Page 301 - Orlicky's Material Requirements Planning

280 PART 3 Managing with the MRP System

the total real investment in safety stock. Don’t be surprised if the actual invest-
ment is significantly higher than the authorized investment.
When this test has been run at many companies, the difference between the autho-
rized and real investments has been as high as a factor of 4 to 6 times! The frustration of
the senior management team is that after all the money that has been poured into com-
puter system implementation, this fact is so well hidden. Make-to-stock companies typi-
cally will order according to some economic lot-sizing rule and buffer with a fixed safe-
ty stock. The net result is inventory—and lots of it!

MAKE TO ORDER
A make-to-order company competes in the market by providing a wide variety of prod-
ucts in the shortest lead time possible. In addition to common raw materials, all products
in a make-to-order company tend to go through similar operations. This type of manu-
facturing facility generally is capital-intensive with general-purpose equipment that can
accomplish a wide range of processes. An example of this kind of business is a machine
shop making sheet-metal parts for many customers. The operations used can include
punching, forming, deburring, plating, and assembling. Almost an infinite number of fin-
ished goods can be produced from these basic operations. To compete effectively in the
market, the make-to-order manufacturer tends to focus its marketing in one type of
industry, such as aerospace and defense, medical devices, computer parts, and so on. The
constraint for growth in this type of company typically is knowledge of the market, the
unique customer demands, and potential distribution channels and other routes to mar-
ket rather than production capability. The cost of adding additional distribution channels
is significantly more expensive than adding production capability.
The inventory strategy in this organization typically is to purchase a safety stock of
the commonly used raw materials so that the overall response time to the customer can
be reduced. Customers tend to order what they want at the last possible minute. Design
changes after the order is placed are not unusual. Normally, relatively few raw materials
are used in the normal course of business. The investment required in safety stock to
shorten the response time is not all that significant. Another competitive strategy is to
standardize the manufacturing processes to use common sizes of raw materials. Rather
than using the size of material that provides the best material utilization, the company
may standardize on sizes of raw material that are easily obtainable. Purchasing standard-
size stock material prevents having to maintain a safety-stock inventory because these
standard sizes are normally in stock at the supplier. In addition, these standard-size mate-
rials typically are less expensive on a square-foot basis. However, it is true that more of
the material will be wasted than if the best-fit material were purchased. The savings in
material cost and inventory cost can far outweigh the material utilization benefit.
Understanding what the best solution is for the company as a whole must consider
the cost of the wasted material, the inventory carrying cost to stock special material, the
less expensive stock material, the competitive position of the company with respect to