You want to find out your future requirements for efficient production, low warehousing costs and a continuous readiness for delivery? Then a determination of requirements is just what you need!
Determination of requirements–definition
The determination of requirements is an economic method for determining the future material requirements. The expected quantity and time are determined.
The following terms are used synonymously: Materials budgeting. Procurement planning and determination of material requirements.
Why is it essential to estimate the future requirements?
The determination of material requirements serves as a production planning, scheduling and stock control system and thus plays an important role in supply-chain management.
It contributes to the efficient implementation of a company’s production plan and the supply of materials. The method must be executed precisely in order to avoid an oversupply or an undersupply. Companies that sell products with very long lead times or that are subject to frequent fluctuations in demand in particular benefit from this method. Additionally, it helps in make-or-buy decisions.
What types of determination of requirements are there?
The procedure identifies the required materials, semi-finished products or assemblies. We distinguish between three different types of requirements:
Primary needs:
Primary needs are products that are sold to customers. These include finished products, accessories, commodities and spare parts. The primary needs are decisive for the production program, which determines framework conditions such as the quantity, production deadline and production location.
Secondary needs:
Secondary needs are the materials required for the manufacturing of primary needs. These include raw materials, individual parts as well as assemblies (semi-finished products) that are used for the manufacturing of the end products. By using bills of material, evidence of parts utilisation and work plans of primary needs, the secondary needs can be calculated.
Tertiary needs:
When manufacturing a product, auxiliary materials, working materials and sealing tools are used that are, however, not part of the product. The requirement of these goods is referred to as tertiary needs. These goods are not processed into the product.
Methods of the determination of requirements
The determination of future needs can take place in four different ways:
Deterministic/program-oriented method
This method is oriented towards the current production plan. The future needs are determined based on the current sales and production program. The secondary and tertiary needs are derived from the primary needs. By balancing the available stock against the required quantity (gross requirements), the net requirements, i.e. the material quantity to be procured, is calculated.
Stochastic/consumption-oriented method
This procedure determines the future consumption based on the past requirements. These values are evaluated statistically and projected onto the future as forecasts. This method is subject to the assumption that the requirements will develop analogously to the previous periods.
By using mathematical procedures (stochastics), the current requirements from the past (time series) are analysed regarding influencing components and the future requirements are forecasted.
Heuristic method
In this procedure, the company relies on the subjective estimation of an employee with extensive experience, or on that of an expert. This could be, for example, a dispatcher’s task.
The method is used when there is no appropriate database for products, parts or assemblies. Each article is subject to individual consideration, which makes the procedure very time-consuming and often only results in rough estimates. However, safety stocks help compensate for the resulting inaccuracies in order to continue to ensure the readiness for delivery.
Rule-based method
In the rule-based method, the secondary needs are calculated based on the primary needs using the IF-THEN rule. This procedure is triggered by the requirements of the customer.
This determination of requirements is common in the automotive industry. If the customer wants specific equipment, the exact individual parts or assemblies are selected from the bill of material: If an equipment variant has been explicitly chosen, then the corresponding parts or assemblies are taken from the bill of material and, at the same time, other ones are excluded.
In certain cases, it can be advantageous to combine the mentioned procedures.
Methods for optimising stocks
An imprecise stock determination can have far-reaching consequences. High warehousing costs occur due to too much stock, while insufficient stock can cause shortages and loss of turnover. Thus, the materials budgeting should always consider the following factors:
• Safety stock
• Minimum order quantity
• Lead time
• Time of re-order
In order to avoid costly mistakes and optimise stocks, there are numerous analysis options and helpful tools. These include the ABC analysis, the material flow analysis (MFA) as well as value stream mapping (VSM).
What are the challenges?
Material budgeting can be complex and time-consuming and requires careful management. Because of the variety of supply chains and their global presence, companies are confronted with many different suppliers and products. This makes it difficult to precisely forecast the future demand and exactly plan the production. Mistakes during material planning can cause disruptions in production and increased costs.
Example
As mentioned, the program-oriented determination of requirements determines the future requirements by calculating the difference between the current stock and the gross stock. The warehouse management software CarLo® inSTORE offers direct access to the stock and provides important information for the determination.
Conclusion
The intelligent determination of requirements is essential in order to have the right product quantity in stock at the right time and thus avoid a production bottleneck. A company should strive to have an optimal material stock in order to keep the capital commitment costs as low as possible and, at the same time, ensure the right supply for production.
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