Vatan Varol
TR EN

Reducing Inventory Costs with Efficient MRP Management

  • Blog
  • MRP
  • Safety Stock
  • Lead Time
  • Inventory Management
  • Data Analysis
  • Inventory Costs
  • Bill of Materials
  • ERP
Automated warehouse aisle with shelves overlaid with digital inventory data

The most delicate balance in good production planning is inventory management. Holding more stock than needed burdens the company with carrying costs, such as opportunity cost, storage costs, risk costs (theft, spoilage, etc.), taxes and insurance. Holding less stock than needed, on the other hand, leads to process stoppages and unmet demand. Good inventory management strikes the balance between the two.

MRP Parameters

For MRP systems to generate the right production and purchase requests, the parameters on the inventory records must be kept up to date at all times. What are they?

  • Safety Stock: The minimum quantity of stock kept to absorb fluctuations in lead times and demand. It is calculated from historical consumption and lead times; I use the mean and standard deviation when setting it.
    We set this quantity, but we also need to consider scrap within the process and defective quantities found at Incoming Quality Control, which are not part of the equation. When that is the case, I set the safety stock level according to the defect or scrap rate as well.
  • Lead Time: The time from placing an order with the supplier until the material arrives at goods receipt. Keeping this time up to date in the ERP system is essential for the Just-In-Time (JIT) philosophy. If it is overstated, customer order due dates get longer; if it is understated, the promised due dates cannot be met. This requires constant communication with the Purchasing Department.
  • Lot Sizing: The data that determines the quantities in which purchase or production orders should be placed. As I said at the start of this post, both too much and too little stock cost money, so the goal is to find the optimum. The calculation methods differ depending on supply or production conditions. To optimize costs I use Economic Order Quantity (EOQ) models. If the price changes with lot size, I use the Quantity-Based Discount model, and if the product has an expiry date, I use the Newsvendor model.

Why Data Accuracy Matters

Even if you work with the best ERP/MRP system in the world, if the data entered into it is wrong, your calculations will be wrong too (garbage in, garbage out). That is why continuously auditing and reviewing the system is vital. Correcting errors in bills of materials and stock quantities is the invisible but most vital step of the MRP process.