Order Batching

In a supply chain, each company places orders with anupstream organization using some inventory monitoringor control. Demands come in, depleting inven-tory, but the company may not immediately placean order with its supplier. It often hatches or accumulatesdemands hefore issuing an order. There aretwo forms of order hatching: periodic ordering andpush ordering.

Instead of ordering frequently, companies may order weekly, hiweekly, or even monthly. There are many common reasons for an inventory system based on order cycles. Often the supplier cannot handle frequent order processing because the time and cost of processing an order can be substantial. P&G estimated that, because of the many manual interventions needed in its order, billing, and shipment systems,each invoice to its customers cost between $35 and$75 to process. Many manufacturers place purchaseorders with suppliers when they run their material requirements planning (MRP) systems. MRP systems are often run monthly, resulting in monthly orderingwith suppliers. A company with slow-moving items may prefer to order on a regular cyclicalbasis becausethere may not be enough items consumed to warrantresupply if it orders more frequently.

Consider a company that orders once a month from its supplier. The supplier faces a highly erratic stream of orders. There is a spike in demand at onetime during the month, followed by no demands for the rest of the month. Of course, this variability is higher than the demands the company itself faces.Periodic ordering amplifies variability and contributesto the hullwhip effect.

One common obstacle for a company that wants to order frequendy is the economics of transportation.There are substantial differences between frill truckload truckload(FTL) and less-than-trucldoad rates, so companies have a strong incentive to fill a truckload when they order materials from a supplier. Sometimes, suppliers give their best pricing for FTL orders. For mostitems, a full truckload could be a supply of a monthor more. Full or close to ftill truckload ordering wouldthus lead to moderate to excessively long order cycles.

In push ordering, a company experiences regularsurges in demand. The company has orders "pushed"on it from customers periodically because salespeopleare regularly measured, sometimes quarterly or annually,which causes end-of-quarter or end-of-year ordersurges. Salespersons who need to fill sales quotas may"horrow" ahead and sign orders prematurely. TheU.S. Navy's study of recruiter productivity foundsurges in the numher of recruits by the recruiters on aperiodic cycle that coincided with their evaluation cycle/ For companies, the ordering pattern from theircustomers is more erratic than the consumption patterns that their customers experience. The "hockeystick" phenomenon is quite prevalent.

When a company faces periodic ordering by itscustomers, the bullwhip effect results. If all customers'order cycles were spread out evenly throughout theweek, the bullwhip effect would be minimal. The periodicsurges in demand by some customers would beinsignificant because not all would be ordering at thesame time. Unfortunately, such an ideal situation rarelyexists. Orders are more likely to be randomly spreadout or, worse, to overlap. When order cycles overlap,most customers that order periodically do so at thesame time. As a result, the surge in demand is evenmore pronounced, and the variability from the bullwhipeffect is at its highest.

If the majority of companies that do MRP or distributionrequirement planning (DRP) to generatepurchase orders do so at the beginning of the month(or end of the month), order cycles overlap. Periodic execution of MRPs contributes to the bullwhip effect,or "MRP jitters" or "DRP jitters."