How to Best Calculate Supply Chain Lead Times

Executive Summary

  • Lead times are critical to understanding supply chain planning systems.
  • We cover the supply lead time, customer lead time, supply lead time in inventory, and how to calculate lead times.

Introduction: What Makes Up the Lead Time?

This article will cover lead time in several dimensions. We will start off with the lead time definition and the lead time in the supply chain. You will learn all of the sub-lead times that constitute the overall lead time.

Lead Time in Supply Chain or Lead Time Supply Chain

The lead time in supply chain or lead time supply chain relates to lead times specific to supply chain are terms that describe lead times specific to supply chain management, as lead times are a general term that can apply to non-supply chain topics.

What Lead Time Means and a Lead Time Definition to Define Lead Time

The lead time definition is required to define lead time.

What lead time means is the time required to complete a supply chain process required to provide product to a customer ultimately. Common lead times include:

  • Supplier Lead Time or Supply Lead Time
  • Manufacturing Lead Time
  • Purchasing Lead Time
  • Shipping Lead Time

Customer Lead Time and Order Lead Time

Additionally, there are lead times from the demand side. This includes:

  • Customer Lead Time
  • Order Lead Time

Supply Lead Time in Inventory

Supply lead time in inventory is the portion of inventory that is correlated directly to the lead time. Lead time in inventory is made up of the inventory without variability.

Safety stock for the lead time in inventory would then be where the variability (always higher as only the variability above the baseline is what is calculated in safety stock) of the lead time is maintained.

Supply Lead Time Analysis

There is a lead time analysis that can be performed to determine the position in the lead time in inventory. This lead time analysis can divide the product database by lead time length. But this required performing a lead time calculation.

How to Calculate Lead Time, Lead Time Calculation and Build a Lead Time Calculator

How to calculate lead time or perform a lead time calculation means knowing how lead time is added together.

The various lead times connect in the following way:

For Manufactured Products

Replenishment Lead Time = Manufacturing Lead Time + Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time

For Procured Products

Replenishment Lead Time = Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time

Often what is desired is a total lead time, and this means having a lead time calculator that combines multiple component lead times as is shown above.

There is often discussion of expediting the various lead times, but in many cases, the only lead time that is reasonably capable of being expedited is the shipping lead time. The shipping lead time can only be accelerated at considerable expense (unless the product in question is of high value and low weight)

Conclusion

In this article, we define lead time, and we covered lead time analysis which requires lead time calculation. But to calculate lead time and develop an accurate lead time calculator and perform a lead time calculation means knowing the independent lead time components. These include things like the manufacturing lead time, procurement lead time, supply lead time, etc..

Lead time in supply chain or lead time supply chain declare lead time separately from other types of non-supply chain lead times.

References

Brightwork MRP & S&OP Explorer for Tuning

Tuning ERP and External Planning Systems with Brightwork Explorer

MRP and supply planning systems require tuning in order to get the most out of them. Brightwork MRP & S&OP Explorer provides this tuning, which is free to use in the beginning. See by clicking the image below:

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

How to Plan Long Lead Time vs Short Lead Time Items

Executive Summary

  • Lead time has a definition and has different categories.
  • Important topics are lead time accuracy, effective lead time, static versus effective lead time and long lead time versus short lead time items.
  • This also gets into the topic of the feasibility of lead time reduction.

Introduction: Lead Time as a Foundational Concept

Lead times are always in the background but often overlooked in supply chain management. Even central concepts such as Lean or JIT are based upon (in part) a misunderstanding of lead times versus the replenishment trigger. You will learn the common lead time categories and our analysis of common (and commonly confusing) lead time topics.

What Are Lead Times?

The lead time a foundational concept of supply chain management. In this article, we will discuss various features of lead times including managing long lead time items and short lead time items and the feasibility of lead time reduction.

Lead times are the time between locations to within, or from a supply network.

Common lead times are:

  • Supplier or procurement lead time
  • Production lead time (still relevant for supply planning)
  • Customer lead times(the time from the supply network to the customer)
  • Transportation lead time

The term lead time often includes processing at the beginning or end of the main consuming component. For instance, a standard lead time definition will consist of the total supplier or customer lead times include the transportation lead time.

Production lead time similarly has processes such as staging, or quality inspection that are on either side of the time where production takes place.

Common Lead Time Categories

The following are common lead times that we will define.

  • Manufacturing Lead Time Definition
  • Procurement Lead Time Definition
  • Stock Transfer Lead Time Definition
  • Transportation Lead Time Definition
  • Goods Issue Lead Time Definition
  • Goods Receipt Lead Time Definition
  • Quality Inspection Lead Time Definition
  • Setup Lead Time Definition
  • Total Lead Time Definition

Manufacturing Lead Time Definition

The time from when the production order is created to when the finished good is available.

Procurement Lead Time Definition

The time from when the procurement order is placed to when it is received.

Stock Transfer Lead Time Definition

The time from when an item is issued from one internal facility to when it is received into another internal facility. Identical to the procurement lead-time, except it covers internal shipments rather than receiving shipments from external sources.

Transportation Lead Time Definition

The time from when an item is shipped to when it is received.

Goods Issue Lead Time Definition

The time from when an item is released to when it is available (normally for production or for shipment)

Goods Receipt Lead Time Definition

The time from when the item is received to when it becomes available as inventory.

Quality Inspection Lead Time Definition

The time from when an item is released to when it passes quality inspection.

Setup Lead Time Definition

A subcomponent of the overall manufacturing lead-time.

Total Lead Time Definition

Not a standardized term as there is no “total lead time” within a system. Rather it is a conceptual term.

Normally it is the entire time from when an order is placed until the item is delivered.

Notice that some these lead times are not referred to as “lead times.” For instance, one would ordinarily use the term “setup time” rather than “setup lead time.” However, the setup time is a lead-time as it is a time required to complete a task.

The Importance of Lead Time Accuracy

One of the major related issues with the lot size determination is data quality and accuracy of lead times. For a supply planning system to calculate accurate dates, the system must have lead times that reflect the reality of operations. The problem is that lead times often differ quite substantially from reality.

  • It should be noted that there is often a lead time variance from suppliers.
  • There can also often lead time variances in manufacturing as well as outbound transportation.

Interestingly this is not an issue that is discussed within companies. But it should be because it is a much wider problem than generally understood. And while there is a universal interest in forecast accuracy, lead time accuracy is often overlooked.

The Definition of Effective Lead Time

Effective lead-time is the lead-time required in the particular circumstance. Effective lead time is only modeled if the category of supply planning software call multi-echelon planning is used.

  • Different demand levels, lead to different circumstances and different needs to move to a higher echelon in the supply network.
  • The most important thing to consider is that while lead times between locations do not change (in the short term) effective lead times do change.

For software to be considered multi-echelon, it must have the ability to reflect the changes in effective lead time in its planning. This, combined with inventory optimization, which is a different set of mathematics. It is what allows the software to position inventory to the right location properly. To select the right quantity based upon the demand, the current stocking position, and the service level.

It can also be described graphically which can allow the reader to more intuitively understand what effective lead time is.

effecive-lead-time

Other Users of the Term Effective Lead Time

Another use of the term is when a company needs to determine if it has the raw materials/components/packaging material to make an order quantity. If a company can produce the sales order quantity from safety stock of all input materials, then the effective lead time is the production lead time.

If the order quantity exceeds this, the effective lead time must include the procurement lead time.

This is covered in more detail in this article.

How Can One Use the Concept of Effective Lead Time?

Interestingly, the term “effective lead time“ is unique to a special class of supply planning software, but is still useful to understand as a concept even if that category of software is not used.

Effective lead-time is the total lead-time required to deliver the product to its final destination. It is variable and dependent upon the stocking positions of higher echelons in the supply network. This is a conditional concept of lead time. A conditional concept of time for a lead time is quite foreign to the normal usage of the term lead time, which is static and hard-coded into a system.

When higher-level locations must be called upon to satisfy a demand, this lengthens the lead time.

In the excellent paper by Cohen, Agrawal, and Agrawal on dynamic asset deployment, this is described as follows.

