Based on orders or forecasts for the final products, quantities for all required materials and items can be computed. Whereas forecasts for independent demand inventories are based on historical data, the demand for dependent demand inventories is calculated based on future demand forecasts (Schroeder 1993). When used in a manufacturing environment the technique to determine dependent item demand is called Material Requirements Planning
(Fleischmann et al 2008, Heizer and Render 2010).
Material Requirements Planning requires the following information: First, the master production schedule needs to be available (Schroeder 1993, Tang and Grubbstrom 2002). The master production schedule specifies what is to be made and when (Verwijmeren et al 1996, Tang and Grubbstrom 2002). It has to comply with a production plan that includes various data such as financial plans, resource capacities, supplier performance, and other considerations (Heizer and Render 2010). Second, the bills of material must be at hand. These lists contain quantities of components, materials and other ingredients required to make the product. The bills of material can also be used as pick lists for provisioning items to manufacturing or assembly staff. The bills of material can take various forms. In modular bills, material of product modules is specified.
Planning bills are used to group items by assigning an artificial parent to the bills of material. Phantom bills exist only temporarily and build components or subassemblies that are incorporated into another assembly directly and are thus, never inventoried (Fleischmann et al 2008, Heizer and Render 2010).
Fourth, knowledge of outstanding orders is essential (Schroeder 1993). Finally, lead times for materials and components needs to be known (Heizer and Render 2010).
These five inputs form the basis of the gross material requirements plan. Here inventory is not considered and order points for items are determined with
respect to the master production schedule. Inventory and outstanding orders are included in the net material requirements plan (Heizer and Render 2010).
In practice not all data input for Material Requirements Planning is reliable. The bills of material or inventory records may not be perfect and procurement lead times may not always be stable. External changes in the supply chain
originating the so called Bullwhip Effect (Metters 1997, Chen et al 2000, Disney and Towill 2003) or impacts of additional short-term orders make it necessary to consider safety stock inventory. It is then integrated in the projected on-hand inventory of the Material Requirements Planning logic (Heizer and Render 2010).
Material Requirements Planning is a planning tool, detailed scheduling is not possible. It provides due dates when certain manufacturing jobs need to be completed, but does not assign these jobs to machines or people. Work schedules are necessary for these tasks (Schroeder 1993). Furthermore Material Requirements Planning employs fixed lead times. This can be a serious limitation in case lead times vary with quantities (Heizer and Render).
Material Requirements Planning allows control of every item with equal intensity. Clustering of items by means of ABC Analysis it not necessary (Schroeder 1993).
According to their usage, different types of Material Requirements Planning can be distinguished. Material Requirements Planning I is an inventory control system. Based on the master production schedule, manufacturing and purchase orders are issued for the required quantities at a certain time. Capacity planning is not included (Schroeder 1993).
Material Requirements Planning II is used to plan and control both inventories and capacities. A lack of capacity leads to a change in capacity or in the master production schedule. This system is also called a closed-loop system as there is a feedback loop between the launched orders and the master production
schedule to adapt capacities (Schroeder 1993).
Material Requirements Planning III finally allows planning and control of all manufacturing resources (Schroeder 1993).
Heizer and Render (2010) do not differentiate between Material Requirements Planning II and Material Requirements Planning III. They attribute resource
planning and control already to Material Requirements Planning II and replace
“requirements” with “resources” here while Schroeder (1993) applies
“resources” only to Material Requirements Planning III.
Material Requirements Planning systems are not only applicable for manufacturing industries. They can also support service providers such as hotels, restaurants, and hospitals. Here demand for service or service items is classified as dependent when it is directly deduced from demand for other services or service items (Heizer and Render 2010).
Distribution Requirements Planning systems apply Material Requirements Planning principles to the management of inventories in the supply chain (Crabtree 1987, Verwijmeren et al 1996). Heizer and Render (2010) use the term “Distribution Resource Planning” for the same system. Gross requirements show the expected demand. Net requirements are computed by allocating inventory available in the supply chain to gross requirements. The inventory is pulled though the system (Heizer and Render 2010).
Enterprise Resource Planning systems have been developed out of Material Requirements Planning systems (Razi and Tarn 2003, Heizer and Render 2010). Inventory Management is often a sub module of the material
management module in today’s Enterprise Resource Planning systems (Razi and Tarn 2003). The Enterprise Resource Planning then is a kind of umbrella system tying together several specialised systems such as Supply Chain Management and customer relationship management systems or human resources applications (Davenport 1998, Heizer and Render 2010). Literature shows that the introduction of Enterprise Resource Planning systems can lead to inventory reduction (Razi and Tarn 2003, Davenport and Brooks 2004).
However, an ERP system - unless it is custom made - impairs its own logic on the company it is employed in. Therefore care has to be taken with respect to the company’s strategy, organisation, and culture when introducing Enterprise
Resource Planning (Davenport 1998).
Just-In-Time systems are an alternative to Material Requirements Planning systems (Schroeder 1993). Overcoming the traditional Just-ln-Case approach where parts are produced just in case they are needed, Just-In-Time provides the right part at the right place at the right time (Heizer and Render 2010).
Compared to Just-ln-Case the Just-In-Time approach results in significantly lower inventory and lower costs (Schroeder 1993). Just-In-Time is a key part in lean operations (Christopher and Towill 2000, Heizer and Render 2010).