Material Requirements Planning systems calculate material needs required for a company to produce a product. When used correctly, the system calculates the correct materials in the right quantities for use at the right time on the production floor. Two types of demand drive the MRP system--independent demand and dependent demand. Companies forecast independent demand but not dependent demand.
A company’s forecast acts as the major independent demand variable in an MRP system. The forecast represents the company’s best determination of what products it will sell and in what quantities. The company’s forecast becomes part of the production plan. The production plan drives the master production schedule, which in turn drives the material requirements plan. Because forecasted values act as independent sources of demand in an MRP system, the forecast serves as the top-level source of demand. For example, a company creates a forecast based on sales projections for the production of a dining room table. Because the table is not dependent on any other products for its demand, it acts as an independent demand input into the MRP system. However, the component parts that make up the table such as legs, screws and tabletops are dependent demand items. The number of components required becomes dependent on the total number of tables forecasted.
Components compose one of the major sources of dependent demand input in an MRP system. Components represent the material required to create a finished goods product. Companies use a bill of materials to show how many components are required to make one unit of an item. Because component parts are dependent demand variables, they do not get forecasted, instead they get calculated based on the independent demand forecast. For example, a table might consist of four legs, two sides, two ends, one top and one hardware kit. The annual forecast for the table totals 20,000 units. The annual component part usage totals 80,000 legs, 40,000 sides, 40,000 ends, 20,000 tops and 20,000 hardware kits. The input into the MRP represents the quantity associated from the bill of materials. For example, if the company plans to produce 1,500 units of the table in May, then the component part input to the MRP would consist of 6,000 legs, 3,000 sides, 3,000 ends, 1,500 tops and 1,500 hardware kits.
For companies that produce made-to-order products, customer orders become the major source of input to the MRP. Made-to-order products do not get forecasted because production of the product doesn’t occur until an order gets received. Once the order gets received, the company uses the details of the order as input into the master production schedule or sometimes the assemble to order schedule. This input drives the MRP system. Once the order gets entered the MRP calculates the requirements the same as a made-to-stock order.