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

12.6 Summary

This chapter describes the deterministic materials management technique for medium-term and short-term planning. The unique aspect of this technique is that the demand for an item is not simply regarded as a total that, de facto, can be evenly distributed along the time axis, as is the case with long-term planning or even stochastic materials management. In contrast, you take advantage of the fact that you know the precise time of every demand and thus the limited period it will take up along the time axis. Lumpy demand can be managed particularly efficiently in this way.

Purely deterministic materials management requires the independent demands to be precisely known. Dependent demands are then derived from them by exploding the bill of material. Since the cumulative lead time remains within the customer tolerance time, the exact demand for procured and produced goods is known.

An attempt should be made to use quasi-deterministic materials management techniques if components at lower levels have to be stored, but demand is only discontinuous. The independent demand is then calculated using stochastic techniques. On the other hand, dependent demand is again calculated by exploding the bill of material.

The starting point for deterministic materials management is the projected available inventory. This is not a scalar variable — it changes after every transaction or every future event that changes stock levels. At any given time, the projected available inventory is defined as the physical inventory plus all open and planned receipts minus all allocated quantities minus all planned demands up to this point.

The projected available inventory calculation thus shows the projected available inventory defined in this way along the time axis. This is useful, for it provides information on the possible demand coverage (quantity and timing, and partial demands, if necessary) for any new demand. The scheduling projected available inventory calculation attempts to bring forward or put back orders in process or allocated quantities so as to maintain a positive projected available inventory at all times. Operating curves for stock on hand describe delivery delays and time in storage in relation to inventory.

Lumpy dependent demand often arises as a result of batch size creation at higher levels, often regardless of whether the independent demand was determined stochastically or deterministically. If stochastic materials management techniques were to be used in this situation, they would result in excessively large inventory stocks and carrying cost. The deterministic MRP (material requirements planning) technique ensures minimum stocks for production or procurement orders that are received in good time.

The MRP technique consists of four steps that are applied to every item in ascending order of their low-level code — starting with the end products, followed by the assemblies and semifinished products, through to the purchased goods.

  • The 1st step is to determine the gross requirement, which may be made up of independent and dependent demands. The gross requirement is a data set, rather than a scalar variable. If the calculation is applied to precise periods, there will be exactly one gross requirement per period. If the calculation is applied to precise events, every demand corresponds to a gross requirement.
  • The 2nd step is to determine the net requirement by offsetting the physical inventory, safety stock, open orders, and allocated quantities. The net requirement can be made up of individual net requirements. If the calculation is applied to precise periods, there will be exactly one net requirement per period. If the calculation is applied to precise events, every demand may give rise to a net requirement.
  • The 3rd step is to combine the individual net requirements to form batches. The conventional EOQ formula is not suitable here, because its batch sizes are fixed. Techniques that use dynamic lot sizes are much more appropriate here, since the demands are known.
  • The 4th step is to convert the batch sizes into order proposals. The start date is determined by scheduling. For in-house production, the work center load and the quantity and date of each component demand are determined from the routing sheet and bill of material. These are dependent demands and can thus be used to calculate the first of the four MRP steps for each component.

MRP generates exception lists containing orders to be released, speeded up, slowed down, or canceled, in addition to order proposals. Pegging and a demand coverage list help to identify orders that are interdependent within the order network.

Course 12: 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.