- MRP systems are very widely used, but the discussion around their financial return is virtually undiscussed.
- We cover the reality of the returns from MRP.
When MRP systems, which stands for Material Requirements Planning, were first implemented, they were stand-alone systems. But in the 1980s, most of the MRP vendors were purchased by and incorporated into ERP systems. What is far less discussed is the ROI of MRP.
Our References for This Article
If you want to see our references for this article and related Brightwork articles, visit this link.
Background on the Financial Returns of MRP Systems
In my book, The Real Story Behind ERP: Separating Fact from Fiction, evaluates the various proposals used to sell ERP systems and in assessing the research on the financial and operational benefits/ROI of ERP. The results are surprisingly poor to many that now consider ERP to be “critical infrastructure.”
Part of ERP systems’ value is that they provide MRP and DRP integrated into other ERP functionality. This was a primary reason MRP/DRP systems primarily stopped being sold as separate products in the mid-1980s.
Upon investigating the research into the benefits/ROI of MRP, it was surprising to find even less research than had been performed for ERP systems. This means that enormous sums of money have been spent in the enterprise software market without buyers or consulting companies analyzing the research of how effective these systems were in meeting their stated results.
The complete study on MRP that I found was performed by Roger G. Schroeder, John C. Anderson, Sharon E. Tupy, and Edna M. White in A Study of MRP Benefits and Costs, which was published back in 1981. That would have given the authors roughly ten years to investigate the results, as MRP was starting to be implemented in the early 1970s and began to hit a critical mass of implementations in 1975 – but of course, leaves out the following 32 years from 1981 to now.
This study found the following improvements in companies that used MRP.
- Inventory Turnover Increase: 26%
- Delivery Lead Time Decrease: 20%
- Percent of Delivery to Promises Increase: 20%
- Reduction of the Number of People Working in Expediting: 67%
This research generally proposes that MRP had a transformative effect on the companies in its study that implemented MRP systems – what else can one conclude from these changes to the state of the companies that implemented MRP in this sample? What is just as impressive is that these same companies only rated the MRP system along with a variety of goals ranging from “Improved Customer Satisfaction” to “Better Inventory Control,” and the average score was 2.46 out of 4. This is right between the improvements being “Some” and “Much” improved.
The Believability of the Results
I have spent quite a few years working on supply chain planning projects. However, moving from the use of periodic inventory recalculations performed by people rather than computers considerably predates my entry into the workforce. However, I can easily imagine that the productivity improvement must have been at least as massive as is represented in these truncated study results (obviously, the 1981 study was looking backward from 1981). However, how much any initiative improves performance depends on the level of sophistication of the environment before the implementation. For instance, the first printing press, which was introduced in 1450, was inefficient by any following standard – with a productivity level that meant that one laborer (either pressman or typesetter) would produce roughly 1/4 of a Bible a month of work. However, it was more efficient than the technology it was replacing, which was copied by hand. Therefore, one must consider that it is more than likely that few of these companies even had computer-based reorder point systems in use as very few of those systems were sold, primarily because MRP systems supplanted them in the marketplace before they could become famous. This study would have been for companies without computers.
A group of studies on MRP is discussed in the book Factory Physics.
“First from a macro perspective, American manufacturing inventory turns remained roughly constant throughout the 1970’s and 1980’s, during and after the MRP crusade. On the other hand, it is obvious that many firms were not using MRP during this period; so it appears that MRP did not revolutionize the efficiency of the entire manufacturing sector, these figures alone do not make a clear statement about MRP’s effectiveness as the individual firm level. At the micro level, early surveys of MRP users did not paint a rosy picture either. Booz Allen Hamilton, in a 1980 survey of more than 1,100 firms, reported that much less than 10 percent of American and European companies were able to recoup their investment in an MRP system within 2 years.(emphasis added)
In a 1982 APICS funded survey of 679 APICS members, only 9.5 percent regarded their companies has being class A users. Fully 60 percent reported their firms as being class C or class D users. To appreciate the significance of these responses, we must not that the respondents in this type of survey were all both APICS members and material managers – people with a strong incentive to see MRP in as good a light as possible!”
If we increase the standard somewhat by asking how well the MRP system is leveraged to provide high-quality planning output versus how it could be leveraged, it is clear from my experience, and the experience of others, that the gap is vast.
MRP systems did not increase inventory turns from before the MRP systems. While there had been much more discussion around service levels, there is little evidence that service levels are rising. What is quite curious is why the lack of financial return from MRP systems is never discussed.
One of the issues of this lack of ROI is that they are implemented by consulting companies that massively increase the systems’ cost. Secondly, most MRP systems are greatly sub-optimized. One of the best ways to understand MRP is by understanding its parameters. We have developed a Brightwork Explorer system that is both designed to improve parameters and how MRP runs and can be used to understand MRP better.