Rethinking Material Requirements Planning: Why MRP Systems May Be Holding You Back

Manufacturing leaders understand the critical role of and approach to inventory management and resource planning can make or break a company’s operational efficiency. For decades, Material Requirements Planning (MRP) systems have dominated this space, promising streamlined operations and optimized inventory levels. However, experienced Lean professionals find these systems to often fall short in practices and hold companies back from their full potential.

This article evaluates the purpose traditional MRP systems, elements of this kind of system, and problems with MRP systems. Keep reading to the end to learn about an alternative to Material Requirements Planning that can help you ensure reliable delivery, optimized workflows, and an enhanced financial position.

What is MRP? Understanding Material Requirements Planning

Material Requirements Planning has been long considered one of the most significant develops in manufacturing and resource management. In fact, at the time it was developed, MRP was one of the first IT systems that primarily focused on optimizing and improving productivity.? While significant improvements have resulted from the evolutions made possible by technological innovations, MRP still poses challenges to full optimizing operations. Before we dive into these obstacles, it is important to understand the meaning of MRP, how it functions, and the components that make up these systems.

What does MRP stand for?

MRP stands for Material Requirements Planning. Despite some confusion with variations like Manufacturing Resource Planning, the strict definition is Material Requirements Planning—a system focused on planning material requirements for production. This type of system differs from Enterprise Resource Planning (ERP), which takes a more enterprise-wide approach versus controlling resources for a company.

What is the meaning of MRP in business?

In business, Material Requirements Planning is a production planning, scheduling, and inventory control system used to manage manufacturing processes. It helps companies determine what materials to order, how much to order, and when to order them based on production schedules and inventory levels.

The first system was developed in 1964, and it was later expanded to MRP II in 1983 by Oliver White, integrating forecasting, planning, and capacity management into the original framework. Ultimately, this system aims to help companies plan their resources more effectively than they could otherwise and improve efficiency levels.

What are the key elements of MRP?

The three most important, core elements of an MRP system include:

1. Master Production Schedule (MPS): This outlines the products a company will make, when production will occur, and the quantity of products to produce.
2. Inventory Status File (ISF): A record within the system that specifies the current inventory or stock levels of each product and expected future availability
3. Bill of Materials (BOM): Provides a comprehensive list of all the parts and materials that a product requires, as well as the associated costs.

Why do companies still use MRP systems?

MRP was initially designed for build-to-order environments, where specific customer orders drive production needs. These systems historically worked well for a company that, for example, manufactures office furniture for a building with 700 cubicles. A company like this could use MRP to calculate exact material requirements for that specific project. However, the prevalence of MRP expanded over the years into businesses with other models.

Material Requirements Planning remains popular for several reasons:

1. Traditional industry standard: MRP has been taught in business schools and promoted by many industry associations and consultants for decades.
2. Handling complex BOMs: For products with hundreds or thousands of components, MRP can mathematically calculate requirements.
3. Integration with ERP systems: Modern ERP systems typically include MRP functionality, making it a default choice for many companies.
4. Perceived control: Management often believes MRP provides greater control over the production process.

5 Problems with Material Requirements Planning

While MRP seems logical in theory, it creates numerous challenges in practice, especially in build-to-stock environments.

1. The Forecast Fallacy

MRP relies heavily on accurate forecasts, which are inherently unreliable. Industry expert Jerry Wright, PE, MBA has previously indicated that most companies experience forecasting accuracy of only 50-70%, with even the best cases rarely exceeding 85%. For a system that boasts its ability to promote efficiency, these metrics tell a different story.

2. The Push System Problem

MRP operates as a "push" system, scheduling production based on forecasts rather than actual demand, which leads to:

• Excessive inventory
• Material shortages
• Constant expediting
• Out-of-sync operations

3. The Constant Firefighting Cycle

Companies using an MRP system often find themselves in a perpetual cycle of:

• Running MRP System
• Building to the forecast
• Discovering the forecast was wrong
• Expediting orders and reworking schedules to meet demand
• Running MRP again the following week

4. Resource Intensive System

MRP systems often require a significant amount resources, including:

• Significant IT investment
• Multiple planners
• Consistent maintenance and updating
• Time-consuming rescheduling activities

5. Resistance to Change

Many companies have been using an MRP system for many years. Plus, often professionals are deeply invested in MRP because they were trained in it and have built careers around it. Beyond significant time and monetary investments, it can be difficult to alter the status quo, get leadership on board, and implement a new system throughout an organization.

