Page 65 - Orlicky's Material Requirements Planning

46 PART 2 Concepts

lable, that is, predictable. Period demand typically consists of a limited number of individ-
ual demands for multiple quantities of the inventory item. The production plan (including
the planned production of such items as service parts) is the sole source of demand, and
this demand is always finite. The inventory investment level is dictated by manufacturing
(i.e., process, setup, queue, and move time) considerations. Work in process, an inventory
entity unique to manufacturing, constitutes a significant part of the investment, and the
level of this inventory is primarily a function of manufacturing lead times and batch sizes
frequently used to improve overall resource utilization and efficiency.
In comparison with a distribution inventory, a manufacturing inventory represents
a means to a different end. A manufacturing inventory, as defined previously, exists only
to be converted into a shippable product. Once the product is assembled or, in the case of
a service part, finished, it passes into distribution inventory. In many cases, at this point
the responsibility for the inventory by manufacturing management ceases and is
assumed by a marketing, distribution, or service organization. Increasingly, services are
becoming an integral offering by the manufacturer as another source of profits.
The difference between distribution and manufacturing inventories is fundamental.
Consequently, the respective inventory management philosophies, systems approaches,
and techniques in use are (or should be) fundamentally different. In determining the
desirable level of a distribution inventory, the tradeoff is between investment (and the
attendant inventory carrying cost) and sales revenue realized through availability. Under
the service-level concept in a distribution environment, 100 percent service theoretically
requires an infinitely large inventory investment. However, this is not actually the case.
In determining a manufacturing inventory level, there is no such tradeoff. The invest-
ment is dictated by production requirements, which, unlike customer demand, are given
and controllable. The inventory that exceeds the minimum required brings no extra rev-
enue. A 100 percent service level (between component items and the shippable product
made from them) is a necessity, but it is feasible to achieve it with a finite inventory
investment. The critical question to be answered is where the decoupling points in the bill
of material are best defined to minimize inventory while at the same time compressing
the overall response time to the customer. This is covered more fully later in this chapter.
Part 4 of this book will discuss in depth a tradeoff inherent in manufacturing inventories
with regard to shared components.
In a distribution inventory environment, demand for each inventory item must be
forecast explicitly or implicitly. Uncertainty exists at the item level. The principle of dis-
tribution stock replenishment to restore availability applies, and the two principal ques-
tions are when to reorder and in what quantity. The first question cannot be answered
with certainty, whereas the second is answered through computation of some form of an
economic order quantity. In a manufacturing inventory environment, on the other hand,
individual-item demand need not be forecast, and uncertainty exists only at the master
production schedule level (will customer demand materialize to allow shipment of the
product?). There is no need to forecast manufacturing inventory, only to order what is
required to cover production needs. Inventory availability can be geared to the time of