Int. J.

Production Economics 78 (2002) 323}334

Planning and replanning the master production schedule under

demand uncertainty
Ou Tang*, Robert W. GrubbstroK m
Department of Production Economics, Linko( ping Institute of Technology, S-581 83 Linko( ping, Sweden
Received 12 April 2000; accepted 21 August 2000

Abstract

The Master Production Schedule (MPS) is essential in maintaining customer service levels and stabilising production
planning in a Material Requirements Planning (MRP) environment. Traditionally, an MPS is derived from a demand
forecast and aggregate production plan but the associated cost to cover demand uncertainty is usually not considered.
Another di$culty in the MPS is its planning frequency. Frequent changes in the MPS reduce productivity whereas
a long-term frozen MPS results in a poor service level and an unfavourable inventory situation. This paper "rst
investigates the possibility to establish a method for planning the MPS under stochastic demand. Secondly, it aims to
evaluate the value of replanning actions. Finally, it provides a model for estimating appropriate MPS parameters such as
the length of the replanning interval and the length of the interval to freeze the plan. g 2002 Elsevier Science B.V. All
rights reserved.

Keywords: Master production schedule; Stochastic demand; Planning and replanning; Production-inventory system

1. Introduction cast error, and, therefore the old plan has to be

The Master Production Schedule (MPS) is essen-
tial in maintaining customer service levels and
stabilising production planning within a Material
Requirements Planning (MRP) environment. Usu-
ally, an MPS will face the pressure to replan
because of the changes of operational circumstan-
ces. There are basically two conditions which lead
to replanning. First, there is a rolling e!ect due to
the extension of the planning period. Secondly,
when demand is uncertain, there is always a fore-
* Corresponding author. Paper presented at the Eleventh
International Working Seminar on Production Economics, Igls/
Innsbruck, Austria, 21}25 February, 2000. Tel.: #46-13-
281773; fax: #46-13-288975.
E-mail address: rwg@ipe.liu.se, ou.tang@ipe.liu.se (O. Tang).
modi"ed to adapt to new information to keep the
production cost low and maintain the service level.
When the MPS is further used for material
requirements planning (MRP), frequent changes
in the MPS lead to schedule adjustments in the
system. Such adjustments of plans also have an
augmented e!ect in an assembly system, and this is
often referred to as system nervousness. Ner-
vousness may become an obstacle in the implemen-
tation of MRP and even cause a collapse of the
whole system. Therefore, to reduce the instability of
the schedule becomes an important objective in
planning the MPS.
In one of our previous studies [1], production
rescheduling has been addressed under the assump-
tion that the cost of rescheduling is determined
externally. A decision tree method was applied

