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2. If the company received an order for ten more AJ8172’s in period four, it would cause production to be shifted earlier and production for the entire lot of 400 LQ8811’s would be shifted one period earlier as well. The dynamics of nervousness makes it demoralizing for production workers and as a result they often ignore the production plans produced by mrp systems. Who can blame them? 2 is released to the floor, then a modest size order causes large changes in the schedule; meanwhile order cancellations can have a similar effect.

1. Basic Cost Data for an Improved MRP II Objective Function Since inventory is a somewhat risky asset the discount rate should be at least as high as the firms weighted average cost of capital and perhaps higher. For example, a value of 25% per year is not unreasonable for discounting many types of inventory. 5 dollars per item per time bucket. The out-of-pocket cost for a changeover is also fairly straightforward as soon as we get past the difference between a setup and a changeover. If a machine or workgroup must spend the same amount of preparation time per item of SKU i, then we call this a setup and we can add the capacity utilization into our calculations of U .

At first glance, this variable is redundant with xi,t , but not equivalent. We will see that it serves a different role. 4 mrp Optimization Formulation 25 The following constraints must hold for all i = 1, . . , P and t = 1, . . , T . • Demand and materials requirement: t−LT (i) t P xi,τ + I(i, 0) − τ =1 D(i, τ ) + τ =1 • Lot size requirement: R(i, j)xj,τ ≥0 j=1 xi,t ≥ δi,t LS(i) • Modeling constraint for production indicator: δi,t ≥ xi,t M • Integer constraint for production indicator: δi,t ∈ {0, 1} • Non-negative production: xi,t ≥ 0 Fig.