What Is MRP? Material Requirements Planning Explained

Material requirements planning (MRP) is the calculation that tells a manufacturer what materials to buy or make, how much, and when, so that production can meet demand without piling up excess stock. Ask a production manager in a small factory how they plan raw materials and the answer is often a mix of experience, a whiteboard and a weekly call with the purchase team. That works until product variety grows, lead times stretch, or a big order arrives with two weeks' notice. This guide explains what MRP is, the inputs it needs, how the calculation works step by step with a worked example, common lot-sizing rules, and why MRP output is only as good as the data behind it.

What is MRP in manufacturing?

MRP converts a production plan for finished goods into time-phased requirements for every component and raw material. It answers three questions for each item:

• What is needed (which components and materials, from the bill of materials)?
• How much is needed after considering stock on hand and orders already placed?
• When must each order be placed, given its lead time?

The output is a list of planned purchase orders and planned production (work) orders, each with a quantity and a release date. Planners review them and convert them into actual orders.

MRP is different from reorder-level planning. A reorder level reacts to stock falling below a threshold, based on average past consumption. MRP looks forward at the production plan, which is far better for components whose demand depends on what you will make. Our guide to reorder level and safety stock covers the reorder approach, which still suits consumables and independent-demand items.

Dependent vs independent demand

The concept behind MRP is simple:

• Independent demand comes from customers: finished goods and spare parts sold directly. It must be forecast or taken from orders.
• Dependent demand is derived: if you plan to make 500 ceiling fans, you need exactly 500 motors, 1,500 blades and 500 canopies. It should be calculated, not forecast.

Forecasting dependent items separately, as many small factories effectively do, creates mismatches: plenty of blades, not enough motors.

The inputs MRP needs

Input	What it contains	Common data problems
Master production schedule (MPS)	Quantity of each finished product to be made, by week	Changed daily without discipline; not linked to sales orders
Bill of materials (BOM)	Components and quantities per unit, across levels	Outdated BOMs, missing scrap factors, wrong units
Inventory records	Stock on hand, allocated, on order	Book stock not matching physical stock
Lead times	Purchase lead time, production lead time per item	Supplier promise used instead of actual history
Planning parameters	Safety stock, minimum order quantity, lot size, scrap percentage	Never set, so MRP suggests impractical quantities

How MRP calculation works: the four steps

1. Explosion: multiply the production plan by BOM quantities to get gross requirements for each component, level by level.
2. Netting: subtract stock on hand and scheduled receipts (open purchase or work orders) and add back safety stock to get net requirements.
3. Lot sizing: round net requirements to practical order quantities (minimum order quantity, pack size, or a lot-sizing rule).
4. Offsetting: move each planned order earlier by the item's lead time, so it arrives when needed.

Worked example: a two-level BOM

Suppose a hypothetical Coimbatore pump maker plans to assemble 200 units of a monoblock pump in week 6. The simplified BOM:

Item	Level	Qty per parent	Make or buy	Lead time
Monoblock pump	0	n/a	Make (assembly)	1 week
Motor assembly	1	1	Make	2 weeks
Impeller	1	1	Buy	3 weeks
Copper winding wire	2 (under motor)	1.8 kg	Buy	2 weeks
Stator stampings	2 (under motor)	1 set	Buy	4 weeks

Stock and open orders: 30 motor assemblies in stock; 50 impellers in stock and 40 on order arriving week 3; 120 kg of copper wire in stock; no stator stampings in stock.

Level 0: the pump

Requirement: 200 pumps in week 6. Assembly takes 1 week, so the work order must start in week 5, and all level 1 components must be available at the start of week 5.

Level 1: motor assembly and impeller

• Motor assembly: gross 200, minus 30 in stock = net 170. Production lead time 2 weeks, so the motor work order for 170 starts in week 3.
• Impeller: gross 200, minus 50 on hand, minus 40 scheduled receipt = net 110. Purchase lead time 3 weeks, so a PO for 110 must be placed in week 2.

Level 2: components of the motor

• Copper wire: gross 170 x 1.8 = 306 kg needed in week 3. Minus 120 kg on hand = net 186 kg. Lead time 2 weeks, so order in week 1. If the supplier sells in 50 kg coils, order 200 kg.
• Stator stampings: gross 170 sets in week 3, none in stock. Lead time 4 weeks means the order should have been placed in week minus 1, which has passed.

