Safety Stock and Safety Lead Times.

Operations management researches have long debated the role of safety stock and
safety lead times in MRP systems. Orlicky felt that these had no place in the system
except, possibly, for the end items. Lower-level items, he believed, were more than
adequately covered by the working of the system. Since Orlickys time, several
researches have disagreed. Because MRP is deterministic, the logic runs, something
should be done to account for uncertainty and randomness.
There are several sources for uncertainty. First, in all except pure make-to-order
systems, neither the demand quantity nor the timing of the demand is known exactly.
Second, production timing is always subject to variation, due to machine breakdowns,
quality problems, fluctuations in staffing and so on. Third, production quantities are
uncertain because the number of good parts that finish can be less than the quantity
that start due to yield fallout or loss.
Safety stock and safety lead time can be used as protection against these problems.
Vollmann et al. (1992) suggest that safety stock should be used to protect against
uncertainties in production and demand quantities, while safety lead time should be
used to protect against uncertainties in production and demand timing.
Providing safety stock in an MRP system is fairly straightforward. Suppose we wish
to maintain a safety stock level of 10 units for part Y.

Part Y 1 2 3 4 5 6 7 8
Gross requirements 10 15 10 25 20 20 15 15
Scheduled receipts
Adjusted SRs
Projected on-hand: 40 30 15 5 -20
Net requirements 20 20 20 15 15
Planned order receipts 40 35 15
Planned order releases 40 35 15

This time we compute the first net requirement as we did before but subtract an
additional 10 units for the desired safety stock. The projected on-hand minus safety
stock first becomes negative in period 3 ( as opposed to period 4 before), as we see
from the table.

Part Y 1 2 3 4 5 6 7 8
Gross requirements 10 15 10 25 20 20 15 15
Scheduled receipts
Adjusted SRs
Projected on-hand: 40 30 15 5
Projected on-handSS 30 20 5 -5 - - - - -
Net requirements 5 25 20 20 15 15
Planned order receipts 30 40 30
Planned order releases 30 40 30

Thus, our first planned order release is for 5 units needed to bring the inventory to the
desired safety stock level, plus 20 units for actual demand.
Introducing safety lead time into the MRP calculation is different. If the nominal lead
time is two weeks and we desire a safety lead time of one week, we perform the
offsetting in two stages: the first for the safety lead time regarding the planned order
receipt date (i.e., the due date), and the second using the usual MRP method, to obtain
the planned order release date. We demonstrate the use of a safety lead time of one
week using the same data.
Part Y 1 2 3 4 5 6 7 8
Gross requirements 10 15 10 25 20 20 15 15
Scheduled receipts
Adjusted SRs
Projected on-hand: 40 30 15 5 -20
Net requirements 20 20 20 15 15
Planned order receipts 40 35 15
Adjusted planned order 40 35 15
receipts
Planned order releases 40 35 15

The one additional step beyond the usual MRP calculation is shown in the Adjusted
planned order receipts line, which backs up these receipts accordingly to the one-
week safety lead time. Notice that the effect on planned order releases is identical to
simply inflating the planned lead times. However, the due dates on the jobs are earlier
in a system using safety lead times than in one without it. The effect of safety lead
times on a single part is fairly simple. Bringing parts in a week early means they will
be available unless delivery is late by more than a week. However, things are more
subtle when we consider multiple parts and assemblies.
For instance, suppose a plant is manufacturing a part had requires 10 components to
come together at assembly. Suppose also that the actual manufacturing lead times can
be well approximated using a normal distribution with a mean of three weeks and a
standard deviation of one week. To maintain good customer service, we want
assemblies to start on time at least 95 percent of the time. If s is the service level
(i.e., the probability of on-time delivery) for each component, then the probability that
all 10 components are available on time (assuming independent deliveries) is given by
Pr(on time start of assembly) = S 10

Since we want the probability to equal 0.95, we can solve for s as follows,
s (0.95)1 / 10 0.9949

Since the manufacturing lead times are normally distributed, this represents
approximately 2.6 standard deviations above the mean, or around 5,6 weeks about
twice the mean lead time for the planned lead time.
Of course, this analysis assumes that the 10 items are arriving to the assembly
operation independently of each other, an assumption that may not be true if they are
all being fabricated in the same plant. Nonetheless, the point is made if we are to try
to guarantee any level of service for an assembly, the service for the component parts
must be much greater.
In conclusion, although safety stock and safety lead times can be useful in an MRP
system, we must be cognizant of the fact that both procedures lie to the system. Safety
stock requires the intentional production of quantities for which there is no customer
need, while safety lead times set due dates earlier than are really required. The users
of the system must be trained to appreciate the need for the safety stock to cushion
variable demand/production and safety lead time to guarantee timely deliveries.
However, there is always the risk that, once discovered by the users, an informal
system of real quantities and due dates will appear. Such behavior can lead to a
subversion of the formal system and can degrade its performance.

Accomodating Yield Losses.

