricationand assembly. The shop floor control system accom-plishes this by translating the master schedule, viaMRP, into priorities that can be used to determine




which parts will be worked on at a particular workcenter. In some companies, “capacity requirementsplanning” is a second link between fabrication andassembly. This is a technique that can project fabri-cation shop loads from the master schedule and canalso help determine labor requirements, subcon-tracting needs, or equipment needs.

In fabrication assembly operations, MRP and asso-

ciated systems allow a company to maintain theseparation between two different types of processes,but they also allow such a company to substitutecurrent and timely information from a centralizedsource for large intraorganizational inventories.

Is MRP Worth It?

Unfortunately, determining the value of MRP isnot easy, because the answer depends on your start-ing point. For one thing, the benefits of the systemdepend on how well your current production controlsystem is working. The costs depend on the stage ofdevelopment of your current manufacturing controlsystem as well as on the skills and attitudes of thepeople in your organization.

To illustrate, a $5 million fabrication/assemblycompany implemented a simple MRP system in sixmonths with a small computer, the part-time effortsof the factory superintendent, and one (the only) sys-tems analyst in data processing. Another company,which has sales in excess of $20 million and whichboth fabricates and assembles similarly complexproducts, is just now reaping the benefits of an inte-

grated MRP-based production control system afterfive years of stop-and-start evolutionary effort onMRP and associated systems, a new, larger com-puter, and a great deal of data processing support.

Is the point that smaller companies or smallermanufacturing departments can use MRP moreeffectively and efficiently than larger ones? Wethink not. More likely, the anomaly stems from thedifferences between the level of skills, the adequacyof related systems, and the organizational supportavailable in the two companies.

The first company had two skilled and dedicatedpeople to design and implement the system; the sec-

ond did not and had to hire them from outside anddevelop them from within. The first company had areasonably good, though informal, shop floor controland reporting system; the second had to developsuch a system from scratch. The first company ben-

efited from good relationships among foremen,workers, engineers, and marketing personnel; thesecond did not consult these people in their originaldesign of the system, experienced organizationalproblems in implementing it, and had to restart withan extensive training and selling program. The firstcompany had accurate bills of material and the orga-nizational commitment and mechanisms to keep

them up to date; the second had to develop the billsand convince people that accurate record keepingwas an important part of their job.

Realistic Expectations

Clearly, these companies started with differentsets of skills, support systems, and levels of organi-zational commitment. And just as clearly, what wasessentially a routine job for one was a major long-term effort for the other. Their experiences show thenecessity of beginning with a realistic set of expec-tations about what it will take and how long it willtake to implement such a system.

What results can you expect? On the one hand, ifyour current production control system is resultingin extremely high inventories and/or poor deliveryperformance, the net result of an MRP installation islikely to be very rewarding. For example, one com-pany recorded a 12% reduction in finished invento-ries, a work-in-process inventory reduction of 30%,and a 35% increase in their number of on-time deliv-eries. But this company had some serious problemsto begin with.

On the other hand, if industry and internal stan-dards indicate that your performance is good, the

results of an MRP system may not be as dramatic.But a lack of dramatic results can itself be deceiving.For instance, one large company adopted MRP dur-ing a period of explosive sales growth that resultedin pressures on its capacity. Even though its inven-tories did not go down (they actually increased), itsturnover remained at about the same level. It isunlikely that this company’s old production controlsystem would have withstood these strains.

The interest generated by the MRP concept isindicative of the promise this type of control systemoffers. The realization of its potential for your orga-nization, however, depends upon an analysis of the

way it must be focused. Moreover, since implement-ing such a system can include problems that beliethe simplicity of its underlying logic, it is essentialthat management formulate realistic expectationsabout its associated costs and benefits.


behind the growth in mrp

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