Page 298 - Orlicky's Material Requirements Planning

CHAPTER 15 Industry Effect on MRP 277

order in period 3 will be short by 45 pieces. If the order-entry personnel use the project-
ed available balance to promise customer orders, customers who have provided the com-
pany with sufficient lead time may be penalized, whereas customers who just called in
may get product immediately. Just comparing the two lines in Figure 15-3 clearly demon-
strates the errors that can be made by using the project available balance.
However, remember the three rules of forecasting: Forecasts are always wrong, they
are worse projecting further in the future, and worse in more detail. What a terrible situ-
ation for this type of company! This company depends entirely on forecasts to drive its
planning for material and capacity. If the forecasts are incorrect, then the resulting plan-
ning is incorrect. If the planning is incorrect, then the inventory that is purchased may be
exactly the wrong material in exactly the wrong amount. This has a terrible impact on
cash flow and can affect overall profitability. The make-to-stock company is the most dif-
ficult kind of company to reduce inventory and still provide good customer service with-
out change to integrated business planning and supply-chain management processes.
One proven strategy for reducing inventory is to have a relatively small number of fin-
ished goods compared with a make-to-order or assemble-to-order enterprise. Also,
remember that the faster a company can respond means that there is less need to have a
detailed forecast far into the future. Improved agility relates directly to improved inven-
tory performance.
A make-to-stock company must fight the urge to try to be everything to everybody
if its processes are not flexible and agile. The marketing department will try to add small
variations to meet the needs of unique market channels. This can wreak havoc on a com-
pany if the processes are not capable of handling these changes easily. Many make-to-
stock companies have deferred the final configuration of products successfully until the
customer order is received. The advantage is that the forecast error is reduced signifi-
cantly because resources to complete finished goods are not committed until an actual
order is received. This competitive strategy is covered in the section on assemble to order.
This strategy may not be possible for the company if it is delivering products such
as mayonnaise or canned green beans to a retail market. The customer is not willing to
wait for the company to package on his or her demand. The customer expects to have
immediate delivery from the shelf. This is why the make-to-stock company typically will
exercise a strategy of carrying a safety stock of finished goods to buffer against the vari-
ability of demands from the market. The key to success is where this buffer is located.
However, understanding what is currently in the entire supply-chain pipeline can mean
the difference between profits and loss for this enterprise. What may be perceived as con-
sumer variability is nothing more than normal supply-chain replenishment cycles. Figure
15-4 shows how demand from just a few different retailers through a few distributors can
wreak havoc on the manufacturer. This is not because the customer had wide variability
in demand but rather because the batch ordering of products from the retailer to the dis-
tributor and the distributor to the manufacturer has set the manufacturer up for guaran-
teed failure. Having a collaborative approach with customers can provide win-win value
because the distributor needs to carry less inventory to achieve the same fill rates because