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, 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 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. [ASCM22]).

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, whereas item demand is measured.

A stockout is a lack of materials, components, or finished goods that are needed ([ASCM22]).

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 ([ASCM22]).

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 %.

Continuation in next subsection (5.3.1b).

Course section 5.3: Subsections and their intended learning outcomes

  • 5.3.4b Overview of Scheduling and Capacity Management Techniques

    Intended learning outcomes: 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).