Where Can EOQ be Implemented?

Executive Summary

  • The question of where can EOQ be implemented is important to answering how to apply this approach.
  • We cover the background of EOQ.

Introduction

The question of where can EOQ be implemented is critical to determine when to use a non-forecast based method of supply planning (reorder points) and forecast based planning (like MRP). EOQ stands for Economic Order Quantity.

EOQ is a way of calculating reorder points. 

Introduction to Economic Order Quantity

The reorder point tells the system when to reorder, while the economic order quantity tells the system how much to order; as such they are necessarily highly integrated values.

EOQ is one method for performing what is generally known as lot sizing. The lot size is the quantity in which the item is produced or procured and therefore it is set at the production location combination in the product master.

Here it is in Demand Works Smoothie on their Policies Tab.

Here the fields the Min ROQ Base (Reorder Quantity) and the ROQ (Reorder Quantity) are the relevant fields. Here the Min ROQ states that one must order in a minimum quantity of 2,880 units. The Qty Increment of 144 units means that after the minimum is met when more than the minimum is required, the item may be ordered in increments of 3,024, 3,168, 3,312, etc. The other alternative in this application is to set the Min ROQ Basis to Days, and in that case the Min ROQ and the Qty Increment would not reflect units, but would reflect days.

Common methods of calculating the lot size are the following:

  1. Lot for Lot: This is confusingly named because lot for lot is simply a lot size based upon the net requirements in a particular period. Therefore it is essentially no lot size. Using lot for lot sizing would be considered Lean as the company is only producing or procuring what it absolutely knows that it needs.
  2. Economic Order Quantity: This bases the lot size on a financial calculation.
  3. Periodic Order Quantity: This is simply the economic order quantity, but stated in terms of a reorder frequency. Economic order quantity is actually one of the oldest formulae in inventory management.

The development of EOQ is, in my view, the most interesting story I can recall reading of all of the supply chain management calculations I have investigated.

The History of EOQ

EOQ was first developed by Ford W. Harris in 1913. As with the development of MRP, the originator of EOQ was not an academic. In fact, at the time he developed EOQ, he did not even have an undergraduate degree. EOQ has proven to be one of the most durable calculations in all of inventory management and has held up remarkably well.

Some have proposed that because EOQ does not automatically adjust with the variability of its inputs, it cannot be used for more product location combinations (PLC’s) with more variable demand history, and this is true – if the data provided to the EOQ is not periodically changed. Therefore, it must be periodically recomputed for the entire product location database. It would be relatively easy to make the EOQ formula continuously altered based upon changes on its inputs, but I have yet to see this functionality in any supply planning application.

The Validity and Applicability of EOQ

EOQ was originally developed for a production lot sizing. However, the book Factory Physics states the following with respect to EOQ:

“For example, in 1913, Harris published his original EOQ paper and established a precise mathematical standard for efficiency research with his famous “square root formula” for the lot size problem. While elegant, this formula relied on assumptions that – for many real-world production systems – were highly questionable.

A fixed, known setup cost

Constant deterministic demand

Instantaneous delivery (infinite capacity)

A single product or no product interactions Because of these assumptions, EOQ makes much more sense applied to purchasing environments than to the production environment for which Harris intended it. In a purchasing environment, setups (i.e. purchase orders) may adequately be characterized with constant costs. However in manufacturing systems, setup costs cause all kinds of other problems (e.g., product mix implications, capacity effects, variability effects). The assumptions of EOQ completely gloss over these important issues.”

Using Economic Order Quantity in Systems

After EOQ’s calculation, it is most often placed into the minimum order quantity field which all supply planning systems have. This sets the minimum order level. However, sometimes other factors that are larger than this – such as when products must be purchased in rail car loads, set the actual minimum order level. In that case, no EOQ calculation is necessary. The minimum order quantity is the carload.

While the formula is one of the easiest in supply chain to calculate, many companies do not determine their unconstrained products (that is unconstrained by minimum order sizes such as with the example of the car load, or minimum package quantities) on the basis of EOQ.

However, there really is no reason aside from work effort to not do so – and in fact, the work effort is quite low. For whatever reason, most companies don’t get around to calculating EOQ or, if they do calculate it, they do so very infrequently.

Students at university are often told that EOQ is frequently used in industry, when in fact it isn’t (this is just one of the misrepresentations of supply chain management on the part of college courses and supply chain textbooks). But this does not mean that it should not be used.

EOQ certainly adds value and quantifies and then trades off the most important costs for making an ordering decision. That is the truth of how understaffed supply chain management departments are. They often do not have the staffing to apply elementary inventory management techniques that are over 80 years old.

The rule of when to apply reorder points is simple, although the specifics of how to create a threshold for mathematically determining when a product location combination should be placed on a forecast based planning approach like MRP and when it should be placed on a non-forecast based approach is a bit more involved, and is something we cover in the article How to Understand Segmentation Versus Inventory Optimization.

Conclusion

This article answered where can EOQ be implemented. Where can EOQ be implemented is essentially a question of where reorder points can be implemented as EOQ is a very common way to calculate reorder points. You can test our EOQ calculator at the link How to Best Use the Economic Order Quantity Calculator.

And it comes down to forecastability of the product location combination. If the forecast is of reasonable accuracy, then MRP can be used. If the forecast is high in error, and cannot be improved much beyond this error, then a reorder point will normally perform better than creating a forecast.

One of the best ways to understand how to set reorder points externally, we developed an approach where reorder points are calculated externally, which allows for a higher degree of control, and for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level and a picture of what is happening to the overall system. This is called the Brightwork Explorer. Calculating individual parameters like reorder points without an appreciation for the systemwide does not make any sense.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

 

Search Our Other Reorder Point Content

References

*https://www.amazon.com/Factory-Physics-Wallace-J-Hopp-ebook/dp/B00H85T466

This topic is covered in depth in the following book.

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

The Definition of Reorder Point

Executive Summary

  • Reorder points are one of the oldest methods of supply planning.
    We cover the definition of reorder point as well as their origin.

Introduction

The definition of reorder point is necessary to understand a major method of supply planning.

The History of Reorder Point

Reorder point planning was the primary way that supply chain planning was performed before computers existed. Reorder point planning was at first performed manually and, just prior to the arrival of MRP systems, reorder point planning software was commercialized in mainframe computers in the 1950’s and 1960’s in the United States. This is why inventory systems were not perpetual or instantly updated when, for instance, the actual inventory changed, because each reorder point had to be recalculated by hand; therefore each product location combination was set onto a different review periodicity.

