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

12.3.1 Characteristics of Discontinuous Dependent Demand

Intended learning outcomes: Describe the principle of lumpy dependent demand due to batch sizes at higher structure levels. Differentiate between two techniques for inventory management of components with lumpy 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.

Course section 12.3: Subsections and their intended learning outcomes