Page 68 - Orlicky's Material Requirements Planning

CHAPTER 4 Inventory in a Manufacturing Environment 49

us ing paper records and electromechanical desk calculators to apply essen tially simple
mathematical formulas for order-quantity and safety-stock calculations.
Part of the second question above, “How many should we buy or make?” was
answered in the decades preceding MRP with economic order quantity (EOQ) tech-
niques. As mentioned in Chapter 8, Ford Harris published the first theoretical formula for
EOQ in 1915. In early practice, the question of the “correct” order quantity deserved and
received only secondary attention. This question does not arise at all when the demand
for an inventory item is either highly continuous (typical for high-volume production
operations—assembly line or continuous production in the Wheelwright and Hayes
product/process matrix in Figure 1-2) or very inter mittent. It is obviously more impor-
tant to have the quantity needed at the time it is needed than to order an economic quan-
tity. Evidence of this was the frequent splitting of lots in process, double, and triple setups
caused by “hot order” expediting and partial vendor shipments, all of which were nor-
mal occurrences.
The first half of the last question, “When are raw materials and components need-
ed?,” received the crudest of answers prior to computer- based MRP programs. Statistical
calculations of safety stocks, proposed by R. H. Wilson in 1934, gave the appearance of
precision without the reality of accuracy. Calculated EOQ and safety stocks and subse-
quent refine ments and elaborations did improve production inventory control over the
guesstimates and estimates preceding them but left much to be desired.

ORDER-POINT VERSUS MRP SYSTEMS

Under convention, there are two alternatives in fundamental approach and two corre-
sponding sets of techniques that a manufacturing enterprise may employ for purposes of
inventory management. They are order-point systems and MRP. Part 4 of this book will
introduce an effective and innovative hybrid.
The first of the alternatives may be defined as a set of procedures, decision rules,
and records intended to ensure continuous physical availability of all items in the face of
uncertain demand. Under the order-point approach, the depletion in the supply of each
inventory item is monitored, and a replenishment order is issued whenever the supply
drops to a predetermined quantity—the reorder point.
This quantity is determined for each inventory item separately—parents and com-
ponents—based on the forecast demand during replenishment lead time and on the
probability of actual demand exceeding the forecast. The portion of the reorder-point
quantity that is carried to compensate for forecast error is termed safety stock. It is com-
puted on the basis of historical demand for the item in question and of the desired ser-
vice level, that is, incidence of availability over the long run. The underlying belief is that
higher inventory is required to provide higher levels of customer service. In an order-
point system, some form of an economic order quantity computation normally deter-
mines the size of the replenishment order. The order-point system is used traditionally
without any analysis to the positioning of the inventory.