How to Use Reorder Point Planning in SAP ERP and SAP APO

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Executive Summary

  • Reorder points are important planning methods that are generally underutilized.
  • This article covers how to use reorder points in both SAP ERP and APO.

Introduction: Why Use Reorder Points

Reorder points are a non-forecasting based planning approach to setting the replenishment trigger in supply planning. You will learn the basics of reorder points, and then move into how they are calculated, and then how they are set up in SAP APO and SAP ERP.

What Are Reorder Points?

A reorder point or re-order level is merely a quantity of stock at which a reorder, or order is to be created. In reorder point or re-order level planning, orders are not triggered by a specific requirement (such as a forecast or dependent requirement). They are triggered by hitting a minimum stock level or reorder point. Production orders, purchase orders, and stock transfer orders are simply generated based upon the relationship between the stocking level and the reorder point.

What is the Reputation of Reorder Points?

Reorder point or re-order level planning is frequently underestimated and considered primitive by many if not most authors in inventory management. In fact, it is common to come across the term KANBAN when describing reorder point planning. KANBAN is a card-based scheduling system used within one facility to control replenishment that was popularized by Toyota and other Japanese manufacturers. For reasons that seem to be based upon the association of each term, KANBAN is often considered desirable, while reorder point is generally not.

Are All Reorder Points and Reorder Level Methods that are Used in Reorder Point Planning That Simple?

Actually no.

  • How the reorder point is set can be quite sophisticated.
  • Many vendors tend to offer simple methods of performing reorder point planning in their applications.
  • For instance, reorder points in SAP APO versus SAP ERP are both relatively straightforward. Although there are quite a few alternatives regarding how to reorder points are set.

Reorder Level Formula

A reorder level formula is merely another name for a reorder point formula. Either a reorder level formula or reorder point formula gets you to the same place, and its complexity can be placed on a continuum.

SAP has the following quotation on the reorder level/reorder point:

“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

So in a formula format that would be the following:

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

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

How is Reorder Point Planning Different from Forecast Based Planning?

Forecast planning feeds a forecast from demand planning to supply planning, and a supply planning procedure or method (i.e. heuristics, optimization) is then run on these requirements. Reorder point planning uses no forecast and simply reorders in the lot size when the planned stock level drops below the reorder point. Some people will talk about using a forecast with a reorder point, but this is not correct.

There is a rule that I have developed to help companies determine when one approach is preferable over another and it is described in this article. I also explain reorder point planning conceptually in this article.

The History of Reorder Points

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 some enterprises, as I describe in the book “Supply Planning with MRP, DRP, and APS Software.” From the research performed for the book, I concluded that reorder point planning has been unfairly maligned primarily by software vendors and consultants and even some authors.

Many arguments against reorder point planning don’t hold up under scrutiny when one considers products with certain demand history characteristics (I provide this examination to particular anti-reorder point planning quotations taken from other books).

  • Reorder points have their place.
  • Many of the critics of reorder point planning have unfounded reasons for resisting them.
  • Paradoxically this has aligned me with proponents of Lean. Lean is the philosophy of reducing inventory without using inventory formulas to set the inventory value. As I favor using math to set inventory, this alignment is not something I never thought would happen.

The Right Approach to Reorder Points

Currently, the best approach I have seen is to blend reorder point planning for some products, with procedural methods for other products. Brightwork’s position is that none of the inventory parameters should be calculated independently for one product location combination in isolation from the rest of the product location database. Therefore, we don’t endorse the standard calculations for any of the parameters unless that interdependency is modeled. This sounds complex, but it isn’t. See the end of this article for more details.

Reorder Point Planning in SAP APO

The options for reorder point planning in APO are the following, and they are evenly divided between those methods derived from values in the Product Location Master to those which are dynamically calculated with time-dependent maintenance in the planning book.

In fact, there are only three “real” reorder point methods that are provided, but there are two versions of these three. The first three are based on values that are hard-coded into the Product Location Master (one which is set in a quantity and the second which is set in days), and the second three are dynamically calculated instead of hard-coded into the Product Location Master.

From Product Location Master

  1. Reorder stock from the Product Location Master: The simplest approach. When reorder points are externally determined, this is where the reorder point is inserted.
  2. Reorder supply from Product Location Master: Points to the Reorder Days Supply field. The Reorder Days Supply just allows you to define in days how much your reorder point will be. This seems to overlap with the periodic days of supply, as the setting for reorder points to a field that is stated as a period.
  3. Maximum MB and MR from Product Location Master:  Takes the higher of either the hard-coded reorder point and the reorder days supply. It is the maximum of the two methods described above.

