Location of Inventories in an MRP Environment

ABSTRACT Previous research on MRP systems has rarely considered at what level in a modular sub‐assembly product structure to hold inventories. Based on a simulation study of an MRP environment, we show that the correct decision concerning where to hold inventory depends on the variance in end‐item demand, the amount of inventory investment, and concomitantly, the desired level of customer service. In particular, for small investment in inventories and moderate end‐item demand variance, it is equally effective to hold inventories at the subassembly level or the end‐item level. But when end‐item demand variance is high, subassembly level inventories are better. As inventory investment grows, however, it is best to use a diversified approach of holding both subassembly and end‐item inventories, irrespective of end‐item demand variance. The robustness of these conclusions is validated by simulating a hypothetical firm that also uses safety time to hedge against uncertainties.