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

5.3.2b Overview of Materials Management Techniques — Customer Order and Material Requirements Planning (MRP)

Intended learning outcomes: 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).

Continuation from previous subsection (5.3.2)

For all other kinds of demand, that is for unique demand or demand for high-cost items with a lumpy demand pattern, Figure shows an additional classification of planning techniques, this time according to the accuracy of the demand and its relationship with other demand (see the definitions above).

Fig.        Additional classification of detailed planning techniques in materials management for unique demand or demand for high-cost items with a lumpy demand pattern.

1. Deterministic independent demand can be met according to the actual demand, that is, according to the customer order.

  • From this perspective, customer order processing and customer blanket order processing are techniques for determining deterministic independent demand and thus in a sense also belong to deterministic materials management.

2. Deterministic dependent demand can be calculated from higher-level independent demand

  • The algorithm called MRP uses “explodes” of the bill of material, that is, the product structure, into its components.
  • This type of demand calculation is a relatively complicated procedure. However, because of the priority of both high delivery reliability rate and low or even no inventory, it is appropriate.

Thus, while sometimes being rather complicated, planning techniques for items downstream from the order penetration point with unique demand or — for high-cost items — with a lumpy demand pattern present no great difficulty. However, planning of such items upstream from the OPP generally leads to unsatisfactory results:

3. Stochastic independent demand is determined more or less intuitively.

  • As demand is lumpy, forecasting techniques tend to be inaccurate, and therefore ask for a lot of additional intuition. The materials management “technique” is often a manual procedure performed by the scheduler using a very personal heuristic. It is often a risky technique that should be avoided whenever possible.

4. Stochastic dependent demand is derived by quasi-deterministic techniques.

  • Here, independent demand is determined using demand forecast techniques. Calculation of dependent demand is then based on independent demand by means of explosion of the bill of mate­rial. This is called quasi-deterministic explosion of the bill of material.
  • As this demand pattern requires forecasting, there is a risk of a low service level or high carrying cost due to capital costs or risk of deprecia­tion as a consequence of technical obsolescence or expiration due to perishability. As a consequence, any materials management technique handling this case will generally yield unsatis­fac­tory results. Therefore, it should be avoided whenever possible. How­ever, for many businesses, being in that situation is a fact of life.
  • It is interesting to consider that, because of the dependent nature of the demand, the value-adding processes are under the control of the company. A thorough analysis of these processes can lead to appropriate modifications that entail more items downstream from the OPP, or a more continuous demand pattern — both situations being desirable. See Chapter 5 on the just-in-time / lean concept.

Forecasting techniques will be discussed in Chapter 9. The planning techniques mentioned are explained in detail in different chapters. At a first glance, they are described in brief as follows.

  • The (deterministic) MRP-technique (material requirements planning)[note 516] calculates, starting from higher-level independent demand, dependent demand by exploding the bill of material. The individual dependent demands are grouped together according to certain batch sizing policies and planned for timely production or procurement. In the deterministic case, the safety stock of components can be very small; inventory is kept to a minimum. In the quasi-deterministic case, safety demand at the level of the independent demand determines the safety stock of components. Deterministic materials management produces order proposals and the information required to control the processing of those orders. See here Chapter 12.

Section 6.5.2 discusses further a possible strategy for choosing one of these techniques and gives tips for implementing procedures.

The following animation distinguishes among the common techniques of materials management (shown in parentheses) according to the accuracy and the relationship of demand, the frequency of the consumer demand, and production or procurement costs as well.
Drag the fields into the prepared scheme in the correct way

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).