Critical success factors for MRP implementation

The 4 major groups and within those the 7 types of Material Requirements Planning (MRP1) system we have selected, implemented, rescued, or removed.
How the most popular of these MRP 1 systems work, and what stops them working well.

It will give you some insights into how to deliver the bottom line benefits you were promised by your software vendor!

For an overview of Materials / Inventory Management and Stock Control see the companion article "Materials Management and Stock Control". A further article on MRP2 also accompanies this article.

Links to related training and further reading on left

Material Requirements Planning (MRP1) is based on the principle:

What you need, minus what you already have, you need to get (in time for them to be used).

MRP1 Inputs & Outputs

Generic model of an MRP1 System

MRP1 System Types

There are 4 major groups of MRP1 software systems (and we have seen a few oddballs). We will not go into much detail on the first two below in this article, except to say that they are valid methods, with advantages and disadvantages over the third, and more information is available on request.

"Gross Requirements" (ignoring stock) (The earliest we introduced and not popularly implemented in modern ERP software, but much simpler than the other methods for producing schedules.) Whilst having some obvious drawbacks, this group significantly reduces the " Forrester Effect" caused by "nervousness", see below). This method simply explodes the Bill of Materials (BOM) (or parts list / ingredients list) (see Previous Best Practice B014: Effective Bill of Material Design) for each required item and date. It then adds these together to generate time phased requirements for components and raw materials taking lead-time into account. With "Gross Requirements" either, current inventory levels are maintained, or alternatively stock / de-stock, and batching calculations are done manually later. This new schedule then simply replaces its predecessor.

Two types of "Net Requirement" systems exist. Both of these deduct existing stock to calculate changed requirements nett of existing stock:

"Bucketed" systems are best described by the the "Period Batch Control / Cyclic Reordering" process. Again not popularly implemented in ERP systems (and in most circumstances not needing an ERP system), this type is well suited to Just In Time (JIT) environments.
"Un-bucketed" or "bucket-less" systems, which place no software restriction on scheduling frequency, or what is a defined as a planning period.

The fourth major group is principally designed for project manufacturing / engineer to order / make to order / job shop environments.

"Project MRP" systems, which we will describe later.

Within groups 2 and 3 we have encountered two modes of processing which together with group 1 make up the first 5 generic types of system:

"Conversational Planning" which discretely plans one Bill of Material (BOM) level at a time (see below). This method is not widely available, but we view as a more natural method of planning if using "backward scheduling" (See MRP2) & in a situation where the MPS is under control. (See below.) Also we will discuss this in a future article.
"Non-conversational Planning", which is incorporated into many ERP systems. This method plans all BOM levels sequentially in one explosion run.

The MRP1 system type most popularly available in software and therefore most widely implemented is:

Net Requirements,
- Un-bucketed,
  - Non conversational

This type is now described in more detail below:

How MRP 1 Systems work

A few MRP systems have the ability to be driven directly from the sales order book or a forecast, but most operate using a separate Master Production Schedule (MPS).

Using a snapshot of all of the data (described below), requirements are aggregated from all sources to create a total, time phased, requirement at MPS level (level 0) for each MPS item. Existing stock at this level is progressively consumed by these requirements to give net requirements.

Lead-times are allowed for, to give start / launch dates for the works and purchase orders / schedules, (in effect working backwards from the future MPS due date). Further provisions can be made for scrap allowances and batching rules (Also see Participative Sales and Operations Planning). The result of this calculation acts as the demand for the next level (in the BOM) constituent parts.

The Bill of Material (BOM) or parts list / ingredients list for each of these items is then exploded into its constituent parts at the next level (level 1) and multiplied by the requirements for these items on each date from level 0. This total, time phased demand is then summed to give a total demand for the items at level 1.

This calculation is then repeated at successive levels in the BOM until the bottom level of the BOM is reached (purchased items).

Because all items do not exist at the same level in different product BOMs, the sequence in which this calculation is performed is critical and is controlled by a sophisticated method of calculating the total requirements from all sources for an item at the same time (called "low level code processing").