After MRP was first developed in the 1960’s and broadly implemented in the late 1970’s, companies moved away from reorder point planning, and reorder point planning was relegated to a lower status vis-à-vis MRP/DRP. Again reorder point planning was soon considered passé. Of course, much of the reason for this was that MRP/DRP software vendors said that reorder points were passé and most of the consulting companies that were obtaining an increasing percentage of their consulting revenues from MRP/DRP software implementations naturally agreed with them.

The Definition of Reorder Point: What Happened Since Reorder Points Were First Introduced

The concept since this time has generally been that all products should have a supply planning method applied to them rather than use reorder points. In a few paragraphs, I will discuss why this is incorrect, and why proponents of “Lean” have caught on to something which is correct with respect to reorder point planning which many experts in supply planning are missing. I consider this explanation important, because individuals that recommend reorder point planning for some items tend to meet stiff resistance from those of an MRP bent; however, much of this resistance is due to not properly considering the conditions under which reorder point planning is effective.

What Are Reorder Points in Their Essence

A reorder point is very simply a quantity of stock or an interval at which a “reorder,” or order, is to be created. In reorder point planning, orders are not triggered by a specific requirement (such as a forecast or dependent requirement), but instead by the depletion of stock over time, eventually triggering the minimum stock level or reorder point. Production orders, purchase orders, and stock transfer orders are generated based upon the relationship between the stocking level and the reorder point. This is stated by SAP in their application help:

“Available stock at plant level plus the firmed receipts that have already been planned (purchase orders, production orders, firmed (emphasis added) purchase requisitions and so on) are compared with the reorder point. If the sum of the stock plus receipts is less than the reorder point, a material shortage exists.”

Reorder points can be used with any of the supply planning methods, or they can be used to exclusively control the supply plan without any of the methods. However, when they are used exclusively to control the supply plan, the company is said to be performing reorder point planning, as opposed to forecast-based planning.

MRP/DRP and APS (heuristic, allocation, cost optimization, inventory optimization) methods are forecast-based planning. As the terminology would indicate, reorder point planning does not require a forecast. The following graphic shows how this works:

The reorder point is a calculated value, expressed as a stocking level, which is then implemented in a supply planning system and stored as a master data parameter. If a company had 100 products, all of which had a reorder point entered in the product location master, and 50 were excluded from the supply planning run – let’s say the MRP run, then 50 of the product locations would be using the MRP supply planning method, and the other 50 would be on reorder point planning. Therefore, a reorder point can be used with or without a specific supply planning method.

This is the Lot Size tab to the product location master in SAP APO/SCM. As can be seen, there are not a lot of alternatives provided here, just the basics. The reason for this is these reorder points are not designed to actually control the planning (that is supposed to be performed by heuristics, the optimizer, or CTM.), but instead these order points are used to moderate the order creation in APO.

In the application Demand Works Smoothie, the inventory parameters are very concentrated onto a single tab. Important fields that relate to reorder point planning are the Fixed Minimum Inventory, Minimum Reorder Quantity (Min ROQ), the Minimum Reorder Quantity Basis (Min ROQ Basis), the Quantity Increment (Qty Increment), as well as the Minimum Cover Days (Min Cover Days).

When the inventory level drops below the Fixed Minimum Inventory, an order is triggered. Therefore the Fixed Minimum Inventory is the reorder point. The order will be created in the Min ROQ in the UOM of the Min ROQ Basis (either a quantity or in days) and any order created that exceeds the Min ROQ will need to be created by incrementing upward in the Qty Increment. More on the Fixed Minimum Inventory is explained in the Smoothie Help:

“This is interpreted by Smoothie as the quantity that the inventory must not go below. Smoothie will recommend receipts to keep ending inventory above this amount (outside the supply fence) and report over/under conditions within the supply fence. The Fixed Min Inventory value drives the Minimum Inventory when the Use Statistical Mins selector is set to No. If the selector is on Linear (or Linear No Outliers), then the greater value (Fixed or RMSE Safety Qty) will be selected as the minimum inventory. Fixed Min Inventory is ignored if the Use Statistical Mins selector is set to Cover (or Cover No Outliers).”

In Smoothie, consumption-based replenishment can also be triggered by falling below the Min Cover Days. This simply allows the replenishment trigger to be stated in days rather than in a quantity. All of this brings up the topic of the economic order quantity, which goes hand in hand with the reorder point. Now is a good time to cover the economic order quantity (EOQ). The reorder point tells the system when to reorder, while the economic order quantity tells the system how much to order; as such they are necessarily highly integrated values.

Conclusion

This article attempted to provide the definition of reorder point.

Reorder points are triggers that are set in the supply planning system that initiate orders once the point is decremented below.

One of the best ways to understand how to set reorder points externally, we developed an approach where reorder points are calculated externally, which allows for a higher degree of control, and for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level and a picture of what is happening to the overall system. This is called the Brightwork Explorer. Calculating individual parameters like reorder points without an appreciation for the systemwide does not make any sense.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

 

Search Our Other Reorder Point Content

References

This topic is covered in depth in the following book.

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

When to Apply Reorder Point

Executive Summary

  • The question of when to apply reorder point is critical to the appropriate planning of products.
  • We cover when to apply reorder point versus forecast based planning.

Introduction

The question of when is reorder point used is critical to determine when to use a non-forecast based method of supply planning (reorder points) and forecast based planning (like MRP).

When to Apply Reorder Point

Reorder points are probably the easiest planning method to understand. They are often based upon an economic order quantity, which determines the batch size (or instead can be based upon the minimum order quantity). From there, the reorder point is calculated, which accounts for the typical demand as well as the average lead-time.

Prior to the development of procedural supply planning systems, reorder points were commonly used for the deployment. Different methods can be used for the initial supply plan and the deployment plan.

Coverage of Reorder Points

There are very few books that cover reorder points. I am not sure why this is, but I have an inkling that it is because reorder points are considered passé. Reorder points are covered in many supply chain books, but it is almost always from a high level, with most stopping at simply explaining the reorder point calculation. However, on the other hand, there seems to be an innumerable number of books on Lean. I find it strange how Lean could be considered a “hot” topic while reorder points would be considered passé, because reorder points are one of the dominant methods within the Lean toolkit. For some reason, Lean books tend to be promotional in nature. There are a number of consultants who work in Lean and clearly many of these books are designed to help increase their consulting business.

In terms of the academic literature, there is quite a bit on the topic of reorder points, with older publications providing a more basic reorder point coverage, and with more modern publications providing quite esoteric reorder points calculations.

The rule of when to apply reorder points is simple, although the specifics of how to create a threshold for mathematically determining when a product location combination should be placed on a forecast based planning approach like MRP and when it should be placed on a non-forecast based approach is a bit more involved, and is something we cover in the article How to Understand Segmentation Versus Inventory Optimization.

