Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

12.2 Deterministic Determination of Independent Demand

Intended learning outcomes: Present the customer order and distribution requirements planning (DRP).Disclose the consumption of the forecast by actual demand.

12.2.1 Customer Order and Distribution Requirements Planning (DRP)

Deterministic independent demand is independent demand where quantity, date, and physical characteristics are all known (see also Section 5.2.1).

For demand external to the organization, this means end products or service parts on order; that is, the individual positions on a customer order. The following are usually handled in a manner similar to the handling of customer demand:

  • Warehouse demand; that is, demand for replacing inventory in a warehouse
  • Interplant demand; that is, one plant’s need for a part or product that is produced by another plant or division in the same organization

A specific position in the customer order exists at least until it is delivered and invoiced during distribution control. If the items or their components are not available from stock, then the “life span” of a position in the customer order incorporates the “life spans” of all the production and procurement orders needed to cover this deterministic independent demand. It should be possible to establish a connection between these orders and the underlying independent demand at any time, so that control of operations can respond to any deviations from the schedule. The consequences that production or procurement delays or changes in quantities will have on customer orders must be apparent.

Strictly speaking, deterministic independent demand arises only when the order is confirmed, since this is the first document to contain a legally binding description of the items ordered, their quantities, and deli­very dates. Nevertheless, despite its legally binding nature, indepen­dent demand is still not deterministic as defined above at this point. Depending on supply and demand, the customer is still in a position to vary the quantity or defer the due date, despite divergent legally binding agreements. Here, the customer may be required to pay a previously agreed-upon penalty.

One important factor when scheduling customer demand is the organization’s distribution network structure as determined by distribution planning. The due date for the independent customer demand is the date of shipment. The distribution network structure determines how far in advance of the delivery date to the customer this date is.

In-transit lead time is the time between the date of shipment (at the shipping point) and the date of receipt (at the receiver’s dock) ([APIC16]).

In-transit lead time includes preparation for delivery from the plant, transportation to distri­bution warehouses, and distribution to the customer. These times are determined by distri­bution planning. For a distribution network structure with limited capacity, such as truck fleets, the date of an independent demand is often determined by the cycles used to cover certain routes. For very large or high-cost items in particular, route planning also determines the order in which parts are assembled (for customer production orders) or commissioned (for customer orders from stock), in addition to the delivery dates. See also Section 15.4.

The duration of the data flow accompanying the customer order is another important aspect of the distribution network structure. This applies to delivery documents and transportation documentation, such as for customs purposes. This aspect of the data flow should be planned carefully, as there are cases in which the data flow can last longer than the associated goods flow, particularly with respect to service parts. Solutions based on the latest communi­ca­tions technology help to speed up the process. Examples include fax, EDIFACT, and so on.

With a multi-echelon distribution network structure, customer demand at each intermediate level can be handled as independent. For management of distribution inventory, the order point technique can be used. However, if demand fluctuates widely, the distribution requirements planning technique has proved practical.

Distribution requirements planning (DRP) translates planned orders of the various levels of warehouses in the distribution network directly into planned orders of the central distribution warehouse.

Figure shows distribution requirements planning for an example item with the item identification 4711.

Fig.       Distribution requirements planning DRP (example).

Planned receipts of the central distribution warehouse — in the example in Figure the 90 units in period 1 and the 30 units in period 3 — are the same as the gross requirements on the production source or sources that supply the central distribution warehouse.

The advantage of the DRP technique over multilevel application of the order point technique along the distribution chain is the elimination of safety stock at the individual levels. With this, however, all demand — on the distribution chain and on the supplying sources — in principle becomes dependent demand. The DRP technique thus corresponds to the MRP technique described in Section 12.3. For that reason, we will not go any further into the logic and the details of the DRP technique, such as determination of planned receipts from the projected available inventory.

12.2.2  Consuming the Forecast by Actual Demand (*)

Consuming the forecast or forecast consumption is the process of reducing the forecast by customer orders or other types of actual demand as they are received ([APIC16]).

Independent demand determined by stochastic methods, that is, a forecast, can be used as an alternative to customer demand not yet received. Viewed quasi-deterministically, it enables deterministic dependent demand to be calculated at lower product structure levels by exploding the bills of material to trigger production or procurement of these items in good time and in sufficient quantity.

The forecast is gradually replaced or “consumed” by actual demand, that is, by customer orders. The actual (deterministic) demand thus “overlays” the stochastic independent demand, which either immediately precedes it along the time axis or is the earliest forecast along the time axis that has not yet been completely replaced by customer demand.

The resulting forecast consumption rules are as follows:

  1. If a customer demand is canceled, the demand forecastremains unchanged.
  2. If a customer demand is issued, it “overlays” the corresponding forecast and thus “consumes” its open quantity, which is then regarded as “issued.” There are two variations of this. In variation 2.1, the demand forecast that immediately precedes it on the time axis is reduced. In variation 2.2, all the forecasts preceding the customer demand whose forecast quantities have not yet been reduced — in chronological order — are reduced.
  3. Option overplanning: If the sum of the customer demands is too large, the quantity by which it exceeds the forecast quantity is regarded as net requirements.

The adjustments yield the value of the remaining forecast for each period. Figure shows the principle of forecast consumption, both before and after the issue of two customer demands. This is variation 2.1.

Fig.       The principle of forecast consumption.

The demand time fence (DTF) is that point in time inside of which the forecast is no longer included in total demand and projected available
inventory calculations. Inside this point, only customer orders are considered ([APIC16]).

With option overplanning, an order may only be planned in the period where new cus­to­mer orders are currently being accepted. This is typically just after the demand time fence.

Course sections and their intended learning outcomes

  • Course 12 – Deterministic Materials Management

    Intended learning outcomes: Produce an overview on demand and available inventory along the time axis. Describe deterministic determination of independent demand. Explain in detail the deterministic determination of dependent demand (Material Requirements Planning, MRP). Differentiate various lot sizing techniques. Disclose how to analyze the results of the MRP.

  • 12.1 Demand and Available Inventory along the Time Axis

    Intended learning outcomes: Explain the projected available inventory and its calculation. Describe scheduling and cumulative projected available inventory calculation. Produce an overview on operating curves for stock on hand.

  • 12.2 Deterministic Determination of Independent Demand

    Intended learning outcomes: Present the customer order and distribution requirements planning (DRP). Disclose the consumption of the forecast by actual demand.

  • 12.3 Deterministic Determination of Dependent Demand

    Intended learning outcomes: Describe characteristics of discontinuous dependent demand. Explain material requirements planning (MRP) and planned orders. Disclose the determination of the timing of dependent demand and the load of a planned order.

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