Operational Research Essay
Stock control or Inventory control has been in use for a long time. While small organizations may use manual methods to track their stock, complex global organizations make use of sophisticated systems like ERP’s to handle inventory control. There are various stock control methods in use. The methods used by a business organization depend upon not only the size and complexity but the type of industry it is in. A DIY superstore may use a method like the Order Point where the demand is driven by the customer’s buying patterns with little or no control by the manufacturer.
As against this, a stock control method like MRP is used in companies like the Executive Upholstery Company where demand is dependent upon sales forecast and the sales orders. In the following paragraphs the stock control methods used by Executive Upholstery Company and DIY superstore are examined and also compared with each other to provide insights into the two methods discussed. Order Point Method – DIY superstore
Supermarkets, warehouses and even some manufacturing companies tend to use Order Timing Decisions or Order Point methods for inventory control where the demand is not certain. The demand pattern in a DIY superstore is seasonal and is dictated by the consumers. The demand is independent of the manufacturing processes and many variations in demand need to be considered while controlling the inventory. Traditionally stock control was done using guess work to identify the stock levels and re order points. Factors like Safety Stock, EOQ, an Lead Times were not considered.
Because of the huge numbers of items involved, and also the need to cope up with variable and uncertain demand patterns, manual methods gave way to some techniques like ABC/ VED analysis; Forecast Order Point. In ABC analysis, for instance, the inventory is categorized by the importance of the contribution to the final product cost. Some classification can be the ‘most important’, ‘important’ and ‘less important’. In the Forecast Order Point method of stock control, the future demand is calculated using the historical demand patterns.
Time series methods like simple average, weighted average and exponential smoothing methods can also be used to forecast demand more accurately. In the DIY superstore example, the simple average method was used to forecast demand and lead time. Based on the 5 weeks of Master Production schedule, re order point for various items for the week6 were determined. Table 2 below shows the reorder point for the various items based on the 5 weeks of maser Production Schedule.
The inherent problem with this technique is that it assumes that the forecast is near accurate and there is safety stock. In a weighted average method of forecasting technique, weighting to the most recent demand is given more and less to the earlier weeks. Techniques like Exponential smoothing are used to forecast the demand more accurately when there are trends in data and data is available for a longer period of time. Considerations like Safety stock and Service Level need to accounted for while using any forecasting technique.
MRP in Executive Upholstery Company MRP is used when the demand is more certain and is based on sales forecasts, sales orders. It uses a time phased production schedule dictated by the capacity available. MRP uses, apart from this top level demand, inputs like Bill of Material, Stock on hand, Purchase orders already placed. Bill of materials lists all the parts and components required to make finished products and subassemblies. A structure diagram for BOM can be made using various levels with the finished product being at level 1.
Manufacturing organizations do use stock files and work order files. Stock files list current stock of all parts: finished, raw material and sub assemblies. Work order files list replenishment orders which have been already placed. The main consideration of MRP is to produce a set of ‘time phased requirements’ (orders) for each component in the system at specified intervals of time – days or weeks. The first step in MRP is to identify the Gross Requirements for each component or assembly – how many in each time period.
The Gross Requirements for each part in the example at table 1 is arrived at by identifying the demand quantity of each of the three types of chairs (Captain, Recliner and Director) from the Master Production Schedule and multiplying this quantity by the quantity in each part in its bill including the parts of sub assemblies and then adding them up all to arrive at the total demand for each part. While calculating the Gross Requirements, the lowest level components are used. Also, the beginning inventory(stock on hand) as well as the purchase orders pending were taken into consideration while calculating the net Requirement for each part.
Another concept used in the example in Table1 is the Planned Order Releases which are scheduled orders by taking into consideration lead time, lot sizes. Summary MRP solves more complex issues like which part to order and when for a production process which are not easily amenable in a stock control method like Order Point. Order Point calculations do not take into consideration lot sizes, safety stock, and the more methodical approach of calculating Gross Requirements and net Requirements of each part involved in a finished product.