Material Requirement – or Resources – Planning (MRP) is essentially about demand planning. Computer-based MRP reporting can forecast how much raw materials a company needs to make the volume of product it expects to sell to customers.
Determining exactly how much is needed to meet customers’ future requirements can be challenging – and getting it wrong can be costly.
You may end up underestimating, which can mean disappointing your customers and forcing them to look elsewhere. On the flip side, overestimating can cost you money in storing inventory – or even wasting product.
However, get it right and MRP reports can improve efficiency, and even profitability.
The primary goal is for a company to figure out how much it expects to sell in the weeks or months ahead. MRP uses historical sales figures to suggest how much material a company needs to make its product. This forecast will determine how much of each component it needs and when it needs it, factoring in current inventory levels and lead times to both buy the components and make the final product.
Note too that customers’ purchasing habits can be seasonal, depending on the product. For instance, demand for materials used in building and construction will be much higher in the peak spring and summer periods, tailing off in the winter. Others – like antifreeze – will see peak demand in the colder, winter months.
Taking antifreeze as an example, a first step is to take a look at customers’ purchasing histories to discover what volumes they buy and in which sizes. Next is to estimate how much you are planning to sell in the coming months, taking the different sizes into account, for example, totes, drums or pails. Adding them all together will ascertain how much antifreeze you will need to stock for each size sold.
Using this forecast, the MRP report will then look at the product’s formula, determining which raw materials are needed, how much of each, as well as how many of the necessary pails, lids and labels will be required for delivering the antifreeze to customers.
It will then give forecasts for each raw material, comparing both inventory and the scale of production, and tell you whether or not you have enough in stock to make the necessary volumes of antifreeze in the months ahead. If there is not enough in stock, then the system will look at lead times and assess when you need to place a purchase order to get your raw materials in time.
Many companies try to pursue a just-in-time (JIT) system, where materials are delivered immediately before they are required in order to keep inventory levels down and minimize costs. But, should someone make a mistake with their calculations, this could mean a company would not be able to ship an order to a customer. MRP reporting can help to provide a balance between being overstocked or understocked.
Supply chain disruptions
Even with the best planning in the world, unexpected disruptions, or so-called “black swan” events, can occur, with sometimes severe and widespread consequences along the supply chain.
There have been plenty of examples this past year – the ongoing COVID-19 pandemic, the Texas “Big Freeze” in February, the blockage of the Suez Canal in March, and various port strikes, to name just a few.
At times like these, planning based on historical business goes out the window. For instance, the Suez Canal blockage lengthened cargo lead times from a typical five-week delivery to 10 weeks and that situation could never have been predicted.
Sometimes though, it is possible to foresee certain disruptions to supply chains, for example labor strikes, or impending hurricanes.
At these times, companies can adjust their MRP reporting to take these anticipated disruptive events into account, perhaps by ordering more material and increasing lead times to see them through and maintain deliveries to customers.
The downside in these situations is that other companies
will be doing the same, so demand will rise, forcing prices up. Buying at a higher price means that the material sitting in the warehouse is now more expensive. So, when a hurricane passes and demand and prices return to more normal levels, customers will not be willing to pay the rate of a company’s higher-priced inventory.
Reacting quickly brings pricing advantages
In instances where a black swan event occurs and the after-effects continue for an undetermined period, customers will need product and will be willing to pay a higher price to secure volumes. It is during these times that suppliers can improve their profitability by increasing their prices during times of tight supply.
MRP can track the higher costs, both for raw materials and replacement product, suggesting what pricing level a company should offer so it can maintain or grow its margins.
In other words, if a company has bought material at a lower cost, prior to an unplanned event and prices skyrocketing, then it can sell its finished product at the higher price because the market will know about the disruption and have reacted accordingly.
Reacting quickly with price increases during supply chain disruption then becomes an opportunity for chemical companies and distributors to increase profitability and enjoy healthy revenue until they need to pay the higher prices themselves.
Automated systems will also assist companies in reacting to these events quickly, by updating customer records and sending out price increase letters simultaneously.
MRP reporting is a core component of Datacor ERP and can help support your company’s decision making and productivity. To schedule a free, no obligation demo, contact one of our advisors.