0925-5273/02/$ - see front matter g 2002 Elsevier Science B.V. All rights reserved.
PII: S 0 9 2 5 - 5 2 7 3 ( 0 0 ) 0 0 1 0 0 - 6
324 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334
to study the bene"t from rescheduling. The Net
Present Value approach was used and the planning
time is on a continuous scale.
In this paper, we "rst investigate the possibility
to establish a method for planning the MPS under
stochastic demand. Secondly, we provide a model
for replanning MPS assuming the lower-level
schedule change cost is known. Then, using a
similar method as in GrubbstroK m and Tang [1]
and taking into account the schedule change cost,
we provide a model for estimating appropriate
MPS parameters such as the length of intervals
to replan and freeze. Finally, we provide nume-
rical examples and draw some conclusions in
a summary.
2. Previous research in MPS
Basically, two approaches have been suggested
to improve the quality of an MPS, namely freezing
the MPS and adding some safety stock into the
forecast. When its operation and planning condi-
tions such as forecasting quality, lot sizing policy,
operation cost etc. are given, a high-quality MPS is
to select a proper planning horizon and a replann-
ing frequency as well as a safety stock.
Lin and Krajewski [2] provided a framework for
studying the MPS. First they presented the con-
cepts of a forecast window (planning horizon),
a frozen interval and a replanning interval and
discussed their relationships. Generally, the cost of
the MPS has been divided into two parts, a forecast
error cost and an MPS change cost. The latter has
the same properties as in the similar approach by
Carlson et al. [3], in which schedule change cost is
a piecewise continuous function of time. The total
cost of the MPS model depends on the forecast
window and the frozen interval and replanning
interval. But it should be reminded that the MPS
change cost is more complicated and di$cult
to estimated in reality when di!erent lot-sizing
policies and a multi-level system are considered.
However, in order to build an analytical model, we
adopted this simpli"cation in our study.
An alternative and more frequently used measure
for MPS quality is in terms of its stability. Srid-
haran et al. [4] suggested a measure of instability,
which is a function of the method used to freeze the
MPS, the proportion of the MPS frozen and the
length of the planning horizon. This instability def-
inition has been followed in other studies [5,2,6,7].
Still, stability is usually used together with other
system performance measures, like the service level.
In a similar way, Inderfurth [8] provided a de"ni-
tion of stability for this type of system.
In most of the MPS studies, simulation is used
due to the complexity of the problem. Analysis of
Variance (ANOVA) is usually applied to determine
the system performance when di!erent operation
policies are tested. Capacity constraints are often
excluded from MPS studies, the only exception
being Kern and Wei [7]. In the following subsec-
tion, we provide a literature overview of the areas of
freezing the MPS and safety stocks in MPS.
2.1. Freezing the MPS
A rolling planning horizon is to replan MPS
each period whenever information is updated. This
tracks the development of demand closely, but gen-
erates instability. One solution to avoid this is to
freeze a portion of the planning horizon to stabilise
the schedule. In a single-level deterministic demand
case, freezing this portion beyond 50% of the
planning horizon could reduce the instability but
increases cost tremendously [9,4].
For the demand uncertainty case, the forecast
quality has a large in#uence on the optimal frozen
interval and planning horizon [10]. Sridharan and
Berry [11] point out that a long MPS frozen inter-
val may increase the need for safety stocks and
enlarges the lot-sizing costs at the MPS level. In
a multi-level system, freezing the MPS is the most
e!ective way to reduce instability and reduce total
costs [6]. This result is di!erent from single-level
and deterministic studies. In Kadipasaoglu's study
in 1995 [12], it is indicated that freezing the MPS
provides a bene"t in the stochastic case only. The
length of the frozen interval is recommended to
cover the cumulative lead time.
The freezing portion depends on the planning
horizon. A longer planning horizon actually may
worsen the MRP performance in a demand uncer-
tainty situation, whereas improve its performance
in a deterministic case [10].
 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334
Chung and Krajewski [13] study the interface
between aggregate planning and master production
planning in a hierarchical planning environment.
They concluded that the cost structure of aggregate
planning has a high in#uence on the replanning
frequency of the MPS.
2.2. Safety stocks
The safety stock is used to provide a bu!er for
uncertainty in the MPS. However, safety stocks
should be applied with great care. Maintaining
a safety stock level should not be the objective of
scheduling the MPS. An MPS that allows safety
stocks to be added to inventory merely in the initial
scheduling can create derive more bene"ts from its
operation than an MPS that carefully tracks safety
stocks and reschedules accordingly. There are also
studies considering safety stocks on both MPS and
component levels in order to provide a #exible
schedule in a multi-level system [14].
Metters [15] studies di!erent strategies for using
the safety stock. An explicit approach distinguishes
the safety stock from normal demand and lets this
amount of stock battle the uncertainty. A new
order (replanning) is trigged only when there is
a real stockout. On the other hand, an implicit
approach triggers a new order whenever an inven-
tory falls down to the safety stock level. Metters
also recommends a third approach, namely the
stable safety policy. In this case, an explicit
approach is used when there is no order in the old
schedule and implicit approach when there is an
order in the old schedule. Similarly, Sridharan and
LaForge [5] provide an intelligent safety policy
concept which does not permit a scheduling of the
MPS solely for the purpose of meeting a safety
stock.
Even though a safety stock increases the service
level, it does not necessarily provide a stable MPS.
In fact, a high safety to meet demand increases
instability. Studies by Sridharan and LaForge [5]
and Metters [15] support such a conclusion.
Hsu and El-Najdawi [16] carried out a study
concerning how to determine the safety stock level.
They incorporated safety stocks into the lot-sizing
policies. Four techniques to determine the optimal
safety stock level are examined and compared.
325
Nevertheless, in all the studies we have mentioned
above, the level of safety stocks is considered as
a constant. In a situation where a portion of the
planning horizon is frozen, we suggest that the level
of safety stock should vary for the reason that the
forecast quality is impaired along with time. Our
previous studies show that the level of safety stock
follows a square root of time relation when demand
is a renewal process [17].
3. The planning decision
The objective of planning is to determine the
production volume for a given demand forecast
and an initial net inventory R . The initial net
º
inventory is de"ned as the di!erence between
cumulative production and cumulative demand so
that it is either positive or negative. Instead of using
techniques like exponential smoothing, we here use
statistical methods for forecasting. Since our objec-
tive in this study is to investigate the planning and
replanning problem under uncertainty, we use the
variance of the demand forecast to express the
forecasting error (forecast quality). Another as-
sumption we have adopted is that the setup cost is
relatively low. This results in a setup in each time
period so that we do not need to consider the
impact from the lot-sizing policy. Because of this,
the system instability due to the rolling horizon
e!ect is reduced.
At any time, the following relation holds for
a production-inventory system with backlogging:
B "DM!PM#S !R . (1)
fi fi fi fi º
However here the time period is discrete, thus
i"1, 2, 2 . In each interval, we must also have the
following relation:
E(B )"E(DM)!PM#E(S )!R . (2)
fi fi fi fi º
Because of the uncertainty in demand, there is
either an excess inventory when the cumulative
production level is high, or stockouts when there is
a shortage of supply. It is apparent from Eq. (1) that
the system service level depends not on the demand
forecast error in each period, but on the forecast
error of cumulative demand. When replanning is
not possible within a frozen interval, the error will
326 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334

