Material Requirements Planning (MRP) Logic and Mechanics

Material Requirements Planning (MRP) Logic and Mechanics: A Comprehensive Guide

Introduction

Material Requirements Planning (MRP) is one of the most foundational and heavily tested topics in the CPIM (Certified in Planning and Inventory Management) exam. Understanding MRP logic and mechanics is essential not only for passing the exam but also for effectively managing internal supply sources in any manufacturing or distribution environment. MRP serves as the engine that drives dependent demand planning, translating a master production schedule into specific component and material requirements with precise timing and quantities.

Why Is MRP Logic and Mechanics Important?

MRP is critically important for several reasons:

1. Bridges the Gap Between Planning and Execution: MRP translates high-level production plans (from the Master Production Schedule) into actionable, detailed plans for every component and raw material needed. Without MRP, planners would have to manually calculate requirements for potentially thousands of items — an impossible task in complex manufacturing environments.

2. Manages Dependent Demand: Unlike finished goods that face independent demand from customers, components and raw materials experience dependent demand — their need is derived from the demand for the parent items. MRP is specifically designed to handle this dependent demand relationship through the Bill of Materials (BOM).

3. Ensures Right Quantity at the Right Time: MRP calculates what is needed, how much is needed, and when it is needed, enabling organizations to minimize inventory while avoiding stockouts. This directly impacts customer service levels, production efficiency, and working capital.

4. Generates Actionable Outputs: MRP produces planned order releases, reschedule notices, and cancellation notices that guide purchasing and production activities on a daily basis.

5. Foundation for Advanced Planning: MRP logic underpins more advanced systems like MRP II (Manufacturing Resource Planning) and ERP (Enterprise Resource Planning). A solid understanding of basic MRP mechanics is prerequisite knowledge for understanding capacity planning, shop floor control, and supplier scheduling.

What Is MRP?

Material Requirements Planning (MRP) is a computer-based planning and scheduling system that calculates material requirements and schedules supply to meet demand. It operates on a simple but powerful logic: starting from what you need to produce (demand), subtracting what you already have (supply), and determining what you must order or produce and when.

Key Inputs to MRP:

1. Master Production Schedule (MPS): The MPS specifies what end items (or critical subassemblies) need to be produced, how many, and when. It is the primary driver of MRP. The MPS represents the company's production plan stated in specific configurations, quantities, and dates.

2. Bill of Materials (BOM): The BOM is a structured list of all components, subassemblies, raw materials, and their quantities required to manufacture one unit of a parent item. The BOM defines the parent-component relationships and is organized in levels (Level 0 being the finished good, Level 1 being direct components, etc.). The BOM tells MRP what is needed and how much per unit of the parent.

3. Inventory Status Records (Inventory Records): These records contain the current status of every item managed by MRP, including:
- On-hand inventory (current stock available)
- Scheduled receipts (open orders already placed, expected to arrive in specific periods)
- Lead times (the time required to produce or procure the item)
- Lot sizing rules (how order quantities are determined)
- Safety stock (buffer stock, if applicable)
- Allocated quantities

Key Outputs of MRP:

1. Planned Order Releases: New orders that MRP recommends be released to purchasing (for purchased items) or to the shop floor (for manufactured items) in specific time periods.

2. Planned Order Receipts: The expected receipt of planned orders, offset from the release by the item's lead time.

3. Action/Exception Messages: These include:
- Release orders
- Reschedule-in (expedite) notices
- Reschedule-out (defer) notices
- Cancel order notices

How MRP Logic Works: Step-by-Step Mechanics

MRP uses a process known as netting, lot sizing, and time phasing (offsetting), combined with BOM explosion. Let us walk through each step in detail.

Step 1: Netting

Netting is the process of calculating net requirements by subtracting available inventory and scheduled receipts from gross requirements.

The basic netting formula for each time period is:

Net Requirement = Gross Requirement − Scheduled Receipts − Projected On-Hand from Prior Period

If the result is positive, there is a net requirement (a shortage). If the result is zero or negative, there is sufficient supply and no action is needed for that period.

More precisely, MRP calculates a projected on-hand balance (also called projected available balance) for each period:

Projected On-Hand (end of period) = Projected On-Hand (beginning of period) + Scheduled Receipts + Planned Order Receipts − Gross Requirements

When the projected on-hand would drop below zero (or below the safety stock level), MRP identifies a net requirement.