“Similarly, investing in additional safety stock at a central depot reduces the effective lead-time for replenishment at the “child” locations connected to it. This lead-time reduction will, in turn, affect the stocking requirements at the child locations. Alternatively, such decisions are often constrained by the budgets allocated to the service organization. Consequently, if a particular asset is assigned to a specific location, it affects what can be assigned to other locations. Thus, the service levels that can be offered to customers at various locations are affected by these decisions, and are, therefore, interrelated; a high level of service to one customer may imply a lower level of service to another.” – Achieving Breakthrough Service Delivery Through Dynamic Asset Deployment Strategies, Cohen, Agrawal and Agrawal 2004 

What is Lead Time and Lead Time Meaning

Lead time meaning is the time required to complete a supply chain process required to provide product to a customer ultimately. Common lead times include:

  • Supplier Lead Time
  • Manufacturing Lead Time
  • Purchasing Lead Time
  • Shipping Lead Time

Additionally, there are lead times from the demand side. This includes:

  • Customer Lead Time
  • Order Lead Time

The Customer lead time and order lead time are considered to be synonyms.

Therefore when the question “what is lead time” the answer depends on what lead time is being discussed.

 Long Lead Time Items and Short Lead Time Items

A product location database can be segmented by the length of the lead time. What is considered a long versus short lead time can change depending on the company? For many US companies, the division between long lead time items and short lead time items is whether the product is sourced from overseas (often China) or domestically sourced. Of the products that are locally sourced cost more, but come along with short lead times.

Long lead time items must be planned considerably differently than short lead time items, and there is less margin for error. Long lead time items must carry more safety stock than short lead time items to make up for this.

How to Reduce Lead Time and The Feasibility of Lead Time Reduction

Often it is proposed that one can reduce lead times and therefore reduce the impact of lead times on supply chain planning. But really, what is the feasibility of lead time reduction? It turns out that there are normally few options to reduce lead times. The lead time that has the highest feasibility of lead time reduction is normally shipping lead time. However, shipping lead time is also normally expensive to reduce. And the supposed case studies that often are used to show the feasibility of lead time reduction tend to have little-published detail about them, and therefore are difficult to verify independently.

Conclusion

The lead time meaning is the time required to complete a supply chain process.

Lead times are one of the most important foundational components of supply chain planning. Many of the misunderstandings when it comes to business process or supply chain planning systems have their source in a faulty understanding of lead times. A good example of this is the notion that companies can simply switch to a make to order manufacturing environment.

  • Some things that many people do not think of as lead times are in fact lead times.
  • Lead times in most systems are static. But in some systems, they can be variable and dependent upon changing circumstances.

Lead times are any passing of time that can contribute to the time required to make something in the supply chain occur.

One of the most important lead time distinctions in companies is short lead time items versus long lead time items. Most companies treat the planning of short lead time items quite differently from long lead time items.

What is often not included in cost calculations for moving to lower cost items with long lead time items is the increased inventory costs which as well as planning and update costs which are incurred by accepting longer lead times. Finally, many of the

Finally, many of the case studies presented that show a reduced lead time example don’t stand up to scrutiny or don’t provide sufficient detail to verify if in fact lead times were reduced, and secondly, what costs were incurred to reduce those lead times.

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Brightwork MRP & S&OP Explorer for Tuning

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References

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

How to Best Understand Inventory Planning

What This Article Covers

  • What is Inventory Planning and Stock Planning and the Stock on Hand?
  • What is the Difference Between Forecast Based Planning and Consumption Based Planning?
  • What is an Inventory List or a list of Inventory Items?
  • Replenishment Lead Time, Procurement Lead Time, Manufacturing Lead Time and Shipping Lead Time or Lead Time For Delivery
  • What is The Role of the Inventory Clerk and the Inventory Manager?
  • What is an Inventory Planning System?

Inventory Planning

Introduction

This article will provide an overview as to many topics related to inventory planning, stock planning and inventory and stock inventory.

What is Inventory Planning and Stock Planning and the Stock on Hand?

Inventory planning or stock planning is the analytical process of determining the stocking levels throughout the supply network. This means planning for every product location combination in the supply network. Inventory planning or stock planning can be based on two primary approaches; one is forecast based planning and the second is consumption based planning.

The stock on hand is the stock at each product location combination (if the overall supply network that is being discussed) that the company has in inventory. The stock on hand can also apply to a specific product location combination, such as a particular product material in a specific distribution center.

What is the Difference Between Forecast Based Planning and Consumption Based Planning?

These two major approaches, which contain a large amount of detail below each are the following:

  1. Forecast Based Planning: This is where a forecast is used by the system to drive the ordering logic.
  2. Consumption Based Planning: This is where the consumption of the stock drives the ordering logic.

There is no need for a company to choose exclusively forecast based planning or exclusively consumption based planning as all supply planning applications contain settings for both, and their forecast based planning or consumption based planning can be used for specific product location combinations.

What is an Inventory List, a list of Inventory Items, Product Inventory or an Inventory Database?

The inventory list or the list of inventory items is the product inventory or inventory database that the company maintains. The inventory list or list of inventory items is not specific to a location, so will always be far lower than when locations are brought into the analysis. This is why it is always important to specify whether one means the inventory database or the inventory database per location.

Any inventory list should be reviewed for whether some of the products on the list of inventory items should be removed. This is because the inventory list has a way of proliferating over time due to things like new product introductions.

Replenishment Lead Time, Procurement Lead Time, Manufacturing Lead Time and Shipping Lead Time or Lead Time for Delivery

The various lead times connect in the following way:

For Manufactured Products

Replenishment Lead Time = Manufacturing Lead Time + Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time or Lead Time for Delivery

For Procured Products

Replenishment Lead Time = Procurement Lead Time (for raw materials, components, and subassemblies) + Shipping Lead Time or Lead Time for Delivery

There is often discussion of expediting the various lead times, but in many cases, the only lead time that is reasonably capable of being expedited is the shipping lead time or lead time for delivery. The shipping lead time or lead time for delivery can normally only be expedited at a considerable expense (unless the product in question is of high value and low weight)

There are cases where the opposite occurs, where the total fulfillment lead time is shorter than the order lead time. Examples of this include defense contracting and custom suits. While it receives a very high amount of coverage, this is in actuality a very small portion of the overall market that is as made to order. Make to order products tend to be premium priced, and many products that are thought to be made to order (such as configurable computers) are not made to order at all, but in fact, assemble to order.

What is The Role of the Inventory Clerk and the Inventory Manager?

The inventory clerk is the individual how touches the inventory and does things like the physical inventory. Although the term inventory clerk is a bit dated. The inventory manager performs inventory planning and also expediting of things like purchase orders and production orders. While the inventory clerk is entirely execution focused, the inventory manager must often keep inventory stock on hand below a certain cap, while attaining service level targets.

What is an Inventory Planning System?

An inventory planning system can refer to either an approach or to software applications that implements a particular inventory planning system.

Conclusion

The functions of inventory are to have the right amount of stock on hand when demands are received to meet expected service levels expectations. The foundational functions of inventory are to compensate for where the order lead time is shorter than the replenishment lead time.

While inventory planning and stock planning is certainly not a high profile activity, it is of great importance.

Inventory planning and stock planning has been greatly changed through the introduction of both inventory planning or supply planning software and the use of general tools like spreadsheets. These tools allow the inventory manager and others to manage far more inventory more effectively than they did in the past.

References

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

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Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

How to Best Understand to Replenish or Replenishment in SAP

Executive Summary

  • Supply chain planning systems are intended to improve replenishment.
  • We cover automatic replenishment system or a continuous replenishment program, retail replenishment and replenishment triggers.
  • We cover where replenishment is found in SAP.

Introduction: Replenishment as the Objective of Supply Chain Planning

Replenishment is the name of the game for supply chain planning and is when orders are triggered in the supply network. You will learn how replenishment fits into the overall supply chain picture and where it is found in SAP.

What is Replenishment?

The term “replenish,” or replenishment is natural to commingle in one’s mind with purchasing. However, the replenishment strategy drives both procured materials and produced materials. To replenish simply means to fill again. But when we speak about a replenish definition, we’re not just discussing the inventory to be sold; we’re also talking about the raw materials needed to produce the inventory and support its manufacturing.  A replenish definition needs to explain that stock replenishment applies to a supply network.

What is a Replenishment Triggers in an Automatic Replenishment System?

Replenishment triggers are actions that cause replenishment to occur. The term replenishment is easy to comingle in one’s mind with purchasing. However, the replenishment strategy drives both procured materials and produced materials. To replenish simply means to fill again. But when we speak about replenishment, we’re not just discussing the inventory to be sold, we’re also talking about the raw materials needed to produce the inventory and support its manufacturing. To understand this complex system of supplies that will need replenishing, let’s talk about supply networks.

