Forecasting Error Evaluation in Material Requirements Planning (MRP) Production-Inventory Systems

The impact of forecasted demand and forecast error, introduced in the Master Production Schedule, upon Material Requirements Planning (MRP) Systems is investigated. A computerized simulation was built to examine several questions. Results indicate that forecasting error, especially the mean error, does impact MRP system inventory costs and shortages; the greater the forecast error the greater the shortages. An exception to this general relationship was that a slight forecast BIAS may improve MRP system performance, which was the case for systems studied herein. Lot-sizing rules and product structure (bill of material structure) were also found to impact total MRP system inventory costs and shortages. The more complicated the MRP structure, the greater the differentiation among lot-sizing rules and the greater the cost impact of forecast errors. A good lot-sizing rule appears to be the period order quantity rule. However, as the forecast error level gets higher, it becomes difficult to select the better lot-sizing rule. Based on this study, suggestions are presented for the production manager's consideration, especially the inventory-production control manager.