How Periodic Forecast Updates Influence MRP Planning Parameters: A Simulation Study

TL;DR

This study examines how periodic forecast updates impact MRP planning parameters and demonstrates that an improved heuristic can reduce inventory and backorder costs in a simulated supply chain environment.

Contribution

The paper introduces a new heuristic for MRP safety stock exploitation that mitigates forecast update disturbances and improves inventory management.

Findings

Forecast updates cause production order disturbances.

The proposed heuristic significantly reduces inventory and backorder costs.

Fixed-order-quantity lot sizing generally outperforms fixed-period lot sizing under forecast updates.

Abstract

In many supply chains, the current efforts at digitalization have led to improved information exchanges between manufacturers and their customers. Specifically, demand forecasts are often provided by the customers and regularly updated as the related customer information improves. In this paper, we investigate the influence of forecast updates on the production planning method of Material Requirements Planning (MRP). A simulation study was carried out to assess how updates in information affect the setting of planning parameters in a rolling horizon MRP planned production system. An intuitive result is that information updates lead to disturbances in the production orders for the MRP standard, and, therefore, an extension for MRP to mitigate these effects is developed. A large numerical simulation experiment shows that the MRP safety stock exploitation heuristic, that has been developed, leads to significantly improved results as far as inventory and backorder costs are concerned. An interesting result is that the fixed-order-quantity lotsizing policy performs - in most instances - better than the fixed-order-period lotsizing policy, when periodic forecast updates occur. In addition, the simulation study shows that underestimating demand is marginally more costly than overestimating it, based on the comparative analysis of all instances. Furthermore, the results indicate that the MRP safety stock exploitation heuristic can mitigate the negative effects of biased forecasts.