The analysis work that planners stems from this question: when will each stocking location run out of any given material good? Supply planning systems only need to replenish the stocking location when there is good reason to do so, as the objective of supply planning is to minimize inventory and maximize service level. Across a supply network there are both planning and execution triggers. Some of these triggers are system determined – either ERP, external supply planning system, or warehouse management. Some triggers are external to the system. No matter whether the trigger is system generated or generated by a buyer or IT specialist, all replenishments are,at some point, reflected in the supply planning system with both a transaction (acquisition or goods or sale or product)and a change to the stock holding position at the stocking location.

Execution Triggers

Supply chain management can be segmented into planning and execution areas. Planning looks into the more distant future and attempts to make decisions that put the supply chain in the best possible position to meet demand given certain restrictions. Execution is the actual doing, the execution of the plan. For instance, creation of a purchase requisition does not cause anything to actually happen, because a purchase requisition is a planning transaction, not an execution transaction. However, once a purchase requisition is converted into a purchase order – now the order is sent to a supplier and, at that point, the “wheels” begin turning. Accounting entries are posted and physical things begin to happen within the supply chain.

Execution triggers exist in both ERP systems and warehouse management or WM systems. One example of an execution replenishment trigger in an automatic replenishment system that will be explained in order to illustrate the differences between a planning trigger and an execution trigger is the KANBAN functionality within some ERP systems.

Replenishment Terms

Replenishment has a wide number of related terms which are used in supply chain management.

  1. Inventory Replenishment or Stock Replenishment
  2. Replenishment Stock or Replenish Stock
  3. Inventory Replenishment Methods
  4. Inventory Replenishment System
  5. Replenishment Planning
  6. Automatic Replenishment System, Auto Replenishment or Continuous Replenishment Program
  7. Retail Replenishment

1. Inventory Replenishment or Stock Replenishment

Inventory replenishment or stock replenishment is the act of replenishing the inventory in the system. Inventory replenishment or stock replenishment can be considered a primary objective of supply planning as it provides replenishment stock to the right locations.

2. Replenishment Stock or Replenish Stock

Replenishment stock or replenish stock is stock that is brought into the supply network for replenishment purposes. Replenishment stock or replenish stock is not normally called out as such or specifically, as it is implied that it make to stock manufacturing environments, the stock is all in some way replenishment stock or replenish stock.

3. Inventory Replenishment Methods

Inventory replenishment methods are the techniques used to make decisions as to how much and when to bring in replenishment stock. Inventory replenishment methods are mathematical. One inventory replenishment method is called reorder point. Another inventory replenishment method is MRP. Inventory replenishment methods are implemented in the computerized era with an inventory replenishment system.

4. Inventory Replenishment System

The inventory replenishment system is software that performs the calculation of replenishment using the planned stock on hand, planned issues and receipts and sometimes goals like service levels to calculate the replenishment stock. The most common inventory replenishment system is ERP, but there are many other systems that are more sophisticated in terms of replenishment calculation. The inventory replenishment system is strongly connected with the concept of replenishment planning.

5. Replenishment Planning

Replenishment planning is the forward calculation of replenishment stock. Replenishment can be execution in orientation, such as when an empty bin triggers a replenishment signal, or it can be replenishment planning focused where the replenishment order is based on forward-looking calculation.

6. Automatic Replenishment System, Auto Replenishment or Continuous Replenishment Program

Automatic Replenishment system, auto replenishment or a continuous replenishment program is simply replenishment logic that is automated. The use of the terms automatic replenishment system, auto replenishment or continuous replenishment program harken back to the pre-computerized age when stock replenishment was calculated on a periodic basis and by hand. Today some consulting companies and software companies use the term auto replenishment or continuous replenishment program as sort of buzzwords. Automatic replenishment system, auto replenishment or continuous replenishment should simply be synonymous with the inventory system.

7. Retail Replenishment

For whatever reason, replenishment is often associated with replenishment stock sent to retail locations. Interestingly, even SAP has a software application called Forecast Replenishment or FR, that is all about retail replenishment. It’s unclear why this association with retail exists, but it is inaccurate. Replenishment applies equally to all parts of the supply network, not only to retail replenishment. Retail replenishment is the same activity as replenishing any other location.

Replenishment Planning Activities

The analysis work that planners stem from this question: when will each stocking location run out of any given material good?

Supply planning systems only need to replenish the stocking location when there is good reason to do so, as the objective of supply planning is to minimize inventory and maximize service level. Across a supply network, there are both planning and execution triggers. Some of these triggers are system determined – either ERP, external supply planning system or warehouse management.

Supply Planning System Generated Replenishment Triggers

These stock replenishment triggers are created through planning runs – or automated procedures that take demand or consumption and create automated replenishment recommendations. The demand-oriented supply planning system replenishment triggers are forecasts and sales orders – or projected demand and confirmed demand. The consumption-oriented replenishment triggers are based upon the monitoring of stocking locations – and triggered when the stocking location falls below a preset level.

  1. Forecasts: This is unconfirmed demand. It is what the company thinks it will sell.
  2. Sales Orders: This is confirmed demand.
  3. Reorder Point: This is a trigger based on the stock level. If the stock level or the projected stock level (some supply planning systems will trigger a replenishment based upon a projected stock level rather than a current stock level) is below the order point, then a new replenishment order is created.

Execution Replenishment Triggers

Supply chain management can be segmented into planning and execution areas. Planning looks into the more distant future and attempts to make decisions that put the supply chain in the best possible position to meet demand given certain restrictions. Execution triggers exist in both ERP systems and warehouse management or WM systems.

CPFR

It can be difficult even for supply chain people to understand how replenishment, is different from normal inventory and procurement management. Part of it is that replenishment is a general term meaning to simply restock or refill. Replenishment is highly connected to a concept called CPFR – Collaborative Planning, Forecasting, and Replenishment.

This is not to say that replenishment cannot occur without it, only that it is a driving concept behind replenishment and replenishment functionality in SAP.

We have included a definition of CPFR from Wikipedia below:

“CPFR seeks cooperative management of inventory through joint visibility and replenishment of products throughout the supply chain. Information shared between suppliers and retailers aids in planning and satisfying customer demands through a supportive system of shared information.”Wikipedia

Case Study of CPFR

The case study always mentioned in both CPFR and replenishment is Wal-Mart. Wal-Mart essentially collaborated very strongly with some of its largest suppliers to share information so that inventory balances in stores were known and possibly even controlled by inventory management at the supplier.

Applicability of the Wal-Mart Case Study To a Automatic Replenishment System Generally

While Wal-Mart is known for a high in-stock position and low-cost replenishment, a few problems are attempting to generalize the CPFR experience to other accounts.

  • Wal-Mart is the largest retailer by a wide margin in the world, and this means they had and have the leverage to push through CPFR, smaller retailers do not have this same bargaining power
  • Wal-Mart is known for very effective IT investment and has been a leader in this field for some time, including satellite uplinks at its stores. Not every retailer has the scale economies to benefit from this type of IT investment
  • Wal-Mart is strongly operationally and industrial engineering oriented. However, many retailers are not. The fashion retailers – The Limited, etc.., are run by merchants, not industrial engineers, so they lack the orientation and capability of Wal-Mart in IT or operations

Where is Replenishment Found in SAP?

Replenishment functionality in SAP exists in the following areas:

  • SAP IS Retail
  • SAP PP
  • SAP SCM F&R
  • SAP SCM SNC

SAP IS Retail

Can be run in two different ways

  • Replenishment for site (or internal replenishment)
  • Replenishment for external customers (the CPFR model)

SAP PP

Production planning has some replenishment strategies that are for internal production planning, that is quite a ways from our discussion on this topic, but we did want to note that it does exist in PP as well.

SAP F&R

This is a mystery module, and we have never heard of it implemented. We discuss this module at this article.

SAP SNC

SAP Supplier Network Collaboration supports some different procurement methods, of which replenishment collaboration is one. This is covered at this article.

Conclusion

The terms…

  • Inventory Replenishment
  • Stock Replenishment
  • Replenishment Stock
  • Replenish Stock
  • Inventory Replenishment Methods
  • Inventory Replenishment System
  • Retail Replenishment
  • Replenishment Planning
  • Automatic Replenishment System
  • Auto Replenishment
  • Continuous Replenishment Program

…are all used in supply chain management.

They all relate to what is the primary objective of supply planning, which is to move stock into the system at the right place and the right time.