We have not so far described the fourth major category (and 6th type) of MRP system ("Project MRP") used in project manufacturing work, where this method of accumulating demand from all sources for an item is not used and each item in effect remains part of it's project. (So for example in this type of system, there may be 3 purchase orders for the same item on the same date, generated by 3 projects.) Conceptually, in conventional MRP1 systems you are planning to make and buy stock which will later be consumed by orders at higher levels in the BOM. In "Project MRP" systems you are making and buying for a project. Some hybrid MRP systems allow for both methods by item, which completes our 7 types. In this type of hybrid system some items can be "stocked" items whilst special items can be "project only" items.

All of these calculations are conducted as one hit in non conversational systems, in a process which is described as "regenerative processing", where every demand is refreshed. Because it may take a little time to recalculate everything using this method, a second method of processing is incorporated into many ERP systems called "Net Change", which simply recalculates only items which are affected by any change at any level since the last time the calculation was performed. Although popular and often heavily promoted by software vendors, "net change" processing can dramatically increase "nervousness".

A further refinement of this calculation is that if a current work or purchase order is already "firm" the calculation will not re-plan it. (The assumption being that some commitments have already been made for these.) The system will however output an "exception message" if as a result of the recalculation the previously "firmed" order no longer looks appropriate. Because of this, lower level requirements are not recalculated for these and in fact these "firm" orders can still be driving in raw materials for an MPS requirement which no longer exists! The worst example of a delinquent MRP system implementation we were involved in rescuing was spitting out 8,500 exception messages per week!

The outputs of an MRP system are:

Purchase requests "planned purchase orders" (or exception message requests to change existing "firm" purchase orders)
Work order requests "planned work orders" (or exception message requests to change existing "firm" work orders)

In our training courses M07 MRP for Beginners and M08 Material Requirements Planning (MRP1) we use an MRP 1 simulation tool to demonstrate how this logic works and the implications of the use of different policies and data errors. Some useful tips on MRP implementation are shown in "Implementing ERP Computer Systems".

Notes:

1. Nervousness:

"Nervousness" is the tendency of the net requirements to fluctuate alarmingly in response to some higher level changes. E.g. the scrapping of one component can result in a requirement to produce another batch of parts immediately. "Jay Forrester" first investigated this amplification of minor changes in his book "Industrial Dynamics". (Also see "Lean Supply Chains".) There are ways of damping this effect! In particular, in some systems, trivial change recommendations can be suppressed using "filters" (to filter these out).

2. Selective Assembly:

Shims in mechanical assemblies and ballast resistors in electronic assembly are good examples of selective assembly (sometimes called "test and select"). The demand for a particular shim size is dependent on the size of the gap to be filled, and the demand for particular resistors is dependent on the individual non-standard electrical properties of a circuit, rather than dependent on the number of products produced (although it has some non-linear relationship to this). Therefore this type of usage together with some other types, which we discuss in our training, are not suitable for MRP1 planning. In some MRP systems an item can be described as a "non MRP item" to exclude these from the calculation. (See Previous Malpractice M007: The cost of the costing system)

To overcome this problem, (and in "assemble to order" situations), in order to produce a forecast of component requirements, some advocate the use of "Planning Bills of Materials", which are "average Bills of Material", (e.g. on average 1.5 x 3mm shims are used per product.). Our experience of trying to use this technique is unfavourable and we believe that there are better methods. (See What Control Systems Do You Need? and Postponement & Mass Customisation).

Advantages and Disadvantages

It is assumed that MRP is universally applicable. It is not! Indeed there are many situations where it is overkill and other situations where it is positively counterproductive and damaging. (See What Control Systems Do You Need?)

What you can confidently say is that it is complicated and requires a significant design, implementation and maintenance effort (not to mention very expensive software). Our experience suggests that there is considerable underinvestment in:

Design
Implementation
Education and training
Maintenance.

The inevitable outcome is a significant minority of failures to deliver the promised bottom line benefits and in a more than a few cases business damage.

Frequently the data structures, recording mechanisms and control processes are not set up correctly, resulting in degenerate, sub-optimal, or faulty operation of the system. We will not go into all our reasoning here but, suffice to say that whilst we have implemented and rescued many MRP systems, we have also:

Removed some MRP systems where they were not appropriate.
Amongst many other rescues:
- Completely restructured & re-implemented others where either the data, or systems, had been configured incorrectly!
- Re-implemented a system which, whilst it had a model initial implementation (and case study write up), had degenerated over a period of time to the point where it had stopped working!
Encountered two MRP systems where the software did not work!

However there are success stories and some of these are characterised in Achievable benchmarks.