Derived in Time-Dependent Maintenance

  1. Reorder point (time-dependent maintenance): Same as method 1, except the reorder point, is dynamic, and not hard-coded.
  2. Reporting Days of Supply (time-dependent maintenance): Same as method 2, except the reorder point is dynamic, and not hard-coded.
  3. Maximum MB and MR (time-dependent maintenance): Same as method 3, except the reorder point is dynamic, and not hard-coded.

The Reorder Point Design Between SNP and PP/DS

Reorder points have an interesting design in APO because although reorder points are considered a setting controlled by supply planning, SAP has several functions in PP/DS which pull off of the reorder point. Therefore, PP/DS can in effect be set in control of the reorder point. Few PP/DS projects will ever get to the point of usability where this is an issue, so this is more of an FYI on hypothetical functionality.

Reasons for Specifying Reorder Points in APO with SNP

  • The SNP heuristic will take into account reorder point 1 or 3.
  • The SNP optimizer does not recognize any reorder point.
  • CTM does not recognize any reorder point. (Therefore, all reorder point planned locations can be left out of the CTM Profile as well as the SNP Optimizer Profile.)

Reasons for Specifying Reorder Points in APO with PP/DS

  • The desire to use reorder point method 1.
  • To plan using the standard SAP_PP_002  in PP/DS planning of standard lot sizes.
  • To plan using SAP_PP_007, the heuristic for reorder point planning.

Periodic Order Quantity

Reorder points are used as a catchall term to encompass both reorders set in quantities and days. That is both EOQ and POQ.

  • EOQ = Economic Order Quantity
  • POQ = Periodic Order Quantity

So far I have only described the EOQ functionality in APO. However, APO has the second reorder point as well. APO’s POQ functionality is just limited to two settings that are connected to one another. This is the following two fields:

  1. Period Type: (Hour, Day, Week, Month,  Quarter, Planning Calendar, and even BAdI – which means a custom definition)
  2. The Number of Periods: Which are of course defined in the field above.

Therefore a setting of “Day” for Period Type and “4” for the Number of Periods, would tell the system to reorder a quantity that would provide four days of supply.

Actual Stock Versus Planned Stock for Reorder Points

SAP ERP has an easy way of dealing with the reorder point. In ERP the reorder points are triggered by actual stock levels or physical stock levels. However, SAP adjusted this logic for APO, and the APO logic for reorder points calculates the reorder points based on planned stock or the “projected stock on hand.”

This is not desirable for all companies and is particularly problematic for businesses that are used to SAP ERP and comfortable with its reorder point calculation, and then prefer not to adjust their usage when they implement APO. SAP ERP does, however, integrate with the SAP APO availability checking module, or GATP (Global Available to Promise), which can be configured to have an order promise horizon that is based on projected stock on hand.

If a reorder point is not based on projected stock on hand, then GATP’s order promise horizon would be much shorter for reorder point planned products than for those that use a supply planning procedure. Therefore, for companies that want to alter APO’s reorder points to match SAP ERP’s calculation method, they must be aware of this important implication. I address this in the following section.

Making Adjustments in APO for Reorder Points

However, adjustments can be made to APO that can allow it to calculate the same way that ERP calculates the reorder point in this regard. This is described in a message exchange at SNC.SAP.COM.

If you want a pure reorder point scenario based on current stock, I’d suppose that you’d want to create a new data view and modify the demand macro so that it doesn’t generate any future requirements (total demand will be essentially zero).

However, this is for the three time-dependent maintenance (4,5,6) methods above that are calculated by a macro in the planning book. This macro can be adjusted, to remove the consideration of project stock on hand. Methods (1,2,3) cannot be modified to work this way as easily and without enhancement.

The Implications of Changing the Reorder Point Calculation Basis in SNP for GATP

While the APO macro, which is used to calculate the reorder point, can be adjusted as described above, there is an important implication for those that also use GATP. If the future basis for the reorder points is disabled, there will be no planned reorder points in the future, and therefore no planned stock on hand on which to confirm back to GATP. Under a mixed planning approach, a procedure such as CTM is used from some product locations, and reorder points are used for others.

This is logically determined by which products are forecastable and which are not as described in this article.

What this means is that for the supply planning horizon the CTM planned product locations will have planned stock on hand to be checked against GATP, but reorder point planned products will not.

This is, of course, an inconsistency and is one very likely reason the reorder points in APO have a different calculation basis than do reorder points in SAP ERP.

Reorder point planning controls are found on the Product Location Master in SAP APO.

reorder-point-methods

Here are the available reorder point methods in SAP APO. 

