MRP Lot Sizing and Lead Time Offsetting

MRP Lot Sizing and Lead Time Offsetting: A Comprehensive Guide for CPIM Exam Success

Introduction: Why MRP Lot Sizing and Lead Time Offsetting Matter

MRP Lot Sizing and Lead Time Offsetting are two foundational mechanics within Material Requirements Planning (MRP) that directly determine how much to order and when to order. Without a solid grasp of these concepts, it is virtually impossible to correctly interpret MRP records, plan production schedules, or answer CPIM exam questions on internal supply sources. These topics sit at the heart of the CPIM Part 2 (formerly ECO and now embedded in the CPIM Learning System) because they bridge demand planning with execution — the moment where planned orders become actionable.

Why Is This Important?

1. Cost Optimization: Lot sizing directly affects ordering costs, carrying costs, and total inventory investment. Choosing the wrong lot-sizing technique can dramatically inflate costs or cause stockouts.
2. Timing Accuracy: Lead time offsetting ensures that planned order releases are timed correctly so materials arrive exactly when needed — not too early (excess inventory) and not too late (shortages and production delays).
3. Cascading Effects: In a multi-level bill of materials (BOM), an error in lot sizing or lead time offsetting at one level propagates to all lower levels, creating amplified distortions known as lumpy demand or the bullwhip effect within the internal supply chain.
4. Exam Relevance: CPIM exam questions frequently present MRP grid calculations where you must apply lot-sizing rules and offset lead times to determine planned order releases. Mastering this topic is essential for passing.

What Is MRP Lot Sizing?

Lot sizing is the process of determining the quantity of a planned order. When MRP identifies a net requirement (i.e., projected available balance falls below zero or below safety stock), it must decide how large the replenishment order should be. The lot-sizing rule governs this decision.

Common Lot-Sizing Techniques:

1. Lot-for-Lot (L4L or LFL):
- Orders exactly the net requirement for each period.
- Minimizes carrying cost but maximizes ordering cost.
- Results in no residual inventory at end of each period.
- Best suited for expensive items (A items) or items with highly variable demand.
- Example: If net requirements are 50, 30, 80 in periods 3, 5, 7 respectively, planned order receipts are exactly 50, 30, 80 in those same periods.

2. Fixed Order Quantity (FOQ):
- A predetermined fixed quantity is ordered every time a replenishment is needed.
- May be based on Economic Order Quantity (EOQ), a supplier minimum, a container size, or a management decision.
- Creates residual inventory that carries forward into subsequent periods, potentially covering future net requirements.
- Example: If FOQ = 100 and net requirement in period 3 is 50, a planned order receipt of 100 is generated. The remaining 50 carries forward.

3. Period Order Quantity (POQ):
- Converts EOQ into a number of periods of supply and orders enough to cover demand for that many periods.
- Like lot-for-lot, it drives inventory to zero at the end of the coverage interval, but orders less frequently.
- Example: If POQ = 3 periods and net requirements for periods 4, 5, 6 are 40, 60, 30, a single planned order receipt of 130 is placed in period 4.

4. Fixed Period Requirements (FPR):
- Similar to POQ but the number of periods is fixed by policy rather than derived from EOQ.
- Orders cover a set number of future periods regardless of demand variability.

5. Economic Order Quantity (EOQ):
- Calculated using the classic formula: EOQ = √(2DS/H), where D = annual demand, S = setup/ordering cost, H = annual holding cost per unit.
- Balances ordering costs and carrying costs at the theoretical minimum total cost point.
- In MRP context, the EOQ is used as a fixed order quantity.

6. Least Unit Cost (LUC):
- A dynamic lot-sizing technique that evaluates cumulative ordering plus carrying cost per unit for successively larger lot sizes covering more future periods.
- Selects the lot size that yields the lowest cost per unit.

7. Least Total Cost (LTC):
- Compares cumulative carrying cost to ordering cost and selects the lot size where carrying cost most closely equals ordering cost (the Part-Period Balancing concept).

8. Wagner-Whitin Algorithm:
- An optimization technique that uses dynamic programming to find the theoretically optimal lot-sizing solution over the planning horizon.
- Computationally intensive; guarantees the minimum total cost solution but is less commonly used in practice.

Key Principle: No single lot-sizing rule is universally best. The choice depends on item characteristics, demand patterns, cost structures, and strategic priorities. CPIM emphasizes understanding the trade-offs.

What Is Lead Time Offsetting?

Lead time offsetting is the MRP process of determining when a planned order must be released so that it is received in time to meet the net requirement. It is the conversion of a Planned Order Receipt into a Planned Order Release by subtracting the item's lead time.

