Reorder Point

How Does Reorder Point Work in SAP?

Executive Summary

  • The question of how does reorder point work in SAP is important to using it properly.
  • We cover how does reorder point work in SAP in both ERP and APO.

Introduction

Reorder points have a poor reputation. Many people that critique them do so on the basis that they do not “look forward.” Reorder points are underused. However, they are appropriate under certain circumstances. MRP is a forecast based planning method. Reorder points are a non-forecast or consumption-based planning method. That is, they are triggered by stock dropping below the reorder point. Each supply planning method can be used for product location combinations to good effect, but they tend to apply to opposite conditions related to forecast accuracy. Both SAP A P O and SAP ERP have reorder point functionality. You will learn the basics of reorder points, then move into how they are calculated, and then set up in SAP A P O and SAP ERP.

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Background on Reorder Point Planning in SAP

For many years, companies used reorder point planning in SAP ERP before some companies decided to move to APO for their planning. Reorder point planning is still quite popular with several companies. As I describe in the book Supply Planning with MRP, DRP, and APS Software, in a historical review of the topic of reorder point planning that was research for the book, I have concluded that reorder point planning has been unfairly maligned, primarily by software vendors and consultants and even several authors chose to take a one-sided view of the topic, characterizing reorder point planning as passe.

Many of the arguments used against reorder point planning don’t hold up under scrutiny when considering products with specific demand history characteristics (I provide this scrutiny to specific anti-reorder point planning quotations taken from other books). I say this having worked in and implemented every supply planning method available in the software: reorder points have their place, and many of the reorder point planning critics have unfounded reasons for resisting them.

Reorder Point Planning in SAP ERP

Let’s look at the reorder point controls that are found on the Material Master in SAP ERP. This is the most common ERP system, but most systems with supply planning functionality work similarly. SAP has the following quotations on reorder points:

The system then calculates the net requirements. The system compares the available stock at plant level (including safety stock) plus the firmed receipts that have already been planned (purchase orders, production orders, firmed purchase requisitions and so on) with the reorder point. If the sum of the stock plus receipts is less than the reorder point, a material shortage exists. – SAP Help

This makes it sound as if the reorder point in SAP ERP does forward calculate, but an important question is how long.

The reorder level (also known as the reorder point) is made up of the sum of the safety stock plus the expected average material consumption within the replenishment lead-time. Therefore, when determining the reorder level, you must take safety stock, previous consumption values or future requirements, and the replenishment lead time into account. – SAP Help

Therefore, it is over the replenishment lead-time. So in a formula format, it looks like the following:

Sum (Safety Stock + Expected Average Consumption for the Replenishment Lead Time)

The reorder level or point is essentially the demand over lead-time + the safety stock, which is the upper level of demand based upon the variability in supply and demand (depending upon how the company calculates safety stock and the safety stock takes into account). Manual or Externally

Calculated Reorder Point Planning in SAP ERP

Once the external program produces values, or if the reorder points are to be manually determined, these are the fields that are populated. This is shown in the following screenshot:

Automatic Reorder Point in SAP ERP

When calculated automatically using the base functionality in SAP ERP, SAP has the following quote on how this works:

If you choose the automatic reorder point planning procedure then both the reorder level and the safety stock level are determined by the integrated forecasting program. The system determines the forecast values for future requirements by means of historical data. From these forecast values, the system then calculates the reorder level and the safety stock level, taking the service level, which is specified by the MRP controller, and the material’s replenishment lead time into account. The system then records these two values in the appropriate material master record. Since the forecast is carried out at regular intervals, the reorder level and the safety stock level are continually adapted to the current consumption and delivery situation. This means that a contribution is made towards keeping stock levels low. – SAP Help

This is shown in the graphic below:

This setting would be a problem for many clients that I work with. They don’t necessarily want their safety stock determined by an integrated forecasting program because they are selecting automatic to reorder point determination.

Using this also means setting a service level and setting it for every product location combination. This can be another problem because companies typically don’t have a custom service level but often have blanked service levels. However, a blanked service level for large parts of the product database can be applied. Some schemes may look like the following:

  1. A Products: 98% Service Level
  2. B Products: 95% Service Level
  3. C Products 88% Service Level

Once the external program produces values, or if the reorder points are to be manually determined, these are the fields that are populated. Setting service levels with safety stock in the most integrated and intelligent way that I am aware of.

How Should EOQ and Other Supply Planning Parameters be Calculated?

One would be able to, for example:

Item #1: Simulation

Set the supply planning parameters in a way that one can simulate the impact on the overall supply plan. When using supply planning systems, inventory parameters are typically managed on a "one by one" basis. This leads to individual planners entering values without considering how inventory parameters are set across the supply network.

Item #2: Interactivity of Changes

This is the ability to see the relationship between changes to service levels and the simulated output.

Item #3: Seeing Financial Implications

This is the ability to see the impact on the dollarized inventory for different aggregate settings.

Item #4: Mass Change for Efficient Maintenance

This allow the parameters to be changed en mass or as a mass change function. Both supply planning systems are designed to receive parameters; they are not designed to develop the parameters.

Getting to a Better Parameter Setting Capability

We developed an approach where EOQ and reorder points are calculated externally, which allows for a higher degree of control. And for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level, and a picture of what is happening to the overall system. Calculating individual parameters like EOQ without an appreciation for the systemwide does not make any sense. Also, in many, perhaps even most cases, there is no reason to use EOQ for the purposes given above. Instead, an alternative custom order batching method can be created to replace EOQ. There is nothing magical about EOQ. It is not a "best practice." It will not provide you with "digital transformation." It is not "Six Sigma." You will not get a "black belt" for using it.

After observing ineffective and non-comparative supply planning parameter setting at so many companies, we developed, in part, a purpose-built supply planning parameter calculation application called the Brightwork Explorer to meet these requirements.

Few companies will ever use our Brightwork Explorer or have us use it for them. However, the lessons from the approach followed in requirements development for supply planning parameter maintenance are important for anyone who wants to improve order batching and supply parameters.

Conclusion

This article answers the question of how does reorder point work in SAP? How does reorder point work in SAP has several different answers depending upon the configuration.

A reorder point is very simply a quantity of stock or an interval at which a “reorder,” or order is created. In reorder point planning, orders are not triggered by a specific requirement (such as a forecast or dependent condition) but instead by depleting stock over time, eventually triggering the minimum stock level or reorder point. Reorder points can be used with any of the supply planning methods, or they can be used to control the supply plan without any of the methods exclusively. However, when used solely to control the supply plan, the company is said to be performing reorder point planning instead of forecast-based planning. MRP/DRP and APS (heuristic, allocation, cost optimization, inventory optimization) methods are forecast-based planning.

And it comes down to the forecastability of the product location combination. If the forecast is of reasonable accuracy, then MRP can be used. If the forecast is high in error, and cannot be improved much beyond this error, then a reorder point will typically perform better than creating a forecast.

We developed an approach where reorder points are calculated externally, which allows for a higher degree of control and for the average inventory to be coestimated in a way that provides an observable total system inventory, holding cost, service level, and a picture of what is happening to the overall system. This is called the Brightwork Explorer. Calculating individual parameters like reorder points without an appreciation for the systemwide does not make any sense.