The short answer
MRP explodes demand through the bill of materials, nets the result against stock and open supply, offsets for lead time, and turns what is still short into orders to buy and make. Material requirements planning takes the demand for finished goods — a sales or production plan, or confirmed orders — and, item by item and level by level, works out exactly what to make, what to buy and when. It is a deterministic calculation with five moves: explode, net, offset, lot-size, and split. Get the inputs right and the same arithmetic that plans one part plans ten thousand.
The engine is worth understanding because every planning decision downstream inherits it. If the explosion is wrong the plan buys the wrong parts; if the netting is wrong it buys the wrong quantity; if the offset is wrong the right parts arrive at the wrong time. This guide is the pillar-level detail behind MRP — BOM explosion & netting; for the wider context of where MRP sits in production planning, start with the pillar, what is production planning software?
What MRP needs before it runs
MRP cannot invent data. It reads four inputs, and the quality of each decides the quality of the plan:
- Demand. The gross requirement for finished goods over a horizon — a forecast for make-to-stock, confirmed customer orders for make-to-order, or a mix. This is the sales / production plan.
- Bill of materials (BOM/BOR). The structured recipe: for each parent item, which children it consumes and the quantity-per. Explosion walks this structure.
- Stock and open supply. Current inventory (free and reserved), open purchase orders and open work orders already on the way. These are what netting subtracts.
- Planning parameters. Per item — make-or-buy, lead time, lot-sizing rule, minimum order quantity, safety stock and reorder level. These live on the item master and govern timing and quantity; see MRP planning parameters.
Step 1 — BOM explosion to gross requirements
Explosion is multiplication down a tree. Take the top-level demand for a finished good and multiply by the quantity-per at each BOM link to derive the gross requirement for every child beneath it. Demand for the parent becomes demand for its components; demand for those components becomes demand for their raw materials. MRP walks the structure level by level — level 0 is the finished good, level 1 its immediate sub-assemblies, and so on down to purchased raw material at the bottom.
A subtlety that keeps MRP correct: low-level coding. If the same component appears in two different assemblies at different depths, MRP defers netting it until it has reached the lowest level at which it occurs, so that all demand for that part is gathered before a single net calculation is made. Without low-level coding a shared part would be netted twice and over-ordered. This is why a serious MRP engine explodes the whole demand set first and nets afterwards, level by level, rather than netting each branch in isolation.
Step 2 — netting: gross to net
Netting is the heart of MRP and the single biggest reason it beats a demand spreadsheet. Gross requirement tells you what the demand needs; net requirement tells you what you actually have to order once existing stock and incoming supply are accounted for. The formula, applied per item and per period:
| Term | Meaning | Effect on the net |
|---|---|---|
| Gross requirement | Exploded demand for the item in the period | Starting quantity |
| Less: projected on-hand | Free stock expected to be available in that period | Reduces the shortfall |
| Less: scheduled receipts | Open POs and open WOs already due in | Reduces the shortfall |
| Plus: safety stock | Buffer you want to keep on hand | Increases the shortfall |
| = Net requirement | If positive, becomes a planned order; if zero or negative, existing supply covers it and nothing is raised | |
Two details make netting honest. First, it is time-phased: a shortage in week three nets against the stock projected to be on hand in week three — after earlier demand has consumed it — not against today's balance. Second, stock committed to another plan must not be double-counted, which is why MRP supports stock reservation: inventory pledged to one plan is netted out of another. Skip reservation and two plans both "see" the same 50 units and both decide they need not order — and the shelf runs short. Netting against live stock and open supply is exactly what BOM explosion & netting does on every run.
Step 3 — lead-time offsetting
Knowing how much is only half the answer; MRP also decides when. Once a net requirement has a date it is needed — its planned order receipt — MRP subtracts the item's lead time to get the planned order release: the date the order must actually start. A bracket needed on the 20th with a 5-day make lead time must be released on the 15th; the sheet it is cut from, with a 10-day purchase lead time, must be ordered earlier still.
This cascade is what ties the levels together in time. The release date of a parent becomes the requirement date of its children, so lead-time offsetting ripples down the BOM: nothing at a lower level is scheduled later than the moment its parent needs it. Get lead times wrong on the item master and the quantities can be perfect while every date is optimistic — the classic reason a "correct" plan still ships late. Because MRP assumes those lead times rather than checking machine hours, the plan it produces must then be loaded against real capacity, which is where machine loading and scheduling take over.
Step 4 — lot sizing
A raw net requirement is rarely the quantity you order. Lot sizing turns it into a practical order:
- Lot-for-lot. Order exactly the net requirement — the leanest rule, common for expensive or make-to-order items where you never want spare.
- Fixed / economic order quantity. Order a set batch that balances ordering cost against carrying cost, typical for steady-demand consumables.
- Minimum order quantity, multiple and rounding. Force the quantity up to a supplier pack, a mould-cavity count or a furnace batch — the reason MRP may suggest 500 when only 430 are short.
All of these are planning parameters on the item, which is why keeping them current matters as much as the BOM itself — the subject of the parameters guide. Lot sizing is applied after netting and before the order is written, so the planned order carries a quantity the shop or the supplier can actually accept.
Step 5 — buy vs make (PR and WO)
Finally MRP splits each planned order by procurement method. Items you buy — raw material and bought-out parts — become purchase requisitions handed to purchasing. Items you make — in-house sub-assemblies (semi-finished goods) and outsourced components sent for outside processing — become work orders, each carrying a process sheet / routing of operations and standard times. The one calculation therefore ends in two streams: what to procure and what to produce, both dated by the lead-time offset and sized by the lot rule.
