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MRP vs. Basic Inventory Management Software in Job Shops
by Harry Landsburg, Director of Business Process Technology Consulting for the Delaware Valley Industrial Resource Center, Philadelphia, PA

Many job shops get orders for items on an individual or recurring basis. Orders for a specific raw material item where the finished product will not be re-ordered by a customer typically involve buying needed parts to the specific job. The cost of those raw material items can be charged to the job in full or a portion can be charged to the job which leaves the company with raw material inventory of the unused parts that were bought because of a minimum order restriction.

What remains in raw material inventory can be valued at the actual purchase price. Subsequent use of the material is at $0 cost to the next job if all the cost of the purchased material was charged to the first job. If there is an inventory value resulting from not charging the first job with all the cost of the initial material order, then that cost (per unit of measure) is charged to subsequent jobs.

The operating framework for most “job shops” is a combination of one-time orders and repeat orders for the same finished part either released when needed by the customer or as a blanket order with pre-determined release dates. Either way the customer gets a better price by committing to more items but spreading demand over a specified period of time.

Some job shops make extra parts to stock when they complete a job run. This is often done when they want to gain efficiencies of setup time when multiple releases of an order will be shipped. Some job shops get access to a customer’s forecast to see when the parts they make are expected for release and delivery to plan future work.

These actions could also be considered make to stock in that they are not producing to a specific delivery of a quantity of parts. What most job shops do not do is try on their own to forecast part demand and make parts to stock before a customer provides demand information from a PO with either a single line item or blanket releases.

Materials Requirement Planning (MRP) was designed to allow the supply chain manager to react to all aspects in the change in inventory requirements including new orders, revised orders (more or less quantity, move in or move out dates), cancelled orders, and even forecasts of orders from customers or the judgment of management about future order levels. MRP also considers the current state of all inventory items that require minimum levels for stock items specified in the system as well as minimum order quantities that need to be purchased.

MRP considers customer forecasts as well as “lower level” demand for items needed to complete all levels of a multi-level Bill of Materials (BOM) that is part of a work order. All combined MRP calculations will provide “recommendations” to the supply chain (purchasing) manager to act on. MRP will also make sure that the recommended purchase quantity recognizes the vendor’s minimum purchase order requirements when a smaller quantity of materials is needed. With MRP there is internal tracking of the day to day changes of the need for all aspects of inventory items. MRP systems typically provide purchasing and inventory management suggestions to buy more of an item, cancel a PO for an item, buy more to maintain minimum stocking levels, and buy based on the minimum order quantity. Once the buyer or inventory manager selects the recommendation they want to follow, MRP will finalize the buy decisions and group items by supplier to automatically print the purchase orders required.

Job Shop systems that do not offer MRP offer alternatives to the MRP process. These systems will present specific order demand at all levels of the BOM structure. In a separate report they will present all demand from stock inventory items falling below minimum stock levels and will include the impact of the minimum order quantity requirements of the preferred supplier. These systems do not include customer forecasts but will work with blanket orders provided by customers with or without release dates.

Some systems also have scheduling based on forward, backward, infinite and finite scheduling parameters from order demand and will schedule blanket releases when they fit into the scheduling timeframe selected for viewing.

These systems may not combine all the items supplied by one vendor onto a single purchase order so there would be a need to create multiple purchase orders from the information provided by each type of report. If the job shop does not place a large number of purchase orders daily, then the information from the split reports may be sufficient for supporting daily supply chain decision making. Larger job shops with more frequent material acquisition volume may benefit from the automated capabilities of MRP.

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