be accumulated. Our previous studies [17] have where h and b are the unit holding cost and
fi fi
shown that the optimal safety stock may vary and stockout cost for period i, respectively, and n is
be a function of time in the continuous-time case. the planning horizon. The Lagrangean function
We assume that external cumulative demand of this minimisation problem with the constraints
DMat the end of the ith period follows a probability Eq. (6) is
fi
density function, which depends on time explicitly:
’
0 for x(0, ¸" Σ ((hfi#b fi)E(S fi)#b fi(E(DMfi)!PMfi!R º))
Pr(x)DM(x#dx|i)" f (x) dx
fi fi for x*0. { (3) fi"¹
#
’¯¹
Σ ( (PM!PM ), (7)
Its cumulative probability function, denoted F (x),
fi fi"¹ fi fi fi+¹
is assumed to be less than unity for "nite values of
where the ( are nonnegative Lagrangean multi-
x, and is shown to have the following property. fi
pliers. The necessary Kuhn}Tucker conditions for
the optimal solution are
Lemma 1.
&¸
F (x)(F (x). "(h #b )F (PM#R )!b #( !( *0
fi+¹ fi
&PM fi fi fi fi º fi fi fi¯¹
fi
Proof. Writing g as the density function for de- for i"1, 2, 2, n,
D
mand during the (i#1)th period, i.e. for D , we
fi+¹ (8)
have &¸
F (x)"Pr(DM#D )x) "PM!PM )0 for i"1, 2, 2, n!1, (9)
fi+¹ fi fi+¹
&( fi fi+¹
fi
∫
’
" F (y) ) g (x!y) dy together with the complementarily conditions
fi D
’"º
’ PM) &¸ "0 for i"1, 2, 2, n, (10)
)F (x) )
fi ∫
g (x!y) dy)F (x).
’"º D fi
fi &PM
&¸
fi
Necessary for the equality to hold, we need ( ) "0 for i"1, 2, 2, n!1, (11)
∫’ g fi &(
’"º D (x!y) dy"1, which is impossible for fi
a "nite x. Hence the inequality is strict. ☐ . where for convenience we de"ne ( "( "0.
º ’
Since setup costs are disregarded, the objective of Hence
b #( !(
the planning is here interpreted as minimising the F (PM)* fi fi¯¹ fi for i"1, 2, 2, n, (12)
uncertainty cost C (a term adopted from [2]) fi fi
’ h #b
fi fi
E(C )" ’
Σ (h E(S )#b E(B )) with equality whenever PM fi'0. We "rst note that
’
fi"¹ fi fi fi fi due to the non-decreasing property of the PM, the
fi
’ optimal sequence will start with a (possibly empty)
" Σ ((hfi #bfi )E(Sfi )#bfi (E(DM
fi
)!PM!R )),
fi º subset PM"PM"2"0 followed by a second
¹ *
fi"¹ (possibly empty) subset PM , PM , , PM'0.
(4) ’¯’ ’¯’+¹ 2 ’
A strict inequality in Eq. (12) can therefore only be
with valid for the "rst of these subsets (if it is nonempty).
M
In Theorem 1 we provide a su$cient condition

∫
ªfi+ªº
E(S )" (PM#R !x) f (x) dx, (5) for determining the structure of the sequence
fi fi º fi PM, PM, 2, PM.
’"º ¹ * ’
subject to the constraints
Theorem 1. If the ratio between unit stockout cost
PM *PM*0 for i"1, 2, 2, n!1, (6) and unit holding cost is non-decreasing in time, i.e.
fi+¹ fi
 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334 327

