Page 178 - Orlicky's Material Requirements Planning

CHAPTER 8 Lot Sizing 157

ed in absolute numbers, for example, “no less than 50 and no more than 400 units,” per-
taining to individual inventory items. Alternatively, the limits on quantity may be stated
in terms of period coverage, for example, “no less than 4 weeks’ and no more than 12
weeks’ requirements” or “not to exceed one year’s supply.” Minimums and maximums
on lot sizes are frequently imposed by management in view of the fact that the lot-sizing
algorithm is blind to a number of practical operating considerations.
A scrap allowance, or shrinkage factor, is a quantity added to the computed lot size that
is intended to compensate for anticipated scrap or loss in process and to ensure that the
required quantity of “good” pieces is received. This is important only in instances of dis-
crete lot sizing because the order quantity covers net requirements in an integral number
of periods (no remnants). The scrap allowance normally will vary from item to item
according to past incidence of scrap.
The scrap allowance may be stated either in terms of pieces or as a percentage of the
order quantity. Where the latter approach is used, a fixed percentage generally is unde-
sirable if the planned-order quantities vary significantly from lot to lot. In a machine shop
environment, scrap tends to be a function of the number of different setups that are
required to complete the part rather than the quantity being run. In view of this fact, a
declining percentage formula can be used, such as the following:
Q L a L

where Q order quantity
L lot size computed by the algorithm
a multiplier reflecting scrap incidence
For example, the lot-sizing technique being used might yield a quantity of 400. This
would be adjusted for scrap by adding the square root of 400, that is, 20, for a final order
quantity of 420. In this case, the multiplier was assumed to be 1—the value usually used
unless the responsible inventory planner specifies a different one. The multiplier, acting
to reflect incidence of past scrap of the inventory item in question, may be set to vary
from 0 (no scrap allowance) to a decimal fraction of 1 to a multiple of 1. With a multipli-
er of 1, the scrap allowances for various lot quantities would be as shown in Figure 8-14.
In an MRP system, the proper way to handle scrap allowances in the time-phased inven-
tory record is simply to add them to (include them in) the planned-order quantities.

FIGURE 8-14
Computed Scrap Order Percentage
Declining- lot size allowance quantity allowed
percentage scrap 1 1 2 100
allowance. 4 2 6 50
9 3 12 33
16 4 20 25
25 5 30 20
100 10 110 10
400 20 420 5
10,000 100 10,100 1