Conclusion

When to apply reorder points comes down to forecastability of the product location combination. If the forecast is of reasonable accuracy, then MRP can be used. If the forecast is high in error, and cannot be improved much beyond this error, then a reorder point will normally perform better than creating a forecast.

One of the best ways to understand how to set reorder points externally, we developed an approach where reorder points are calculated externally, which allows for a higher degree of control, and for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level and a picture of what is happening to the overall system. This is called the Brightwork Explorer. Calculating individual parameters like reorder points without an appreciation for the systemwide does not make any sense.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

 

Search Our Other Reorder Point Content

References

This topic is covered in depth in the following book.

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

When is Reorder Point Used?

Executive Summary

  • The question of when is reorder point relates to the several important factors.
  • We cover when to use reorder points versus forecast based planning.

Introduction

The question of when is reorder point used is critical to determine when to use a non-forecast based method of supply planning (reorder points) and forecast based planning (like MRP).

When is Reorder Point Used: The Relationship Between MRP and Forecastability

MRP is a forecast-based planning system. It assumes a certain level of forecast accuracy, which in turn assumes a certain level of forecastability on the part of the product/location combinations. I have analyzed a good number of product databases over the years, and many of the products that I have analyzed from different companies are clearly unforecastable. There is a simple reason for this. Many products that are difficult to forecast have no discernible pattern in their demand history and, without a discernible pattern, no mathematical algorithm can create a good forecast. For statistical forecasting, the only products that can be forecasted are those that have a discernible pattern to their demand history, and not all products have this pattern.

Determining Forecastability

Forecastability can usually be determined – or at least indicated -without any math by simply observing a line graph of a product’s three-year demand history. If there is no discernible pattern, it is unlikely that the product is forecastable with mathematical methods. (Products that are using just the last few periods to create a forecast are the exception to this rule.) An algorithm that can appear to be predictive can be built for unforecastable products, but more often than not this is an illusion created by the forecaster who over-fitted the forecast.

Products with Stable Demand History

Products that have a very stable history exist at the other end of the continuum of forecast difficulty. Typically, it is very easy to forecast for products with a stable demand history; however, if this is the case, actively forecasting the product does not add very much value to supply planning (the ultimate consumer of the demand plan) because a product with stable demand history does not need to be forecasted. Products with stable demand can be managed.

Intermittent – or “lumpy” – demand is one of the most common features of a product’s demand history that makes a product unforecastable. Services parts are the best-known example of a product with lumpy demand. However, I have come across intermittent demand in many different types of companies. For instance, one of my clients was a textbook publisher. A large percentage of their product database had an intermittent demand history, which would normally not be expected of this type of product. However, due to the fact that different US states buy textbooks in large volumes whenever funding comes through, the demand ends up being quite unpredictable for many books. A school system will not make any purchase for some time, and then will buy many textbooks all at once. For example, California is on a seven-year procurement cycle, which means that they wait seven years between purchases.

Examples of Unforecastable Demand

The central premise of this chapter is that many products are inherently unforecastable. As was stated earlier, a lack of forecastability can be determined mathematically and it can also be determined visually. I find that displaying the graphics of unforecastable products is a very educational exercise, and I have used this technique with clients to get the point across. A visual representation of unforecastability is better, in my view, than representing the same thing with a series of numbers in columns. The following graphics are examples of unforecastable demand history. An analysis of each is provided below the screenshot.

This product is clearly statistically unforecastable as there is no discernible pattern. This product has one demand peak in month seven (July), and several other smaller demand points, but simply not enough to forecast another demand point. This is a fairly obvious unforecastable demand pattern. The next example is a bit more complicated.

This product is clearly statistically unforecastable as there is no discernible pattern. This product has one demand peak in month seven (July), and several other smaller demand points, but simply not enough to forecast another demand point. This is a fairly obvious unforecastable demand pattern. The next example is a bit more complicated.

In this case there are two demand peaks, and it might appear to be a good bet that the demand peak will repeat a third time…except it is not a good bet, because the first peak is in month five (May) of the first year, and the second peak is in month one (January) in the second year. Where this product is going next is anyone’s guess. This product is also unforecastable.

Managing Products with No Forecast with Supply Planning

One might think that it’s not really possible to simply stop forecasting products. In fact, it is quite possible and easy to implement, although there can be a fair amount of complexity in the methods designed to calculate reorder points (something that is not commonly understood by those that oppose reorder point planning on the grounds that it is too simple). In the book, Supply Planning with MRP/DRP and APS Software, I cover reorder point planning differently than it is covered in a number of supply planning books. So I won’t repeat the information here. Suffice it to say that there are many cases where it is better not to send a forecast to the supply planning system, and the supply planning system will still manage quite well. Therefore, a simple moving average forecast can be sent for unforecastable products or no forecast at all.

A graphical presentation of how reorder points are set. 

Where reorder points are set in SAP APO, see the bottom of the screen. Further, we will describe the importance of setting reorder points external to ERP or to the planning system. 

Conclusion

In this article, we in part answered the question of when is reorder point used. In order for MRP to work well, the forecast for any particular item must be of a reasonable level. However, many products do not meet this qualification. Sometimes this is due to the skill level, training, system, etc. on the part of the company. Yet, other times it is due to the nature of the demand history itself for a particular product. Forecastability can usually be determined – or at least indicated – without any math by simply observing a line graph of a product’s three-year demand history. If there is no discernible pattern, it is unlikely that the product is forecastable with mathematical methods.

Intermittent – or “lumpy” – demand is one of the most common features of a product’s demand history that makes a product unforecastable. Unfortunately, as is covered in the book Promotion Forecasting: Techniques of Forecast Adjustment in Software, a number of factors are combining to reduce the forecastability of product databases. This includes factors such as the increase in the number of SKU’s carried – called product proliferation, reduced product lifecycles and higher turnover, and increases in promotions. The less forecastable the product database, the less than an MRP, or any other supply planning method, can do to provide a good supply plan. With Sales and Marketing running strategy at most companies, companies are making it increasingly difficult on themselves to have a manageable supply chain. It also means that some maintenance areas must be performed with increased frequency on the MRP system. This is a good segue into our next topic, which is how to improve MRP systems.

One of the best ways to understand how to set reorder points externally, we developed an approach where reorder points are calculated externally, which allows for a higher degree of control, and for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level and a picture of what is happening to the overall system. This is called the Brightwork Explorer. Calculating individual parameters like reorder points without an appreciation for the systemwide does not make any sense.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

 

Search Our Other Reorder Point Content

References

This topic is covered in depth in the following book.

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

When MRP Should be Run?

Executive Summary

  • The question of when MRP should be run has several different answers.
  • We cover several answers to the question of when MRP should be run.

Introduction

The question of when MRP should be run is typically a question about timing. In most companies, MRP is run according to the following schedule.