(b /h )*(b /h ), i"1, 2, 2, n!1, then we i"1, 2, 2, n!1. If PM, is the earliest positive cumu-
fi+¹ fi+¹ fi fi fi
have the following conditions regarding the produc- lative production, then the multipliers from j!1 on-
tion sequence. wards are all zero, i.e. ( "( "( "
fi¯¹ fi fi+¹
2"( "0.
If F (R )'b /(h #b ), then PM"PM"2"PM" ’¯¹
fi º fi fi fi ¹ * fi
0; if F (R )(b /(h #b ), then PM, PM , 2, PM'0. Proof. PM being the earliest positive production
fi º fi fi fi fi fi+¹ ’ fi
Hence, this theorem o!ers a means for deciding requires ( "0. We rearrange Eq. (12) as an
fi¯¹
where the sequence of positive cumulative produc- equality for i"j and i"j#1:
tion levels should start. ( !( b
F (PM#R )# fi fi¯¹ " fi ,
fi fi º h #b h #b
fi fi fi fi
Proof of Theorem 1. Assume (i) that F (R )' ( !( b
fi º )(
b /(h #b ), then b /(h #b ))b /(h #b
fi fi fi fi fi fi fi fi fi F (PM #R )# fi+¹ fi " fi+¹ .
fi+¹ fi+¹ º
F (R )(F (R ) for 1)i(j. h #b h #b
fi º fi º fi+¹ fi+¹ fi+¹ fi+¹
Based on Eq. (12), we always need Since the right-hand member is nondecreasing,
F (R #PM)*(b !( )/(h #b ). If PM'0, then so must the left-hand member also be. Assume
¹ º ¹ ¹ ¹ ¹ ¹ ¹
F (R #PM)"(b !( )/(h #b )'F (R )'b that ( '0, then PM"PM ; and therefore
¹ º ¹ ¹ ¹ ¹ ¹ ¹ º ¹ fi fi fi+¹
/(h #b ) which creates a contradiction since F (PM #R )(F (PM#R ), which implies
¹ ¹ fi+¹ fi+¹ º fi fi º
( *0. Hence we obtain PM"0. (( !( )/(h #b )'(( !( )/(h #b ).
¹ ¹ fi+¹ fi fi+¹ fi+¹ fi fi¯¹ fi fi
Based again on Eq. (12), we always need Therefore, also ( '0, which creates PM "
F (R #PM)*(b !( #( )/(h #b ). If PM fi+¹ fi+¹
* º * * * ¹ * * * PM . Continuing this process, we end up with
'0, then F (R #PM)"(b !( #( )/(h # fi+*
!( /(h #b )'0, which contradicts the non-
* º * * * ¹ * ’¯¹ ’of the’ multipliers. Therefore we conclude
negativity
b )'F (R )'b /(h #b ). This requires
* * º * * * that ( "0. Analogously we get ( "0, etc.
!( #( '0, therefore ( '0, which creates fi fi+¹
* ¹ ¹ Hence, no multiplier ( , for i*j!1, may be posit-
a contradiction. Hence we obtain PM"0. Follow- fi
*
ing the same procedure for i"3, 4,2, we end up ive. This concludes our proof. ☐ .
with PM"0.
fi By using Theorems 1 and 2, we are now in
Assume (ii) that F (R )(b /(h #b ). Then
fi º fi fi fi a position to construct a solution procedure to the
F (R )(F (R )(2(F (R )(b /(h #b )
’ º ’¯¹ º fi º fi fi fi stated problem of minimising the uncertainty cost.
(b /(h #b ) for all j)i(n. Since F (R #
fi fi fi ’ º This procedure is stated in the following theorem.
PM)*(b #( )/(h #b )*b /(h #b )'F (R ),
’ ’ ’¯¹ ’ ’ ’ ’ ’ ’ º
we must have PM'0. If we assume PM"0 and take
’ fi Theorem 3. As before, we assume a non-decreasing
into account F (R #PM)*(b !( #( )/
fi º fi fi fi fi¯¹ sequence of unit cost ratios b /h )b /h , i"
(h #b ), we obtain b /(h #b )'F (R )* fi fi fi+¹ fi+¹
fi fi fi fi fi fi º 1, 2, 2, n!1. The solution PM H to the minimisation
(b !( #( )/(h #b ), which leads to !( # fi
fi fi fi¯¹ fi fi fi problem Eq. (4) subject to the constraints Eq. (6) then
( (0. Therefore ( '0 and we have
fi¯¹ fi satisxes
PM "PM"0.
fi+¹With fi PM "0 and b /(h #b )'
F (R )*(b fi+¹ !( #( )/(h fi+¹ #b fi+¹ ),fi+¹we H"0 if F (R )' bf i,
PM
fi+¹ º!( fi+¹
obtain #( (0 fi+¹ andfi therefore fi+¹ fi+¹
( '0. fi fi º bh #b b
Hence we have PM "PM "0. fi+¹ fi fi+¹ F (PMH#R )" fi fi if fiF (R )) fi .
fi+* fi+¹
By repeating the above procedure, we obtain fi fi º
h #b fi º h #b
PM"0, which contradicts PM'0. Therefore we
’ ’ fi fi fi fi
"nally obtain PM, PM , 2, PM'0. ☐ If all F (x) are monotonically increasing functions,
fi fi+¹ ’ fi
the solution must be unique.
Theorem 2. We assume as in Theorem 1 that the ratio
between unit stockout cost and unit holding cost is Proof of Theorem 3 follows immediately from
non-decreasing in time, i.e. b /h )b /h for our previous results. The theorem shows that this
fi fi fi+¹ fi+¹
328 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334

optimal planning model is essentially an extension

of the Newsboy problem.

