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

5.3.1 Basic Principles of Materials Management Concepts

Intended learning outcomes: Present the objectives of materials management. Differentiate between deterministic materials management and stochastic materials management. Differentiate between independent demand and dependent demand. Produce an overview on quasi-deterministic materials management, fill rate, cumulative fill rate, stockout, backorder.


Materials management must provide the goods required by demand both cost effectively and according to schedule. The objectives of materials management are similar for supply chains in industry and in the service sector. The objectives are (see also Section 1.2.2):

  • Avoidance of disruptions in delivery or production due to shortages
  • Lowest possible costs for the administration of production and goods purchased externally
  • Lowest possible carrying cost caused by goods procured too soon or even unnecessarily

The more exact our knowledge of inventory in stock and of open orders and due dates, the better the problem can be solved. It is even more important, however, to have exact information on demand. There are two possible ways to classify demand: with respect to accuracy or with respect to its relationship to other demand.

Classification of demand according to accuracy is defined as follows:

Deterministic demand is demand downstream from the (customer) order penetration point.

Stochastic demand is demand upstream from the (customer) order penetration point (OPP).

Classification of demand according to accuracy is thus dependent on the OPP, or, in other words, on the relationship between the customer tolerance time and (cumulative) lead time, as shown in Figure 1.3.3.1. Accordingly, the following sections will discuss two classes of methods and techniques in materials management.

Deterministic materials management utilizes a number of deterministic methods and deterministic techniques. In principle, these methods and techniques take demand as their starting point to calculate the necessary resources requirements on the basis of current conditions.

Stochastic materials management involves a number of stochastic methods and stochastic techniques. The methods and techniques utilize demand forecasts and buffer forecasting errors by building safety stock into the resource requirements.

Classification of demand according to its relationship is defined as follows:

Independent demand is the demand that is unrelated to the demand for other items.

Dependent demand is demand that is directly related to or derived from the demand for other items (cf. [APIC16]).

Company-external demand, or (customer) demand for end products or service parts, is independent demand, as is also a company’s own internal demand for office supplies or — partly — indirect materials. The demand for assemblies, semifinished goods, compo­nents, raw materials, and — in part — auxiliary materials are examples of dependent demand.

There is an important subclass of stochastic materials management:

Quasi-deterministic materials management utilizes stochastic methods to determine independent demand. However, it utilizes deterministic methods and techniques to determine dependent demand, e.g., the bill-of-material explosion.

For stochastic demand, the practice is to avoid quasi-deterministic materials management whenever possible and to employ pure stochastic materials management. Here the fill rate plays a decisive role.

The fill rate used here is that percentage of demand that can be satisfied through available inventory or by the current production schedule.

This is the definition used as in Figure 1.4.4.1, whereas item demand is measured.

A stockout is a lack of materials, components, or finished goods that are needed ([APIC16]). 

A backorder is an unfilled customer order or commitment, an immediate (or past due) demand against an item whose inventory is insufficient to satisfy the demand ([APIC16]). 

The stockout quantity or backorder quantity is the extent of demand, that is, the quantity that cannot be covered during a stockout condition. 

The stockout percentage or backorder percentage is the complementary percentage remaining when the fill rate is subtracted from 100 %. 

The cumulative fill rate is the probability that several different components will be available simultaneously on demand.

If the fill rate for a component is not very close to 100%, then the probability that several items of a product will be available from inventory simultaneously will be very low. For example, if we need to have 10 components from inventory for an assembly, and the fill rate is 95%, the cumulative fill rate is only 60% (» 0.9510), which usually will not suffice. Figure 5.3.1.1 illustrates this phenomenon.

Fig. 5.3.1.1       Cumulative fill rate with components required simultaneously.

Complex products such as machines are very often made up of a large number of components. In this case, avoiding planning errors means ensuring a high fill rate for each component. Materials management, both in techniques and in form, is very dependent on the characteristic features of planning & control.


The animation shows how to calculate the cumulative service level.
Click on the arrow in the top left corner to select the level of output.

Quiz on Chapter 5.3.1. (not yet available): Basic Principles of Materials Management Concepts.[kml_flashembed movie="https://opess.ethz.ch/wp-content/uploads/elements/Quiz_5_3_1.swf" height="75%" width="100%" /]



Course section 5.3: Subsections and their intended learning outcomes

  • 5.3 Introduction to Detailed Planning and Execution

    Intended learning outcomes: Disclose basic principles of materials management, scheduling and capacity management concepts. Produce an overview of materials management, scheduling and capacity management techniques. Differentiate between available-to-promise and capable-to-promise.

  • 5.3.1 Basic Principles of Materials Management Concepts

    Intended learning outcomes: Present the objectives of materials management. Differentiate between deterministic materials management and stochastic materials management. Differentiate between independent demand and dependent demand. Produce an overview on quasi-deterministic materials management, fill rate, cumulative fill rate, stockout, backorder.

  • 5.3.2 Overview of Materials Management Techniques

    Intended learning outcomes: Disclose the basic classification of detailed planning techniques in materials management. Explain the additional classification for unique demand or demand for high-cost items with a discontinuous demand pattern. Produce an overview on techniques such as Kanban, order point technique, CPFP (cumulative production figures principle), and MRP (material requirements planning).

  • 5.3.3 Basic Principles of Scheduling and Capacity Management Concepts

    Intended learning outcomes: Present the objectives of the tasks as well as the overall objective of scheduling and capacity management. Describe the vicious circle caused when capacity bottlenecks prolong the planned production lead-time. Disclose to which extent capacity can be stored.

  • 5.3.4 Overview of Scheduling and Capacity Management Techniques

    Intended learning outcomes: Differentiate between infinite loading and finite loading. Explain the classification of techniques for capacity management in dependency upon flexibility of capacity and flexibility of order due date. Produce an overview on order-oriented infinite loading, order-wise infinite and finite loading, operations-oriented and order-oriented finite loading, constraint-oriented finite loading, load-oriented order release (Loor), capacity-oriented materials management (Corma).

  • 5.3.5 Available-to-Promise (ATP) and Capable-to-Promise (CTP)

    Intended learning outcomes: Explain available-to-promise (ATP) and the determination of ATP quantities. Produce an overview on the techniques of multilevel available-to-promise (MLATP) and capable-to-promise (CTP).

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