Page 71 - Orlicky's Material Requirements Planning

52 PART 2 Concepts

resort, used only when it is not possible to extract, determine, or derive demand from
something else. In cases of dependent demand, forecasting is unnecessary because
dependent demand is, by definition, derivable and calculable.
How well order-point inventory planning works depends on how closely the
assumptions relate to the actual situations in the inventory. Introduced with manual cal-
culations in the 1940s, order-point systems were an improvement over the earlier crude
guesstimate approaches. The enhance ments made possible by computers further
improved their performance, but the fallacious basic assumptions defeated their users in
getting tight control over manufactured inventories.
The order-point assumption of fairly uniform usage in small increments is invalid
for manufacturing inventory. Requirements for components of products are anything but
uniform; depletion occurs in discrete “lumps” caused by parent-order lot sizes. The
example in Figure 4-1 shows this clearly; in it, order point is being used for all items.
These could be a box wrench, the rough forging it is made from, and the forging steel.
Wrenches and more complex products are not made in quantities of one piece, of course,
but in reasonably sized lots. When an order is placed on the factory to produce a quanti-
ty of such an end item, it is necessary to withdraw from inventory corresponding quan-
tities of the components; this will deplete component inventories and at some time drive
them below the order points. When it does (as at the end of July in the example), the tech-
nique will act immediately to reorder the components, necessitating a large withdrawal
of raw materials to produce their order quantities. If the raw materials order points are
then “tripped,” these materials also will be reordered immedi ately.
In this example, demands for the components and raw materials show marked dis-
continuity, causing several serious problems when an order-point approach is used for
manufacturing inventory:

1. Average inventory levels are considerably higher than one-half the replenish-
ment lot size plus safety stock, which the order-point theory com monly
assumes. The shaded areas clearly demonstrate these high inventory levels.
2. The order-point system reorders prematurely, far in advance of actual need,
and excess inventory will be carried for significant periods of time.
3. The schedule dates on the replenishment orders are wrong, and credibility of
the system will be low.
4. Scarce capacity and materials will be applied to the wrong items.
Table 4-1 summarizes the characteristics of order-point and MRP systems.

Mixed Independent and Dependent Demand

In a manufacturing environment, a given inventory item (subassembly, component part,
or raw material) may be subject to dependent demand exclusively, or it may be subject to
both dependent and independent demand. This can be further complicated with com-
plementary products. For example, every roller chain needs at least two sprockets. But