4. The replanning decision

The objective of replanning is to determine a res-

cheduled production volume in each period P ,
¹ª³›fi
i"¹#1, ¹#2,2, for a given demand forecast,
and initial net inventory R at the replanning point
T
based on the old production plan P and the
³’ª’›fi
schedule change cost & , so that the total cost can be
fi
minimised. The total cost C consists of the uncer-
’ Fig. 1. Cost structure for replanning.
tainty cost, as discussed in the previous section, and
the rescheduling cost C :
¹
C "C #C . (13)
’ ’ ¹ At a certain time, the schedule change cost is
The rescheduling cost is the sum of the schedule therefore a monotonically decreasing function
change costs in di!erent time periods. In a practical when P (P and a monotonically increasing
fi ³’ª’›fi
setting, we would assume that the schedule change function when P 'P . This is illustrated in
fi ³’ª’›fi
cost depends on the lot-sizing policy, the product Fig. 1. Quite often in practice, to cancel an order is
structure, the rescheduling time desired, and the easier than adding an new order, so y could then be
fi
rescheduling quantity desired. In this study, our assumed to be smaller than .
fi
focus is on the MPS level. Thus we use a single
schedule change cost function to take care of the Lemma 2. Let y (z) and y (z) be two functions of z,
each hav ¹ * z and z , respec-
aggregate information of negative e!ects of res- ing a unique minimum at
¹ *
cheduling on the lower levels. Here we assume that tively, and no other local minima. Then any linear
the schedule change cost is a function of the res- combination of y (z) and y (z) with positive coez-
¹ *
cheduling time and that it is proportional to the cients will have a unique minimum in the interval
between z and z .
quantity being changed. This is in accordance with ¹ *
the unit change cost concept in Lin and Krajewski The proof of this proposition is trivial. Regarding
[2]. As a result from Tang and GrubbstroK m [18] the optimal replanning decision, we state the fol-
where control theory was applied, this type of cost
lowing theorem.
should be a function of time as well. With this in
mind, we de"ne the schedule change cost as Theorem 4. If all F (x) are monotonically increasing,
fi
(P !P ) if P *P , the total cost function of replanning (Eq. (13)) is
" ¹ª³›fi ³’ª’›fi fi ¹ª³›fi ³’ª’›fi
&fi
{(P
³’ª’›fi
!P )y
¹ª³›fi fi
if P (P
¹ª³›fi ³’ª’›fi
,
(14) convex. Then the optimal replanning decision
P
¹ª³›fi
falls into the interval between the old production
where and y both are nonincreasing functions of plan P and P* , the latter being the optimal solu-
fi fi ³’ª’›fi fi
the time period i. This means that in order to tion when minimising the uncertainty cost based only
reschedule, whether adding orders or cancelling on the initial net inventory R and demand forecast,
T
the orders, it is always at least as expensive to see Fig. 1.
change the earlier schedule as the latter one. In
practical terms, these costs may relate to the time Proof. The proof follows from Lemma 2 and
fences, which are the guidelines to note various our assumption regarding the monotonic behav-
restrictions in schedule changes related to lower- iour of the schedule change cost with respect to
level items. P !P . ☐
fi ³’ª’›fi
 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334 329

