An Introduction to MRP Software

I wanted to write this IntroMRPduction to MRP Software (short for Material Resource Planning). I am writing especially for the Small and Medium manufacturing company (SMB Manufacturing). In the past year or two I have noticed a significant increase in interest regarding this technology. Companies looking at Microsoft Dynamics NAV are often asking about Material Planning. As the manufacturing economy improves, the number of companies looking for MRP systems has been growing. Many of these companies have an older system, although some are using Quickbooks and Spreadsheets and know they need to move up to full system.

This is by no means a complete introduction, but I feel it gives enough of an overview so people have a sense of what Material Resource Planning is, how it works and what you need to do to make proper use out of it.

Software

MRP is a software module, generally delivered as part of a larger ERP system. There are some stand alone MRP systems as well, but my experience is that there are limitations to how these systems interface with accounting and finance systems. Regardless of whether you get MRP as it’s own system, or as part of an ERP system such as Microsoft Dynamics NAV, the requirements are the same.

It starts with Inventory

MRP is basically a system for analyzing and predicting inventory over time. This is a very important concept and is often misunderstood. Although MRP requires some degree of inventory accuracy (how much you have now), in reality managing order dates in a system is much, much more important. This is because of how MRP works.

How MRP Works

MRP takes your current inventory levels, what sales or sales forecasts you have and analyzes and plans so you can deliver as soon as possible with the least inventory required. What this means is that those sales and sales forecasts (along with all the accurate delivery dates) is the critical part of MRP. Without this the software really can’t do much.

Most companies using an entry level accounting system are not entering their sales orders into that system. They enter shipments only, so they can invoice. This is a radical departure from the way they do it today and the most frequent misunderstanding I see.

What MRP Needs

MRP needs a few fundamental things to work.

  • You must have formal part numbers for everything you order and use. Also they must not include duplicate parts that are interchangeable. That means you can’t use a vendor’s part number unless you only purchase that part from that vendor.
  • You need accurate bills of material (BOM) for what you make. Also (although less important unless you want to do capacity planning), you need accurate routings for what you make.
  • Bills of material (and the parts on them) need to have accurate unit of measure conversions. An example is tracking how many square feet of material is on a sheet of steel, or how many pounds an inch of bar stock weights.
  • You need a formal sales order process. All your customer’s purchase orders entered into your system as sales orders. You need to ship these sales orders out of the system. The quantities and due dates (the dates you need to have the parts on the truck by) all need to be accurate, and most important constantly maintained.
  • You need a formal purchasing process, with purchase orders and purchase receipts. This means that someone is keying in the same information that your finance department probably does now (quantity to order, unit price, part description and most important, due date).

What MRP and Finance Share

Because you’re entering sales order data and purchase order data into your MRP, this generally needs to be transferred to accounting. Otherwise accounting will need to re-enter all this data manually. This can be done in two ways.

Integrated MRP and Finance

This is commonly referred to as ERP, although ERP can also include many other modules like project accounting, human resources, CRM etc… When your MRP and Finance systems are integrated, then activities are easier.  Activities like entering purchase orders or sales orders are going to dramatically reduce the time required by finance to invoice. The documents were already created, and finance spends more time just “approving” what is there and much less time keying things in.

Stand Alone MRP

There really isn’t any such thing as a fully stand alone Material Resource Planning system any more. Certainly there are systems that are designed to “interface” with an accounting system. That said, the idea of an MRP system that requires double entry of sales and purchase data in two systems is totally outdated. Those systems that are “bolt on” solutions for accounting systems come in many sizes and qualities. One thing is true however, most of them have some difficulty managing the synchronization between the accounting system and MRP system. This is one of the reasons that companies tend to prefer integrated systems.

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