Analyzing impacts on backorders and ending inventory in MRP due to changes in lead-time, demand variability and safety stock levels

Global sourcing represents one of the major focuses in many industries as a means to lower costs. While global sourcing generally reduces per unit costs, the impact of global sourcing on total costs throughout the supply chain often remains unrecognized. Increased lead-time due to global sourcing represents one of the commonly unrecognized costs. Hence, the simulation model developed in this study demonstrates the impact of lead-time length and variation as well as variation in demand and safety stocks on the ending inventory and backorder levels in a two product MRP system. The results show that backorders grow at a diminishing rate as a function of lead-time while ending inventories show the opposite trend. In addition, the study shows that firms need to more carefully consider the impact of lead-time. The study demonstrates that lead-time, not just lead-time variability, represents a key cost factor.