Measures of Performance (MOPS)

(See Focused Improvement Systems)

Compliance:

MRP systems can be measured by "compliance" which simply counts the number of occurrences where the output from MRP cannot be followed and must be changed. (We discuss this in detail in Previous Technique T040: Measuring MRP Success or Delinquency.)

Data Accuracy:

In addition and in order for you to perform the above calculations, the system requires a high degree of data accuracy. So data must be captured in such a way that accuracy can be relied upon. (See Previous Best Practice B044: TRAP (Rules for data collection)). Therefore data accuracy is also a key performance criterion! Some guidance is provided in Achievable benchmarks. "Garbage In / Garbage Out" is a common problem!

On time In Full (OTIF):

But one of the Key Performance Indicators (KPI's) for an MRP system is on-time delivery. (See Previous Best Practice B045: Measuring on-time delivery or schedule adherence (OTIF)). Further guidance is provided in Achievable benchmarks.

Operation of MRP 1

The variables inherent in the system are:

Master Schedule (also see Participative Sales and Operations Planning)
Bills of Material (BOMs) (also see Previous Best Practice B014: Effective Bills of Material Design)
- Units of Measure
Lead-times (also see Participative Sales and Operations Planning)
Current Stocks
Current Work orders / schedules / Work in Progress (WIP)
Current Purchase orders / schedules
Yields / scrap allowance
Safety stock / Safety Time
Batch Sizes
Working days / times
Owners

Master Schedule

(See Participative Sales and Operations Planning and Level 2. Development, Sales and Operations Management)

Probably the biggest single cause of MRP problems, an unstable and / or "un-doable" Master Production Schedule, will kill your MRP system stone dead. The master schedule is controlled by the Participative Sales and Operations Planning process. What you will make and when, are probably the most important decisions in a manufacturing business. It is therefore surprising that this is often left to chance, or that the customer order is simply accepted with no view of its "do-ability". "Available To Promise" (ATP) is a key requirement of Master Production Scheduling. (Work is scheduled when both capacity is available and long lead-time items can be acquired.) Master scheduled items are typically your end products, but with a number of significant exceptions, which we describe in our training course M04 Participative Master Production Scheduling, where we describe how to design a Master Scheduling process in detail.

Bills of Material (BOM)

Bills of Materials (parts list / ingredients list), with a structure relevant to the manufacturing process, must be created for all master scheduled items, as a part of the New Product Introduction process and then maintained & controlled via a Specification Change Management process, (see Previous Best Practice B022: Change Management (Specification Change Management)). If picking by work order is performed the pick list acts a form of integrity check. I.e. if it is not on the pick list it does not get picked. This can often be a useful source of feedback for BOM errors.

Bills of Material Design is covered by our M03 Bill of Material & Routing Design & Management training course and paraphrased in Previous Best practice B014: Effective Bill of Material Design. Product Change is covered by our D02 Specification Change Management training and paraphrased by Previous Best Practice B022: Change control.

Further refinements, designed to significantly reduce the administration costs and reconcile the differences between a technical view of the BOM and a manufacturing view of the BOM, are shown in Previous Technique T038 Bills of Materials Simplification and Previous Question Q022. What is the benefit of "Phantoms" in Bills of Material (particularly in PCB assembly)?

Units of measure define the units that the quantity shown in the BOM are interpreted as. There are two:

Stocking units
Purchasing units

E.g. You may stock bar in metres (how you issue it from stock), but buy it by random bar lengths measured by weight.

Lead-times

In an MRP1 system lead-times are often assumed to be fixed. In fact this is most definitely not true. Lead-time should be average recently observed or promised lead-time. Firstly this needs to be realistic (monitored and maintained). Secondly real lead-times need to be reduced. (See Previous Best Practice B010 Lead time reduction and Previous Technique T040: Measuring MRP Success or Delinquency and Participative Sales and Operations Planning)

(In MRP2 & Advanced Planning & Scheduling Systems systems, lead-time can be built up by adding components of lead-time together. (See MRP2.) Unfortunately this still does not make them correct!)

