Material requirement planning will assist manufacturing companies to plan out the production schedule and determine when materials need to be ordered for which products. While material requirement planning can be done by hand, MRP systems save companies a substantial amount of time and money. MRP software simplifies the planning process. Material Requirement Planning 2-3 Fundamental data in item master file The attributes of all items including raw materials, works-in-process, semi-finished goods, or finished goods, are expressed in the item master file. Part number, lead-time, safety stock, lot-sizing rule, low level code, etc. Are required by the MRP processor.
Price determination, price control and Actual Costing for materials: 3S or 2V
You are using Material Ledger with Actual Costing and wonder if using materials 3S (price determination =3; price control = S) or materials 2V (price determination = 2; price control = V).
Setting 2 for transaction-based price determination functions in the same way as the system without the Material Ledger, but has the added advantage of allowing you to carry prices in multiple currencies or valuations. Materials with price determination = 2 generally do not participate in the multilevel actual costing. These materials are treated like S-price and MA-price materials without Material Ledger. If price difference postings occur with an MA-price material, the price differences are not assigned to the consumption or to the ending inventory from the single-level or multilevel price determination. These price differences remain on the price difference account. Materials which are to participate in the Actual Costing get price determination = 3 (single-level/multilevel material price determination).
Goods movements of such materials are valued with a preliminary valuation price first. The price variances which often occur with procurement transactions are collected per material in the Material Ledger and displayed immediately in the material ledger data display (transaction CKM3). At the period end, the collected price differences are assigned to the consumptions and the ending inventory of the material (single-level price determination). Price differences which are assigned to multilevel usages are rolled up to the next higher manufacturing level (multilevel material price determination). Advantages of the price determination control 3 for materials:
A realistic valuation price develops periodically.
Occurring price differences are assigned to the consumption and to ending inventory at the end of the month and activated in the inventory, if necessary.
Price variances can be charged to the manufactured material (rolled up) even if the invoice is posted after a consumption.
With controlling level vendor/purchasing organization a procurement actual price can be determined per vendor (Transaction CKM3).
The following notes provide detail information concerning price determination: 81682 Pr.contr.V for semi-finished and finished products 721360 MAP-controlled materials and actual costing 1949907 How to update Price determination field in materials with split valuation 1575904 How to use transaction CKMM with split valuated materials 155874 Change valuation category in material master 1511937 C+065 or C+470 or C+019... no ML flag when ML active for a plant, MLAST MLMAA fields missing
The Huffington Post reported in 2012 that a company holds inventory for an average of 23.82 days. This time between when a company purchases raw materials and when finished goods are sold can have a significant negative effect on cash flow. The downturn in cash flow affects the money a company has available for capital investment, additional production, sales and owner payouts, not to mention the intrinsic value of a firm. Just-in-time inventory management and material requirements planning reduce order costs and inventory-holding time, which increases a company's cash flow.
Just-in-Time System
Companies implement the just-in-time inventory method to achieve a balance between financial performance as gauged by cash flow and the certainty of a stable supply chain. The JIT manufacturing processes create a demand-pull system in which purchasing, production and distribution is demand-driven and not forecast-driven. This means that rather than maintain large and costly amounts of in-process inventory, a company adopts the “Kaizen” model, which calls for just-in-time production and minimum amounts of in-process inventory to improve the return on investment. In this case, manufacturing processes kick in to respond to actual production orders rather than a production forecast. The order dictates what item is manufactured, the quantity to be created and the time the production should occur. As a result, materials are available in the quantity needed at the time required and not before.
Material Requirements Planning
Material requirements planning is a production planning and inventory system based on the dependent demand of the components needed to satisfy master schedule requirements. The primary objective of MRP is to equate the due date of materials and components to the need date to eliminate excess stocks, keep inventory levels low and ensure the availability of products and materials needed for production and customer shipments. The system tracks bills of material and determines parts requirements based on a particular production schedule. The system also plans purchasing and manufacturing activities and delivery schedules. It also reschedules materials on order If production demand fluctuates. The MRP system also manages production scheduling, cash flow, labor capacity planning, inventory and distribution.
Implementation of JIT and MRP
The focus of the materials requirements planning system is the projected usage of parts or materials during a predetermined time period based on end-item requirements. MRP systems are suitable for discrete manufacturing environments in which production lines operate on a batch basis and produce output that is countable in discrete units or identifiable with serial numbers. The focal point of the just-in-time system is the current or real usage of parts in a production system, which makes it appropriate for a repetitive manufacturing environment in which each of a series of products passes through the same machinery and the same sequence of operations in a continuous flow over an extended period of time.
JIT and MRP Advantages
Just-in-time manufacturing focuses a company's manufacturing lines on the products its customers want, which contributes to a company's long-term viability. In addition, because materials are made available as needed, inventory shrinkage and redundant functions, including inspections, are reduced. Although inventory and supplies are kept at a minimum, the reliability of materials availability is increased. MRP reduces the work-in-process inventory, while eliminating material shortages by increasing the reliability of materials availability. Both JIT and MRP enable companies to plan for the long term, which enables a manufacturer to plan labor and facility use more effectively. Both systems also reduce lead times and past-due orders.
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About the Author
Billie Nordmeyer works as a consultant advising small businesses and Fortune 500 companies on performance improvement initiatives, as well as SAP software selection and implementation. During her career, she has published business and technology-based articles and texts. Nordmeyer holds a Bachelor of Science in accounting, a Master of Arts in international management and a Master of Business Administration in finance.