Step 2: Lot Sizing

Once a net requirement is identified, MRP must determine the order quantity. This is governed by the lot-sizing rule assigned to the item. Common lot-sizing methods include:

- Lot-for-Lot (L4L or LFL): Order exactly the net requirement for each period. This minimizes inventory but may result in many orders. It is the simplest and most commonly tested method.
- Fixed Order Quantity (FOQ): Order a predetermined fixed quantity whenever an order is needed. If the net requirement exceeds the FOQ, multiple lots may be ordered.
- Period Order Quantity (POQ): Cover requirements for a fixed number of periods with each order.
- Economic Order Quantity (EOQ): Order the calculated economic order quantity that minimizes total ordering and holding costs.
- Minimum/Maximum Order Quantity: Constraints that set a floor or ceiling on order sizes.

The lot-sizing decision creates the Planned Order Receipt — the quantity and timing of when the order will arrive.

Step 3: Time Phasing (Lead Time Offsetting)

Once the planned order receipt is determined (when the material is needed), MRP offsets the order by the item's lead time to determine when the order must be released. This creates the Planned Order Release.

Planned Order Release Date = Planned Order Receipt Date − Lead Time

For example, if a component is needed in Week 8 and has a 2-week lead time, the planned order release would be in Week 6.

Step 4: BOM Explosion

The planned order releases at one BOM level become the gross requirements for components at the next lower level. This process is called BOM explosion or requirements explosion.

MRP processes items level by level, starting at Level 0 (finished goods) and working down through each BOM level. This is important because a component may be used in multiple parent items. By processing level by level, MRP ensures all gross requirements for a given component are accumulated before netting and lot sizing occur.

This level-by-level processing approach is called low-level coding. Each item is assigned to the lowest level at which it appears in any BOM. This ensures the item is not planned until all its parent-level requirements have been determined.

The MRP Grid (Time-Phased Record)

The MRP record for each item is typically displayed as a grid with the following rows:

- Gross Requirements: Total demand for the item in each period (from MPS for Level 0 items, or from planned order releases of parent items for lower-level items).
- Scheduled Receipts: Open orders (already released) expected to arrive in each period.
- Projected On-Hand (Projected Available Balance): Expected ending inventory for each period after accounting for all supply and demand.
- Net Requirements: The shortage quantity that must be covered (appears when projected on-hand would go below zero or safety stock).
- Planned Order Receipts: The quantity and timing of orders planned to cover net requirements (sized according to the lot-sizing rule).
- Planned Order Releases: The same orders offset backward by lead time, indicating when orders should be released.

Detailed Example of MRP Calculation

Let's work through a practical example:

Item: Component X
- On-hand inventory: 50 units
- Safety stock: 0
- Lead time: 2 weeks
- Lot-sizing rule: Lot-for-Lot
- Scheduled receipt: 30 units in Week 2

Gross Requirements by week:
Week 1: 20 | Week 2: 25 | Week 3: 40 | Week 4: 30 | Week 5: 35

Calculations:

Week 1:
Projected On-Hand = 50 + 0 − 20 = 30
No net requirement.

Week 2:
Projected On-Hand = 30 + 30 (scheduled receipt) − 25 = 35
No net requirement.

Week 3:
Projected On-Hand = 35 + 0 − 40 = −5
Net Requirement = 5
Planned Order Receipt (Week 3) = 5 (lot-for-lot)
Projected On-Hand (adjusted) = 35 + 5 − 40 = 0
Planned Order Release = Week 3 − 2 weeks lead time = Week 1

Week 4:
Projected On-Hand = 0 + 0 − 30 = −30
Net Requirement = 30
Planned Order Receipt (Week 4) = 30
Projected On-Hand (adjusted) = 0 + 30 − 30 = 0
Planned Order Release = Week 4 − 2 = Week 2

Week 5:
Projected On-Hand = 0 + 0 − 35 = −35
Net Requirement = 35
Planned Order Receipt (Week 5) = 35
Projected On-Hand (adjusted) = 0 + 35 − 35 = 0
Planned Order Release = Week 5 − 2 = Week 3

Summary of Planned Order Releases:
Week 1: 5 | Week 2: 30 | Week 3: 35

These planned order releases would then become gross requirements for Component X's own components at the next BOM level.

