ORDER POINT, TPOP & DOUBLE ORDER POINTbyBrian Willcox CFPIM of Action MRPII | |
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| This month I look at the much maligned order point system which appears in three forms. Many systems people discount order point as something from the past and no longer useful. There are thousands of companies using order point to replenish their material and so we should look at the correct place to use it. | |
| At the 1970
APICS Conference in Cincinnati, Ohio, George Plossl, Joseph Orlicky and
the late Oliver Wight explained why order point was not suitable for
replenishing material for manufacturing and expounded on the wonders of a
new system called Material Requirements Planning (MRP). Order point
is defined in the APICS dictionary as a set inventory level where, the
total stock on hand plus open orders falls to or below that point, action
is taken to replenish the stock. The order point is normally
calculated as: forecasted usage during the replenishment lead time
plus safety stock. The formula for calculating the reorder point is
as follows:
OP = (D x L/T) + SS When D =
demand per period | |
| The principle is that you need to order replenishment stock while you still have sufficient in stock to cover the anticipated demands during the time it takes to get that stock in. The safety stock is provided to protect against the fluctuations in demand and should be correctly calculated. Statistical safety stock takes into account variability of demand, replenishment lead time and service level. | |
| Service level is the factor which causes any replenishment system that uses safety stock to be unsuitable for replenishing raw material and purchased parts for issuing to manufacturing. Service level is the acceptance that you will not always have sufficient stock when you need it. In the finished goods store, many companies set a required service level of 98% which means that out of every 100 demands for an item, 2 will not be met. The probability of the availability of material can be calculated when a replenishment system using safety stock is used. With a service level of 95% it means that there is a 95% chance of the required part being available when needed. If 2 parts are required at the same time that chance becomes 95% times 95% which is only 90,2% If 10 parts are required at the same time, it then drops to 59,9% which is totally unacceptable to manufacturing. When issuing a kit of parts to manufacturing to assemble a product, they need all of the parts, not most of them. |
| In addition, order point assumes level demand as it works on averages, which is often not the case in manufacturing who produce in batches. This is why material requirements planning which orders parts against a planned demand is the correct tool to use for manufacturing material stock. Having now explained why order point is not suitable for replenishing material for manufacturing, the question is where is it suitable. In its basic form, we often see it working successfully supplying consumables to a factory when is not possible to include these items on the bills of material. What can cause problems even in this area is a change in demand often due to product mix changes in the factory. TPOP which is an advanced form of order point and stands for "time phased order point" overcomes many of these problems. It can handle lumpy demand, the change in demand and provide rescheduling messages when actuals are different from the plan. This system uses the MRP logic for calculating when to order and as it is continually recalculated (either daily or weekly) it immediately identifies when order due dates and need dates are not the same. The difference between TPOP and an MPS item is that a forecast is entered into the projected gross requirements field and MRP calculates the supply orders to meet the need. As each period passes the forecast demand falls away automatically. This method is extremely useful for controlling a high number of parts with a forecast demand, such as spares. This approach is also used for controlling stock at a distribution centre when a centralised distribution requirements planning system (DRP) is used. In this case, the MRP logic creates planned order releases on the main factory warehouse.In addition, order point assumes level demand as it works on averages, which is often not the case in manufacturing who produce in batches. This is why material requirements planning which orders parts against a planned demand is the correct tool to use for manufacturing material stock. Having now explained why order point is not suitable for replenishing material for manufacturing, the question is where is it suitable. In its basic form, we often see it working successfully supplying consumables to a factory when is not possible to include these items on the bills of material. What can cause problems even in this area is a change in demand often due to product mix changes in the factory. TPOP which is an advanced form of order point and stands for "time phased order point" overcomes many of these problems. It can handle lumpy demand, the change in demand and provide rescheduling messages when actuals are different from the plan. This system uses the MRP logic for calculating when to order and as it is continually recalculated (either daily or weekly) it immediately identifies when order due dates and need dates are not the same. The difference between TPOP and an MPS item is that a forecast is entered into the projected gross requirements field and MRP calculates the supply orders to meet the need. As each period passes the forecast demand falls away automatically. This method is extremely useful for controlling a high number of parts with a forecast demand, such as spares. This approach is also used for controlling stock at a distribution centre when a centralised distribution requirements planning system (DRP) is used. In this case, the MRP logic creates planned order releases on the main factory warehouse. |
| Decentralised control or a pull system, is used by many companies who have a distribution network. This means that each distribution centre orders a product from the main warehouse using the replenishment system such as order point. One of the short comings of this approach is that it is assumed that the main warehouse will always have stock available even though several of the distribution centres could demand products on the same day. The centralised warehouse receives no advanced warning that this material will be required. To overcome this, a system called double order point was introduced. The concept of this system is that you have a normal order point system, but in addition a second order point is provided which we call order point 2, this is the normal order point plus the average demand during the manufacturing lead time of the item. As the availability drops, which is stock on hand plus open orders, at the distribution centre and reaches order point 2, so the information is sent to the central warehouse. They have now got advance warning that an order is pending. When the distribution centre stock reaches order point 1, the normal order point, the actual order is sent off. This means that the central warehouse has received advanced notice of orders which are due to arrive in the near future. |
| In theory, no safety stock needs to be held at the central warehouse as they always know what orders will be coming. This also means that the manufacturing plan for the factory can be verified to ensure that it will meet the distribution centres demands. The diagram below shows how this double order point system works. |
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| In summary, there are three forms of order point as we have discussed. The simple straight forward order point which can be used for replenishing material where there is a forecast and not calculated demand. Time phased order point using the MRP logic is suitable where we have a large number of forecast demand such as spares. This is also used with the DRP distribution centre system. Double order point should be used where decentralised control is used in a distribution network. |
| August 1998 |
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