- There is a general misunderstanding of what MRP and external supply planning systems do.
- What happens without order sizing and the results of misunderstanding systems regarding order optimization.
Optimal order size depends upon factors that companies normally do not use to determine order size. One of these should be the fully loaded cost of inventory as well as the ordering cost and the product cost.
- Companies often discuss using EOQ, but most often do not activate EOQ in their ERP or external supply planning system.
- Most order sizing that has been placed into ERP and other supply planning applications has been placed there not based upon calculations.
This leads directly to the next point, which is what executive decision makers understand MRP systems actually do, and what they don’t do.
Misunderstanding of What MRP and External Supply Planning Systems Do
One of the most significant areas of misunderstanding of supply planning software is that it is frequently thought that MRP or external supply planning systems optimize these parameters.
They do not.
Let us review what they actually do with respect to order sizing specifically.
- These applications rely upon the ordering logic as input into the systems to tune or modify the method that is used.
- These applications then run a procedure (which is usually one of the leading selling points of the application — MRP is one example of a supply planning procedure) — which then uses these ordering quantities.
What Happens Without Order Sizing?
Without order sizing the ordering quantities will match demand. However, this does not account for the limitations that exist in the supply network. A supply planning system without order sizing will create a large number of orders in quantities that don’t make any sense and can’t be converted to purchase or production orders.
The Results of Misunderstanding Systems Regarding Order Optimization
Because it is so frequently thought that the system optimizes the ordering, this results in order quantity setting being sub-optimized within companies.
This is why we developed the Brightwork MRP & S&OP Explorer. Brightwork MRP & S&OP Explorer is designed to calculate all of the inventory parameters including EOQ easily and to do so in a way that is integrated with the service level targets of the company.