Combining Eqs. (13) and (14), we may write the 5. The planning and replanning model
total cost as
Essentially establishing the MPS is a dynamic
C "E(C )#C planning and replanning process. Fig. 2 illustrates
’ ’ ¹
’+T the decision scheme following a similar interpreta-
" Σ ((h #b )E(S )#b (E(DM)!PM!R )#& ). tion as in Lin and Krajewski [2]. The replanning
fi fi fi fi fi fi T fi interval is the time period until when no replanning
fi"T
(15) is under consideration. However, due to certain
production constraints in practice, such as the res-
Its "rst-order derivative is thus cheduling time fence, a portion of the old plan
&C ’+T needs to be "xed. Sometimes, because of unfavour-
’" able economic consequences or system perfor-
Σ ((h #b )F (PM#R )!b )
&P
fi ’"fi ’ if’ PH
’ 'P’ T, ’ mance, part of the old plan needs to be kept. The
fi fi ³’ª’›fi total length of the "xed part of the old plan is called
# (16)
the frozen interval. During the time intervals be-
{
fi
!y
if PH(P
fi ³’ª’›fi
. yond the frozen interval, the production plan is
allowed to be changed to improve the performance
Regarding the solution to the optimal replanning of the system by using the knowledge of the state
decisions, we have the following theorem. that was realised at the replanning time.
In GrubbstroK m and Tang [1], a decision tre
Theorem 5. method was used to address the rescheduling prob-
(i) If PH'P and (&C /&P )| '0, then we
fi ³’ª’›fi ’ fi ª³’ª’›fi lem. Here we follow the same methodology for the
have the optimal solution P "P . planning and replanning problem. However, an
¹ª³›fi ³’ª’›fi
(ii) If PH'P and (&C /&P )| (0, then the explicit schedule change cost has been added and
optimal fi P ³’ª’›fiis such that ’ (&C fi ª³’ª’›fi
/&P )| "0. the decision tree has been changed correspond-
¹ª³›fi ’ fi ª¹ª³›fi
(iii) If PH'P and (&C /&P )| Hfi '0, then the opti- ingly. As in Fig. 3, the replanning may take place at
fi ³’ª’›fi ’ fi ª
mal solution becomes P "PH. time ¹. The sequences of production decisions
(iv) If PH(P and (&C /&P¹ª³›fi )| H(0 fi and (&C /
fi ³’ª’›fi ’ fi ª fi ’ prior to and at this point are denoted p and those
&Pfi)|ª³’ª’›fi (0, then the optimum will be beyond this point are denoted p'. Let d and d'
P "P .
¹ª³›fi ³’ª’›fi represent stochastic sequences of a demand pro-
(v) If PH(P and (&C /&P )| H(0, and
cess, before and after the possible replanning time
(&C’ /&Pfi)|ª³’ª’›fi '0, then the’ optimal
fi ³’ª’›fi fi ªfi value of ¹ (Fig. 4).
P is such that (&C /&P )| "0. With this notation, the following planning and
¹ª³›fi ’ fi ª¹ª³›fi
replanning schemes can be interpreted in the form
Proof. The proof is obtained from Theorem 4 and of a decision tree. At time 0, we make a decision
the de"nition of the schedule change cost in combi-
nation with Kuhn}Tucker conditions. ☐

Based on Theorems 3 and 5, we propose the

following solution procedure to obtain the optimal
replanning decision.
(i) Start from i"¹#1.
(ii) Calculate the unique solution P* according to
fi
Theorem 3.
(iii) Compare P* and P and calculate P ac-
fi ³’ª’›fi ¹ª³›fi
cording to Theorem 5.
(iv) Increase i one step and repeat the steps (ii)}(iii), Fig. 2. Planning and replanning scheme (adapted from Lin and
if i is smaller than the planning horizon ¹#n. Krajewski, [2]).
330 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334

6. Numerical examples

Below, we provide numerical examples to illus-

Fig. 3. Decision tree diagram for the planning and replanning
trate the models of previous sections. We assume
that external demand follows a Stuttering Poisson
process [19], in which the interval between demand
events obeys an exponential distribution and the
event size is geometrically distributed. The prob-
ability density function of cumulative demand at
the end of the ith time period is therefore

{
processes.
e¯’fi
concerning the production plan p followed by p'. As for M"0,
f (M)"
shown in Section 3, this requires to determine fi ¹ (ßi)fi M!1
P*, for i"1, 2,2,¹, and P* for i"¹#1,
fi fi
¹#2,2,¹#n. At the replanning point, a state of
e¯’fi Σ
fi"¹
( )
j! j!1
þfi (1!þ)¹¯f
i
(21)

for M"1, 2,2, .

the net inventory R will be realised based on the
T
outcome of the previous sequence of demand DM. where ß and þ are constants. The random variable
T
We now use the replanning model given in Section M, cumulative demand, has the mean µ"ßi/þ and
4 to decide P for i"¹#1, ¹#2,2, ¹#n. variance o*"ßi(2!þ)/þ*. This shows that for
¹ª³›fi
The rescheduling cost in the current model, such a type of compound Poisson process, both the
depends on the state at which replanning occurs mean and variance of cumulative demand increase
(essentially on R ) and this cost will be di!erent for proportionally with the time period.
T
di!erent states in general. This is one of the major Given the production parameters b, h, ß, þ, we
di!erences from our previous study in GrubbstroK m calculate the optimal MPS according to the model
and Tang [1]. of Section 3. The safety stock SS equals the di!er-
The optimal frozen interval ¹ is therefore ence between cumulative production and expected
¹
P "P , for all ¹(i)¹#¹ . (17) cumulative demand immediately prior to the time
¹ª³›fi ³’ª’›fi ¹ of production.
The gain from replanning is the di!erence between A "rst example is given in Table 1, which shows
total costs for replanning and total costs for the that the optimal safety stock increases monotoni-
stay alternative. As illustrated in GrubbstroK m an d
cally with time, even if the demand forecast is
Tang [1], this gain has a non-negative value
constant in each time period. The resulting produc-
C "C (R , P )!C (P |R , P )*0.
$ªfi¹ ’ T ³’ª’›fi ’ ¹ª³›fi T ³’ª’›fi tion volume is then used for the purpose of the
(18) MPS in this system. According to this production
plan, the production volumes tend to be close to
In this equation, the state R
lative demand DM T is a result of cumu- constant except for the "rst few periods, and they
according to Eq. (1). Since cumu- are all higher than expected demand. The increas-
T
lative demand at the replanning point ¹ has a ing contribution to E(C ) shows that the system
cumulative density function F (x), the expected ’
T needs to pay more to cover increasing uncertainty
gain from replanning is therefore
in later time periods.
Tables 2 and 3 o!er examples of the replanning
∫
◉

