Planning Methods

Planning methods are used in Material Requirements Planning to determine how the lots are formed for the parts when new demand arises. Planning methods control the planning data you must enter for a part. When you enter planning data for the inventory part, you specify the planning method to be used when new requirements are planned. These planning methods are used both in MRP and in creating order proposals for purchasing. 

Choosing a Planning Method

It is not always easy to decide which planning method to use. The goal of a planning method is to balance the order overhead (the setup cost) with the stock keeping costs. Many times, you must use trial and error to find the best planning method for a part. However, when you are deciding on planning methods, be sure not to use a completely incorrect planning method or completely incorrect planning data. An example of incorrectly chosen planning information would be to choose planning method A, Lot for Lot, for screws and nuts used in several structures or to specify a minimum lot size of 1000 for an expensive part of which only one is used per week.

Here are some tips and guidelines for the planning methods:

• Planning method A, Lot for Lot, is for use with expensive parts that are not often needed. The order overhead for these parts should not be high. You can also use lot for lot, when a part has a complicated structure, to avoid overloads when production takes several steps.
• Do not use planning method A for raw materials and components that are needed in many parts. It is better to use planning method B, Order Point Planning, or G, Cover Time, which provides more cyclical receipts. If there are physical limitations to how much can be kept in inventory, you might want to use planning method C, Replenishment Level.
• If the order overhead and stock keeping costs are both high, use planning method E, Least Unit Cost; F, Least Total Cost; or G, Order Cover Time.
• Safety stock can be used if planning is uncertain. Factors that can make planning uncertain include consumed quantity, scrapping, and receipt dates. Your operations determine whether you should keep a safety stock of raw materials, intermediary levels, or end products. However, you should not have safety stock on several levels in a row in a structure.

Descriptions of Planning Methods

Following are descriptions of the planning methods. The example used for illustration assumes that scrapping factor and safety stock are zero (0) and that the onhand balance is ten (10).

A. Lot for Lot

This planning method means that the order quantity is equal to the actual demand of the period. It considers minimum, maximum, or multiple lot sizes. The demands are not combined unless they are from the same day.

Example: When the quantity on hand decreases, order proposals are created with the same lot size as the quantity required.

B. Order Point Planning

The part is not affected by MRP. The order point and order quantity are specified in the inventory part register. When the quantity on hand falls below the order point, a new order proposal is created, which is shown on the order proposal list. The order quantity you enter determines the default order quantity.

C. Replenishment Level

The part is not affected by MRP. This planning method works in the same way as order point planning, the difference being that the order quantity is calculated as the order proposal quantity minus the current quantity on hand, which is the replenishment level. This value is useful if storage space for the parts is limited, e.g., storage in silos.

D. Fixed Lot Size

This planning method creates order proposals where the order quantity is fixed by the minimum and multiple lot sizes entered in the inventory part register. The fixed order quantity planning requires that the lot size, maximum, minimum or multiple quantity must be the same.

Example: The fixed lot size is 30. If the demand is over 30, more requisition lines will be created with the same demand date.

E. Least Unit Cost

The order quantity is calculated by using order overhead and stockkeeping costs. This is a variation of the Wilson formula. The method attempts to find the optimal order quantity by comparing setup costs and stockkeeping costs. It attempts to minimize the unit cost to calculate how great a demand is considered in manufacturing the part. This planning method considers the minimum, maximum and multiple lot sizes defined in Inventory Part, if any specified.

If you manufacture the part often, the setup costs increase while stockkeeping costs decrease. If you manufacture the part rarely, stockkeeping costs increase while setup costs decrease. Somewhere, by combining demand into larger lots, you reach the optimal level, which is the least unit cost.

The calculation considers the following values:

According to this planning method, MRP starts by calculating the stock keeping cost per day. This information is then used to calculate the unit cost. Stock keeping cost per day is calculated as:

The information about inventory interest is retrieved from the inventory part register and the standard part price is retrieved from cost set 1 (standard yearly costs in the inventory part register). The number of stockkeeping days per year is controlled by the default values you enter in MRP.

When the daily stockkeeping cost is calculated, the unit cost is calculated into the future until the least unit cost is found. The order is handled based on when the unit cost is least.

The order overhead is retrieved from the inventory part register. The number of days in inventory is calculated as the number of parts in inventory times the number of days they remain in inventory.

Example: The inventory interest is 50%, the part's standard price is $264, and the order overhead is $100, which makes the stockkeeping cost per day $0.6. This assumes that the number of stockkeeping days per year is set to the default 220 specified at installation. On the second day, the estimated balance is 2, making the demand 27 - 2 = 25. MRP checks how many days' demand must be considered by calculating the unit cost. The calculation is:

The calculation derives 2.15, which is a lower unit cost than 4. The calculation continues to find the absolute lowest individual price.

