DDMRP vs Order Point

Inventory management prior to MRP

Order Point was the most widely used inventory management strategy prior to MRP. The primary restrictions existed within the companies at the same time. The market required more than a business could produce. Every product made would and could be sold. The primary issue was how to efficiently satisfy market demand. The product line had a small number of SKUs, simple products, a lengthy product life cycle, and occasionally, products that were produced unchanged for decades. What does this mean in terms of inventory management? Businesses have a limited number of SKUs, stable demand, and a BOM (Bill of Material) that establishes a foreseeable requirement for components. It is significantly simpler to manage and optimize a system if it is not steady, complex, or linear. At that time, the idea of EOQ (Economic Order Quantity) was introduced and frequently incorporated into the Order Point system.

Economic Order Quantity

We may determine the point at which Total Holding Cost will be minimized if we assume that Demand, Ordering, and Holding Costs are known and do not change over time (often a year). That is the rationale for the original EOQ. While more complex formula extensions are frequently used in modern EOQ implementation approaches, the initial presumption that Demand and Cost are known and constant is still true.

 

DDMRP vs Order PointIn our VUCA environment, where there are more SKUs in the assortment, the supply chain is more complicated, product life cycles are shorter, and customer demand is anything but predictable and consistent. Unfortunately, we still apply formulas to a world that doesn’t exist anymore. In most cases, EOQ logic implementation in contemporary manufacturing enterprises results in larger production batches, which causes a company to waste resources and production capacity. Better OOE (overall operations effectiveness), less flexible production planning and higher inventory levels are the most frequent outcomes. The good news is that there is potential for improvement with DDMRP after a traditional EOQ project. (Learn how Kormotech moved from EOQ’s implementation to DDMRP).

 

 

What is the order point’s mechanism?

Let’s examine the EOQ and Order Point figure. Order point is based on a simple concept. A fresh supply order is generated when the level of total inventory plus “on order” hits a specified threshold. Please provide your order quantity in the EOQ.

DDMRP vs Order PointThe order point’s calculation method. Typically, this includes safety stock level in addition to consumption over lead time. Therefore, if we assume that there is no demand or supply variability, the batch could be provided before safety stock use (point 2).

In reality, either the supplier or production may be late, or client demand would always be larger or lower than anticipated (points 1 and 3). (point 4). The safety stock’s responsibility is to take care of such swings.

Again, the reason this strategy is so well-liked and is still in use in many businesses is that it is so straightforward and appears to be common sense.

 

What are the drawbacks of this approach?

Consistent Order and Safety Stock levels are beneficial in circumstances that are linear, stable, and predictable. How many of those assumptions are valid today. As a result, there is an excessive amount of stock overall and a bimodal inventory distribution (too little of the correct and too much of the wrong).

In this strategy, bimodal inventory distribution is typically brought on by No relation to capacity. Even when it is calculated, it is often fixed for a long time and tends to have excessive batch sizes. Changes to the BOM and assortment list. Order Points and EOQs expire more quickly than they are actually adjusted in daily operations. The effectiveness of this strategy is typically undermined by high promotions or seasonality, which leads to workarounds.

No utilization of orders from real clients. Without visibility, the Service Level falls or more stock is required to make up the difference. A lack of flexibility in responding to shifting consumer demands and manufacturing schedules.

One of the main causes for the replacement of the Order Point technique with MRP technology was the last bullet. Its term, “Material Requirements Planning,” refers to calculations that are made using the Bill of Materials and the present production schedule. Which leads businesses to believe that they will only produce what is actually required to meet client demand. And only buy raw materials in the quantities required to meet the production schedule. Through the Bill of Materials, they made dependent planning possible, which was intended to increase ROI. And it did in the past. However, MRP becomes less effective as the environment grows more erratic and chaotic. But this is a topic for another story.

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Sviatoslav Oliinyk

Co-founder of Demand Driven Institute Representative office in CIS region, business trainer and supply chain management consultant at ABM Cloud. Experienced in business process re-engineering, project management using Lean, 6 Sigma and TOC in retail, distribution and production. Certified expert in Innovative Solutions for Supply Chain optimization, specializing in DDMRP methodology education and implementation. Author of various case studies and business media publications, event speaker, founder and coordinator of business training clubs, practicing expert in corporate culture development, coaching, team building.

Author: Чорна Карина

Co-founder of Representative office of Demand Driven Institute in CIS region, business trainer

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