E(C (¹))" C (x) dF (x). (19)

$ªfi¹ $ªfi¹ T model for a positive and negative initial net inven-
’"º
tory, respectively. The frozen intervals are 1 and
Similarly, we obtain the expected value of the
3 time periods, respectively. The schedule change
frozen interval ¹ from
◉
¹ cost structure is of course the major component
E(¹ )"
¹ ∫ ’"º
¹ (x) dF (x).
¹ T
(20) in#uencing the frozen interval. In our examples we
assume a decay function 0e¯fi for adding an order
 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334 331

Table 1
The planning decisions with b"30, h"1, ß"5, þ"0.5

i E(D) PM P (MPS) SS E(Sfi ) E(Bfi ) E(C‘fi )

(Forecasting)

1 10 22 22 12 12.10 0.10 15.06

2 10 36 14 16 16.14 0.14 20.19
3 10 49 13 19 19.17 0.17 24.11
4 10 62 13 22 22.18 0.18 27.41
5 10 74 12 24 24.20 0.20 30.33
6 10 86 12 26 26.22 0.22 32.96
7 10 98 12 28 28.24 0.24 35.38
8 10 110 12 30 30.25 0.25 37.61
9 10 122 12 32 32.26 0.25 39.72
10 10 134 12 34 34.25 0.25 41.72
11 10 145 11 35 35.28 0.28 43.61
12 10 157 12 37 37.27 0.27 45.42
13 10 168 11 38 38.30 0.30 47.16
14 10 180 12 40 40.29 0.29 48.84
15 10 191 11 41 41.31 0.31 50.44
16 10 202 11 42 42.32 0.32 52.01
17 10 213 11 43 43.34 0.34 53.52
18 10 225 12 45 45.32 0.32 54.99
19 10 236 11 46 46.34 0.34 56.41
20 10 247 11 47 47.35 0.35 57.80

and ©e¯fi for cancelling an order. But we would be Table 2

able to use any other form of schedule change cost Replanning decision with b"30, h"1, ß"5, þ"0.5, R"40
in our replanning model. It is shown in Table 3 that i!T E(D) 4 P* P³’ª’ P (MPS)
the "rst two periods are frozen due to the high (Forecasting)
change cost even though stockouts exist there. In
the event of a very tight production environment, 1 10 100.00 5.00 0 12 12
2 10 36.79 1.84 0 12 0
within which where rescheduling is impossible, we 3 10 13.53 0.68 0 12 0
may assign the schedule change cost an in"nitely 4 10 4.98 0.25 10 12 12
large value so that the optimal solution always 5 10 1.83 0.09 10 12 12
becomes identical to the old plan according to the 6 10 0.67 0.03 10 11 11
decision rules of Theorem 5. 7 10 0.25 0.01 11 12 12
8 10 0.09 0.00 11 11 11
We use di!erent values of 0 and © in the sched- 9 10 0.03 0.00 12 12 12
ule change cost function to represent the reschedul- 10 10 0.01 0.00 12 11 12
ing #exibility of the system. These vary according 11 10 0.00 0.00 11 11 11
as costs are high (10000), (medium) 1000, (low) 100 12 10 0.00 0.00 12 11 12
and 50, 5, 0.5. Demand uncertainty is indicated by 13 10 0.00 0.00 11 12 12
14 10 0.00 0.00 11 11 11
assigning di!erent values to ß and þ. But we retain 15 10 0.00 0.00 11 11 11
the expected demand rate as a constant. 16 10 0.00 0.00 11 11 11
As illustrated in Fig. 5, the expected gain 17 10 0.00 0.00 11 11 11
from replanning increases when the forecast error 18 10 0.00 0.00 12 11 12
is raised. An optimal replanning interval is 19 10 0.00 0.00 11 11 11
20 10 0.00 0.00 11 11 11
shown to exist. However, this optimal value
332 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334

Table 3
Replanning decision with b"30, h"1, ß"5, þ"0.5,
R"!40

i!T E(D) y P* P³’ª’ P (MPS)