MRP Timing

Most MRP timing looks like the following.

  1. Sunday: Weekly Full Run
  2. Monday Evening: Net Change MRP Run
  3. Tuesday Evening: Net Change MRP Run
  4. Wednesday Evening: Net Change MRP Run
  5. Thursday Evening: Net Change MRP Run
  6. Friday Evening: Net Change MRP Run
  7. Saturday: Open for a Simulation Run of Whatever Combination

Setting Up MRP

The following is an MRP configuration screen in SAP, as one example.

Here is an example of some of the options in MRP in SAP. These are profiles that can be saved and then scheduled. 

Conclusion

In this article, we in part answered the question of when MRP should be run.

The MRP scheduled presented above is the most common timing of MRP runs.

One reason that MRP is often run as net change is that ERP servers are designed not for running procedures like MRP and DRP, but instead are designed for transaction processing. By placing the MRP procedure on an AWS server, we are able to dramatically increase the performance of MRP, and it can be easily run very quickly, as we cover in the article Real Time MRP.

One of the best ways to understand MRP, is by understanding its parameters. We have developed a system called the Brightwork Explorer that is both designed to improve parameters and how MRP runs and also can be used to better understand MRP.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

Search Our Other MRP Content

References

This topic is covered in depth in the following book.

Repairing the MRP System Book

MRP System

Repairing your MRP System

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.

Chapters

  • 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

When MRP is Applicable or When is MRP Appropriate?

Executive Summary

  • MRP is not always applicable to companies.
  • We cover when MRP is applicable to situations and why.

Introduction

When is MRP applicable is a question we receive occasionally, and it is a very important question, and not asked as often as it should be.

It is critical to when to select to run and MRP system and when there are better alternatives for the requirements.

The Question of When is MRP applicable

For the past several decades, MRP/DRP and ERP have become dominant concepts and dominant application categories or functionalities (as stand-alone MRP/DRP systems are not rare, its more accurate to describe MRP/DRP as functionalities than as systems).

The general thinking on these topics has most commonly been the following:

1. All companies must acquire and implement ERP systems. A good example of this mindset is found in a white paper written by Aberdeen titled To ERP or Not to ERP: In Manufacturing,

It Isn’t Even a Question. This paper did not analyze any of the previous research on ERP, but simply reviewed the opinions of manufacturers, which favored the continued implementation of ERP. While not necessarily true or well researched, it is a good example of the common thinking out in industry.

All companies must maintain a full BOM and explode this BOM using MRP or using other supply planning/production planning methods to accomplish the same objective. This is normally proposed even for companies that outsource their manufacturing.

However, is this always the case? For companies that perform their own production, some type of supply and production planning system – be it MRP or MRP substitute – is a necessity. The last few decades have shown the rise of companies that design, but do not manufacture their own products. This is, in fact, the common approach among high-tech OEM’s.

So let us first review what MRP does.

  1. Explode the Bill of Materials: Automates the calculation of input products (raw material and components) which are necessary for a certain quantity of desired output products (finished goods).
  2. Inventory Netting: Reduces the forecast + sales orders by the planned onhand from the planned inventory position.
  3. Inventory Planning: Calculates reorder points, safety stock, etc.
  4. Purchase Order Creation: In the quantities and in the adjusted for the lead-time required to meet the demand date.
  5. Production Order Creation: In the quantities and in the adjusted for the lead-time required to meet the demand date.
  6. Create Stock Transfers: This is technically not part of MRP but is the output of DRP – however when people refer to “MRP systems” they are actually referring to both MRP/DRP, as they work in conjunction. A system with only an MRP procedure would have no way of creating stock transfers and moving stock through the supply network.

Now let us review how these MRP/DRP functions are used or not used by companies that outsource their manufacturing:

  1. Explode the Bill of Materials: No
  2. Inventory Netting: Yes
  3. Inventory Planning: Yes
  4. Purchase Order Creation: Yes – but only at the finished good level.
  5. Production Order Creation: Yes
  6. Create Stock Transfers: Yes

Therefore, even companies that outsource all of their manufacturing still need to use an MRP or other supply planning system.

There are other ways to perform these same activities – and all the more advanced supply planning/initial production planning methods provide the same categories of output – however, this book is about sticking to the simpler side of the supply and production planning continuum and so MRP/DRP is still useful.

When is MRP Applicable: Do Companies that Outsource Need to Have a Perform MRP?

I want to be careful to be specific here so as not to cause confusion.

  1. Is the Topic of Discussion the Design BOM or Manufacturing BOM? There are many different types of BOM’s, however for our purposes here we only need to be concerned with the design BOM and the manufacturing BOM (or MBOM). The design BOM is, as the name implies, the BOM that is produced by the engineering and design side of the business.
  2. Must the OEM (original equipment manufacturer) Instantiate and Maintain an MBOM in their MRP (or other supply planning/production planning) System? : There is no doubt the OEM will have a design BOM. It is their design after all. However, the question is – if they do not perform any manufacturing, do they need to maintain the MBOM? The answers is no, because the OEM does not need to explode the BOM because they are not communicating with their suppliers detail below the finished good. This is because the CM (contract manufacturer) is delivering the finished good to the OEM.
  • The Alternative Design 1: MRP at Finished Good Level at OEM Instead, the OEM can move directly from the forecast for the finished good and then send the finished goods forecast – which is actually the same as the OEM procurement plan – to their contract manufacturer. The steps in this process look like the following:

This design can be used with a product called Arena Demand.

Arena Solutions, a PLM/PDS vendor, has a product called Arena Demand that can allow the OEM supply plan to be aggregated and then exported to a file to be sent to the CM. This vendor is used as an example, and this is not an endorsement of Arena Solutions or its business practices. See our disclosure notice at the bottom — we take no income and have no relationships with vendors.

It would allow the following to be performed.

  • The demand report is intended for general quoting.
  • From a top-level demand plan, the OEM probably would use a spreadsheet and type in the fields themselves.

As the CM already has the BOM in their MRP system, they would be

able to derive the component demand themselves.

  • The OEM can’t see the component demand (if they don’t run MRP) and therefore Arena Demand enables them to see the component demand based on the supply plan.
  • The OEM is able to use this information to quote component cost across the market to ensure that each component is taking advantage of the purchase volume planned for the upcoming months.

Notice the quarterly supply plan shown above for the two GPS units. This is a finished goods supply plan and, because there is no BOM, there is no necessity for the Arena application to calculate lead times – that calculating is performed by MRP when the CM has provided feedback to the OEM on the feasibility of the OEM supply plan, and when PO’s have been sent from the OEM to the CM.

