STUDENTS' CORNER -56
The next component of the logistics we have to look into is what is called Requirement Planning. It is popularly known as Materials Requirement Planning (MRP).
The title itself is clearly explanatory. Imagine you are a manufacturer of a product, say soap. (For the sake of consistency, soap is taken for illustration.) Let us see how MRP is vital to your business of soap production for marketing.
The MRP system has three major areas of operation. First, the MRP says you must have all the materials required for soap making; they are two important raw materials: fat and alkali. Without these two basic raw materials, you cannot produce soap. Therefore, before you start production, you have to be sure that you have these two raw materials in enough quantities. It means you must purchase them in advance and keep them in store so that you can take them when you need them. To purchase means to purchase these raw materials from the market cost effectively; that is, depending on the kind of soap you have planned to manufacture, you have to purchase them from a supplier who will give you what you need at a reasonable price. And you must arrange the supply of these two basic materials in such a way that you do not fail to manufacture soap at any time; that is, your customers must get their soap at all times. There should be no shortage of soap which will affect the customers and in turn, it will affect your business. In the first part of MRP, you plan your requirement: here, the two raw materials needed to manufacture soap.
The second part of MRP is keeping lowest possible materials levels in stock. This is also a very important part of the business strategy. Supposing it is enough for you to have in stock 50 tins of fat and 15 pockets of alkali – to give quantitative examples—for the production of one month’s need of soap for supply, and, instead, you store double the quantity of the raw materials, it is not a good business strategy. You are stocking over and above the need which means you capital is locked unnecessarily in the excess stock of the raw materials. It is waste of money, to put it simply. This extra money does not bring you any more profit. Therefore, according to the second part of MRP, you store materials what you need, neither more nor less. If more, it is money ill-spent; if less, you face the risk of shortage of your products which at times may have negative impact on you customers. Some may switch to some other brand which will be always available.
The third and last part of MRP deals with delivery schedules. Your products must be delivered to the outlets, to the agents, to wholesaler, whosoever has business contracts, business contacts with you, in time and in required quantity.
We have seen so far the fundamentals of Materials Requirement Planning. This concept has further evolved into more sophisticated frameworks and this is for the present. In our next session, we will discuss Production Planning in its basic form.