Page 137 - Orlicky's Material Requirements Planning

116 PART 2 Concepts

The most primitive expression of inventory status is limited to data on quantities on
hand and on order. Action then is determined by comparing need (demand) with that
availability status or on depletion of inventory with some predetermined minimum, in
which case the action taken reflects antici pated future need. A more elaborate expression
of inventory status is provided by the classic “perpetual inventory control” equation
introduced in Chapter 6 and repeated below, which states the elements of expanded
inventory status and their relationship. This equation, while valid, is still somewhat
primitive:
A B – C X

where A is the quantity on hand, B is the quantity on order, C is the quantity required,
and X is the quantity available.
If X has a positive value, it indicates the quantity available for future requirements.
If it is negative, it is an indication of an impending shortage, that is, inadequate coverage.
The idea behind this venerable approach to in ventory control is for the value of X to
equal or exceed zero at all times. This is accomplished by increasing the value of B by
placing a new order whenever X approaches zero or turns negative. This policy would
appear to preclude shortages, but it does not because the expression of inventory status
is too crude on three counts:

1. Information on timing of the demand and supply is lacking.
2. The data on B and C represent summaries.
3. The status formula does not provide for planned (future) coverage.
For example, status might be indicated as follows:

On hand: 100
On order: 120 100 120 – 200 20
Required: 200

The technique signals that all is well and that no action is called for, but in fact, there
will be a shortage, as becomes evident when information on timing is associated with the
status data:
On hand: 100
On order: 120, due June 1
Required: 200, May 15

Coverage is adequate in terms of quantity but not in terms of timing. To illustrate
the opposite case, let the status be as follows:

On hand: 20
On order: 100 20 100 – 200 –80
Required: 200