Also, notice that in the upper right corner there is an export button, which is used to export the supply plan to a file. Notice further that this is just one possible planning bucket – one can also choose the monthly planning bucket rather than quarterly. Arena refers to this as the “Interval.” The Benefits of the Alternative Design The OEM gets a much easier and lower cost to maintain system, and the complex manufacturing is moved to where it should reside at the CM, as they are actually planning the production. Some companies attempt to actively plan their CM/subcontract suppliers; however, while this may work when the OEM is a sizable part of the demand of the CM/subcontractor (and there are still complications in this – a detailed explanation of the type of software than can relatively easily handle this requirement is covered in my book SuperPlant: Creating a Nimble Manufacturing Enterprise with Adaptive Planning Software), if one represents only a small fraction of the demand of a CM/subcontractor capacity, it makes little sense to model this plant – in fact it is highly unlikely the CM/subcontractor would be willing to share capacity information – it’s simply not worth their time.

Conclusion

In this article, we in part answered the question of when is MRP applicable.

MRP is not always the right thing to use, it depends upon the requirements. In the example provided in this article, the company uses a contract manufacturer. In that scenario, it is not necessary for both the purchasing company and the MRP company to run MRP.

Our view is that MRP must be customized for requirements while the industry mostly proposes the use of generic MRP. Find out more about super fast customized MRP at the article Real Time MRP.

One of the best ways to understand MRP, is by understanding its parameters. We have developed a system called the Brightwork Explorer that is both designed to improve parameters and how MRP runs and also can be used to better understand MRP.

Financial Disclosure

Financial Bias Disclosure

Neither this article nor any other article on the Brightwork website is paid for by a software vendor, including Oracle, SAP or their competitors. As part of our commitment to publishing independent, unbiased research; no paid media placements, commissions or incentives of any nature are allowed.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

Search Our Other MRP Content

References

This topic is covered in depth in the following book.

Repairing the MRP System Book

MRP System

Repairing your MRP System

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.

Chapters

  • 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

What is Net Requirements in MRP?

Executive Summary

  • Net requirements calculation is one of the most important functions in MRP.
  • We cover what is net requirements in MRP and how it connects to other things.

Introduction

What is net requirements in MRP is a question we receive occasionally. It is critical to understanding the MRP output.

What is Net Requirements in MRP?

Net requirements calculation is the math MRP performs to determine the time phased need. This is explained well by SAP’s help.

“Net requirements” is simply a method of comparing and calculating the overall planned supply to overall planned demand for a product at a location. It is the primary calculation which is performed within any MRP system and as the book Factory Physics points out, one of the five things that MRP does along with lot sizing, time phasing, BOM explosion and iteration (repeating these steps). The following quotation is helpful with regards to net requirements. Net requirements calculation is carried out in MRP in the planning run after the planning file check at the plant level. The system checks whether it is possible to cover requirements with plant stock and fixed receipts already planned. – SAP Help

Net requirements from this description can be said to be exactly what the name implies, a comparison of supply to demand.

Net requirements is calculated for not only MRP, but reorder point planning as well. When net requirements planning is triggered tells you a lot about the procedure.1 In reorder point planning, the net requirements calculation is only carried out once the stock level has fallen below the reorder level. It is calculated as follows:

Plant Stock + Receipts (PO’s, firmed planned orders, firmed purchase requisitions) = Available Stock – SAP Help

Net requirements is triggered for MRP planned products whenever MRP is run. Now let us compare this to net requirements in MRP. The basis for forecast based planning is the forecast of the total requirements.

Plant Stock – Safety Stock + Receipts (POs, firmed planned orders) +

Requirements Quantity (forecast requirements) = Available Stock

SAP Help

Looking at the differences between these formulae is straightforward enough and is highlighted in blue. Here is what is different between the two:

  • Safety Stock
  • Firmed Purchase Requisitions
  • Forecast Requirements

“At an abstract level, supply chains consist of product-location nodes, which are connected by links. That is precisely the way that Smoothie visualizes supply chains. A unique planning item in Smoothie is a node, which is connected by links. Link relationships can be factored (if one product produces a requirement for 2 of another, for example), and they can be offset with a lag, allowing for the possibility that nodes can be separated from one another by a significant amount of time.” “MRP models are used to represent the conversion of one material’s requirement into a requirement for other materials. For example, the manufacture of a food product produces dependent requirements for packaging and ingredients. Another example might be a machine, which is assembled from many parts or sub-components (which can consist of parts…). The most complex models tend to be MRP models. They can span multiple levels, and they often involve conversion of goods using factors as multiples. The example below shows an MRP relationship that might be appropriate for the manufacture of hand tools. Notice that it includes multiple levels in depth, where a kit comes from components, and those components can be made up from raw materials. Notice also that some materials, such as the extrusions and handles, can receive demand from multiple items. Lastly, note that the screw drivers require various lengths of the same steel casting. For example, it takes 25 short screw drivers to consume a 10 ft. length of steel, so the conversion is equal to 1/25, or 0.04.” – Demand Works Smoothie Help, Version 7.3, 2013

Conclusion

Net requirements is simply a method of comparing and calculating the overall planned supply to overall planned demand for a product at a location. Net requirements and pegging provide the calculation as well as the detailed connection between demand and supply in MRP systems. Net requirements is calculated for not only MRP, but reorder point planning as well.

One of the best ways to understand MRP, is by understanding its parameters. We have developed a system called the Brightwork Explorer that is both designed to improve parameters and how MRP runs and also can be used to better understand MRP.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

Search Our Other MRP Content

References

This topic is covered in depth in the following book.

Repairing the MRP System Book

MRP System

Repairing your MRP System

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.

Chapters

  • 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

How MRP Works

Executive Summary

  • How MRP works is a common question and companies normally invest little in MRP education.
  • We cover how MRP works.

Introduction

The question of how does MRP works is a common question. Companies purchase and implement MRP systems (or MRP from within ERP), but as we cover in the article The Weak General Knowledge of MRP Systems, but then often invest little in educating their workers as to how does MRP works. We cover not only how MRP works, but some of the history of MRP.

How MRP Works

Materials Requirements Planning, or MRP, was the first supply planning method to be computerized. MRP can create purchase requisitions and initial production requisitions. However, MRP does not have the information necessary to schedule production and is not aware of production constraints. For this reason, I like to call MRP a method for “initial” planning only and production requisitions created by MRP should be considered a first pass. These production requisitions are really just translations of demand quantities and dates adjusted for lead times. Either they must be capacity-leveled in the ERP system, or sent to a production planning and scheduling system.

A Brief History of MRP

MRP’s initial focus was not material requirements planning. MRP first stood for “manufacturing requirements planning” before it was renamed to “materials requirements planning”. Unlike the planning methods that were being researched at the time and were implemented after MRP, MRP was not developed by academics. Instead, it was developed by practitioners in the field. While roughly a decade passed after MRP’s development before a substantial number of companies began to use it, the timeframe is actually remarkably fast for a new supply planning method. Prior to MRP, reorder point methods and manual methods drove the planning. Back then, many of the calculations had to be performed by hand because computational and data storage capabilities limited the types of planning mathematics and techniques that could be used.

