Production Planning: From Bill of Materials to Actual Cost

Most manufacturing companies run planning on the foreman's experience. It works for a while. It stops working when product variety grows, when the same raw material feeds several products, and when lead times stretch. At that point the question becomes: "If I accept this order, will I have the material, will I make the date, and what will it cost?"

Answering those three questions is precisely what MRP does. It looks complex but rests on one data structure: the bill of materials.

The Foundation: Bill of Materials

• Component list and quantities: More reliable when given for a defined batch size rather than a single unit.
  
• Scrap rate: Material lost to cutting, tolerance or quality. Left out of the BOM, material always comes up short.
  
• Operation steps: Which work centre, and how long. Capacity planning depends on this.
  
• Sub-assembly levels: In multi-level manufacturing each level needs its own BOM; flattened into one level, work-in-progress becomes invisible.
  
• Alternate components: A substitute when the primary material is unavailable. This saves the plan during supply disruptions.
  

Work Orders: Bringing the Plan to the Floor

• Creation: Triggered by a customer order or a stock replenishment need.
  
• Material reservation: Required components are blocked so another work order cannot consume them.
  
• Issue to floor: Material moves from stores to production — this is a stock movement and must be recorded.
  
• Production reporting: Completed quantity, scrap and time spent are reported.
  
• Finished goods receipt: Output enters stock and its cost is calculated.
  
• Closure: Unused material is returned to stores.
  

Skip any of these and both stock and cost break. The step most often skipped is returning leftover material.

How MRP Actually Calculates

The arithmetic is simpler than it looks. For every material the system asks:

Requirement (open work orders + sales orders + safety stock) minus available (current stock + inbound purchase orders) = quantity to purchase.

It then works backwards through the lead time to determine when the order must be placed. Accuracy depends on three inputs: BOM accuracy, stock accuracy and lead-time accuracy. If one is wrong, the output is wrong.

Capacity Planning

• Identify the bottleneck. Rather than scheduling every work centre in detail, focusing on the one that constrains the line is enough for most companies.
  
• Account for setup time. Changeover time can be half of total time on short runs.
  
• Deduct planned downtime. Maintenance, shift gaps and holidays must come out of available capacity.
  

Production Cost

• Direct material: Stock cost of material issued to the work order, including scrap.
  
• Direct labour: Reported time multiplied by the work centre's hourly labour rate.
  
• Manufacturing overhead: Energy, maintenance, depreciation and production management, allocated over machine or labour hours.
  

The variance between standard and actual cost is the most honest measure of production efficiency. A consistent one-directional variance means either the BOM does not reflect reality or the standard times are out of date.

Where to Start

• Month one: Build BOMs and validate them against actual floor usage, starting with your highest-volume products only.
  
• Month two: Run work orders open to close. Settle the material issue and finished goods receipt movements.
  
• Month three: Run MRP and compare its suggestions with what purchasing would have done — but do not let it raise orders automatically yet.
  
[*]Month four: Switch on costing and start comparing standard against actual.

In Short

The quality of production planning equals the quality of the bill of materials. If the BOM does not reflect reality, no MRP algorithm can produce a correct answer. Validate BOMs against the shop floor first, settle the work order flow second, and switch MRP on last.

We can review a setup that fits your manufacturing with Mekjoy Manufacturing (MRP).