An Experimental Analysis of Capacity‐Sensitive Setup Parameters for MRP Lot Sizing

Abstract

ABSTRACTMost material requirements planning (MRP) systems apply standard costing (absorption costing) approaches to define setup costs that are used as fixed (time invariant) setup parameters in single‐level lot‐sizing methods. This paper presents a computationally simple approach for estimating more appropriate setup parameters based on estimates of work‐center shadow prices. These setup parameters then are used in traditional single‐level MRP lot‐sizing procedures.The shadow price of capacity at each work center is calculated as the increase in the overall inventory carrying cost for each additional hour of capacity lost to setups. The opportunity cost of a setup for an order subsequently is determined based on the routing information for each order and is used by traditional MRP lot‐sizing procedures to calculate lot sizes.A simulation experiment compares the performance period order quantity lot sizing with capacity‐sensitive setup parameters with the fixed accounting‐based setup parameters. The simulation replicates the planning and control functions of a typical MRP system. The results of the experiment show that capacity‐sensitive setup parameters can make significant reductions in both carrying cost and lateness and can achieve many of the benefits of optimized production technology in the context of an MRP system.