The concept of what is referred to as “automatic replenishment system” really just means the computerization of replenishment. At one time there was a term called periodic ordering. This is really a term applied in the pre-computerized period where groups of product locations were placed upon a schedule for recalculation, because they need to be calculated by hand.

Considering an Automatic Replenishment System Versus a Correct Replenishment System

However, just because it is an automatic replenishment system, does not mean that it is ordering the right amounts or making the right outcomes. A major issue is that while supply planning applications have been around for decades (both MRP and more advanced external supply planning systems) the problems with these systems is they are still complicated to manage. These systems more often than not overwhelm the ability of companies to properly manage them.

Remote Supply Planning Consulting

  • Want Help with Supply Planning?

    It is difficult for most companies to make improvements in supply planning without outside advice. And it is close to impossible to get knowledgeable supply planning advice from large consulting companies. We offer remote unbiased multi-dimension supply planning support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

References

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

How to Best Understand SKU Stands and the SKU Number

Executive Summary

  • The term SKU has a specific meaning and is associated with the SKU number.
  • The SKU number tells us important things about the properties of the SKU.
  • There is a question of whether the location is part of the SKU, sometimes it is and sometimes it isn’t. And when it is it can be quite beneficial.

Introduction

SKU stands for “stock keeping unit” is a commonly used term in supply chain management. According to the website Lokad, an SKU is..

“Refers to a specific item stored to a specific location. The SKU is intended as the most disaggregated level when dealing with inventory.”

A little later on, I will discuss why this explanation of the term is inconsistent with something called the SKU number. Understanding what the term SKU stands for means knowing a bit how the term first developed.

Understanding what the term SKU stands for means knowing a bit how the term first developed.

Origin of What the Term SKU Stands For

The term Stock Keeping Unit was originally used at the store level. So if one goes into a Target, each product has a bar code and is called a Stock Keeping Unit. That is a distinct item from any other item in that store.

And for that purpose, the term works perfectly well.

The problem arises when one works in supply chain management, and that same Stock Keeping Unit is in many locations, including warehouses. Therefore what the term SKU stands for does not translate well outside of the single store environment.

SKU Numbers

SKU numbers are internal numbers and letters that are used for products. Sometimes the SKU number can have a code that is human-readable build into it. For instance, the following SKU number could apply for socks.

  • NK-SK-BL-8-12-0023

The code of this type of SKU number would be the following:

Manufacturer, Color, Size, Model Number. Therefore this is

Therefore this SKU number tells us that this is an (NK) Nike, (SK) Sock, (8-12) Size 8 to 12, (0023) model number.

Most SKU numbers are short, and therefore, one has to know the “code” to read them. A SKU number both identifies the SKU from other SKUs but also provides information about the SKU to the individual/company/entity that maintains the SKU.

Location as Part of the SKU Number?

Something else interesting about SKU numbers is that they do not have a location component. I have never seen a SKU number that looked like the following:

  • NK-SK-BL-8-12-0023-SDDC

That is the last add-on being (SDDC) San Diego Distribution Center.

This is because it makes no sense to have a location appended to a SKU because obviously, a SKU travels through the supply chain, and if it had a location appended to the SKU number, then everytime that SKU was transferred it would have to have its SKU number altered. That would create a serious problem.

Conclusion

  • The term SKU has been around for a very long time.
  • What the term SKU stands for is not descriptive. That it does not tell the listener what they want to know.
  • The term SKU does not include within it whether it refers to a location, and opinions vary as to what its meaning is.
  • When you use the term SKU, it may have a different meaning to the listener.
  • SKU numbers are important components to supply chain management, and a SKU number both identifies the SKU from other SKUs and provides information about that SKU.

Remote Supply Planning Consulting

  • Want Help with Supply Planning?

    It is difficult for most companies to make improvements in supply planning without outside advice. And it is close to impossible to get knowledgeable supply planning advice from large consulting companies. We offer remote unbiased multi-dimension supply planning support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

References

https://www.lokad.com/stock-keeping-unit-(sku)-definition

I cover supply planning and stocking principles in the following book.

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Service Level & Safety Stock Setting

Service Level & Safety Stock Setting

Setting service levels and inventory can be performed far more easily than is done at the vast majority of companies. Click the image to see how.

service_level_and_safety_stock_setting

Is the Term SKU a Useful Term?

What This Article Covers

  • What is a SKU?
  • The Problems with the Term SKU
  • The Term Product Location Combination, aka the PLC, aka the PL.
  • What is the Relationship Between the SKU and the Product Location Combination?
  • Counting Valid PLCs

The most important information carried by this term is two attributes. This is the uniqueness of the product and the uniqueness of the location. Does the term SKU communicate this information to the listener? In this article, you will find out. 

Introduction

SKU, which stands for “stock keeping unit” is a commonly used term in supply chain management. According to the website Lokad, an SKU is..

refers to a specific item stored to a specific location. The SKU is intended as the most disaggregated level when dealing with inventory.

That is not how I have found the term to be used in practice. Often when people use the term SKU, they only mean the “product” divorced from its location. For years the term SKU-Location or “SKUL” was commonly used in companies and still is.

The Problem with the Term SKU

The term Stock Keeping Unit was originally used at the store level. So if one goes into a Target, each product has a bar code and is called a Stock Keeping Unit. That is a distinct item from any other item in that store. And for that purpose, the term works perfectly well. The problem arises when one works in supply chain management, and that same Stock Keeping Unit is in many locations, including warehouses.

In that environment, the term SKU, which has some confusion as to whether it is tied to a location or not linked to a location is more confusing than helpful. I can say this because I have had repeated discussions where I have to ask, or the other person has to ask if they or I mean an SKU or an SKU location combination. For this reason, I recommend the use of a different term.

That is the term product location combination or “PLC” for short or even the “PL.”

The Product Location Combination, the PLC

The term “product location combination” is an excellent term because it is impossible to confuse with any other meaning. All supply networks are made up a mix of goods at locations. If we look at a company that carries 100 products and has 10 locations, then 1000 product site combinations are the maximum number of potential product location combinations.

Counting Valid PLCs

In most cases, the actual number will be significantly lower than this as companies don’t carry every product at every location. On the other hand, when on looks in the supply chain system, there are often many more product location combinations than the theoretical maximum because of old product locations that have not been removed from the system. Therefore another important distinction is how many “active” PLCs exist in the system.

Conclusion

  • The term Stock Keeping Unit has been around for a very long time.
  • Ther term Stock Keeping Unit is not descriptive. That it does not tell the listener what they want to know.
  • The term Stock Keeping Unit does not include within it whether it refers to a location, and opinions vary as to what its meaning is.
  • The term product location is far more useful for being self-descriptive.

References

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

https://www.lokad.com/stock-keeping-unit-(sku)-definition

I cover supply planning and stocking principles in the following book.

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Service Level & Safety Stock Setting

Service Level & Safety Stock Setting

Setting service levels and inventory can be performed far more easily than is done at the vast majority of companies. Click the image to see how.

service_level_and_safety_stock_setting

How to Best Calculate Ordering Cost for EOQ

Executive Summary

  • We cover the Economic Order Quantity formula and the applicability of the Economic Order Quantity and EOQ and perishability and quantity discounts.
  • EOQ can be calculated for both production and procured products.

Introduction: The Origins of the Economic Order Quantity

Economic order quantity (EOQ) is one of the oldest formulas in inventory management. It was first developed by Ford W. Harris in 1913. Since its introduction, EOQ has been one of the most important and most durable formulas in inventory management. You will learn about the calculation of EOQ, reorder points and the other factors which are included into the calcuation of EOQ.

What is the Reorder Point?

The reorder point tells the system when to reorder, while the economic order quantity tells the system how much to order; as such they are necessarily highly integrated values. EOQ is one method for performing what is generally known as lot sizing. The lot size is the quantity in which the item is produced or procured and therefore it is set at the production location combination in the product master.

Common Methods of Lot Sizing

Common methods of calculating the lot size are the following:

  • Lot for Lot: This is confusingly named because lot for lot is simply a lot size based upon the net requirements in a particular period. Therefore it is essentially no lot size. Using lot for lot sizing would be considered Lean as the company is only producing or procuring what it absolutely knows that it needs.
  • Economic Order Quantity: This bases the lot size on a financial calculation.
  • Periodic Order Quantity: This is simply the economic order quantity, but stated in terms of a reorder frequency.

