Inventory inaccuracy in material requirements planning implementation
This study develops a simulation model to investigate the effects of inventory data inaccuracy in a Material Requirements Planning (MRP) environment. The factors of inaccuracy incorporated into the model are the frequency, magnitude, and location of errors. The study examines the effects of these factors on the performance measures of excess inventory carrying costs and percentage of late units. The simulation model explores these effects under two raw materials replenishment policies, the dynamic lot-for-lot and static fixed order quantity policies. The results are similar under both of these policies.
Several approaches are employed to examine the data, all of which indicate that the factor of error frequency was highly influential on the performance measures. While it had been anticipated that all three factors would be significant, the factor of error magnitude had a minimal effect. Location of error increased the carrying costs, but had little effect on the percentage of late units.
The implication for practicing managers is that the heuristic standard promoted by the American Production and Inventory Control Society (APICS) is basically valid. This standard suggests that records for 95 percent of the inventory items must be correct for the firm to reap the benefits of MRP. However, additional attention should be paid to inventory records of components near completion, as the higher values and longer lead times of these components create expensive delays.
While buffer stock has been recommended in prior studies to offset such uncertainties as supply and demand in the MRP environment, it was also shown to reduce the problems associated with inventory data errors. In addition, the findings of this study suggest that managers should be aware that errors in these records can nullify the trade-off between inventory carrying costs and late customer deliveries.