How It Works:
- If a planned order receipt of 100 units is needed in Period 8 and the lead time is 3 periods, then the planned order release must occur in Period 5 (Period 8 minus 3 = Period 5).
- This planned order release in Period 5 then becomes a gross requirement for all component items at the next lower level of the BOM (this is called BOM explosion).

Lead Time Components (for manufactured items):
- Queue time (waiting before processing)
- Setup time
- Run time
- Wait time (after processing, before moving)
- Move time (transit between work centers)

Lead Time Components (for purchased items):
- Order preparation time
- Supplier lead time (manufacturing + transit)
- Receiving and inspection time

How MRP Lot Sizing and Lead Time Offsetting Work Together — Step by Step

The MRP netting and explosion process follows these steps for each item, level by level:

Step 1: Calculate Gross Requirements
Derived from the Master Production Schedule (MPS) for end items, or from planned order releases of parent items for components.

Step 2: Determine Net Requirements
Net Requirement = Gross Requirement − Scheduled Receipts − Projected Available Balance (from prior period) + Safety Stock (if applicable)
If the result is positive, a replenishment is needed.

Step 3: Apply Lot-Sizing Rule (Planned Order Receipt)
The lot-sizing rule determines the quantity of the planned order receipt. For example:
- L4L: Order exactly the net requirement.
- FOQ: Order the fixed quantity (may exceed net requirement; excess carries forward).
- POQ: Order enough to cover multiple periods of net requirements.

Step 4: Lead Time Offset (Planned Order Release)
Subtract the lead time from the planned order receipt period to determine the planned order release period.

Step 5: Explode to Lower Levels
Multiply planned order release quantities by the usage quantity per parent (from the BOM) to generate gross requirements for child components. Repeat the entire process at the next BOM level.

Worked Example:

Consider Item A with the following data:
- Lead Time: 2 periods
- Lot Size Rule: FOQ = 150
- Safety Stock: 0
- On Hand (beginning): 60
- No scheduled receipts

Gross Requirements by period:
Period 1: 30 | Period 2: 50 | Period 3: 70 | Period 4: 40 | Period 5: 60 | Period 6: 80

MRP Calculations:

Period 1: Projected Available = 60 − 30 = 30 (no order needed)
Period 2: Projected Available = 30 − 50 = −20 → Net Requirement = 20 → Apply FOQ: Planned Order Receipt = 150 → Projected Available = 30 − 50 + 150 = 130
Period 3: Projected Available = 130 − 70 = 60 (no order needed)
Period 4: Projected Available = 60 − 40 = 20 (no order needed)
Period 5: Projected Available = 20 − 60 = −40 → Net Requirement = 40 → Planned Order Receipt = 150 → Projected Available = 20 − 60 + 150 = 110
Period 6: Projected Available = 110 − 80 = 30 (no order needed)

Planned Order Receipts: Period 2: 150 | Period 5: 150
Planned Order Releases (offset by 2 periods):
- Period 2 receipt → Release in Period 2 − 2 = Period 0 (i.e., immediately / past due)
- Period 5 receipt → Release in Period 5 − 2 = Period 3

This example illustrates a critical point: if lead time offsetting pushes a release before Period 1, it becomes a past-due or expedite action message — a common exam scenario.

Important Concepts and Nuances for the Exam

1. Planned Orders vs. Scheduled (Firm/Open) Orders: Planned orders are generated by MRP and exist only in the computer — they are automatically adjusted each time MRP runs. Scheduled receipts (open orders) are already released and committed. MRP does not automatically change scheduled receipts but may issue reschedule action messages.

2. Nervousness and Lot Sizing: Lot-for-lot creates the least nervousness in lower-level components because order quantities match net requirements exactly. FOQ and POQ can create lumpy demand at lower levels because residual inventory shifts the timing of future orders unpredictably.

3. Lot Size Modifiers:
- Minimum order quantity: The order cannot be less than a specified amount.
- Maximum order quantity: The order cannot exceed a specified amount.
- Order multiple (lot size increment): The order must be rounded up to the nearest multiple (e.g., pallet quantity of 24).
- Scrap allowance: The planned order quantity is increased to account for expected yield loss: Planned Order Qty = Net Requirement / (1 − Scrap Rate).

4. Safety Stock vs. Safety Lead Time:
- Safety stock adds a quantity buffer — MRP triggers orders whenever projected available drops below the safety stock level rather than below zero.
- Safety lead time adds a time buffer — MRP plans for the order to arrive earlier than actually needed. This effectively increases the lead time used for offsetting.

5. Pegging: The ability to trace where a gross requirement came from (which parent's planned order release). This is critical for understanding the cascading impact of lot sizing and lead time offsetting.

