The result of arranging the parts is often plotted in the form of a so-called Lorenz curve as shown in Fig. 2.22 . When doing an ABC analysis, many organizations realize that: • A small percentage of their total part numbers (e.g., 10 %) account for a substantial share of the total inventory value (e.g., 65 %)—these are the A parts. • Another ca. 20 % of the parts account for approximately 25 % of the value—these are the B parts. • The largest percentage of parts (e.g., 70 %) accounts for only a small share of the total value (e.g., 10 %)—these are the C parts. Since the A parts are expensive, causing high cost, it is essential that the requirements of these parts are carefully planned, using precise methods in order to avoid unnecessary inventory and shortage costs. Shortage cost would occur when not enough parts are available, leading to a disruption of the production process. On the other hand, the C parts are less critical. Additional inventory to provide for safety buffers is acceptable because the additional inventory cost is low. Therefore, C parts can be planned with less precision using simpler methods. For secondary requirements planning , two basic approaches exist, differing with regard to computation time and accuracy of the results. These approaches are: • Consumption-driven (stochastic) planning • Demand-driven (deterministic) planning Cumulated inventory value (%) Cumulated number of parts (%) A B C parts 100 90 80 70 60 50 40 30 20 10 % 10 20 30 40 50 60 70 80 90 100 % Fig. 2.22 Typical result of an ABC analysis 2.3 Planning Primary and Secondary Requirements 43
Consumption-driven planning is fairly simple but not exact, whereas requirements-driven planning is exact, but requires a lot of computing effort. Taking these characteristics into account, many companies choose to employ the two approaches as follows: • A parts are planned in a requirements-driven way. • B parts are also planned requirements driven or partly requirements and partly consumption driven. • C parts are planned consumption driven. 2.3.1 Consumption-Driven Planning Consumption-driven planning involves estimat- ing the secondary requirements based on past consumption rates, whereas requirements-driven planning calculates the exact amounts using the bills of materials. The same methods used to forecast end- product sales can be used to predict future mate- rial requirements: moving averages, exponential smoothing, etc. If the forecast value applies to an entire period (e.g., a quarter) and consumption is constant per unit of time, a consumption rate can be calculated by dividing the forecast value by the length of the period. This quotient is also known as the withdrawal rate. After the forecasted requirements have been determined, two other issues need to be addressed:
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