The Applicability of the Economic Order Quantity

Some have proposed that because EOQ does not automatically adjust with the variability of its inputs, it cannot be used for more product location combinations (PLC’s) with more variable demand history, and this is true – if the data provided to the EOQ is not periodically changed. Therefore, it must be periodically recomputed for the entire product location database. It would be relatively easy to make the EOQ formula continuously altered based upon changes on its inputs, but I have yet to see this functionality in any supply planning application.

Validity and Applicability of EOQ

EOQ was originally developed for a production lot sizing. However, the book Factory Physics states the following with respect to EOQ:

“For example, in 1913, Harris published his original EOQ paper and established a precise mathematical standard for efficiency research with his famous “square root formula” for the lot size problem. While elegant, this formula relied on assumptions that – for many real world production systems – were highly questionable.”

  1. A fixed, known setup cost
  2. Constant deterministic demand
  3. Instantaneous delivery (infinite capacity)
  4. A single product or no product interactions

“Because of these assumptions, EOQ makes much more sense applied to purchasing environments than to the production environment for which Harris intended it. In a purchasing environment, setups (i.e. purchase orders) may adequately be characterized with constant costs. However in manufacturing systems, setup costs cause all kinds of other problems (e.g., product mix implications, capacity effects, variability effects). The assumptions of EOQ completely gloss over these important issues.”

This is the very well-known sawtooth pattern, which is a feature of the stocking level rising to its highest point when a new procurement order is received or a new production order is completed, and with the stocking level declining to its lowest point right before the procurement order is received or right before a new production order is scheduled. The minimum stock level should be the safety stock, which the inventory level may consume due to variability in demand or supply.

EOQ actually has a number of slight adjustments to the formula used to account for different requirements, like the calculator included at this article which calculates an EOQ in the case where the company wants to build inventory.

EOQ and Perishability

There can be scenarios where the shelf life of the product does not allow for the full EOQ to be ordered. In this case, the EOQ formula should not be used, and the shelf life time converted into units, should be used instead (Silver and Peterson).

The same issue applies to products that go through frequent revisions, where ordering the EOQ would or could result in significant obsolescence. EOQ must also be managed versus storage capacity. In general, storage capacity is less expensive than accepting increased costs through shorter production runs. However, this does not seem to have much influence with companies because they cannot quantify how their production costs change from changing the length of production runs.

Therefore, philosophy rather than facts tends to rule the day with a much greater focus being placed in inventory and storage costs rather than production costs. Although, this greatly depends upon the company. Some companies work exactly the opposite, focusing very little on reducing inventory and being primarily focused on minimizing procurement costs through buying in very large and uneconomic quantities. The question becomes quite a bit more grey for procured items where the costs to be traded off are quantity discounts and order costs.

Using Economic Order Quantity Formula in Live Systems

After EOQ’s calculation, it is most often placed into the minimum order quantity field which all supply planning systems have. This sets the minimum order level. However, sometimes other factors that are larger than this – such as when products must be purchased in rail carloads, set the actual minimum order level. In that case, no EOQ calculation is necessary. The minimum order quantity is the carload.

While the formula is one of the easiest in supply chain to calculate, many companies do not determine their unconstrained products (that is unconstrained by minimum order sizes such as with the example of the carload, or minimum package quantities) on the basis of EOQ. However, there really is no reason aside from work effort to not do so – and in fact, the work effort is quite low.

Economic Order Quantity and Forecast Error

The higher the forecast error, the less use the EOQ value is. This is because as the forecast error increases, the likelihood that the quantity will be consumed declines. However, this is no different from any other supply planning parameter; supply planning parameters have the highest value when the forecast is most accurate.

EOQ and Quantity Discounts

If there are quantity discounts, the calculation below will not be accurate. For instance, the formula below may propose an EOQ of 184 units. If the price per each at this level is $50, then this is a total cost of (184 * $50) + 45 or $9,245. However, if the quantity discount kicks in at 200 units and this discount is 15%, then 16 more units could be obtained for $8,538. This would be a missed opportunity. This can be easily calculated for an individual item, but this cannot really be systematized because supply planning applications do not have EOQ functionality or even step function min lot sizes. Typically this is handled by procurement as they are up to date on the volume discounts and will increase the orders to meet the discount.

How Often is EOQ Actually Calculated?

For whatever reason, most companies don’t get around to calculating EOQ or, if they do calculate it, they do so very infrequently. Students at university are often told that EOQ is frequently used in industry, when in fact it isn’t (this is just one of the misrepresentations of supply chain management on the part of college courses and supply chain textbooks). But this does not mean that it should not be used. EOQ certainly adds value and quantifies and then trades off the most important costs for making an ordering decision. That is the truth of how understaffed supply chain management departments are. They often do not have the staffing to apply elementary inventory management techniques that are over 80 years old.

Deriving EOQ Order Cost or Cost Per Order

If the item in question is procured than the standard term order cost or cost per order which is often used with the EOQ formula is correct.

EOQ For Procured Items

EOQ is often first introduced to people as the order cost or cost per order from a supplier. If you discuss this topic with companies, you will often hear order costs around $12 discussed. In fact, there are many web pages that estimate the ordering cost in the low teens. This is inaccurate and does not show appreciation for what the EOQ formula represents.

The order cost or cost per order for EOQ is supposed to moderate the number of orders that companies place, which means that the order cost or cost per order includes all the costs of placing the order. This includes not only the cost of placing the order in the system (which is the lowest cost portion of the order) but also the cost of receiving the order. The cost of moving the order into stock. The cost of tracking the order and following up if the order is not delivered, etc.. For this reason, once all the total ordering cost is considered, that is the cost of the initial order.

That is all the way to put away, an order cost of between $60 to $75 seems reasonable for many items. However, certain items can be much higher than this. Larger, more difficult items to manage should receive greater economies of scale in receipt and put away than smaller items. Once you move to ordering extremely large units, such as industrial equipment, the order cost or cost per order rises again. But on the other hand, as a percentage of the cost of the item, the order cost or cost per order cost may decline.

EOQ Internally Produced Items

If the EOQ is being calculated for an internally produced item, then the order cost or cost per order becomes the “ordering and setup/changeover cost.” This is the cost of changing the line over to a new product. Unfortunately, few companies have costings for their changeovers. Therefore, this usually takes some time to develop these costs.

EOQ and Production Planning

If the item in question is procured, then the standard term “ordering cost,” which is often used with the EOQ formula, is correct. However, if the EOQ is being calculated for an internally produced item, then the order cost becomes the “ordering and setup/changeover cost.” This is the cost of changing the line over to a new product. This is because what is called the ordering cost is really just the total costs for initiating the replenishment. Unfortunately, few companies have realistic costings for their changeovers. Therefore, it usually takes some time to develop these costs.

Conclusion

Order cost or cost per order estimation is tricky, and no one can say exactly what an ordering cost is for a particular item. Companies can use variable order cost or cost per order to change depending on the product.

One thing for certain is that the order cost or cost per order that is often presented on websites on the topic does not represent what the EOQ is meant to represent regarding the total order cost or cost per order.

To calculate the EOQ formula online, see our EOQ Calculator at this article.

Also, learn about the limitations of EOQ at this article.

Remote Supply Planning Consulting

  • Want Help with Supply Planning?

    It is difficult for most companies to make improvements in supply planning without outside advice. And it is close to impossible to get knowledgeable supply planning advice from large consulting companies. We offer remote unbiased multi-dimension supply planning support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

References

Lean and Reorder Point Planning Book


Lean and Reorder Point 2

Lean and Reorder Point Planning: Implementing the Approach the Right Way in Software

A Lost Art of Reorder Point Setting?

Setting reorder points is a bit of a lost art as company after company over-rely upon advanced supply planning methods to create the supply plan. Proponents of Lean are often in companies trying to get a movement to Lean. However, how does one implement Lean in software?

Implementing Lean in Software

All supply planning applications have “Lean” controls built within them. And there are in fact some situations where reorder points will provide a superior output. With supply planning, even within a single company, it is not one size fits all. The trick is understanding when to deploy each of the approaches available in software that companies already own.

Are Reorder Points Too Simple?

Reorder points are often considered to be simplistic, but under the exact circumstances, they work quite well.

There are simply a great number of misunderstandings regarding reorder points – misunderstandings that this book helps clear up.

Rather than “picking a side,” this book shows the advantages and disadvantages of each.

