Why companies should be looking beyond MRP to Supply Chain Optimization for holistic, profit-driven planning.
When first launched back in 1964, MRP was a brilliant innovation. For the first time ever, companies started using computer technology to understand what they needed to manufacture and purchase to be able to meet real customer demand. The introduction of MRP was a real breakthrough and will always remain an important milestone in material planning.
However, the real innovators have stopped using MRP, and are seeing the benefits that modern optimization planning software can bring. 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?
First a quick look at the benefits of MRP
With a proper MRP setup, 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 deliver in time, and MRP would give a notification if something seemed to be late. For companies that quickly adopted these features, it was a breakthrough and a major competitive advantage.
The introduction of MRP II also created a structured approach for long-term planning. Companies started to forecast future sales and tried to analyze what that would mean for their business. This has really helped companies to adjust their capacity early to better meet market need. But even today it is a very time-consuming, iterative process and it is extremely difficult to get an overview and analyze the consequences of different scenarios.
And so to the drawbacks
Although it was a significant innovation in its time, many companies struggled (and still do!) 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, just as many have not. 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 trying to pinpoint 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 with using MRP. There are always constraints, and not considering them means a lot of extra work for planners.
- Revenues and Costs – MRP systems do not consider the profit picture associated with delivering a particular order, meaning a planner can spend valuable time and effort on less profitable orders/customers that bring no revenue to the company.
- Priorities – Market leaders 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. MRP will simply not allow you to create holistic plans that ensure the best overall profit for the business.
What’s the alternative to MRP?
For companies that seek to plan accurately and holistically, and with a view to overall profit, the alternative is Supply Chain Optimization. As a mathematical concept, optimization has been around for many years, however, it’s only recently that the technology has been made available in a way that’s accessible for business.
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. It is now possible to quickly optimize even large data sets in just seconds. Technology advancements have made it possible to completely replace MRP as a base for planning with a modern planning tool that uses optimization as its 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 – one which doesn’t even meet all their business needs at that? The answer is simple – they shouldn’t.