I’m not talking about the smoke and mirrors of a Las Vegas act. I’m talking about real magic where parts and materials suddenly appear at the right quantity, the right place and at the right time. I’m talking about the two-bin system, reorder points and statistical forecast models.
It has been said that Henry Ford used the two-bin system in the early production of his automobiles. As you know, each bin had to be equal in size to hold the quantity used during the lead time of the part with a little extra for unforeseen emergencies. When the first bin was emptied, a reorder card was sent to Purchasing to reorder another bins worth.
The two-bin system assumed, falsely, that all demand quantity was, for the most part, steady and continuous. Because of this false assumption, there were many problems with stock shortages and inflated inventories. There was also a problem where you had to stock lots and lots of different sized bins to operate such a system. In the 1930’s some mathematicians worked to eliminate the “lots of different bins” problem by devising the Reorder Point quantity formula.
Here they said the reorder point quantity on hand was equal to the demand during lead time plus some added safety stock (RP = DLT + SS). This formula allowed the two-bin system to still be used and stocked on any shelf without the bin problem but still falsely assumed all demand to be steady and continuous while still generating stock outs and inflating inventory levels.
Can you see the magic in the two-bin Reorder Point formula? A lot of people can. Reorder points are still used in many of the new sophisticated ERP software packages today. Heck, I even read a published article where one author thought that MRP didn’t work for whatever reason and suggested we should do away with MRP in favor of a 3-Bin Kanban with two bins on the shop floor and one at the supplier.
After reading this I remembered the old saying that “Those ignorant of history are doomed to repeat it”. By now you can figure out that I don’t believe in two-bin, reorder point magic, however I do believe in statistical forecast models. I believe that all forecast models are wrong.
I don’t like to forecast at all but I realize that sometimes you just have to. I’ve been trying to come up with a forecast model for the six numbers of the Powerball drawing for years. When I come up with an accurate model, I’ll let you know. Forecasts are simply guesses requiring constant vigilance and adjustments to history. Two-bin reorder points assume parts are totally independent of each other so you have to forecast for every single part. That’s a lot of guessing and adjustments to history which requires a lot of maintenance.
The MRP planning process was devised to avoid most of the smoke and mirrors hocus pocus by a dramatic reduction in the amount of forecasting (guessing) you have to do. MRP has product structure. The idea here is only to guess where you have to (Independent Demand) and derive (Dependent) demand from those fewer guesses via a product structure therefore requiring much less maintenance. When you need reorder points for “C” items use the MRP generated Time Phased Order Point (TPOP) which utilizes independent, derived, unsteady and discontinuous demand, a future blog topic of mine.