8.4 MRP, Bills of Material & Distribution Requirements Planning
Key Takeaways
- Independent demand comes from outside the organization and must be forecast; dependent demand is derived arithmetically from the parent item's schedule and must never be forecast.
- Applying reorder-point logic to a dependent-demand component is the classic materials management error, because dependent demand is lumpy and known rather than smooth and uncertain.
- MRP nets requirements against on-hand and scheduled receipts, then offsets by lead time to produce planned order releases level by level down the bill of material.
- Distribution Requirements Planning applies the same time-phased logic outward across a distribution network, and its output becomes the master schedule input at the source.
- MRP output is only as good as three inputs: an accurate master production schedule, an accurate bill of material, and accurate inventory records.
MRP, Bills of Material & Distribution Requirements Planning
The inventory models covered earlier — economic order quantity, reorder point, safety stock — assume demand arrives continuously and independently. For components consumed inside an assembly, that assumption is wrong, and applying those models to them is one of the most consequential errors in materials management. This section covers the planning method that dependent demand actually requires.
Independent vs. Dependent Demand
| Independent demand | Dependent demand | |
|---|---|---|
| Source | Outside the organization — customers | Derived from the demand for a parent item |
| Examples | Finished goods, service parts sold to customers, MRO supplies | Components, subassemblies, raw materials inside a bill of material |
| Pattern | Relatively continuous and smooth | Lumpy — nothing for weeks, then a full lot |
| Knowledge | Uncertain; must be forecast | Calculable from the parent schedule; must be computed |
| Correct method | Reorder point, EOQ, safety stock, statistical forecasting | MRP — time-phased requirements planning |
The classic error, and a favourite exam item: managing a dependent-demand component with a reorder point. Because dependent demand is lumpy, the reorder point either triggers far too early — carrying inventory for weeks before the build — or fails to trigger at all until the shortage is already unavoidable. Worse, safety stock is being carried against uncertainty that does not exist, since the requirement is calculable from the master schedule. The correct answer is always to plan dependent demand with MRP and reserve reorder-point logic for independent-demand items.
The Bill of Material
The bill of material (BOM) lists every component required to make one unit of a parent item, with the quantity per parent.
| BOM type | Structure | Used for |
|---|---|---|
| Single-level | Parent and its immediate children only | Simple issue lists |
| Indented / multi-level | Full hierarchy showing every level | Engineering and planning visibility |
| Modular | Organized by option and feature group rather than by end item | Configure-to-order products; drastically reduces the number of BOMs required |
| Planning / phantom | An artificial grouping that is never stocked | Passes requirements straight through a transient subassembly |
Low-level coding assigns each part the lowest (deepest) level at which it appears anywhere in any bill of material. MRP processes level by level, and low-level coding ensures a component used at several levels is netted once, after all of its requirements have accumulated. Without it, the same part is planned repeatedly and order quantities are wrong.
BOM accuracy is the constraint. A BOM that is 98% accurate on individual lines produces, on a 50-line assembly, roughly $0.98^{50} = 36%$ probability that the whole assembly's requirements are correct. Component-level accuracy compounds catastrophically at the assembly level, which is why serious operations target 99%+ BOM accuracy and treat engineering change control as a materials management discipline rather than a documentation one.
MRP Mechanics — the Gross-to-Net Explosion
MRP takes three inputs and produces one output.
Inputs: the master production schedule (what end items, how many, when), the bill of material (what goes into them), and the inventory record file (what is on hand, what is on order, lead times, lot sizes, safety stock).
Output: planned order releases — what to buy or make, how much, and when to release it.
The Netting Logic
Then the planned order receipt is offset backward by the lead time to produce the planned order release.
Worked Time-Phased Record
Item: bracket, 2 required per parent assembly. Lead time 2 weeks. Lot size lot-for-lot. On hand at start 90. A scheduled receipt of 100 is already due in week 2.
