MRP and ERP in manufacturing

In short

Material Requirements Planning (MRP) is a computer-based, backward-scheduling technique that converts a Master Production Schedule for finished goods into timed purchase and manufacturing orders for every component, using the bill of materials, inventory records and lead times. MRP II extends it to capacity, shop floor, costing and finance; Enterprise Resource Planning (ERP) extends it further into a single integrated database covering sales, procurement, production, stores, quality, maintenance, HR and accounts across plants. The topic matters because dependent demand (components) cannot be planned by reorder-point rules meant for independent demand — MRP is the standard answer in discrete, assembly-type manufacturing. It is examined in GATE PI/ME (MRP explosion tables, net requirement and planned order release problems), university Production Planning papers and in placement rounds for Tata Motors, Mahindra, Bosch, Ashok Leyland, L&T, Godrej, TVS, Cummins and for ERP functional-consultant roles at TCS, Infosys, Wipro, Accenture and LTIMindtree.

Explained

Independent versus dependent demand, and why MRP exists

• Independent demand: demand for an end item, set by the market and forecast (cars, pumps, fans). Handled by EOQ/reorder-point and forecasting.
• Dependent demand: demand for components, derived arithmetically from the end item's schedule (4 wheels per car). It is *lumpy* and *known in advance* — so it should be calculated, not forecast.
• Applying reorder-point logic to dependent items causes either excess stock or shortages, because consumption comes in bursts when a batch is assembled.
• MRP philosophy: "right part, right quantity, at the right time" — order so that material arrives just before it is needed, not earlier.
• MRP is a push system driven by a schedule; JIT/kanban is a pull system driven by actual consumption. Most Indian plants run MRP for planning and procurement with kanban for internal replenishment (a hybrid).

The three MRP inputs and the two outputs

• Input 1 — Master Production Schedule (MPS): what end items, how many, in which time bucket (usually weeks). Built from the firm order book plus forecast, and already checked roughly for feasibility by Rough-Cut Capacity Planning (RCCP).
• Input 2 — Bill of Materials (BOM): the structured parent-child product tree with quantity-per-assembly. Levels are numbered from 0 (end item) downwards. A modular BOM splits options for configurable products; a phantom BOM is a transient sub-assembly never stocked; a planning BOM is an artificial average mix for forecasting.
• Low-level coding: each part is assigned the lowest (deepest) level at which it appears anywhere, so a common part is netted only once, after all parents have been exploded. Pegging is the reverse trace — which parent order created this requirement.
• Input 3 — Inventory Record File (item master): on-hand stock, scheduled receipts (open orders), lead time, lot-size rule, safety stock, scrap/yield allowance, unit cost.
• Primary outputs: planned order releases, and planned order receipts by period.
• Secondary outputs: exception reports (past-due, excess), rescheduling notices, cancellation notices, inventory and purchase commitment projections, and input to CRP.

The MRP logic, step by step (the exam procedure)

1. Gross requirements for a level-0 item come straight from the MPS; for a component they come from the *planned order releases* of its parent × quantity-per-assembly.
2. Netting: Net requirement = Gross requirement − Scheduled receipts − Projected on-hand at end of previous period + Safety stock. If this is zero or negative, no order is needed.
3. Lot sizing: convert the net requirement into an order quantity — lot-for-lot, fixed order quantity, EOQ, periodic order quantity, or least-unit-cost/least-total-cost (part-period balancing); apply minimum order quantity and multiples from the item master.
4. Lead-time offsetting (backward scheduling): place the planned order release in the period = period of need − lead time. This is what makes MRP time-phased.
5. Explosion: pass those releases down as gross requirements of the next level, and repeat level by level using low-level codes.
6. Allow for scrap/yield: order quantity = requirement ÷ yield (e.g. 1,000 ÷ 0.98 = 1,021 pieces at 98% yield).
7. Time bucket is usually a week; bucketless MRP stores exact dates and is what modern ERP uses.
8. Planning horizon must be at least as long as the cumulative (critical-path) lead time of the deepest branch, else the plan is infeasible on day one.