Interestingly, there are papers on multi-echelon that date from the late 1950’s and papers for inventory optimization from the mid-1970’s. Nonetheless, it was decades before inventory optimization mathematics could be actually implemented in enterprise software. MRP on the other hand, was much faster out of the gate.

The lag time between development and commercialization and general implementation for simpler methods of supply planning (MRP and DRP) was much shorter than for more advanced methods. Research into advanced methods like multi-echelon planning actually preceded MRP by several years, but while MRP started to be broadly implemented within 10 years of its initial development, it would be 40 years after multi-echelon’s initial development before it would be used in commercial applications.

Only recently have many of the hardware constraints mentioned previously been lifted, although more and more options become available with every passing year. Reorder point methods are still used to control procurement and sometimes production; however, they now work with MRP to create economic order quantities. (They can also be used without MRP and are covered in detail in my book Supply Planning with MRP, DRP and APS Software.) Even though MRP is mathematically simple, it performs a number of repetitive calculations that prior to MRP had to be calculated manually, which was a tedious task. Converting large volumes of sales orders into production orders and purchase orders was quite a feat when this capability was first developed independently in the early 1960’s at J. I. CASE and Stanley Tools. Yet quite a few companies continued using their old systems before industry converted over to MRP in the late 1970’s.

How MRP Works: What MRP Includes

The easiest way to understand MRP is to understand what is included in the MRP calculation that generates production and procurement orders:

  • Sales Orders
  • Purchase Orders
  • Materials
  • Stock (There are many different types of stock, but only unrestricted and valuated stock can be included in MRP. In addition, while optional, MRP should be set to incorporate the stock in transit.)
  • Material Lead Times
  • Components
  • Assemblies
  • Lot Size
  • Resources/Work Centers

How MRP Works: What MRP Does Not Include

MRP is very simple; it has fewer options and configuration requirements when compared to the other methods for performing initial planning (production and procurement planning). Therefore, it is also useful to understand what MRP does not include.

  • Normal Stock Transfers: Notice that unlike APS or DRP, MRP does not create stock transfers. This is because it has no concept of the relationships between facilities and is not a method for deployment.
  • Inventory Balancing Stock Transfers: MRP does not rebalance inventory to meet future demand the way several supply planning methods do.
  • Prioritization: MRP does not understand priority; it only understands quantities, dates and lead times. Consequently, if a high-priority customer places an order for product later than a low-priority customer, the low-priority customer receives the inventory. However, many companies operate based on customer priority in addition to the need date, so this is where inventory is either manually allocated or allocation software comes into the equation.
  • Constraints: One of the great limitations of MRP – and one of the main reasons that constraint-based planning was developed and flourished in the late 1990’s – is that it does not know what is feasible; rather it works backwards from requirements and simply develops a plan based upon this figure.

A screenshot of the MRP setup in SAP ERP demonstrates MRP’s simplicity and how few options require configuration.

The first option is the processing key, which relates to whether MRP will reprocess everything (called regenerative planning) or whether it will just perform a net change.

  • The second option relates to whether purchase requisitions are within the planning horizon. If purchase requisitions are not created by the system, they can be created manually. One option here allows only planned orders to be created outside the planning horizon.
  • The delivery schedule setting controls if and how schedule lines will be created.
  • The next setting relates to whether or not an MRP List should be created. The MRP List is the list of the MRP output per material.
  • The planning mode setting controls whether the system re-explodes the BOM after each run. This is performed when the BOM for the assembly has changed, and/or the quantity or date of the procurement proposal has changed.
  • The scheduling setting controls how dates are determined for planned orders and whether only a basic method will be used to determine the dates of planned orders or whether a more complex method involving lead time scheduling and capacity planning will be used.

As you can see, the options are limited and several are related to such things as reprocessing all orders, determining when to create procurement orders, etc.

By contrast, the SNP Supply Network Planning Network Heuristic ,which is a supply and production planning method in the SAP SNP module in APO, and which essentially emulates MRP, has many more controls, including something called “Low Level Codes,” which controls the sequence in which the product/location combinations are run. This is described in the article on the Bill of Materials in the SNP Heuristics and Low Leve Codes.

Many companies rely upon SAP ERP to run their MRP, and SAP has a good description of the mechanics of MRP:

“The system calculates net requirements for all the requirement quantities that are to be planned. The system thereby compares available warehouse stock or the scheduled receipts from purchasing and production with planned independent requirements, material reservations and incoming sales orders. In the case of a material shortage, that is, if the available stock (including firmed receipts) is smaller than the quantity required, the system creates procurement proposals.” – SAP MRP Uses and Their Implications

Major Functionality of MRP

Understanding MRP is a great place to start for understanding the other supply planning methods. The major functionality in MRP is shown in the graphic below.

MRP covers the functions listed above. MRP’s functionality is basic arithmetic; however, it does so for many products at once and can be rerun quickly compared to other supply planning methods.

Manufacturing Capacity Leveling/Planning

As this book focuses on supply planning, I will not spend much time on the manufacturing side of MRP. However, it is important to know that it exists and the implications it has for the supply plan.

Capacity leveling/planning is the activity of spreading or moving production orders from periods where there is no capacity to periods where there is capacity.

  1. Capacity leveling can be carried out with all of the supply planning methods described in this book. Even when capacities are constrained (such as with cost optimization and allocation), it is often still necessary to perform manual capacity leveling as the resource master data is never 100% accurate.

When infinite capacity planning is configured, capacity leveling is frequently performed with a capacity leveling heuristic. Capacity leveling heuristics have the following limitations:

  • They do not take into account dependent demands in the leveling process. Leveling is only performed locally on a resource, sometimes leading to overloaded resources, and on-hand stocks or shortfall quantities. Because of its more limited nature, the overall result of capacity leveling is less comprehensive than constraint-based planning.
  • Infinite capacity planning with capacity leveling is less automated than a system that is capacity constrained. A capacity-constrained system, because it is automated, allows for more planning reruns without the necessity of rechecking the capacity consumption.

Keeping in mind the above limitations, it is also important to remember few companies are using constraint-based planning (which is the opposite approach from capacity leveling) or – if they have implemented a constraint-based planning approach – few are using it successfully. There are many barriers to effective constraint-based planning, which are discussed in detail in the book Supply Planning in MRP, DRP and APS Software. Therefore, I will not get into detail here.

A description of capacity leveling and SAP is available at this link.