That last result is the most valuable thing MRP does: it reveals a shortage before it happens. The planner now knows the motor work order cannot start in week 3 unless stampings are expedited, an alternate supplier is found, or the pump plan is moved. Without MRP, this would be discovered when the motor line stops.

Lot sizing rules

Rule	How it works	Best for
Lot for lot	Order exactly the net requirement for each period	Expensive or custom items
Fixed order quantity	Always order a set quantity (or multiples)	Items with supplier minimums or pack sizes
Period order quantity	Combine requirements for several weeks into one order	Low-value items with high ordering cost
Economic order quantity	Order quantity balancing ordering and holding cost	Stable-demand purchased items

MRP vs MRP II vs ERP

• MRP plans materials.
• MRP II (manufacturing resource planning) adds capacity: machine and labour hours, so plans are checked against what the shop floor can actually produce.
• ERP integrates MRP and MRP II with accounting, purchasing, sales, inventory and other functions, so planned orders become real POs and work orders, and their costs flow into the books.

Capacity: the reality check

MRP assumes infinite capacity unless capacity planning is added. In the example, if the motor winding section can produce only 60 motors a week, a work order for 170 starting in week 3 will not finish in two weeks. Rough-cut capacity planning compares the load from the production plan with available hours at key work centres. Where the load exceeds capacity, the plan must be levelled: start earlier, add a shift, subcontract, or move the due date.

Making MRP output trustworthy

Planners stop using MRP the moment its suggestions look wrong. The usual causes, and fixes:

1. Inaccurate stock: run cycle counts on A-class components. MRP netting against wrong stock produces wrong orders.
2. Outdated BOMs: put BOM changes under engineering change control, with effective dates.
3. Unrealistic lead times: calculate actual supplier lead times from PO and GRN dates and update quarterly.
4. Missing scrap factors: if 4 percent of castings are rejected at machining, MRP must plan for it.
5. Unrecorded issues: material taken from stores without an issue entry leaves MRP thinking it is still available.
6. A changing plan: freeze the near-term schedule (for example, the next two weeks) and allow changes only with approval.

MRP in Excel vs in an ERP

Small factories sometimes build MRP in Excel for a handful of products. It becomes fragile with multi-level BOMs, multiple warehouses, open orders and frequent changes, because each recalculation needs fresh stock and order data. In an ERP, MRP runs against live inventory, open POs and work orders, and planned orders can be converted directly into purchase orders and work orders. Fininvo's manufacturing module lists BOMs, work orders, MRP and capacity planning, routing, subcontracting and production cost tracking, linked to inventory and purchasing.

Getting started with MRP: a 6-week approach

1. Week 1: pick your top 10 finished products by volume and validate their BOMs on the shop floor.
2. Week 2: count stock of all components in those BOMs.
3. Week 3: set lead times, minimum order quantities and safety stock for those components.
4. Week 4: build a 12-week production plan and run MRP; compare suggestions with what planners would have done.
5. Weeks 5 to 6: investigate differences, fix data, then extend to more products.

Frequently Asked Questions

What is the difference between MRP and inventory reorder levels?

Reorder levels trigger orders when stock falls below a threshold based on past consumption. MRP calculates requirements from the future production plan and BOMs, which is more accurate for components.

Does a small manufacturer need MRP?

If you make multiple products with shared components and multi-week lead times, MRP helps even at small scale. Very simple operations with few products may manage with reorder levels.

What is a bill of materials in MRP?

A BOM lists all components and quantities required to make one unit of a product, often across several levels. MRP uses it to explode finished goods demand into component demand.

How often should MRP be run?

Many manufacturers run MRP weekly, and some daily for fast-changing plans. The key is reviewing and acting on the suggestions after each run.

Why does MRP suggest strange quantities?

Usually because of inaccurate stock, outdated BOMs, wrong units of measure, missing open orders or unset lot-size parameters. Fix the data rather than overriding every suggestion.

How Fininvo Helps

Fininvo connects BOMs, MRP, work orders, inventory and purchasing in one system so planned orders become real documents. Explore manufacturing, purchasing and pricing.