MRP and Consumption-based planning are two fundamental SAP planning types that can be used to determine a product’s requirements. To avoid any confusion we not referring to the MRP run that is executed through MD01 and MD02. We are referring to planning types that are set in the Material Master’s MRP1 tab. The MRP type is used in the MRP run to determine HOW procurement and/or production quantities are calculated.
When you plan a material according to MRP logic it means that it’s requirements (i.e. how much of this product do I need in the future) are dependent on the following:
- independent requirements determined by a Sales and Operations Planning process (S&OP or SOP), or;
- dependent requirements coming from another material of which the material in question is a component (part of Bill Of Material - BOM).
The key-word here is: dependency. The dependency of one material’s future demand to requirements is determined elswhere. MRP is commonly used in a production / manufacturing environment.
When you plan a material according to Consumption-based planning logic, the future demand of the product is always determined by it’s historical demand. In SAP there are two ways to approach this:
- Forecast-based planning: on the basis of historical demand you estimate future requirements and you procure according to this estimate. This is suitable for materials that are sold or produced with higher volume. Only then a decent statistical forecast makes sense.
- Re-order point procedure: when your stock falls below a pre-determined stock level the system issues a procurement proposal. This is generally applied to low-volume or bulk materials. Forecasting on low-volume materials is too error-prone. Forecasting low-volume materials will result in unreasonably high safety stocks (I will blog on the relationship between forecasting and safety stock in the future).
The key-word here is: independency. The material’s requirements are determined independent of another material or process. Consumption-based planning is commonly used in a wholesale environment, but also in a production environment for some raw materials, additives and bulk materials.
A Sales and Operations Planning process is, like forecast-based planning, also based on forecast. The fundamental difference in comparison with forecast-based planning (a Consumption-based process) is that:
- in SOP a material’s sales forecast is based on aggregated historical demand for multiple materials in a product-group or a sales-region. The aggregated sales forecast is then manipulated by the production department for capacity reasons. The final aggregated forecast is then spread over the individual materials according to a distribution logic (10% to product X, 8% to product Y, etc.).
- in Consumption-based planning the forecast is always based on the material’s own historical demand. There is no-one in the process that manipulates the numbers.