Stocks

Stock recording procedures, (which we describe in our training course M06 Stock and Work in Process Tracking), must be designed to create integrity of stock balances. Stock (and WIP) accuracy is a major cause of problems in MRP systems. However the concept of stock accuracy sometimes gets lost in the daily life of the operation. Procedures must be followed. Leadership is essential. If the prescribed procedures are not a natural way of operating, the discipline will quickly break down. This is covered by Previous Best Practice B029: Bin Discipline. Some MRP software systems have the ability to disallow certain conditions such as negative stocks, to try to improve record integrity.

Work Orders (WIP) / Purchase Orders

In an MRP1 system the order is the unit of recording and therefore tracking, for a batch. A work order has a life cycle from requisition (planned order), through firm, allocate materials, issue to Work in Process (WIP), and then full or partial completion (closure). (Unlike MRP 2 & Advanced Planning & Scheduling Systems systems which also track to individual operation in WIP.)

A purchase order has a cycle which includes planned (requisition), firm (issue of a purchase commitment to a supplier), partial receipt and /or complete receipt (and closure).

A sub-contract process can have both.

Perhaps the biggest single contribution to WIP accuracy is to follow our simple definition of "work in process", namely, that this is work that is actually being worked on, not:

firmed too early
allocated too early
picked too early
launched too early (See Previous Malpractice: M006: Hitting the Numbers.)
parked waiting for:
- something else to happen
- someone to make a decision about it
- half done (the urgent minimum) and half left.

WIP recording procedures, (which we describe in our training course M06 Stock and Work in Process Tracking), must be designed to create integrity of WIP balances.

The other major problem in day-to-day work order management operation is the problem of "ghost" work orders or purchase orders. I.e. orders which are shown as incomplete but have already been completed or cancelled but not reported, or because the bookings are only partially complete, where there is a residual (sometimes small) quantity still outstanding on the order. (See Previous Best Practice B029: Bin Discipline.) Some MRP systems have the ability to highlight these sort of conditions, to try to improve integrity.

Yields & Scrap Allowances

Unless yields are significant they should be ignored in MRP systems, because they lead to "nervousness" and not being able to understand the MRP output. (E.g. Use safety stock instead.) However if scrap is significant, provisions must be made for anticipated scrap. These "planned yields" need to be reviewed regularly. But abnormal scrap & rejects must be reported routinely by exception, in a "TRAP" way, (see Previous Best Practice: B044: TRAP (Rules for data collection)).

Safety Stock / Safety Time

By specifying safety stock for an item, the MRP calculation (above) attempts to maintain safety stock (in effect inflating demand to top up buffers by the deficit between planned levels and current actual level).

By specifying safety time for an item, the calculation generates demand by that amount of time earlier (in effect pulling forward the due dates for orders).

Batch Sizes

There are three types of batching rules for an item available in many MRP systems:

Make to Order / "Lot for Lot" The requirement quantity on a date from the BOM level above (MPS quantity) is unchanged (not batched) at the next level.
Fixed order quantity (results in variable order frequency as demand changes)
Fixed order frequency (the default used in "bucketed" systems but also used in some "bucket-less" systems resulting in variable order size as demand changes)

Calendar

Finally do not forget to maintain the calendar(s) with your working times / days well beyond your lead-times. Set a date for doing it.

Data Integrity

All these data & the processes that maintain them need to be owned! (See Previous Best Practice B001: Ownership.) Also without some procedures and disciplines over the way the data is collected, the data is bound to be inaccurate. We cover this in Previous Best Practice B044: TRAP (Rules for data collection). Many MRP systems enable clearly defined data owners with secure, privileged, access and the ability to differentiate between read access and update access. E.g. I am happy for anyone within the organisation to look at a Bill of Material, but I will not let everyone update it!

Planning Changes

When recalculated, changes to plans, data and provisions, make instantaneous changes in demand, to which you may not be able to respond!

We discuss the impact on plans, interaction between these parameters, suitable use of parameters and implementation issues in our training.

Output

The output of an MRP system consists of action messages highlighting exception conditions caused by changes and data errors. Firstly, on implementation, these messages need to be actively minimised and secondly these need to be managed effectively (handled most effectively using methods which we discuss on our training).

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Whilst great care has been taken to provide relevant, accurate, practical, advice based on our considerable process design and development experience, this will almost certainly require interpretation into the context of your unique business. Please be careful in doing so and if in doubt seek expert advice. We would welcome your feedback!

SM Thacker & Associates

Independent Best Practice Training & Consultancy

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Material Requirements Planning (MRP 1)