Throw an MRP party to boost business

Nov. 4, 2016

Cleaner inventory and happier customers come with better material requirements planning.

In process manufacturing, conducting material requirements planning (MRP) is crucial to ensuring on-time shipments, minimizing inventory carrying costs and keeping customers happy. Still, if not given the attention it deserves, it can set a company back and hurt customer service. Companies may carry out their MRP processes using an enterprise resource planning (ERP) system or even by hand. However they do it, there are proven steps they can follow to make MRP an asset to their operation that enhances performance and enables growth.

Take out the trash

With MRP, it is garbage in, garbage out. From inventory balances to quality control approvals, manufacturers need to be able to trust their numbers. If a listed quantity is incorrect, the MRP system is going to plan around those inaccurate amounts, which will result in useless data. If the inventory value in the ERP system is consistently unreliable, the company needs to find out why. The reasons for inaccurate inventory vary, but in some instances, it comes down to how a company records actual production consumption.

Most companies will generate a batch ticket, which contains a list of the amounts of raw materials needed to produce an end item and use this as a guide for their MRP. When it is time to report end-item production, they end up back flushing the raw material quantities and posting that figure into their ERP system, recording production consumption at theoretical values instead of actual values. On a per-batch basis, this may be somewhat immaterial, but it can quickly add up over time.

With inaccurate inventory – based on end-item production — MRP is more likely to underestimate the quantity of raw materials needed. This will make it difficult to purchase materials in a timely manner and produce product in time for customer ship dates. A company may not realize it is short of material until the day it is ready to stage the product. It will then have to place a rush order from a vendor, which generally results in higher costs.

To avoid this nightmare scenario, manufacturers need to focus on recording more accurate information from production, which is much more cost effective than regularly performing cycle counts.

Clean up around the house

The primary reason manufacturers run MRP is to ensure the ability to meet demand as defined by sales orders, sales forecasts or minimum stocking requirements.

With the demand as the starting point, the MRP system takes into account a manufacturer’s quantity on hand, open production tickets and open planned tickets to establish the baseline from which to determine production quantities. From there, the MRP system determines the material demand and compares it with the current purchase orders. At the end of the process, the MRP system will often produce a list of suggested production orders and purchase orders. All of this is then organized by date to determine when the company needs the item for production or shipping, when it will have sufficient quantity available, and when it needs to purchase or produce.

Similar to how a manufacturer needs to have an accurate inventory quantity to rely upon, it also needs to have reliable dates entered into open documents. It is not uncommon to modify the production schedule or for customers to change requested shipping dates. However, as these changes occur, it is imperative to change the dates in the source documents the MRP system uses.

Simply put, if a manufacturer looks at an open sales order report, there should be no orders with a past-due request date. There is usually a reason why a product has not yet shipped. If so, that should be documented, and a revised, requested ship date should be assigned. The same applies for purchase orders and production tickets. Inaccurate dates greatly affect the integrity of the MRP data. Further, staying current with dates can provide valuable insight into vendor performance, the company’s performance or even customer performance.

Manufacturers should also clean up obsolete documents that are either cancelled or have remaining quantities that will not be received, shipped or produced. The worker who processes receipts against a purchase order is often not responsible for the actual purchase order. In the event that the vendor shipped fewer than what was on order, the purchasing manager or purchasing agent should determine if the remaining quantity should be on back order or if the purchase order should be marked as complete. If that step is not executed correctly, the remaining quantity will clog up the MRP data. That scenario could also apply to open production tickets or sales orders and would have a similar effect on MRP.

Plan the menu

Once a manufacturer has more reliable inventory balances from which to conduct MRP, it will want to focus on the data the MRP system uses to calculate its suggestions. For many process manufacturers, loss is an inherent part of the process. Evaporation, spillage or the reactivity of certain materials can all be causes. A company may put in 1,100 pounds of raw materials in order to get 1,000 pounds of finished product. But if it doesn’t account for that loss factor, the MRP will show it coming up short by 100 pounds of raw materials every time.

MRP should tell a manufacturer what it needs to bring in as well as when it needs to do so. For example, when does a company need to place a purchase order in order to have 500 pounds of ethyl alcohol on hand and ready for production? The key is knowing how long it generally takes for materials to arrive from the moment the order is placed as well as how long it takes to make the finished product. Taking it a step further, a company should also consider the time it takes for its quality control team to release the material to production and shipping.

Party time

Many organizations put the responsibility for managing MRP on one individual. And this person may not always know the solution to the many issues that arise. Therefore, companies should bring others into the mix. One strategy could be to schedule a daily meeting that includes the purchasing, customer service, production and quality control teams to review the MRP report, analyze any potential shortcomings, and identify any necessary changes. For example, customer service and production should be able to easily coordinate changes to the production schedule to meet customer deadlines.

Further, though companies increasingly rely on technology, they should not neglect the human element when it comes to decision-making. For example, purchasing agents can analyze the MRP system’s suggestions to purchase 500 pounds of a product this week and another 500 pounds for another two weeks and determine if it is a cost-effective solution. Bringing together different departments and maximizing collaboration across the company will allow a manufacturer to get the most value out of MRP.

MRP is an integral part of a productive, customer-focused manufacturing operation. With a consistent focus on data accuracy and improving internal processes, manufacturers can optimize MRP and ensure it produces valuable data and reliable information every time. This will help them ensure they have cleaner inventory, meet customer demands and position themselves for future growth.

Steve Kalina is a senior managing consultant for Microsoft Dynamics NAV at Sikich LLP. He has more than 15 years of experience working with companies on enterprise resource planning (ERP). He can be contacted at [email protected].

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