Page 95 - Orlicky's Material Requirements Planning

CHAPTER 4 Inventory in a Manufacturing Environment 75

(not have too much inventory). In most cases, the primary positioning factor in distribution
networks has to do with inventory leverage and flexibility in relation to three facts.
Fact 1: Making the right decisions (whether predictions or actions) is inherently eas-
ier when the factors being considered are more stable and/or known. The most common
factor for distribution networks is demand variability. Figure 4-18 is a depiction of a sim-
ple distribution network that has only two levels. One manufacturing plant supplies four
regional warehouses. The demand variability is much higher at each discrete distribution
location than at the plant for the same time period. The law of total variance means that
aggregating the demand variability from the remote locations creates a natural smooth-
ing effect for the manufacturer.
The most interesting observation in this example is to point out that common sense
is not common practice. Distribution management and forecasting is typically accom-
plished at the distribution center level. Only net demand is passed to the manufacturer.
This then is extremely lumpy and discontinuous. See the discussion about lumpy
demand earlier in this chapter.
Fact 2: Holding inventory closer to the source actually protects the largest portion of
potential consumption for the least amount of inventory. A distribution network is

FIGURE 4-18
Simple distribution network and variability of demand.

Demand Demand Demand Demand

Time Time Time Time
Region 1 Region 2 Region 3 Region 4

Demand

Time