Are we seeing the end of Material Requirements Planning (MRP)?

When first launched back in 1964, MRP was a brilliant innovation. For the first time ever, companies started to use computer technology to understand what they needed to manufacture and purchase to be able to deliver according to real customer order demand. The introduction of MRP was a real breakthrough and will always remain an important milestone in material planning.

However, in this blog I will claim that innovative companies already have stopped using MRP system and are seeing the benefits that modern optimization planning software can give them. Based on the current rate of uptake, and the undeniable benefits, I fully expect that over 50 % of all companies will replace MRP with optimization software within 5 years. Are you ready?

Benefits introduced with MRP

With a proper setup of a MRP many companies went from guesswork to having a structured approach to planning. Production and material planners could easily see when they needed to start a production order or buy a component to have orders delivered in time and MRP would give a notification if something seemed to be late. For companies that quickly adopted these features it was a major breakthrough and a competitive advantage against other companies.

The introduction of MRP II also created a structured approach for long term planning and companies started to forecast future sales and tried to analyze what that would mean for their business. Having a process such as this has really helped companies to earlier adjust their capacity to better fit the market need, but even today it is a very time consuming iterative process and it is very hard to get an overview and analyze the consequences of different scenarios.

Drawbacks of MRP

Although it was a significant innovation in its time, many companies still struggle to make good use of MRP.

There are a number reasons for this, but let me give you some examples:

  • Basic Data – The old saying, ‘garbage in, garbage out’ applies here. Successful MRP requires accurate data for product structures, inventory levels and lead times. While many companies have adopted a structured approach for this, many have also failed. This is most likely because the benefits of MRP are not sufficient to drive business to be rigorous about the integrity of this data.
  • Static data – MRP suffers from the fact that some assumptions need to be made. One example is related to the fixed lead time of manufacturing – many companies have spent years or even decades to try to find the right lead time, when in fact there is no such thing. A lead time will always be dependent on the current load and the availability of key resources. Similar problems can be seen with static product structures, sourcing rules, costing model etc.
  • Capacity Constraints – MRP always suggests an infinite plan, which means it does not consider constraints in production, supplier, storage, transport capacity… This is probably the biggest problem of using MRP in the modern world. All companies have constraints not considering them means a lot of extra work for planners.
  • Revenues and Costs –MRP systems do not consider the revenues and costs associated to deliver a particular order, meaning a planner may end up spending valuable time and effort on less important customers who bring no revenue to the company.
  • Priorities –Modern companies analyze their customer base and often have different strategies for different kinds of customers and products. Standard MRP does not provide a system for supporting this business strategy.

The result of these limitations is that MRP is not able to factor in all of the necessary aspects of the business, whether it be business rules and constraints, lead times, or customer priorities, nor factor in a dynamic, constantly changing environment.  Consequently, MRP will not enable businesses to create holistic plans that ensure the best overall profit for the business.

Today’s alternative to MRP

end of mrp 2Optimization is a long sought-after alternative for innovative companies who seek to plan accurately and holistically, and with a view to overall profit.  As a theoretical mathematical concept, optimization has been around for many years, however the technology simply did not exist to deal with the sheer complexity required to deliver the sophisticated planning solutions required by businesses in the modern world.

In fact, technology made surprisingly few steps since 1964 when MRP first was introduced.  At that time, even an MRP run was an extremely time consuming process that could last for days if not even a weeks.

Up until 5-10 years ago it was not really feasible to try to plan a complete business by using optimization software. However, this has all changed. The introduction of 64-bit technology in computers has dramatically improved optimization times and now it is possible to quickly optimize even large models of data in just seconds or minutes meaning that the technology advancements have made it possible to completely replace MRP as a base for planning with a modern planning tool that uses optimization as a foundation.

The ahead-of-the-curve businesses who are adopting optimization as their planning solution are describing the switch as a “no-brainer”. Why should a modern company use a planning concept from 1964- (which doesn’t handle all their business needs) to plan their business in 2014. The answer is simple- they shouldn’t.  Over the next 5 years you can expect to see the majority of companies replace MRP with an optimization engine. In doing so they will be able to analyze and simulate the consequences of decisions and changes in their environment and, importantly, plan for profit.

by Erik Sandberg, Managing Director, Optimity Sweden 

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