(Forecasting)

1 10 1000.00 5.00 62 12 12
2 10 367.88 1.84 63 12 12
3 10 135.34 0.68 36 12 12
4 10 49.79 0.25 27 12 29
5 10 18.32 0.09 19 12 27
6 10 6.74 0.03 16 11 23
7 10 2.48 0.01 12 12 18 Fig. 4. Expected gain from replanning vs. replanning interval on
8 10 0.91 0.00 12 11 14 di!erent uncertainty levels. Mean demand rate"10, b"30,
9 10 0.34 0.00 12 12 15 h"1, n"30.
10 10 0.12 0.00 12 11 12
11 10 0.00 0.00 11 11 11
12 10 0.00 0.00 12 11 12
13 10 0.00 0.00 11 12 12
14 10 0.00 0.00 11 11 11
15 10 0.00 0.00 11 11 11
16 10 0.00 0.00 11 11 11
17 10 0.00 0.00 11 11 11
18 10 0.00 0.00 12 11 12
19 10 0.00 0.00 11 11 11
20 10 0.00 0.00 11 11 11

does not change very much with the forecast error.

It remains between 11 and 12 time periods in Fig. 5. Expected frozen interval vs. replanning interval on di!er-
these particular examples given by Fig. 5. ent uncertainty levels. Mean demand rate"10, b"30, h"1,
Fig. 6 shows that the forecast error does not have n"30.
an obvious impact on the length of the frozen
interval.
Intuitively, a lower schedule change cost brings
more of a gain from replanning (Fig. 7). Again, from
Fig. 7, we observe the existence of an optimal re-
planning interval and that the sequence of optimal
replanning intervals is insensitive to the schedule
change cost. However, the schedule change cost has
a signi"cant impact on the length of the frozen
interval.
We have also studied examples with di!erent
planning horizons. The planning horizon has
a large impact on the optimal replanning interval Fig. 6. Expected gain from replanning vs. replanning interval on
di!erent schedule change cost levels. b"30, h"1, ß"5,
(Figs. 8}10). With a longer planning horizon, the
þ"0.5, n"30.
replanning interval is prolonged as well. Neverthe-
less, Figs. 8 and 10 also show that neither forecast-
ing, nor the schedule change cost have any When we study the optimal replanning interval,
important in#uence on the length of the replanning Fig. 9 again shows that the forecast error has little
interval. e!ect on the frozen interval. It seems as if the only
 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334 333

Fig. 7. Expected frozen interval vs. replanning interval on di!er- Fig. 9. Expected frozen interval vs. planning horizon on di!er-
ent schedule change cost levels. b"30, h"1, ß"5, þ"0.5, ent uncertainty levels when the replanning interval is optimal.
n"30. Mean demand rate"10, b"30, h"1.

Fig. 8. Optimal replanning interval vs. planning horizon on Fig. 10. Optimal replanning interval vs. planning horizon on
di!erent uncertainty levels. Mean demand rate"10, b"30, di!erent schedule change cost levels. b"30, h"1, ß"5,
h"1. þ"0.5.

major factor changing the frozen interval is the

schedule change cost (Fig. 11).

7. Summary

In this paper, we have studied planning and

replanning problems at the MPS level. First, we
have applied our previous research "ndings about
safety stocks in an MPS system. We provide
a model for MPS planning in which the safety stock
is determined and is shown to be an increasing
function of time. Secondly, we developed a model
for replanning in which the scheduling change Fig. 11. Expected frozen interval vs planning horizon on di!er-
cost is considered and for which an e$cient ent schedule change cost levels when the replanning interval is
solution procedure was presented. This provides optimal. b"30, h"1, ß"5, þ"0.5.
334 O. Tang, R.W. Grubbstro( m / Int. J. Production Economics 78 (2002) 323}334
the possibility for further studying replanning when
several alternative replanning points are con-
sidered.
The numerical examples demonstrate procedures
to solve the optimal replanning interval and to
estimate the expected frozen interval. An interest-
ing "nding is that the forecast error appears to be of
little importance to either of them when the safety
stock bu!er is optimised according to our planning
model. But how to determine the optimal planning
horizon still remains an open question.
In this paper, we have assumed that there is only
one replanning point inside of the "rst planning
horizon. In future studies, it is of interest to remove
this assumption. Simulation studies may be needed
for dynamic replanning problems, in which re-
planning decisions may be interpreted following
the model in Section 4. Only after that, the interre-
lationship between the replanning interval, the
frozen interval and the planning horizon may be-
come more transparent.
Another remaining point for discussion is the
schedule change costs. If in the real world multi-
level production system we could develop prin-
ciples for aggregating the information necessary for
estimating the rescheduling cost, our replanning
model in Section 4 would become more important
for practical uses.
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