- We cover the history of MRP and DRP and how these methods were developed.
- Why MRP is the basis of DRP, and how both became absorbed into ERP.
- The automation brought by MRP and DRP.
This article discusses five supply planning methods. Each one of these found application in business at different times historically, and each at one time was considered state of the art at one time. You will learn all of the methods and their background.
What is the Sequence of Adoption of Supply Planning
The sequence of adoption was:
- MRP/DRP (which I count as one as they must be combined to provide both inbound and outbound supply planning)
- Cost optimization
- Inventory optimization and multi-echelon planning is the final supply planning method to be commercialized in packaged enterprise software (it is not covered in this book, but is covered in my other book, Inventory Optimization, and Multi-Echelon Planning Software).
How These Methods Were Developed
The Origins of the Different Supply Planning Methods
“Material Requirements Planning programs, made practical by computers, were implemented in many firms beginning in the 1970s. Interest was greatly stimulated by an MRP Crusade conducted by APICS nationwide. The powers of the technique were stressed, but too little emphasis was given to the supporting activities of:”
- Master Scheduling
- Structured Bills of Materials
- Getting Accurate Data
- Shop Floor Control
- Capacity Planning and Control – Orlicky’s Material Requirement’s Planning
MRP as a Forecast Based Planning Method
Material Requirements Planning is emphatically a forecast based planning method. It is combined with lead times and the BOM. It creates a series of planned production orders and purchase requisitions which are all timed to allow the demand to be met. Material Requirements Planning has these frequently unstated prerequisites:
- Every inventory items move into and out of stock.
- All components of an assembly are required at the time the assembly order is released.
- Components are disbursed and used in discrete lots.
- Each manufacturing item can be processed independently of any other. – Orlicky’s Material Requirement’s Planning.
The First Broadly Used Computerized Procedure for Supply and Production Planning
Material Requirements Planning can be considered to be the first broadly used computerized procedure for supply and production planning.
- The actual full leveraging of Material Requirements Planning’s capabilities change depending on the company.
- Some companies still having problems properly using Material Requirements Planning. With many companies applying Material Requirements Planning incorrectly to unforecastable product locations.
The concept of forecastability is in my view the most important concept that must be understood to manage any supply planning method.
How MRP Implementations Began
MRP implementations were not immediately successful when first introduced. MRP was a very different way of running a business from one that was pre-MRP, and there were cultural as well as educational challenges to getting MRP to work properly. While this is generally infrequently discussed, books on MRP written in the 80’s and 90’s described the challenges in clear terms that these projects faced. The experiences MRP implementations (first stand alone systems and then ERP based MRP systems) can be seen as a maturation process that took quite a number of years at most companies that implemented these systems. I found the following combined quotations one the problems with MRP illustrative.
“Computerization made it possible to crunch through thousands of records in an effort to provide a more effective way in managing materials. It would, according to the proponents, help us plan priorities for the shop, determine when and how much material to order. But when the software was installed, inventories weren’t reducing, and we began to discover the reasons. First we had to have ninety-five percent accuracy in our bills of material for the system to work. And..98% accuracy in our inventory balances. It seemed that the people who had the most to gain were the ones with a vested interest in MRP, particularly the educators and the software houses. It releases orders according to lead times devised to represent a floor of disorder,…and it is not equipped to recover quickly from mistakes that occur, or deliveries that are late. The lot sizes, usually based on EOQ logic have little to do with real demand. Most companies that we interface with seldom get through more than 60% of the MRP review reports weekly. Because the extensive amount of variances aren’t maintained, over time, the effect is usually a build-up of unneeded materials, a consequential rise in inventory, and continued daily anguish over missing parts. The irony is that companies are still managing themselves using old manual techniques, while automated systems are pouring out data in massive volumes. We calculated that one company produced over 25 tons of unread MRP reports annually. Another produced three pounds of paper for every pound of production aircraft that left the runway.” – Richard G. Ligus, Consultant
Richard Lingus is partially describing issues faced with older MRP systems. For instance, MRP is not anymore an overnight batch job. However, other issues he describes are related to master data accuracy, which are with us to the present day.