Key MRP Concepts for the Exam

1. Pegging: The ability to trace a requirement back to its source of demand (which parent item created the requirement). Bottom-up pegging traces from component to parent; top-down pegging (also called full pegging) traces from parent down to all components. Pegging helps planners understand why a requirement exists and make informed decisions when shortages occur.

2. Firm Planned Orders (FPO): These are planned orders that have been frozen by the planner so that MRP will not automatically change their quantity or timing. FPOs are used to override MRP's logic when the planner has special knowledge about a situation — for example, to prevent nervousness or to accommodate a known constraint.

3. Regenerative vs. Net Change MRP:
- Regenerative MRP completely recalculates all requirements for all items from scratch, typically run weekly or on a scheduled basis.
- Net Change MRP only recalculates items affected by changes since the last MRP run, making it faster and suitable for more frequent (even daily) runs.

4. Time Fences: Time fences define zones within the planning horizon where different rules apply:
- Demand Time Fence (DTF): Inside this fence, only actual customer orders (not forecasts) drive demand. Changes require high-level approval.
- Planning Time Fence (PTF): Inside this fence, MRP will not automatically create or reschedule planned orders. The planner controls changes.
- Beyond the PTF, MRP operates automatically.

5. Safety Stock vs. Safety Lead Time:
- Safety stock is extra inventory held as a buffer. MRP treats safety stock as a quantity that must not be consumed — effectively raising the reorder point. Net requirements are triggered when projected on-hand would fall below the safety stock level rather than below zero.
- Safety lead time is extra time added to the lead time. Orders are planned to arrive earlier than actually needed.

6. Scheduled Receipts vs. Planned Order Receipts:
- Scheduled Receipts are open orders that have already been released (purchase orders placed or production orders launched). They are real commitments.
- Planned Order Receipts are orders recommended by MRP but not yet released. They exist only in the planning system and will be automatically recalculated with each MRP run (unless firmed as FPOs).

7. Dependent vs. Independent Demand: MRP handles dependent demand — demand that is derived from the production schedule of parent items. Independent demand (end customer demand) is handled by forecasting and the MPS. This distinction is fundamental to understanding why MRP exists.

8. Nervousness: MRP systems can exhibit nervousness — frequent and significant changes in planned orders due to small changes in inputs. Techniques to dampen nervousness include using firm planned orders, time fences, lot-sizing rules that create less frequent orders, and frozen zones in the MPS.

9. Low-Level Coding: As mentioned, each item is assigned a low-level code corresponding to the lowest level at which it appears in any BOM. MRP processes all items at Level 0 first, then Level 1, and so on. This ensures that all gross requirements for a component are known before its net requirements are calculated.

10. Capacity Considerations: Standard MRP is an infinite capacity planning system — it assumes unlimited capacity and does not check whether sufficient resources exist. Capacity Requirements Planning (CRP) is used in conjunction with MRP to validate that the plan is feasible.

Common Pitfalls and Challenges with MRP

- Data Integrity: MRP is only as good as its inputs. Inaccurate BOMs, incorrect inventory records, or unreliable lead times will produce unreliable plans. Inventory record accuracy of 95% or higher is typically considered necessary for effective MRP.
- Lead Time Accuracy: If actual lead times differ significantly from planned lead times, orders will arrive too early or too late.
- BOM Accuracy: BOMs must accurately reflect the current product structure. Engineering changes must be promptly reflected.
- MPS Validity: If the MPS is overstated or unrealistic, MRP will generate inflated requirements.

Exam Tips: Answering Questions on Material Requirements Planning (MRP) Logic and Mechanics

Tip 1: Master the MRP Grid Calculation
Practice completing MRP grids by hand until the process becomes second nature. Many exam questions present a partial MRP record and ask you to calculate a specific value — such as a planned order release quantity in a given week, or the projected on-hand balance at the end of a period. Know the formula: Projected On-Hand = Prior On-Hand + Scheduled Receipts + Planned Order Receipts − Gross Requirements. Work through each period sequentially.

Tip 2: Pay Close Attention to the Lot-Sizing Rule
The lot-sizing rule significantly impacts the answer. A lot-for-lot rule means the planned order receipt equals the net requirement exactly. A fixed order quantity may result in leftover inventory carrying into the next period, reducing or eliminating subsequent net requirements. Always check which lot-sizing rule is specified in the question before calculating.