The unit cost continues to decrease and the calculation continues one more day.

Now the unit cost and the calculation have found the breaking point for the lowest unit cost. Manufacturing will cover four days' demand, 95 pieces, at a unit cost of 1.75.

F. Part Period Balancing

This planning method is similar to the previous one. The order quantity is calculated by using the order overhead and the stockkeeping cost. This is also a variation of the Wilson formula. The method attempts to find the optimal order quantity by comparing order for order to see if the result approaches the optimal relationship between the order overhead and the stockkeeping cost. This planning method considers the minimum, maximum and multiple lot sizes.

The calculation starts by calculating the stockkeeping cost per day, using the same formula described for planning method E.

When the stockkeeping cost per day is calculated, demand is totaled so that the quotient between order overhead and stockkeeping cost per day is as close as possible to the optimum quotient. If the formula is rearranged a little, you see that MRP calculates the workday that lies closest to the day when the stockkeeping cost exceeds the order overhead.

This means that MRP tries to calculate the economically optimum number of days a part can be kept in inventory by calculating the optimum quotient. The optimum quotient has the unit days. When the optimum quotient is determined, the number of stockkeeping days is calculated, which is the quantity in inventory times the number of days they remain in inventory, until stockkeeping days fall as close to the optimum quotient as possible.

Example: Inventory interest is 50%, the part's standard price is $264, and order overhead is $100, which makes the stockkeeping cost per day $0.6. This assumes that the number of stockkeeping days per year is set to the default 220 that was specified at installation. This makes the optimum quotient 100 / 0.6 = 166.7. On the second day, the estimated quantity on hand is 2, making the demand 27 - 2 = 25. MRP determines how many days' demand must be considered by calculating the number of inventory days, which is the quantity in inventory times the number of days they spend in inventory. The calculation is as follows:

After this, the number of inventory days increases and the calculation has discovered the breaking point for the least total cost. Manufacturing should occur for four days' requirement, 120 units.

G. Order Cover Time

If an order must be placed, the lot size is determined by the total demand during the order cover time, which is specified in days in the inventory part register. The order cover time can be complemented with minimum, maximum, and multiple lot sizes.

Example: The order cover time for the part is 4 days. On the second day, the estimated quantity on hand is 2, making the demand 27 - 2 = 25. MRP totals the demand, 25, with the demand of the four following days. The calculations for this period are:

K. Blow Through

This value does not apply to real parts, but it provides a way to transfer demand directly to parts on lower levels. The imaginary part is called a blow-through part, described as an in-between step in manufacturing, such as an assembly stage. The part can never be kept in stock, ordered, or planned by MRP. The onhand quantity is always zero.

Example: The onhand quantity is always zero. Demand is always broken down to lower levels.

M. Manufacturing Cell Part

MRP creates shop order requisitions for these parts but does not break down the demand for their components. Requisitions for parts with this planning method are not included in MRP until they are converted into actual shop orders. MRP considers the minimum, maximum, and multiple lot sizes when it generates shop order and purchasing requisitions.

N. Next Level Demand

Parts with this planning method are not processed by MRP. Requisitions for parts with this planning method are not included in MRP until they are converted into actual shop orders.

Parts with this planning method support planning with the pull principle. This means that the demands created by a customer order are processed as soon as the order is processed. If there is not enough of the part in inventory, a shop order or purchasing requisition is created.

This planning method makes sure that no parts are manufactured or purchased unless there is an actual demand for the part.

O. Level 0 Part

This is used in MS to calculate level 0. In the structure of a master schedule level 0 part, you can enter end products directly or use blow-through parts, also called phantom parts, as an intermediate step from the breakdown from level 0 to end product. Blow-through parts must have planning method T, which is intended specifically for MS.

P. Phantom Part

This is an alternative similar to planning method K, Blow Through. This planning method directly transfers requirements to parts on lower levels. The part represents an assembly stage and cannot be stocked, ordered, or planned by MRP. However, parts with this planning method can have a quantity on hand. The inventory is used as first priority to cover the demand for a phantom part. Remaining requirements are transferred directly to the components. This planning method can be used for spare parts.

Example: No order proposals are created, as all parts in inventory have been used up. Demand is broken down to lower levels.

T. Master Schedule Blow Through Part

This planning method means that the part is a type of phantom part but is specially adapted for use in MS. Phantom parts are used to distribute forecasts from level 0 to level 1 in MS.