There always has been much debate on the topic of MRP, and in fact there is a great debate between Lean proponents and MRP proponents. This is in my view is primarily because of the following three reasons:
- Over Application of Forecast Based Supply Planning Systems: MRP, which is a forecast based planning is over-applied, and that is applied to products which do not have a sufficient forecast accuracy to be placed on any forecast based planning system, MRP or any other. However, supply planning systems can still plan products using lead times and BOM explosion, but by using reorder points. So while the MRP procedure in not applicable to every product location in the company’s database, the use of a system which can calculate dependent requirements based upon a forecast or based upon a reorder point, is of great benefit to a company, and this point is not generally debated, although it can sometimes seem to be as the term MRP tends to be over applied to several computerized functions in supply and production planning.
- Maintenance Issues: Companies have historically not been willing to maintain the master data well enough to get all of the benefits of the MRP procedure. Planning is based upon a series of assumptions, and these assumptions are encapsulated in the master data of the system. Poor quality master data results in poor quality output, and this is true regardless of what supply planning methods (MRP, heuristics, CTM, allocation, etc..) are employed.
- Forecastability: Companies tend to do many things to degrade their forecast accuracy, which in turn reduces the forecastability of the product database, and reduces their ability to use forecast based supply planning methods. Companies often blame the external environment, but many things which reduce forecastability are their own doing. These behaviors extend from having too many SKUs, to the overuse of promotions, to not performing elementary activities such as differentiating their manually controlled forecast from their system created forecast. These same companies will then turn around and complain about the quality of their forecast. It must be reiterated that MRP is a forecast based planning system, and no forecast based planning system can provide good output with a forecast of poor quality.
Benefiting from the Supply Chain Planning Functionality in an ERP System
The supply chain planning functionality in ERP systems is at this point considered basic, however, there are still quite a lot of investments required in order to run an ERP system in just its supply chain areas. It is in fact surprising to many that work in the field, including myself, that such a large segment of companies have not been able to move beyond MRP/DRP and that so many companies have still not actually mastered MRP/DRP. I entered the field in 1998 working for an advanced planning software vendor, and the assumption which was generally accepted within this vendor that MRP had been mastered by companies and that it was time for more advanced methods. This was the philosophy throughout the software vendor, but roughly 14 years of experience in the field later, it seems a completely incorrect assumption. This shows how one’s financial incentives can distort the interpretation of a market.
In addition to forecasting well, there are number of key competencies required to run MRP/DRP properly, and these competencies still do not exist at many companies in the US. I will address these further on in this article, however, first I want to discuss the categorization that is routinely applied to ERP systems.
ERP: Execution System? Planning System? Or Both?
ERP systems are often referred to as “execution systems,” however while this is often stated; this is not actually an accurate description of ERP. Its accuracy depends upon how the system is used. It can be an accurate term when an external planning system is connected to the ERP system, and all planning functionality is unused. In this sense the ERP system is merely the “execution system.” But when a company uses an ERP system without the benefit of and external planning system then planning is performed in the ERP system.
In terms of functionality, ERP systems there can be no question that ERP systems are also planning systems. This is because they both contain procedures that look out and make virtual decisions and secondarily they allow users or planners to insert and change virtual decisions in a planning horizon. A virtual decision would be any requisition or recommendation for an order, while an order is an execution document. ERP systems make virtual decisions based upon assumptions. What ERP systems do not provide is sophisticated functionality in the area of planning. However, this is a question of degree, not a question of existing or not existing. MRP and DRP and forecasting are planning functionalities, and all of these exist in ERP systems.
