Production Planning and MRP: A Step-by-Step Guide with Examples
Understand how manufacturers turn demand into a plan: master production schedule, bill of materials, material requirements planning (MRP), lot sizing, lead-time offsetting, capacity checks and SAP PP. Includes a complete multi-level worked example for students and practitioners in the USA, UK, Canada and Australia.
Introduction: From Customer Demand to Shop-Floor Action
A factory cannot build a product until it has the right materials, machines, people and time. Production planning decides what to make and when. Material requirements planning (MRP) works out exactly which materials and components are needed, in what quantity and by which date, so nothing is late and nothing is over-ordered.
MRP is the logic inside almost every ERP system, including SAP, Oracle and Microsoft Dynamics. If you understand the six-step calculation in this guide, you understand what those systems do behind the screen. Every step is shown with a worked example you can reproduce by hand.
- What is production planning?
- The planning hierarchy
- What is MRP?
- MRP inputs
- The 6 steps of MRP
- Complete worked example
- Lot-sizing techniques
- MRP outputs and action messages
- Capacity planning
- Planning strategies: MTS, MTO, ATO
- MRP vs MRP II vs ERP
- Production planning in SAP PP
- KPIs
- Common MRP problems
- USA, UK, Canada and Australia
- Mini case study
- FAQ
- Study questions and glossary
1. What Is Production Planning?
Production planning is the process of deciding what to produce, how much, when, where and with which resources, so demand is met at minimum cost within the limits of materials, labour and machine capacity. It sits between sales forecasting and shop-floor execution.
| Function | Question it answers | Horizon |
|---|---|---|
| Production planning | What and how much should we make over the coming months? | Medium to long term |
| Production scheduling | Which job runs on which machine at what time? | Short term (days or weeks) |
| Production control | Are we executing to plan, and how do we fix deviations? | Daily and real time |
2. The Planning Hierarchy: From Forecast to Factory
- S&OP aligns sales, operations and finance on volumes by product family, usually monthly.
- MPS converts the plan into specific finished products by week.
- MRP breaks the MPS down into components and raw materials.
- Execution releases purchase and production orders and tracks them.
3. What Is MRP (Material Requirements Planning)?
MRP is a time-phased planning method that answers four questions for every item: What do we need? How many? When? When must we order or start making it? It was developed in the 1960s and 70s and remains the core planning logic in manufacturing ERP.
4. The Three Core MRP Inputs
1. Master production schedule
What finished goods will be built and in which weeks, from forecasts and confirmed orders (in SAP, planned independent requirements).
2. Bill of materials (BOM)
The product structure: all assemblies, components and raw materials with quantities per parent unit, organised in levels.
3. Inventory records
On-hand stock, scheduled receipts (open orders), lead times, safety stock and lot-size rules for each item.
Accuracy matters: MRP is only as good as these inputs. Many firms aim for BOM accuracy and inventory record accuracy of 95% or higher.
5. The 6 Steps of MRP
Determine gross requirements
Start with finished-goods demand from the MPS. For lower-level items, gross requirements come from the planned order releases of their parents.
Explode the bill of materials
Work level by level, multiplying parent quantities by the BOM quantity per unit. Items used in several products are totalled at their lowest level (low-level coding).
Net against inventory (gross-to-net)
Subtract what you already have or have on order.
Apply lot sizing
Convert net requirements into practical order quantities, considering minimums, multiples and cost.
Offset by lead time
Schedule backward from the due date by the item's lead time to find when the order must be released.
Release planned orders
Convert planned orders into purchase requisitions (bought items) or production orders (made items), then review action messages.
6. Complete Worked Example: Office Chair
Seat unit (B): lead time 2 weeks. Needs 2 × Cushion (D).
Cushion (D): bought item, lead time 1 week.
Rules: lot-for-lot, no safety stock. Opening stock: A = 50, B = 40, D = 100. No scheduled receipts. We follow A, B and D below; the base (C) is calculated the same way.
Level 0: Chair (A)
The MPS gives customer demand of 20, 20, 40, 20, 60 and 20 chairs in weeks 1 to 6.
| Item A (LT 1 wk) | W1 | W2 | W3 | W4 | W5 | W6 |
|---|---|---|---|---|---|---|
| Gross requirements | 20 | 20 | 40 | 20 | 60 | 20 |
| Projected on hand (end) | 30 | 10 | 0 | 0 | 0 | 0 |
| Net requirements | 0 | 0 | 30 | 20 | 60 | 20 |
| Planned order receipts | 0 | 0 | 30 | 20 | 60 | 20 |
| Planned order releases | 0 | 30 | 20 | 60 | 20 | 0 |
How it works: Opening stock of 50 covers weeks 1 and 2 (50 − 20 − 20 = 10 left). In week 3 demand is 40 but only 10 remain, so net = 40 − 10 = 30. Each planned receipt is released one week earlier because the lead time is 1 week.