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

So this makes it sound as if the reorder point in SAP ERP does forward calculate, but an important question is for 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

Three Options for Reorder Point Setting

SAP states that the reorder point can be determined by SAP or manually by the planner. However, these are not the only alternatives. A common third option is to calculate the reorder point in an external program, and then populate the field (in either SAP APO or SAP ERP).

Improved Usable Sophistication

The complexity that can be used to create reorder points is greatly underestimated. This is described in this article.

An external reorder point program provides many advantages including many of the following:

  1. Unlimited flexibility in how to determine reorder points.
  2. The ability to leverage academic literature for the reorder point logic.
  3. The ability to select one’s development environment. Most development environments are far superior to ABAP. This is a reason to not place this program into SAP in a ZTable. Clients often don’t know and are not informed that a ZTable is not connected to any SAP logic, but what it does to is limit the options and increase the expense of custom development. With other development languages,  the application can be web-enabled, making it easier for users or planners to interoperate with it.)
  4. The ability to view and compare reorder points across product categories and locations.
  5. Enhanced master data maintenance capabilities.
  6. An easy and simple integration to SAP to populate the fields.
  7. The fact that these fields in SAP are stable and not likely changing in future releases.
  8. The fact that SAP itself follows this correct parameter management approach when they integrate inventory optimization and multi echelon planning Vendor SmartOps.

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 which are populated.

Setting the MRP Type to ND stops MRP from being run for that particular product location combination. 

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

The Problem for Clients

This 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 just because they are selecting automatic 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 scheme 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 which are populated.
We show this screenshot again to point out where time-phased planning is set.

Time-Phased Planning with Reorder Point Planning in SAP ERP

SAP has the following quote on time-phased based planning:

“In this case, the material is not only planned on the MRP date recorded in the planning file, but it is also planned if stock falls below the reorder level due to a goods issue. When the stock level falls below the reorder level, the system automatically sets the net change planning indicator in the planning file which means that the material will be included in the next planning run.”SAP Help

This essentially adds an extra control over the reorder point, making it aware between planning runs. The SAP application help says the following:

“Key that determines the day on which the material is planned and ordered. The planning cycle is a planning calendar that is defined in customizing for MRP. If you carry out the planning run and place orders every Monday and Tuesday. The system interprets an additional specified planned delivery time as the minimum delivery time. Must be assigned to the MRP Type that allows time phased planning.” – SAP Help

Forecast Based Forward Calculating Reorder Points

If one reads through any number of books on inventory management/supply planning one will come across the following phrase in some shape or form:

Reorder points are a non-forecast based method for supply planning.

This was the original design of reorder points and is the way reorder points are calculated in SAP ERP. However, SAP APO SNP changed the calculation method so that it calculates forward. With the reorder points in SAP ERP, it does not matter if you enter forecasts because the SAP reorder points do not forward calculate. However in SAP APO, as long as forecasts are entered, and because of the reorder points in APO calculate by planned stock on hand (and not actual stock on hand) reorder point based orders can be created for the entire planning horizon.

This means that SAP has converted the reorder point to be a forecast based planning method. This is demonstrated in a mockup of the SAP APO planning book (the primary user interface for SAP DP and SAP SNP), which is included below:

As you can see, this spreadsheet mockup simulates the forward calculating reorder point in SNP. While there are no sales orders after the first time bucket, there are forecasts in every time bucket, and these drive reorder point based planned orders into the future. I have also “set” a maximum stock quantity, so APO would, therefore, manage its planned orders to come in underneath this maximum stock level.  

Adjusting the Reorder Point Macro in APO to Not Forward Calculate

While forward calculation was a decision by APO development, it is not necessarily how all clients want to have their reorder points work. In fact, at one company I worked at, they wanted the option of both reorder point calculation methods.

This can be provided through an adjustment to the reorder point macro. The reorder points are set in the planning book based upon a value entered in the product location master. However, as with all macros, the reorder point macro can be adjusted. In fact, the adjustment that is required for the reorder point macro is quite minor and can be done easily.

The screenshot below shows the change that is necessary.

Planning Book Macros

However, there can be only one planning book macro per planning book. This means that the product location combinations which are to be assigned the standard macro must use one planning book, and the product location combinations which are to be assigned to the adjusted reorder point must be assigned and viewed in a different planning book.