Changes at Companies Due to ERP Systems
ERP systems excel at enforcing an enormous number of rigid rules and processes on a business. This has positive and negative consequences, although the ERP vendors and the major consulting companies tend to emphasize the positive consequences if for no other reason that they make money selling and implementing these systems. In some cases vendors and consulting companies will discuss the “best practices,” but in many cases what is offered in the software is simply a generic practice, or specifically a logical sequence. It is a logical sequence that one would post a goods issue prior to a goods movement, and very difficult to see how this is innovative, requires special thought or a best practice. In fact many countries have accounting rules that state this must occur in this sequence. There are also many cases where a generic practice is to create the forecast before creating a supply order, at least for a make to stock environment. There is nothing particularly intelligent or insightful about this sequence, it is just how it should naturally be performed. This is a natural sequence in the same way that opening a car door should precede starting the car. One can instead choose to start the car by rolling down the window, starting the car from outside and then opening the door to get in, but it would make little sense to follow this alternative sequence.
What is MRP Categorized As Within Planning?
MRP was the first supply planning method that was incorporated into the software. MRP is one way of creating the initial supply plan. A complete supply planning always has two components.
- The first is the planning of production orders and purchase requisitions to bring into facilities. This brings material into the supply network and schedules production.
- More detailed production planning is performed further on in the workflow by a specialized production planning application.
The second component is the deployment plan where planned stock transfers are created to push material between the internal locations and finally out to wholesale or retail locations.
The Best Known Supply Planning Method
Material Requirements Planning is one of the best-known supply planning methods, but MRP only addresses the initial supply plan. The deployment plan is not created by Material Requirements Planning but by a related procedure that developed around 15 years after MRP called DRP.
Secondly, different methods can be used for the initial supply plan and the deployment plan. There is no rule saying that for instance if a company chooses cost optimization for the initial supply plan, it must use cost optimization for the deployment plan method.
It would not have been possible without the reduction in the price of memory that occurred around this time.
APS software companies like i2 Technologies marketed against ERP vendors. ERP software companies fought back by downplaying the importance of these planning systems. They promoting the idea ERP systems could perform all planning. They held to this view until later when they developed or purchased their own advanced planning systems.
Before developing their planning systems, a high-level representative from SAP is renowned for telling a senior representative from i2 Technologies that only a few customers would be interested in these types of products.
The Criticisms of MRP/DRP by APS Vendors
Introduction Versus Commercialization
Estimates of MRP Uptake
The Movement towards More Advanced Methods
MRP Becomes Absorbed by the Rising Trend of ERP
Eventually, the market matured, and Material Requirements Planning became seen as less of a differentiator between vendors. The industry consolidated. Software vendors merged or exited the marketplace as Material Requirements Planning was incorporated into ERP systems.
Around this time, DRP took over as the leading edge. It was easy for those experienced with material requirements planning to understand since both methods moved material through a series of linked locations based on external demand.
The Relationship Between MRP and DRP
“The concept of DRP very closely mimics the logic of MRP. As with MRP, gross requirements consist of actual customer orders, forecasted demand, or some combination of both; scheduled receipts are the goods the distributor expects to receive from orders that already have been released, while goods that already are received and entered into inventory constitute the on-hand inventory balance. Subtracting scheduled receipts and on-hand inventory from gross requirements yields net requirements. Based upon the distributor’s lot-sizing policy and receiving behavior, planned order receipts are generated. Firms may order only what they need for the next planning period or for a designated period. Known as economic order quantity (EOQ), this involves a lot size based on a costing model. Alternatively, firms may be limited to multiples of a lot size simply because the supplying firm packages or palletizes their goods in standard quantities. Also, some distributors may require some time interval between the arrival of goods on their docks and the entry of the goods into the inventory system.” – Reference for Business
Before Material Requirements Planning, reorder point methods, and manual methods drove the planning. Many of the calculations had to be performed by hand. Of course, this logic was also calculated by hand before being computerized. Going back in time, computational and data storage capabilities set a significant limitation on the types of planning mathematics and techniques that could be used.
Interestingly, papers on multi-echelon date back late 1950’s, articles for inventory optimization date back to the mid-1970’s.