Level 1: Seat unit (B)
The chair releases become the gross requirements for B (1 seat unit per chair).
| Item B (LT 2 wks) | W1 | W2 | W3 | W4 | W5 | W6 |
|---|---|---|---|---|---|---|
| Gross requirements | 0 | 30 | 20 | 60 | 20 | 0 |
| Projected on hand (end) | 40 | 10 | 0 | 0 | 0 | 0 |
| Net requirements | 0 | 0 | 10 | 60 | 20 | 0 |
| Planned order receipts | 0 | 0 | 10 | 60 | 20 | 0 |
| Planned order releases | 10 | 60 | 20 | 0 | 0 | 0 |
How it works: Stock of 40 covers week 2 (30), leaving 10, so week 3 needs 20 − 10 = 10. A 2-week lead time moves each release two weeks earlier (week 3 receipt → week 1 release).
Level 2: Cushion (D), a purchased item
Each seat unit needs 2 cushions, so gross requirements are 2 × B's releases: 20, 120 and 40.
| Item D (LT 1 wk) | W1 | W2 | W3 | W4 | W5 | W6 |
|---|---|---|---|---|---|---|
| Gross requirements | 20 | 120 | 40 | 0 | 0 | 0 |
| Projected on hand (end) | 80 | 0 | 0 | 0 | 0 | 0 |
| Net requirements | 0 | 40 | 40 | 0 | 0 | 0 |
| Planned order receipts | 0 | 40 | 40 | 0 | 0 | 0 |
| Planned order releases | 40 | 40 | 0 | 0 | 0 | 0 |
7. Lot-Sizing Techniques
Lot sizing decides how net requirements are grouped into orders.
| Technique | How it works | Best when |
|---|---|---|
| Lot-for-lot (L4L) | Order exactly the net requirement each period | Expensive items, low setup cost, JIT |
| Fixed order quantity (FOQ) | Always order the same quantity | Supplier packs, minimum order sizes |
| Period order quantity (POQ) | Order enough to cover a fixed number of periods | Regular, predictable demand |
| EOQ | Order √(2DS/H) | Steady demand, known costs |
Safety stock and safety time add protection. Safety stock raises the required stock level; safety time releases orders earlier to absorb lead-time variability. Use them only where variability justifies the extra inventory.
8. MRP Outputs and Action Messages
- Planned orders: proposed purchase or production quantities and dates.
- Purchase requisitions: for externally procured items, passed to procurement.
- Production orders: for in-house items, passed to the shop floor.
- Action messages: reschedule in (needed earlier), reschedule out (needed later) and cancel (no longer needed).
- Exception reports: items with shortages, past-due orders or missing data.
Planners should review exceptions rather than every item, a practice called management by exception.
9. Capacity Planning: Can We Actually Make It?
MRP assumes capacity is available, so it must be checked. Rough-cut capacity planning (RCCP) tests the MPS against key resources. Capacity requirements planning (CRP) checks detailed load after MRP.
Load % = required hours / available hours
10. Planning Strategies: Make-to-Stock, Make-to-Order, Assemble-to-Order
| Strategy | Production triggered by | Example |
|---|---|---|
| Make-to-stock (MTS) | Forecast; goods held in stock | Packaged food, consumer electronics |
| Make-to-order (MTO) | Customer order | Custom machinery |
| Assemble-to-order (ATO) | Customer order, from stocked sub-assemblies | Configured computers |
| Engineer-to-order (ETO) | Customer order with new design | Ships, plant equipment |
Time fences keep the plan stable: inside the demand time fence only actual orders count, and inside the planning time fence changes need approval.
11. MRP vs MRP II vs ERP
| System | Scope |
|---|---|
| MRP | Materials and components: what, how many, when |
| Closed-loop MRP | MRP plus capacity checks and feedback from execution |
| MRP II (manufacturing resource planning) | Adds machines, labour, finance and sales planning |
| ERP | Integrates the whole enterprise: finance, HR, supply chain, sales |
| DRP | Applies MRP logic to distribution centre replenishment |
12. Production Planning in SAP PP: How the Process Flows
- Master data: create materials (for example MM01) and BOMs (CS01), with routings or recipes and production versions.
- Demand management: enter planned independent requirements (MD61) or use sales orders and forecasts.
- MRP run: in SAP S/4HANA, MRP Live (MD01N) calculates net requirements and creates planned orders and purchase requisitions.
- Review: check the stock/requirements list (MD04) and exception messages.
- Convert and execute: convert planned orders to production orders (for example CO01), receive goods and confirm production.
Transaction codes and MRP tools change between SAP releases, so confirm them against current SAP documentation. For more background see the SAP articles on MRP process flow, Production Planning and Control, Demand Management and Bill of Materials, and the full SAP Supply Chain guide.
