Page 387 - Orlicky's Material Requirements Planning

366 PART 4 Looking Backward and Forward

(original) fullness. But manufacturing inventories should, if possible, be the very oppo-
site of the mentioned fullness. Typical stock replenishment systems are based on the prin-
ciple of having inventory items in stock at all times so as to make them available at the
(poorly predictable) time of need. Stock replenishment is intended to compensate for the
inability to determine the precise quantity and time of need in the short-term future.
In manufacturing, though, the idea is to have the inventory item available at the
time of need (and, if possible, not before or after that time) rather than to carry it just so
that it would be available when, and if, needed. To the extent that short-term need for
individual manufacturing inventory items can be pinpointed in terms of both quantity
and timing—and this is indeed possible through the use of modern computer-assisted
methods—traditional stock replenishment techniques in a manufacturing environment
prove undesirable and wasteful. One example of this is the use of kanbans in many lean
implementations. These kanbans can contain inventory that is not necessary for some
time but consume cash and space. The management of these kanbans through cards and
other manual methods adds yet even another level of unnecessary complexity and waste
when the desire is to eliminate waste.

Reorder-Point Techniques
Reorder-point techniques, in their various forms, represent implementation of the stock
replenishment concept. These techniques, including the statistical order point,
min/max, ordering “up to,” and maintenance of N months’ supply, represent variations
on a common theme. Whether explicitly or implicitly, all of them forecast demand dur-
ing replenishment lead time, and all attempt to provide for some safety stock to com-
pensate for fluctuations in demand. Systems based on reorder-point techniques suffer
from false assumptions about the demand environment, tend to misinterpret observed
demand behavior, and lack the ability to determine the specific timing of future
demand. These shortcomings, inherent in all systems of this type, manifest in a number
of unsatisfactory performance characteristics, chief among them being an unnecessarily
high overall inventory level, inventory imbalance, and stock-outs or shortages caused
by the system itself.

Economic Order Quantity
According to American Production and Inventory Control Society (APICS), economic
order quantity is defined as:

economic order quantity (EOQ): A type of fixed order quantity model that determines
the amount of an item to be purchased or manufactured at one time. The intent is to
minimize the combined costs of acquiring and carrying inventory. 1

1 APICS Dictionary, 12th ed. New York: Blackstone, 2008.