  • Understand the Lean Versus the MRP debate.
  • How Lean relates to reordering points.
  • Understand when to use reorder points.
  • When to use reorder points versus MRP.
  • The relationship between forecastability and reorder points.
  • How to mix Lean/re-order points and MRP to more efficiently perform supply planning.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: The Lean versus MRP Debate.
  • Chapter 3: Where Supply Planning Fits Within The Supply Plan
  • Chapter 4: Reorder Point Planning
  • Chapter 5: Lean Planning.
  • Chapter 6: Where Lean and Reorder Points are Applicable
  • Chapter 7: Determining When to use Lean Versus MRP
  • Chapter 8: Mixing Lean and Reorder Points with MRP-Type Planning

EOQ is calculated in supply planning systems.

Software Ratings: Supply Planning

Software Ratings

Brightwork Research & Analysis offers the following free supply planning software analysis and ratings. See by clicking the image below:

software_ratings

How to Understand the Types of Inventory Infographic

Executive Summary

  • There are important segmentation or types of inventory.
  • There is a segmentation of inventory that includes the types of inventory, inventory classification, and the uses of inventory.
  • The functions of inventory include the anticipation inventory, goods in transit or stock in transit, transportation inventory, pipeline inventory, lot size inventory and hedge inventory or speculative inventory.

Introduction to Inventory Segments

In this article, we will cover many of the different ways that inventory can be divided or segmented.

The Concept of Types of Inventory, Inventory Types, Categories of Inventory, Inventory Categories and Inventory Classification

There are many concepts of the types of inventory, inventory types, categories of inventory or inventory categories that are used in supply chain management. Some of these have to do with how the types of inventory or inventory types are treated by the supply planning system. For instance, high-value product inventory may be set on different supply planning settings that low-value product inventory.

Categories of inventory or inventory categories can be based upon what that inventory does. That is, is the inventory a raw material, a finished good, a component, work in process, etc. Understanding these categories of inventory is important both for working with others (so you can have a shared understanding of the meaning of different categories of inventory) but also to decide which of the inventory categories one may want to use themselves.

Target Stocking Level, Safety Stock Level, and the Initial Stock Level

One way of looking at inventory is the total amount of inventory in the system or the inventory at a stocking location in total. This can be viewed as the actual inventory versus the target inventory.

The target inventory or target inventory level is often made up of the following conceptual components.

  • TSL: The Target Stocking Level
  • SS: The Safety Stock Level
  • ISL: The Initial Stock Level

Each of these different stocks is shown in the following graphic:

tsl-or-safety-stock

  • Using this inventory optimization construct, a portion of the total stocking level is the safety stock, and another portion is called the ISL or initial stocking level.
  • The initial stocking level would be the target stocking level if no supply or demand variability were to exist.

Segmentation Of Inventory by Inventory Usage

  • Inventory has multiple inventory uses.
  • It can be categorized into multiple inventory types.
  • By categorizing inventory and evaluating the allocation of the overall inventory into the different uses and types, one can gain a measure of the relative impact on overall inventory of these segments.
  • It is also valuable to consider what the actual function is the inventory that is carried.

Types of Inventory, Inventory Classification, and Inventory InfoGraphic

The following infographic shows the types of inventory and inventory classification by two different dimensions.

inventory-categories

Functions of Inventory: Anticipation Inventory, Goods in Transit or Stock in Transit, or Transportation Inventory, Pipeline Inventory, Lot Size Inventory and Hedge Inventory or Speculative Inventory

Another way to categorize inventory is by its function.

  •  Fluctuation Inventory: Fluctuation inventory is inventory that is carried to account for variability in either demand or supply. The technical definition of this is safety stock.
  • Anticipation Inventory: Anticipation inventory is inventory that is held in anticipation of specific or unusual demand. It goes without saying that all inventory is “anticipatory” in nature unless the stock has been sold already, but what makes anticipation inventory different from normal inventory is that there is a reason that can be pointed to for carrying more inventory than normal. A very common example of anticipation inventory is inventory carried specifically for weather events.
  • Goods in Transit, Stock in Transit or Transportation Inventory: Goods in transit, stock in transit or transportation inventory is stock that is somewhere in the process.
  • Pipeline Inventory: Pipeline inventory is a subset of transportation inventory. However, pipeline inventory is only the portion of the stock in transit inventory that it is outbound to the customer.
  • Lot Size Inventory: A lot size is an order size that in many cases are larger than the demand. The lot size is applied to keep companies from purchasing in “non-economic” quantities, which means quantities that would incur overly high transaction costs. The resultant lot size inventory, therefore, is the inventory that is carried not because of need, but because the lot size required the quantity to be increased. Lot size inventory is differentiated from inventory that is purely demand driven.
  • Hedge Inventory or Speculative Inventory: Hedge inventory or speculative inventory is inventory that is carried above what would ordinarily be carried to meet the demand for a speculative purpose. If an entity were to conclude that some input material has a high chance of becoming more expensive in the future, then it would make sense for that entity to purchase and carry hedge inventory or speculative inventory which would reduce its cost of material acquisition. Hedge inventory or speculative inventory would tend to be the most common in raw materials, as the raw material can be converted into so many output items and never really becomes obsolete.

Classes of Inventory: Raw Materials Inventory and Raw Materials Examples, Components Inventory, Work in Process Inventory, Finished Goods Inventory

Another way to classify inventory is of its class.

  • Raw Materials Inventory: Raw Materials Inventory is the material that is in a very basic stated with little manufacturing or other processing performed by the supplier. Raw materials examples are things like gold, copper, grain, industrial powders, raw milk, etc. Raw materials examples will tend to be shipped in bulk.
  • Component Inventory: Component inventory is inventory that is a recognizable part or assembly that goes into the finished goods. When component inventory is held until a sales order is received, this is called assemble to order manufacturing.
  • Work In Process Inventory: Work in process inventory is material that has is somewhere along in the manufacturing process but is not yet a finished good or finished product.
  • Finished Goods Inventory: Finished goods inventory may be in storage at the factory right after manufacture, or finished goods inventory can be anywhere in the outbound supply chain. For entities that distribute an item rather than manufacture an item, these entities receive finished goods inventory from suppliers.

Conclusion

Most supply planning systems will not break out the total inventory by the types of inventory that I have listed above.

There are many “dimensions” by which one can “segment” inventory. This article explained some of the most commonly used.

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References

Safety Stock and Service Level Book

Safety Stock

Safety Stock and Service Levels: A New Approach

Important Features About Safety Stock

Safety stock is one of the most commonly discussed topics in supply chain management. Every MRP application and every advanced planning application on the market has either a field for safety stock or can calculate safety stock. However, companies continue to struggle with the right level to set it. Service levels are strongly related to safety stock. However, companies also struggle with how to set service levels.

How Systems Set Safety Stock

The vast majority of systems allow the setting of safety stock by multiple means (static, dynamic, adjustable with the forecast in days’ supply, etc..). However, most systems do not allow the safety stock to be set in a way that is considerate of the inventory that is available to be applied.By reading this book you will:

  • Understand the concepts and formula used for safety stock and service level setting.
  • Common ways of setting safety stock.
  • Service levels and inventory optimization applications.
  • The best real ways of setting both service levels and safety stock.

Chapters

Chapter 1: Introduction
Chapter 2: Safety Stock and Service Levels from a Conceptual Perspective
Chapter 3: The Common Ways of Setting Safety Stock
Chapter 4: The Common Issues with Safety Stock
Chapter 5: Common Issues with Service Level Setting
Chapter 6: Service Level Agreement
Chapter 7: Safety Stock and Service Levels in Inventory Optimization and Multi-Echelon Software
Chapter 8: A Simpler Approach to Comprehensively Setting Safety Stock and Service Levels

Software Ratings: Supply Planning

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How to Make DRP Software Better

What This Article Covers

  • Observations from Companies that Run DRP
  • DRP System Comparison
  • Testing With an External System
  • How The Large Consulting Companies Stand in the Way
  • The Consequences
  • The Intelligence of This Sequence
  • Diagnosing DRP Issues
  • Lead Time Accuracy
  • Deployment Parameters
  • The Importance of Deployment Parameters
  • Deployment Parameters Flexibility
  • Determining the State of a DRP Implementation

Introduction

DRP implementations have common areas where they can be improved. I have run into quite a few companies that were unhappy with their DRP systems. But on the other hand, I rarely run into many companies that put enough into their DRP systems. One of the great misunderstandings in this area is that migrating to a new system with a new more advanced supply and production planning method (i.e., cost optimization, prioritization, etc..) will solve the issue of DRP dissatisfaction.

