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What Is MRP

Material requirements planning (MRP) is a production planning and inventory control system used to manage manufacturing processes. Smaller organizations often use spreadsheet programs such as Excel to simulate MRP instead of application software which is programmed to perform the necessary functions.

The essential functions of MRP systems include inventory control, bill of materials processing and elementary scheduling. MRP software helps organizations maintain only the minimum amount of inventory levels necessary. It is used to plan manufacturing, purchasing and delivering activities. Companies need to control the types and quantities of materials they purchase, plan which products are to be produced, and in what quantities, and ensure that they are able to meet current and future customer demand, all at the lowest possible cost. Inadequate planning of these issues affects company cash flow, profitability and customer satisfaction.

Perhaps the most significant indicator of a company's financial health and management capabilities is its level of inventory in relation to its sales revenue. Inventory "turns" (revenue divided by the average cost of inventory maintained) measures how efficiently the supply chain system of the company is working with regard to ordering parts and components to make end products "just in time" to meet customer order delivery requirements.

> If a company purchases insufficient quantities of an item used in manufacturing (or the wrong item) it may be unable to meet contract obligations to supply products on time.

> If a company purchases excessive quantities of an item, money is wasted - the excess quantity ties up cash while it remains as stock and may never even be used at all due to obsolescence.

Beginning production of an order at the wrong time can cause customer deadlines to be missed.

Other factors to consider for MRP include:

1. Ability to forecast into a defined period of time the demand for and supply of components in a Bill of Materials

2.Flexibility to set time periods by days, weeks, months based on the needs of your Company.

3. Capability to take forecasted demand for known needs and not consume the forecast if a new need is identified that adds to the forecast rather than uses a portion of what was already known.

4. Can be as simple as Net Requirements Planning where demand is for one order at a time.