Page 167 - Orlicky's Material Requirements Planning

146 PART 2 Concepts

connection with manufactured inventory items, and the term setup covers all (fixed) costs
of ordering. The reader should understand, however, that the logic on which these tech-
niques are based is not limited to manufactured items. Where the cost of ordering pur-
chased items is significant and/or where quantity discounts apply, any of the economics-
oriented lot-sizing techniques can be used after appropriate modification. 1

Fixed Order Quantity (FOQ)
An FOQ policy may be specified for any item under an MRP system, but in practice, it
would be limited to selected items only, if used at all. This policy would be applicable to
items with ordering cost sufficiently high to rule out ordering in net requirements quan-
tities period by period. The FOQ specified for a given inventory item may be determined
arbitrarily, or it can be based on intuitive/empirical factors. The quantity may reflect
extraneous considerations, that is, facts not taken into account by any of the available lot-
sizing algorithms. Such facts may be related to the capacities of certain facilities or
processes, die life, packaging, storage, and so on. It is understood (and the MRP system
would be programmed accordingly) that when using this lot-sizing rule, the order quan-
tity will be increased if necessary to equal an unexpectedly high net requirement in the
period the order is intended to cover. For example, if the FOQ were 60 and the earliest net
requirement were 75, the planned-order quantity normally would be increased to 75
because it would make little sense to generate two orders of 60 each for the same period.
Note that this also applies to the EOQ, particularly where it is used as a fixed quantity
repetitively ordered over a period of time (typically a year). An example of an FOQ of 60
is provided in Figure 8-1. Note that in this and subsequent examples, the order quantities
are not offset for lead time; that is, each quantity is shown under (keyed to) the earliest
period it is intended to cover.

FIGURE 8-1
Period 1 2 3 4 5 6 7 8 9 Total
Fixed order
quantity (60). New Requirements 35 10 40 20 5 10 30 150
Planned-Order Coverage 60 60 60 180

Economic Order Quantity (EOQ)
The EOQ formula was first derived by Ford W. Harris in 1915. It is the oldest technique
in the field and is still an aid to sound planning when its limitations are recognized.
Although it predated and was not intended for an MRP environment, it can be incorpo-
rated easily into an MRP system if the user so wishes. Figure 8-2 shows EOQ coverage of
the same net requirements as used in the preceding example.

1 Purchasing (General Information Manual Form No. GH20-1149-1). New York: International Business Machines
Corp., 1973, pp. 140–164.