Most companies that think this way have not properly maintained their DRP systems, so they don’t know what they could get out of them.

Observations from Companies that Run DRP

The evidence that I have seen is that companies that have a problem maintaining DRP systems have even a greater problem maintaining more advanced methods. The reason for this is that DRP systems have comparatively less maintenance and are easier to understand and troubleshoot than the more complex methods within advanced supply planning systems. For instance, compared with other supply and production planning methods, such as prioritization or cost optimization DRP is far easier to understand. There is also an enormous processing time difference between DRP and say cost optimization or cost optimization.

Secondly, the more advanced methods all use some of the same data as DRP systems. So lead times, deployment parameters, sales orders, forecasts are all the same. The areas, which are different, include the user interface and the calculation method and the way that the problem is calculated. C0ntrary to what many think, there is no waste in doing this because after the inputs are improved within DRP, they are simply ported to the new supply planning system whenever it comes online.

Therefore whether improving the DRP system to continue to use the DRP system or improving the DRP system in preparation for migrating to a more sophisticated supply and production planning method, I have found the following to be consistent areas of opportunity.

DRP System Comparison

A major problem with the DRP systems by companies is that they have no means of comparing the DRP planning output to another system. This is a problem because it makes diagnosing the system far more challenging. Companies can run their live or production DRP system in simulation mode – which is where a separate copy of the data is created, but the same hardware is used to process the procedure – and the simulation results do not impact the live version. The benefits of this are explained in the following quotation:

“In the demo version of the system you can try and work out what the limits of your system are. If you have a question and you can configure your system to accept the change you can test it. If the test goes wrong when you operate the system then you will know how the system reacts and can avoid doing that on the real system. From doing this experiment you can gain insight into how you can further improve the system.” – Making MRP Work: A Practical Guide to Improving Your System’s Performance

Testing With an External System

I am proposing going a step beyond simply creating a simulation version and testing every change in one DRP system. For a number of years now, I have advised clients to stop thinking in terms of a single solution for supply planning and to entertain more than one supply planning solution. This includes external simulation tools and general optimization solvers— that can enhance their company’s capabilities and meet more requirements that any one tool can, even with expensive enhancements.

How The Large Consulting Companies Stand in the Way

Doing this is an uphill battle because the large consulting companies promote the mindset that all of the supply planning needs of a company can, and should, be met by a single application model. Financial incentives blind large consulting companies to better ways of doing things. And while this is the official position of the large consulting companies, it is also the position of IT that want as few applications to maintain as possible.[1]

In most cases, DRP is run from an ERP system.

The problem with this is that ERP systems are in most cases difficult to diagnose and troubleshoot. ERP systems excel at enforcing an enormous number of rigid rules and processes on business.

The Consequences

This has positive and negative consequences, although the ERP vendors and the major consulting companies tend to emphasize the positive consequences if for no other reason that they make money selling and implementing these systems. In some cases vendors and consulting companies will discuss the “best practices,” but in many cases what is offered in the software is simply a generic practice, or specifically a logical sequence. It is a logical sequence that one would post a goods issue before a goods movement, and very difficult to see how this is innovative, requires special thought or a best practice. In fact, many countries have accounting rules that state this must occur in this sequence. There are also many cases where a generic practice is to create the forecast before creating a supply order, at least for make to the stock environment.

The Intelligence of This Sequence

There is nothing particularly intelligent or insightful about this sequence; it is just how it should naturally be performed. This is a natural course in the same way that is opening a car door should precede starting the car. One can instead choose to start the car by rolling down the window, starting the car from outside and then opening the door to get in, but it would make little sense to follow this alternative sequence.

Therefore, ERP systems in my estimation did not do anything to enable DRP to be run better than it had before ERP systems – although this was promised to be the case because ERP systems were so integrated. Integration does not improve the actual functionality, and most ERP vendors stopped developing their DRP functionality years ago – building it to an elementary state, and then choosing to focus on other things.

Diagnosing DRP Issues

Most ERP systems are not the best systems in which to troubleshoot and diagnose DRP problems. What can be useful is to run DRP for just a small number of products and review and document the results, make a change to the system, and then rerun DRP and re-review and document the results. Changing inventory parameters in many ERP systems is often a tedious process. There are smaller and nimbler DRP systems that can be purchased to allow a person to run DRP much more quickly. Then the output from this external system can be used to check the results within the ERP system. Some of these applications are inexpensive, and in my experience, the improvement in efficiency quickly makes up for the costs of the software. I believe this so firmly that I purchased this software myself, as many companies prefer to not buy a DRP application for a month or two of analysis – and this allows me to use a DRP application, which can run circles any ERP based DRP functionality.

Lead Time Accuracy

For the DRP system to provide correctly timed stock transfer requisitions, lead times, which for DRP are the lead times between the locations in the supply network, need to be as accurate as they can be reasonably made. The objective here should be to tell the planning system the “truth.” Comments about reducing lead times should be subordinated to what the lead times are. As soon as the lead times decline, this master data can be updated.

Deployment Parameters

This is rather obvious, but deployment is typically controlled by deployment parameters. Not all systems will have the same parameters, but some of the common parameters are the following:

  1. Push or Pull Distribution: The deployment system can either wait for a demand signal from the receiving location or push ahead of demand. There are different degrees of push or pull. One can only consider sales orders as a replenishment trigger. Or both sales orders and forecasts can be found as demand. Of course, if forecasts are considered (which is more often the case), then the system becomes more push based. In a push distribution configuration, a material will be pushed through the supply chain in advanced of any forecast as well. Therefore, it is not simply a question of the following push or pulls, but of choosing a strategy, which is along a continuum between push and pulls. This would ordinarily be set in in the product location master.
  2. Fair Share Allocation: Fair share allocation is a method of allocating demand under conditions of shortage. How fair share deployment allocation works very much depends upon whether a push or pull strategy is configured. When a pull deployment is used, and when there is less demand than supply (also known as the available to deploy), fair share is not used. If demand exceeds supply, then some mechanism must determine which receiving location will receive which allocation. Conversely, if push deployment is used and there is Excel available to deploy versus the target stocking level, then fair share would not be used. If the combined requirements from the target stock level in the receiving locations are higher than the available to deploy, then again fair share allocation would be used. Some deployment systems can allocate stock depending upon different rules. This would ordinarily be set in in the product location master. A few examples of this are the following:
    1. Previous Demand: This allocates the stock to be deployed based upon the previous demand allocation.
    2. Target Stock Level: This requires a target stocking level to be set at every location. The target stocking level is the stock level that should be carried. This typically requires an inventory analysis to determine.
    3. Quota Arrangements: A quota can be set between the locations and the deployment between two or more locations will respect the configuration of this quota.
  3. The Horizon: An important are of configuration is how far out to make the deployment decision. This is the deployment horizon. The deployment horizon is a planning horizon and the duration over which the stock transfers recommendations are created. Outside of the horizon, any forecast, sales order, planned inventory level could exist, but it will not drive a deployment recommendation. This would ordinarily be set in the procedure setting. Therefore, one DRP planning run could be set for one week, while another could be set for two weeks. This deployment planning horizon may change depending on the time of year. Also, one can choose to run the deployment for any sub-segment of the product location database.

The Importance of Deployment Parameters

As the deployment parameters are so important to how the deployment is run, it’s important to evaluate all of the parameters and ensure that they match the business requirements. There are all types of decisions that must be made that go to the policy of the company’s deployment. For instance, does the company want to deploy based on sales orders or sales order and forecasts? Is a push or pull deployment desired? How far out should the stock transfers be created? Secondly, it’s important to look at all of these parameters about on another. Looking at any parameter in isolation, which is the most common way that deployment functionality tend to implemented will result in suboptimal outcomes.

This means that a company that wants to get the right answers needs to create a series of deployment scenarios and then track the situation through all of the deployment implications. This should be done for a variety of deployment parameters to ensure that the way the deployment parameters are set will work as much of the time for the common scenarios that the company faces.

Deployment Parameters Flexibility

Because in many systems the deployment parameters (depending on the parameter) change changed either per product location combination or the deployment planning run, the company has a great deal of flexibility in deployment parameters. It can, therefore, customize the parameters for certain products. As an example, it can choose a one-week deployment planning horizon for one region, or for some products within that region, but a two-week deployment horizon for other products or other regions. The best way to keep all of this straight is to create a deployment parameter spreadsheet which declares the coding for each product location combination.

