Requirements Planning with Substitutions: Exploiting Bill-of-Materials Flexibility in Production Planning

Designing product lines with substitutable components and subassemblies permits companies to offer a broader variety of products while continuing to exploit economies of scale in production and inventory costs. Past research on models incorporating component substitutions focuses on the benefits from reduced safety-stock requirements. This paper addresses a dynamic requirements-planning problem for two-stage multi product manufacturing systems with bill-of-materials flexibility, i.e., with options to use substitute components or subassemblies produced by an upstream stage to meet demand in each period at the downstream stage. We model the problem as an integer program, and describe a dynamic-programming solution method to find the production and substitution quantities that satisfy given multi period downstream demands at minimum total setup, production, conversion, and holding cost. This methodology can serve as a module in requirements-planning systems to plan opportunistic component substitutions based on relative future demands and production costs. Computational results using real data from an aluminum-tube manufacturer show that substitution can save, on average, 8.7% of manufacturing cost. We also apply the model to random problems with a simple product structure to develop insights regarding substitution behavior and impacts.