MRP II, closed-loop MRP and capacity

• Open-loop MRP assumes infinite capacity — it tells you *what* to make but not *whether you can*.
• Closed-loop MRP adds feedback: Capacity Requirements Planning (CRP) loads planned and released orders onto work centres using routings and standard times; if a work centre is overloaded the planner revises the MPS, adds overtime, subcontracts or reschedules. Input/output control monitors planned versus actual work hours at each work centre.
• MRP II (Manufacturing Resource Planning, 1980s, Oliver Wight): business planning → sales & operations planning → MPS → MRP → CRP → execution, with a financial mirror so the same plan yields the material budget, labour budget and cash flow. Includes simulation ("what-if") capability.
• Hierarchy to remember: Business plan → S&OP/aggregate plan → MPS (with RCCP) → MRP → CRP → shop floor control & purchasing.
• DRP (Distribution Requirements Planning): the same time-phased logic applied upstream from depots and warehouses to the factory — important for FMCG and spare-part networks.
• Regeneration versus net change: regenerative MRP re-explodes the whole plan periodically (weekly); net-change MRP updates only what changed (continuous). Net change is faster but noisier.
• System nervousness: small MPS changes causing large, repeated rescheduling downstream. Controlled by a frozen period / demand time fence, planning time fences, firm planned orders, and pegging to judge which changes matter.

ERP: scope, architecture and modules

• ERP is a single integrated transaction system on one common database, so a sales order, its material plan, its production order, its goods receipt, its invoice and its ledger entry are one chain of records entered once.
• Evolution: inventory control packages (1960s) → MRP (1970s) → MRP II (1980s) → ERP (1990s) → ERP II / cloud, mobile and analytics-enabled suites with IoT and MES integration (Industry 4.0).
• Core modules: Materials Management (purchase, inventory, MRP), Production Planning (PP), Sales & Distribution, Quality Management, Plant Maintenance, Finance & Controlling (FI/CO), Project Systems, Human Capital Management, and SCM/APS add-ons.
• Shop-floor layer: MES/SCADA and PLCs feed actual production, downtime and quality data up to ERP; barcodes, QR and RFID capture material movement.
• Key master data: material master, BOM, routing (operations, work centres, standard times), work centre, vendor and customer masters, cost centre. Garbage master data is the single biggest cause of ERP failure — wrong lead times and BOMs produce wrong plans at machine speed.
• Products in use in India: SAP S/4HANA and SAP Business One, Oracle Fusion/NetSuite, Microsoft Dynamics 365, Infor, Ramco, and Indian/open options such as Tally Prime (accounting-led), Marg, Zoho, Odoo and ERPNext (open source, widely used by Indian MSMEs).
• Implementation stages: feasibility and package selection → As-Is/To-Be business blueprint → configuration and customisation → data migration and cleansing → integration/UAT testing → training → go-live cutover (big-bang, phased or parallel) → post-go-live support and continuous improvement. Change management and top-management ownership matter more than software choice.
• Indian statutory fit is a hard requirement: GST-compliant invoicing and e-invoicing (IRN/QR via the Invoice Registration Portal), e-way bills, TDS/TCS and returns under the Income-tax Act, 2025 (in force from 1 April 2026, which renumbered the sections and forms of the 1961 Act), payroll and register/return formats under the four Labour Codes in force from 21 November 2025 (Code on Wages; Industrial Relations; Social Security; Occupational Safety, Health and Working Conditions — which together replaced 29 central labour laws, with the Minimum Wages Act subsumed in the Code on Wages, the Industrial Disputes Act in the Industrial Relations Code, and the Factories Act and BOCW Act in the OSH Code), EPF/ESI filing, and GST rate slabs of 5%, 18% and 40% as revised on 22 September 2025 (a merit/nil category continues for specified goods; rates change by notification, so the master rate table must be maintained, not hardcoded). Quality and calibration records are usually aligned to IS/ISO 9001 quality management system requirements.