As for how to implement the reorder point run, both types of product locations can be assigned to the same SNP heuristic variant/profile. The differences do not take place in the in how the heuristic runs, but rather in macros themselves. Therefore the steps for implementing the two different reorder points are as follows:

  1. Engage the business subject matter experts in selecting the product location combinations, which will be assigned to each reorder point type.
  2. Enter the reorder point levels into the product location master.
  3. Create duplicate planning books for each of the planning books you had intended to create.
  4. Adjust the reorder point macros of the duplicate planning books as described earlier in this article.
  5. Create the selection profiles so that each product location combination is assigned to the correct planning book and therefore the correct reorder point type.

Implementing Old Reorder Points with New SNP Implementations

Many companies are hazy as to when to use reorder points and when to use a supply planning procedure. When a company is implementing SAP SNP, they may have reordered points for a wide number of products that have worked very well. While reorder points are dismissed as unsophisticated, in fact as I describe in my book “Supply Planning with MRP, DRP, and APS Software,” reorder points are both unfairly maligned and can be calculated with some sophisticated methods.

Therefore, I would have to disagree with quite a few consultants that attempt to move companies away from reordering points. As I will describe, one of the reasons they do this is because combining reorder points as well as a procedure tends to be more work. However, it is in my view worthwhile and meets the standard business requirement for combining multiple supply planning methods.

Using Multiple Supply Planning Methods

This common question, along with the dearth of information on this topic is the main reason I wrote “Multi-Method Supply Planning in SAP APO.” In this book, I will show not only the business logic for multiple methods but specifically how to configure SAP APO to implement multiple supply planning methods.

Conclusion

There are several alternatives for setting reorder points in SAP ERP. The automatic calculation of reorder point in ERP is relatively straightforward. The calculation of automatic reorder point is significantly more complex in SAP APO.

The decision that SAP APO development made is quite interesting. With their adjustment, they have changed a non-forecast based planning method into a forecast based planning method. This limit design caused one client to conclude that they would have to plan some of their products in SAP ERP. However, this is not necessary. With a slight adjustment to the reorder point macro, APO can be made to adjust to either reorder point calculation approaches.

The Benefits

This provides extra flexibility and is particularly beneficial for companies that have come to be used to running reorder points without forwarding calculation. I would estimate that some projects have concluded that they need to plan their products in SAP ERP to gain access to these reorder points. That was the case for a project I arrived at, but we quickly changed that approach once we decided to adjust the reorder point macro. The reorder point along with the target stock level interoperates with the SNP heuristic. These are usually not considered full-blown “supply planning methods,” but can be considered minor methods.

The SNP heuristic is often discussed as if it operates alone. However, the SNP heuristic is the main way of activating different minor methods, although the SNP heuristic can be run by itself without any of these minor methods.

The Problem: Maintaining Inventory Parameters

A major part of replenishment is inventory parameters. These parameters include values like safety stock or days of supply, rounding value, reorder point, lot size/economic order quantity and minimum order quantity. Whatever the planning procedure that is used, these parameters control what the supply planning system does.

Testing of the extracted parameters of ERP and external supply planning systems clearly shows that these values are poorly maintained. The result is far worse planning results than could be obtained otherwise.

Being Part of the Solution: Our Evolution of Thinking on Maintaining Reorder Points in ECC or APO

Maintaining reorder points in APO or ECC comes with a number of negatives that tend to not be discussed. One issue is that when using APO or ECC, the reorder points are typically managed on a “one by one” basis. This leads to individual planners entering values without any consideration for how inventory parameters are set across the supply network. We have developed a SaaS application that sets the inventory parameters for ECC or APO or both systems externally, and that allows for simulations to be created very quickly. These parameters can then be easily exported and it allows for far more control over the parameters in APO and ECC. Both APO and ECC are designed to receive parameters, they are not designed to develop the parameters.

In our testing, the approach, which is within the Brightwork Explorer is one of the most effective methods for managing planning in SAP applications.

Brightwork MRP & S&OP Explorer for Order Optimization

Order Sizing and Optimization

SAP ECC and SNP cannot be run effectively for MRP and supply planning without help from another application.

Order optimization is necessary in order to get the predicted value from ERP and other supply planning applications. The Brightwork MRP & S&OP Explorer does exactly this, and it is free to use in the beginning until it sees “serious usage.” It is permanently free to academics and students. See by clicking the image below:

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References

https://help.sap.com/saphelp_40b/helpdata/en/7d/c27102454011d182b40000e829fbfe/content.htm
https://help.sap.com/saphelp_40b/helpdata/en/7d/c2711c454011d182b40000e829fbfe/content.htm
https://help.sap.com/saphelp_erp60_sp/helpdata/en/f4/7d257044af11d182b40000e829fbfe/frameset.htm

Lean Reorder Point 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