Influence of Lot Sizing on Lead Time Error Costs in M.R.P. Systems- a Computer Simulation Study

Abstract

Timing of ordering of inventory items is of very great importance in Materials Requirement Planning. Uncertainties in timing can have an adverse effect on the system performance. Most often the lead time variation contribute to timing uncertainties; and their effects are reflected in added costs. Lead time error effects are investigated in this thesis. The study attempts to estimate the effects through some relevant costs, and their variations across the lot sizing rules. The hypotheses for this study are 1) Between any two lot sizing rules, there will be a significant difference in error coats due to combined effect of purchased lead time error and manufacturing lead time errors; 2) Relative cost performance of lot sizing rules in MRP is influenced by the lead time errors; 3) There will be a difference in error cost between lot for l o t rule and least total cost rule even with single source of lead time variation. To carry out the study a MRP programme was developed, in FORTRAN 77 with provisions to include the lot sizing rules while exploding the structure. The lot sizing rules used in the study are Lot for Lot, Silver and Meal heuristics, Wagner-Whitin algorithm, Least total cost, Least unit cost and Part Period balancing. A simulation model is developed using GPSS/PC, to test the hypotheses. An hypothetical production situation with three end items, each with a different product structure is designed. In addition, a master production schedule and a job shop are also structured. Appropriate distributions are assumed for both manufacturing lead times and purchase lead times. These provide the stochastic variables in the simulation experiments. A series of experiments were carried out with the model to investigate into the variations of costs amongst lot sizing rules. Results of the simulation experiments prove that there are costs associated with lead time errors in MRP. These error costs vary significantly with different lot sizing rules. It is also found that the resultant error costs vary significantly even with a single source of lead time variation. Least unit cost rule gives the beat performance having least error costs. Lot for Lot rule has shown the worst performance amongst the lot sizing rules considered. Other interesting results have emerged out of the study.