Advantages, limitations and comparisons

• Advantages: lower work-in-process and raw-material inventory; fewer stockouts and expediting; realistic delivery promises; visibility of future load; one source of truth; faster closing and better costing (ERP); priority planning that can be rescheduled when demand changes.
• Limitations of MRP: depends entirely on data accuracy (BOM accuracy ≥ 98%, inventory record accuracy ≥ 95% are the usual thresholds); assumes fixed lead times though lead time actually grows with load; infinite capacity unless CRP is added; nervousness; computationally heavy for deep BOMs; weak for process industries with co-products (they need recipe/flow-based planning).
• Limitations of ERP: high licence, hardware and consulting cost; 6–24 month implementations; resistance to change; over-customisation destroys upgradability; rigid processes may not suit a job shop.
• MRP versus EOQ/reorder point: MRP is time-phased and schedule-driven for dependent demand; reorder point is quantity-driven and best for low-value independent or consumable items (ABC class C, fasteners, consumables).
• MRP versus JIT: MRP plans with a horizon and tolerates variability by holding time buffers; JIT removes buffers by levelling production and reducing setup. MRP versus Theory of Constraints (DBR): TOC schedules only the bottleneck and releases material to its drum beat.

Key points

• Dependent demand - component demand calculated from the parent's schedule, never forecast separately.
• MPS - the time-phased build plan for end items; the only authorised driver of MRP.
• BOM - parent-child tree with quantity per assembly; levels numbered from 0 at the top.
• Low-level code - the deepest level at which a part appears; nets common parts only once.
• Inventory record file - on-hand, scheduled receipts, lead time, lot-size rule, safety stock.
• Net requirement - Gross − Scheduled receipts − Prior projected on-hand + Safety stock, floored at zero.
• Lead-time offsetting - planned order release is placed one lead time before the need date (backward scheduling).
• Planned order release - MRP's primary output; becomes the parent's contribution to child gross requirements.
• Lot sizing - lot-for-lot, FOQ, EOQ, POQ, least-total-cost; trades ordering cost against carrying cost.
• Closed-loop MRP - MRP plus CRP and execution feedback, so capacity infeasibility is detected and fed back.
• MRP II - closed-loop MRP extended to capacity, costing, finance and simulation across the business.
• ERP - one integrated database and process chain across all functions and plants; MRP is one engine inside it.
• DRP - the same time-phased logic for distribution depots feeding the plant.
• Regeneration vs net change - full periodic re-explosion versus continuous incremental update.
• Nervousness - instability from frequent MPS changes; damped by frozen periods and time fences.
• Planning horizon ≥ cumulative lead time - otherwise the earliest orders are already late.
• Data accuracy - BOM ≈ 98%+ and inventory ≈ 95%+ accuracy are preconditions, not nice-to-haves.
• Indian compliance - GST e-invoicing, e-way bills, Income-tax Act 2025 TDS/TCS, four Labour Codes (from 21 Nov 2025) must be configured, with rate tables maintained by notification.

Formulas and examples

Example 1 — Net requirement and planned order release (single item). Item: gearbox casing. Lead time L = 2 weeks, safety stock = 50, opening on-hand = 200, scheduled receipt of 100 in week 2. Lot-for-lot ordering. Gross requirements: Wk1 80, Wk2 120, Wk3 150, Wk4 100, Wk5 200.

• Week 1: POH = 200 + 0 − 80 = 120 ≥ SS 50, so NR = 0.
• Week 2: POH = 120 + 100 − 120 = 100 ≥ 50, NR = 0.
• Week 3: NR = 150 − 0 − 100 + 50 = 100 → receive 100 in Wk3, so release in Wk1 (3 − 2).
• Week 4: NR = 100 − 0 − 50 + 50 = 100 → receive Wk4, release Wk2.
• Week 5: NR = 200 − 0 − 50 + 50 = 200 → receive Wk5, release Wk3.
• Total planned releases = 400 units; ending stock stays at the safety level of 50.

Example 2 — BOM explosion through two levels. Product X (level 0) needs 2 of sub-assembly A and 1 of part B. A (level 1) needs 3 of part C and 1 of B. So B's low-level code is 2 (it appears at level 1 under X and at level 2 under A, so it must be netted at level 2, after A's orders are planned). MPS for X: 100 in Wk6, 150 in Wk8. Lead times: X = 1 wk, A = 2 wk, B = 1 wk, C = 3 wk. No opening stock, no safety stock, lot-for-lot.