In the example above, the product locations that had the one-week deployment planning horizon applied to them would have this called out in the spreadsheet. This also makes reviewing the settings much easier than having to cycle through all of the product locations combinations within the system or trying to find or create a report that will present the information in an optimized way for the evaluation.

Determining the State of a DRP Implementation

Before beginning DRP improvement project, it is important to understand the usage level of the DRP system. It’s not sufficient to ask executives this question as they receive most of their information about the system second-hand and are not in the system dealing with its output.

An understanding can be typically be determined from just a few interactions with those that use the system. I have also found it important to list the statements that are collected from these interactions. This is because when combined, the statements can be triangulated and can provide insight into the system’s usage.

Conclusion

There are variances regarding what are the largest areas of opportunity for improving DRP systems. A significant opportunity exists for every company I have encountered to make a small project focused on improving DRP worth the effort. It should be understood that any DRP improvement project should be undertaken with an open mind regarding the areas of opportunity because in many cases the company itself is not only unaware of where the opportunities lie, but also how large the opportunities are.

However, a DRP system can be diagnosed, and from there a prioritized list of what to focus on can be created. Typically there will be a funding limitation – even though DRP improvement projects don’t take very long – there tends to be much less appetite for spending money on fixing a DRP system than there was for funding the initial DRP/ERP system implementation. I am not sure why this is the case, but it may have something to do with not wanting to pay for something twice.

Most large consulting companies – along with vendors make quite unrealistic promises of the improvement that will occur from implementing a new application. So implementing companies are most often lead to believe that no further tuning of the system is necessary. This need to allocate money for future tuning and improvements, something that extremely few software vendors will agree to include into the total cost of ownership TCO calculation is something that I set as a default value when calculating TCO.[2]

All of these adjustments take money and time. It typically makes sense to improve DRP for the most important (largest, most profitable products) before moving on to less critical products. Most companies have some very high volume products where improving DRP makes a big impact on the bottom line. Marketing, through product proliferation, tends to grow the product database so that most companies now have scores of products that it would be better for the company to discontinue, but marketing will not allow it. Under optimal circumstances and unlimited funding all product location combinations would be analyzed for improvement, but in most cases, this will not be feasible.

Therefore identifying the most relevant product location combinations is typically an important first step which can reduce the overall work effort and bring it down to a manageable level which matches the available funding.

[1] Even a single application can have too much maintenance if the application is naturally higher in maintenance.

[2] TCO is strangely under calculated, and it is frequently proposed that neither software vendors, nor consulting companies nor analysts like Gartner want TCO calculated. Instead, it is far better to suggest the importance of TCO as a general concept but never to calculate TCO. This is explained in great detail in this SCM Focus Press book.

References

Brightwork MRP & S&OP Explorer

Improving Your Supply Planning, MRP & S&OP Software

Brightwork Research & Analysis offers the following supply planning tuning software, which is free to use in the beginning. See by clicking the image below:

Supply Planning Book

SUPPLY

Supply Planning with MRP, DRP and APS Software

Showing the Pathway for Improvement

Supply planning software, and by extension supply planning itself, could be used much more efficiently than it currently is. Why aren’t things better?

Providing an Overall Understanding of Supply Planning in Software

Unlike most books about software, this book showcases more than one vendor. Focusing an entire book on a single software application is beneficial for those that want to use the application in question solely. However, this book is designed for people that want to understand supply planning in systems.

  • What methods fall into APS?
  • How do the different methods work and how do they differ in how they generate output?
  • What is the sequence of supply planning runs?

These types of questions are answered for readers in this book.

This book explains the primary methods that are used for supply planning, the supply planning parameters that control the planning output as well as how they relate to one another.

Who is This Book For?

This book as a practical primer for anyone looking to perform a supply planning software selection, any person beginning a supply planning project, or anyone who just wants to understand supply planning software simply better.

Chapters

  • Chapter 1: Introduction
  • Chapter 2: Where Supply Planning Fits Within the Supply Chain Planning Footprint
  • Chapter 3: MRP Explained
  • Chapter 4: DRP Explained
  • Chapter 5: APS Supply Planning Methods
  • Chapter 6: APS for Deployment
  • Chapter 7: Constraint-based Planning
  • Chapter 8: Reorder Point Planning
  • Chapter 9: Planning Parameters
  • Chapter 10: How MRP, DRP, and APS Relate to One Another
  • Chapter 11: Supply Planning Visibility and Master Data Management
  • Chapter 12: Understanding the Difference Between Production Versus Simulation

 

Software Ratings: Supply Planning

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How to Best Understand Make to Stock

This Article Covers

  • The Make to Stock Definition
  • The Relationship Between the Sales Order and the Replenishment Trigger
  • Where Make to Stock Environments Apply

Definition-2

Make to Stock Definition

Make-to-Stock (MTS, a.k.a. Build-to-Stock or Build-to-Forecast): Here the replenishment is triggered by a forecast. Probably misnamed, MTS should probably have been called make to forecast, as the forecast is the trigger for replenishment – which of course results in stock until the actual sales order arrives.

Make to stock, or sometimes called (MTS) is one of the major manufacturing environments. The others are

  • Assemble to order
  • Engineered to order
  • Make to order.

Make to stock is the most common of the manufacturing environments. While little discussed, make to stock allows for economies of scale in procurement, manufacturing, and distribution, which lowers the unit costs of items.

The Relationship Between the Sales Order and the Replenishment Trigger

All procurement and production are performed before the sales order is received. By contrast, both Engineering-to-Order and Make-to-Order all of the procurement and production is performed after a sales order is received.

And that is with the products in the BOM for Engineering-to-Order being procured and produced the latest after the sales order is received as, at the time of the receipt of the sales order, it is not known exactly what is to be built.

In MTS, the replenishment is triggered on the basis of a forecast.

Where Make to Stock Environments Apply

In markets or submarkets where customization is more important than volume or cost to the consumer, production can be postponed until after the sales order.

In markets or submarkets where costs are more important, and there are little in the way of benefits of customization for the product make to order is not an option.  A good example being light bulbs for instance. Here production should be performed before the receipt of the sales order. It should also be observed that multiple manufacturing environments are employed for the same category of product. For instance, one can either buy a dress shirt from Brooks Brothers in a store, which was produced with a make to stock manufacturing environment or can provide one’s measurements to a tailor and have the shirt custom made in a make to order manufacturing environment.

Remote Supply Planning Consulting

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    It is difficult for most companies to make improvements in supply planning without outside advice. And it is close to impossible to get knowledgeable supply planning advice from large consulting companies. We offer remote unbiased multi-dimension supply planning support.

    This article is free, we do not answer questions for free. Filling out this form is for those that have a budget. If that describes you, just fill out the form below and we'll be in touch asap.

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References

Make to order, assemble to order and more topics related to replenishment triggers are covered in my book.

Replenishment Triggers Book

Replenishment Triggers

Getting the Terminology Right

The terms make to order and make to stock roll quickly off of people’s tongues regardless of their knowledge of other supply chain conditions. Many executives speak about “moving to make to order environment.” For most companies, this simply is not realistic. And many businesses that say they do make to order/configure to order/engineer to order are doing assemble to order planning.

The Universality of The Manufacturing Environment Type

These terms are specific types of manufacturing environments. They are embedded in almost all supply planning applications ranging from the most basic ERP to the most sophisticated advanced planning system. However, each manufacturing environment leads to some implications, implications that are most often not completely understood.

Getting Clear on Requirements Strategies

Requirements strategies are what control what drives the replenishment of supply in systems. In most cases, the need strategies control whether the forecast or the sales order triggers replenishment.

This book cuts down the amount of time that is required for people in companies to understand the relationship between manufacturing environments (the business) and requirements strategies (the technology setting in the supply planning application).

By reading this book you will learn:

  • What are the major manufacturing environments and what determines which manufacturing environment a company follows?
  • How do the different manufacturing environments impact how inventory is carried?
  • How are the various production environments configured in software?
  • What is mass customization, and how accurate is useful is this concept in real life?
  • What is the interaction between variant configuration and the manufacturing environment and the bill of materials?

Chapters

Chapter 1: Introduction
Chapter 2: The Different Manufacturing Environments
Chapter 3: Triggering Replenishment
Chapter 4: Requirements Strategies
Chapter 5: The Make to Order Illusion
Chapter 6: The Limitations to the Concept of Mass Customization
Chapter 7: Forecast Consumption
Chapter 8: Variant Configuration in SAP ERP
Chapter 9: Conclusion

Software Ratings: Supply Planning

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