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A Study of MRP Benefits and Costs

Material Requirements Planning (MRP) has grown greatly in popularity. While the MRP benefits are usually observed to be substantial, little is mentioned about the costs of MRP. Yet both the benefits and costs of MRP are crucial to its ultimate success in industry. A useful paper (by Roger G. Schroeder, John C. Anderson, Sharon E. Tupy, and Edna M. White) seeks to redress this lack. They describe the benefits and costs of MRP systems, based on a large survey of MRP users, and explore why some companies seem to obtain more benefits than others. Data was obtained from a survey sent to 1700 companies, from which 679 valid responses were received.

Benefits

As can be seen from Table 1, users report they have achieved significant improvements in inventory turnover, delivery performance, and other benefits, and that further improvements are expected when their MRP systems are fully implemented.

Table 1: The Benefits of MRP

(a) For each of the characteristics below, state (in column II) the current experience given your stage of MRP development. Then state (in column I) the experience that you would expect operating in today's economic environment with your pre-MRP production system. Finally, state (in column III) the future experience that you anticipate given total completion of your MRP development plans.


 

                                                     I         II        III     

                                                 "Pre-MRP"   Current    Future   

                                                 Estimate   Estimate   Estimate  

Inventory turnover                                  3.2        4.3       5.3     

Delivery lead time (days)                           71         59         44     

Percent of time meeting delivery promises (%)       61         76         88     

Percent of orders requiring "splits" because        32         19         9      
of unavailable material (%)                                                      

Number of expeditors (# people)                     10          6         5      

Average unit production cost                        N/A        N/A       N/A     


(b) To what degree have the following benefits been achieved from your MRP system?


 

                                          Degree of Improvement               

                              Little/    Some      Much      Very      Average    
                               None                          Much       Score     

Improved competitive             1         2         3         4         2.1      
position                                                                          

Improved customer                1         2         3         4         2.5      
satisfaction                                                                      

Better production                1         2         3         4         2.7      
scheduling                                                                        

Improved plant efficiency        1         2         3         4         2.4      

Reduced safety stocks            1         2         3         4         2.5      

Better cost estimating           1         2         3         4         2.2      

Better control of inventory      1         2         3         4         3.0      

Improved co-ordination with      1         2         3         4         2.4      
marketing and finance                                                             

Improved morale in               1         2         3         4         2.3      
production                                                                        


Costs

Tables 2 and 3 report the costs of MRP. One of the survey questions asked about the cost of MRP installation. The precise wording was:

How much would you estimate it cost to install MRP in your facility? An approximate estimate will be helpful. Include costs of software, hardware, people, etc.
Current Cost $ _____________________________________________
Total Eventual Cost $ _______________________________________

This question was intended to gain general information about costs. As can be seen from Table 2, companies reported they have spent an average of $375,000 on MRP installation to date, rising to $618,000 before the system is fully installed. Clearly, costs vary substantially among companies, and the standard deviation exceeds the average.

Table 2: Cost of MRP Systems Installation* (in $000)


                       Current cost     Total Cost    

Average                     375             618       

Standard deviation          600            1137       

Median                      150             250       



* Installation cost includes software, hardware and personnel costs. Sample size = 200

The authors further analysed the reasons for the large variance in costs. Statistics were computed for cost versus sales, degree of computerization, year of pre-MRP, number of levels in the bill of materials, number of parts and components, and the number of employees. The only highly significant relationship found was between cost and sales, as shown in Table 3. The cost of installation ranged from $93,000 for facilities with $0-10 million annual sales, to $1,633,000 for companies with over $500 million annual sales.

Table 3: Cost versus Sales (in $000)


   Million Sales       Current cost      Total Cost    

       0-10                 93               194       

       11-25               210               385       

       25-50               298               560       

      51-100               511               912       

      101-500              565               800       

     Over 500              1633             2237       


Interestingly, however, the authors found no relation between cost and class of MRP company, as defined by Oliver Wight.

Conclusions

The authors conclude from their study that the average company installing MRP has achieved significant benefits. These companies can expect still greater benefits when their MRP systems are fully installed.

Their study also found that average costs of MRP system installation were substantial, ranging from as little as $93,000 in small companies to $1,633,000 in the largest companies. Interestingly, it does not cost more to be a Class A company or to achieve high MRP benefits. The degree of computerization, management support, and the implementation approach used are more important in achieving high benefits that the amount of money spent on the MRP system.

The authors modeled the influence of various factors. Some categories, such as size, type of product or process, and data accuracy, have rather weak effects on performance. Other categories, such as degree of computerization, pre-MRP conditions, and implementation methods used, have rather strong effects. Management support has some effect on performance, but not as much as is usually suggested.

Because all variables have some effect on performance, an even-handed approach to implementation should be taken.. Indeed, the authors suggest that this finding (that all categories of independent variables affect performance, and that none can be excluded) is one of the most significant findings of the study.

Another significant finding of the study is that starting performance level is important for predicting post-installation performance. Consequently, high performance companies will not gain as much benefit from MRP as those with poor performance. MRP is not a panacea. Consideration must be given to current performance levels before deciding whether to implement or not.

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The Players