• X: receipts 100 (Wk6), 150 (Wk8) → releases 100 (Wk5), 150 (Wk7).
• A: GR = 2 × X releases = 200 (Wk5), 300 (Wk7) → L = 2 → releases 200 (Wk3), 300 (Wk5).
• B: GR = 1 × X releases + 1 × A releases = Wk3: 200; Wk5: 100 + 300 = 400; Wk7: 150. L = 1 → releases 200 (Wk2), 400 (Wk4), 150 (Wk6).
• C: GR = 3 × A releases = 600 (Wk3), 900 (Wk5) → L = 3 → releases 600 (Wk0), 900 (Wk2).
• Cumulative lead time for the X→A→C branch = 1 + 2 + 3 = 6 weeks, which is exactly why C must be released in week 0 for a week-6 delivery. The planning horizon must therefore be at least 6 weeks; had the first MPS entry been in week 4, the plan would be infeasible.

Example 3 — Lot sizing compared (lot-for-lot vs FOQ vs POQ). Net requirements for a bearing over 6 weeks: 100, 150, 50, 200, 100, 200 (total 800). Ordering/setup cost ₹2,000 per order; carrying cost ₹5 per unit per week, charged on end-of-week stock.

• FOQ workings: order 400 in Wk1 → end stock 300, 150, 100; stock runs out in Wk4, so order 400 again → end stock 300, 200, 0.
• POQ workings: cover weeks 1–3 with 300 → end stock 200, 50, 0; cover weeks 4–6 with 500 → end stock 300, 200, 0.
• POQ is cheapest here because the order quantity matches the actual lumpy requirement instead of a fixed 400; lot-for-lot minimises stock but pays six setups. With setup cost reduced to ₹300, lot-for-lot would cost ₹1,800 and win — which is precisely the JIT argument: cut setup cost and small lots become economic.

Example 4 — Capacity check (CRP) against the MRP plan. A CNC work centre has 2 machines, 2 shifts of 8 h, 6 days a week, utilisation 90%, efficiency 95%. MRP releases for week 10: 300 casings at 4 min/piece with 60 min setup, and 500 covers at 3 min/piece with 45 min setup.

• Available = 2 × 2 × 8 × 6 × 0.90 × 0.95 = 192 × 0.855 = 164.2 h.
• Required = (300 × 4 + 60)/60 + (500 × 3 + 45)/60 = 1,260/60 + 1,545/60 = 21.0 + 25.75 = 46.75 h.
• Load factor = 46.75/164.2 = 28.5% — ample capacity, so the MRP plan is feasible at this work centre. Had the requirement been 900 casings and 2,000 covers: (3,660 + 6,045)/60 = 161.75 h, a load factor of 98.5% — technically feasible but with no room for breakdowns, so the planner would subcontract or pull some orders earlier.

Example 5 — Yield and scrap allowance. A pump order needs 1,000 good impellers. The casting supplier yields 92% and machining yields 97%.

• Castings to be ordered = 1,000 ÷ (0.92 × 0.97) = 1,000 ÷ 0.8924 = 1,121 pieces (rounded up).
• If the item master is left at 100% yield, MRP plans 1,000 and the line is short by roughly 108 good pieces — the classic "MRP shortage that is really a master-data error".

Where it is used

• Automotive and auto components: Tata Motors, Maruti Suzuki, Mahindra, Bajaj, TVS and their tier-1 suppliers (Bosch, Sundram Fasteners, Bharat Forge) run MRP inside SAP for deep multi-level BOMs, plus kanban and milk-run supply for line-side parts.
• Capital goods and engineering: L&T, BHEL, Thermax, Kirloskar use MRP/ERP with Project Systems for engineer-to-order machines where BOMs are released progressively.
• Consumer durables, electronics and FMCG: Godrej, Voltas, Havells, Dixon use MRP for assembly plus DRP to plan depot replenishment across states.
• MSME clusters: Pune, Rajkot, Coimbatore, Ludhiana and Faridabad job shops increasingly run ERPNext, Odoo, Tally Prime or Marg for GST e-invoicing, stock and simple MRP — a common first ERP for a small plant.
• Job roles: production planner / PPC engineer, materials or supply-chain planner, buyer, SAP PP-MM functional consultant, ERP implementation and data-migration analyst, master-data (BOM and routing) engineer, MES-ERP integration engineer.
• Beyond factories: hospital consumables planning, airline MRO spares, construction material planning, and defence/railway production units (HAL, Indian Railways production units) use the same time-phased logic.