The Bill of Material in MRP

The Bill of Material (BOM) is the most important data structure in MRP and is really at the heart of MRP. Taking the finished good and calculating all of the dependent subcomponents need dates is called “exploding the BOM.” However, not many people get to see how exploding the BOM is actually done and it is something that is important to visualize in order to fully understand what occurs when MRP is run.

In the following paragraphs, I will demonstrate the BOM with a very easy-touse supply planning application created by Demand Works, called Smoothie. Smoothie contains both demand planning and supply planning functionality, but for this demonstration, I will only show tables used in supply planning. Smoothie has a file structure so simple and well laid out that it is very easy to see how the BOM is exploded, depending on a demand.

This is a process BOM because it has a factor, which is less than one, meaning that there is a conversion between quantities and they are a percentage. The “to_ item” is Alcohol, which is converting to the “from_ item,” which is Beer, Wine and Liquor. More Alcohol is used in the production of Liquor than Beer, and this is only one of the ingredients of each of these output products. The “offset_days” is currently set to zero, but in reality, the manufacturing process takes time and should be higher than zero.

Understanding Explosion “Explosion” essentially refers to the multiplicative calculation performed by the planning system method, in this case MRP. In the example above, if 1,000 items of liquor are demanded, then 400 units of alcohol (1,000 x 0.4) are demanded, in addition to a similar multiplication of 1,000 for any other items that are also connected to the Liquor from_item in the BOM (not shown in the simplified BOM above). Explosion could just as well be called “finished good to input product relationship multiplication.” The input products to the BOM are the dependent demand. Their demand is “dependent” upon the demand of the finished good.

If you are interested in reading about the calculation of net requirements in MRP, see the article What is Net Requirements in MRP?.

Conclusion

How MRP works is answered by a combination of considering demand, which then explodes a BOM (in most cases, a top-level MRP run is called the MPS) and creates planned purchase orders and planned production orders, that are aligned in their quantities and dates to match with demand — and then, of course, any safety stock or rounding values that are parameters that have been loaded into the system.

Our view is that MRP must be customized for requirements while the industry mostly proposes the use of generic MRP. Find out more about super fast customized MRP at the article Real Time MRP.

One of the best ways to understand MRP, is by understanding its parameters. We have developed a system called the Brightwork Explorer that is both designed to improve parameters and how MRP runs and also can be used to better understand MRP.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

Search Our Other MRP Content

References

This topic is covered in depth in the following book.

Repairing the MRP System Book

MRP System

Repairing your MRP System

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.

Chapters

  • 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

How to Solve MRP Problems

Executive Summary

  • MRP has a well-known list of problems or limitations.
  • In this article, we analyze the problems to see what can be done about them.

Introduction

The list of commonly listed problems with MRP is analyzed in this article along with our analysis of how to solve problems MRP problems.

Wikipedia’s Listing of Problems with MRP Software

Oliver Wight and other companies complain that the MRP software functionality within their ERP system is challenging to implement. There are articles written on why MRP is a problem for many businesses, and Wikipedia has a section on its MRP software entry, a synopsis of which is provided below.

While they are not listed this way in Wikipedia — I have added a “name” in parentheses for each problem.

How to Solve MRP Problems

Below the listed problem is my analysis.

Problem 1: Data Integration

“First problem with MRP software – the integrity of the data. If there are any errors in the inventory data, the bill of materials (commonly referred to as ‘BOM’) data, or the master production schedule, then the output data will also be incorrect (“GIGO”: Garbage In, Garbage Out).”

Analysis: (Data Integrity)

This is listed by Wikipedia as an issue for MRP, but in fact, it’s an issue for any method of planning — either computerized or even if planning is performed manually. Most companies reduce their ability to plan as accurately as they could because they are unaware that software exists to help them manage the BOM, and think that a combination of Excel & ERP is BOM (or recipe if in the process industry) solution. I have yet to see a consulting company understand this. They are hired to bring knowledge; that is simply too often not evident.

Problem 2: Lead Time Estimation

“Systems is the requirement that the user specify how long it will take for a factory to make a product from its component parts (assuming they are all available). Additionally, the system design also assumes that this “lead time” in manufacturing will be the same each time the item is made, without regard to quantity being made, or other items being made simultaneously in the factory.”

Analysis: (Lead Time Estimation)

Inaccuracy exists both for suppliers and for production lead times. Production lead times can auto adjust in constraint-based methods such as cost optimization, however, unless the supplier is modeled as an internal plant, lead times will not change for volume from vendors.

The synopsis on this is the most sophisticated supply planning systems have very similar issues to MRP on lead time inaccuracy. In fact, few companies are meticulous about reviewing their lead times and adjusting them to the current reality.

Problem 3: Multi-Plant Planning

“A manufacturer may have factories in different cities or even countries. It is not good for an MRP system to say that we do not need to order some material, because we have plenty thousands of miles away. The overall ERP system needs to be able to organize inventory and needs by individual factory, and inter-communicate the needs in order to enable each factory to redistribute components, so as to serve the overall enterprise.”

Analysis: (Multi-Plant Planning)

This is a true limitation of MRP. However, to be able to do this, it is necessary to use a method that “can see the entire supply network.” MRP cannot see outside of a single location — that is its design. Multi-plant planning is rated by SCM Focus as one of the two most sophisticated functionalities in supply planning. The only known application which performs multi-plant planning is PlanetTogether, and this is one of the three Superplant functionalities. Turning on multi-plant planning is a desirable goal, but it is a more involved activity than simply using MRP functionality.

Problem 4: Other Systems

“This means that other systems in the enterprise need to work properly, both before implementing an MRP system and in the future. For example, systems like variety reduction and engineering, which makes sure that product comes out right first time (without defects), must be in place.”

Analysis: (Other Systems)

Yes, MRP relies upon other systems, as do all other supply planning methods.

Problem 5: Alternate BOMs

“Production may be in progress for some part, whose design gets changed, with customer orders in the system for both the old design, and the new one, concurrently. The overall ERP system needs to have a system of coding parts such that the MRP will correctly calculate needs and tracking for both versions. Parts must be booked into and out of stores more regularly than the MRP calculations take place. Note, these other systems can well be manual systems, but must interface to the MRP. For example, a ‘walk around’ stock intake done just prior to the MRP calculations can be a practical solution for a small inventory (especially if it is an “open store”).”

Analysis: (Alternate BOMs)

This is performed by having alternate BOMs or recipes in the application with different effectivity dates — something most vendors that offer MRP has mastered — although there are considerable differences in the usability and maintainability of this functionality, and therefore which changes the real-life capability that companies have with this functionality. Furthermore, a true BOM or recipe management solution should feed the new BOM or recipe information, as was discussed in the first bullet point. This takes the recursive complexity of BOM/recipe management both away from the ERP system and the external planning system. Both of these systems are simply designed to represent BOMs and recipes, not to actively manage this master data.