13. Production Planning KPIs
Schedule adherence
Share of orders completed as planned.
On-time in-full (OTIF)
Customer orders delivered complete and on time.
Forecast accuracy
How close the forecast is to actual demand.
Capacity utilisation
Hours used versus hours available.
Inventory turnover
COGS divided by average inventory.
Plan stability
Frequency of changes inside the planning time fence.
Lead time
Time from order release to completion.
MRP exception count
Messages per planner; fewer means cleaner data.
14. Common MRP Problems and Fixes
| Problem | Cause | Fix |
|---|---|---|
| Garbage in, garbage out | Wrong BOMs or stock counts | Cycle counts, BOM change control |
| Wrong lead times | Outdated master data | Review actual vs planned lead times regularly |
| System nervousness | Constant small demand changes | Time fences, frozen horizon |
| Ignored capacity | Infinite-capacity logic | RCCP and CRP checks |
| Excess stock | Over-large lot sizes, high safety stock | Review lot-size and safety parameters |
| Poor adoption | Planners override the system | Training and exception-based workflow |
15. Terminology in the USA, UK, Canada and Australia
| Concept | USA | UK | Canada | Australia |
|---|---|---|---|---|
| Shop floor | Shop floor / plant floor | Shop floor / factory floor | Shop floor | Factory floor |
| Production order | Work order / job order | Works order / job order | Work order | Work order / production order |
| Capacity measure | Utilization | Utilisation | Utilization | Utilisation |
| Certifications | ASCM (APICS) CPIM, CSCP | CIPS, CILT, ASCM | ASCM, SCMA | CIPS, SCLAA, ASCM |
16. Mini Case Study: A Furniture Plant Stabilises Its Plan
Actions: The team cleaned the BOMs and stock counts, corrected lead times for imported fabric, introduced a planning time fence, ran RCCP on the upholstery line, and switched cushions to a period order quantity.
Illustrative result: on-time delivery rises to the mid-90% range, expediting falls sharply and inventory drops about 12%.
Student takeaway: fix data quality and planning rules first. Software cannot compensate for inaccurate BOMs, stock and lead times.
17. Frequently Asked Questions
What is production planning?
Production planning decides what to make, how much, when and with which resources so that customer demand is met at the lowest cost and with available capacity and materials.
What is MRP?
Material requirements planning (MRP) is a method that calculates what materials and components are needed, how many, and when, using the master production schedule, bills of materials and inventory records.
What are the inputs of MRP?
The three core inputs are the master production schedule (demand), the bill of materials (product structure) and inventory records including scheduled receipts and lead times.
What are the outputs of MRP?
Planned orders, purchase requisitions, production orders, reschedule and cancel action messages, and projected inventory.
What is the MRP formula for net requirements?
Net requirement = gross requirement − projected on-hand inventory − scheduled receipts + safety stock.
What is the difference between MRP and MRP II?
MRP plans materials. MRP II extends it to capacity, labour, machines, finance and sales planning. ERP then integrates the whole business.
What is a bill of materials (BOM)?
A BOM is a structured list of all assemblies, components and raw materials, with quantities, needed to make one unit of a product.
What is the difference between MPS and MRP?
The master production schedule states what finished products will be built and when. MRP uses it to plan the components and materials needed to build them.
18. Study Questions and Glossary
2. Recalculate item D using a fixed order quantity of 100. How many orders are placed and what is the ending stock in week 6?
3. Add a safety stock of 10 to item A. How do net requirements and releases change?
4. Calculate the load % if the weekly demand rises to 170 units in the capacity example. What options would you consider?
5. Explain why MRP results become unreliable when lead times in the master data are wrong.
| Term | Meaning |
|---|---|
| BOM | Bill of materials: product structure with quantities |
| CRP / RCCP | Capacity requirements planning / rough-cut capacity planning |
| Gross requirement | Total demand for an item before considering stock |
| Lead time | Time from order release to receipt or completion |
| MPS | Master production schedule for finished goods |
| Net requirement | Quantity still needed after using stock and open receipts |
| PIR | Planned independent requirement (SAP term for planned demand) |
| S&OP | Sales and operations planning |
| Scheduled receipt | An open order already placed and due to arrive |
Conclusion and Key Takeaways
- Production planning sets the plan; MRP calculates the materials needed to deliver it.
- MRP needs three accurate inputs: MPS, BOM and inventory records.
- Follow the six steps: gross requirements, BOM explosion, netting, lot sizing, lead-time offsetting and order release.
- Always check capacity, since MRP alone does not.
- Use exception messages and time fences to keep the plan stable.
- Master data quality decides success more than software does.
Related reading: Procurement articles, the MRP label and the SAP Supply Chain Management guide.
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