Interview questions

• Q: Why can't you use EOQ and reorder point for components? A: Component demand is dependent and lumpy — it occurs in bursts when parents are built. Reorder-point logic assumes smooth, continuous consumption, so it either holds excess stock or signals too late.
• Q: What are the three inputs to MRP? A: The Master Production Schedule, the bill of materials, and the inventory record file (on-hand, scheduled receipts, lead times, lot-size rules, safety stock).
• Q: How is net requirement calculated? A: Gross requirement minus scheduled receipts minus the previous period's projected on-hand, plus safety stock; if the result is zero or negative, no order is planned.
• Q: What is lead-time offsetting? A: Shifting a planned order receipt back by the item's lead time to get the release date — the backward scheduling that makes MRP time-phased.
• Q: What is a low-level code and why is it needed? A: The deepest BOM level at which an item appears. MRP nets the item only when that level is reached, so a part used in several assemblies is netted once against total requirements rather than piecemeal.
• Q: Difference between closed-loop MRP and MRP II? A: Closed-loop MRP adds capacity planning and execution feedback to material planning; MRP II adds the financial and business planning layers plus simulation on top of that.
• Q: What is system nervousness and how do you control it? A: Instability where small MPS changes trigger large rescheduling downstream; controlled with frozen periods and time fences, firm planned orders, lot-size and safety-stock buffers, and pegging to assess which changes actually matter.
• Q: Your MRP shows shortages though stock records look fine — where do you look first? A: Master data: BOM quantity-per and scrap/yield, wrong or stale lead times, unrecorded issues and rejections, and open orders not confirmed — data errors, not the algorithm.
• Q: Is MRP compatible with JIT? A: Yes, as a hybrid: MRP plans the horizon, releases schedules to suppliers and handles long-lead items, while kanban pulls material on the shop floor for repetitive, high-volume parts.
• Q: What must the planning horizon be at least equal to? A: The cumulative lead time of the longest BOM branch; a shorter horizon means the deepest-level orders are already past due when the plan is generated.
• Q: Name the main causes of ERP implementation failure in India. A: Poor master-data quality, excessive customisation that blocks upgrades, weak change management and training, unclear process ownership, and underestimating statutory configuration (GST e-invoicing, e-way bills, payroll under the Labour Codes).
• Q: What does CRP need that MRP does not? A: Routings — operations, work centres, setup and run times — plus work-centre capacity data, to convert planned orders into hours of load.
• Q: What is DRP and how does it relate to MRP? A: Distribution Requirements Planning applies the same netting and lead-time offsetting to depots and warehouses, and its aggregated replenishment orders become the demand input to the plant's MPS.

Common mistakes

• Treating the MPS quantity as the gross requirement of a component — the child's gross requirement comes from the parent's planned order releases, not its receipts or MPS figures.
• Forgetting to add safety stock in the netting equation, or subtracting it instead.
• Placing the order in the period of need instead of offsetting by the lead time, and vice versa — mixing up planned order *receipt* and *release* rows.
• Netting a common part separately under each parent instead of once at its low-level code, which double-counts orders and inflates inventory.
• Ignoring scrap/yield and minimum order quantity or pack multiples, so the plan is short or non-orderable.
• Assuming MRP checks capacity; without CRP the plan can be arithmetically perfect and physically impossible.
• Calling ERP "accounting software" or equating it with MRP in interviews — MRP is one planning engine within an integrated enterprise system.

Related topics

Inventory control: EOQ and ABC · Forecasting and aggregate planning · Production planning and control · Scheduling and sequencing · Supply chain and logistics management · Lean manufacturing and JIT