Chapter 11

Determining Manufacturing
Order Quantities—Concepts
 Nature of net requirements data
•
Demand is not constant, uniform.
•
Requirements are discrete (in periods).
•
Requirements are lumpy.
 Problems
•
Inventory cost reductions require complex procedures.
•
Component lumpiness may increase due to lot-sizing method used with the “parent.”

Determining Manufacturing
Order Quantities—Concepts
 Assumptions
•
Quantities are available at the beginning of the period.
•
Future requirements must be met/can’t be backordered.
•
Ordering decisions occur at regular time intervals
(day/week).
•
Requirements are properly offset for manufacturing lead time.
•
Component requirements are satisfied at a uniform rate during the period —hence use average inventory level to compute inventory carrying costs.

Determining Manufacturing
Order Quantities—Methods
 Ordering as required (lot-for-lot)
 Economic order quantities (EOQ).
 Periodic order quantities (POQ).
 Part-period balancing (PPB).

McLaren’s order moment (MOM).
 Wagner-Whitin algorithm.
 Simulation experiments.

Economic Order Quantities
(EOQ)
 See Figure 11.2, p. 442. (EOQ = 166 units.)
 Evaluation:
•
Fixed EOQ lot sizes don’t match requirements —excess inventory may be carried forward from period to period.
•
Must increase order size when requirements exceed EOQ.
•
Using average period requirements to compute EOQ ignores lumpiness in demand.

Periodic Order Quantities (POQ)
 See Figure 11.3, p. 443. (POQ = 2 weeks)
 Use EOQ to calculate an economic time between orders —which determines the number of period-requirements to meet. The POQ equals the requirements in that number of periods.
 Evaluation:
•
Improves inventory cost (from EOQ).
•
Ignores lumpiness of demand .

Part-Period Balancing (PPB)


•
See Figure 11.4, p. 444.
Approximately balances ordering costs and inventory carrying costs. A part-period is one unit of inventory carried for one period.
•
Test ordering alternatives: Period 1 only;
Periods 1 and 2; Periods 1, 2, and 3, etc.
Evaluation:
•
Reduces inventory carrying costs (from POQ).
•
PPB permits both lot size and time between orders to vary.

Purchasing Discount Problem
 Price discounts may be available for ordering large quantities or for transportation savings for shipping fulltruckloads.
 Issues:
•
Carrying costs based on period-ending rather than period-average inventory.
•
Calculations based on “all units” versus
“additional units” discounts.

Least Unit Cost (LUC)
 Calculate cost/unit (Figure 11.9, p. 451).
Order the quantity that provides least unit cost.
•
Aggregate requirements through an integral number of periods until the quantity to be ordered qualifies for the discount.
•
Determine whether the discount should be accepted based on LUC.
•
Evaluate ordering a quantity exactly equal to the quantity discount.

Least Period Cost (LPC)
 Cost calculation same as LUC (see
Figure 11.10, p. 452).
•
Except, use the cost/period instead of the cost/unit to choose the order quantity.

Categories of Uncertainty
Types
Timing
Quantity
Demand
Requirements shift from one period to another
Sources
Supply
Orders not received when due
Requirements for more or less than planned
Orders received for more or less than planned

Safety Stock and Safety Lead
Time


Safety stock. (Figure 11.16, p. 458)
•
Specify a quantity that will provide a desired level of customer service.
•
Usually excluded from the initial inventory balance when determining projected available balance.
Safety lead time. (Figure 11.16, p. 458)
•
Plans order releases earlier than indicated by requirements plan and schedules receipt earlier than required due date.

Other buffering Mechanisms
 Reduce uncertainty in the system.
•
Increase forecast accuracy, improve MPS planning processes, freeze the MPS for some time periods, develop an effective shop-floor priority system, improve data accuracy, implement JIT.
 Provide slack in the production system.
•
Additional time, labor, machine capacity, etc.

Nervousness
 Sources of MRP nervousness.
•
Significant changes in MPS and MRP plans.
 Reducing MRP system nervousness.
•
Reduce causes of change to MRP plan.
Stabilize the MPS through freezing and time fences.
•
Selectively use lot-sizing procedures.
Use fixed-order quantity at top level; either fixedorder quantity or lot-for-lot at the intermediate level;
POQ at the bottom level.
•
Firm planned orders in MRP (or MPS) records.

Other Advanced MRP Concepts
 Timing conventions.
 Bucketless systems.
 Phantom assemblies.
 Scrap allowances.
 Automatic updating.

Concluding Principles
 MRP enhancements should be done after a basic
MRP system is in place.
 Discrete lot-sizing procedures for manufacturing can reduce inventory-associated costs. But the complexity should not outweigh the savings.
 Selecting the appropriate lot-sizing procedure for purchasing should consider quantity discounts.
 Safety stocks should be used when uncertainty is of the quantity category.

Concluding Principles
 Safety lead times should be used when uncertainty is of the timing category.
 MRP system nervousness can result from lotsizing rules, parameter changes, and other causes. The MPC professional should take precautions to dampen the amplitude and impact.
 MRP system enhancements should follow the development of ever more intelligent users.

Chapter 11 Assignments
 Problems 3(a) and 15.
 Due Thursday, October 10.