Tip 3: Remember the Lead Time Offset Direction
Planned order releases are always earlier than planned order receipts by the lead time. If an exam question asks when an order must be released, take the period when the material is needed and subtract the lead time. A common mistake is adding the lead time instead of subtracting it.

Tip 4: Understand the BOM Explosion Process
When a question involves multiple BOM levels, remember that planned order releases at the parent level become gross requirements at the component level. Also, remember to multiply by the quantity per from the BOM. If 3 units of Component Y are needed per unit of Parent A, and the planned order release for Parent A in Week 4 is 100 units, then Component Y has a gross requirement of 300 in Week 4.

Tip 5: Know the Difference Between Scheduled Receipts and Planned Orders
Exam questions may test whether you understand that scheduled receipts are firm commitments already in progress, while planned orders are system recommendations. MRP can suggest rescheduling or canceling scheduled receipts via action messages, but it cannot automatically change them — only the planner can. Planned orders, however, are automatically adjusted by MRP with each regeneration.

Tip 6: Watch for Safety Stock
If safety stock is specified, net requirements are triggered when projected on-hand would drop below the safety stock level, not below zero. Essentially, treat the safety stock quantity as a new "zero" baseline. This is a common trick in exam questions.

Tip 7: Understand the Role of Firm Planned Orders
If a question mentions a firm planned order, remember that it is fixed in both quantity and time. MRP will not change it. It will, however, plan around it. FPOs are treated like scheduled receipts from a planning perspective but remain in the "planned" category.

Tip 8: Read Questions About Regenerative vs. Net Change Carefully
If asked about the difference, remember: regenerative MRP replans everything; net change MRP only replans items with changes. Net change is faster but may require periodic regeneration to maintain data integrity. Questions may frame this as a frequency or computational efficiency issue.

Tip 9: Don't Confuse MRP with Reorder Point Systems
MRP is a time-phased system that plans requirements by period based on the BOM and MPS. Reorder point (ROP) systems are quantity-based and trigger orders when inventory falls below a threshold. MRP is superior for dependent demand items because it anticipates future needs rather than reacting to current inventory levels. Exam questions may test this conceptual distinction.

Tip 10: Know the Prerequisites for Successful MRP
Exam questions may ask about what is needed for MRP to work effectively. The standard answer involves: (1) an accurate and valid MPS, (2) accurate BOMs (98%+ accuracy recommended), (3) accurate inventory records (95%+ accuracy), and (4) accurate lead times. Data integrity is the most common theme in these questions.

Tip 11: Practice Multi-Level MRP Problems
The exam often tests multi-level scenarios where you must cascade requirements from a parent item through one or more component levels. Practice problems where you complete the parent's MRP grid, identify planned order releases, explode through the BOM (multiplying by quantity per), and then complete the component's MRP grid. Be methodical and track each step carefully.

Tip 12: Understand Action Messages
MRP generates action messages to guide planners. Key action messages include: release order, reschedule in (expedite — the order is needed sooner), reschedule out (defer — the order is needed later), and cancel (the order is no longer needed). Questions may describe a scenario and ask which action message MRP would generate.

Tip 13: Use Process of Elimination on Conceptual Questions
For conceptual questions about MRP, use process of elimination. If an answer choice mentions MRP checking capacity — eliminate it (MRP is infinite capacity). If an answer mentions MRP planning independent demand — eliminate it (MRP handles dependent demand). These distinctions help narrow down choices quickly.

Tip 14: Review Low-Level Coding
If a question provides a product structure and asks about the low-level code of an item, remember that the low-level code equals the lowest (deepest) level at which the item appears across all product structures. This ensures it isn't planned prematurely.

Tip 15: Time Management During the Exam
MRP calculation questions can be time-consuming. If you encounter a complex multi-level MRP grid problem, consider flagging it and returning to it after completing faster questions. However, these problems are highly predictable and methodical — if you have practiced, they become straightforward point-earners.

Summary

MRP logic and mechanics form the backbone of internal supply planning. By understanding the inputs (MPS, BOM, inventory records), the process (netting, lot sizing, offsetting, and explosion), and the outputs (planned order releases, action messages), you will be well-prepared for both the CPIM exam and real-world supply chain management. Focus on mastering the MRP grid calculation, understanding how BOM levels interact, and knowing the conceptual underpinnings that distinguish MRP from other inventory management approaches. With thorough practice and a clear understanding of these mechanics, MRP questions become some of the most reliable scoring opportunities on the exam.