In an Indian job-work shop this split matters commercially, not just operationally: outsourced (OSL) components carry their own send-out and return legs and their own lead time, and MRP must plan them as make-side orders even though a third party does the work. A planning engine that treats make, buy and outsource as three flavours of the same netted result keeps all three on one plan.
A worked example
Take a single finished pump with demand of 100 units needed in week 4, and follow one component — the bracket, 2 per pump, 40 in free stock, one open work order of 30 due in week 2, safety stock 10, make lead time 1 week, order multiple of 25.
| Step | Calculation | Result |
|---|---|---|
| Explode | 100 pumps × 2 brackets | 200 gross |
| Net against stock | 200 − 40 on hand | 160 short |
| Net against scheduled receipt | 160 − 30 open WO | 130 short |
| Add safety stock | 130 + 10 buffer | 140 net requirement |
| Lot size | Round 140 up to multiple of 25 | 150 planned order |
| Offset | Needed week 4, 1-week lead | Release a 150-unit WO in week 3 |
Every number is traceable, and every one depends on data that has to be right: the quantity-per, the on-hand balance, the open-order status, the safety stock, the lead time and the lot rule. That traceability is the point — a planner can always answer "why is MRP suggesting this?"
Where MRP goes wrong
MRP rarely fails because the maths is wrong; it fails because the data is. The recurring culprits:
- BOM errors. A wrong quantity-per or a missing line explodes into a wrong requirement for every parent that uses the part. BOM discipline and engineering change control are non-negotiable.
- Stock inaccuracy. Netting against a balance that does not match the shelf either over-orders (phantom stock) or stocks out (stock the system has not seen). Live, accurate inventory is a precondition, not a nicety.
- Stale parameters. An old lead time, a forgotten lot size or a missing reorder level distorts timing and quantity even when demand and BOM are perfect.
None of these are software faults — they are data-hygiene faults the software surfaces. The value of running MRP on one shared platform, rather than a spreadsheet, is that the BOM, the stock and the parameters are the same records execution uses, so they are exercised daily and stay honest.
How Fast Planning runs MRP
Fast Planning Software implements exactly this calculation on the shared Fast Suite platform, built by Improsys in Pune under the Fast Technology brand, cloud or on-premise. A run reads demand from the sales / production plan, explodes each finished good through its BOM, and nets every item against stock on hand, open POs, open work orders and reserved stock — with stock reservation so two plans never double-count the same inventory. The netted result is split automatically: raw-material and bought-out shortfalls become purchase requisitions for purchasing, in-house and outsourced (OSL) shortfalls become work orders, each dated by its lead-time offset and sized by its lot rule. Because it runs on the same database as machine loading and scheduling, the quantities MRP suggests flow straight into a capacity-checked schedule with no re-keying.
Frequently asked questions
How does MRP calculate net requirement?
MRP nets gross requirement against supply for each item and period: Net requirement = Gross requirement minus projected on-hand stock minus scheduled receipts (open purchase orders and open work orders) plus any safety stock you want to protect. If the result is positive, that shortfall becomes a planned order; if it is zero or negative, existing stock and open supply already cover the demand and nothing is raised. The calculation runs period by period across the horizon, so a shortage in week three is netted against stock projected to be on hand in week three, not stock on hand today.
What is BOM explosion in MRP?
BOM explosion is the step where MRP takes the demand for a finished good and multiplies it down through the bill of materials to derive the gross requirement for every sub-assembly, component and raw material. If one finished unit needs two of a bracket and each bracket needs 0.5 kg of sheet, then 100 finished units explode to 200 brackets and 100 kg of sheet. Explosion walks the BOM level by level, from the finished good at the top to raw material at the bottom, so demand at each level becomes the parent demand for the level beneath it.
What is lead-time offsetting?
Lead-time offsetting (time-phasing) is how MRP decides when to release an order, not just how much. Once a net requirement and its planned order receipt date are known, MRP subtracts the item's lead time to get the planned order release date — the date the purchase requisition or work order must actually start so the material arrives when it is needed. Offsetting cascades down the BOM: a component cannot start until its raw material is on hand, so each level's release date drives the demand date of the level below it.
What is lot sizing in MRP?
Lot sizing turns a raw net requirement into a practical order quantity. Lot-for-lot orders exactly the net shortfall; a fixed order quantity or economic order quantity orders a set batch; a minimum order quantity, order multiple or rounding value forces the quantity up to a supplier pack, a mould cavity count or a furnace batch. Lot sizing is why MRP may suggest buying 500 when the net requirement is only 430 — the supplier sells in boxes of 100, so it rounds up. The rules live on the item master as planning parameters.
Why do MRP suggestions go wrong?
MRP is arithmetic, so its output is only as good as its inputs. The two that break plans most often are BOM accuracy and stock accuracy: a wrong quantity-per on a BOM line explodes into a wrong requirement for every parent that uses it, and an inventory balance that does not match the shelf nets against stock that is not really there. Missing or stale planning parameters — no lead time, no reorder level, an old lot size — distort timing and quantity. Keep the BOM, the stock and the parameters current and the same calculation that misfired becomes reliable.
What is the difference between MRP and a reorder point?
A reorder point is independent, item-by-item replenishment: when free stock falls below a threshold, replenish. It ignores the bill of materials and future demand. MRP is dependent-demand planning: it explodes finished-good demand through the BOM and time-phases the requirement, so it plans components against the actual production that will consume them rather than against a static threshold. Most plants use both — MRP for demand-driven components and reorder points for cheap, high-turn consumables where a threshold is enough.