# Material Requirements Planning (MRP): Benefits, Process, and Challenges

![Material Requirements Planning (MRP)](https://www.investopedia.com/thmb/3oqO8AKNxWpRwMZp3PyTURs8I9o=/1500x0/filters:no_upscale():max_bytes(150000):strip_icc()/mrp-fba7896e29114d2b9bb3a4409917a7a6.jpg)

*— Investopedia / Ellen Lindner*

> **Definition**
>
> Material Requirements Planning is a software-based system that helps businesses manage inventory and production by estimating how much raw material is needed and schedules their delivery.

## What Is Material Requirements Planning (MRP)?

Material requirements planning (MRP) is a software-based integrated inventory and supply management system designed for businesses.

Companies use MRP to estimate raw material needs, manage inventory, and plan production and [deliveries](https://www.investopedia.com/terms/d/delivery.asp). Some of the key components of MRP are the Master Production Schedule (MPS), Inventory Status File (ISF), and Bill of Materials (BOM).

### Key Takeaways

*   Material Requirements Planning (MRP) is essential for businesses to manage inventory efficiently, predict necessary quantities of raw materials, and schedule production and deliveries effectively.
*   By utilizing data inputs like the Master Production Schedule, Inventory Status File, and Bill of Materials, MRP accurately calculates the materials needed and optimizes manufacturing processes.
*   While MRP has pros such as reducing inventory costs and increasing manufacturing efficiency, it also has drawbacks, including heavy reliance on data accuracy and high implementation costs.
*   As an early example of integrated IT systems in business, MRP has evolved alongside technology, from the mainframe computers of the 1940s to becoming a component within modern ERP systems.
*   MRP systems are vital for just-in-time production, minimizing inventory levels, and efficiently moving materials through the manufacturing process to meet customer demands.

## Understanding the Functionality of Material Requirements Planning

MRP helps businesses determine what, how much, and when materials are needed, starting from a production plan.

MRP converts a plan into a list of requirements for the subassemblies, parts, and raw materials needed to produce a final product within the established schedule. MRP helps manufacturers get a grasp of [inventory](https://www.investopedia.com/terms/i/inventory.asp) requirements while balancing both supply and demand.

Using MRP, managers can determine [their need for labor](https://www.investopedia.com/ask/answers/013015/how-are-labor-demand-forecasts-made-human-resources-planning.asp) and supplies and improve their [production efficiency](https://www.investopedia.com/terms/p/production_efficiency.asp) by inputting data into the MRP scheme such as:

*   **Item Name or Nomenclature**: The finished good title, sometimes called Level "0" on BOM.
*   **Master Production Schedule (MPS)**: How much is required to meet demand? When is it needed?
*   **Shelf life of stored materials.**
*   **Inventory Status File (ISF):** Materials available that are in stock and materials on order from suppliers.
*   **Bills of materials (BOM)**: Details of materials and components required to make each product.
*   **Planning data**: Restraints and directions like routing, labor and machine standards, quality and testing standards, and lot sizing techniques.  
    

## Integrating MRP in Manufacturing Processes

Manufacturers strategically manage material types and quantities to meet current and future demand cost-effectively.

### BOM

A [bill of materials](https://www.investopedia.com/terms/b/bill-of-materials.asp) (BOM) is an extensive list of raw materials, components, and assemblies required to construct, manufacture or repair a product or service.

The MRP process:

**• Estimates demand and required materials.** After determining customer demand and utilizing the bill of materials, MRP breaks down demand into specific raw materials and components.

**• Allocates Inventory of materials.** MRP allocates inventory into the exact areas as needed.

**• Schedules Production.** Time and labor requirements are calculated to complete manufacturing and a timeline is created.

**• Monitors the process.** MRP automatically alerts managers of any delays and even suggests contingency plans to meet build deadlines.

## The Evolution of Material Requirements Planning (MRP)

Material requirements planning was among the earliest information technology (IT) systems to boost productivity by using computers and software technology.

The first MRP systems of [inventory management](https://www.investopedia.com/terms/i/inventory-management.asp) evolved in the 1940s and 1950s, using mainframe computers to extrapolate information from a bill of materials for a specific finished product into a production and purchasing plan. MRP systems expanded to include information feedback loops so that production managers could change and update the system inputs as needed.

The next generation of MRP, manufacturing resources planning (MRP II), also incorporated marketing, finance, accounting, engineering, and human resources aspects into the planning process. [Enterprise resources planning](https://www.investopedia.com/terms/e/erp.asp) (ERP), developed in the 1990s, expands on MRP by linking various business functions using computer technology

## Pros and Cons of Material Requirements Planning

Pros

*   Materials and components are available when needed
    
*   Minimized inventory levels and associated costs
    
*   Reduced customer lead times
    
      
    
*   Increased manufacturing efficiency
    
*   Increased labor productivity
    
      
      
    

Cons

*   Requires accurate input data
    
      
    
*   Expensive to implement
    
*   Lack of flexibility in the production schedule
    
      
    
*   Often results in excess inventory
    
      
    
*   Less capable than an ERP system
    

## Comparing MRP and ERP: What’s the Difference?

Enterprise resource planning (ERP) is an extension of MRP systems. While MRP is a planning and control system for the resources in a company, ERP is a solution for the enterprise as a whole and an ERP system includes advanced functionality in the areas of financial, customer relationships, and sales order management.

MRP can be a stand-alone application or a piece of an ERP, a single solution that addresses all business needs, not just the scheduling of resources. It decreases any information redundancies and adds elements, like user-level security.

Benefits of an ERP system include increased efficiency, integrated information, customized reports, and higher-quality customer service,

## What Are the 3 Main Inputs for MRP?

The three basic inputs of an MRP system include the Master Production Schedule (MPS), Inventory Status File (ISF), and Bill of Materials (BOM).

## How Does MRP Benefit a Business?

MRP ensures that materials and components are available when they're needed, inventory levels are optimized, manufacturing efficiency is improved, and customer satisfaction increases.

## What Are the Outputs of an MRP System?

Using required inputs, the MRP calculates what materials are needed, how much is needed to complete a build, and exactly when materials are needed in the build process.

This allows businesses to use [just-in-time (JIT) production](https://www.investopedia.com/terms/j/jit.asp), scheduling production based on material availability. This minimizes inventory levels and businesses can move materials through the manufacturing process efficiently.

  

## The Bottom Line

MRP is a fundamental tool for businesses that aims to optimize inventory levels and production schedules by accurately estimating raw material needs. It helps ensure materials and components are available when needed, reduce inventory levels, and ultimately enhance manufacturing efficiency and customer satisfaction. The success of MRP heavily depends on the accuracy of data inputs, such as the Master Production Schedule (MPS), Inventory Status File (ISF), and Bill of Materials (BOM).

While MRP is beneficial, it comes with challenges, including a high implementation cost and a dependency on data accuracy, which can lead to excess inventory if not managed correctly. Comparatively, while MRP focuses on production and inventory, ERP systems offer a broader integration across business functions, including finance and customer relationship management.

Understanding MRP's advantages and limitations helps businesses to implement the system effectively and consider it within the larger context of inventory management strategies like ERP.