Since the re-opening after the March shutdown, I’ve visited three companies with similar production and inventory planning challenges. In each case, the company never truly adopted the Material Requirements Planning (MRP) module but, instead, opted to use the seemingly and supposedly simpler Order Point (Min/Max) replenishment method. While some see these as synonyms, the results at these companies show a stark difference. Order Point methods don’t respond to changes in demand patterns on the downside as we experienced in March or the upside as we’re experiencing now.
Imagine taking a trip but your GPS only tells you where you’ve been, not where your going. Worse yet, imagine you can’t look through the windshield but have to look in the rearview mirror. That’s the Order Point method.
Using travel as another example, Order Point (Min/Max) replenishment is the technique your gas tank uses. When your gas on hand reaches the Order Point, a dashboard gauge lights up indicating that you only have enough gas to get you a few more miles. If your gas gauge comes on while driving through, say, a rural area like West Texas, (equating to a long lead time), that notification may not come in time. You needed a time-phases demand plan to prevent your stockout on gasoline before embarking on the trip.
Most manufacturing and distribution companies are using the transaction processing layer of their ERP systems. This layer represents what used to be called Accounting Software. Financial, inventory, shipment, receipt, and the like are examples. They’re necessary, but not sufficient for an effective management system.
Another layer, the decision support layer, comes from the part of ERP software formerly known as MRP software. At its core, this layer does one thing: it translates a company’s demand into supply requirements, supply being materials as well as machine and labor resource capacity. MRP and its sister modules help a company determine what to buy and when, what to make and when, and what machine and resources it will need to manufacture those needed products.
Simply put, MRP is a planning tool and Order Point is not. Order Point is a reactive execution tool. Planning tools like MRP earn their stripes in times of dynamic change like we’re experiencing in 2020 because they look forward, not in the rearview mirror.
Back to the three companies I’ve visited in July. Each of them is lamenting the failure of their Order Point system to prevent them from stocking out. They’re running out of gas, only in their cases, the gas is raw material, component, subassembly, and finished goods inventory.
These companies need a demand forecast combined with a classic MRP model. The result will be improved inventory management (more appropriate mix with less inventory investment) which, perhaps more importantly, will result in improved delivery performance and customer satisfaction.