The above discussion and examples illustrate the use of hedges against uncertainties
in demand and timing. However, hedging against random scrapping of parts during
production yield loss involves an additional computation. Suppose the net demand
is Nt units and the average yield fraction is y. Also suppose, for this example, that Nt,
is a large number so that we do not have to worry about integer quantities. Thus, if we
start Nt(1/y) units, we will, on average, finish with Nt units, the net demand.
However, if Nt(1/t) is a large number, it is very unlikely that we will finish with
exactly Nt. We will, with roughly equal probability, either finish with more or less
than the net demand. Finishing with more means that we will carry the extra parts in
inventory until they are netted from future demand. If the product is highly
customized, this can be a problem. On the other hand, if we finish with less, a new job
will be required to make up the difference and it is unlikely that the order will ship on
time.
Safety stock can improve customer service and responsiveness in this case. We inflate
the size of the job to Nt(1/y) as before, and carry safety stock to accommodate
instances when production is less than the average yield. Another strategy is to carry
no safety stock but to inflate the job by more than (1/y). In this case, it is likely that
the job will finish with more than (1/y). In this case, it is likely that the job will finish
with more than the net demand and the extra stock will be carried in inventory. The
two procedures are essentially equivalent since both result in better service at the
expense of additional inventory.
Lastly, we should point out that the effectiveness of any yield strategy depends on the
variability of the yields themselves. For instance, if a job starts with 100 units, each
unit having an independent probability of 0.9 of being completed, then the mean and
standard deviation of the number of the finishing will be 90 and 3, respectively. Thus,
by starting 120 (i.e., 100/0.9 + 3x3) units, we have a probability of more than 0.99
(three standard deviations above the mean) that will finish with at least 100 units.
However, if the yield situation is more of an all or nothing type, so that either all the
units that start finish properly or none of them do (as in a batch process), then we
would need to release two separate jobs of 100 each to obtain a 0.99 probability of
finishing 100 on time. In the first (independent) case, the average increase in
inventory would be eight units (120x0.9 100). In the second (batch) case, it would
be 80 units (200x0.9-100). The moral is that average yield rate is not enough to
determine an effective yielding strategy. The mechanism and variability of the
processing causing the yield fallout must also be considered.
Problems in MRP.
Three on the most severe problems: (1) capacity infeasibility of MRP schedules,
(2)long planned lead times, and (3) system nervousness. These and other problems
first led to new MRP procedures and eventually to a new generation of MRP, called
Manufacturing Resources Planning or MRPII.
Capacity Infeasibility. The basic working model of MRP is a production line with a
fixed lead time. Since this lead time does not depend on how much work is in the
plant, there is an implicit assumption that the line will always have sufficient capacity
regardless of the load. In other words, MRP assumes all lines have infinite capacity.
This can create problems when production levels are at or near capacity.
 One way to address this problems is to make sure that the master production schedule
that supplies demand to the system is capacity feasible. A check of that provided by a
procedure called rough-cut capacity planning (RCCP). As its name implies, RCCP is
an approximation. A more detailed capacity assessment of the resulting MRP plans
can be made using a procedure known as capacity requirements planning (CRP). Both
RCCP and CRP are modules that are often found in MRPII.
Long Planned lead times. As we saw in our earlier discussion of safety lead times,
there are many pressures to increase planned lead times in an MRP system. In Part II,
we will see that long lead times invariably lead to large inventories. However, as long
as the penalty for a late job is greater than for excess inventory (which is typically the
case, since the inventory does not scream but dissatisfied customers do!), production
control managers will tend towards long planned lead times.
The problems caused by long planned lead times are further exacerbated by the fact
that MRP uses constant lead times when, in fact, actual manufacturing times vary
continually. To compensate, a planner will typically choose pessimistic (long)
estimates for the planned lead times. Suppose the average manufacturing lead time is
three weeks, with a standard deviation of one week. To maintain good customer
service, the planned lead time is set to five weeks. Since the actual lead times are
random, some will be less than the mean of three weeks and some will be greater. If
these follow an approximately normal distribution, then the most likely lead times
will be three weeks so the most likely holding time in inventory will be two weeks.
The result can be a large amount of inventory.
The longer the planned lead times, the longer parts will wait for the next operation,
and so the more inventory there will be in the system. Since setting planned lead times
equal to the average manufacturing time yields a service level of only 50 percent for
each component ( and therefore much worse service for finished assemblies),
managers will virtually always choose lead times that are much more longer than
average manufacturing times. Such behavior results in a lack of responsiveness as
well as high inventory levels.
System Nevousness. Nervousness in an MRP system occurs when a small change in
the master production schedule results in a large change in planned order releases.
This can lead to strange effects. For instance, as we demonstrate with the following
example, it is actually possible for a decrease in demand to cause a formerly feasible
MRP plan to become infeasible.
The following example is taken from Vallmann et.al. (1992). We consider two parts.
Item A has a lead time of two weeks and uses the fixed order period (FOP) lot-sizing
rule with an order period of five weeks. Each unit of A requires one unit of component
B, which has a lead time of four weeks and uses the FOP rule with an order period of
five weeks. Tables give the MRP calculations for both parts.