Parent assembly master schedule: week 3 = 80 units, week 5 = 120 units, week 7 = 100 units. Gross requirements for the bracket are therefore 160 in week 3, 240 in week 5, and 200 in week 7.
| Week | 1 | 2 | 3 | 4 | 5 | 6 | 7 |
|---|---|---|---|---|---|---|---|
| Gross requirements | 0 | 0 | 160 | 0 | 240 | 0 | 200 |
| Scheduled receipts | 0 | 100 | 0 | 0 | 0 | 0 | 0 |
| Projected on hand | 90 | 190 | 30 | 30 | 0 | 0 | 0 |
| Net requirements | — | — | — | — | 210 | — | 200 |
| Planned order receipt | — | — | — | — | 210 | — | 200 |
| Planned order release | — | — | 210 | — | 200 | — | — |
Reading the table step by step:
- Week 1: nothing happens; 90 on hand carries forward.
- Week 2: the scheduled receipt of 100 arrives, taking projected on hand to 190.
- Week 3: gross requirement 160 is covered by the 190 on hand, leaving 30. No net requirement.
- Week 5: gross requirement 240 against 30 on hand gives a net requirement of 210.
- Offsetting the 210 receipt back by the 2-week lead time puts the planned order release in week 3.
- Week 7: gross requirement 200 against zero on hand gives a net requirement of 200, released in week 5.
Exam trap: the planned order release is what procurement acts on, and it sits lead time earlier than the requirement. Confusing the release row with the receipt row produces an order placed exactly when the material was needed. Note also how the scheduled receipt in week 2 suppresses what would otherwise have been a week-3 net requirement — netting against existing supply before planning new supply is the whole point of the calculation.
Lot-Sizing Rules
| Rule | Method | Best fit |
|---|---|---|
| Lot-for-lot | Order exactly the net requirement | Expensive items, low ordering cost, JIT environments |
| Fixed order quantity | Always order a set quantity | Supplier minimums, container or pallet quantities |
| Economic order quantity | Classic EOQ formula | Items with relatively stable demand — a poor fit for genuinely lumpy demand |
| Period order quantity | Cover a fixed number of periods of requirement | Balances ordering cost against carrying cost with lumpy demand |
| Least total cost / least unit cost | Dynamic rules comparing setup and carrying cost across period combinations | Where the cost trade-off justifies the complexity |
Related Outputs and Concepts
- Action messages / exception messages — MRP tells the planner to release, reschedule in, reschedule out, or cancel. Managing by exception is the intended operating model; reviewing every line defeats the system.
- Pegging — traces a component requirement upward to the parent order and ultimately the customer order that caused it. This is what lets a buyer answer "which customer is affected if this shortage is not resolved?"
- MRP II (Manufacturing Resource Planning) — extends MRP with capacity, financial, and simulation capability, closing the loop between the material plan and the resources needed to execute it.
- Closed-loop MRP — feeds capacity feasibility back into the schedule rather than assuming infinite capacity.
Distribution Requirements Planning (DRP)
DRP applies the same time-phased netting logic outward across a distribution network instead of downward through a bill of material.
| MRP | DRP | |
|---|---|---|
| Structure | Bill of material (product hierarchy) | Distribution network (location hierarchy) |
| Explodes | Parent item into components | Central source into regional and local stocking points |
| Demand source | Master production schedule | Independent demand forecast at each field location |
| Output | Planned purchase and production orders | Planned shipments between locations, and total requirements at the source |
DRP calculates time-phased requirements at each stocking location, offsets them by the transportation lead time, and aggregates them upward. The result is a planned shipment schedule and — critically — a time-phased demand signal at the central source, which becomes an input to the master production schedule.
Why DRP matters for the bullwhip effect. A network run on independent reorder points at every location generates orders that batch and overlap unpredictably at the source. DRP replaces those independent signals with a single visible time-phased plan across the whole network, so the source sees genuine requirements rather than the sum of many local ordering policies. That visibility is one of the most effective structural bullwhip mitigations available.
Push vs. pull deployment: DRP is a push model in which the central source allocates based on the network plan, and it is well suited to constrained supply where allocation must be managed centrally. A pure pull model lets each location order what it wants, which works well with ample supply and fails badly during shortage, when every location orders defensively and inflates the apparent requirement.
A buyer manages a component consumed only inside a single assembly using a reorder point with safety stock. What is wrong with this approach?
An MRP record shows a net requirement of 210 units in week 5 for an item with a two-week lead time and lot-for-lot sizing. When must the planned order be released, and what does the planner act on?
A distribution network of twelve regional warehouses each operates an independent reorder point against the central plant. The plant experiences severe, unpredictable order spikes. What structural change addresses this?