New BOMs/receipts are brought over in an interface when released from the BOM/recipe management system when they are production-ready. They should be coded with their priorities at this time. The highest-rated BOM solution by SCM Focus is Arena Solutions. For process industries where recipes are used, our recommended solution is Hamilton Grant. This overall topic will be discussed in the next section.

Problem 6: Lack of Constraints

“The other major drawback of MRP is that takes no account of capacity in its calculations.”

Analysis: (Lack of Constraints)

Yes, MRP is unconstrained.

This means that planners must capacity level the plan either manually (by moving orders around by hand) or by using a capacity leveling method. Many vendors provide a procedure for capacity leveling which can be configured. This brings up the related issue of the accuracy of resource capacity information, but while this issue is often directed at methods that perform capacity constraining, it affects all of the supply/production planning methods. Here again, not all applications are created equal — because the existence of constraining functionality says nothing about how easy or difficult it is to maintain resources. SAP APO has an extraordinarily ineffective and time-consuming resource management functionality, which results in data not being updated as frequently, and a heavy maintenance load. Overall the techniques for constrained planning have had a high failure rate on projects, something that promoters of things like cost optimization frequently leave out of their presentations to customers and at conferences.

Executive decision-makers generally cannot see the distinctions between applications in this area, and will often end up with a heavy maintenance application that is not able to effectively keep capacity information updated, even though the application can perform capacity constraining within the procedure. This has given capacity constraining a black eye generally when in reality it is just as much a function of the application selected.

Conclusion

How to solve MRP problems was the topic we focused on. However, how to solve MRP problems cannot be accomplished entirely within the MRP system.

One of the best ways to answer the question of how to solve MRP problems is by understanding its parameters. We have developed a system called the Brightwork Explorer that is both designed to improve parameters and how MRP runs and also can be used to better understand MRP.

Improving Your Constraint Planning

Brightwork Research & Analysis offers the following supply planning tuning software with a new approach to managing capacity constraints, which is free to use in the beginning. See by clicking the image below:

 

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References

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)

What is MRP (I,II) Full citation lacking, but available at this link
https://www.share-pdf.com/73ec30f31e4e41e29f089357308d2349/What%20is%20MRP.pdf

As MRP II is essentially ERP, I provide my book on ERP below:

The Real Story Behind ERP Book

 

ERPThe Real Story Behind ERP: Separating Fiction From Reality

How This Book is Structured

This book combines a meta-analysis of all of the academic research on the benefits of ERP, coupled with on project experience.

ERP has had a remarkable impact on most companies that implemented it. Unplanned expenses for customization, failed implementations, integration, and applications to meet the business requirements that ERP could not–have added up to a higher Total Cost of Ownership for ERP were all unexpected, and account control, on the part of ERP vendors — is now a significant issue affecting IT performance.

Break the Bank for ERP?

Many companies that have broken the bank to implement ERP projects have seen their KPIs go down— but the question is why this is the case. Major consulting companies are some of the largest promoters of ERP systems, but given the massive profits they make on ERP implementations — can they be trusted to provide the real story on ERP? Probably not, however, written by the Managing Editor of SCM Focus, Shaun Snapp — an author with many years of experience with ERP system. A supply chain software expert and well known for providing authentic information on the topics he covers, you can trust this book to provide all the detail that no consulting firm will.

By reading this book you will:

  • Examine the high failure rates of ERP implementations.
  • Demystify the convincing arguments ERP vendors use to sell ERP.
  • See how ERP vendors take control of client accounts with ERP.
  • Understand why single-instance ERP is not typically feasible.
  • Calculate the total cost of ownership and return on investment for your ERP implementation.
  • Understand the alternatives to ERP.

Chapters

  • Chapter 1: Introduction to ERP Software
  • Chapter 2: The History of ERP
  • Chapter 3: Logical Fallacies and the Logics Used to Sell ERP
  • Chapter 4: The Best Practice Logic for ERP
  • Chapter 5: The Integration Benefits Logic for ERP
  • Chapter 6: Analyzing The Logic Used to Sell ERP
  • Chapter 7: The High TCO and Low ROI of ERP
  • Chapter 8: ERP and the Problem with Institutional Decision Making
  • Chapter 9: How ERP Creates Redundant Systems
  • Chapter 10: How ERP Distracts Companies from Implementing Better Functionality
  • Chapter 11: Alternatives to ERP or Adjusting the Current ERP System
  • Chapter 12: Conclusion

Software Ratings: ERP

Software Ratings

Brightwork Research & Analysis offers the following free ERP software analysis and ratings. See by clicking the image below:

software_ratings

An Analysis of the History of the Financial Return from MRP Systems

Executive Summary

  • 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.

Introduction

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.

Background on the Financial Returns of MRP Systems

In my book, The Real Story Behind ERP: Separating Fact from Fiction, evaluates the various proposals that were used to sell ERP systems, and in evaluating 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 the value of ERP systems is that they provide MRP and DRP integrated to other ERP functionality. This was a primary reason that MRP/DRP systems primarily stopped being sold as separate products in the mid-1980’s.

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 most 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 all the way back in 1981. That would have given the authors roughly 10 years to investigate the results, as MRP was just starting to be implemented in the early 1970’s and really 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.

  1. Inventory Turnover Increase: 26%
  2. Delivery Lead Time Decrease: 20%
  3. Percent of Delivery to Promises Increase: 20%
  4. Reduction of the Number of People Working in Expediting: 67%

What this research generally proposes is 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 interesting is that these same companies only rated the MRP system along 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, although moving from the use of periodic inventory recalculations performed by people rather than computer considerably predates my entry into the workforce. However, I can easily imagine that the productivity improvement must have been at least as large as is represented in these truncated study results (obviously the 1981 study was looking backwards from 1981). However, how much any initiative improves performance is dependent upon the level of sophistication of the environment prior to the implementation. For instance, the first printing press which was introduced in 1450 was horribly inefficient by any following standard – with a productivity level which meant that one laborer (either pressman or typesetter) would produce roughly 1/4 of a Bible in a month of work. However, it was more efficient than the technology it was replacing, which was copying 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 popular. 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 the question of 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.

Conclusion

MRP systems did not increase inventory turns from prior to the MRP systems. While there had been much more discussion around service levels, there is little evidence that service levels are increasing. 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 cost of the systems, 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 system called the Brightwork Explorer that is both designed to improve parameters and how MRP runs and also can be used to better understand MRP.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

 

Search Our Other MRP Content

References

This topic is covered in depth in the following book.

Repairing the MRP System Book

MRP System

Repairing your MRP System

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.

Chapters

  • 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