4 Steps to Materials Requirements Planning and Inventory Planning in Retail and E-Commerce

Time phased materials requirements planning (MRP) is a method used in supply planning and inventory management to plan and control the flow of materials throughout the production process. It is a critical tool for companies that plan purchases of products, as it helps them to ensure that they have the right materials on hand at the right time to meet customer demand.

Step 1 – Forecast Demand Quantities

The MRP process begins with forecasting demand for the finished product. This forecast is then used to determine the materials that will be needed to produce the product, taking into account lead times for ordering and receiving materials. The materials requirements are then planned over a specific time period, typically on a weekly or monthly basis.

Step 2 – Determine Materials Plan

Once the materials requirements have been planned, the next step is to create a materials plan that takes into account the available inventory and the expected delivery dates of materials that have been ordered. This plan is then used to schedule production and to place orders for materials as needed.

Step 3 – Include Safety Stock

One key aspect of MRP is the use of safety stock. Safety stock is a buffer of materials that is kept on hand to ensure that production can continue in the event of unexpected delays in receiving materials. The amount of safety stock that is kept on hand will depend on the lead time for ordering materials and the level of demand for the product.

Here’s an example – let’s say that a company produces widget A, which has a lead time of 2 weeks for materials and a demand of 100 units per week. To calculate the safety stock, the company would first determine the maximum lead time for materials, which in this case is 2 weeks. They would then multiply this by the demand (100 units/week) to find the safety stock needed (2 weeks x 100 units/week = 200 units). This means that the company should maintain a buffer of 200 units of widget A in case of unexpected delays in receiving materials.

Another important aspect of MRP is the use of reorder points. A reorder point is the point at which an order for more materials should be placed to ensure that there are enough materials on hand to meet demand. This point is calculated by taking into account the lead time for materials, the demand for the product, and the safety stock level.

As another example, if a company produces widget B which has a lead time of 4 weeks and a demand of 150 units per week. The company maintains a safety stock of 300 units. To calculate the reorder point, the company would add the lead time (4 weeks) to the demand (150 units/week) and add the safety stock (300 units) to find the reorder point (4 weeks x 150 units/week + 300 units = 900 units). This means that the company should place an order for more materials when the inventory of widget B falls below 900 units.

Step 4 – Review Your Exceptions and Take Action!

In addition to forecasting demand and managing inventory, MRP also helps companies to identify potential material shortages across the supply chain. By analyzing the materials requirements and vendor schedules, companies can identify areas where there may be a lack of materials or capacity, and take steps to address these issues before they become a problem.

The Bottom Line (TL;DR) – MRP and predictive inventory planning are powerful tools for managing the flow of materials throughout the supply chain. It allows companies to forecast demand, plan materials requirements, and maintain the right level of inventory to meet customer demand. By using safety stock and reorder points, companies can also ensure that production is not interrupted by unexpected delays in receiving materials. By identifying potential bottlenecks in the supply chain, MRP can also help companies to improve the efficiency of their operations.