Page 98 - Orlicky's Material Requirements Planning

78 PART 2 Concepts

Applying these three facts transforms companies with multiple distribution centers to a
type of hub-and-spoke distribution model. With regard to vertically integrated compa-
nies that own both distribution and manufacturing locations, it often will make sense to
set up the hub or “central buffer” at the manufacturing plant. Figure 4-21 demonstrates
how part FPA is held at the plant as a central buffer and fed to regional distribution cen-
ters as demand dictates.
This configuration is the complete opposite of how companies frequently operate.
Often companies tend to push inventory out into the distribution network, assuming that
the closer the majority of inventory is located to market, the better they are able to meet
demand. In addition, most companies book their revenue at the point inventory is
shipped to distribution. The negative result is all too common in most major distribution
scenarios. On average, there is sufficient inventory to cover demand, but it is located in
the wrong places. This leads to costly expediting activity, including cross-shipments
and/or schedule deviations, expedited materials shipments, and overtime at the plant as
the plant attempts to react to false requirements from distribution. In most large compa-
nies with both manufacturing and distribution, there is constant tension among planning,
manufacturing, distribution, sales, and logistics. This solution, however, is an effective
answer to that tension. The insertion of a central buffer:
■ Protects regional locations by ensuring a reliable pipeline of supply defined by
transportation time only as opposed plant lead time plus transportation time
■ Allows consumption and corresponding resupply signals to the plant to be natu-
rally consolidated into batches that are still sensible
■ Allows the manufacturing facility to schedule close in time to actual central
buffer requirements rather than to frozen schedule horizons that further limit
flexibility and create frustration for sales

A DISTRIBUTION POSITIONING EXAMPLE

This section presents an example of the power of the hub-and-spoke concept in distribution.
These data were developed with a sizable consumer products company with a wide array
of products ranging from personal care to food. Two product lines were chosen for study. A
hub-and-spoke model was constructed, and buffers were sized and managed according to
the tactics seen in Part 4 of this book. Figure 4-22 shows the simulated results over a 180-day
period using actual demand for a line of cake mixes and compared against actual results.
In this case, one of the company’s eight regional warehouses has been selected for the
hub or “central buffer.” This warehouse was chosen because of both its relative proximity
to the plant and its available space. One thing that is apparent is that the central buffer car-
ries the bulk of the inventory: $5,996,940 versus a combined $2,059,152 for all the forward
locations. Obviously, the central buffer not only will supply the other seven regional ware-
houses but also will directly serve its regional customers. In summary, service levels
increased, inventory decreased, and cross-shipments were effectively eliminated. All this
occurred with no appreciable change in the overall number of plant setups.