Integral Logistics Management — Operations Management and Supply Chain Management Within and Across Companies

11.3.2 Variants of the Order Point Technique

Intended learning outcomes: Identify the criterion for the release of a production or procurement order, if the customer allows a minimum delivery lead time. Explain the criterion for an early issuance of a production or procurement order. Produce an overview on the min-max (reorder) system. Describe the double order point system.



If the customer allows a minimum delivery lead time, then we know all the allocated quantities or reserved quantities (i.e. the demand that is linked to released customer orders or assigned to production orders; see the definitions in Section 12.1.1) during this period of time. This is true for all customer or production orders that require the item. Thus, we can choose the time to release according to the formula in Figure 11.3.2.1.

Since the demand that is to be determined stochastically must now cover only a reduced lead time, the technique becomes more deterministic and precise — particularly in the case of trends that are not considered by the forecast model.

Fig. 11.3.2.1       Criterion for the release of a production or procurement order, if the customer allows a minimum delivery lead time.

Production or procurement orders can be released earlier than necessary:

The anticipation horizon refers to the maximum anticipated time for consideration of early release of a production or procurement order.

Figure 11.3.2.2 shows a formula to identify the items that are candidates for an early relea­se. For techniques with an early issuance of production orders, see Section 15.1.3.

Fig. 11.3.2.2       Criterion for an early issuance of a production or procurement order.

The saw-toothed curve — which stands for the optimal functioning of the order point tech­nique — is best attained if the issue quantities are small compared to the pro­duc­tion or procure­ment batch size. If instead they are relatively large, a chopped-off saw-toothed curve results. For issue quantities on the order of the production or pro­cure­ment batch size, the resulting curve looks more like the shape of human teeth with gaps between them. Then, the order point tech­nique no longer yields satisfactory results. Here see Section 12.3.1.

A variant of the order point technique described above is the min-max (reorder) system.

With the min-max (reorder) system, the “min” (minimum) is the order point, and the “max” (maximum) is the order-up-to level or target inventory level. The order quantity is variable and is the result of the max minus physical
inventory minus scheduled receipts. An order is recommended when the sum of the physical inventory plus scheduled receipts is below the minimum. The periodic review system is a variant of the min-max system in which an order is placed every fixed number of time units. The order quantity is variable and essentially replaces the items consumed during the current time period. Cf. [APIC16].

These techniques define maximal storage space requi­rements. This is particularly important for racks and shelves in super­markets, for example. Another variant of the order point technique is a system that is used frequently for management of distribution inventory.

The double order point system has two order points. The smallest equals the traditional order point, which covers the demand forecast during the replenishment lead time. The second, higher order point is the sum of the first order point plus the demand forecast during the replenishment lead time of the preceding structural level, most usually the production lead time or the purchasing lead time. Cf. [APIC16].

Figure 11.3.2.3 shows the principle for applying the double order point system. RLT1 is the replenishment lead time of the traditional order point technique, and RLT2 is the replenishment lead time of the preceding structural level.

Fig. 11.3.2.3       The double order point system.

As soon as inventory at the regional distribution center drops and reaches order point 2, the information is sent to the central warehouse as an order proposal, which the regional distribution center would have to release at about this time if it were ordering directly from the manufacturer or supplier instead of from the central warehouse.

The central warehouse has now got advance warning that an order is pending. It enables the central warehouse to forewarn the manufacturer of future replenishment orders. The advantage is that in theory, no safety stock needs to be held at the central warehouse.




Course section 11.3: Subsections and their intended learning outcomes

  • 11.3 ROP (Re)-Order Point Technique, and Safety Stock Calculation

    Intended learning outcomes: Explain the (re-)order point technique and variants thereof. Describe the safety stock calculation with continuous demand. Disclose the determination of the service level and the relation of service level to fill rate.

  • 11.3.1 The ROP (Re)-Order Point Technique

    Intended learning outcomes: Present in detail characteristic data for the (re-) order point technique. Explain the (re-)order point calculation. Identify the criterion for the release of a production or procurement order.

  • 11.3.2 Variants of the Order Point Technique

    Intended learning outcomes: Identify the criterion for the release of a production or procurement order, if the customer allows a minimum delivery lead time. Explain the criterion for an early issuance of a production or procurement order. Produce an overview on the min-max (reorder) system. Describe the double order point system.

  • 11.3.3 Safety Stock Calculation with Continuous Demand

    Intended learning outcomes: Describe Different techniques for determining safety stock. Identify different patterns of the deviation of demand from forecast. Explain safety stock in relation to service level. Produce an overview on the normal integral distribution function (service function) and the Poisson distribution integral function. Present the formula for safety stock.

  • 11.3.4 Determining the Service Level and the Relation of Service Level to Fill Rate

    Intended learning outcomes: Describe the order point technique where the length of order cycle provided by the batch size is a multiple of the lead time. Explain the probability of stockout in dependency on stockout costs per unit. Present the service function (of the stockout quantity coefficient) P(s) in dependency upon the safety factor s. Produce an overview on and examples of the relation between fill rate and service level.