COST INCREASES DUE TO DEMAND UNCERTAINTY IN MRP LOT SIZING

Abstract

ABSTRACTThis paper analyzes the cost increases due to demand uncertainty in single‐level MRP lot sizing on a rolling horizon. It is shown that forecast errors have a tremendous effect on the cost effectiveness of lot‐sizing techniques even when these forecast errors are small. Moreover, the cost differences between different techniques become rather insignificant in the presence of forecast errors. Since most industrial firms face demand uncertainty to some extent, our findings may have important managerial implications. Various simulation experiments give insight into both the nature and the magnitude of the cost increases for different heuristics. Analytical results are developed for the constant‐demand case with random noise and forecasting by exponential smoothing. It is also shown how optimal buffers can be obtained by use of a simple model. Although the analysis in this paper is restricted to simplified cases, the results merit further consideration and study. This paper is one of the first to inject forecast errors into MRP lot‐sizing research. As such it attempts to deal with one of the major objections against the practical relevance of previous research in this area.