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

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.

12.3.1 Characteristics of Discontinuous Dependent Demand

If dependent demand is continuous or regular, analytical forecasting techniques may be used to determine demand, and, if necessary, the (stochastic) order point technique may be used for materials management. This applies to purchased parts, such as screws and nuts, or raw materials, such as sheet metal, which are of a very general nature and appear as components in various higher-level products. Demand for such commodities is very frequent, sometimes extremely high, and is distributed along the time axis such that a relatively continuous pattern of demand is obtained overall. The individual demands are also relatively small in relation to the batch size of the production or procurement order.

However, the need for components of manufactured products often arises discontinuously, rather than continuously. Under these circum­stances, we will first see several periods with no demand, followed by a large demand resulting from a production or procurement batch for the product at a higher structure level, as Figure shows. In this case, the quantities issued will typically be of the same order of magnitude as the production or procurement batch for the component.

Fig.       Lumpy dependent demand due to batch sizes at higher structure levels.

Where the demand for components can be derived from the requirements for higher-level sub­assemblies, the order point technique is unsuitable for control purposes, because the carrying cost is too high. Figure illustrates this point (the shaded areas represent the carrying cost).

Fig.       Two techniques for inventory management of components with lumpy demand.

  • There is a demand for component C as soon as an order for assembly A is received. Thus, the demand for component C is not continuous. There is no point in maintain­ing a safety stock of 20 units of C, for example, if the lumpy demand is for 100 units.
  • The order point technique results a large physical inventory of C, which must be kept until the next order is received for higher-level assembly A.
  • The ideal situation is the one shown at the bottom part of Figure The production or procurement order for C should occur immediately before the demand for component C arises. In this case, component C is stored in the warehouse either for a very short time or not at all. This type of planning is the explicit objective of the MRP (material requirements planning) technique.

The MRP technique calculates dependent demand on the basis of higher-level independent demands. In principle, this technique requires no safety stock to be kept in stock. On the other hand, a safety lead time must be incorporated into the lead time in order to absorb the effects of late deliveries.

If a small safety stock of components is kept to cover such fluctuations, its purpose is to enable any parts that have to be scrapped during production of higher product structure levels to be replaced as quickly as possible. Similarly, scrap and yield factor can also be considered for every batch that is released. For example:

Batch size (= expected yield):       100
Scrap factor:                                    5%
=> Yield factor:                                 95%
=> Order quantity to be released:   100/ 95% = 105.26 -> 106

However, if the demand is a stochastic independent demand, that is, a forecast, then a safety demand will already have been included in the (quasi-deterministic) independent demand, as described in Section 10.5.5. In this case, the bills of material explosion transfers this safety demand to the lower structure levels.

12.3.2 Material Requirements Planning (MRP) and Planned Orders

The MRP technique (material requirements planning) for calculating dependent demand is defined below. See also [PtSm11] and [Orli75]. Net requirements planning is another term for MRP (see also Section 5.1.2).

Four steps are carried out for each item, in ascending order of their low-level code (see Section 1.2.2). The four steps thus start with the end products and finish with the raw materials and purchased parts. Repeating the four steps for every item results in a multilevel procedure, as shown in Figure

Fig.       Schematic representation of the MRP technique.

Let us now consider the four steps in detail:

1 Determine gross requirements:

Gross requirement is the time-phased sum of independent and dependent demand of the respective period.
  • At the highest level, that is, for end products, the gross requirement is independent demand. This main input for the MRP technique stems, in general, from the master production schedule (MPS) and is made up of, on the one side, customer orders (the “original” requirement, this is deterministic independent demand), and, on the other side, sales forecasts (the supplementary requirement, this is stochastic independent demand, which entails quasi-deterministic materials management).
  • At the lower levels, that is, for assemblies and parts, the gross requirement often consists of just one of the two classifications of demand, namely, of independent demand or dependent demand. For service parts, for example, it will be made up of both classes. The so-called service parts demand is demand for service parts that are sold as such. Thus, it is forecasted independent demand. Demand for service parts that are integrated into higher-level products is calculated as dependent demand derived from the demand for the higher-level product in step 4. Thus, it is derived by a deterministic technique; in the case of stochastic independent demand, by a quasi-deterministic technique. If the gross requirement consists of both classes, a multilevel master schedule may have to be used.[note 1203]

2 Determine the net requirements:

Net requirements are the time-phased negative projected available inventory.

Figure shows a common situation for any given item.

Fig.       Determination of net requirements and batch sizes (example).

