One of the main variables in the manufacturing process is the forecasting of production needs from the end user or customer ”“ consumers of any product or service normally wants the product as soon as possible and the supplier needs to therefore forecast production needs in advance of actual supplies.





There are lead times with all manufacturing processes and when forecasting sales there are inherent costs that can drive a company out of business e.g. buying the stock is an input cost to the business and then the subsequent storage of that cost is an added on cost i.e. the physical building for warehousing will have a cost, the logging in and inventory of the raw components has a wage cost.





The forecast is therefore key to success ”“ and great planning is required to ensure that sufficient stock can meet both the potential and latent demand of the customer. If you buy too many raw components to keep the customer happy then there are cash flow considerations and also storage costs. Sales may come under forecasted targets with components remaining unsold a hence represents a loss to the business. If too many components are purchased with insufficient demand then additional warehousing costs and additional staff for inventory and stock control purposes may also have cash flow implications creating more strain on the business. In such cases it is not uncommon for businesses to actually make up a product using the unsold components and then sell the end product at a loss or reduced price just to free up inventory and improve cash flow affecting the profitability of the company.





This is why Just Enough Stock made in Just in Time are important management tools that can greatly affect the business in terms of profitability and efficiency. This is where MRP became an important management tool in the 1960s.





History of MRP





Dr Joseph Orlicky was a Czech-American engineer working with IBM in the 1960s in the US. Orlicky linked product demand to raw material supplies and then the computer do the rest of the work! The calculations were based on assumptions of buying what was required at the latest possible opportunity while ensuring that forecast demand targets were accurately meet. By keeping stock control tight the components inventory would be low and help aid in cash flow and consequently profitability of the company. 





This was the revolution of the 1960s and many businesses today still use MRP. 

The Basic elements of MRP





As with all business and management tools there are a variety of MRP systems in business today some which are simple and others that are complex. However the fundamentals of the system are:





–         a forecast or Master Production Schedule ”“ i.e. what products need to be made in the short term



–         A bill of materials which is similar to a recipe and specifies which  materials are to be used in what quantities to build each product



–         Lead times ”“ how long does it take to obtain or manufacture all products



–         What is the batch size and minimum order quantity for both the components and also the end product?



–         What is the current inventory balance ”“ the stock that is on hand and available at the suppliers of the components.







By understanding the factors above any company can then commence a MRP either at a basic level but also at a computerised and specialist level especially when there is a manufacturing process that involves many raw components are daily fluctuations in demand. Imagine the complications when raw components are shipped in from overseas and there are shipping and freight complications added into the matrix.







The Conclusion: