Page 67 - Orlicky's Material Requirements Planning

48 PART 2 Concepts

2. Cushion against variability. Demand changes and interruptions in supply have cost-
ly and harmful effects. Buffers, called fluctuation inventory, minimize these effects.
3. Level production. Cyclic and seasonal changes in demand are expen sive and
often impossible to handle, and early production for anticipated changes is
necessary. The stocks built for these reasons are called anticipation inventory or
stabilization stock.
4. Fill distribution pipelines. Materials in transit are called transportation inventory.
5. Hedge against external expected events. Suppliers’ price increases, labor strikes in
suppliers’ facilities or in transportation, new government regulations, and simi-
lar events may make hedge inventory a good investment.
In general, there are four fundamental questions of management regardless of the
classification of inventory:
1. Where should inventory be placed?
2. When is the proper time to reorder?
3. How much should be ordered at that time?
4. What the investment level should be appears in a different light in manufactur-
ing inventory management because the problems and criteria are quite different.

These questions are covered more fully later in this chapter and are expanded on in
Part 4.

THE LOGIC OF MANUFACTURING

The fundamental logic of manufacturing includes the following questions: What will we
be making? How many of each component are needed? How many do we already have?
When do we need the rest, and how will we get them? This logic has been used since cave
dwellers made slings, bows, arrows, and spears. In pre-MRP industry, the first question
was answered using forecasts of future demand unless a large backlog of customers’
orders was available and sufficient to cover the planning, acquisition, and manufacturing
lead time, which is the rare exception. The next three questions required great amounts
of detailed information on products, inventories, and processes so often lacking integri-
ty that crude estimates and approximations were substituted.
Manufacturers of large, complex equipment (e.g., ships, trains, planes, and central
station boilers and generators) had long future horizons covered with firm orders.
Planning was manual, slow, and crude. Large clerical groups calculated gross require-
ments for major components of their products and time-phased (albeit very roughly)
these and their procurement. Revising such plans was even more tedious and was rarely
done. The capability of massive data storage and manipulation required for sound inven-
tory planning simply did not exist at that time.
Because of this constraint, methods of stock replenishment (order point and eco-
nomic order quantity) predominated prior to the 1970s. Inventory control was attempted