  • The safety stock is subtracted from projected available inventory right at the start. As a result, production or procurement orders are then scheduled such that they enter into stock when the projected available inventory falls below zero.
  • It is assumed that receipts occur at the beginning of a time period and that issues occur during a period. Receipts and issues are now added or subtracted over time, and the available quantity is calculated along the time axis. This results in the net requirements: a series of negative available inventories after each period. The sum of all these negative available inventories along the time axis is known as net requirements.
  • Step 3 of the MRP technique (see Figure, determina­tion of batch sizes, has already been carried out by way of example. In step 4, planned orders are generated from the batches. Planned release, that is, the scheduled release of a planned order, is thus the planned receipt brought forward by the lead time (here, by three periods).
  • Of course, it would also be possible to use the same graphical representation for listing every planning-related event individually, rather than in a bucketed system, that is, combining them in periods or time buckets. Such a bucketless system could result in a very large list, however (or a large number of columns in Figure

3 Determine the batch sizes:

  • There are a number of batch-sizing policies for combining net requirements into batch sizes. These are described in Section 12.4.

4 Create an order proposal, that is, a planned order for every batch:

  • The first step is to calculate the lead time to determine the point in time at which the order should be released.
  • For a planned production order, the next step is to determine — from the routing sheet of the product to be manufactured — the planned operations and thus the planned load of the work centers (see also Section 12.3.3).
  • For a planned production order, this also includes a requirements explosion to schedule the demand for components (see also Section 12.3.3). This (dependent) demand is the batch size multiplied by the usage quantity. It is also the gross require­ment for the component and is one of the quantities to be determined in step 1 for the component in a subsequent MRP stage. This is the final MRP planning stage.

If the order proposals are not subsequently released, they are automatically adapted to take account of the current situation the next time that requirements are calculated. This generally means deleting all the planned orders and then recalculating them in a comprehensive rerun of the MRP algorithm.

If the independent demand changes only slightly, the net change MRP technique is usually faster. This technique attempts to consider only those net requirements that have changed. The four-step procedure is applied only to those articles whose projected available inventory has changed since the last MRP run. If planned production orders are changed, this will also affect the dependent demands for components, so that the MRP procedure must be repeated for each component. If a large number of items are affected, the entire order network will have to be recalculated — effectively a comprehensive rerun of the MRP algorithm.

Exercise: Compare the effects of the MRP technique compared to the order-point technique by chosing different values for the parameters as well as the monthly gross requirements.

12.3.3 Determining the Timing of Dependent Demand and the Load of a Planned Order

Order proposals are compared against the net requirements, which are broken down into meaningful batch sizes. For a purchased item, generating an order proposal essentially means calculating the order point with due regard to the lead time (which is part of the master data for the item). For an item produced in-house, the start date can also be determined by sub­tracting the lead time from the completion date. The dependent demands for all the com­ponents will be needed on the start date. This is how the conventional MRP technique works.

A more detailed and comprehensive technique calculates the process plan (see Section 1.2.3) of the item’s final production stage. At the same time, planning data are generated for materials management, time management, and scheduling and capacity management:

  • The load that this order will generate at the various work centers: by multiplying the order quantity by the operation load for each operation (see also Chapter 14).
  • The time at which a load arises: by means of a lead-time calculation starting with the order completion date (see also Chapter 13).
  • The start date for the order (see also Chapter 13).
  • The dependent gross requirement (or dependent demand): by multiplying the order quantity by the usage quantity for each position on the bill of material.
  • The time at which a dependent demand arises, taking into account the start date for the operation that processes the demand.

Figure compares the conventional MRP technique (variation 1), that is, the mean lead time, with the above-mentioned more comprehensive technique (variation 2). The example calculates the timing of the dependent demands for a product A, which is made up of components B and C.

In variation 1, it is assumed that the average lead time for producing A is two months. The timing of the dependent demands for components B and C is thus the planned order completion date for A minus its average lead time.

Fig.       Calculating the timing of dependent demands.

Variation 2 shows the more comprehensive and detailed technique. The process plan for product A was included in the calculation. The first difference is that the lead time for batches of 25 is just 1.5 months, whereas it rises to 2.5 months for batches of 50. In addition, demand for C does not arise until the fourth operation, which should start half or one month before the order completion date, depending upon the batch size.

Figure shows how this affects the way in which the timing of dependent demands is calculated in variation 2. If B and C are very high-cost items, the detailed procedure would help to allow the components to be channeled into production exactly when they are needed. This can reduce both the volume and the value of goods in process.

If we compare the two variations, we can see that the more general variation 1 is very suitable both for (long-term) master planning and for medium-term or short-term planning for inexpensive and low-volume components. In all other cases, variation 2 is more suitable, although calculation requires much more processing power and more complex algorithms, which may also be more prone to error.

By the way: The multilevel available-to-promise (MLATP) technique uses variation 1, the capable-to-promise (CTP) technique uses variation 2. For details refer to Section 5.3.5.

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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