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 multiproduct 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 down-stream 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 multiperiod 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 aluminium-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.