The Alternative: Pull Systems and Kanban

While MRP pushes production based on forecasts, Kanban operates as a "pull" system in which actual consumption triggers replenishment. This fundamental difference changes everything for business seeking optimized efficiency while more accurately matching customer demand.

What is a Pull System?

A pull system responds to real-time demand signals, so production occurs only when it is needed. Plus, production is done in the correct quantities and at the right time. Organizations who implement pull systems experience:

• Lower inventory levels
• Fewer shortages and backorders
• Less expediting and ‘firefighting’
• Higher fulfillment rates
• Increased reliability to meet demand

Implementing a Pull System

The key to successfully implementing a pull system is to start small, then scale.

Steps to implementing a pull system in an organization include:

1. Identify a High-Impact Area: Select a product or production line with stable demand so the pull system can be tested without overwhelming the operators or other components of the operation.
2. Set Up Kanban Signals: Create visual cues that trigger replenishment when raw materials, work-in-process, or finished goods reach a predefined minimum level. The visual cues signal to production when and what to produce rather than a schedule generated by an MRP system.
3. Use the Do Not Schedule (DNS) Function in MRP: This removes select items from the MRP schedule, allowing the team to experiment with a pull-based replenishment system without interfering with the rest of the operation.
4. Collaborate with Suppliers: Instead of placing batch purchase orders tied to MRP forecasts, companies can use blanket purchase agreements with their suppliers, allowing them to replenish stock based on actual consumption.
5. Scale Up: Once the pilot proves successful by showing improved fill rates, lower inventory, and better lead times, the next step is to expand pull-based systems to other areas of the business.

What is Kanban?

Kanban is a visual system for controlling the flow of work, developed as part of Toyota Production System. It helps teams manage and visualize their work, track progress, and improve their workflow efficiency.

In manufacturing settings, Kanban uses visual signals (cards, bins, electronic signals) to indicate when to replenish materials or produce more items. This creates a direct connection between inventory consumption and production, eliminating the need for forecasting. This system allows for companies to product only what is needed when it is needed by establishing inventory levels that are based on actual consumption.

Key principles include:

• Visualizing workflow: making work visible to all team members
• Limiting work in progress: controlling how many items are in production at once
• Managing flow: ensuring smooth movement through the production process

The Impact of Implementing Kanban

To help showcase the benefits of Kanban, several real-world examples of companies that switched from MRP to Kanban systems follow:

1. From Constant Shortages to Reliable Delivery

One medical device company experienced dramatic improvements:

• Backorders decreased from 40-50 daily to 1-2
• Inventory reduced by approximately 50%
• Eliminated need for outside warehousing
• Fulfillment rate improved from mid-80% to 96%

2. From Overworked to Optimized

For employees, the change was equally significant:

• Buyer-planners who worked 70-hour weeks could complete their work in normal hours
• Focus shifted from firefighting to improvement activities
• Psychological burden of constant expediting was eliminated

3. Financial Benefits

The financial impact can be substantial:

• Inventory reductions of 40-50%
• Elimination of outside warehousing costs
• Reduced overtime and expediting expenses
• Higher customer satisfaction

In one documented case, a medical device manufacturer cutting their inventory in half represented $10-15 million in freed-up capital.

Beyond Kanban: Additional Improvements

Companies that move away from MRP often implement other lean improvements:

1. Blanket Purchase Orders: Replace numerous individual POs with quarterly blanket orders when appropriate
2. Supplier-Managed Inventory: Have suppliers take responsibility for maintaining stock levels
3. Simplified Accounting: Reduce transaction volume and variance analysis
4. TAKT Time Conformance: Measure team-based performance against customer demand

"When you get your process right, you'll improve your quality, reduce your lead time, and your productivity will take care of itself." – Mark DeLuzio

Moving Forward with Lean Manufacturing Principles

While MRP has been an industry standard for over half a century, its fundamental reliance on forecasting creates many issues for manufacturers. Kanban and pull systems offer a proven alternative that can dramatically improve operational performance, employee satisfaction, and financial results.

For manufacturing professionals tired of constant firefighting, excessive inventory, and missed deliveries, it may be time to consider breaking free from the MRP system you have gotten used to and embracing pull-based systems.

Our team of experience Lean professional can help you evaluate your current position, determine the best path forward, and work with you step-by-step to ensure your company is well-positioned through implementing Kanban. So, take the next step to improve your operational efficiency and reduce inventory costs by reaching out to our team at Lean Horizons.