MRP calculations for Item A before change in demand.

Part A 1 2 3 4 5 6 7 8
Gross requirements 2 24 3 5 1 3 4 50
Scheduled receipts
Adjusted SRs
Projected on-hand: 28 26 2 -1 - - - - -
Net requirements 1 5 1 3 4 50
Planned order receipts 14 50
Planned order releases 14 50
MRP calculation for component B before change in demand.
Component B 1 2 3 4 5 6 7 8
Gross requirements 14 50
Scheduled receipts 14
Adjusted SRs 14
Projected on-hand: 2 2 2 2 2 2 -48 - -
Net requirements 48
Planned order receipts 48
Planned order releases 48

We now reduce the demand in period 2 from 24 to 23. It would seem obvious that any
schedule that is feasible for 24 parts in period 2 should also be feasible for 23 in the
same period. But notice what happens to the calculations in table. The aggregation of
demand during lot sizing causes a drastically different set of planned order releases.
MRP calculations for Item A after change in demand.
Part A 1 2 3 4 5 6 7 8
Gross requirements 2 23 3 5 1 3 4 50
Scheduled receipts
Adjusted SRs
Projected on-hand: 28 26 3 0 -5 - - - -
Net requirements 5 1 3 4 50
Planned order receipts 63
Planned order releases 63

In the case of component B the planned order release are no longer even feasible.
MRP calculations for component B after change in demand.
Component B 1 2 3 4 5 6 7 8
Gross requirements 63
Scheduled receipts 14
Adjusted SRs 14
Projected on-hand: 2 2 -47
Net requirements 47
Planned order receipts 47
Planned order releases 47*

There have been several remedies to reduce nervousness. One is the proper use of lot-
sizing rules. Clearly, if we use lot-for-lot, the magnitude of the change to the planned
order releases will be no larger than the changes to the MPS. However, lot-for-lot may
result in too many setups, so we need to look for other cures.
Vollmann et. al. (1992) recommend the use of different lot-sizing rules for different
levels in the BOM, with fixed order quantity for end items, either fixed order quantity
or lot-for-lot for intermediate levels, and fixed order period for the lowest levels.
Since order sizes do not change at the higher levels, this tends to dampen nervousness
due to changes in lot size. Of course, care must be taken when establishing the
magnitude of the fixed lot size..
While the use of proper lot-sizing rules can reduce system nervousness, other
measures can alleviate some of its effects. One obvious way is to reduce changes in
the input itself. This can be done by freezing the early part of the master production
schedule. This reduces the amount of change that can occur in the MPS, there by
reducing changes in planned order releases. Since early planned order releases are the
ones in which change is most disruptive, a frozen zone, an initial number of periods
in the MPS in which changes are not permitted, can dramatically reduce the problems
caused by nervousness.
In some companies the first X weeks of the MPS are considered frozen. How-ever, in
most real systems, the term frozen may be too strong, since changes are resisted but
not strictly forbidden. (Perhaps slushy zone would be a more accurate metaphor.) The
concept of time fences formulizes this type of behavior. The earliest time fence, say
for four weeks out, is absolutely frozen no changes can be made. The next fence,
maybe five to seven weeks out, is restricted but less rigid. Changes might be accepted
in model options if the options are available, and possible resulting in a financial
penalty to the customer. The next fence, perhaps 8 to 12 weeks out, is less rigid still.
In this case, changes in the part number might be accepted if all components are on
hand. In the final fence, 13 weeks and beyond, anything goes.
Another way to reduce the consequences of nervousness is to make use of firm
planned orders (FPO). Unlike frozen zones or time fences, firm planned orders fix
planned order releases. By converting early planned order releases into firm planned
orders, we eliminate all system nervousness early in the schedule, where it is most
disruptive. Consider what would happen if the first planned order release in table was
made into a firm planned order before the change in demand. This would result in its
being treated just like a scheduled receipt in the MRP processing. With this change
there is no nervousness.

MRP Calculations for Item A with FPO.

Part A 1 2 3 4 5 6 7 8
Gross requirements 2 23 3 5 1 3 4 50
Scheduled receipts
Adjusted SRs 14
Projected on-hand: 28 26 3 14 9 8 5 1 -49
Net requirements 49
Planned order receipts [14] 50
Planned order releases [14] 49

MRP calculations for component B with FPO

Component B 1 2 3 4 5 6 7 8
Gross requirements 14 49
Scheduled receipts 14
Adjusted SRs
Projected on-hand: 2 2 2 2 2 2 -47 - -
Net requirements 47
Planned order receipts 47
Planned order releases 47

Of course, the use of firm planned orders and time fencing means that the frozen part
of the schedule will be less responsive to changes in demand. Another drawback is
that the firm planned orders represent tedious manual entries that must be managed by
planners.