Since before the Industrial Revolution there had been a need for a better inventory control system. In times before, people would use a system of either ordering their materials beforehand or by ordering their materials as needed. The problem with this was either there would be too much inventory or too little inventory to meet the demand needed. Large quantities of inventory can be very costly for purposes of warehousing and deterioration of the material (e.g. food spoilage, animal infestation, etc…).
Secondly, the cost of waiting for inventory as in a pull system can be costly as well. The loss of customers for the wait of the final product can be very detrimental to the business as well as the supplier of raw material. Thirdly there is the matter of taxes. The cost of keeping inventory over the next fiscal year is considered an asset and therefore taxable. Furthermore, there was no way of linking the various structures within the organization. But as the internet grows in popularity every day, so too does electronic commerce. Electronic commerce, simply put, is the exchange of money for goods and services via electronic means. In other words, electronic commerce is usually when you purchase something off of the internet. Electronic commerce is often referred to as e-commerce, or e-business.
Before controlled inventory and e-commerce, in order to purchase something, the purchaser would have to negotiate with the supplier. Then the purchaser would have to go to the accounting department (assuming that the authority was given to the purchaser to buy the material) to procure the money for the transaction. Then the accountant would send an order to the receiving warehouse. The receiving warehouse would make sure there was room, and then go to the mail department. The process goes on and on and therefore would create a huge amount of paperwork to accompany each transaction within an organization. So until the 1950’s and 1960’s, the technology did not exist to be able to eliminate such problems with inventory like this.
So in the 1970’s a new system was introduced called MRP. Material requirements planning (MRP) is a computerized inventory control and production planning system. This model integrates production, purchasing, and inventory management of interrelated products.
The MRP model was based upon three distinct principles: the dependence of demand, the netting of inventory and the expected receipt of open orders such as on-hand inventory, and time phasing (i.e. lead times). These three items are very important to the proper use of an MRP system. They are the foundations for the implementation of the MRP system. For example, the dependence upon demand is very important in the MRP model. Demand is varied in any type of business, but with a surplus of available inventory to meet the demand it would eliminate the loss of customers. Also, the use of an MRP model helps to determine w would link the various departments so that interaction between the organization’s departments would become necessary.
Externally, (SCM, or supply chain management) the company would have to begin to see their suppliers, distributors, and retailers as partners instead of separate entities. By doing this, an organization would not only be able to access inventory easier, but they would be able to track their shipments easier. With the use of this model, companies can begin to eliminate unneeded time and money that would not be considered value-added processes. The major problems with these two models are that it takes a lot of organization internally and externally. For example, if a supplier is not willing to share their trade secrets or is unwilling to go through the process of incorporating an ERP system into their productions, then the system may not work effectively. Another problem with this model is that it would require extensive training of managers and employees in every functional area.
The third principle is what helps to try and decrease lead times. Lead time, the time it takes to finished good to reach a customer from the raw material supplier to the retailer, emphasizes the practice of keeping a relatively short wait for a customer’s goods.
The MRP model also uses three inputs to implement the entire strategy. The first input is the master production schedule (MPS). The MPS thus becomes the stepping-stone for which the entire MRP model is based. The next input is the Bill of Materials (BOM). The BOM is a means of simplifying the requisitioning process where a large number of frequently needed line items are involved. The third input is the file that contains information on inventories, open orders, and lead times so that the quantity and timing of orders can be calculated. The third input is very important because it puts the entire process on a time constraint. Thus limiting the amount of time used in the production of the final product, this is an important aspect for any company.
Thus in the 1980’s the need for a new inventory control system were in order. MRP-2 (Material Resource Planning) was first introduced in the 1980’s and variations of it are still used today. MRP-2 included expansion into incorporation as such things as demand, supply, accounting, cash-flow analysis, forecasting, production planning, capacity planning, purchasing, and other areas of the inventory control system. All of these things proved invaluable to the MRP-2 system because it compensated for many areas that the first MRP model neglected. Furthermore, the idea of feedback was introduced to the MRP-2 to help forecast the demand of consumers.