6. Low-Level Coding: Ensures that MRP processes an item only after all parents at higher levels have been processed. This prevents processing an item before all its gross requirements have been accumulated.

Trade-Offs Summary Table:

Lot-for-Lot: Low carrying cost | High ordering cost | Smooth component demand | Best for expensive/variable items
FOQ/EOQ: Balanced costs at steady demand | Can create lumpy component demand | Residual inventory carries forward
POQ: Balanced costs | Inventory returns to zero at end of coverage | Less lumpiness than FOQ
Wagner-Whitin: Optimal total cost | Computationally complex | Rarely tested in detail on CPIM

Exam Tips: Answering Questions on MRP Lot Sizing and Lead Time Offsetting

1. Read the MRP Grid Carefully: Exam questions often present a partially completed MRP grid. Identify what is given (gross requirements, on-hand, scheduled receipts, lot-sizing rule, lead time) and what you need to calculate (planned order receipts, planned order releases, projected available balance). Work period by period sequentially — do not skip ahead.

2. Always Net Before Sizing: First calculate the net requirement (projected available going negative or below safety stock), then apply the lot-sizing rule. A common mistake is applying the lot size before properly netting.

3. Remember the Offset Direction: Planned Order Release = Planned Order Receipt period minus Lead Time. If this results in a period before Period 1, recognize it as a past-due action. Exam questions may test whether you recognize expedite messages.

4. Track Residual Inventory: With FOQ and EOQ, excess inventory from one planned order receipt carries into future periods and may eliminate the need for orders in subsequent periods. Recalculate projected available balance after each planned order receipt before moving to the next period.

5. Watch for Lot Size Modifiers: If the question specifies a minimum order quantity, maximum order quantity, or order multiple, apply these after determining the base lot size. Round up to the nearest multiple, never down.

6. Scrap Allowance Adjustment: If a scrap rate is given, increase the planned order quantity: Order Qty = Net Requirement ÷ (1 − Scrap %). For example, a net requirement of 100 with 5% scrap becomes 100 ÷ 0.95 = 105.26, rounded up to 106 (or per the order multiple rule).

7. Multi-Level BOM Questions: When a question involves parent-child relationships, complete the parent MRP record first to determine planned order releases. Multiply each planned order release by the quantity per assembly from the BOM to get gross requirements for the child. Then repeat netting, lot sizing, and lead time offsetting for the child.

8. Know the Conceptual Differences: The exam tests not only calculations but also conceptual understanding. Be prepared for questions like:
- Which lot-sizing method minimizes carrying cost? → Lot-for-Lot
- Which lot-sizing method minimizes total cost theoretically? → Wagner-Whitin
- What effect does FOQ have on lower-level demand? → Creates lumpy (uneven) demand
- What is the purpose of lead time offsetting? → To determine when to release an order so it arrives on time

9. Distinguish Dependent vs. Independent Demand Context: EOQ was originally designed for independent demand with relatively stable usage. In MRP (dependent demand), demand is lumpy, making techniques like POQ, LTC, or L4L often more appropriate. The exam may test this distinction.

10. Use Process of Elimination: In multiple-choice questions, if you are unsure of a calculation, estimate. For lot-sizing questions, check whether the answer choices align with the lot-sizing rule stated in the question. If the rule is FOQ = 200 and an answer choice shows an order of 175, it is immediately wrong.

11. Practice MRP Grid Calculations: The single most effective preparation for these exam questions is to practice completing MRP grids by hand. Work through multiple examples with different lot-sizing rules and lead times until the process becomes automatic. Time yourself — on the actual exam, you need to be efficient.

12. Safety Stock Creates a Higher Trigger Point: When safety stock is present, net requirements arise whenever projected available balance would fall below the safety stock level, not below zero. This is a subtle but frequently tested point. Ensure you add safety stock to your netting calculation.

13. Past-Due Orders and Action Messages: If a planned order release falls before the current period, MRP generates an action message to expedite. If a planned order is no longer needed, MRP generates a cancel or de-expedite message. Understand these action messages as they are commonly tested.

14. Firm Planned Orders (FPO): An FPO is a planned order that has been frozen by the planner — MRP will not automatically change its quantity or timing. This is used to reduce system nervousness. The exam may ask about the purpose and effect of FPOs in the context of lot sizing.

Summary

MRP Lot Sizing determines how much to order, and Lead Time Offsetting determines when to release that order. Together, they form the core computational engine of MRP. Mastering the step-by-step MRP netting process — calculating projected available balance, identifying net requirements, applying the lot-sizing rule, and offsetting by lead time — is essential for both real-world materials planning and CPIM exam success. Practice with diverse scenarios, understand the trade-offs between different lot-sizing methods, and always work through MRP grids methodically, period by period, to avoid costly errors on exam day.