We now turn our attention from purchasing to managing the production inventories of manufacturing companies. Two of the most widely used systems to plan and implement inventory activities within plants are materials requirements planning (MRP) and just-in-time (JIT) production.
A materials requirements planning (MRP) system is a “push-through” system that manufactures finished goods for inventory on the basis of demand forecasts. Companies such as Guidant, which manufactures medical devices, and Philips, which makes consumer electronic products, use MRP systems. To determine outputs at each stage of production, MRP uses (1) the demand forecasts for final products; (2) a bill of materials detailing the materials, components, and subassemblies for each final product; and (3) information about a company’s inventories of materials, components, and products. Taking into account the lead time required to purchase materials and to manufacture components and finished products, a master production schedule specifies the quantity and timing of each item to be produced. Once production starts as scheduled, the output of each department is pushed through the production line.
Maintaining accurate inventory records and costs is critical in an MRP system. For example, after becoming aware of the full costs of carrying finished-goods inventory in its MRP system, National Semiconductor (now a division of Texas Instruments) contracted with FedEx to airfreight its microchips from a central location in Singapore to customer sites worldwide instead of storing the chips at geographically dispersed warehouses.