Of course was decades before inventory optimization mathematics could be implemented in enterprise software.
When the Research into the Various Supply Planning Methods was Published
The simpler methods, such as MRP and DRP had a much smaller lag between their development and their commercialization and general implementation. Research into advanced methods like multi-echelon planning preceded MRP by several years. While MRP began to be broadly implemented with ten years of its initial development. Multi-echelon would take another 40 years after its original development until it would be used in commercial applications.
Determining the State of an ERP Implementation
Before beginning any planning implementation it is important to understand the usage level of the ERP system that the planning system will be connecting to. It’s not sufficient to ask executives this question as they receive most of their information about the system second-hand and are not in the system dealing with its output. However, an understanding can be typically be determined from just a few interactions with those that use the system. I have also found it important to list the statements that are collected from these interactions. This is because when combined, the statements can be triangulated and can provide a insight into the system’s usage. Below I have a list of some of the statements made to me by one company:
- Only around 12% of ERP (i.e. MRP) driven recommendations are followed.
- Sales orders are often entered after the production order is complete. This is done because it is not always known what the production quantity will end up being. By entering the sales order after the production order, the sales order and production order match in quantity.
- We have a forecast accuracy of (this number varies – but estimations ranged from 25% to 40% accuracy).
- New production orders are created and scheduled for the following week for the same item, which is still being run this week. Because the quantity that will be produced this week is still not known (as the run is not complete), the production order is not created until after the production run is complete.
- Sometimes we use a forecast, but sometimes we don’t and we just use the sales order quantities from the previous month.
- We divide our products into short lead-time and long lead-time products with short lead time products going out on MRP, and long lead time products going out on reorder points.
- I am concerned with master data for this project because we have very little master data in the system such as correct routings.
These statements tell us quite a bit about how the system is used. Below I have listed some obvious conclusions from these statements.
- Based upon statement 1, its clear that the company is not really using the MRP procedure for planning. It is changed manually so frequently that it is more accurate to describe the system as manually planned. Statement 3 points out that they run MRP, however with such a high percentage adjusted, MRP does not decide very much.
- Statement 2 shows a breakdown of normal sequence of orders. This is not a make to stock example (even in make to stock the production order does not precede the sales order). Statement 5 is another example of the same issue. The company does not even commit to its production orders one week out. This means that the production order is begun in the factory, and both the production order and sales order are created after the production run is complete. These orders are a recording step, the planning step of creating requisitions probably does not occur. The concept of an ERP system is that the system initiates the activities in real life, not that ERP simply records what has already occurred. If this is all true, then the purchase orders or stock transport orders must also be manually created, in order to have material for the factory to use for production. These must be created manually as the production orders is not in the system prior to the component lead times requiring them to be placed. This further means that the planners must be manually exploding the BOM, i.e. using a spreadsheet with the BOM to calculate how much material is needed to support each production order.
- The forecast accuracy, be it either 25 or 40%, is so low, that MRP, a forecast based planning system cannot add value to the process for the items with the higher forecast accuracy (this is an average, so some products probably can be planned with MRP if the master data for production details and lead time were correct). Therefore, most of the products would fall to a reorder point planning approach.
- On statement 6, this individual was not aware that this is in fact a forecast. However, this can be setup in SAP ERP demand management. But from his description, it sounds to be yet another manual override.
- Statement 8 combined with many statements related to the problems with master data told me that the output quality of requisitions and orders of this system would have to be quite low. This is one of the major factors that has promoted the company to treat an ERP system as a recording system for decisions that they make with external support tools.
- Further interviews with external procurement and deployment groups showed that the both MRP does not drive purchase orders, and the DRP procedure’s stock transport requisitions are in the vast majority of cases overwritten manually.
The synopsis of these statements is that the ERP system is not controlling the decision-making for supply chain planning. Instead the ERP system is used to record what has already happened. The users of the system do not trust the system’s output, and most likely with good reason. In fact the reasons are contained within the quotations above.
The Automation Brought by MRP and DRP
“manufacturing requirements planning”
“material requirements planning.”
The development and implementation of MRP and DRP is an interesting story, which dovetails with the use of computers for the supply chain. MRP and DRP are quite simple, but with the limited power of computers in the 1970’s Material Requirements Planning took quite a while to process and was often set up as overnight jobs.
MRP and DRP can be run in a matter of minutes. State of the art has moved on. However, a surprising number of companies are still only using MRP and DRP, along with reordering points for supply and production planning.
- The term MRP is frequently over applied and misapplied by many people in companies. While it is often used to mean the initial supply and initial production plan by any method, in fact, MRP is a particular procedure. It is not to say, and was never intended to be a generic term to describe a process.
- MRP is one of five methods for creating the initial supply and production plan, the others being heuristics, allocation, optimization, and inventory optimization multi-echelon planning.
I cover Material Requirements Planning in depth the following book.
Repair Your MRP System Book
What is the State of MRP?
MRP is in a sorry state in many companies. The author routinely goes into companies where many of the important master data parameters are simply not populated. This was not supposed to be the way it is over 40 years into the introduction of MRP systems.
Getting Serious About MRP Improvement
Improving MRP means both looking to systematic ways to manage the values that MRP needs, regardless of the MRP system used. It can also suggest evaluating what system is being used for MRP and how much it is or is not enabling MRP to be efficiently used. Most consulting companies are interested in implementing MRP systems but have shown little interest in tuning MRP systems to work to meet their potential.
The Most Common Procedure for Supply and Production Planning?
While there are many alternatives to MRP, MRP, along with its outbound sister method DRP, is still the most popular method of performing supply, production planning, and deployment planning. In the experience of the author, almost every company can benefit from an MRP “tune up.” Many of the techniques that the author uses on real projects are explained in this book.
- Chapter 1: Introduction
- Chapter 2: The Opportunities to Improve MRP
- Chapter 3: Where Supply Planning Fits Within the Supply Chain
- Chapter 4: MRP Versus MRP II
- Chapter 5: MRP Explained
- Chapter 6: Net Requirements and Pegging in MRP
- Chapter 7: Where MRP is Applicable
- Chapter 8: Specific Steps for Improving MRP
- Chapter 9: Conclusion
- Appendix A: Calculating MRP
I cover DRP in depth in the following book
Supply Planning Book
Showing the Pathway for Improvement
Supply planning software, and by extension supply planning itself, could be used much more efficiently than it currently is. Why aren’t things better?
Providing an Overall Understanding of Supply Planning in Software
Unlike most books about software, this book showcases more than one vendor. Focusing an entire book on a single software application is beneficial for those that want to use the application in question solely. However, this book is designed for people that want to understand supply planning in systems.
- What methods fall into APS?
- How do the different methods work and how do they differ in how they generate output?
- What is the sequence of supply planning runs?
These types of questions are answered for readers in this book.
This book explains the primary methods that are used for supply planning, the supply planning parameters that control the planning output as well as how they relate to one another.
Who is This Book For?
- Chapter 1: Introduction
- Chapter 2: Where Supply Planning Fits Within the Supply Chain Planning Footprint
- Chapter 3: MRP Explained
- Chapter 4: DRP Explained
- Chapter 5: APS Supply Planning Methods
- Chapter 6: APS for Deployment
- Chapter 7: Constraint-based Planning
- Chapter 8: Reorder Point Planning
- Chapter 9: Planning Parameters
- Chapter 10: How MRP, DRP, and APS Relate to One Another
- Chapter 11: Supply Planning Visibility and Master Data Management
- Chapter 12: Understanding the Difference Between Production Versus Simulation
Wight, Oliver. The Oliver Wight Class A Checklist for Business Excellence. Sixth Edition. Oliver Wight International. 2005
Plossel, George. Orlicky’s Material Requirement’s Planning. Second Edition. McGraw Hill. 1984. (first edition 1975)